FCBC 10-K 12/31/2005
Section 1: 10-K (FIRST COMMUNITY BANCSHARES, INC. 10-K/FYE 12-
31-05)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission file number 000-19297
FIRST COMMUNITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation)
P.O. Box 989
Bluefield, Virginia
(Address of principal executive offices)
55-0694814
(IRS Employer Identification No.)
24605-0989
(Zip Code)
(276) 326-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
State the aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005.
$384,602,389 based on the closing sales price at that date
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class — Common Stock, $1.00 Par Value; 11,229,852 shares outstanding as of March 7, 2006
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be held April 25, 2006, are incorporated by reference in Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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Item 1
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13
Item 14.
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions
Principal Accounting Fees and Services
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84
84
84
84
PART III
Exhibits and Financial Statement Schedules
Signatures
PART IV
85
87
Item 15.
EX-10.13
EX-12
EX-23
EX-31.1
EX-31.2
EX-32
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ITEM 1.
BUSINESS.
General
PART I
First Community Bancshares, Inc. (the "Company") is a one-bank holding company incorporated in the State of Nevada and serves as the
holding company for First Community Bank, N. A. (the "Bank"), a national association that conducts commercial banking operations within the states
of Virginia, West Virginia, North Carolina and Tennessee. United First Mortgage, Inc., acquired in the latter part of 1999, was a wholly-owned
subsidiary of the Bank and served as a wholesale and retail distribution channel for the Bank’s mortgage banking business segment. In August 2004,
the Company sold 100% of its interest in the mortgage banking subsidiary. Accordingly, the Company’s financial statements have been reformatted to
segregate the assets, liabilities, operations and cash flows of this "discontinued operating segment." The required information concerning
discontinued operations is set forth in Note 16 of the Consolidated Financial Statements included herein. The Bank also owns Stone Capital
Management ("Stone Capital"), an investment advisory firm purchased in January 2003. The Company had total consolidated assets of approximately
$1.9 billion at December 31, 2005 and conducts commercial and mortgage banking business through fifty-one full-service banking locations, ten loan
production offices, and six trust and investment management offices.
Currently, the Company is a bank holding company, and the banking operations are expected to remain the principal business and major source
of revenue. The Company provides a mechanism for ownership of the subsidiary banking operations, provides capital funds as required, and serves
as a conduit for distribution of dividends to stockholders. The Company also considers and evaluates options for growth and expansion of the
existing subsidiary banking operations. The Company currently derives substantially all of its revenues from dividends paid by its subsidiary bank.
Dividend payments by the Bank are determined in relation to earnings, asset growth and capital position and are subject to certain restrictions by
regulatory agencies as described more fully under Regulation and Supervision of this item.
Employees
The Company and its subsidiaries employed 716 full-time equivalent employees at December 31, 2005. Management considers employee
relations to be excellent.
Regulation and Supervision
The Company is a bank holding company and, as such, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5%
voting interest in any bank, and restricts interstate banking activities. The BHC Act allows interstate bank acquisitions anywhere in the country and
interstate branching by acquisition and consolidation in those states that had not opted out by January 1, 1997.
The BHC Act restricts the Company’s nonbanking activities to those which are determined by the Federal Reserve Board to be closely related to
banking. The BHC Act does not place territorial restrictions on the activities of nonbank subsidiaries of bank holding companies. The Company’s
banking subsidiary is subject to limitations with respect to transactions with affiliates.
The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the BHC Act. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount
consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding
companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations
on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated debt
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and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate
loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not past-due (90 days or more) or non-
performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighting system, as
are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics. At December 31, 2005, the Company’s Tier I capital and total capital ratios were 10.54% and 11.65%,
respectively.
In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage
capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the
3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or
operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies are
expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition. The Company’s leverage ratio,
at December 31, 2005, was 7.77%.
The enactment of the Graham-Leach-Bliley Act of 1999 (the "GLB Act") represented a pivotal point in the history of the financial services
industry. The GLB Act removed large parts of a regulatory framework that had its origins in the 1930s. Since March 2000, banks, other depository
institutions, insurance companies, and securities firms have been permitted to enter into combinations that allow a single financial services
organization to offer customers a more complete array of financial products and services. The GLB Act provides a new regulatory framework for
financial holding companies, which have as their primary regulator the Federal Reserve Board. Functional regulation of a financial holding company’s
separately regulated subsidiaries is conducted by their primary functional regulator. The GLB Act requires "satisfactory" or higher Community
Reinvestment Act compliance for insured depository institutions and their financial holding companies in order for them to engage in new financial
activities. The GLB Act also provides a federal right to privacy of non-public personal information of individual customers. The Company and its
subsidiaries are also subject to certain state laws that deal with the use and distribution of non-public personal information.
The Bank is subject to the provisions of the National Bank Act, is under the supervision of and is subject to periodic examination by the
Comptroller of the Currency (the "OCC"), and is subject to the rules and regulations of the OCC, Board of Governors of the Federal Reserve System,
and the Federal Deposit Insurance Corporation ("FDIC").
The Bank is also subject to certain laws of each state in which such bank is located. Such state laws may restrict branching of banks within the
state and acquisition or merger involving banks located in other states. Virginia, West Virginia, North Carolina, and Tennessee have all adopted
nationwide reciprocal interstate banking.
The Federal Deposit Insurance Corporation Act, as amended ("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." An FDIC-insured
bank will be "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a leverage ratio of 5% or greater
and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital
measure. A depository institution’s capital tier will depend upon where its capital levels compare to various relevant capital measures and certain other
factors, as established by regulation. As of December 31, 2005, the Bank had capital levels that qualify it as being "well capitalized" under such
regulations.
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The Bank is subject to capital requirements adopted by the OCC similar to the capital requirements for the Company. The capital ratios of the
Bank are set forth in Note 13 to the Consolidated Financial Statements included herewith.
The monetary policies of regulatory authorities, including the Federal Reserve Board and the FDIC, have a significant effect on the operating
results of banks and holding companies. The nature of future monetary policies and the effect of such policies on the future business and earnings of
the Company cannot be predicted.
The USA Patriot Act of 2001 (the "Patriot Act") contains anti-money laundering measures affecting insured depository institutions, broker-
dealers and certain other financial institutions. The Patriot Act requires such financial institutions to implement policies and procedures to combat
money laundering and the financing of terrorism and grants the Secretary of the Treasury broad authority to establish regulations and to impose
requirements and restrictions on financial institutions’ operations. In addition, the Patriot Act requires the federal bank regulatory agencies to
consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company
acquisitions. Compliance with the Patriot Act by the Company has not had a material impact on the Company’s results of operations or financial
condition.
The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations and corporate
reporting for companies with equity or debt securities registered under the Securities Exchange Act of 1934, as amended. In particular, the Sarbanes-
Oxley Act established: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities
regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and
regulation of audits; (iv) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (v) new
and increased civil and criminal penalties for violation of the securities laws.
In response to the Sarbanes-Oxley legislation, the Board of Directors of the Company approved a series of actions to strengthen and improve its
already strong corporate governance practices. Included in those actions was the adoption of a new Code of Ethics, Corporate Governance Guidelines
and new charters for its Audit, Compensation, and Nominating Committees.
Website Access to Company Reports
The Company makes available free of charge on its website at www.fcbinc.com its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after the Company files such reports with, or
furnishes them to, the Securities and Exchange Commission. Investors are encouraged to access these reports and the other information about the
Company’s business on its website. Information found on the Company’s website is not part of this Annual Report on Form 10-K. The Company will
also provide copies of its Annual Report on Form 10-K, free of charge, upon written request of its Investor Relations department at the Company’s
main address, P.O. Box 989, Bluefield, VA 24605.
Forward-Looking Statements
This Annual Report on Form 10-K may include "forward-looking statements", which are made in good faith by the Company pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements
with respect to the Company’s beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to
significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company’s control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the Company’s financial performance to differ materially from that
expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which
the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of competitive
new products and services of the
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Company and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’
products and services for the Company’s products and services and vice versa; the impact of changes in financial services’ laws and regulations
(including laws concerning taxes, banking, securities and insurance); technological changes; the effect of acquisitions, including, without limitation,
the failure to achieve the expected revenue growth and/or expense savings from such acquisitions; the growth and profitability of the Company’s non-
interest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits;
and the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-
looking statement.
ITEM 1A.
RISK FACTORS.
The Company and its subsidiary business are subject to interest rate risk and variations in interest rates may negatively affect its financial
performance.
We are unable to predict actual fluctuations of market interest rates with complete accuracy. Rate fluctuations are affected by many factors,
including inflation, recession, a rise in unemployment, a tightening of the money supply and domestic and international disorder and instability in
domestic and foreign financial markets.
Changes in the interest rate environment may reduce profits. We expect that the Company and the Bank will continue to realize income from the
differential or "spread" between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings
and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-
earning assets and interest-bearing liabilities. Changes in levels of market interest rates could materially and adversely affect the Company’s net
interest spread, levels of prepayments and cash flows, the market value of its securities portfolio, and overall profitability.
The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent the Company requires such dividends in the future,
may affect the Company’s ability to pay its obligations and pay dividends.
The Company is a separate legal entity from the Bank and its subsidiaries and does not have significant operations of its own. The Company
currently depends on the Bank’s cash and liquidity as well as dividends to pay the Company’s operating expenses and dividends to shareholders. No
assurance can be made that in the future the Bank will have the capacity to pay the necessary dividends and that the Company will not require
dividends from the Bank to satisfy the Company’s obligations. The availability of dividends from the Bank is limited by various statutes and
regulations. It is possible, depending upon the financial condition of the Company and other factors that the OCC, the Bank’s primary regulator, could
assert that payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends
sufficient to satisfy the Company’s obligations and the Bank is unable to pay dividends to the Company, the Company may not be able to service its
obligations as they become due, including payments required to be made to the FCBI Capital Trust, a business trust subsidiary of the Company, or
pay dividends on the Company’s common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s
financial condition, results of operations, cash flows and prospects.
The Bank’s allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, the Bank maintains an allowance for loan losses to provide for probable loan defaults and non-performance. The
Bank’s allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely
affect the Bank’s operating results. The Bank’s allowance for loan losses is 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. The
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amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond
the Bank’s control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review
the Bank’s loans and allowance for loan losses. While we believe that the Bank’s allowance for loan losses is adequate to provide for probable losses,
we cannot assure you that we will not need to increase the Bank’s allowance for loan losses or that regulators will not require us to increase this
allowance. Either of these occurrences could materially and adversely affect the Bank’s earnings and profitability.
The Company’s business is subject to various lending and other economic risks that could adversely impact the Company’s results of
operations and financial condition.
Changes in economic conditions, particularly an economic slowdown, could hurt the Company’s business. The Company’s business is directly
affected by political and market conditions, broad trends in industry and finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond the Company’s control. A deterioration in economic conditions, in particular an
economic slowdown within the Company’s geographic region, could result in the following consequences, any of which could hurt the Company’s
business materially:
• loan delinquencies may increase;
• problem assets and foreclosures may increase;
• demand for the Company’s products and services may decline; and
• collateral for loans made by the Company may decline in value, in turn reducing a client’s borrowing power, and reducing the value of assets
and collateral associated with the Company’s loans held for investment.
A downturn in the real estate market could hurt the Company’s business.
The Company’s business activities and credit exposure are concentrated in Virginia, West Virginia, North Carolina, Tennessee and the
surrounding southeast region. A downturn in this regional real estate market could hurt the Company’s business because of the geographic
concentration within this regional area. If there is a significant decline in real estate values, the collateral for the Company’s loans will provide less
security. As a result, the Company’s ability to recover on defaulted loans by selling the underlying real estate would be diminished, and we would be
more likely to suffer losses on defaulted loans.
The Company’s level of credit risk is increasing due to the expansion of its commercial lending, and the concentration on middle market
customers with heightened vulnerability to economic conditions.
Commercial business and commercial real estate loans generally are considered riskier than single-family residential loans because they have
larger balances to a single borrower or group of related borrowers. Commercial business and commercial real estate loans involve risks because the
borrower’s ability to repay the loan typically depends primarily on the successful operation of the business or the property securing the loan. Most of
the commercial business loans are made to small business or middle market customers who may have a heightened vulnerability to economic
conditions. Moreover, a portion of these loans have been made or acquired by the Company in the last several years and the borrowers may not have
experienced a complete business or economic cycle.
The Bank may suffer losses in its loan portfolio despite its underwriting practices.
The Bank seeks to mitigate the risks inherent in the Bank’s loan portfolio by adhering to specific underwriting practices. These practices include
analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of
independent appraisers and verification of liquid assets. Although the Bank believes that its underwriting criteria are appropriate for the various kinds
of loans it makes, the Bank may incur losses on loans that meet its underwriting criteria, and these losses may exceed the amounts set aside as
reserves in the Bank’s allowance for loan losses.
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The Company and its subsidiaries are subject to extensive regulation which could adversely affect them.
The Company and its subsidiaries’ operations are subject to extensive regulation by federal, state and local governmental authorities and are
subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company’s operations.
The Company believes that it is in substantial compliance in all material respects with applicable federal, state and local laws, rules and regulations.
Because the Company’s business is highly regulated, the laws, rules and regulations applicable to it are subject to regular modification and change.
There are various laws, rules and regulations that impact the Company’s operations, including, among other things, matters pertaining to corporate
governance, requirements for listing and maintenance on national securities exchanges and over the counter markets, Securities and Exchange
Commission ("SEC") rules pertaining to public reporting disclosures and banking regulations governing the amount of loans that a financial
institution, such as the Bank, can acquire for investment from an affiliate. In addition, the Financial Accounting Standards Board ("FASB"), made
changes which require, among other things, the expensing of the costs relating to the issuance of stock options. These laws, rules and regulations, or
any other laws, rules or regulations, that may be adopted in the future, could make compliance more difficult or expensive, restrict the Company’s
ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold
by the Bank and otherwise adversely affect the Company’s business, financial condition or prospects.
The Company faces strong competition from other financial institutions, financial service companies and other organizations offering services
similar to those offered by the Company and its subsidiaries, which could hurt the Company’s business.
The Company’s business operations are centered primarily in Virginia, West Virginia, North Carolina, Tennessee and the surrounding southeast
region. Increased competition within this region may result in reduced loan originations and deposits. Ultimately, we may not be able to compete
successfully against current and future competitors. Many competitors offer the types of loans and banking services that we offer. These competitors
include other savings associations, national banks, regional banks and other community banks. The Company also faces competition from many other
types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial
intermediaries. In particular, the Bank’s competitors include other state and national banks and major financial companies whose greater resources may
afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising
campaigns.
Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the credit needs of larger clients. These institutions, particularly to the extent they
are more diversified than the Company, may be able to offer the same loan products and services that the Company offers at more competitive rates
and prices. If the Company is unable to attract and retain banking clients, the Company may be unable to continue the Bank’s loan and deposit growth
and the Company’s business, financial condition and prospects may be negatively affected.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
The Company has no unresolved staff comments as of the filing date of this 2005 Annual Report on Form 10-K.
ITEM 2.
PROPERTIES.
The Company generally owns its offices, related facilities, and unimproved real property. The principal offices of the Company are located at
One Community Place, Bluefield, Virginia, where the Company owns and occupies approximately 36,000 square feet of office space. The Bank operates
fifty-one full-service branches and ten loan production offices throughout the four-state region of Virginia, West Virginia, North Carolina and
Tennessee. The Bank also provides wealth management services through two trust and investment management offices, as well as Stone Capital, an
investment advisory firm, which has four offices. The Company’s banking subsidiary owns 42 of its banking offices while others are leased or are
located on leased land. There are no mortgages or liens against any property of the Bank or the Company. The Bank operates 50 Automated Teller
Machines ("ATM’s").
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In Virginia, the Bank operates offices in Blacksburg, Bluefield, Clintwood, Drakes Branch, Emporia, Max Meadows, Norfolk, Pound, Richlands,
Richmond, Tazewell, and Wytheville. In West Virginia, the Bank operates offices in Athens, Beckley, Bluefield, Bridgeport, Buckhannon, Cowen,
Craigsville, Grafton, Hinton, Linside, Man, Mullens, Oceana, Pineville, Princeton, Richwood, Rowlesburg, Summersville, and Teays Valley. In North
Carolina, the Bank operates offices in Charlotte, Elkin, Hays, Mount Airy, Sparta, Taylorsville, and Winston-Salem. In Tennessee, the Bank operates
offices in Fall Branch, Johnson City, Kingsport, and Piney Flats. A complete listing of all branches and ATM sites can be found on the Internet at
www.fcbresource.com. Information on such website is not part of this Annual Report on Form 10-K.
ITEM 3.
LEGAL PROCEEDINGS.
The Company is currently a defendant in various legal actions and asserted claims involving lending and collection activities and other matters
in the normal course of business. While the Company and legal counsel are unable to assess the ultimate outcome of each of these matters with
certainty, they are of the belief that the resolution of these actions should not have a material adverse affect on the financial position of the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
The number of common stockholders of record on December 31, 2005 was 3,613 and outstanding shares totaled 11,251,803. The number of
common stockholders is measured by the number of recordholders.
The Company’s common stock trades on the NASDAQ National Market under the symbol FCBC. On December 31, 2005, the Company’s year-
end common stock price was $31.16, a 13.60% decrease from the $36.08 closing price on December 31, 2004.
Book value per common share was $17.29 at December 31, 2005, compared with $16.29 at December 31, 2004, and $15.57 at the close of 2003. The
year-end market price for the Company’s common stock of $31.16 represents 180.2% of the Company’s book value as of the close of the year and
reflects total market capitalization of $350.6 million. Utilizing the year-end market price and 2005 diluted earnings per share, First Community common
stock closed the year trading at a price/earnings multiple of 13.4 times diluted earnings per share.
Cash dividends for 2005 totaled $1.02 per share, up $0.02 or 2.0% from the $1.00 paid in 2004. The 2005 dividends resulted in a cash yield on the
year-end market value of 3.27%. Total dividends paid for the current and prior year totaled $11.5 million and $11.2 million, respectively.
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The following table sets forth the high and low stock prices, book value per share, and dividends paid per share on the Company’s common
stock during the periods indicated.
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 36.21
33.20
34.25
33.71
$ 27.39
26.25
28.02
27.14
$ 32.79
33.00
32.71
37.67
$ 28.82
24.42
29.11
31.37
Book Value
Per Share
(End of
Period)
Cash
Dividends
Per Share
$
$
16.35
16.83
17.15
17.29
15.83
15.28
16.08
16.29
$
$
$
$
0.255
0.255
0.255
0.255
1.02
0.25
0.25
0.25
0.25
1.00
The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 550,000 shares. The plan has no expiration date,
remains open and no plans have expired during the reporting period. No determination has been made to terminate the plan or to stop making
purchases. The following table sets forth open market purchases by the Company of its equity securities during 2005. The repurchase of Company
stock has the effect of increasing earnings per share. During 2005, the weighted-average increase in the number treasury shares had an insignificant
impact on earnings per share.
January 1-31, 2005
February 1-29, 2005
March 1-31, 2005
April 1-30, 2005
May 1-31, 2005
June 1-30, 2005
July 1-31, 2005
August 1-31, 2005
September 1-30, 2005
October 1-31, 2005
November 1-30, 2005
December 1-31, 2005
Total
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the Plan
303
—
—
2,000
2,123
—
—
5,000
491
—
6,100
25,517
41,534
$
$
32.63
—
—
28.12
29.46
—
—
30.50
29.44
—
30.89
32.22
31.38
10
303
—
—
2,000
2,123
—
—
5,000
491
—
6,100
25,517
41,534
281,000
281,000
281,000
281,216
330,080
328,821
331,845
328,169
327,678
327,678
330,133
305,491
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA.
Five-Year Selected Financial Data
Balance Sheet Summary
(at end of period) (in thousands)
Securities(a)
Loans held for sale
Loans, net of unearned income
Allowance for loan losses
Assets related to discontinued operations
Total assets
Deposits
Other indebtedness
Liabilities related to discontinued operations
Total liabilities
Stockholders’ equity
2005
At or for the Year Ended December 31,
2003
2004
2002
2001
$
428,554
1,274
1,331,039
14,736
—
1,952,483
1,405,944
129,231
—
1,757,982
194,501
$
410,218
1,194
1,238,756
16,339
—
1,830,822
1,359,064
131,855
—
1,647,589
183,233
$
473,177
424
1,026,191
14,624
22,372
1,672,727
1,225,536
144,616
17,992
1,497,692
175,035
$
334,018
865
927,621
14,410
71,631
1,524,363
1,139,628
59,172
65,519
1,371,901
152,462
$
383,657
797
904,496
13,952
70,267
1,478,235
1,078,260
80,814
64,908
1,345,194
133,041
Summary of Earnings (in thousands)
Total interest income
Total interest expense
Provision for loan losses
Non-interest income
Non-interest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
(Loss) income from discontinued operations before income
$
taxes
Income tax (benefit) expense
(Loss) income from discontinued operations
Net income
Per Share Data
Basic earnings per share
Basic earnings per common share — continuing operations
Basic (loss) earnings per common share — discontinued
$
operations
Diluted earnings per common share
Diluted earnings per common share — continuing operations
Diluted (loss) earnings per common share — discontinued
$
operations
Cash dividends
Book value at year-end
$
$
96,136
26,953
2,671
17,329
48,035
35,806
9,786
26,020
(5,746 )
(2,090 )
(3,656 )
22,364
1.99
2.32
(0.33 )
1.97
2.29
(0.32 )
1.00
16.29
$
$
$
$
$
90,641
26,397
3,419
14,542
37,590
37,777
11,058
26,719
(2,174 )
(693 )
(1,481 )
25,238
2.27
2.41
(0.14 )
2.25
2.39
(0.14 )
0.98
15.57
$
$
$
$
$
92,580
32,299
4,208
10,617
32,720
33,970
9,740
24,230
798
309
489
24,719
2.26
2.22
0.04
2.25
2.21
0.04
0.91
14.02
$
$
$
$
$
89,805
39,847
5,134
10,693
29,939
25,578
7,733
17,845
1,958
669
1,289
19,134
1.75
1.63
0.12
1.75
1.63
0.12
0.81
12.17
$
$
$
$
$
109,508
35,880
3,706
22,305
55,591
36,636
10,191
26,445
(233 )
(91 )
(142 )
26,303
2.33
2.35
(0.02 )
2.32
2.33
(0.01 )
1.02
17.29
11
Table of Contents
Five-Year Selected Financial Data
2005
At or for the Year Ended December 31,
2003
2002
2004
Selected Ratios
Return on average assets
Return on average assets — continuing
Return on average equity
Return on average equity — continuing
Average equity to average assets
Average equity to average assets — continuing
Dividend payout
Risk based capital to risk adjusted assets
Leverage ratio
1.37 %
1.38 %
13.79 %
13.87 %
9.91 %
9.91 %
43.78 %
11.65 %
7.77 %
1.24 %
1.45 %
12.53 %
14.58 %
9.88 %
9.96 %
50.25 %
12.09 %
7.62 %
1.56 %
1.70 %
15.13 %
16.02 %
10.32 %
10.64 %
43.17 %
14.55 %
8.83 %
1.68 %
1.72 %
17.16 %
16.82 %
9.79 %
10.22 %
40.16 %
13.33 %
8.10 %
2001
1.49 %
1.44 %
14.80 %
13.80 %
10.05 %
10.42 %
46.23 %
12.10 %
7.93 %
(a) The 2001-2004 periods reflect the reclassification of Federal Reserve Bank and Federal Home Loan Bank stock from Securities Available for Sale to
Other Assets, consistent with the 2005 presentation.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
This discussion should be read in conjunction with the consolidated financial statements, notes and tables included throughout this report. All
statements other than statements of historical fact included in this report, including statements in this 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. As discussed below, the financial statements, footnotes, schedules and discussion within
this report have been reformatted to conform to the presentation required for "discontinued operations" pursuant to the Company’s sale of its
mortgage banking subsidiary.
Executive Overview
First Community Bancshares, Inc. is a bank holding company which provides commercial banking services and has positioned itself as a
regional community bank and a financial services alternative to larger banks which often provide less emphasis on personal relationships, and smaller
community banks which lack the capital and resources to efficiently serve customer needs. The Company has focused its growth efforts on building
financial partnerships and more enduring and complete relationships with businesses and individuals through a very personal approach to banking
and financial services. The Company and its operations are guided by a strategic plan which includes growth through acquisitions and through office
expansion in new market areas including strategically identified metro markets in Virginia, West Virginia, North Carolina and Tennessee. While the
Company’s mission remains that of a community bank, management believes that entry into new markets will accelerate the Company’s growth rate by
diversifying the demographics of its customer base and customer prospects and by generally increasing its sales and service network.
Despite strong competition, the Company has succeeded in establishing new offices in seven new market areas including four new loan
production offices in the last year and three new full service offices since the second quarter of 2003. The Company has also completed two bank
acquisitions and one wealth management acquisition since January 2003 and has grown total assets by 17% over the last two years and 32% over the
last four years. The Company continues its pursuit of community banking partners and is progressing with plans for new offices within its established
target markets. Additional details regarding recent acquisitions and expansion are included under the heading Recent Acquisitions and Branching
Activity.
12
Table of Contents
Economy
Throughout 2005, short-term market interest rates increased significantly, while long-term market rates remained largely unchanged. Those
changes have resulted in a flat interest rate curve, an environment that has led to compression of net interest margins.
The local economies in which the Company operates are diverse and cover the majority portion of a four state region. West Virginia and
Southwest Virginia continue to benefit from increasing crude oil prices. These economies have significant exposure to extractive industries, such as
coal and natural gas, which become more active and lucrative when oil prices rise. The local economies in the central portion of North Carolina have
suffered in recent years due to foreign competition in both furniture and textiles as well as consolidation in the financial services industry. Despite
these detractions, the economies in this region continue to benefit from strong real estate development, good commercial occupancy rates and
national companies relocating and expanding in the Triad and Central Piedmont areas. The Eastern Virginia local economies are experiencing strong
growth in residential and commercial development as those areas continue to benefit from a wide array of corporate activities and relocations.
Competitive Focus
As the Company competes for increased market share and growth in both loans and deposits it continues to encounter strong competition from
many sources. Bank expansion through de novo branches and Loan Production Offices has grown in popularity as a means of reaching out to new
markets. Many of the markets targeted by the Company are also being entered by other banks in nearby markets and, in some cases, from more distant
markets. Despite strong competition from other banks, credit unions and mortgage companies, the Company has seen success in newly established
offices in Winston-Salem as well as other markets in both Virginia and North Carolina. The Company attributes this measure of success to its
recruitment of local, established bankers and loan personnel in those targeted markets. Competitive forces do impact the Company through pressure
on interest yields, product fees and loan structure and terms; however, the Company has countered these pressures with its relationship style and
pricing and a disciplined approach to loan underwriting.
Application of Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and
conform to general practices within the banking industry. The Company’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 the
Company’s consolidated financial position and 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 by management primarily through the use of internal modeling techniques and
appraisal estimates.
The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and
Results of Operation. The following is a summary of the Company’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 i.) the determination of the allowance for loan losses, ii.) accounting for acquisitions and intangible assets, and iii.) accounting for income
taxes as the accounting areas
13
Table of Contents
that require the most subjective or complex judgments. Derivatives hedging practices were previously included, but were eliminated in August 2004 in
connection with the disposition of the Company’s mortgage banking subsidiary.
Allowance for Loan Losses
The allowance for loan losses is established and maintained at levels management deems adequate to cover losses inherent in the portfolio and
is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. In June 2005, the
Company reclassified $392 thousand of its allowance for loan losses to a separate allowance for lending-related commitments, which is included in
other liabilities. 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 the Company’s 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 geographic areas in which
the Company conducts business.
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 foregoing analysis is performed by management to evaluate the portfolio and calculate an estimated valuation allowance
through a quantitative and qualitative analysis that applies risk factors to those identified risk areas.
This risk management evaluation is applied at both the portfolio level and the individual loan level for commercial loans and credit relationships
while the level of consumer and residential mortgage loan allowance is determined primarily on 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 commercial portfolio
requires more specific analysis of individually significant loans and the borrower’s underlying cash flow, business conditions, capacity for debt
repayment and the valuation of secondary sources of payment, such as collateral. This analysis may result in specifically identified weaknesses and
corresponding specific impairment allowances.
The use of various estimates and judgments in the Company’s ongoing evaluation of the required level of allowance can significantly impact the
Company’s results of operations and financial condition and may result in either greater provisions against earnings to increase the allowance or
reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and
assumptions.
Acquisitions and Intangible Assets
The Company may, from time to time, engage in business combinations with other companies. The acquisition of a business is generally
accounted for under purchase accounting rules promulgated by the FASB. Purchase accounting requires the recording of underlying assets and
liabilities of the entity acquired at their fair market value. Any excess of the purchase price of the business over the net assets acquired and any
identified intangibles is recorded as goodwill. Fair values are assigned based on quoted prices for similar assets, if readily available, or appraisal by
qualified independent parties for relevant asset and liability categories. Financial assets and liabilities are typically valued using discount models
which apply current discount rates to streams of cash flow. All of these valuation methods require the use of assumptions which can result in alternate
valuations and varying levels of goodwill and, in some cases, amortization expense or accretion income.
Management must also make estimates of useful or economic lives of certain acquired assets and liabilities. These lives are used in establishing
amortization and accretion of some intangible assets and liabilities, such as the intangible associated with core deposits acquired in the acquisition of
a commercial bank.
14
Table of Contents
Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the revalued net assets. Goodwill is tested at least annually
in the month of November for possible impairment. This testing again uses a discounted cash flow model applied to the anticipated stream of cash
flows from operations of the business or segment being tested. Impairment testing necessarily uses estimates in the form of growth and attrition rates,
anticipated rates of return, and discount rates. These estimates have a direct bearing on the results of the impairment testing and serve as the basis for
management’s conclusions as to impairment.
Income Taxes
The establishment of provisions for federal and state income taxes is a complex area of accounting which also involves the use of judgments and
estimates in applying relevant tax statutes. The Company operates in multiple state tax jurisdictions and this requires the appropriate allocation of
income and expense to each state based on a variety of apportionment or allocation bases. Management strives to keep abreast of changes in tax law
and the issuance of regulations which may impact tax reporting and provisions for income tax expense. The Company is also subject to audit by
federal and state tax authorities. Results of these audits may produce indicated liabilities which differ from Company estimates and provisions. The
Company continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of possible exposure based on
current facts and circumstances. The Company recently completed a state tax audit. The results of that audit are discussed under the heading "Results
of Operations — Income Tax Expense."
Recent Acquisitions and Branching Activity
On December 2, 2005, the Company completed the sale of its Clifton Forge, Virginia, branch location to Sonabank, N. A. The sale included
deposits and repurchase agreements totaling approximately $45 million and loans of approximately $7 million. The transaction resulted in an
approximate $4.4 million pre-tax gain on sale.
The Company has plans to open five de novo branches, convert three loan production offices to full service locations, and open two new loan
production offices in 2006 and 2007. Most of these locations will be in the Richmond, Virginia and Winston-Salem, North Carolina metropolitan areas.
The following schedule details branch and loan production office openings since January 1, 2004.
Quarter Opened
Q1 2004
Q1 2004
Q1 2004
Q2 2004
Q2 2004
Q4 2004
Q2 2005
Q3 2005
Q4 2005
Q4 2005
Location
Mount Airy, North Carolina
Charlotte, North Carolina
Piney Flats, Tennessee
Blacksburg, Virginia
Norfolk, Virginia
Princeton, West Virginia
Clarksburg, West Virginia
Charleston, West Virginia
Roanoke, Virginia
Kernersville, North Carolina
Type
Loan Production Office
Loan Production Office
Full Service Branch
Loan Production Office
Loan Production Office
Full Service Branch
Loan Production Office
Loan Production Office
Loan Production Office
Loan Production Office
After the close of business on March 31, 2004, PCB Bancorp, Inc., a Tennessee-chartered bank holding company ("PCB") headquartered in
Johnson City, Tennessee, was acquired by the Company. PCB had five full service branch offices located in Johnson City, Kingsport and surrounding
areas in Washington and Sullivan Counties in East Tennessee. At acquisition, PCB had total assets of $171.0 million, total net loans of $128.0 million
and total deposits of $150.0 million. These resources were included in the Company’s financial statements beginning with the second quarter of 2004.
Under the terms of the merger agreement, shares of PCB common stock were purchased for $40.00 per share in cash. The total deal value,
including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with the PCB acquisition, Peoples Community Bank,
the wholly-owned subsidiary of PCB, was merged into the Bank. As a result of the acquisition and preliminary purchase price allocation, approximately
$21.3 million
15
Table of Contents
in goodwill was recorded which represents the excess of the purchase price over the fair market value of the net assets
acquired and identified intangibles.
RESULTS OF OPERATIONS
2005 COMPARED TO 2004
Net income for 2005 was $26.3 million, up $3.9 million from $22.4 million in 2004. Basic and diluted earnings per share
for 2005 were $2.33 and $2.32, respectively, compared to basic and diluted earnings per share of $1.99 and $1.97,
respectively, in 2004.
The Company’s key profitability ratios are return on average assets (net income as a percentage of average assets)
and return on average equity (net income as a percentage of average common shareholder’s equity). Returns on average
assets for the last two years were 1.37% and 1.24%. The returns on average equity for the last two years were 13.79% and
12.53%. The Company continues to compare favorably to national peer returns of 1.16% and 13.51%, respectively, based
on the September 2005 Bank Holding Company Performance Report.
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 borrowings represent the major portion of interest-bearing liabilities. For purposes of the following
discussion, comparison of net interest income is done on a tax equivalent basis, which provides a common basis for
comparing yields on earning assets exempt from federal income taxes to those which are fully taxable (see the table titled
Average Balance Sheets and Net Interest Income Analysis).
Net interest income was $73.6 million for 2005, compared to $69.2 million for 2004. Tax-equivalent net interest income
totaled $77.7 million for 2005, an increase of $4.8 million from the $72.9 million reported for 2004. The increase reflects a
$6.3 million increase due to increased volume, which was partially offset by a $1.5 million decrease due to rate changes on
the underlying assets and liabilities.
During 2005, average earning assets increased $118.3 million while average interest-bearing liabilities increased
$100.5 million over the comparable period. The yield on average earning assets increased 37 basis points to 6.42% from
6.05% for 2004. The rate earned on assets was positively impacted by the continued increases in short-term market interest
rates throughout 2005.
Total cost of average interest-bearing liabilities increased 47 basis points during 2005, as such liabilities were also
affected by increases in short-term market interest rates. The net result was a decrease of 10 basis points to net interest rate
spread, or the difference between interest income on earning assets and expense on interest-bearing liabilities. 2005 spread
was 4.01% compared to 4.11% for the same period last year. The Company’s tax-equivalent net interest margin of 4.39% for
2005 was essentially unchanged with a small decrease of 2 basis points from 4.41% in 2004.
The largest contributor to the increase in the yield on average earning assets in 2005, on a volume-weighted basis,
was the $142.9 million increase in loans held for investment. The loan portfolio contributed approximately $13.1 million to
the change in interest income, while the portfolio’s average yield increased 28 basis points from the prior year to 6.91%.
The yield on variable-rate loans tied to prime and other indices increased in response to the recent increases in short-term
interest rates.
During 2005, the tax-equivalent yield on securities available for sale increased 36 basis points to 4.98% while the
average balance decreased by $17.0 million. Although the total portfolio decreased through the period, the average tax-
equivalent yield increased due to the addition of higher-rate securities and the sale of lower-rate securities. Funds received
from the paydowns, maturities, calls, and sales of investment securities helped fund loan growth.
Average interest-bearing balances with banks remained steady during 2005, while the yield increased 154 basis points
to 3.36%. The yield on those balances is directly correlated to the increases in the target federal funds rate which occurred
throughout the year.
16
Table of Contents
The Company attempts to control the cost of deposited funds in relation to the prevailing economic climate and competitive forces. The
Company achieves its balance sheet management goals through its Asset/Liability Management Committee. Throughout 2005, the pressures of
increasing short-term interest rates resulted in an increase of 40 basis points in the average cost of interest-bearing deposits. The average rate paid on
interest-bearing demand deposits remained consistent, while the average rate paid on savings, which includes money market and passbook accounts,
increased 32 basis points. The Company was successful in keeping rates paid on interest-bearing checking accounts relatively stable and increased
money market account rates to remain competitive. Average time deposits increased $46.2 million while the average rate paid increased 48 basis points
to 2.92%. During the first quarter, the Company ran a successful certificate of deposit campaign, which generated market-rate deposits centered mostly
in the Richmond and Winston-Salem markets. The level of average non-interest-bearing demand deposits increased $16.0 million to $228.8 million
compared to the prior year.
Average federal funds purchased and repurchase agreements increased $19.3 million due mostly to increases in the balances of customer
repurchase agreements. The average rate paid on those funds also increased, as they are closely tied to the target federal funds rate. Average Federal
Home Loan Bank ("FHLB") advances increased $29.5 million as the Company borrowed $75 million through the year. Interest paid on those
borrowings increased 19 basis points as interest rates were increasing on adjustable-rate borrowings. Other borrowings remained steady, but the rate
paid increased 198 points because the majority of such borrowings consist of the Company’s trust preferred borrowings, which are tied to LIBOR.
Average Balance Sheets and Net Interest Income Analysis
2005
2004
2003
Average
Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) Balance Interest(1) Rate(1)
(Dollars in thousands)
Average
Average
Yield/
Yield/
Yield/
Earning Assets:
Loans Held for Investment:(2)
Taxable
Tax-Exempt
Total
Securities Available for Sale:(5)
Taxable
Tax-Exempt
Total
Held to Maturity Securities:
Taxable
Tax-Exempt
Total
Interest-Bearing Deposits with Banks
Federal Funds Sold
Total Earning Assets
Other Assets
Assets Related to Discontinued Operations
Total
$ 1,299,328 $
2,692
89,788
177
6.91 % $ 1,154,166 $
4,965
6.58 %
76,519
297
6.63 % $ 971,402 $
5,252
5.98 %
70,185
380
7.23 %
7.24 %
1,302,020
89,965
6.91 % 1,159,131
76,816
6.63 % 976,654
70,565
7.23 %
262,715
144,242
11,062
9,193
4.21 % 313,033
6.37 % 110,904
12,094
7,474
3.86 % 312,834
94,910
6.74 %
13,083
6,750
4.18 %
7.11 %
406,957
20,255
4.98 % 423,937
19,568
4.62 % 407,744
19,833
4.86 %
399
28,336
28,735
32,100
—
15
2,269
2,284
1,077
—
3.76 %
8.01 %
7.95 %
3.36 %
419
35,535
35,954
32,430
60
1,769,812 $ 113,581
153,410
—
6.42 % 1,651,512 $
140,379
14,950
$ 1,923,222
$ 1,806,841
25
2,853
2,878
591
1
99,854
5.97 %
8.03 %
8.00 %
1.82 %
1.67 %
598
39,083
39,681
39,062
711
6.05 % 1,463,852 $
103,520
49,780
$ 1,617,152
33
3,231
3,264
595
9
5.52 %
8.27 %
8.23 %
1.52 %
1.27 %
94,266
6.44 %
17
Table of Contents
2005
2004
2003
Average
Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) Balance Interest(1) Rate(1)
(Dollars in thousands)
Average
Average
Yield/
Yield/
Yield/
Interest-Bearing Liabilities:
Demand Deposits
Savings Deposits
Time Deposits
Federal Funds Purchased and Repurchase Agreements
FHLB Borrowings and other long-term debt
Total Interest-bearing Liabilities
Demand Deposits
Other Liabilities
Liabilities Related to Discontinued Operations
Stockholders’ Equity
Total
Net Interest Income
Net Interest Rate Spread(3)
Net Interest Margin(4)
$ 152,774 $
368,339
661,498
128,551
177,832
1,488,994
228,781
14,772
—
190,675
$ 1,923,222
401
4,309
19,321
2,782
9,068
35,881
0.26 % $ 149,502 $
1.17 % 366,074
2.92 % 615,346
2.16 % 109,223
5.10 % 148,384
2.41 % 1,388,529
212,777
13,980
13,113
178,442
$ 1,806,841
366
3,112
15,001
1,405
7,070
26,954
0.24 % $ 129,072 $
0.85 % 279,972
2.44 % 610,201
1.29 % 100,817
93,032
4.76 %
1.94 % 1,213,094
178,961
14,609
43,676
166,812
$ 1,617,152
373
2,185
17,392
1,599
4,848
0.29 %
0.78 %
2.85 %
1.59 %
5.21 %
26,397
2.18 %
$
77,700
$
72,900
$
67,869
4.01 %
4.39 %
4.11 %
4.41 %
4.26 %
4.64 %
(1) Fully Taxable Equivalent at the rate of 35%. (see tax equivalent adjustment table below)
(2) Non-accrual loans are included in average balances outstanding but with no related interest income during the period of non-accrual.
(3) Represents the difference between the yield on earning assets and cost of funds.
(4) Represents tax equivalent net interest income divided by average interest-earning assets.
(5) FHLB and FRB stock are included in securities available for sale as they are earning assets.
The following table recaps the adjustments incorporated when converting net interest earnings to a tax-equivalent basis:
2005
2004
(Amounts in thousands)
2003
Loans — tax exempt
Securities available for sale — tax exempt
Securities held to maturity — tax exempt
Rate and Volume Analysis of Interest
$
62
3,216
794
$
103
2,616
999
$
133
2,362
1,131
The following table summarizes the changes in interest earned and paid resulting from changes in volume of earning assets and paying liabilities
and changes in their interest rates. In this analysis, the change in interest due to both rate and volume has been allocated to the volume and rate
columns in proportion to absolute dollar amounts. This table will assist you in understanding the changes in the Company’s principal source of
revenue, net interest income. The principal themes or trends which are evident in this table include:
• The increase in net interest income in 2005 was due largely to increases in earning assets resulting from growth seen in both the consumer and
commercial loan portfolios.
• Increases in both rates earned on assets and paid on liabilities due to increases in benchmark short-term interest rates.
18
Table of Contents
• In 2005, margin compressed slightly as increases to the rates paid on money market accounts and certificates of deposit outpaced increases in
the rates received on loans.
• The significant volume increase in 2004 was due in part to the PCB acquisition.
2005 Compared to 2004
$ Increase/(Decrease) due to
Rate
Volume
2004 Compared to 2003
$ Increase/(Decrease) due to
Rate
Total
Total
Volume
(Amounts in thousands)
Interest Earned On(1):
Loans
Securities available for sale
Securities held to maturity
Interest-bearing deposits with other banks
Federal funds sold
Total interest-earning assets
Interest Paid On:
Demand deposits
Savings deposits
Time deposits
Federal funds purchased and repurchase agreements
FHLB borrowings
Other long-term debt
Total interest-bearing liabilities
Change in net interest income
(1) Fully taxable equivalent using a rate of 35%.
Provision for Loan Losses
$ 9,782
87
(578 )
(6 )
(1 )
9,284
8
19
1,186
284
1,443
—
2,940
$ 6,344
$ 3,367
600
(16 )
492
—
4,443
27
1,178
3,134
1,093
248
307
5,987
(1,544 )
$
$ 13,149
687
(594 )
486
(1 )
13,727
35
1,197
4,320
1,377
1,691
307
8,927
$ 4,800
$ 12,428
1,100
(297 )
(110 )
(10 )
13,111
54
718
145
126
2,121
562
3,726
$ 9,385
$
$
(6,177 )
(1,365 )
(89 )
106
2
(7,523 )
(61 )
209
(2,537 )
(320 )
(473 )
13
(3,169 )
(4,354 )
$ 6,251
(265 )
(386 )
(4 )
(8 )
5,588
(7 )
927
(2,392 )
(194 )
1,648
575
557
$ 5,031
The provision for loan losses for the year ended December 31, 2005 was $3.7 million, an increase of $1.0 million when compared to the year ended
December 31, 2004. The increase in loan loss provision between the periods is primarily attributable to new or increased specific allocations, increased
commercial and residential real estate loan volume, and changes in various qualitative risk factors. Net charge-offs for 2005 and 2004 were $4.9 million
and $2.7 million, respectively. Expressed as a percentage of average loans, net charge-offs increased from 0.24% for 2004, to 0.38% for 2005. The
Company experienced a loss from a previously disclosed credit to a hospitality concern, which accounted for a large portion of the increase in net
charge-offs in 2005. During 2005, the $4.4 million loan was charged down to its net realizable value of $2.2 million. The note was sold to a third party
and the final net loss to the Company was $1.5 million.
19
Table of Contents
Non-interest Income
Details of non-interest income are summarized in the following table:
2005
Years Ended December 31,
2004
(Amounts in thousands)
2003
Wealth management income
Service charges on deposit accounts
Other service charges, commissions and fees
Other operating income
Net gains on sale of securities
Total
$ 2,956
10,095
2,785
5,716
753
$ 22,305
$ 2,489
9,122
2,239
1,875
1,604
$ 17,329
$ 2,159
8,071
2,013
1,101
1,198
$ 14,542
Non-interest income consists of all revenues which are not included in interest and fee income related to earning assets. Non-interest income
from continuing operations for 2005 was $22.3 million compared to $17.3 million in the same period of 2004. Wealth management income, which
includes fees for trust services and commission and fee income generated by Stone Capital, increased $467 thousand in 2005, or 18.8%, compared to
2004 as a result of the Company’s continued focus on growth. Stone Capital has expanded its retail asset management services through the addition of
two investment advisors and the licensing of a number of investment associates within the bank branches.
Service charges on deposit accounts increased $973 thousand, or 10.7%, while other service charges, commissions and fees reflected gains of
$546 thousand, or 24.4%. Other service charges, commissions and fees increased largely because of ATM usage fees on foreign cards of $1.4 million
and official check commissions of $256 thousand.
Other operating income includes $4.4 million in gain from the sale of the Clifton Forge, Virginia, branch location. The remaining components of
other operating income decreased $525 thousand compared to 2004. 2005 included securities gains of $753 thousand, which were $851 thousand less
than those recognized in 2004.
Non-interest Expense
Total non-interest expense from continuing operations was $55.6 million, an increase of $7.6 million for 2005 over 2004. The single largest item
contributing to the increase was the $3.8 million prepayment penalty incurred in connection with the early termination of $77.0 million of FHLB
advances in late December. Salaries and benefits increased approximately $2.8 million due to increases in staffing to support added corporate services,
continued branch and loan production office growth, and increased health benefits costs.
Occupancy and furniture and equipment expenses increased $344 thousand and $447 thousand, respectively, compared to 2004. The general
level of occupancy and furniture and equipment costs in 2005 grew largely as a result of increases in depreciation and insurance costs associated with
de novo branches and depreciation associated with continued investment in operating equipment and technology infrastructure.
All other operating expense accounts increased $100 thousand in 2005 compared to 2004. The most significant item within the increase in other
operating expense was the increase in audit fees, which increased over $335 thousand year-over-year.
The Company uses a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations.
Management believes this traditional ratio better focuses attention on the core operating performance of the Company over time than does a GAAP-
based ratio, and is highly useful in comparing period-to-period operating performance of the Company’s core business operations. It is used by
management as part of its assessment of its performance in managing non-interest expenses. However, this measure is supplemental and is not a
substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the traditional efficiency ratio used by the Company
may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.
20
Table of Contents
In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income. Non-interest expenses
used in the calculation of the traditional, non-GAAP efficiency ratio exclude amortization of goodwill and intangibles and non-recurring expenses.
Income for the traditional ratio is increased for the favorable effect of tax-exempt income (see Table I), and excludes securities gains and losses, which
vary widely from period to period without appreciably affecting operating expenses, and non-recurring gains. The measure is different from the GAAP
based efficiency ratio, which also is presented in this report. The GAAP based measure is calculated using non-interest expense and income amounts
as shown on the face of the Consolidated Statements of Income. The GAAP and traditional based efficiency ratios are reconciled in the table below.
The traditional, non-GAAP efficiency ratios for continuing operations for 2005, 2004, and 2003 were 53.9%, 53.2%, and 45.2%, respectively.
Increases in the current year is reflective of the higher direct costs associated with the new offices in 2005 and 2004 and added corporate overhead
required to support Company expansion. The following table details the components used in calculation of the efficiency ratios.
GAAP based and Traditional Efficiency Ratios
Non-interest expenses — GAAP based
Net interest income plus non-interest income — GAAP based
Efficiency ratio — GAAP based
Non-interest expenses — GAAP based
Less non-GAAP adjustments:
Foreclosed property expense
Amortization of intangibles
Prepayment penalties on FHLB advances
Non-interest expenses — traditional ratio
Net interest income plus non-interest income — GAAP based
Plus non-GAAP adjustments:
Tax-equivalency
Less non-GAAP adjustments:
Security gains
Branch sale gains
Efficiency Ratio — traditional
Equity-based Compensation
2005
2004
(Dollars in thousands)
2003
$ 55,591
99,933
57.95 %
$ 55,591
$ 48,035
86,512
55.52 %
$ 48,035
$ 37,590
$ 78,786
47.71 %
$ 37,590
(288 )
(435 )
(3,794 )
51,074
95,933
(500 )
(399 )
—
47,136
86,512
(602 )
(243 )
—
36,745
78,786
4,072
3,719
3,626
(753 )
(4,366 )
94,886
53.83 %
(1,604 )
—
88,627
53.18 %
(1,198 )
—
81,214
45.24 %
On January 1, 2006, the Company adopted the equity-based compensation accounting provisions of Statement of Financial Accounting
Standards ("SFAS") 123R. Through December 31, 2005, the Company accounted for equity-based compensation under APB Opinion No. 25, using the
intrinsic-value model. Under Opinion No. 25, the Company recognized no compensation expense related to stock options granted, and provided pro-
forma disclosures of the effects of accounting for stock options under the fair value model. The Company has selected the modified prospective
method of transition. Management expects the adoption of the new equity-based compensation accounting standard to result in increased
compensation expense. The total compensation cost related to nonvested stock option awards that management expects to recognize is approximately
$721 thousand. The weighted average period over which that compensation cost is expected to be recognized is 1.9 years. Future awards of stock
options will increase the amount of compensation expense to be recognized under SFAS 123R.
21
Table of Contents
Income Tax Expense
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the Company. Income taxes as a
percentage of pre-tax income may vary significantly from statutory rates due to items of income and expense which are excluded, by law, from the
calculation of taxable income. These items are commonly referred to as permanent differences. The most significant permanent differences for the
Company include i) income on state and municipal securities which are exempt from federal income tax, ii) certain dividend payments which are
deductible by the Company, iii) tax credits generated by investments in low income housing and iv) for 2004, goodwill impairment expense which is not
deductible.
Consolidated income taxes for 2005 were $10.1 million, a 27.7% effective tax rate, compared to $7.7 million, an effective tax rate of 25.6%, for 2004.
The effective tax rate for the 2004 was less than 2005 due to the tax benefits realized from the divestiture of the mortgage banking subsidiary.
Specifically, the non-deductible impairment charges recognized in 2003 and the first two quarters of 2004 reduced the book carrying basis of the
investment in the mortgage subsidiary and resulted in a permanent difference during the third quarter of 2004 upon sale of the entity. This difference
reduced the 2004 effective tax rate to 25.6% and is the primary cause of the increase in the effective tax rate when comparing 2004 to 2005.
The previously disclosed state tax audit of state income, franchise, and sales tax in one of the Company’s tax jurisdictions was concluded during
the fourth quarter of 2005. The outcome of this audit was favorable to the Company and resulted in total state income and franchise tax refunds of
approximately $473 thousand. During the fourth quarter the company submitted the required claims of refund to the state. The Company anticipates
receiving these refunds during the first quarter of 2006.
2004 COMPARED TO 2003
Net income for 2004 was $22.4 million, down $2.8 million from $25.2 million in 2003. Basic and diluted earnings per share for 2004 were $1.99 and
$1.97, respectively, compared to basic and diluted earnings per share of $2.27 and $2.25, respectively, in 2003.
The Company’s key profitability ratios are return on average assets (net income as a percentage of average assets) and return on average equity
(net income as a percentage of average common shareholder’s equity). Return on average assets for 2004 and 2003 were 1.24% and 1.56%,
respectively. The return on average equity for those years were 12.53% and 15.13%, respectively. The returns compare with national peer returns of
1.20% and 14.00%, respectively, based on the September 2004 Bank Holding Company Performance Report.
Net Interest Income
Net interest income from continuing operations was $69.2 million for the year ended December 31, 2004 compared to $64.2 million for the
corresponding period in 2003. Tax equivalent net interest income totaled $72.9 million for 2004, an increase of $5.0 million from the $67.9 million
reported in 2003. This $5.0 million increase includes a $9.5 million increase due to an increase in earning assets, which were added to the portfolio at
declining replacement rates. This increase was partially offset by a net $4.4 million reduction due to rate changes on the underlying assets and
liabilities as asset yields fell in the declining rate environment. Average earning assets increased $187.7 million while average interest-bearing liabilities
increased $175.4 million. The yield on average earning assets decreased 39 basis points from 6.44% for the year ended December 31, 2003 to 6.05% for
the year ended December 31, 2004. This decrease was accompanied by a 24 basis point decline in the cost of funds during the same periods. As a
result, the net interest rate spread at December 31, 2004 was lower at 4.11% compared to 4.26% for the same period last year. The Company’s tax
equivalent net interest margin of 4.41% for the year ended December 31, 2004 decreased 23 basis points from 4.64% in 2003.
The largest contributor to the decrease in the yield on average earning assets in 2004, on a volume-weighted basis, was the decrease in the
overall tax equivalent yield on loans held for investment of 60 basis points from the prior year to 6.63%, as loans repriced downward in response to the
declining rate environment of the preceding year and continued low rates in the first half of 2004. The average balance of loans increased
$182.5 million, largely due to the PCB acquisition in Tennessee and expansion offices in North Carolina. The decline in asset yield is
22
Table of Contents
attributable to the recent interest rate environment which created refinancing or repricing incentives for fixed-rate borrowers to lower their borrowing
costs. Strong competition for commercial loans also held loan yields lower in 2004.
During 2004, the taxable equivalent yield on securities available for sale decreased 24 basis points to 4.62% while the average balance increased
by $16.2 million. Consistent with the current rate environment, the Company and the securities industry as a whole have experienced rapid turnover in
securities as higher yielding securities are either called or prepaid as refinancing opportunities arise. The increasing average security balance is the
result of continued reinvestment of available funds. The average balance of investment securities held to maturity decreased $3.7 million, while the
average yield decreased 23 basis points to 8.00%. Securities held to maturity are largely comprised of tax-free municipal securities. Compared to 2003,
average interest-bearing balances with banks decreased $6.6 million between 2003 and 2004, while the yield increased 30 basis points to 1.82%.
The average cost of interest-bearing liabilities decreased by 24 basis points from 2.18% in 2003 to 1.94% in 2004 while the average volume of
interest-bearing liabilities increased $175.4 million.
Compared to 2003, the average balance of FHLB and other short-term convertible and callable borrowings increased in 2004 by $58.6 million to
$240.6 million while the average rate decreased 3 basis points to 3.15%, the result of the addition of balances acquired with the CommonWealth and
PCB acquisitions, the addition of new advances at lower rates partially offset by the maturity of a $25 million FHLB advance in December 2004. The
average balance of all other borrowings increased $5.1 million in 2004 compared to 2003; the result of the issuance of $15 million in subordinated
debentures late in the third quarter of 2003, while the rate paid decreased 30 basis points.
In addition, the average balances of interest-bearing demand and savings deposits increased $20.4 million and $86.1 million, respectively. The
average rate paid on demand deposits decreased by 5 basis points while the average rate paid on savings increased by 7 basis points (the result of
higher rates paid by PCB on certain money market accounts). Average time deposits increased $5.1 million while the average rate paid decreased
41 basis points from 2.85% in 2003 to 2.44% in 2004. The level of average non-interest-bearing demand deposits increased $33.8 million to
$212.8 million at December 31, 2004 compared to 2003. Average interest-bearing deposits and non-interest bearing demand deposits for
CommonWealth Bank, which was acquired in June 2003, totaled $66.1 million and $25.1 million, respectively in 2004 and $35.9 million and $18.1 million,
respectively in 2003. Included in the 2004 average balances related to the PCB acquisition were interest-bearing and non-interest bearing deposits of
$97.7 million and $14.2 million at December 31, 2004.
Provision for Loan Losses
The provision for loan losses for the year ended December 31, 2004 decreased $748 thousand compared to the year ended December 31, 2003.
The provision for loan losses was $2.7 million in 2004 and $3.4 million in 2003. Net charge-offs for 2004 and 2003 were $2.7 million and $4.8 million,
respectively. Expressed as a percentage of average loans held for investment, net charge-offs decreased from 0.49% for 2003, to 0.24% for 2004.
Non-interest Income
Total non-interest income increased approximately $2.8 million, or 19.2%, from $14.5 million for the year ended December 31, 2003 to $17.3 million
for the corresponding period in 2004. Service charges on deposit accounts increased $1.1 million or 13.0% while other service charges, commissions
and fees reflected gains of $226 thousand or 11.2%. Other operating income improved 70.3%, or $774 thousand, in 2004.
During 2004, the Company realized a gain on sale of securities of approximately $1.6 million due largely to the sale of $25.0 million of corporate
bonds held in the Company’s available for sale investment portfolio, the market value of which had declined in step with the flattening of the Treasury
yield curve. The proceeds from the sale of these securities in the second quarter of 2004 provided sufficient liquidity to pay-off overnight borrowings
and assisted the Company in funding increased loan demand. These gains, along with smaller gains on securities called, compared to those of the
same period of 2003 reflect a year over year increase of $406 thousand.
23
Table of Contents
Wealth management revenues, which include fees for trust services, increased $330 thousand in 2004 versus 2003. The increase in fiduciary
revenues in 2004 relates to both account and asset growth within the trust division which came under new management in early 2004. The increase in
revenues includes an increase of $106 thousand in mutual fund shareholder service fees which were previously retained by an outsourced investment
advisor and increased estate fees of $52 thousand. Stone Capital asset management fees grew from $371 thousand in 2003 to $531 thousand in 2004.
This growth reflects the initial stages of expansion of the retail asset management services under Stone Capital and its addition of investment advisors
and the licensing of a number of investment associates within the bank branches.
Non-interest Expense
Total non-interest expense from continuing operations was $48.0 million, an increase of 27.8% or $10.4 million for 2004 over 2003. A $6.0 million
or 29.1% increase in salaries and benefits and a $2.8 million increase in other operating expenses account for 85% of this increase, resulting from the
Company’s expansion into Blacksburg, Virginia, Eastern Virginia, East Tennessee, and Charlotte, Winston-Salem and Mount Airy, North Carolina.
This expansion brings with it the associated costs of additional branch personnel, corporate services and support, added technology and
infrastructure as further detailed below.
The $6.0 million increase in salaries and benefits includes the addition of CommonWealth Bank in June 2003 ($1.0 million), the acquisition of PCB
in the second quarter of 2004 ($1.9 million), the salaries and benefits associated with three North Carolina de novo branches opened in late 2003 and
the opening of two new North Carolina loan production offices in the first quarter of 2004 ($1.2 million), and three new loan production offices in
Virginia and West Virginia ($230 thousand), as well as a general increase in salaries and benefits as staffing needs at several locations were satisfied in
order to support added corporate services and continued branch growth.
Occupancy and furniture and equipment expenses increased $647 thousand and $878 thousand, respectively, compared to 2003 for a total of
$1.5 million. The general level of occupancy and furniture and equipment costs grew largely as a result of the CommonWealth acquisition ($156
thousand), the PCB Bancorp acquisition ($477 thousand), increases in depreciation and insurance costs associated with new de novo branches ($210
thousand) and depreciation associated with continued investment in operating equipment and technology infrastructure.
All other operating expense accounts increased $2.8 million in 2004 compared to 2003. Significant increases were related to the additional costs
associated with the opening of three new branches in Winston-Salem and two loan production offices in Charlotte and Mount Airy, North Carolina
($119 thousand), the opening of three loan production offices in Virginia and West Virginia ($68 thousand), the acquisition of CommonWealth in
Richmond, Virginia ($263 thousand) and the Tennessee acquisition of PCB Bancorp ($616 thousand). Other operational and data processing expenses
also increased as a result of the acquisition and branching activity, such as correspondent bank fees, insurance, courier and OCC assessments.
The efficiency ratios for continuing operations for 2004 and 2003 were 53.2% and 45.2%, respectively. Increases in the current year is reflective
of the higher direct costs associated with the acquisitions and new offices in 2003 and 2004 and added corporate overhead required to support
Company expansion.
Income Tax Expense
Consolidated income taxes were $7.7 million for 2004, a 25.6% effective tax rate, compared with $10.3 million, an effective tax rate of 29.1% in 2003.
During 2004, the Company sold its mortgage subsidiary. Prior to the disposition of the mortgage subsidiary the Company recognized goodwill
impairment expense in 2003 and the first two quarters of 2004. Because the goodwill impairment charges were not deductible, they increased the
effective tax rate for 2003 and for the first two quarters of 2004. The impairment charges did, however, reduce the book carrying basis of the mortgage
subsidiary which resulted in a tax benefit of $950 thousand at the time of sale. This difference reduced the combined effective tax rate for 2004 to 25.6%
from 29.1% in 2003.
24
Table of Contents
FINANCIAL POSITION
Securities Available for Sale
Securities available for sale were $404.4 million at December 31, 2005, compared to $376.0 million at December 31, 2004, an increase of
$28.4 million.
The Company attempts to maintain an acceptable level of interest rate risk within its securities portfolio. At December 31, 2005, the average life
and duration of the portfolio were 7.0 years and 5.4, respectively. Average life and duration were somewhat higher than December 31, 2004, at 4.0 years
and 3.5, respectively. However, the Company has been shifting towards more floating-rate securities. At December 31, 2005, 22% of the portfolio was
floating-rate, compared to 16% at December 31, 2004.
Available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. This review includes an
analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for
that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery or maturity. A
decline in value that is considered to be other-than-temporary would be recorded as a loss within non-interest income in the Consolidated Statements
of Income. At December 31, 2005, the combined depreciation in value of the individual securities in an unrealized loss position for more than 12 months
was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any unrealized loss, individually
or in the aggregate, as of December 31, 2005, represents other-than-temporary impairment. The Company has the intent and ability to hold these
securities until such time as the value recovers or the securities mature. Furthermore, the Company believes the decline in value is attributable to
changes in market interest rates and not the credit quality of the issuer.
The following table details amortized cost and fair value of securities available for sale December 31, 2005, 2004, and 2003.
2005
Amortized
Cost
Fair
Value
December 31,
2004
Amortized
Cost
Fair
Value
(Amounts in thousands)
2003
Amortized
Cost
Fair
Value
$
92,739
151,118
61,466
305,323
94,954
5,390
$ 405,667
$
91,424
152,168
61,274
304,866
92,994
6,521
$ 404,381
$
46,541
142,882
37,589
227,012
142,427
2,626
$ 372,065
$
45,946
145,146
38,129
229,221
142,979
3,797
$ 375,997
$
72,856
100,708
66,021
239,585
184,773
2,517
$ 426,875
$
72,259
103,051
69,656
244,966
186,723
3,468
$ 435,157
U.S. Government agency securities
States and political subdivisions
Corporate Notes
Mortgage-backed securities
Equities
Total
Securities Held to Maturity
Investment securities held to maturity are comprised primarily of high-grade state and municipal bonds. These securities generally carry AAA
bond ratings, most of which also carry credit enhancement insurance by major insurers of investment obligations. The portfolio totaled $24.2 million at
December 31, 2005 compared to $34.2 million at December 31, 2004. This decrease is reflective of continuing paydowns, maturities and calls within the
portfolio. The market value of investment securities held to maturity was 102.9% and 104.1% of book value at December 31, 2005 and 2004,
respectively. Recent trends in interest rates have had little effect on the portfolio market value since December 31, 2004, due to its larger percentage of
municipal securities which display less price sensitivity to rate changes.
25
Table of Contents
The average final maturity of the held to maturity investment portfolio decreased from 7.4 years in 2004 to 5.3 years in 2005 with the tax-
equivalent yield decreasing from 8.00% at year-end 2004 to 7.95% at the close of 2005. The average maturity of the investment portfolio, based on
market assumptions for prepayment, is 1.6 years and 1.91 years at December 2005 and 2004, respectively. The average maturity data differs from final
maturity data because of the use of assumptions as to anticipated prepayments.
The following table details amortized cost and fair value of securities held to maturity at December 31, 2003.
2005
Amortized
Cost
Fair
Value
December 31,
2004
Amortized
Cost
Fair
Value
(Amounts in thousands)
2003
Amortized
Cost
Fair
Value
$
$
23,781
375
24,156
17
24,173
$ 24,486
374
24,860
17
$ 24,877
$
$
33,814
375
34,189
32
34,221
$ 35,202
375
35,577
33
$ 35,610
$
$
37,521
375
37,896
124
38,020
$ 39,557
375
39,932
128
$ 40,060
States and political subdivisions
Corporate Notes
Mortgage-backed securities
Total
Loans Held for Sale
To mitigate interest rate risk, the Company sells most of the long-term, fixed-rate mortgage loans it originates in the secondary market. At
December 31, 2005, the Company held $1.3 million of loans for sale to the secondary market. The gross notional amount of outstanding commitments
to originate mortgage loans for customers at December 31, 2005, was $9.2 million on 53 loans.
Loans Held for Investment
Total loans held for investment increased $92.3 million to $1.33 billion at December 31, 2005, from $1.24 billion at December 31, 2004 as a result of
increased loan production and contributions by new loan production offices. Average loan to deposit ratio increased to 92.3% at December 31, 2005,
compared with 86.3% at December 31, 2004. 2005 average loans held for investment of $1.30 billion increased $142.9 million when compared to the
average for 2004 of $1.16 billion. The increase in average loans reflects the impact of the acquisition of PCB on March 31, 2004 and growth through the
Company’s de novo and loan production office expansion efforts, along with the existing branches.
26
Table of Contents
The held for investment loan portfolio continues to be diversified among loan types and industry segments. The following table presents the
various loan categories and changes in composition at year-end 2001 through 2005.
Loan Portfolio Summary
Commercial, Financial and Agricultural
Real Estate — Commercial
Real Estate — Construction
Real Estate — Residential
Consumer
Other
Total
Less Unearned Income
Less Allowance for Loan Losses
Net Loans
December 31,
2005
2004
2003
2002
2001
(Amounts in thousands)
$
$
110,211
464,510
143,976
504,387
106,206
1,808
1,331,098
59
1,331,039
14,736
1,316,303
$
$
99,302
453,899
112,705
457,417
113,639
2,012
1,238,974
218
1,238,756
16,339
1,222,417
$
$
69,395
317,421
98,510
421,299
119,195
992
1,026,812
621
1,026,191
14,624
1,011,567
74,186
$
285,847
72,275
364,087
131,385
726
928,506
885
927,621
14,410
$ 913,211
96,641
$
259,717
77,402
332,671
138,426
961
905,818
1,322
904,496
13,952
$ 890,544
The Company maintained no foreign loans in the periods presented.
The following table details the maturities and rate sensitivity of the Company’s loan portfolio at December 31, 2005.
Maturities and Rate Sensitivity of Loan Portfolio at December 31, 2005
Commercial, Financial and Agricultural
Real Estate — Commercial
Real Estate — Construction
Real Estate — Mortgage*
Consumer*
Other
Rate Sensitivity:
Pre-determined Rate
Floating or Adjustable Rate
One Year
and Less
Remaining Maturities
Over
One to
Five Years
Over
Five Years
(Dollars in thousands)
Total
Percent
$ 51,817
73,225
89,616
43,226
18,289
51
$ 276,224
$
54,461
271,105
50,948
148,193
79,820
1,616
$ 606,143
$
3,933
120,180
3,412
312,967
8,039
141
$ 448,672
$ 108,324
167,900
$ 276,224
$ 447,653
158,490
$ 606,143
$ 105,749
342,923
$ 448,672
$
$
$
$
110,211
464,510
143,976
504,386
106,148
1,808
1,331,039
8.28 %
34.90 %
10.82 %
37.89 %
7.97 %
0.14 %
100.00 %
661,726
669,313
1,331,039
49.71 %
50.29 %
100.00 %
* Amounts are net of $59 thousand of unearned income; $1 thousand in the Real Estate — Mortgage category and $58 thousand in Consumer.
27
Table of Contents
Allowance for Loan Losses
The allowance is increased by charges to earnings in the form of provisions and by recoveries of prior charge-offs, and decreased by charge-
offs. The provisions are calculated to bring the allowance to a level, which, according to a systematic process of measurement, is reflective of the
required amount needed to absorb probable losses.
Management performs monthly assessments to determine the appropriate level of the allowance. Differences between actual 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 loan loss portion of the
allowance. The specific components of the loan 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 commitments 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 was $14.7 million at December 31, 2005, compared to $16.3 million at December 31, 2004. The decrease in the
allowance since December 2004 is primarily attributable to changes in various qualitative risk factors specific to the portfolio and increased charge-offs
for 2005. Management considers the allowance adequate based upon its analysis of the portfolio as of December 31, 2005. However, no assurance can
be made that additions to the allowance for loan losses will not be required in future periods.
The following table details loan charge-offs and recoveries by loan type for the five years ended December 31, 2001 through 2005.
Summary of Loan Loss Experience
2005
2004
Years Ended December 31,
2003
(Dollars in thousands)
2002
2001
Allowance for loan losses at beginning of period
Acquisition balances
Charge-offs:
Commercial, financial, agricultural and commercial real estate
Real estate — residential
Installment
Total Charge-offs
Recoveries:
Commercial, financial and agricultural
Real estate — residential
Installment
Total Recoveries
Net charge-offs
Provision charged to operations
Reclassification of allowance for lending-related commitments(1)
Allowance for loan losses at end of period
$ 16,339
—
$ 14,624
1,786
$ 14,410
1,583
$ 13,952
395
$ 12,303
484
5,017
385
1,534
6,936
1,925
723
1,526
4,174
3,302
686
2,133
6,121
2,162
464
2,243
4,869
1,979
720
2,181
4,880
1,413
188
418
2,019
4,917
3,706
(392 )
$ 14,736
727
90
615
1,432
2,742
2,671
—
$ 16,339
711
58
564
1,333
4,788
3,419
—
$ 14,624
167
129
428
724
4,145
4,208
—
$ 14,410
155
298
458
911
3,969
5,134
—
$ 13,952
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(1) At June 30, 2005, the Company reclassified $392 thousand of its allowance for loan losses to a separate allowance for lending-related liabilities.
Net income and prior period balances were not affected by this reclassification. The allowance for lending-related liabilities is included in other
liabilities.
The following table details the allocation of the allowance for loan losses for the five years ended December 31, 2005.
Allocation of Allowance for Loan Losses
2005
2004
December 31,
2003
(Dollars in thousands)
2002
2001
Commercial, Financial and Agricultural
Real Estate — Mortgage
Consumer
Unallocated
$ 9,993
2,462
2,281
—
58 %
34 %
8 %
0 %
$ 11,700
2,084
2,555
—
57 %
34 %
9 %
0 %
$ 9,414
2,207
3,003
—
47 %
41 %
12 %
0 %
$ 8,905
1,684
3,821
—
47 %
39 %
14 %
0 %
$ 8,399
3,543
2,010
—
47 %
38 %
15 %
0 %
Total
$ 14,736
100 %
$ 16,339
100 %
$ 14,624
100 %
$ 14,410
100 %
$ 13,952
100 %
Non-performing Assets
Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and still accruing interest, other real
estate owned, and repossessions. The levels of non-performing assets for the last five years are presented in the following table.
Summary of Non-Performing Assets
Non-accrual loans
Loans 90 days or more past due and still accruing interest
Other real estate owned
Repossessions
Total non-performing assets
Non-performing loans as a percentage of total loans
Non-performing assets as a percentage of total loans and other real estate owned
Allowance for loan losses as a percentage of non-performing loans
Allowance for loan losses as a percentage of non-performing assets
2005
$ 3,383
11
1,400
55
$ 4,849
0.25 %
0.36 %
434.2 %
303.9 %
2004
December 31,
2003
(Amounts in thousands)
2002
$ 5,168
—
1,419
1
$ 6,588
0.42 %
0.53 %
316.2 %
248.0 %
$ 2,993
—
2,091
—
$ 5,084
0.29 %
0.49 %
488.6 %
287.6 %
$ 3,075
91
2,855
—
$ 6,021
0.34 %
0.65 %
455.1 %
239.3 %
2001
$ 3,633
1,351
3,029
—
$ 8,013
0.55 %
0.88 %
279.9 %
174.1 %
Total non-performing assets were $4.8 million at December 31, 2005 compared to $6.6 million at December 31, 2004, a decrease of $1.7 million.
Non-accrual loans decreased by $1.8 million to $3.4 million at December 31, 2005. Ongoing activity within the classification and categories of non-
performing loans continues to include collections on delinquencies, foreclosures and movements into or out of the non-performing classification as a
result of changing customer business conditions. Loans 90 days past due and still accruing at December 31, 2005 and 2004, were $11 thousand and $0,
respectively. Other real estate owned decreased $19 thousand to $1.4 million in 2005 and is carried at the lesser of estimated net realizable value or
cost.
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Certain loans included in the non-accrual category 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 2005, 2004 and 2003, $1.3 million, $2.1 million, and $1.6 million, respectively, 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.
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
Recorded investment in impaired loans with related allowance
Allowance for loan losses related to loans considered to be impaired
Average recorded investment in impaired loans
Total interest income recognized on impaired loans
Recorded investment in impaired loans with no related allowance
$ 4,645
3,383
3,555
1,528
5,687
338
1,090
$ 8,319
2,096
8,319
2,647
8,483
389
—
$ 7,649
1,609
7,189
2,422
7,798
443
460
The Company has considered all impaired loans in the evaluation of the adequacy of the allowance for loan losses at December 31, 2005. The
following table presents detail of non-performing loans for the five years ended December 31, 2005. Additional information regarding nonperforming
loans can be found in Note 5, Allowance for Loan Losses, included in the Financial Statements under Item 8 of this report.
2005
2004
(Amounts in thousands)
2003
Non-Performing Loans
2005
2004
December 31,
2003
(Amounts in thousands)
2002
2001
Non-accruing Loans
Loans Past Due Over 90 Days and still accruing interest
Restructured Loans Performing in Accordance with Modified Terms
Gross Interest Income Which Would Have Been Recorded Under Original
Terms of Non-Accruing and Restructured Loans
Actual Interest Income During the Period
$ 3,383
11
302
$ 5,168
—
354
$ 2,993
—
356
$ 3,075
91
345
$ 3,633
1,351
518
380
161
439
293
282
194
222
108
291
97
There are no outstanding commitments to lend additional funds to borrowers related to restructured loans.
Potential Problems Loans — In addition to loans which are classified as non-performing, the Company closely monitors certain loans which
could develop into problem loans. These potential problem loans present characteristics of weakness or concentrations of credit to one borrower. At
December 31, 2005, there were no significant potential problem loans.
Although the Company’s loans are made primarily in the four-state region in which it operates, the Company had no concentrations of loans to
one borrower or industry representing 10% or more of outstanding loans at December 31, 2005.
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Deposits
Total deposits grew by $46.9 million, or 3.4%, during 2005. Noninterest-bearing demand deposits increased by $9.0 million, or 4.1%, while
interest-bearing demand deposits decreased $5.8 million, or 3.9%. Savings deposits, which are made of up money market accounts and passbook
savings, decreased $30.0 million, or 7.8%, while time deposits increased $73.6 million, or 12.2%. The attrition from savings and the increase in time
deposits reflects the continued migration of new and current customer funds in response to the upward movement in time deposit interest rates.
Adding to the increase in time deposits were the results of the Company’s successful first quarter certificate of deposit marketing campaign.
Average total deposits increased to $1.41 billion for 2005 versus $1.34 billion in 2004, an increase of 5.0%. Average savings deposits increased
by $2.3 million while average time deposits increased by $46.2 million. Average interest-bearing demand and non-interest bearing demand deposits
increased by $3.3 million and $16.0 million, respectively. In 2005, the average rate paid on interest bearing deposits was 2.03%, up from 1.63% in 2004.
Average Deposits and Average Rates
Interest-bearing liabilities:
Demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
2005
2004
2003
Average
Balance Interest Rate
Average
Balance Interest Rate
(Dollars in thousands)
Average
Balance Interest Rate
$ 152,774 $
401 0.26 %
368,339 4,309 1.17 %
661,498 19,321 2.92 %
$ 1,182,611 $ 24,031 2.03 %
$ 149,502 $
366 0.24 %
366,074 3,112 0.85 %
615,346 15,001 2.44 %
$ 1,130,922 $ 18,479 1.63 %
$ 129,072 $
373 0.29 %
279,972 2,185 0.78 %
610,201 17,392 2.85 %
$ 1,019,245 $ 19,950 1.96 %
Non-interest bearing demand deposits
$ 228,781
$ 212,777
$ 178,961
Scheduled Maturities of Certificates of Deposit Greater than $100,000 As of December 31, 2005
Three Months or Less
Over Three to Six Months
Over Six to Twelve Months
Over Twelve Months
Total
Borrowings
(Amounts in thousands)
$
$
61,762
35,218
59,398
91,104
247,482
The Company’s borrowings consist primarily of overnight federal funds purchased from the FHLB and other sources, securities sold under
agreements to repurchase, and FHLB borrowings. This category of liabilities represents wholesale sources of funding and liquidity for the Company.
Federal funds purchased were $82.5 million and $32.5 million, at year-end 2005 and 2004, respectively. Securities sold under repurchase
agreements were $124.2 million and $109.9 million at December 31, 2005 and 2004, respectively. These agreements are sold to customers as an
alternative to available deposit products. The underlying securities included in repurchase agreements remain under the Company’s control during the
effective period of the agreements.
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Short-term borrowings include overnight federal funds, and securities sold under agreements to repurchase. Balances and rates paid on short-
term borrowings for continuing operations are summarized as follows:
At year-end
Average during the year
Maximum month-end balance
2005
2004
2003
Amount
Rate
Amount
Rate
(Dollars in thousands)
Amount
Rate
$ 206,654
128,551
206,654
2.79 %
2.16 %
$ 142,357
109,223
142,357
1.55 %
1.29 %
$ 97,651
100,817
131,128
1.02 %
1.59 %
Short-term borrowings increased on average approximately $19.3 million compared to the prior year as a result of continued loan demand and
increases in portfolio assets. Funding cost is managed by the Company’s Asset/Liability Management Committee, which monitors, among other
things, product and pricing, overall cost of funds, and maintenance of an acceptable net interest margin.
In December 2005, the Company prepaid certain of its highest interest rate FHLB advances. The retired obligations had a weighted-average
interest rate and maturity of 5.96% and 4.3 years, respectively. In connection with the early termination, the Company incurred prepayment penalties of
approximately $3.8 million. In January 2006, the Company borrowed $75 million in new adjustable-rate advances from the FHLB. $50 million of the
advances were hedged by an interest rate swap to approximate a fixed rate of 4.34%. The remaining $25 million floats at an interest rate equal to
3-month LIBOR less 45 basis points.
At December 31, 2005, FHLB borrowings included $106.1 million in convertible and callable advances and $7.7 million of noncallable advances
for a total of $113.8 million. The weighted-average interest rates of all advances were 4.17% and 5.54% at December 31, 2005 and 2004, respectively. At
December 31, 2005, the FHLB advances had maturities between twelve months and 8 years. The scheduled maturities of the advances are as follows:
2006
2007
2008
2009
2010
2011 and thereafter
(Amounts in thousands)
$
$
384
6,260
25,000
—
25,000
57,123
113,767
Also included in other indebtedness is $15.5 million of junior subordinated debentures issued by the Company in October 2003 to an
unconsolidated trust subsidiary.
Liquidity and Capital Resources
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 $681.0 million at December 31, 2005, is comprised of the following: cash on hand and deposits with other financial institutions
of $57.5 million; securities available for sale of $404.4 million; securities held to maturity due within one year of $1.8 million; and FHLB credit
availability of $217.3 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 securities, mortgage-backed obligations and loans with varying
maturities. The Company uses sources of funds primarily to meet ongoing commitments, to pay maturing savings certificates and savings withdrawals,
fund loan commitments and maintain a portfolio of securities. At December 31, 2005, approved loan commitments
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outstanding amounted to $198.1 million. Certificates of deposit scheduled to mature in one year or less totaled $422.4 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.
The following table presents contractual cash obligations as of December 31, 2005.
Cash Obligations
Deposits without a stated maturity(1)
Federal funds borrowed and overnight security repurchase
agreements
Certificates of Deposit — Principal
Certificates of Deposit — Interest
Certificates of Deposit(2)(3)
Securities sold under agreements to repurchase
FHLB Advances(2)(3)
Trust Preferred Indebtedness
Leases
Total
December 31, 2005
Total Payments Due by Period
Total
Less Than
1 Year
Two to
Three Years
(Amounts in thousands)
Four to
Five Years
After
5 Years
$
730,040 $
730,040 $
— $
— $
—
165,951
675,904
29,900
705,804
40,782
145,170
45,967
3,510
1,671,273 $
165,951
422,395
15,283
437,678
38,617
7,448
1,097
780
1,215,660 $
$
—
173,480
10,694
184,174
1,352
43,554
2,194
1,382
—
3,180
504
3,684
—
59,875
40,482
760
232,656 $ 118,156 $ 104,801
—
76,849
3,419
80,268
813
34,293
2,194
588
(1) Excludes Interest.
(2) Includes interest on both fixed and variable-rate obligations. The interest associated with variable-rate obligations is based upon interest rates in
effect at December 31, 2005. The interest to be paid on variable-rate obligations is affected by changes in market interest rates, which materially
affect the contractual obligation amounts to be paid.
(3) Excludes carrying value adjustments such as unamortized premiums or discounts.
The following table presents detailed information regarding the Company’s off-balance sheet arrangements at December 31, 2005.
Off-Balance Sheet Arrangements
December 31, 2005
Amount of Commitment Expiration Per Period
Two to
Three Years
(Amounts in thousands)
Four to
Five Years
Less Than
One Year
Total
After
Five Years
Commitments:
Commercial lines of credit
Consumer lines of credit
Letters of credit
Total commitments
$ 118,250
71,722
8,140
$ 198,112
$
73,232
29,062
7,006
$ 109,300
$
$
29,730
1,611
930
32,271
$
$
11,523
2,336
130
13,989
$
$
3,765
38,713
74
42,552
Lines of credit with no stated maturity date are included in commitments for less than one year.
33
Table of Contents
In January 2006, the Company entered into a pay fixed and receive variable interest rate swap. The swap effectively fixes $50 million of FHLB
borrowings at 4.34% for a period of five years. Management does not anticipate this derivative transaction will have a significant impact on reported
earnings or cash flows.
Stockholders’ Equity
Total stockholders’ equity increased $11.3 million to $194.5 million at December 31, 2005, as the Company continued to balance capital adequacy
and returns to stockholders. The increase in equity was due mainly to net earnings of $26.3 million after dividends paid to stockholders of
$11.5 million.
Risk-based capital guidelines and leverage ratio measure capital adequacy of banking institutions. At December 31, 2005, the Company’s Tier I
capital ratio was 10.54% compared with 10.80% in 2004. The Company’s total risk-based capital-to-asset ratio was 11.65% at the close of 2005
compared with 12.09% in 2004. 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, 2005 was 7.77% versus 7.62%
at December 31, 2004, both of which are well above the minimum levels prescribed by the Federal Reserve. See Note 12 of the Notes to Consolidated
Financial Statements.
Trust and Investment Management Services
As part of its community 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 $487 million and $506 million at
December 31, 2005 and 2004, respectively. The Trust Division manages inter vivos trusts and trusts under will, develops and administers employee
benefit plans and individual retirement plans and manages and settles estates. Fiduciary fees for these services are charged on a schedule related to
the size, nature and complexity of the account.
The Trust Division employs 18 professionals and full time equivalent 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 are offered to other branch locations and primary markets through the Bluefield-based division.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company’s profitability is dependent to a large extent upon its net interest income, 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
Company, 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 Company 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 net interest income given the current
interest rate environment.
The Company’s primary component of operational revenue, net interest income, is subject to variation as a result of changes in interest rate
environments in conjunction with unbalanced repricing opportunities on earning assets and interest-bearing 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 Company seeks to control its interest rate risk ("IRR") exposure to insulate net interest income and net earnings from
fluctuations in the general level of interest rates. To measure its exposure to IRR, quarterly simulations of net interest income are performed using
financial models that
34
Table of Contents
project net interest income 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-earning assets and interest-paying liabilities and 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 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 slightly toward liability sensitive position. Absent adequate management, liability sensitive
positions can negatively impact net interest income in a rising rate environment or, alternatively, positively impact net interest income in a falling rate
environment.
The Company has established policy limits for tolerance of interest rate risk that allow for no more than a 10% reduction in projected net interest
income based on quarterly income simulations compared to forecasted results. In addition, the policy addresses exposure limits to changes in the
Economic Value of Equity according to predefined policy guidelines. The most recent simulation indicates that current exposure to interest rate risk is
within the Company’s defined policy limits as short-term rates are anticipated to remain relatively stable throughout 2006.
The following table summarizes the impact of immediate and sustained rate shocks in the interest rate environment on net interest income and
the economic value of equity as of December 31, 2005 and 2004. The model simulates plus and minus 200 basis points from the flat rate simulation at
December 31, 2005. 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 and 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 and external variables.
Rate Sensitivity Analysis
Increase (Decrease)
in Interest Rates
(Basis Points)
200
100
(100)
(200)
Increase (Decrease)
in Interest Rates
(Basis Points)
200
100
(100)
Change in
Net Interest
Income
%
Change
Change in
Market Value
of Equity
%
Change
(Dollars in thousands)
$
(764 )
(403 )
(950 )
(4,299 )
$
(1.0 )
(0.5 )
(1.3 )
(5.8 )
(13,392 )
(6,211 )
(4,376 )
(15,755 )
(4.6 )
(2.2 )
(1.5 )
(5.5 )
Change in
Net Interest
Income
%
Change
Change in
Market Value
of Equity
%
Change
$
2,768
1,622
(2,770 )
$
4.0
2.4
(4.0 )
(6,497 )
(2,495 )
(10,114 )
(2.5 )
(1.0 )
(3.9 )
2005
2004
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
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 Registered Public Accounting Firm on Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control over
Financial Reporting
37
38
39
40
41
78
79
80
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FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
Cash and due from banks
Interest-bearing balances with banks
Total cash and cash equivalents
Securities available for sale (amortized cost of $405,667, 2005; $372,065, 2004)
Securities held to maturity (fair value of $24,877, 2005; $35,610, 2004)
Loans held for sale
Loans held for investment, net of unearned income
ASSETS
Less allowance for loan losses
Net loans held for investment
Premises and equipment, net
Other real estate owned
Interest receivable
Other assets
Goodwill
Other intangible assets
Total Assets
Deposits:
Noninterest-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
LIABILITIES
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued and outstanding in 2005 and 2004
Common stock, $1 par value; shares authorized: 25,000,000 in 2005 and 15,000,000 in 2004; shares issued: 11,496,312 in 2005
and 11,472,311 in 2004; shares outstanding: 11,251,803 in 2005 and 11,250,927 in 2004
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.
37
December 31,
2005
2004
(Amounts in thousands,
except share data)
$
46,872
10,667
$
37,294
17,452
57,539
404,381
24,173
1,274
1,331,039
14,736
1,316,303
34,993
1,400
10,232
41,069
59,182
1,937
$ 1,952,483
54,746
375,997
34,221
1,194
1,238,756
16,339
1,222,417
37,360
1,419
8,554
33,604
58,828
2,482
$ 1,830,822
$
230,542
1,175,402
1,405,944
16,153
82,500
124,154
129,231
1,757,982
$
221,499
1,137,565
1,359,064
14,313
32,500
109,857
131,855
1,647,589
—
—
11,496
108,573
82,828
(7,625 )
(771 )
194,501
11,472
108,263
68,019
(6,881 )
2,360
183,233
$ 1,952,483
$ 1,830,822
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2005
Years Ended December 31,
2004
(Amounts in thousands,
except share and per share data)
2003
Interest Income:
Interest and fees on loans
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 long-term debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income:
Wealth management income
Service charges on deposit accounts
Other service charges, commissions and fees
Other operating income
Net gains on sale of securities
Total noninterest income
Noninterest Expense:
Salaries and employee benefits
Occupancy expense of bank premises
Furniture and equipment expense
Core deposit amortization
Prepayment penalties on FHLB advances
Other operating expense
Total noninterest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued operations before income tax
Income tax benefit
Loss from discontinued operations
Net income
Basic earnings per common share
Diluted earnings per common share
Basic earnings per common share from continuing operations
Diluted earnings per common share from continuing operations
Dividends declared per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
$
$
89,903
11,077
7,451
1,077
109,508
24,030
9,721
2,129
35,880
73,628
3,706
69,922
2,956
10,095
2,785
5,716
753
22,305
29,481
3,903
3,319
435
3,794
14,659
55,591
36,636
10,191
26,445
(233 )
(91 )
(142 )
26,303
2.33
2.32
2.35
2.33
1.02
$
$
$
$
$
$
$
$
$
$
$
$
76,713
12,119
6,712
592
96,136
18,478
7,585
890
26,953
69,183
2,671
66,512
2,489
9,122
2,239
1,875
1,604
17,329
26,646
3,559
2,872
399
—
14,559
48,035
35,806
9,786
26,020
(5,746 )
(2,090 )
(3,656 )
22,364
1.99
1.97
2.32
2.29
1.00
$
$
$
$
$
$
$
70,432
13,117
6,488
604
90,641
19,950
5,792
655
26,397
64,244
3,419
60,825
2,159
8,071
2,013
1,101
1,198
14,542
20,644
2,912
1,994
243
—
11,797
37,590
37,777
11,058
26,719
(2,174 )
(693 )
(1,481 )
25,238
2.27
2.25
2.41
2.39
0.98
11,269,258
11,238,648
11,096,900
11,341,804
11,337,606
11,198,353
See Notes to Consolidated Financial Statements.
38
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
2005
Years Ended December 31,
2004
(Amounts in thousands)
2003
Cash flows from operating activities — continuing operations:
Income from continuing operations
Adjustments to reconcile net income to net cash provided by operating activities:
$ 26,445 $ 26,020 $ 26,719
Provision for loan losses
Depreciation and amortization of premises and equipment
Intangible amortization
Net investment amortization and accretion
Gains on the sale of assets
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Deferred income tax expense
(Increase) decrease in interest receivable
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities — continuing operations
Cash flows from investing activities — continuing operations:
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
Purchase of securities held to maturity
Net (increase) decrease in loans made to customers
Cash (used in) provided by divestitures and acquisitions, net
Purchase of premises and equipment
Proceeds from sale of equipment
Net cash used in investing activities — continuing operations
Cash flows from financing activities — continuing operations:
Net (decrease) increase in demand and savings deposits
Net increase (decrease) in time deposits
Net (decrease) increase in FHLB and other borrowings
Net increase in federal funds purchased
Net increase in securities sold under agreement to repurchase
Net proceeds from debt-trust preferred securities
Cash provided by issuance of common stock
Acquisition of treasury stock
Dividends paid
Net cash provided by (used in) financing activities — continuing operations
Net increase (decrease) in cash and cash equivalents — continuing operations
Cash flows from discontinued operations: (Revised — See Note 16)
Net cash (used in) provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Net cash used in discontinued operations
Cash and cash equivalents at beginning of year — continuing operations
Cash and cash equivalents at beginning of year — discontinued operations
3,706
3,339
436
1,049
(4,845 )
2,671
2,938
399
2,203
(1,786 )
(37,593 ) (26,751 )
37,513 25,981
147
705
(2,660 )
1,310
1,864
(1,707 )
(6,549 )
1,137
3,419
2,085
243
2,842
(1,064 )
(28,551 )
28,992
31
(150 )
1,975
(3,641 )
24,795 31,177
32,900
—
33,159 45,391
44,115 144,573
10,097
4,374
(111,223 ) (108,726 )
—
(104,307 ) (84,580 )
(32,630 ) (26,340 )
(7,336 )
334
(162,986 ) (32,310 )
(3,215 )
1,018
3,283
150,877
3,058
(300,858 )
(75 )
19,289
1,324
(6,722 )
402
(129,422 )
902
(6,362 ) 13,902
(20,019 )
96,130 (29,031 )
47,696
(3,088 ) (19,914 )
—
50,000 32,500
5,774
16,721 11,044
14,560
—
708
504
(4,977 )
(1,196 )
(10,847 )
(11,494 ) (11,239 )
33,797
(3,430 )
141,126
(4,563 ) $ (62,725 )
2,935 $
$
—
522
(1,303 )
$
(142 ) $ 15,149 $ 47,108
(83 )
—
460
(47,333 )
— (17,852 )
$
(142 ) $
(2,243 ) $
(308 )
$ 54,746 $ 59,309 $ 122,034
2,551
2,243
—
Cash and cash equivalents at beginning of year
$ 54,746 $ 61,552 $ 124,585
Cash and cash equivalents at end of year — continuing operations
Cash and cash equivalents at end of year — discontinued operations
Cash and cash equivalents at end of year
Supplemental information — Noncash items
Transfers of loans to other real estate
$ 57,539 $ 54,746 $ 59,309
2,243
$ 57,539 $ 54,746 $ 61,552
—
—
$
1,263 $
2,070 $
1,581
(See Note 1 for detail of income taxes and interest paid and Note 2 for supplemental information regarding detail of
cash paid in acquisitions.)
See Notes to Consolidated Financial Statements
39
Table of Contents
Balance December 31, 2002
Comprehensive income:
Net income
Other comprehensive income
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional
Accumulated
Other
Common Paid-in
Stock
Retained Treasury Comprehensive
Capital Earnings Stock
Income
Total
(Amounts in thousands, except share and per share information)
$
9,957 $
58,642 $ 79,084 $ (1,982 ) $
6,761 $ 152,462
25,238
$ 25,238
Unrealized loss on securities available for sale of $4,157, net of $1,663 tax benefit
Less reclassification adjustment for gains realized in net income of $1,185, net of
$474 tax benefit
Comprehensive income (loss)
Common dividends declared ($.98 per share)
Purchase 153,500 treasury shares at $32.43 per share
Acquisition of Stone Capital Management — 8,409 shares issued
Issuance of 63,095 shares under stock option plan
Acquisition of CommonWealth Bank — 389,609 shares issued
10% Stock Dividend & Fractional Adjustment
Issuance of ESOP shares
Balance December 31, 2003
Comprehensive income:
Net income
Other comprehensive income
$420 tax benefit
Comprehensive income (loss)
Common dividends declared ($1.00 per share)
Purchase 44,467 treasury shares at $26.89 per share
Acquisition of Stone Capital Management — 2,541 shares issued
Tax benefit from exercise of non-qualified stock options
Stock-based compensation
Issuance of 54,873 shares under stock option plans
Balance December 31, 2004
Comprehensive income:
Net income
Other comprehensive income
Unrealized loss on securities available for sale of $5,413, net of $2,165 tax benefit
Less reclassification adjustment for gains realized in net income of $1,050, net of
—
— 25,238
(10,847 )
8
49
390
1,038
236
311
12,904
35,992 (36,581 )
43
—
(4,977 )
349
(477 )
680
(2,494 )
(2,494 )
711
711
(1,783 ) 23,455
(10,847 )
(4,977 )
244
709
13,294
(28 )
723
11,442 108,128 56,894
(6,407 )
4,978 175,035
22,364
$ 22,364
—
3
27
— 22,364
(11,239 )
—
(1,196 )
85
164
131
(245 )
722
(3,248 )
(3,248 )
630
630
(2,618 ) 19,746
(11,239 )
(1,196 )
88
164
131
504
11,472 108,263 68,019
(6,881 )
2,360 183,233
26,303
26,303
Unrealized loss on securities available for sale of $5,647, net of $2,259 tax benefit
Less reclassification adjustment for gains realized in net income of $428, net of
$171 tax benefit
Comprehensive income (loss)
Common dividends declared ($1.02 per share)
Purchase 41,534 treasury shares at $31.38 per share
Acquisition of Stone Capital Management — 2,541 shares issued
Tax benefit from exercise of non-qualified stock options
Stock-based compensation 1,750 shares
Issuance of 38,146 shares under stock option plans
—
2
2
20
— 26,303
(11,494 )
—
(1,303 )
85
102
17
106
8
551
(3,388 )
(3,388 )
257
257
(3,131 ) 23,172
(11,494 )
(1,303 )
87
102
27
677
Balance December 31, 2005
$ 11,496 $ 108,573 $ 82,828 $ (7,625 ) $
(771 ) $ 194,501
See Notes to Consolidated Financial Statements
40
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of First Community Bancshares, Inc. and subsidiaries ("First Community" or
the "Company") conform to accounting principles generally accepted in the United States and to predominant practices
within the banking industry. In preparing financial statements, management is required to make estimates and assumptions
that affect the 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.
Principles of Consolidation
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 consolidation. First Community operates in the
community banking segment and operated a second segment related to mortgage banking until the disposition of United
First Mortgage, Inc. in 2004.
The financial statements and footnotes within this report have been reformatted to conform to the presentation
required in Statement of Financial Accounting Standards ("SFAS") 144 for "discontinued operations" pursuant to the
Company’s sale of its mortgage banking subsidiary in August 2004. Income statement items for the discontinued
subsidiary, including contractual obligations, are presented in discontinued operations without elimination. Interest
expense accrued and paid by the discontinued operation is based upon the contractual terms of the obligations entered
into by the mortgage subsidiary including lines of credit extended by its parent company. Approximately $10.9 million for
the year ended December 31, 2004 of average short-term borrowings from the Federal Home Loan Bank ("FHLB") have
been allocated to "Liabilities related to discontinued operations" to properly reflect discontinued liabilities.
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 FHLB that are available for immediate withdrawal. Interest and income taxes
paid were as follows:
2005
2004
(Amounts in thousands)
2003
Interest
Income Taxes
$ 35,880
8,962
$ 26,952
7,616
$ 29,081
10,515
Pursuant to agreements with the Federal Reserve Bank, the Company maintains a cash balance of approximately $670
thousand in lieu of charges for check clearing and other services.
Trading Securities
At December 31, 2005 and 2004, no securities were held for trading purposes and no trading account was maintained.
Securities Available for Sale
Securities to be held for indefinite periods of time, including securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes in interest rates, changes in prepayment
risk, or other similar factors, are classified as available for sale and are recorded at estimated fair value. Unrealized
appreciation or depreciation in fair value above or below amortized cost is included in stockholders’
41
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, if any, on available for sale securities are included in net securities losses and gains.
All securities, including securities held to maturity, are evaluated for indications of other-than-temporary impairment. For
debt securities available for sale with unrealized losses, management has the intent and ability to hold these securities until
such time as the value recovers or the securities mature.
Securities Held to Maturity
Investments in debt securities that management has the ability and intent to hold to maturity are carried at amortized
cost. Premiums and discounts are amortized to expense and accreted to income over the lives of the securities. Gain or loss
on the call or maturity of investment securities, if any, is 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 are carried at the lower of cost or estimated fair value determined on an aggregate basis. The long-term, fixed-rate loans
are sold to investors on a best efforts basis such that the Company does not absorb the interest rate risk involved in the
loan. The fair value of loans held for sale is determined by reference to quoted prices for loans with similar coupon rates
and terms.
The Company enters into rate-lock commitments it makes to customers with the intention to sell the loan in the
secondary market. The derivatives arising from the rate-lock commitments are recorded at fair value in other assets and
liabilities and changes in that fair value are included in other income. The Company also enters into forward sales
commitments with institutional investors for the sale of those loans, which have been determined not to qualify as
derivatives. Gains and losses on the sale of those loans are included in other income.
The Company’s mortgage banking subsidiary was sold during the third quarter 2004. The loans held for sale by the
mortgage banking subsidiary in prior periods are carried as assets related to discontinued operations on the balance sheet
and have been removed from continuing operations. Loans held for sale by the mortgage banking subsidiary primarily
consisted of one to four family residential loans originated for sale in the secondary market and were carried at the lower of
cost or estimated fair value determined on an aggregate basis. The fair value of loans held for sale was determined by
reference to quoted prices for loans with similar coupon rates and terms. Gains and losses on sales of loans held for sale by
the mortgage banking subsidiary have been reclassified to "loss from discontinued operations" in the Consolidated
Statements of Income.
The mortgage subsidiary entered into forward commitments and options or derivatives to manage the risk inherent in
interest rate lock commitments made to potential borrowers. The inventory of loans and loan commitments (both retail and
wholesale) were hedged to reduce the interest rate risk and any corresponding fluctuation in cash flows derived upon
settlement of the loans with secondary market purchasers, and consequently, to achieve a desired margin upon delivery.
The hedge transactions were used for risk mitigation and were not for trading purposes. The derivative financial
instruments stemming from these hedging transactions were recorded at fair value and reclassified in "Assets related to
discontinued operations" on the Consolidated Balance Sheets and the changes in fair value have been reclassified to "loss
from discontinued operations" on the Consolidated Statements of Income. For the year ended December 31, 2003, the net
derivative expense reflected in Discontinued Operations within the Consolidated Statements of Income was $3.14 million,
which was comprised of a $490 thousand increase in the fair value of the forward mortgage contracts, a $1.5 million expense
associated with the contract settlements including option expense and a $2.1 million decline in the value of rate lock
commitments. Forward mortgage contracts were settled at fair value upon expiration of the contract and resulted in either
the payment or receipt of funds while option contracts were paid for in advance and amortized to expense over their useful
life.
42
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loans Held for Investment
Loans held for investment are carried at the principal amount outstanding less any write-downs which may be
necessary to reduce individual loans to net realizable value. Individually significant commercial loans are evaluated for
impairment when evidence of impairment exists. Impairment allowances are recorded through specific additions to the
allowance for loan losses. Loans are considered past due when principal or interest becomes delinquent by 30 days or
more. Consumer loans are charged-off when the loan becomes 120 days past due (180 days if secured by residential real
estate). Other loans are charged-off against the allowance for loan losses after collection attempts have been exhausted,
which generally is within 120 days. Recoveries of loans charged-off are credited to the allowance for loan losses in the
period received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses inherent in the loan
portfolio. The Company consistently applies a review process to continually evaluate loans and commitments for changes
in credit risk. This process serves as the primary means by which the Company evaluates the adequacy of the allowance
for loan losses. The allowance is maintained 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.
The allowance for loan losses is allocated to specific loans to cover loan relationships identified with significant cash
flow weaknesses and for which a collateral deficiency may be present. The allowance established under the specific
reserve method is based upon the borrower’s estimated cash flow and projected liquidation value of related collateral. The
allowance is allocated to pools of loans based on historical loss experience to cover the homogeneous and non-
homogeneous loans not individually evaluated. Pools of loans are grouped by specific category and risk characteristics.
To determine the amount of allowance needed for each loan category, an estimated loss percentage is developed based
upon historical loss experience. The historical loss experience is weighted for various risk factors including macro and
micro economic conditions, qualitative assessments relative to the composition of the loan portfolio, the level of
delinquencies and non-accrual loans, trends in the volume and term of loans, anticipated impact from changes in lending
policies and procedures, and any concentration of credits in certain industries or geographic areas. The calculated
percentage is used to determine the estimated allowance excluding any relationships specifically identified and evaluated.
While allocations are made to specific loans and classifications within the various categories of loans, the allowance for
loan losses is available for all loan losses.
The allowance for loan losses related to impaired loans is based upon the discounted estimated cash flows or fair
value of collateral when it is probable that all amounts due pursuant to contractual terms of the loan will not be collected
and the recorded investment in the loan exceeds the fair value. Certain smaller balance, homogeneous loans, such as
consumer installment loans and residential mortgage loans, are evaluated for impairment on an aggregate basis in
accordance with the Company’s policy.
Long-term Investments
Certain long-term equity investments representing less than 20% ownership are carried at cost and are included in
other assets. These investments in operating companies represent required long-term investments in insurance, investment
and service company affiliates or consortiums which serve as vehicles for the delivery of various support services. On the
cost basis, dividends received are recorded as current period revenues and there is no recognition of the Company’s
proportionate share of net operating income or loss.
43
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed
on the straight-line method over estimated useful lives. Useful lives range from 5 to 10 years for furniture, fixtures, and
equipment; three to five years for software, hardware, and data handling equipment; and 10 to 40 years for buildings and
building improvements. Land improvements are amortized over a period of 20 years, and leasehold improvements are
amortized over the term of the lease plus the first optional renewal period, when renewal is reasonably assured.
Maintenance and repairs are charged to current operations while improvements that extend the economic useful life of the
underlying asset are capitalized. Disposition gains and losses are reflected in current operations.
The Company leases various properties within its branch network. Leases generally have initial terms of up to
20 years and most contain options to renew with reasonable increases in rent. All leases are accounted for as operating
leases.
Other Real Estate Owned
Other real estate owned and acquired through foreclosure is stated at the lower of cost or fair value less estimated
costs to sell. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses.
Expenses incurred in connection with operating the properties, subsequent write-downs and gains or losses upon sale are
included in other non-interest income and expense.
Goodwill and Other Intangible Assets
The excess of the cost of an acquired company over the fair value of the net assets and identified intangibles acquired
is recorded as goodwill. The net carrying amount of goodwill for continuing operations was $59.2 million and $58.8 million
at December 31, 2005 and 2004, respectively. A portion of the purchase price in certain transactions has been allocated to
values associated with the future earnings potential of acquired deposits and is being amortized over the estimated lives of
the deposits, ranging from seven to ten years while the weighted average remaining life of these core deposits is
approximately 5.67 years. As of December 31, 2005 and 2004, the balance of core deposit intangibles was $4.5 million and
$4.6 million, respectively, while the corresponding accumulated amortization was $2.5 million and $2.1 million, respectively.
The 2004 acquisition of PCB Bancorp added an additional $21.2 million of goodwill and $1.5 million in other intangibles,
while the 2003 acquisition of CommonWealth Bank added an additional $13.6 million of goodwill and $471 thousand in
other intangibles. The net unamortized balance of identified intangibles associated with acquired deposits was $1.9 million
and $2.5 million at December 31, 2005 and 2004, respectively. Annual amortization expense of intangibles is approximately
$367 thousand for the next three years, then $318 thousand and $218 thousand for the following two years, respectively.
With the adoption of SFAS 142 and SFAS 147 in 2002, the Company ceased amortization of certain goodwill subject to
an annual impairment test. The impairment test involves identifying separate reporting units based on the reporting
structure of the Company, then assigning all assets and liabilities, including goodwill, to these units. Each reporting
segment is then tested for goodwill impairment by comparing the fair value of the unit with its book value, including
goodwill. The Company determines fair value through a discounted cash flows valuation performed by an independent
third party. If the fair value of the reporting unit is greater than its book value, no goodwill impairment exists. However, if
the book value of the reporting unit is greater than its determined fair value, goodwill impairment may exist and further
testing is required to determine the amount, if any, of the actual impairment loss. Through the results of impairment tests,
and the sale of the discontinued operating subsidiary, goodwill impairment charges of $400 thousand and $1.4 million were
appropriate for the discontinued mortgage banking segment in the fourth quarter of 2003 and the second quarter of 2004,
respectively. The impairment losses in the mortgage segment stem from operating losses incurred in that segment in the
second half of 2003 and the first half of 2004, along with
44
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
forecasts for thin margins in the mortgage segment, particularly within the wholesale division. These charges are included
in "loss from discontinued operations" in the consolidated statements of income.
The progression of the Company’s goodwill and intangible assets for continuing operations for the three years ended
December 31, 2005, is detailed in the following table:
Balance at December 31, 2002
Acquisitions
Tax Benefits, Exercise of Stock Options and Other Adjustments
Amortization
Balance at December 31, 2003
Acquisitions
Tax Benefits, Exercise of Stock Options and Other Adjustments
Amortization
Balance at December 31, 2004
Acquisitions (Dispositions)
Tax Benefits, Exercise of Stock Options and Other Adjustments
Amortization
Balance at December 31, 2005
Securities Sold Under Agreements to Repurchase
Other
Goodwill Intangibles
(Amounts in thousands)
$ 23,976 $
14,478
(476 )
—
37,978
21,231
(381 )
—
58,828
—
354
—
$ 59,182 $
1,325
471
(190 )
(243 )
1,363
1,518
—
(399 )
2,482
(109 )
—
(436 )
1,937
Securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions.
Securities, generally U.S. government and Federal agency securities, pledged as collateral under these arrangements
cannot be sold or repledged by the secured party. The fair value of the collateral provided to a third party is continually
monitored, and additional collateral is obtained as appropriate.
Loan Interest Income Recognition
Accrual of interest on loans is based generally on the daily amount of principal outstanding. Loans are considered
past due when either principal or interest payments are delinquent by 30 or more days. It is the Company’s policy to
discontinue the accrual of interest on loans based on the payment status and evaluation of the related collateral and the
financial strength of the borrower. The accrual of interest income is normally discontinued when a loan becomes 90 days
past due as to principal or interest. Management may elect to continue the accrual of interest when the loan is well secured
and in process of collection. When interest accruals are discontinued, interest accrued and not collected in the current year
is reversed from income and interest accrued and not collected from prior years is charged to the reserve for possible loan
losses. Interest income realized on impaired loans is recognized upon receipt if the impaired loan is on a non-accrual basis.
Accrual of interest on non-accrual loans may be resumed if the loan is brought current and follows a period of substantial
performance, including six months of regular principal and interest payments. Accrual of interest on impaired loans is
generally continued unless the loan becomes delinquent 90 days or more. Cash receipts are credited first to interest unless
the loan has been converted to non-accrual, in which case, the receipts are applied to principal.
45
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Loan Fee Income
Loan origination and underwriting fees are reduced by direct and indirect costs associated with loan processing,
including salaries, review of legal documents and obtainment of appraisals. Net origination fees and costs are deferred and
amortized over the life of the related loan. Loan commitment fees are deferred and amortized over the related commitment
period. Net deferred loan fees were $1.35 million at December 31, 2005 and $1.97 million at December 31, 2004.
Advertising Expenses
Advertising costs are generally expensed as incurred. Amounts recognized for the three years ended December 31,
2005, are detailed in Note 13 — Other Operating Expenses.
Stock Dividend
On June 17, 2003, the Company’s Board of Directors declared a 10% stock dividend to shareholders of record as of
August 1, 2003, which was distributed on August 15, 2003. Average shares outstanding and per share amounts included in
the consolidated financial statements for 2003 and prior periods have been adjusted to reflect the impact of the stock
dividend.
Stock Options
The Company has stock option plans for certain executives and directors currently accounted for under the intrinsic
value method. Because the exercise price of the options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS 123R, "Share-Based Payment,"
which is an amendment of SFAS 123. SFAS 123R changes, among other things, the manner in which share-based
compensation, such as stock options, will be accounted for by both public and non-public companies. For public
companies, the cost of employee services received in exchange for equity instruments including options and restricted
stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using
option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market
prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the
vesting period, and will be re-measured subsequently at each reporting date through settlement date. In March 2005, the
Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"), which expresses the SEC staff’s views on SFAS 123R. SAB 107 provides further discussion on
various topics, including share-based payment transactions with non-employees, valuation methods, classification of
expense in financial statements, and disclosures in management’s discussion and analysis. In April 2005, the SEC
announced that it would provide for a phased-in implementation process for SFAS 123R. As such, the Company was
required to adopt the standard’s fair-value method of accounting for share-based payments to employees on January 1,
2006.
The Company has adopted SFAS 123R under the "modified prospective" method. Under the modified prospective
method the Company will recognize compensation cost beginning January 1, 2006, for all share-based payments granted
after December 31, 2005, and for all unvested awards granted prior to January 1, 2006.
The estimated annual pre-tax stock option compensation cost required to be recognized in accordance with
SFAS 123R over the required service period beginning in January 2006 and beyond is summarized below. The
46
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
actual compensation cost recognized will differ from this estimate due to a number of items, including new awards granted
and changes in estimated forfeitures.
2006
2007
2008
2009
(Amounts in thousands)
$
$
281
222
148
70
721
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation." This standard provided
alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based
compensation. In addition, the Statement requires prominent disclosure in both annual and interim financial statements
about the method of accounting for stock-based compensation and the underlying effect of the method used on reported
results until exercised. The effect of option shares on earnings per share relates to the dilutive effect of the underlying
options outstanding. To the extent the granted exercise share price is less than the current market price, or "in the money",
there is an economic incentive for the options to be exercised and an increase in the dilutive effect on earnings per share.
Assuming the use of the fair value method of accounting for stock options, pro forma consolidated net income and
consolidated earnings per share would have been as follows:
2005
2004
(Amounts in thousands,
except per share data)
2003
Net income as reported
Less: Total stock-based employee compensation expense determined under fair value-
$ 26,303
$ 22,364
$ 25,238
based method for all awards, net of related tax effects
Net income, pro forma
Earnings per share:
Basic as reported
Basic pro forma
Diluted as reported
Diluted pro forma
Income Taxes
(258 )
$ 26,045
(205 )
$ 22,159
(139 )
$ 25,099
$ 2.33
$ 2.31
$ 2.32
$ 2.30
$ 1.99
$ 1.97
$ 1.97
$ 1.95
$ 2.27
$ 2.26
$ 2.25
$ 2.24
Income tax expense is comprised of federal and state current and deferred income taxes on pre-tax earnings of the
Company. Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of
income and expense which are excluded, by law, from the calculation of taxable income. These items are commonly referred
to as permanent differences. The most significant permanent differences for the Company include i) income on state and
municipal securities which are exempt from federal income tax, ii) certain dividend payments which are deductible by the
company, iii) for 2003 and 2004, goodwill impairment expense which is not deductible, iv) for the third quarter of 2004, the
loss on the sale of the mortgage subsidiary which had a significant tax basis over and above its book carrying value, and
v) tax credits generated by investments in low income housing and rehabilitation of historic structures.
State and municipal income and the dividends deduction are permanent differences that occur on a regular basis.
Goodwill impairment expense is infrequent and has historically been related to the mortgage subsidiary,
47
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
which has been sold. The difference related to the excess tax over book basis of the mortgage subsidiary was a one time
event linked to the sale of the mortgage subsidiary. This item resulted in a substantial reduction in the effective income tax
rate for 2004. This difference arose due to the non-deductible goodwill impairment charges associated with the sale of the
mortgage subsidiary. Because those charges (expenses) were not deductible, they resulted in permanent differences which
increased the effective tax rate in 2003 and the first two quarters of 2004. Goodwill expense, by its very nature, is a
permanent difference. These expenses did, however, reduce the carrying basis of the mortgage subsidiary and resulted in a
permanent difference of approximately $950 thousand in the third quarter of 2004 upon the sale of the entity, which reduced
the combined effective tax in 2004 to 25.6% from 29.1% in 2003.
Income tax expense is classified according to continuing operations and discontinued operations. The $950 thousand
tax benefit associated with the loss on the sale of the mortgage subsidiary in 2004 is included in Income Tax Benefit —
Discontinued Operations on the income statement.
During 2005 the Company invested in a limited partnership formed to perform the rehabilitation of properties certified
as historic structures by the National Park Service. The buildings associated with this project were placed in service during
2005 and at the in-service date the Company’s investment generated federal and state historic tax credits. As a result the
Company realized the entire tax credit and the investment in the limited partnership was written off.
Earnings Per Share
Basic earnings per share is determined by dividing net income by the weighted average number of shares
outstanding. Diluted earnings per share is determined by dividing net income by the weighted average shares outstanding
increased by the dilutive effect of stock options. Basic and diluted net income per common share calculations follow:
For the Year Ended December 31,
2004
(Amounts in thousands, except per share data)
2003
2005
Basic:
Income from continuing operations
(Loss) income from discontinued operations
Net income
Weighted average shares outstanding
Dilutive shares for stock options
Weighted average dilutive shares outstanding
Basic:
Earnings per share continuing operations
(Loss) earnings per share discontinued operations
Earnings per share
Diluted:
Diluted earnings per share continuing operations
Diluted (loss) earnings per share discontinued operations
Diluted earnings per share
$
$
26,445
(142 )
26,303
$
$
26,020
(3,656 )
22,364
$
$
26,719
(1,481 )
25,238
11,269,258
72,546
11,341,804
11,238,648
98,958
11,337,606
11,096,900
101,453
11,198,353
$
$
2.35
(0.02 )
2.33
2.33
(0.01 )
2.32
$
$
2.32
(0.33 )
1.99
2.29
(0.32 )
1.97
2.41
(0.14 )
2.27
2.39
(0.14 )
2.25
$
48
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Variable Interest Entities
The Company maintains ownership positions in various entities which it deems variable interest entities ("VIE’s") as
defined in FIN 46. These VIE’s include certain tax credit limited partnerships and other limited liability companies which
provide aviation services, insurance brokerage, investment brokerage, title insurance and other financial and related
services. Based on the Company’s analysis, it is a non-primary beneficiary; accordingly, these entities do not meet the
criteria for consolidation under FIN 46. The carrying value of VIE’s at December 31, 2005 and 2004 was $3.2 million and
$3.3 million, respectively and the Company’s maximum possible loss exposure was $3.3 million and $3.7 million, respectively
in 2005 and 2004. Management does not believe losses resulting from its involvement with the entities discussed above
will be material.
Reclassifications
Certain amounts included in the 2004 and 2003 financial statements, footnotes and schedules have been reclassified to
conform to the current presentation. Revenues from Stone Capital Management have been combined with fiduciary
revenues to form the new wealth management income item. Additionally, FHLB and FRB stock held by the Company has
been combined with other assets to conform to the new presentation required by the AICPA.
Other Recent Accounting Developments
In November 2005, the FASB issued FASB Staff Position 115-1 ("FSP 115-1"), "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." FSP 115-1 provides additional guidance
on when an investment in a debt or equity security should be considered impaired and when that impairment should be
considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor
should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision
to sell has not been made. FSP 115-1 also requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP 115-1 replaces the impairment evaluation guidance
(paragraphs 10-18) of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments." EITF 03-1’s disclosure requirements remain in effect. FSP 115-1 was effective for
other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The issuance of the
final consensus did not have a material impact on the financial condition, the results of operations, or liquidity.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections," which changes the
accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in
accounting principle and changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This statement requires retrospective application to prior
period financial statements of changes in accounting principle, unless it is impractical to determine either the period-
specific or cumulative effects of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005. The adoption of this standard is not expected to have a material effect on financial condition, the
results of operations, or liquidity.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion
No. 29, "Accounting for Nonmonetary Transactions." This statement amends the principle that exchanges of nonmonetary
assets should be measured on the fair value of the assets exchanged and more broadly provides for exceptions regarding
exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard is not expected to
have a material impact on financial condition, results of operations, or liquidity.
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires acquired loans, including
debt securities, to be recorded at the amount of the purchaser’s initial investment and
49
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
prohibits carrying over valuation allowances from the seller for those individually evaluated loans that have evidence of
deterioration in credit quality since origination, and it is probable all contractual cash flows on the loan will be unable to be
collected. SOP 03-3 also requires the excess of all undiscounted cash flows expected to be collected at acquisition over the
purchaser’s initial investment to be recognized as interest income on a level-yield basis over the life of the loan.
Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the
loan’s yield over its remaining life, while subsequent decreases are recognized as impairment. Loans carried at fair value,
mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from
the scope of SOP 03-3. The Company adopted the provision of SOP 03-3 effective January 1, 2005. The adoption of this
standard did not have a material impact on financial condition, results of operations, or liquidity.
Note 2. Merger, Acquisitions and Branching Activity
In December 2005, the Company completed the sale of its Clifton Forge, Virginia, branch location to Sonabank, N. A.
Sonabank, N. A. assumed deposits and repurchase agreements of approximately $45.3 million and loans of approximately
$7.1 million. The transaction resulted in an approximate $4.4 million pre-tax gain on sale.
The following schedule details branch openings since January 1, 2004.
Quarter
Opened
Q1 2004
Q1 2004
Q1 2004
Q2 2004
Q2 2004
Q4 2004
Q2 2005
Q3 2005
Q4 2005
Q4 2005
Location
Type
Mount Airy, North Carolina
Charlotte, North Carolina
Piney Flats, Tennessee
Blacksburg, Virginia
Norfolk, Virginia
Princeton, West Virginia
Clarksburg, West Virginia
Charleston, West Virginia
Roanoke, Virginia
Kernersville, North Carolina
Loan Production Office
Loan Production Office
Full Service Branch
Loan Production Office
Loan Production Office
Full Service Branch
Loan Production Office
Loan Production Office
Loan Production Office
Loan Production Office
After the close of business on March 31, 2004, PCB Bancorp, Inc., a Tennessee-chartered bank holding company
("PCB") headquartered in Johnson City, Tennessee, was acquired by the Company. PCB had five full service branch
offices located in Johnson City, Kingsport and surrounding areas in Washington and Sullivan Counties in East Tennessee.
At acquisition, PCB had total assets of $171.0 million, total net loans of $128.0 million and total deposits of $150.0 million.
These resources were included in the Company’s financial statements beginning with the second quarter of 2004.
Under the terms of the merger agreement, shares of PCB common stock were purchased for $40.00 per share in cash.
The total deal value, including the cash-out of outstanding stock options, was approximately $36.0 million. Concurrent with
the PCB acquisition, Peoples Community Bank, the wholly-owned subsidiary of PCB, was merged into the First Community
Bank, N. A. (the "Bank"). As a result of the acquisition and preliminary purchase price allocation, approximately
$21.3 million in goodwill was recorded which represents the excess of the purchase price over the fair market value of the
net assets acquired and identified intangibles.
On June 6, 2003, the Company acquired The CommonWealth Bank, a Virginia-chartered commercial bank
("CommonWealth"). CommonWealth’s four branch facilities located in the Richmond, Virginia metro area were
simultaneously merged with and into the Bank. The completion of this transaction resulted in the addition of approximately
$120.0 million in loans and $105.0 million in deposits to the Bank. As a result of the purchase price allocation, approximately
$14.1 million of goodwill was recorded.
50
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In January 2003, the Bank completed the acquisition of Stone Capital Management ("Stone Capital"), based in
Beckley, West Virginia. This acquisition expanded the Bank’s operations to include a broader range of financial services,
including wealth management, asset allocation, financial planning and investment advice. At December 31, 2005, Stone
Capital had a total market value of assets under management of $67.7 million. Stone Capital was acquired through the
issuance of 8,409 shares of Company common stock, which represents 50% of the total consideration. In 2003, 2004 and
2005, Stone Capital exceeded the annual revenue requirement outlined in the acquisition agreement and additional shares
were paid to the original shareholders. The balance of the remaining consideration was paid in January 2006 in the form of
Company common stock. As a result of the purchase price allocation, approximately $360 thousand of goodwill was
recorded.
The following table summarizes the net cash provided by or used in acquisitions and divestitures during the three
years ended December 31, 2005.
Fair value of assets acquired
Fair value of liabilities assumed
Purchase price in excess of net assets acquired
Total purchase price
Less non cash purchase price
Less cash acquired
Net cash paid (received) for acquisition
Fair value of assets sold
Fair value of liabilities sold
Sales price in excess of net liabilities assumed
Total sales price
Add cash on hand sold
Less amount due remaining on books
Net cash paid for divestiture
51
2005
2004
2003
(Amounts in thousands)
$ —
—
—
—
—
—
$ —
$ (7,803 )
45,363
(4,570 )
32,990
166
526
$ 32,630
$ 172,375
(158,906 )
22,750
36,219
—
9,879
$ 26,340
$ 137,613
(129,078 )
15,697
24,232
12,927
12,629
(1,324 )
$
$
$
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Investment Securities
The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, classified as
available for sale are as follows:
December 31, 2005
U.S. Government agency securities
States and political subdivisions
Corporate Notes
Mortgage-backed securities
Equities
Total
U.S. Government agency securities
States and political subdivisions
Corporate Notes
Mortgage-backed securities
Equities
Total
Amortized Unrealized Unrealized
Gains
Cost
Losses
(Amounts in thousands)
Fair
Value
92,739 $
$
151,118
61,466
305,323
94,954
5,390
$ 405,667 $
— $
2,426
125
2,551
155
1,282
3,988 $
(1,315 ) $ 91,424
152,168
(1,376 )
61,274
(317 )
304,866
(3,008 )
92,994
(2,115 )
6,521
(151 )
(5,274 ) $ 404,381
December 31, 2004
Amortized Unrealized Unrealized
Gains
Cost
Losses
(Amounts in thousands)
Fair
Value
46,541 $
$
142,882
37,589
227,012
142,427
2,626
$ 372,065 $
20 $
2,647
540
3,207
921
1,188
5,316 $
(615 ) $ 45,946
145,146
(383 )
38,129
—
229,221
(998 )
142,979
(369 )
3,797
(17 )
(1,384 ) $ 375,997
52
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortized cost and estimated fair value of securities available for sale by contractual maturity, at December 31,
2005, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Available For Sale
Amortized Cost Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Amortized cost
Mortgage-backed securities
Equity securities
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
Fair Value
Mortgage-backed securities
Equity securities
Total Fair Value
U.S.
States
and
Government
Agencies & Political
Corporations Subdivisions Notes
Corporate
Total
Tax
Equivalent
Purchase
Yield
4.54 %
5.09 %
5.30 %
6.00 %
4.48 %
2.39 %
(Dollars in thousands)
12,273 $
34,435
30,048
15,983
92,739 $
— $ 13,973
1,700 $
— 40,743
6,308
20,000 90,201
40,153
102,957
41,466 160,406
151,118 $ 61,466 305,323
94,954
5,390
$ 405,667
4.48 %
6.52
6.53 %
11.49
5.71 %
5.57 %
17.50 11.19
12,225 $
34,051
29,522
15,626
91,424 $
— $ 13,929
1,704 $
— 40,473
6,422
20,125 89,567
39,920
41,149 160,897
104,122
152,168 $ 61,274 304,866
$
$
$
$
92,994
6,521
$ 404,381
As a condition to membership in the FHLB system, the Bank is required to subscribe to a minimum level of stock in
the FHLB. At December 31, 2005, the Bank owned approximately $11.8 million in stock which is classified as other assets.
53
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortized cost and estimated fair value of securities, with gross unrealized gains and losses, classified as held to
maturity are as follows:
December 31, 2005
Amortized Unrealized Unrealized Fair
Value
Cost
Gains
Losses
(Amounts in thousands)
States and political subdivisions
Other securities
Mortgage-backed securities
Total
$
$
23,781 $
375
24,156
17
24,173 $
706 $
—
706
—
706 $
(1 ) $ 24,486
(1 )
374
24,860
(2 )
—
17
(2 ) $ 24,877
December 31, 2004
Amortized Unrealized Unrealized Fair
Value
Cost
Gains
Losses
(Amounts in thousands)
States and political subdivisions
Other securities
Mortgage-backed securities
Total
$
$
33,814 $
375
34,189
32
34,221 $
1,388 $
—
1,388
1
1,389 $
— $ 35,202
—
375
35,577
—
—
33
— $ 35,610
54
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortized cost and estimated fair value of securities by contractual maturity, at December 31, 2005, are shown
below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Held-to-Maturity
Amortized Cost Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Amortized cost
Mortgage-backed securities
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
Fair Value
Mortgage-backed securities
Total Fair Value
States
and
Political
Subdivisions
Other
Total
Securities
(Dollars in thousands)
Tax
Equivalent
Purchase
Yield
$
$
$
$
1,631 $
4,837
15,730
1,583
23,781 $
— $ 1,631
5,212
375
15,730
—
1,583
—
24,156
375
17
$ 24,173
8.79%
7.42%
8.03%
8.25%
7.00%
8.01 %
6.61
4.78 %
2.75
7.96 %
6.55
1,644 $
4,942
16,233
1,667
24,486 $
— $ 1,644
5,316
374
16,233
—
1,667
—
24,860
374
17
$ 24,877
The carrying value of securities pledged to secure public deposits and for other purposes required by law were
$254.8 million and $250.9 million at December 31, 2005 and 2004, respectively.
At December 31, 2005, there were no securities of a single issuer, other than U.S. federal agency debentures and other
U.S. government-sponsored agency securities, which exceeded 10% of stockholders’ equity.
In 2005, net gains on the sale of securities was $753 thousand. Gross gains were $799 thousand while gross losses
were $46 thousand during 2005. Gross proceeds from sales of securities were $33.2 million, while gross proceeds from the
maturity and call of securities were approximately $54.2 million. Total purchases of securities approximated $111.2 million.
55
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables reflect those investments, both available for sale and held to maturity, in a continuous unrealized
loss position for less than 12 months and for 12 months or longer for the years ended December 31, 2005 and 2004. There
were no securities for either period in a continuous unrealized loss position for 12 or more months for which the Company
does not have the ability to hold until the security matures or recovers in value.
December 31, 2005
Description of Securities
Less than 12 Months 12 Months or Longer
Unrealized Fair Unrealized
Fair
Value
Value
Losses
Losses
Fair
Value
Total
Unrealized
Losses
(Amounts in thousands)
U.S. Government agency securities
States and political subdivisions
Other Securities
Subtotal, debt securities
Mortgage-backed securities
Equity securities
Total
$ 61,469 $
47,706
41,523
150,698
40,651
1,786
$ 193,135 $
(722 ) $ 29,851 $
(830 )
(318 )
(1,870 )
(952 )
(129 )
18,583
—
48,434
45,607
99
(593 ) $ 91,320 $
(547 )
—
(1,140 )
(1,163 )
(22 )
66,289
41,523
199,132
86,258
1,885
(2,951 ) $ 94,140 $
(2,325 ) $ 287,275 $
(1,315 )
(1,377 )
(318 )
(3,010 )
(2,115 )
(151 )
(5,276 )
December 31, 2004
Description of Securities
Less than 12 Months 12 Months or Longer
Unrealized Fair Unrealized
Fair
Value
Value
Losses
Losses
Fair
Value
Total
Unrealized
Losses
(Amounts in thousands)
U.S. Government agency securities
States and political subdivisions
Other Securities
Subtotal, debt securities
Mortgage-backed securities
Equity securities
Total
$ 12,357 $
35,620
—
47,977
112,755
—
$ 160,732 $
(101 ) $ 28,146 $
(344 )
—
(445 )
(369 )
—
2,118
—
30,264
—
136
(814 ) $ 30,400 $
(514 ) $ 40,503 $
(39 )
—
(553 )
—
(17 )
(570 ) $ 191,132 $
37,738
—
78,241
112,755
136
(615 )
(383 )
—
(998 )
(369 )
(17 )
(1,384 )
At December 31, 2005, the combined depreciation in value of the 263 individual securities in an unrealized loss
position was less than 1.25% of the combined reported value of the aggregate securities portfolio. Management does not
believe any individual unrealized loss as of December 31, 2005, represents an other-than-temporary impairment. The
Company has the intent and ability to hold these securities until such time as the value recovers or the securities mature.
Furthermore, the Company believes the value is attributable to changes in market interest rates and not the credit quality of
the issuer.
56
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Loans
Loans held for investment, net of unearned income, consist of the following at December 31:
Real estate — commercial
Real estate — construction
Real estate — residential
Commercial, financial and agricultural
Loans to individuals for household and other consumer expenditures
All other loans
2005
2004
(Amounts in thousands)
$ 464,510
143,976
504,386
110,211
106,148
1,808
$ 1,331,039
$ 453,899
112,732
457,386
99,303
113,424
2,012
$ 1,238,756
Financial instruments whose contract amounts represent credit risk at December 31, 2005, are commitments to extend
credit (including availability of lines of credit) of approximately $232.9 million and standby letters of credit and financial
guarantees written of approximately $8.7 million. 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 underwriting guidelines for the particular loan. Commitments outstanding at December 31, 2005 are
summarized in the following table:
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
Notional
Amount
Rate
(Dollars in thousands)
$ 8,039
26,462
14,301
55,101
3,389
47,821
3,209
34,612
3,709
1,469
$ 198,112
4.25% - 12.00%
4.24% - 9.75%
5.00% - 9.00%
5.50% - 9.75%
4.25% - 10.99%
2.99% - 12.00%
3.25% - 18.00%
3.98% - 12.25%
3.24% - 18.50%
4.50% - 18.00%
In the normal course of business, the Bank has made loans to directors and executive officers of the Company and its
subsidiary. All loans and commitments made to such officers and directors and to companies in which they are officers, or
have significant ownership interest, have been made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with other persons. The aggregate dollar amount of
such loans was $5.5 million and $6.7 million at December 31, 2005 and 2004, respectively. During 2005, $2.5 million of new
loans were made, repayments totaled $3.5 million, and other decreases due to the change in composition of the Bank’s
board members and executive officers approximated $131 thousand.
57
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2005 and 2004, overdrafts totaling $895 thousand and $1.5 million, respectively were reclassified as
loans.
Note 5. Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
2005
2004
(Amounts in thousands)
2003
Balance at January 1
Provision for loan losses
Acquisition balance
Loans charged off
Recoveries credited to allowance
Net charge-offs
Reclassification of allowance for lending-related commitments(1)
Balance at December 31
$ 16,339
3,706
—
(6,936 )
2,019
(4,917 )
(392 )
$ 14,736
$ 14,624
2,671
1,786
(4,174 )
1,432
(2,742 )
—
$ 16,339
$ 14,410
3,419
1,583
(6,121 )
1,333
(4,788 )
—
$ 14,624
(1) At June 30, 2005, the Company reclassified $392 thousand of its allowance for loan losses to a separate allowance for
lending-related liabilities. Net income and prior period balances were not affected by this reclassification. The
allowance for lending-related liabilities is included in other liabilities.
During 2005, 2004 and 2003, assets in the amounts of $1.3 million, $2.1 million and $1.6 million, respectively, were
acquired through foreclosure and transferred to other real estate owned.
Management analyzes the loan portfolio regularly for concentrations of credit risk, including concentrations in
specific industries and geographic location. At December 31, 2005, commercial real estate loans comprised 34.9% of the
total loan portfolio. Commercial loans include loans to small to mid-size industrial, commercial and service companies that
include but are not limited to coal mining companies, manufacturers, automobile dealers, and retail and wholesale
merchants. Commercial real estate projects represent several different sectors of the commercial real estate market,
including residential land development, single family and apartment building operators, commercial real estate lessors, and
hotel/motel developers. Underwriting standards require comprehensive reviews and independent evaluations be performed
on credits exceeding predefined market limits on commercial loans. Updates to these loan reviews are done periodically or
on an annual basis depending on the size of the loan relationship.
The majority of the loans in the current portfolio, other than commercial and commercial real estate, were made and
collateralized in Virginia, West Virginia, North Carolina, Tennessee and the surrounding Southeast area. Although sections
of the West Virginia and Southwestern Virginia economies are closely related to natural resource production, they are
supplemented by service industries. The Company’s presence in four states, Virginia, West Virginia, North Carolina and
Tennessee provides additional diversification against geographic concentrations of credit risk.
58
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the Company’s investment in loans considered to be impaired and related information on
those impaired loans:
2005
2004
(Amounts in thousands)
2003
Recorded investment in loans considered to be impaired
Loans considered to be impaired that were on a non-accrual basis
Recorded investment in impaired loans with related allowance
Allowance for loan losses related to loans considered to be impaired
Average recorded investment in impaired loans
Total interest income recognized on impaired loans
Recorded investment in impaired loans with no related allowance
$ 4,645
3,383
3,555
1,528
5,687
338
1,090
$ 8,319
2,096
8,319
2,647
8,483
389
—
$ 7,649
1,609
7,189
2,422
7,798
443
460
Note 6. 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
2005
2004
(Amounts in
thousands)
$ 11,001
31,631
24,113
66,745
31,752
$ 34,993
$ 11,012
32,673
23,908
67,593
30,233
$ 37,360
Total depreciation expense for years ended December 31, 2005, 2004, and 2003, was $3.3 million, $2.9 million, and
$2.1 million, respectively
In 2004, the Company constructed new offices in one of its existing locations for the consolidation of its loan
operations and paid the remaining costs for the construction of a new branch that was opened in 2004. The prime
contractor for this construction was a firm in which an individual who is an immediate family member of two directors of the
Company is a preferred shareholder. All branch construction contracts involving the related party were let pursuant to a
competitive bidding process. Total payments to the related party were $247 thousand, $880 thousand, and $62 thousand in
2005, 2004, and 2003, respectively.
The Company also enters into land and building leases for the operation of banking and loan offices, operations
centers and for the operation of automated teller machines. All such leases qualify as operating leases. Following is a
schedule by year of future minimum lease payments required under operating leases that have initial or remaining non-
cancelable lease terms in excess of one year as of December 31, 2005:
Year Ended December 31:
(Amounts in thousands)
2006
2007
2008
2009
2010
Later years
Total
$
$
780
704
678
331
257
760
3,510
59
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total lease expense for the years ended December 31, 2005, 2004 and 2003 was $777 thousand, $692 thousand and
$351 thousand, respectively. Certain portions of the above-listed leases have been sublet to third parties for properties not
currently being used by the Company. The impact of the future lease payments to be received and the non-cancelable
subleases are as follows:
Year Ended December 31:
(Amounts in thousands)
2006
2007
2008
2009
2010
Later years
Total
Note 7. Deposits
The following is a summary of interest-bearing deposits by type as of December 31:
Interest-bearing demand deposits
Money market accounts
Savings deposits
Certificates of deposit
Individual Retirement Accounts
Total
$
$
19
19
19
19
19
336
431
2005
2004
(Amounts in thousands)
$ 144,314
161,958
193,226
597,928
77,976
$ 1,175,402
$ 150,127
168,039
217,095
519,539
82,765
$ 1,137,565
At December 31, 2005, the scheduled maturities of certificates of deposit are as follows:
2006
2007
2008
2009
2010 and thereafter
(Amounts in thousands)
$
$
422,395
127,328
46,152
36,122
43,907
675,904
Time deposits of $100 thousand or more are $247.5 million and $202.4 million at December 31, 2005 and 2004,
respectively. Interest expense on these deposits is $7.4 million, $5.5 million, and $5.7 million for 2005, 2004, and 2003,
respectively.
60
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2005, the scheduled maturities of certificates of deposit of $100 thousand 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)
$
$
61,762
35,218
59,398
91,104
247,482
Included in total deposits are deposits by related parties in the total amount of $23.4 million and $21.6 million at
December 31, 2005 and 2004, respectively.
Note 8. Borrowings
The following table details borrowings as of December 31:
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
Subordinated debt
Other indebtedness
Total
2005
2004
(Amounts in
thousands)
$ 82,500
124,154
113,767
15,464
—
$ 335,885
$ 32,500
109,857
116,836
15,000
19
$ 274,212
The following table details maturities of FHLB borrowings, other indebtedness and subordinated debt as of
December 31, 2005.
2006
2007
2008
2009
2010
2011 and thereafter
(Amounts in thousands)
$
$
384
6,260
25,000
—
25,000
57,123
113,767
The Bank is a member of the FHLB which provides credit in the form of short-term and long-term advances
collateralized by various mortgage assets. At December 31, 2005, credit availability with the FHLB totaled approximately
$217.3 million. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying first mortgage loans of
$430.6 million, mortgage-backed securities, and certain other investment securities. The FHLB advances are subject to
restrictions or penalties in the event of prepayment.
Structured term borrowings from the FHLB of $106.1 million and $107.4 million at December 31, 2005 and 2004,
respectively, in the form of convertible and callable advances. The callable advances may be called (redeemed) at quarterly
intervals after various lockout periods. These call options may substantially shorten the lives of these instruments. If these
advances are called, the debt may be paid in full, converted to another FHLB
61
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
credit product, or converted to an adjustable rate advance. At December 31, 2005 and 2004, the Company also held non-
callable term advances of $7.7 million and $9.4 million, respectively.
Other various debt obligations of the Company were zero in 2005 and approximated $19 thousand at December 31,
2004.
The following schedule details the outstanding FHLB advances, rates and corresponding final maturities at
December 31, 2005.
Callable advances
Noncallable advances
Total advances
Principal
Amount
of Advance Rate Maturity
Next Call
Date
(Dollars in thousands)
4.75%
5.47%
3.83%
3.64%
1/31/11
10/4/10
2/14/08
6/27/12
1/31/06
1/4/06
2/14/06
6/27/08
5.01%
4.14%
4.24%
2.95%
12/11/06
5/2/07
1/30/07
7/1/13
N/A
N/A
N/A
N/A
$
6,102
25,000
25,000
50,000
$ 106,102
384
$
1,260
5,000
1,021
$
7,665
$ 113,767
In December 2005, the Company prepaid certain of its higher-rate FHLB borrowings totaling $77 million. The
prepayment penalty incurred in connection with the early termination of those obligations was $3.8 million.
In January 2006, the Company borrowed an additional $75 million from the FHLB. The advances have a LIBOR-based
floating interest rate and the initial rate was 4.09%. The advances have a European call option in 5 years and mature in
15 years.
Note 9. Income Taxes, Continuing Operations
The components of income tax expense from continuing operations consist of the following:
2005
Years Ended December 31,
2004
(Amounts in thousands)
2003
Income tax provisions consists of:
Current tax expense
Federal
State
Deferred tax expense
Federal
State
$ 7,673
654
8,327
$ 8,977
662
9,639
$ 10,302
725
11,027
1,673
191
1,864
$ 10,191
137
10
147
$ 9,786
29
2
31
$ 11,058
62
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes related to continuing operations 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, 2005 and 2004 are as follows:
Deferred tax assets:
Allowance for credit losses
Unrealized losses on assets
Deferred compensation
Deferred loan fees
Low income investments, basis difference
Unrealized loss on securities available for sale
Unrealized capital loss
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Odd days interest deferral
Fixed assets
Accrued discounts
Deferred gain on involuntary conversion
Deferred gain on sale of assets
Unrealized gain on securities available for sale
Other
Total deferred tax liabilities
Net deferred tax assets
2005
2004
(Amounts in
thousands)
$ 6,043
362
2,164
526
338
515
229
126
$ 10,303
$ 3,091
2,206
1,289
736
365
383
—
55
8,125
$ 2,178
$ 6,417
443
1,826
767
285
—
406
150
$ 10,294
$ 3,222
1,324
1,336
675
365
—
1,573
42
8,537
$ 1,757
Income taxes as a percentage of pre-tax income may vary significantly from statutory rates due to items of income and
expense which are excluded, by law, from the calculation of taxable income. State and municipal bond income represent the
most significant permanent tax difference. These additional permanent differences resulted in a consolidated effective tax
rate of 27.7% in 2005, compared to 25.6% in 2004 and 29.1% in 2003.
The reconciliation of the statutory federal tax rate and the effective tax rates from continuing operations for the years
ended December 31, 2005, 2004 and 2003 are as:
Tax at statutory rate
(Reduction) increase resulting from:
Tax-exempt interest, net of nondeductible expense
State income taxes, net of federal benefit
Other, net
Effective tax rate
63
Years Ended December 31,
2003
2004
2005
35.00 %
35.00 %
35.00 %
(6.70 )%
2.19 %
(2.67 )%
27.82 %
(6.36 )%
1.22 %
(2.53 )%
27.33 %
(5.68 )%
1.25 %
(1.30 )%
29.27 %
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10. Employee Benefits
Employee Stock Ownership and Savings Plan
The Company maintains an Employee Stock Ownership and Savings Plan ("KSOP"). Coverage under the plan is
provided to all employees meeting minimum eligibility requirements.
Employer Stock Fund: Annual contributions to the stock portion of the plan are made at the discretion of the Board
of Directors, and are allocated to plan participants on the basis of relative compensation. Substantially all plan assets are
invested in common stock of the Company. Total expense recognized by the Company related to the Employer Stock Fund
within the KSOP was $891 thousand, $913 thousand and $825 thousand in 2005, 2004 and 2003, respectively. The Company
reports the contributions to the plan as a component of employee compensation and benefits. The 2005 contribution rate
was 4.0% of eligible employee compensation. At December 31, 2005, the Employer Stock Fund held 519,255 shares of the
Company’s stock.
Employee Savings Plan: The Company provides a 401(k) Savings feature within the KSOP that is available to
substantially all employees meeting minimum eligibility requirements. The cost of Company contributions under the
Savings Plan component of the KSOP was $967 thousand, $870 thousand, and $680 thousand in 2005, 2004 and 2003,
respectively. The Company’s matching contributions are at the discretion of the Board up to 100% of elective deferrals of
no more than 6% of compensation. The Company matching rate was 100% for 2005, 2004, and 2003. The employee
participants have various investment alternatives available in the 401(k) Savings feature, but Company securities are not
permitted as an investment alternative.
Employee Welfare Plan
The Company provides various medical, dental, vision, life, accidental death and dismemberment and long-term
disability insurance benefits to all full-time employees who elect coverage under this program (basic life, accidental death
and dismemberment, and long-term disability coverage are automatic). The health plan is managed by a third party
administrator. Monthly employer and employee contributions are made to a tax-exempt employer benefits trust against
which the third party administrator processes and pays claims. Stop loss insurance coverage limits the Company’s funding
requirements and risk of loss to $75 thousand and $3.2 million for individual and aggregate claims, respectively. Total
Company expenses under the plan were $2.7 million, $2.2 million, and $2.0 million in 2005, 2004 and 2003, respectively.
Deferred Compensation Plan
The Company has deferred compensation agreements with certain current and former officers providing for benefit
payments over various periods commencing at retirement or death. The liability at December 31, 2005 and 2004 was
approximately $511 thousand and $540 thousand, respectively. The annual expenses associated with this plan were
$41 thousand, $10 thousand and $42 thousand for 2005, 2004 and 2003, respectively. The obligation is based upon the
present value of the expected payments and estimated life expectancies of the individuals.
The Company maintains a life insurance contract on the life of one of the participants covered under this plan.
Proceeds derived from death benefits are intended to provide reimbursement of plan benefits paid over the post
employment lives of the participants. Premiums on the insurance contract are currently paid through policy dividends on
the cash surrender values of $865 thousand and $727 thousand at December 31, 2005 and 2004, respectively.
Executive Retention Plan
The Company maintains an Executive Retention Plan for key members of senior management. This Plan provides for a
benefit at normal retirement (age 62) targeted at 35% of final compensation projected at an assumed 3% salary progression
rate. Benefits under the Plan become payable at age 62. Actual benefits payable under the
64
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Retention Plan are dependent on an indexed retirement benefit formula which accrues benefits equal to the aggregate after-
tax income of associated life insurance contracts less the Company’s tax-effected cost of funds for that plan year. Benefits
under the Plan are dependent on the performance of the insurance contracts and are not guaranteed by the Company.
Additionally, during 2001, the Company entered into a similar retirement plan arrangement as described below with non-
employee board members of the Company.
The Company funded the contracts through the purchase of bank-owned life insurance, ("BOLI"), which is
anticipated to fully fund the projected benefit payout after retirement. The cash surrender value of the BOLI for the
Executive Retention Plan at December 31, 2005 and 2004, was $6.8 million and $6.6 million, respectively. The associated
projected benefit obligation accrued as of year-end 2005 and 2004 was $2.5 million and $2.0 million, respectively, while the
associated obligation expense incurred in connection with the Executive Plan was $247 thousand, $307 thousand and
$170 thousand for 2005, 2004 and 2003, respectively. The income derived from policy appreciation was $230 thousand,
$248 thousand and $234 thousand in 2005, 2004 and 2003, respectively.
In conjunction with the CommonWealth acquisition, the Company assumed the obligations of the CommonWealth
BOLI plan and added assets of $1.4 million, which is reflected in the growth of the BOLI assets, income and corresponding
expense in 2003.
In connection with the Executive Retention Plan, the Company has also entered into Life Insurance Endorsement
Method Split Dollar Agreements (the "Agreements") with the individuals covered under the Plan. Under the Agreements,
the Company shares 80% of death benefits (after recovery of cash surrender value) with the designated beneficiaries of the
plan participants under life insurance contracts referenced in the Plan. The Company as owner of the policies retains a 20%
interest in life proceeds and a 100% interest in the cash surrender value of the policies.
The Plan also contains provisions for change of control, as defined, which allow the participants to retain benefits,
subject to certain conditions, under the Plan in the event of a change in control. Benefits under the Executive Plan, which
begin to accrue with respect to years of service under the Plan, vest 25% after five years, 50% after ten years, 75% after
15 years and 5% per year thereafter, with vesting accelerated to 100% upon attainment of age 62.
Directors Supplemental Retirement Plan
In 2001, the Company established the Directors Supplemental Retirement Plan (the "Directors Plan") for its non-
employee directors. The Directors Plan provides for a benefit upon retirement from service on the Board at specified ages
depending upon length of service or death. Benefits under the Directors Plan become payable at age 70, 75, and 78
depending upon the individual director’s age and original date of election to the Board. Actual benefits payable under the
Directors Plan are dependent on an indexed retirement benefit formula that accrues benefits equal to the aggregate after-tax
income of associated life insurance contracts less the Company’s tax-effected cost of funds for that plan year. Benefits
under the Directors Plan are dependent on the performance of the insurance contracts and are not guaranteed by the
Company. Participants in the Directors Plan vest in the indexed benefit balance as it accrues.
In connection with the Directors Plan, the Company has also entered into Life Insurance Endorsement Method Split
Dollar Agreements (the "Agreements") with certain directors covered under the Directors Plan. Under the Agreements, the
Company shares 80% of death benefits, after recovery of cash surrender value, with the designated beneficiaries of the
executives under life insurance contracts referenced in the Retention Plan. The Company, as owner of the policies, retains a
20% interest in life proceeds and a 100% interest in the cash surrender value of the policies.
The Directors Plan also contains provisions for change of control, as defined, which allow the directors to retain
benefits under the Directors Plan in the event of a termination of service, other than for cause, during the
65
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12 months prior to a change in control or anytime thereafter, unless the director voluntarily terminates his service within
90 days following the change in control.
The expenses associated with the Directors Plan for 2005, 2004 and 2003 were $322 thousand, $202 thousand and
$155 thousand, respectively.
Stock Options
In 1999, the Company instituted a Stock Option Plan to encourage and facilitate investment in the common stock of
the Company by key executives and to assist in the long-term retention of service by those executives. The Plan covers
key executives as determined by the Company’s Board of Directors from time to time. Options under the Plan were granted
in the form of non-statutory stock options with the aggregate number of shares of common stock available for grant under
the Plan set at 332,750 (adjusted for 10% stock dividends paid in 2002 and again in 2003). The options granted under the
Plan represent the rights to acquire the option shares with deemed grant dates of January 1 for each year beginning with
the initial year granted and the following four anniversaries. All stock options granted pursuant to the Plan vest ratably on
the first through the seventh anniversary dates of the deemed grant date. The option price of each stock option is equal to
the fair market value (as defined by the Plan) of the Company’s common stock on the date of each deemed grant during the
five-year grant period. Vested stock options granted pursuant to the Plan are exercisable during employment and for a
period of five years after the date of the grantee’s retirement, provided retirement occurs at or after age 62. If employment is
terminated other than by early retirement, disability, or death, vested options must be exercised within 90 days after the
effective date of termination. Any option not exercised within such period will be deemed cancelled.
In 2001, the Company also granted stock options to non-employee directors. The Director Option Plan was
implemented to facilitate and encourage investment in the common stock of the Company by non-employee directors
whose efforts, solely as directors, are expected to contribute to the Company’s future growth and continued success. The
options granted pursuant to the Plan expire at the earlier of 10 years from the date of grant or two years after the optionee
ceases to serve as a director of the Company. Options not exercised within the appropriate time shall expire and be deemed
cancelled. The Plan covers non-employee directors as determined by the Company’s Board of Directors. Options under the
Plan were granted in the form of non-statutory stock options with the aggregate number of shares of common stock
available for grant under the Plan set at 108,900 shares (adjusted for the 10% stock dividends paid in 2002 and 2003).
In 2003, with the acquisition of CommonWealth, the Company acquired additional stock options of 120,155 shares
(adjusted by the merger conversion factor of .9015 and the 10% stock dividend in 2003). These options were issued by
CommonWealth in 12 grants beginning in 1994 and ending in 2002 and, following the merger, reflect adjusted exercise
prices ranging from $4.75 to $17.40. These options were fully vested at the point of grant and are exercisable for up to ten
years following the original grant date.
At the 2004 Annual Meeting, shareholders ratified approval of the 2004 Omnibus Stock Option Plan ("2004 Plan")
which made available up to 200,000 shares for potential grants of Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock Awards or Performance Awards. The purposes of the 2004 Plan were to promote the long-term success of
the Company by encouraging officers, employees, directors and individuals performing services for the Company to focus
on critical long-range objectives.
66
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the Company’s stock option activity, and related information for the years ended December 31 is as
follows:
2005
Weighted-
Average
2003
Weighted-
Average
Option Exercise Option Exercise Option Exercise
Shares
2004
Weighted-
Average
Shares
Shares
Price
Price
Price
Outstanding, beginning of year
Granted
Acquired with CommonWealth
Exercised
Forfeited
Outstanding, end of year
Exercisable at end of year
Weighted-average fair value of options
401,875 $
31,675
—
38,146
11,842
383,562 $
20.79
29.78
—
13.69
25.72
22.08
414,809 $
42,000
—
54,873
61
401,875 $
19.01
26.24
—
11.58
—
20.79
291,638 $
75,186
120,155
63,095
9,075
414,809 $
256,327 $
20.78
225,549 $
18.62
105,460 $
19.25
29.15
11.44
—
19.01
12.67
granted during the year
$
6.53
$
6.79
$
7.05
The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model and certain
assumptions. The fair values of grants made in the last three years were estimated using the following weighted-average
assumptions:
Volatility
Expected dividend yield
Expected term (in years)
Risk-free rate
2005
2004
2003
28.26 %
3.54 %
5.53
4.10 %
30.10 %
3.10 %
6.60
3.99 %
22.80 %
2.96 %
11.97
4.03 %
Additional information regarding stock options outstanding and exercisable at December 31, 2005 is provided in the
following table:
Ranges of
Exercise
Prices ($)
$ 7.66 - $12.62
$12.63 - $17.59
$17.60 - $22.56
$22.57 - $27.53
$27.54 - $32.51
Weighted-
Weighted-
Average
Weighted- Average
Number of Average Remaining Options
Options
Outstanding
Exercise Contractual Currently Currently
Life (Years) Exercisable Exercisable
Number of Exercise Price
of Options
Price
22,188 $
91,075
67,163
100,822
102,314
383,562 $
8.65
14.86
20.63
25.16
29.35
22.08
3.34
15.02
11.07
12.99
13.73
12.78
22,188 $
64,249
67,163
53,291
49,436
256,327 $
8.65
15.03
20.63
25.04
29.26
20.78
67
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Awards
The 2004 Plan permits the granting of restricted and unrestricted stock grants either alone, in addition to, or in tandem
with other awards made by the Company. Stock grants are generally measured at fair value on the date of grant based on
the number of shares granted and the quoted price of the Company’s stock. Such value is recognized as expense over the
corresponding service period. The Company granted restricted and unrestricted stock awards of 750 shares with a
weighted-average value of $30.98 and 5,000 shares with a weighted-average $26.24 in 2005 and 2004, respectively.
Note 11. Litigation, Commitments and Contingencies
In the normal course of business, the Company is a defendant in various legal actions and asserted claims, most of
which involve lending, collection and employment matters. While the Company and legal counsel are unable to assess the
ultimate outcome of each of these matters with certainty, they are of the belief that the resolution of these actions, singly or
in the aggregate, should not have a material adverse affect on the financial condition, results of operations or cash flows of
the Company.
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk
beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the
event of 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 policies in making commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit
is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying
types and amounts is held to secure customer performance under certain of those letters of credit outstanding.
Financial instruments whose contract amounts represent credit risk at December 31, 2005 and 2004, are commitments
to extend credit (including availability of lines of credit) of $232.9 million and $156.7 million, respectively, and standby
letters of credit and financial guarantees written of $8.7 million and $8.3 million, respectively.
In September 2003, the Company issued, through FCBI Capital Trust, $15.0 million of trust preferred securities in a
private placement. In connection with the issuance of the preferred securities, the Company has committed to irrevocably
and unconditionally guarantee the following payments or distributions with respect to the preferred securities to the
holders thereof to the extent that FCBI Capital Trust has not made such payments or distributions and has the funds
therefore: (i) accrued and unpaid distributions, (ii) the redemption price, and
68
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(iii) upon a dissolution or termination of the trust, the lesser of the liquidation amount and all accrued and unpaid
distributions and the amount of assets of the trust remaining available for distribution.
The previously disclosed state tax audit of state income, franchise, and sales tax in one of the Company’s tax
jurisdictions was recently concluded. The outcome of this audit was favorable to the Company and resulted in total state
income and franchise tax refunds of approximately $473 thousand, subject to the final filing of amended returns. The
Company regularly evaluates the tax provision and continues to believe that it has established appropriate provisions for
state income and franchise taxes.
Note 12. Regulatory Capital Requirements and Restrictions
The primary source of funds for dividends paid by the Company is dividends received from the Bank. Dividends paid
by the Bank are subject to restrictions by banking regulations. The most restrictive provision of the regulations requires
approval by the Office of the Comptroller of the Currency if dividends declared in any year exceed the year’s net income, as
defined, plus retained net profit of the two preceding years. During 2006, subsidiary accumulated earnings available for
distribution as dividends to the Company without prior approval are $38.1 million plus net income for the interim period
through the date of dividend declaration.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under
the capital adequacy guidelines and the regulatory framework for prompt corrective action, which applies only to the Bank,
the Bank must meet specific capital guidelines that involve quantitative measures of the entity’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The entity’s capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios for total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined). As of December 31, 2005, the Company and
banking subsidiary met all capital adequacy requirements to which they are subject. As of December 31, 2005 and 2004, the
most recent notifications from the Federal Reserve Board categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-
based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since
those notifications that management believes have changed the institution’s category.
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.
December 31, 2005
Actual
For Capital
Adequacy
Purposes
Amount Ratio Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
(Dollars in thousands)
$ 164,864 11.65 % $ 113,218 8.00 %
N/A
154,709 10.99 % 112,639 8.00 % $ 140,799
N/A
10.00 %
N/A
$ 149,154 10.54 % $ 56,609 4.00 %
139,508 9.91 % 56,319 4.00 % $ 84,479
N/A
6.00 %
$ 149,154 7.77 % $ 76,772 4.00 %
N/A
139,508 7.30 % 76,418 4.00 % $ 95,522
N/A
5.00 %
69
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004
Actual
For Capital
Adequacy
Purposes
Amount Ratio Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
(Dollars in thousands)
$ 150,673 12.09 % $ 99,677 8.00 %
N/A
139,854 11.24 % 99,546 8.00 % $ 124,433
N/A
10.00 %
N/A
$ 134,562 10.80 % $ 49,839 4.00 %
124,290 9.99 % 49,773 4.00 % $ 74,660
N/A
6.00 %
$ 134,562 7.62 % $ 70,630 4.00 %
N/A
124,290 7.06 % 70,386 4.00 % $ 87,982
N/A
5.00 %
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.
At December 31, 2005, $15.5 million in subordinated debt is treated as Tier 1 capital for bank regulatory purposes.
Tier 1 capital consists of total equity plus qualifying capital securities and minority interests, less unrealized gains and
losses accumulated in other comprehensive income, certain intangible assets, and adjustments related to the valuation of
mortgage servicing assets and certain equity investments in non-financial companies (principal investments).
Total risk-based capital is comprised of Tier 1 capital plus qualifying subordinated debt and allowance for loan losses
and a portion of unrealized gains on certain equity securities.
Both the Tier 1 and the total risk-based capital ratios are computed by dividing the respective capital amounts by risk-
weighted assets, as defined.
The leverage ratio reflects Tier 1 capital divided by average total assets for the period. Average assets used in the
calculation exclude certain intangible and mortgage servicing assets.
Note 13. Other Operating Expenses
Included in other operating expenses are certain costs, the total of which exceeds one percent of combined interest
income and non-interest income. Following are such costs for the years indicated:
Advertising and public relations
Telephone and data communications
FHLB Prepayment penalties
Note 14. Fair Value of Financial Instruments
Years Ended December 31,
2004
2005
(Amounts in thousands)
2003
$ 1,158
1,488
3,794
$ 1,323
1,561
—
$ 1,268
1,208
—
Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is
practical to estimate the value is based upon the characteristics of the instruments and relevant market information.
Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity
that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the
amount at which a financial instrument could be exchanged in a current transaction
70
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one
exists.
The following summary presents the methodologies and assumptions used to estimate the fair value of the
Company’s financial instruments presented below. The information used to determine fair value is highly subjective and
judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things,
estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the
fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or
maturity on these various instruments could be significantly different.
Carrying
Amount
December 31, 2005
Carrying
Fair
Amount
Value
(Amounts in thousands)
December 31, 2004
Fair
Value
Assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans held for sale
Loans held for investment
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased
Securities sold under agreements to repurchase
FHLB and other indebtedness
$
57,539
404,381
24,173
1,274
1,316,303
$
57,539
404,381
24,877
1,278
1,304,804
$
54,746
375,997
34,221
1,194
1,222,417
$
54,746
375,997
35,610
1,194
1,225,691
230,542
144,314
355,184
675,904
82,500
124,154
129,231
230,542
123,062
333,594
666,439
82,500
124,154
128,951
221,499
318,166
217,095
602,304
32,500
109,857
131,855
221,499
318,166
217,095
597,965
32,500
109,857
139,279
Financial Instruments with Book Value Equal to Fair Value
The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair
value as a result of the short-term nature of these items.
Securities Available for Sale
For securities available for sale, fair value is based on current market quotations, where available. If quoted market
prices are not available, fair value has been based on the quoted price of similar instruments.
Securities Held to Maturity
For investment securities, fair value has been based on current market quotations, where available. If quoted market
prices are not available, fair value has been based on the quoted price of similar instruments.
Loans
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.
71
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deposits and Securities Sold Under Agreements to Repurchase
Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at
their carrying value in accordance with SFAS 107. No value has been assigned to the franchise value of these deposits. For
other types of deposits with fixed maturities, fair value has been estimated by discounting future cash flows based on
interest rates currently being offered on deposits with similar characteristics and maturities. Securities sold under
agreements to repurchase are reported at their carrying value.
Other Indebtedness
Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar
characteristics and maturities.
Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees
The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is
considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of
commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures,
the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the
commitment.
Note 15. Parent Company Financial Information
Condensed financial information related to First Community Bancshares, Inc. as of December 31, 2005 and 2004, and
for each of the years ended December 31, 2005, 2004, and 2003, is as follows:
Condensed Balance Sheets
Assets
Cash
Securities available for sale
Investment in subsidiary
Other assets
Total assets
Liabilities
Other liabilities
Long-term debt
Total 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
72
December 31,
2005
2004
(Amounts in
thousands)
$ 1,344
8,874
199,109
651
$ 209,978
$ 5,081
6,127
187,206
963
$ 199,377
$
13
15,464
15,477
$
680
15,464
16,144
11,496
108,573
82,828
(7,625 )
(771 )
194,501
$ 209,978
11,472
108,263
68,019
(6,881 )
2,360
183,233
$ 199,377
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Income
Cash dividends received from subsidiary bank
Other income
Operating expense
Income tax benefit (expense)
Equity in undistributed earnings of subsidiary — continuing operations
Net income from continuing operations
Equity in undistributed (loss) earnings of subsidiary — discontinued operations
Net (loss) income from discontinued operations
Net income
73
2005
Years Ended December 31,
2004
(Amounts in thousands,
except per share data)
2003
$ 11,600
823
(1,808 )
10,615
662
15,026
$ 26,303
—
—
$ 26,303
$ 12,600
339
(1,361 )
11,578
606
10,180
$ 22,364
—
—
$ 22,364
$ 11,900
1,257
(790 )
12,367
(5 )
14,357
$ 26,719
(1,481 )
(1,481 )
$ 25,238
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Statements of Cash Flows
2005
Years Ended December 31,
2004
(Amounts in thousands)
2003
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 — continuing operations
Equity in undistributed earnings of subsidiary — discontinued operations
Gain on sale of securities
Decrease in other assets
(Decrease) increase in other liabilities
Other, net
Net cash provided by operating activities
Cash flows from investing activities
Purchase of securities available for sale
Payments for investments in and advances to shareholders
Proceeds from sale of securities available for sale
Net cash (used in) provided by investing activities
Cash flows from financing activities
Repayment of long-term debt
Net Proceeds from debt related to the issuance of Trust Preferred Securities
Issuance of common stock
Acquisition of treasury stock
Dividends paid
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$ 26,303
$ 22,364
$ 25,238
(15,026 )
—
(513 )
312
(666 )
379
10,789
(3,819 )
—
1,568
(2,251 )
—
—
522
(1,303 )
(11,494 )
(12,275 )
(3,737 )
5,081
$ 1,344
(10,180 )
—
(94 )
527
93
3
12,713
(14,357 )
1,481
(999 )
849
87
—
12,299
(526 )
—
430
(96 )
(323 )
(15,000 )
1,845
(13,478 )
—
—
504
(1,196 )
(11,239 )
(11,931 )
686
4,395
$ 5,081
—
14,560
709
(4,977 )
(10,847 )
(555 )
(1,734 )
6,129
$ 4,395
Note 16. Discontinued Operations
On August 18, 2004, the Company sold United First Mortgage, Inc., its mortgage banking subsidiary headquartered in
Richmond, Virginia. The transaction resulted in the sale of 100% of the stock of the mortgage banking subsidiary for cash
consideration of approximately $250 thousand. The transaction produced an after-tax gain of approximately $387 thousand.
This sale completed the Company’s exit from its mortgage banking operations.
The business related to the former mortgage banking subsidiary is accounted for as discontinued operations in
accordance with SFAS 144 for all periods presented in this report. The results of the former mortgage banking
74
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
subsidiary are presented as discontinued operations in a separate category on the income statement following results from
continuing operations.
During the fourth quarter of 2003, the Company performed its annual impairment test of goodwill, resulting in a charge
off of approximately $400 thousand of goodwill related to the mortgage banking subsidiary. Following the 2004 decision to
sell the subsidiary, the remaining $1.4 million of goodwill was considered impaired and subsequently charged off. These
charges are included in the "loss from discontinued operations" category on the consolidated income statement and as a
reduction to "assets related to discontinued operations" on the balance sheet.
The results of discontinued operations for the most recent three years ended December 31 are as follows:
Interest Income
Interest & fees on loans held for sale
Income on investments taxable
Interest on fed funds and time deposits
Total interest income
Interest Expense
Interest on short term borrowings
Interest on other borrowings
Total interest expense
Net interest income
Other Income
Gain (loss) on securities
Mortgage banking income
Total other income
Other Expenses
Salaries and benefits
Occupancy expense
Furniture and equipment expense
Other operating expense
Total other expenses
Loss before income taxes (2004 includes a $570 thousand loss on the disposition of
UFM)
Applicable income tax benefit (2004 includes a tax benefit of $957 thousand related to the
disposition of UFM)
Net loss
Year Ended December 31,
2003
2004
2005
(Amounts in thousands)
$ —
—
—
—
$ 681
6
3
690
—
—
—
—
—
—
—
25
—
35
173
233
505
2
507
183
13
943
956
2,990
229
106
3,560
6,885
$ 2,367
21
11
2,399
1,975
2
1,977
422
—
7,165
7,165
6,115
436
254
2,956
9,761
(233 )
(5,746 )
(2,174 )
(91 )
$ (142 )
(2,090 )
$ (3,656 )
(693 )
$ (1,481 )
There were no discontinued assets and liabilities from the former mortgage banking subsidiary for the periods ended
December 31, 2005 and 2004.
The discontinued cash flows for 2004 and 2003 have been revised to conform with the current year’s presentation,
which details cash flows from operating, investing, and financing activities.
75
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 17. Supplemental Financial Data (Unaudited)
Quarterly earnings for the years ended December 31, 2005 and 2004, are as follows:
2005
Quarter Ended
March 31
Dec 31
(Amounts in thousands, except per share data)
June 30
Sept 30
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Net securities gains
Other expenses
Income before income taxes
Income taxes
Net income from continuing operations
Loss from discontinued operations before income tax
Income tax benefit
Loss from discontinued operations
Net income
Per share:
Basic earnings
Basic earnings continuing
Diluted earnings
Diluted earnings continuing
Dividends
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
$ 25,188
7,435
17,753
691
17,062
3,700
22
12,496
8,288
2,237
6,051
(131 )
(51 )
(80 )
$ 5,971
$ 26,790
8,268
18,522
1,073
17,449
4,449
121
13,301
8,718
2,494
6,224
(39 )
(15 )
(24 )
$ 6,200
$ 28,293
9,572
18,721
1,060
17,661
4,496
536
13,118
9,575
2,641
6,934
(36 )
(14 )
(22 )
$ 6,912
$ 29,237
10,605
18,632
882
17,750
8,907
74
16,676
10,055
2,819
7,236
(27 )
(11 )
(16 )
$ 7,220
0.53
$
0.54
$
0.53
$
$
0.53
$ 0.255
$ 0.55
$ 0.55
$ 0.55
$ 0.55
$ 0.255
$ 0.61
$ 0.61
$ 0.61
$ 0.61
$ 0.255
$ 0.64
$ 0.64
$ 0.64
$ 0.64
$ 0.255
11,259
11,274
11,275
11,268
11,339
11,344
11,343
11,341
76
Table of Contents
2004
Quarter Ended
March 31
Dec 31
(Amounts in thousands, except per share data)
June 30
Sept 30
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Net securities gains
Other expenses
Income before income taxes
Income taxes
Net income from continuing operations
Loss from discontinued operations before income tax
Income tax benefit
Loss from discontinued operations
Net income
Per share:
Basic earnings
Basic earnings continuing
Diluted earnings
Diluted earnings continuing
Dividends
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
Note 18. Subsequent Events
$ 22,229
6,245
15,984
532
15,452
3,232
11
10,910
7,785
2,183
5,602
(1,891 )
(450 )
(1,441 )
$ 4,161
$ 24,356
6,729
17,627
723
16,904
4,136
1,438
12,226
10,252
2,666
7,586
(2,374 )
(502 )
(1,872 )
$ 5,714
$ 24,649
6,948
17,701
1,152
16,549
4,218
60
12,237
8,590
1,968
6,622
(1,266 )
(1,054 )
(212 )
$ 6,410
$ 24,902
7,031
17,871
264
17,607
4,139
95
12,662
9,179
2,969
6,210
(215 )
(84 )
(131 )
$ 6,079
$
$
$
$
$
0.37
0.50
0.37
0.49
0.25
0.51
0.67
0.50
0.67
$ 0.25
0.57
0.59
0.57
0.58
$ 0.25
0.54
0.55
0.54
0.55
$ 0.25
11,245
11,229
11,232
11,248
11,348
11,320
11,327
11,355
Subsequent to year-end, the Company signed definitive agreements to sell its branch locations in Drake’s Branch,
Virginia, and Rowlesburg, West Virginia. The following table presents details about the two transactions based on
December 31, 2005, loans and deposits outstanding.
Loans
Deposits
Expected deposit premium
77
Drakes Branch, Rowlesburg,
Virginia
West Virginia
(Amounts in thousands)
$
1,926 $
16,142
726
3,193
10,721
382
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
Audit Committee of the Board of Directors and the
Shareholders of First Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the First Community Bancshares, Inc.’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 2005,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the effectiveness of First Community Bancshares, Inc.’s internal control over financial reporting as of December 31,
2005, based on criteria established in "Internal Control — Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 3, 2006, expressed an unqualified opinion thereon.
Charleston, West Virginia
March 3, 2006
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
First Community Bancshares, Inc. (the "Company") is responsible for the preparation, integrity, and fair presentation
of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial
statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with U.S. generally
accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and
judgments.
We, as management of the Company, are responsible for establishing and maintaining effective internal control over
financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted
accounting principles. The system of internal control over financial reporting as it relates to the financial statements is
evaluated for effectiveness by management and tested for reliability. Any system of internal control, no matter how well
designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and
misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal
control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting
based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management concluded that its system of internal
control over financial reporting was effective as of December 31, 2005. Ernst & Young LLP, independent registered public
accounting firm, has issued an attestation report on management’s assessment of the Company’s internal control over
financial reporting.
The Report of Independent Registered Accounting Firm on Management’s Report on Internal Control Over Financial
Reporting appears hereafter in Item 8 of this Annual Report on Form 10-K.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors
First Community Bancshares, Inc.
We have audited management’s assessment, included in the accompanying Report on Management’s Assessment of
Internal Control Over Financial Reporting, that First Community Bancshares, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). First Community
Bancshares, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because management’s assessment and our audit were
conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), management’s assessment and our audit of First Community Bancshares, Inc.’s internal
control over financial reporting included controls over the preparation of financial statements in accordance with the
instructions for the preparation of Consolidated Financial Statements for Bank Holding Companies (Form FRY-9C). A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that First Community Bancshares, Inc. maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also,
in our opinion, First Community Bancshares, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of First Community Bancshares, Inc. as of December 31, 2005 and 2004, and the
related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2005, of First Community Bancshares, Inc. and our report dated March 3, 2006, expressed an
unqualified opinion thereon.
Charleston, West Virginia
March 3, 2006
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the
Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls
and procedures pursuant to the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(b). Based upon that
evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There
have not been any changes in the Company’s internal controls over financial reporting during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over
financial reporting.
Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that
information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Our management’s Report on Internal Control Over Financial Reporting and The Report of Independent Registered
Accounting Firm on Management’s Report on Internal Control Over Financial Reporting are each hereby incorporated by
reference from Item 8 of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The required information concerning directors and executive officers has been omitted in accordance with General
Instruction G. Such information regarding directors and executive officers appears under the headings of "Election of
Directors", "Continuing Directors", and "Executive Officers who are not Directors" of the Proxy Statement relating to the
2006 Annual Meeting of Stockholders and is incorporated herein by reference.
A portion of the information relating to compliance with Section 16(a) of the Exchange Act has been omitted in
accordance with General Instruction G. Such information appears under the heading of "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Proxy Statement relating to the 2006 Annual Meeting of Stockholders and is incorporated
herein by reference.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar functions. A copy of the Company’s Code of Ethics
is available on the Company’s website at http:/www.fcbinc.com and was filed as Exhibit 14.1 to the registrant’s Annual
Report on Form 10-K for the year ended December 31, 2003. Since its adoption, there have been no amendments to or
waivers of the code of ethics related to any of the above officers.
A portion of the information relating to Audit Committee Financial Expert has been omitted in accordance with General
Instruction G. Such information regarding the Audit Committee Financial Expert appears under the heading "Report of the
Audit Committee" of the Proxy Statement relating to the 2006 Annual Meeting of Stockholders and is incorporated herein
by reference.
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BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
Harold V. Groome, Jr.
Chairman, Groome Transportation, Inc.; Chairman Groome
Transportation of Georgia, Inc.
A. A. Modena
Past Executive Vice President and Secretary, First
Community Bancshares, Inc.; Past President & Chief
Executive Officer, The Flat Top National Bank of Bluefield;
Member Executive Committee; Chairman, Nominating
Committee
Allen T. Hamner
Professor of Chemistry, West Virginia Wesleyan College;
Member Executive Committee, Audit Committee and Member
Nominating Committee
Robert E. Perkinson, Jr.
Past Vice President — Operations, MAPCO Coal, Inc. —
Virginia Region; Chairman, Audit Committee
B. W. Harvey
Retired — Former President, Highlands Real Estate
Management, Inc.; Member Executive Committee and Audit
Committee; Member Nominating Committee
William P. Stafford
President, Princeton Machinery Service, Inc.; Chairman,
First Community Bancshares, Inc.; Chairman, Executive
Committee
I. Norris Kantor
Of Counsel, 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
William P. Stafford, II
Attorney-at-Law, Brewster, Morhous, Cameron, Mullins,
Caruth, Moore, Kersey & Stafford, PLLC; Member
Executive Committee
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
John M. Mendez
President and Chief Executive Officer
Robert L. Buzzo
Vice President and Secretary
Mark A. Wendel
Chief Financial Officer
E. Stephen Lilly
Chief Operating Officer
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BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
Dr. James P. Bailey
Retired Veterinarian, Veterinary Associates, Inc.; Chairman,
Emeritus, First Community Bank, N.A.
B. W. Harvey
Retired — Former President, Highlands Real Estate
Management, Inc.; Chairman, First Community Bank, N.A.
W. C. Blankenship, Jr.
Agent, State Farm Insurance
D. L. Bowling, Jr.
President, True Energy, Inc.
Juanita G. Bryan
Homemaker
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.
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 L. Buzzo
Vice President and Secretary, First Community Bancshares,
Inc.; President, First Community Bank, N.A.
Robert E. Perkinson, Jr.
Past Vice President — Operations, MAPCO Coal, Inc. —
Virginia Region
Sam Clark
Agent, State Farm Insurance
Owner, Country Junction Company, Inc.
Clyde B. Ratliff
President, Gasco Drilling, Inc.
C. William Davis
Attorney-at-Law, Richardson & Davis
William P. Stafford
President, Princeton Machinery Service, Inc.
Harold V. Groome, Jr.
Chairman, Groome Transportation, Inc.; Chairman, Groome
Transportation of Georgia, Inc.
William P. Stafford, II
Attorney at Law, Brewster, Morhous, Cameron, Mullins,
Caruth, Moore, Kersey & Stafford, PLLC
Franklin P. Hall
Businessman; Senior Partner, Hall & Family Law Firm
Frank C. Tinder
President, Tinder Enterprises, Inc. and Tinco Leasing
Corporation
Allen T. Hamner, Ph.D.
Professor of Chemistry, West Virginia Wesleyan College
Dale F. Woody
President, Woody Lumber Company
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ITEM 11. EXECUTIVE COMPENSATION.
The required information concerning management remuneration has been omitted in accordance with General
Instruction G. Such information appears under the headings of "Report on Executive Compensation", "Compensation
Committee Interlocks and Insider Participation", "Executive Compensation for the Three Years Ended December 31, 2005",
"Stock Options", "Options Deemed Granted in Last Fiscal Year", "Option Exercises in Last Fiscal Year", "Wrap Plan",
"Executive Retention Plan", "Directors’ Supplemental Retirement Plan", and "Indemnification Agreements" of the Proxy
Statement relating to the 2006 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The required information concerning security ownership of certain beneficial owners and management has been
omitted in accordance with General Instruction G. Such information appears under the heading of "Beneficial Ownership of
Common Stock by Certain Beneficial Owners and Management" of the Proxy Statement relating to the 2006 Annual
Meeting of Stockholders is incorporated herein by reference.
The following table presents information for all equity compensation plans with individual compensation
arrangements (whether with employees or non-employees such as directors), in effect as of December 31, 2005.
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants Options, Warrants
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Plan Category
and Rights
(a)
and Rights
(b)
Reflected in Column (a))
(c)
Equity compensation plans approved by security
holders
Equity compensation plans not approved by
security holders
Total
67,800 $
319,762
387,562
26.35
20.90
129,825
80,443
210,268
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The required information concerning certain relationships and related transactions has been omitted in accordance
with General Instruction G. Such information appears under the heading of "Transactions with Directors and Officers" in
the Proxy Statement relating to the 2006 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The required information concerning principal accountant fees and services has been omitted in accordance with
General Instruction G. Such information appears under the heading of "Audit Fees" in the Proxy Statement relating to the
2006 Annual Meeting of Stockholders is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents Filed as Part of this Report
(1) Financial Statements
The Consolidated Financial Statements of First Community Bancshares, Inc. and subsidiaries together with the
Independent Registered Public Accounting Firm’s Report dated March 3, 2006 are incorporated by reference to Item 8
hereof.
(2) Financial Statement Schedules
No financial statement schedules are being filed since the required information is inapplicable or is presented in
the consolidating financial statements or related notes.
(b) Exhibits
Exhibit No.
Exhibit
2 .1
—
Agreement and Plan of Merger dated as of January 27, 2003, and amended as of February 25, 2003, among
First Community Bancshares, Inc., First Community Bank, National Association, and The CommonWealth
Bank.(1)
3 (i)
3 (ii)
4 .1
4 .2
4 .3
4 .4
10 .1
10 .2
10 .3
10 .4
10 .5
10 .6
10 .7
10 .8
10 .9
— Articles of Incorporation of First Community Bancshares, Inc., as amended.(2)
— Bylaws of First Community Bancshares, Inc., as amended.(2)
— Specimen stock certificate of First Community Bancshares, Inc.(7)
— Indenture Agreement dated September 25, 2003.
— Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003.
— Preferred Securities Guarantee Agreement dated September 25, 2003.
— First Community Bancshares, Inc. 1999 Stock Option Plan.(2)(3)
— First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan.(4)
—
Employment Agreement dated January 1, 2000 and amended October 17, 2000, between First Community
Bancshares, Inc. and John M. Mendez.(2)(5)
— First Community Bancshares, Inc. 2000 Executive Retention Plan.(3)
— First Community Bancshares, Inc. Split Dollar Plan and Agreement.(3)
— First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan.(2)
— First Community Bancshares, Inc. Wrap Plan.(7)
— Employment Agreement between First Community Bancshares, Inc. and J. E. Causey Davis.(8)
—
Agreement and Plan of Merger dated as of December 31, 2003 among First Community Bancshares, Inc.,
First Community Bank, National Association, and PCB Bancorp.(9)
Form of Indemnification Agreement between First Community Bancshares, its Directors and Certain
Executive Officers.(10)
Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain
Executive Officers.(10)
10 .10
—
10 .11
—
— First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan.(11)
10 .12
10 .13* — Change of control agreement between First Community Bank, N.A. and Mark A. Wendel.
11
12 *
14
21
23 *
— Statement regarding computation of earnings per share.(6)
— Computation of Ratios.
— Code of Ethics.(12)
— Subsidiaries of Registrant — Reference is made to "Item 1. Business" for the required information.
—
Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm for First Community
Bancshares, Inc.
31 .1* — Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive Officer.
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Exhibit No.
Exhibit
31 .2* — Rule 13a-14(a)/a5d-14(a) Certification of Chief Financial Officer.
32 *
— Certification of Chief Executive Officer and Chief Financial Officer Section 1350.
* Furnished herewith.
(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Form 8-K filed with the
Commission on January 28, 2003 and February 26, 2003.
(2) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002 filed on
August 14, 2002.
(3) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 1999 filed on
March 30, 2000 as amended April 13, 2000.
(4) The options agreements entered into pursuant to the 1999 Stock Option Plan and the 2001 Non-Qualified Directors
Stock Option Plan are incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30,
2002 filed on August 14, 2002.
(5) First Community Bancshares, Inc. has entered into substantially identical agreements with Messrs. Buzzo and Lilly,
with the only differences being with respect to titles, salary and the use of a vehicle.
(6) Incorporated by reference from Footnote 1 of the Notes to Consolidated Financial Statements included herein.
(7) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2002 filed on
March 25, 2003 as amended on March 31, 2003.
(8) Incorporated by reference from S-4 Registration Statement filed on March 28, 2003.
(9) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Form 8-K filed with the
Commission on December 31, 2003.
(10) Form of indemnification agreement entered into by the Company and by First Community Bank N. A. with their
respective directors and certain officers of each including, for the registrant and Bank: John M. Mendez, Robert L.
Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly and at the Bank level: Samuel L. Elmore.
(11) Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19, 2004.
(12) Incorporated by reference from the Annual Report of Form 10-K for the period ended December 31, 2003 filed on
March 15, 2004.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 3rd day of March 2006.
SIGNATURES
First Community Bancshares, Inc.
(Registrant)
By:
By:
/s/ John M. Mendez
John M. Mendez
President and Chief Executive Officer
/s/ Mark A. Wendel
Mark A. Wendel
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John M. Mendez
John M. Mendez
/s/ Mark A. Wendel
Mark A. Wendel
/s/ Harold V. Groome, Jr.
Harold V. Groome, Jr.
/s/ Allen T. Hamner
Allen T. Hamner
/s/ B. W. Harvey
B. W. Harvey
/s/ I. Norris Kantor
I. Norris Kantor
/s/ A. A. Modena
A. A. Modena
Director, President and
Chief Executive Officer
Chief Financial Officer
Chief Accounting Officer
March 3, 2006
March 3, 2006
Director
March 3, 2006
Director
March 3, 2006
Director
March 3, 2006
Director
March 3, 2006
Director
March 3, 2006
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Signature
Title
Date
/s/ Robert E. Perkinson, Jr.
Robert E. Perkinson, Jr.
/s/ William P. Stafford
William P. Stafford
/s/ William P. Stafford, II
William P. Stafford, II
Director
March 3, 2006
Chairman of the Board of Directors
March 3, 2006
Director
March 3, 2006
88
Section 2: EX-10.13 (EX-10.13)
November 3, 2005
Exhibit 10.13
Dear Mr. Wendel:
In connection with your acceptance of employment as Senior Vice President — Finance of First Community Bank, N.A. (the "Bank"), we are pleased
to offer you this contract which would provide you with a severance payment in the event that a "change of control" of the Bank’s parent company,
First Community Bancshares, Inc. ("FCBI"), should occur after the date hereof.
Severance Payment
If a Change of Control, as defined below, shall have occurred while you are employed by the Bank and your employment is terminated by the Bank,
or its successor, within 12 months following a Change of Control, then the Bank and/or its successor shall pay to you a cash severance amount equal
to your annual base salary as in effect immediately prior to the date of termination ("Severance Pay"). Such Severance Pay shall be paid within five
business days after the date of termination.
Non Competition
In consideration of the foregoing, you covenant and agree that, while you are employed by the Bank and for one year after you cease to be
employed by the Bank, you shall not, directly or indirectly, manage, operate or control, any Competing Business, as defined below, or, directly or
indirectly, induce or influence any customer or other person that has a business relationship with the Bank, or any affiliate of the Bank, to discontinue
or reduce the extent of such relationship. For purposes of this agreement, you shall be deemed directly or indirectly interested in a business if you are
engaged or interested in that business as a stockholder, director, officer, or executive, agent, partner, individual proprietor, consultant, advisor or
otherwise, but not if your interest is limited solely to the ownership of not more than 5% of the securities of any class of equity securities of a
corporation or other person whose shares are listed or admitted to trade on a national securities exchange or are quoted on Nasdaq or a similar means
if Nasdaq is no longer providing such information.
While you are employed by the Bank and for one year after you cease to be employed by the Bank, you shall not, directly or indirectly, solicit to
employ for yourself or others any employee of the Bank or any affiliate of the Bank as of the date of the termination of your employment with the Bank,
or to solicit any such employee to leave such employee’s employment or join the employee of another, then or at a later time.
Confidential Information
You acknowledge and agree that by virtue of your position and involvement with the business and affairs of the Bank, you will develop substantial
expertise and knowledge with respect to all aspects of the Banks’ business, affairs and operations and will have access to all significant aspects of the
business and operations of the Bank and to Confidential and Proprietary Information, as defined below.
You agree that, during the term of employment and thereafter, unless otherwise authorized by the Bank in writing, you shall not, directly or
indirectly, under any circumstance: (i) disclose to any other person or entity (other than in the regular course of business of the Bank) any
Confidential and Proprietary Information, other than pursuant to applicable law, regulation or subpoena or with the prior written consent of the Bank;
(ii) act or fail to act so as to impair the confidential or proprietary nature of any Confidential and Proprietary Information; (iii) use any Confidential and
Proprietary Information other than for the sole and exclusive benefit of the Bank; or (iv) offer or agree to, or cause or assist in the inception or
continuation of, any such disclosure, impairment or use of any Confidential and Proprietary Information. Following your term of employment, you shall
return all documents, records and other items containing any Confidential and Proprietary Information to the Bank (regardless of the medium in which
maintained or stored).
The parties agree that nothing in this agreement shall be construed to limit or negate the common law of torts, confidentiality, trade secrets,
fiduciary duty and obligations where such laws provide the Bank with any broader, further or other remedy or protection than those provided herein.
Because the breach of any of the provisions of this agreement will result in immediate and irreparable injury to the Bank for which the Bank will not
have an adequate remedy at law, the Bank shall be entitled, in addition to all other rights
and remedies, to seek a degree of specific performance of the restrictive covenants contained in this agreement and to a temporary and permanent
injunction enjoining such breach, without posting bond or furnishing similar security.
Definitions
The following words and terms shall have the meanings set forth below for the purposes of this agreement:
Change in Control. "Change in Control" shall mean the occurrence of any of the following events subsequent to the date of this agreement: (i) the
acquisition of control of FCBI or the Bank as defined in the Change in Bank Control Act of 1978, as amended, 12 U.S.C. § 1842(3), or any successor to
such sections; (ii) an event that would be required to be reported in response to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A
pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not any class of securities of
FCBI is registered under the Exchange Act; (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a
trustee or other fiduciary holding securities under an employee benefit plan of FCBI, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of FCBI representing 30% or more of the combined voting power of FCBI’s then
outstanding securities; (iv) the sale or other disposition of all or substantially all of the assets of FCBI or the transfer by FCBI of greater than 30% of
the voting securities of FCBI.
Competing Business. Competing Business shall mean any business, enterprise or other entity that as one of its businesses or activities, is engaged
in the business of banking (including, without limitation, the acceptance of deposits and the making of loans) or a permitted non-banking activity in
which the Bank is directly or indirectly engaged within the counties of Washington, Tazewell, Wythe, Bland and Henrico and the City of Richmond in
Virginia, Mercer Raleigh and Wyoming Counties in West Virginia, Forsyth County in North Carolina, and Washington and Sullivan Counties in
Tennessee.
Confidential and Proprietary Information. Confidential and Proprietary Information shall mean any and all (i) confidential or proprietary information
or material not in the public domain about or relating to the business, operations, assets or financial condition of the Bank or any affiliate of the Bank
or any of the Banks’ or any such affiliate’s trade secrets; and (ii) information, documentation or material not in the public domain by virtue of any
action by or on the part of you, the knowledge of which gives or may give the Bank or any affiliate of the Bank an advantage over any person not
possessing such information. For purposes hereof, the term Confidential and Proprietary Information shall not include any information or material
(i) that is known to the general public other than due to a breach of this agreement by you or (ii) was disclosed to you by a person who you did not
reasonably believe was bound to a confidentiality or similar agreement with the Bank or the Corporation.
Amendment; Waiver; Assignability
No provisions of this agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and
signed by you and such officer or officers as may be specifically designated by the Board of Directors of the Bank to sign on its behalf. No waiver by
any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
You may not assign or transfer this agreement or any rights or obligations hereunder.
FIRST COMMUNITY BANK, N. A.
/s/ John M. Mendez
John M. Mendez
Executive Vice President
ACCEPTED BY:
/s/ Mark A. Wendel
Mark A. Wendel
Date: November 3, 2005
Section 3: EX-12 (EX-12)
Computation of Ratios
Exhibit 12
Basic Earnings Per Share
Diluted Earnings Per Share
Cash Dividends Per Share
Book Value Per Share
Return on Average Assets
Return on Average Assets-Continuing
Return on Average Shareholders’ Equity
Return on Average Shareholders’ Equity-Continuing
Efficiency Ratio
=
Loans to Deposits
Dividend Payout
Average Shareholders’ Equity to Average Assets
Tier I Capital Ratio
Total Capital Ratio
=
Tier I Leverage Ratio
Net Charge-offs to Average Loans
Non-performing Loans to Total Loans
Non-performing Assets to Total Loans Plus OREO
Allowance for Loan Losses to Total Loans
Allowance for Loan Losses to Non-performaing Assets
Allowance for Loan Losses to Non-performing
Net Interest Margin
Basic Earnings Per Share-Continuing
Diluted Earnings Per Share-Continuing
Section 4: EX-23 (EX-23)
=
=
=
=
=
=
=
=
90
= Net Income/Average Common Shares Outstanding
= Net Income/Average Diluted Shares Outstanding
Dividends Paid/Average Common Shares
=
Outstanding
Total Shareholders’ Equity/Average Common Shares
Outstanding
=
= Net Income/Average Assets
=
Net Income from Continuing Operations/Average
Assets
= Net Income/Average Shareholders’ Equity
=
Income from Continuing Operations/Average
Shareholders’ Equity
Noninterest Expense/(Net Interest Income Plus
Noninterest Income)
= Net Loans/ Deposits Outstanding
= Dividends Declared/Net Income
= Average Shareholders’ Equity/Average Assets
=
Shareholders’ Equity — Intangible Assets —
Securities Mark-to-market Capital Reserve (Tier I
Capital)/ Risk Adjusted Assets
Tier I Capital Plus Allowance for Loan Losses/Risk
Adjusted Assets
= Tier I Capital/Average Assets
=
(Gross Charge-offs Less Recoveries)/ Average Net
Loans
(Nonaccrual Loans Plus Loans Past Due 90 Days or
Greater)/Gross Loans Net of Unearned Interest)
(Nonaccrual Loans Plus Loans Past Due 90 Days or
Greater Plus OREO)/Total Loans +OREO
Allowance for Loan Losses/(Gross Loans Net of
Unearned Interest)
Allowance for Loan Losses/(Nonaccrual Loans Plus
Loans Past Due 90 days or Greater Plus OREO)
Allowance for Loan Losses/(Nonaccrual Loans
Performing)
Tax Equivalent Net Interest Income/Average Earning
Assets
Income from Continuing Operations/Average
Common Shares
Income from Continuing Operations/Average Diluted
Shares
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements pertaining to the CommonWealth Bank
Amended and Restated Stock Option Plan (Form S-8, No. 333-106338), the 2001 Directors Stock Option Plan (Form S-8,
No. 333-75222), the 1999 Stock Option Plan (Form S-8, No. 333-31338) and the Employee Stock Ownership and Savings Plan
(Form S-8, No. 333-63865) of First Community Bancshares, Inc. of our reports dated March 3, 2006, with respect to the
consolidated financial statements of First Community Bancshares, Inc., First Community Bancshares, Inc.’s assessment of
the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial
reporting of First Community Bancshares, Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
2005.
Charleston, West Virginia
March 13, 2006
Section 5: EX-31.1 (EX-31.1)
Exhibit 31.1
I, John M. Mendez, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
/s/ John M. Mendez
John M. Mendez
Chief Executive Officer
Date: March 3, 2006
Section 6: EX-31.2 (EX-31.2)
Exhibit 31.2
I, Mark A. Wendel, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of First Community Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
/s/ Mark A. Wendel
Mark A. Wendel
Chief Financial Officer
Date: March 3, 2006
Section 7: EX-32 (EX-32)
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Community Bancshares, Inc. (the "Company") on Form 10-K for the
period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned hereby certify, to the officers’ best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated this 3rd day of March, 2006.
First Community Bancshares, Inc.
/s/ John M. Mendez
John M. Mendez
Chief Executive Officer
/s/ Mark A. Wendel
Mark A. Wendel
Chief Financial Officer