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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, 2008
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
(I.R.S. 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:
Title of each class
Common Stock, $1.00 par value
Name of exchange on which registered
NASDAQ Global Select
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:1)
Yes (cid:3) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act (cid:1) Yes
(cid:3) 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. (cid:3) Yes (cid:1) 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 any amendment to this Form 10-K. (cid:1)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)
Accelerated filer (cid:3)
Non-accelerated filer (cid:1) Smaller reporting company (cid:1)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:1)
Yes (cid:3) No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter.
Approximately $258.21 million based on the closing sales price at June 30, 2008.
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; 11,567,449 shares outstanding as of March 2, 2009
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be held April 28, 2009, are incorporated by
reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
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
PART III
Item 10.
Item 11.
Item 12.
Item 13
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
EX-12
EX-23.1
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 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 banking
association that conducts commercial banking operations within the states of Virginia, West Virginia, North and
South Carolina, and Tennessee. The Company also owns GreenPoint Insurance Group, Inc. (“GreenPoint”), a full-
service insurance agency acquired in September 2007, and Investment Planning Consultants (“IPC”), an investment
advisory. The Company had total consolidated assets of approximately $2.13 billion at December 31, 2008, and
conducts its banking operations through fifty-nine locations.
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’s banking operations
are expected to remain the principal business and major source of revenue for the Company. 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 638 full-time equivalent employees at December 31, 2008.
Management considers employee relations to be excellent.
Regulation and Supervision
General
The supervision and regulation of the Company and its subsidiaries by the banking agencies is intended
primarily for the protection of depositors, the deposit insurance fund of the Federal Deposit Insurance Corporation
(“FDIC”), and the banking system as a whole, and not for the protection of stockholders or creditors. The banking
agencies have broad enforcement power over bank holding companies and banks, including the power to impose
substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the Company and the Bank are subject.
References in the following description to applicable statutes and regulations are brief summaries of these statutes
and regulations, do not purport to be complete, and are qualified in their entirety by reference to such statutes and
regulations.
The Company
The Company is a financial holding company pursuant to the Gramm-Leach-Bliley Act (“GLB Act”) and a bank
holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Accordingly,
the Company is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve
System (“Federal Reserve Board”). The BHCA, the GLB Act, and other federal laws subject financial and bank
holding companies to particular restrictions on the types of activities in which they may engage, and to a range of
supervisory requirements and activities, including regulatory enforcement actions for violations of laws and
regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that
bank holding companies should pay cash dividends on common stock only from income available over the past year
and only if prospective earnings retention is consistent with the organization’s expected future needs and financial
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condition. The policy provides that bank holding companies should not maintain a level of cash dividends that
undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
Furthermore, under the Treasury’s Capital Purchase Program, the Company must obtain the Treasury’s consent
for any increase in dividends declared on its common stock. This restriction applies until the third anniversary of the
investment by the Treasury, unless prior to that time the Company redeems the Series A Preferred Stock that it issued
to the Treasury or the Treasury transfers the Series A Preferred Stock to a third party.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength
to each of its banking subsidiaries and commit resources to their support. Such support may be required at times
when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed
below, a bank holding company in certain circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
Scope of Permissible Activities. Under the BHCA, bank holding companies generally may not acquire a direct
or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or bank
holding company or from engaging in activities other than those of banking, managing or controlling banks or
furnishing services to or performing services for its subsidiaries, except that it may engage in, directly or indirectly,
certain activities that the Federal Reserve Board determined to be closely related to banking or managing and
controlling banks as to be a proper incident thereto.
Notwithstanding the foregoing, the GLB Act, effective March 11, 2000, eliminated the barriers to affiliations
among banks, securities firms, insurance companies and other financial service providers and permits bank holding
companies to become financial holding companies and thereby affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature. The GLB Act defines “financial in nature” to
include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; merchant banking activities and activities that the Federal Reserve Board has
determined to be closely related to banking. No regulatory approval is generally required for a financial holding
company to acquire a company, other than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
Under the GLB Act, a bank holding company may become a financial holding company by filing a declaration
with the Federal Reserve Board if each of its subsidiary banks is well-capitalized under the Federal Deposit
Insurance Corporation Improvement Act of 1991 (“FDICIA”) prompt corrective action provisions, is well managed
and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”). The Company
elected financial holding company status in December 2006.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound
banking practices. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies
and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute
violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing
and reckless basis, if those activities caused a substantial loss to a depository institution.
Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of
certain services, such as extensions of credit, to other services offered by a holding company or its affiliates.
Stock Repurchases. A bank holding company is required to give the Federal Reserve Board prior notice of any
redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s
consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or regulation.
The Company’s ability to repurchase its shares also is restricted under the terms of the Purchase Agreement. The
Treasury’s consent is generally required for the Company to make any stock repurchases until the third anniversary
of the investment by the Treasury unless prior to that time the Company redeems the Series A Preferred Stock that it
issued to the Treasury or the Treasury transfers the Series A Preferred Stock to a third party. Further,
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common, junior preferred or pari passu preferred shares may not be repurchased if the Company is in arrears on the
Series A Preferred Stock dividends.
Capital Adequacy Requirements. The Federal Reserve Board has promulgated capital adequacy guidelines for
use in its examination and supervision of bank holding companies. If a bank holding company’s capital falls below
minimum required levels, then the bank holding company must implement a plan to increase its capital, and its
ability to pay dividends, make acquisitions of new banks or engage in certain other activities such as issuing brokered
deposits may be restricted or prohibited.
The Federal Reserve Board currently uses two types of capital adequacy guidelines for holding companies, a
two-tiered risk-based capital guideline and a leverage capital ratio guideline. The two-tiered risk-based capital
guideline assigns risk weightings to all assets and certain off-balance sheet items of the holding company’s
operations, and then establishes a minimum ratio of the holding company’s Tier 1 capital to the aggregate dollar
amount of risk-weighted assets (which amount is usually less than the aggregate dollar amount of such assets without
risk weighting) and a minimum ratio of the holding company’s total capital (Tier 1 capital plus Tier 2 capital, as
adjusted) to the aggregate dollar amount of such risk-weighted assets. The leverage ratio guideline establishes a
minimum ratio of the holding company’s Tier 1 capital to its total tangible assets (total assets less goodwill and
certain identifiable intangibles), without risk-weighting.
Under both guidelines, Tier 1 capital (sometimes referred to as “core capital”) is defined to include: common
shareholders’ equity (including retained earnings), qualifying non-cumulative perpetual preferred stock and related
surplus, qualifying cumulative perpetual preferred stock and related surplus, trust preferred securities, and minority
interests in the equity accounts of consolidated subsidiaries (limited to a maximum of 25% of Tier 1 capital).
Goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of the total risk-based capital
guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include: allowances for
loan and lease losses (limited to 1.25% of risk-weighted assets), perpetual preferred stock not included in Tier 1
capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt
and mandatory convertible debt securities, and intermediate-term subordinated debt instruments (subject to
limitations). The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital. For purposes of
the total capital guideline, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in
unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets
and other deductions. The Federal Reserve Board’s current capital adequacy guidelines require that a bank holding
company maintain a Tier 1 risk-based capital ratio of at least 4% and a total risk-based capital ratio of at least 8%. At
December 31, 2008, the Company’s ratio of Tier 1 capital to total risk-weighted assets was 11.92% and its ratio of
total capital to risk-weighted assets was 12.91%.
In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional
tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital
divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a
minimum leverage ratio of 3.0%, but other bank holding companies are required to maintain a leverage ratio of 4.0%
or more, depending on their overall condition. At December 31, 2008, the Company’s leverage ratio was 9.75%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally
applicable to banking organizations that meet certain specified criteria, assuming that they have the highest
regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well
above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular
banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board
guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant
reliance on intangible assets.
Acquisitions by Bank Holding Companies. The BHCA requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or
ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding
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companies, the Federal Reserve Board is required to consider the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to
be served, and various competitive factors.
The Bank
The Bank is a national association and is subject to supervision and regulation by the Office of the Comptroller
of Currency (“OCC”). Since the deposits of the Bank are insured by the FDIC, the Bank is also subject to supervision
and regulation by the FDIC. Because the Federal Reserve Board regulates the Company, and because the Bank is a
member of the Federal Reserve System, the Federal Reserve Board also has regulatory authority which directly
affects the Bank.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking
subsidiaries and/or affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. In
general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral
for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the
securities or obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that
certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to
the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons.
The Federal Reserve Board has issued Regulation W which codifies prior regulations under Sections 23A and 23B of
the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests
contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and
holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before
such a loan can be made. There is also an aggregate limitation on all loans to such persons. These loans cannot
exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is
appropriate.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have
provided the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the
Bank to the Company will continue to be the Company’s primary source of operating funds.
Capital adequacy requirements of the OCC limit the amount of dividends that may be paid by the Bank. The
Bank cannot pay a dividend if, after paying the dividend, it would be classified as “undercapitalized.” In addition,
without the OCC’s approval, dividends may not be paid by the Bank in an amount in any calendar year which
exceeds its total net profits for that year, plus its retained profits for the preceding two years, less any required
transfers to capital surplus. National banks also may not pay dividends in excess of total retained profits, including
current year’s earnings after deducting bad debts in excess of reserves for loan losses. In some cases, the OCC may
find a dividend payment that meets these statutory requirements to be an unsafe or unsound practice.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the
distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior
claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository
institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment
over the claims of holders of any obligation of the institution to its shareholders, including any depository institution
holding company or any shareholder or creditor thereof.
Examinations. Under the FDICIA, all insured institutions must undergo regular on-site examination by their
appropriate banking agency and such agency may assess the institution for its costs of conducting the examination.
The OCC periodically examines and evaluates national banks, such as the Bank. These examinations review areas
such as capital adequacy, reserves, loan portfolio quality and management, consumer and other compliance issues,
investments, information systems, disaster recovery and contingency planning and management practices. Based
upon such an evaluation, the OCC may revalue the assets of a bank and require that it establish specific reserves to
compensate for the difference between the OCC-determined value and the book value of such assets.
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Capital Adequacy Requirements. The OCC has adopted regulations establishing minimum requirements for the
capital adequacy of insured national banks. The OCC may establish higher minimum requirements if, for example, a
bank has previously received special attention or has a high susceptibility to interest rate risk.
The OCC’s risk-based capital guidelines generally require national banks to have a minimum ratio of Tier 1
capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted assets of 8.0%. The
capital categories have the same definitions for the Bank as for the Company. At December 31, 2008, the Bank’s
ratio of Tier 1 capital to total risk-weighted assets was 10.69% and its ratio of total capital to total risk-weighted
assets was 11.69%.
The OCC’s leverage guidelines require national banks to maintain Tier 1 capital of no less than 4.0% of average
total assets, except in the case of certain highly rated banks for which the requirement is 3.0% of average total assets.
At December 31, 2008, the Bank’s leverage ratio was 8.71%.
Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take “prompt
corrective action” with respect to capital-deficient institutions. Agency regulations define, for each capital category,
the levels at which institutions are “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” A “well-capitalized” bank has a total risk-based capital ratio of
10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not
subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital
measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1
in its most recent examination report and is not experiencing significant growth); and does not meet the criteria for a
well-capitalized bank. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately
capitalized. The Bank is classified as “well-capitalized” for purposes of the FDIC’s prompt corrective action
regulations.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations
contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions,
branch establishment and expansion into new lines of business. With certain exceptions, an insured depository
institution is prohibited from making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized after any such distribution or
payment.
As an institution’s capital decreases, the federal regulators’ enforcement powers become more severe. A
significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management and other restrictions. The FDIC has limited discretion
in dealing with a critically undercapitalized institution and is generally required to appoint a receiver or conservator.
Similarly, within 90 days of a national bank becoming critically undercapitalized, the OCC must appoint a receiver
or conservator unless certain findings are made with respect to the institution’s continued viability.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain
administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no tangible capital.
Deposit Insurance Assessments. The Bank’s deposits are insured up to applicable limits by the Deposit
Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC
utilizes a risk-based assessment system to evaluate the risk of each financial institution based on three primary
sources of information: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if the
institution has one. The FDIC also adopted a new base schedule of rates that it can adjust up or down, depending on
the needs of the DIF, and set premiums for 2008 that range from 5 basis points in the lowest risk category to 43 basis
points for banks in the highest risk category.
In an effort to restore capitalization levels and to ensure the DIF will adequately cover projected losses from
future bank failures, the FDIC, in October 2008, proposed a rule to alter the way in which it differentiates for risk in
the risk-based assessment system and to revise deposit insurance assessment rates, including base assessment rates.
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The FDIC also proposes to introduce three adjustments that could be made to an institution’s initial base assessment
rate, including (i) a potential decrease of up to 2 basis points for long-term unsecured debt, including senior and
subordinated debt, (ii) a potential increase for secured liabilities in excess of 15% of domestic deposits and (iii) a
potential increase for brokered deposits in excess of 10% of domestic deposits. In addition, the FDIC proposed
raising the current rates uniformly by 7 basis points for the assessment for the first quarter of 2009 resulting in a
minimum annualized assessment rate of 12 basis points. The proposal for first quarter 2009 assessment rates was
adopted as a final rule in December 2008. The FDIC also proposed, effective April 1, 2009, an initial minimum base
assessment rate of 10 basis points. A final rule related to this proposal is expected to be issued during the first quarter
of 2009. The Company cannot provide any assurance as to the amount of any proposed increase in its deposit
insurance premium rate, should such an increase occur, as such changes are dependent upon a variety of factors,
some of which are beyond the Company’s control.
FDIC insurance expense totaled $202 thousand and $164 thousand in 2008 and 2007, respectively. FDIC
insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related
to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive
Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation. Under the Federal Deposit Insurance Reform Act of 2005, the Bank received
a one-time assessment credit of $1.13 million to be applied against future deposit insurance assessments, subject to
certain limitations. This credit was utilized to offset $693 thousand and $356 thousand of deposit insurance
assessments during 2008 and 2007, respectively.
On February 26, 2009, the FDIC adopted an interim rule, with request for comment, to impose a one-time
20 basis point emergency special assessment effective on June 30, 2009 and to be collected on September 30, 2009.
Based on the Company’s most recent FDIC deposit insurance assessment base, the emergency special assessment of
20 basis points, if implemented, would increase our FDIC deposit insurance premiums by approximately
$2.87 million in 2009. The FDIC has indicated that it may consider reducing the emergency special assessment by
half to 10 basis points if, among other factors, Congress enacts legislation to expand the FDIC’s line of credit with
the Treasury.
On February 26, 2009, the FDIC adopted another interim rule, with request for comment, to have the option to
impose a further special assessment of up to 10 basis points on an institution’s assessment base on the last day of any
calendar quarter after June 30, 2009 to be collected at the same time the risk-based assessments are collected. The
assessment will be imposed if the FDIC determines the DIF reserve ratio will fall to a level that would adversely
affect public confidence or to a level close to zero or negative, among other factors. These interim rules are be
subject to change and may or may not be enacted.
The Company cannot provide any assurance as to the amount of any proposed increase in its deposit insurance
premium rate, as such changes are dependent upon a variety of factors, some of which are beyond the Company’s
control. Given the enacted and proposed increases in assessments for insured financial institutions in 2009, the
Company anticipates that FDIC assessments on deposits will have a significantly greater impact upon operating
expenses in 2009 compared to 2008, and could affect its reported earnings, liquidity and capital for the period.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
Temporary Liquidity Guarantee Program. In November 2008, the FDIC adopted a final rule relating to the
Temporary Liquidity Guarantee Program (“TLG Program”). Under the TLG Program, the FDIC will (i) guarantee,
through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating
institutions on or after October 14, 2008, and before June 30, 2009 and (ii) provide full FDIC deposit insurance
coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC-insured
institutions through December 31, 2009. Coverage under the TLG Program was available for the first 30 days
without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis
points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance
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coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. In December 2008, the
Company elected to participate in both guarantee programs.
Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers,
including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties
and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory
agreements could subject the Company or the Bank, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. The
appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect
of becoming adequately capitalized; fails to become adequately capitalized when required to do so; fails to submit a
timely and acceptable capital restoration plan; or materially fails to implement an accepted capital restoration plan.
Emergency Economic Stabilization Act of 2008. On October 3, 2008, the President signed into law EESA,
which, among other measures, authorized the Secretary of the Treasury to establish the TARP. Pursuant to TARP,
the Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed
securities and certain other financial instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. In addition, under TARP, the Treasury created the Capital Purchase
Plan, pursuant to which it provides access to capital that will serve as Tier 1 capital to financial institutions through a
standardized program to acquire preferred stock (accompanied by warrants) from eligible financial institutions. On
November 21, 2008, the Company sold $41.50 million of Series A Preferred Stock to the Treasury under the Capital
Purchase Program.
On February 17, 2009, the President signed into law the ARRA, which is intended, among other things, to
provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime
mortgage crisis and the resulting dislocations in the financial markets. ARRA also includes numerous non-economic
recovery related items, including a limitation on executive compensation of certain of the most highly-compensated
employees and executive officers of financial institutions, such as the Company, that participated in the TARP
Capital Purchase Program. Compliance requirements under ARRA for TARP recipients, which will be further
described in rules to be adopted by the SEC and standards to be established by the Treasury, include restrictions on
executive compensation and corporate governance requirements.
Comprehensive Financial Stability Plan of 2009. On February 10, 2009, the Secretary of the Treasury
announced a new comprehensive financial stability plan (the “Financial Stability Plan”), which builds upon existing
programs and earmarks the second $350 billion of unused funds originally authorized under the EESA. The major
elements of the Financial Stability Plan include: (i) a capital assistance program that will invest in convertible
preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new
consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a new public-
private investment fund that will leverage public and private capital with public financing to purchase up to
$500 billion to $1 trillion of legacy “toxic assets” from financial institutions, and (iv) assistance for homeowners to
reduce mortgage payments and interest rates and establishing loan modification guidelines for government and
private programs. In addition, all banking institutions with assets over $100 billion will be required to undergo a
comprehensive “stress test” to determine if they have sufficient capital to continue lending and to absorb losses that
could result from a more severe decline in the economy than projected. Institutions receiving assistance under the
Financial Stability Plan going forward will be subject to higher transparency and accountability standards, including
restrictions on dividends, acquisitions and executive compensation and additional disclosure requirements.
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also
subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit
Opportunity Act, and the Fair Housing Act, and various state counterparts. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial institutions must deal with customers
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when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of
these consumer protection laws and regulations as part of their ongoing customer relations.
In addition, federal law currently contains extensive customer privacy protection provisions. Under these
provisions, a financial institution must provide to its customers, at the inception of the customer relationship and
annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal
financial information. These provisions also provide that, except for certain limited exceptions, a financial institution
may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer
that such information may be so provided and the customer is given the opportunity to opt out of such disclosure.
USA PATRIOT Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) was enacted in October 2001. The Patriot Act has
broadened existing anti-money laundering legislation while imposing new compliance and due diligence obligations
on banks and other financial institutions, with a particular focus on detecting and reporting money laundering
transactions involving domestic or international customers. The U.S. Treasury Department has issued and will
continue to issue regulations clarifying the Patriot Act’s requirements. The Patriot Act requires all “financial
institutions,” as defined, to establish certain anti-money laundering compliance and due diligence programs.
Recently, the regulatory agencies have intensified their examination procedures in light of the Patriot Act’s anti-
money laundering and Bank Secrecy Act requirements. The Company believes that its controls and procedures are in
compliance with the Patriot Act.
Troubled Asset Relief Program
On November 21, 2008, the Company entered into a Letter Agreement, which incorporates by reference the
Securities Purchase Agreement — Standard Terms (the “Purchase Agreement”), with the U.S. Department of the
Treasury (“Treasury”). Pursuant to the terms of the Purchase Agreement, the Company issued and sold to the
Treasury (i) 41,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 176,546 shares of the Company’s common
stock, par value $1.00 per share (the “Common Stock”), for an aggregate purchase price of $41.50 million in cash.
The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5.00% per
annum for the first five years, and 9.00% per annum thereafter. The Series A Preferred Stock is generally non-voting.
The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise
price of $35.26. Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect
to any share of Common Stock issued upon exercise of the Warrant.
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. In accordance with the terms of the Purchase
Agreement, the Company registered the Series A Preferred Stock, the Warrant, and the shares of Common Stock
underlying the Warrant with the Securities and Exchange Commission (the “SEC”). Neither the Series A Preferred
Stock nor the Warrant are subject to any contractual restrictions on transfer, except that Treasury may only transfer
or exercise one-half of the Warrant Shares prior to the earlier of the redemption of 100% of the Series A Preferred
Stock and December 31, 2009.
Pursuant to the terms of the Purchase Agreement, upon issuance of the Series A Preferred Stock, the ability of
the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Common Stock is subject to restrictions, including a restriction against increasing cash
dividends above the amount of the last quarter cash dividend per share declared prior to October 14, 2008, which was
$0.28 per share, without express permission of the Treasury. These restrictions will terminate on the earlier of (a) the
third anniversary date of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has
been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties.
In the Purchase Agreement, the Company agreed that, until such time as Treasury ceases to own any debt or
equity securities of the Company acquired pursuant to the Purchase Agreement, the Company will take all
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necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111
(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”) as implemented by any guidance or
regulation under the EESA that has been issued and is in effect as of the date of issuance of the Series A Preferred
Stock and the Warrant, and has agreed to not adopt any benefit plans with respect to, or which covers, its senior
executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was signed into
law. Section 7001 of the ARRA amended Section 111 of the EESA in its entirety. While the Treasury must
promulgate regulations to implement the restrictions and standards set forth in Section 7001, the ARRA, among other
things, significantly expands the executive compensation restrictions previously imposed by the EESA. Such
restrictions apply to any entity that has received or will receive financial assistance under the Troubled Asset
Recovery Program (“TARP”), and will generally continue to apply for as long as any obligation arising from
financial assistance provided under TARP, including preferred stock issued under the Capital Purchase Program,
remains outstanding. As a result of the Company’s participation in the Capital Purchase Program, the restrictions and
standards set forth in Section 7001 of the ARRA are applicable to the Company. In addition, Section 7001(g) of the
ARRA, provides that the Secretary of the Treasury shall permit, subject to appropriate federal banking agency
approval, a TARP recipient to repay such assistance previously provided under the TARP, without regard to whether
the recipient has replaced such funds from any other source or to any waiting period. ARRA further provides that
when the TARP recipient repays such assistance, the Secretary of the Treasury shall liquidate the warrants associated
with the assistance at the current market price.
Website Access to Company Documents
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 SEC. 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.
Also posted on the Company’s website, and available in print upon request of any shareholder to our Investor
Relations Department, are the charters of the standing committees of its Board of Directors, the Standards of Conduct
governing our directors, officers, and employees, and the Company’s Insider Trading & Disclosure Policy.
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 Federal Reserve Board; inflation, interest rate, market and monetary
fluctuations; the timely development of competitive new products and services of the 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
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noninterest 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 all-inclusive. If one or more of the
factors affecting these forward-looking statements proves incorrect, then the Company’s actual results, performance,
or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained
in this Annual Report on Form 10-K. Therefore, the Company cautions you not to place undue reliance on these
forward-looking statements.
The Company does not intend to update these forward-looking statements, whether written or oral, to reflect
change. All forward-looking statements attributable to the Company are expressly qualified by these cautionary
statements.
ITEM 1A. RISK FACTORS.
The current economic environment poses significant challenges for the Company and could adversely affect its
financial condition and results of operations.
The Company is operating in a challenging and uncertain economic environment, including generally uncertain
national and local conditions. Financial institutions continue to be affected by sharp declines in the real estate market
and constrained financial markets. Dramatic declines in the housing market over the past year, with falling home
prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by
financial institutions. Continued declines in real estate values, home sales volumes, and financial stress on borrowers
as a result of the uncertain economic environment could have an adverse effect on the Company’s borrowers or their
customers, which could adversely affect the Company’s financial condition and results of operations. A worsening of
these conditions would likely exacerbate the adverse effects on the Company and others in the financial institutions
industry. For example, further deterioration in local economic conditions in the Company’s markets could drive
losses beyond that which is provided for in its allowance for loan losses. The Company may also face the following
risks in connection with these events:
• Economic conditions that negatively affect housing prices and the job market have resulted, and may continue
to result, in a deterioration in credit quality of the Company’s loan portfolios, and such deterioration in credit
quality has had, and could continue to have, a negative impact on the Company’s business.
• Market developments may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates on loans and other credit facilities.
• The processes the Company uses to estimate allowance for loan losses and reserves may no longer be reliable
because they rely on complex judgments, including forecasts of economic conditions, which may no longer be
capable of accurate estimation.
• The Company’s ability to assess the creditworthiness of its customers may be impaired if the models and
approaches it uses to select, manage, and underwrite its customers become less predictive of future charge-
offs.
• The Company expects to face increased regulation of its industry, and compliance with such regulation may
increase our costs, limit our ability to pursue business opportunities, and increase compliance challenges.
As the these conditions or similar ones continue to exist or worsen, the Company could experience continuing or
increased adverse effects on its financial condition.
The Company and its subsidiary business are subject to interest rate risk and variations in interest rates may
negatively affect its financial performance.
The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income
is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest
expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly
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sensitive to many factors that are beyond our control, including general economic conditions and policies of various
governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the Company receives on loans and securities
and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Company’s
ability to originate loans and obtain deposits, and (ii) the fair value of the Company’s financial assets and liabilities.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on
loans and other investments, the Company’s net interest income, and therefore earnings, could be adversely affected.
Earnings could also be adversely affected if the interest rates received on loans and other investments fall more
quickly than the interest rates paid on deposits and other borrowings.
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 Bank 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 or
is otherwise 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 Company is subject to restrictions on its ability to declare or pay dividends and repurchase its shares as a
result of its participation in the Treasury’s TARP Capital Purchase Program.
On November 21, 2008, the Company issued to the Treasury for aggregate consideration of $41.50 million
(i) 41,500 shares of Series A Preferred Stock and (ii) a Warrant to purchase 176,546 shares of the Company’s
Common Stock pursuant to the terms of the Purchase Agreement. Under the terms of the Purchase Agreement, the
Company’s ability to declare or pay dividends on any of its shares is restricted. Specifically, the Company may not
declare dividend payments on common, junior preferred or pari passu preferred shares if it is in arrears on the
dividends on the Series A Preferred Stock. Further, the Company may not increase the dividends on its Common
Stock above the amount of the last quarter cash dividend per share declared prior to October 13, 2009, which was
$0.28 per share, without the Treasury’s approval until the third anniversary of the investment unless all of the
Series A Preferred Stock has been redeemed or transferred.
The Company’s ability to repurchase its shares is also restricted under the terms of the Purchase Agreement. The
Treasury’s consent generally is required for the Company to make any stock repurchases until the third anniversary
of the investment by the Treasury unless all of the Series A Preferred Stock has been redeemed or transferred.
Further, common, junior preferred or pari passu preferred shares may not be repurchased if the Company is in arrears
on the Series A Preferred Stock dividends.
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 losses.
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, 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
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outcome of which are uncertain. The 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. Although 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 Company’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
have a material adverse effect on the Company’s business:
• 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.
The declining real estate market could impact the Company’s business.
The Company’s business activities and credit exposure are concentrated in Virginia, West Virginia, North
Carolina, Tennessee and the surrounding region. A continued 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 its focus on commercial lending, and the concentration
on small businesses and 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 borrowers’ ability to repay the loans typically
depends primarily on the successful operation of the businesses or the properties securing the loans. Most of the
Bank’s 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 recent 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 and supervision by federal and
state 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. Banking regulations governing the
Company’s operations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the
banking system as a whole, not security holders. Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company
in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of
financial services and products the Company may offer and/or increase the ability of non-banks to offer competing
financial services and products, among other things. Failure to comply with laws, regulations or policies could result
in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material
adverse effect on the Company’s business, financial condition and results of operations. While the Company has
policies and procedures designed to prevent any such violations, there can be no assurance that such violations will
not occur. 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.
On October 3, 2008, the EESA was signed into law. Pursuant to the EESA, the Treasury was granted the
authority to take a range of actions for the purpose of stabilizing and providing liquidity to the U.S. financial markets
and has proposed several programs, including the purchase by the Treasury of certain troubled assets from financial
institutions and the direct purchase by the Treasury of equity of financial institutions. There can be no assurance,
however, as to the actual impact that the foregoing or any other governmental program will have on the financial
markets. The failure of the financial markets to stabilize and a continuation or worsening of current financial market
conditions could materially and adversely affect the Company’s business, financial condition, results of operations,
access to credit or the trading price of its Common Stock. In addition, current initiatives of President Obama’s
Administration and the possible enactment of recently proposed bankruptcy legislation may adversely affect the
Company’s financial condition and results of operations.
The financial services industry is likely to face increased regulation and supervision as a result of the existing
financial crisis, and there may be additional requirements and conditions imposed on the Company as a result of its
participation in the TARP Capital Purchase Program. Such additional regulation and supervision may increase the
Company’s costs and limit its ability to pursue business opportunities. The affects of such recently enacted, and
proposed, legislation and regulatory programs on the Company cannot reliably be determined at this time.
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 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
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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.
Potential Acquisitions May Disrupt the Company’s Business and Dilute Stockholder Value
The Company may seek merger or acquisition partners that are culturally similar and have experienced
management and possess either significant market presence or have potential for improved profitability through
financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches
involves various risks commonly associated with acquisitions, including, among other things:
• Potential exposure to unknown or contingent liabilities of the target company.
• Exposure to potential asset quality issues of the target company.
• Difficulty and expense of integrating the operations and personnel of the target company.
• Potential disruption to the Company’s business.
• Potential diversion of the Company’s management’s time and attention.
• The possible loss of key employees and customers of the target company.
• Difficulty in estimating the value of the target company.
• Potential changes in banking or tax laws or regulations that may affect the target company.
The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities
related to possible transactions with other financial institutions and financial services companies. As a result, merger
or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions
involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a
premium over book and market values, and, therefore, some dilution of the Company’s tangible book value and net
income per common share may occur in connection with any future transaction. Furthermore, failure to realize the
expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits
from an acquisition could have a material adverse effect on the Company’s financial condition and results of
operations.
In the fourth quarter of 2008, the Company completed its acquisition of Coddle Creek Financial Corp., the
holding company for Mooresville Savings Bank, Inc., SSB, located in Mooresville, North Carolina. In addition, the
Company’s wholly owned insurance subsidiary, GreenPoint, acquired Carr & Hyde Insurance, based in Warrenton,
Virginia, among other agencies. Details of these transactions are presented in Note 2 in the Notes to the Consolidated
Financial Statements included in Item 8 hereof.
The Company may lose members of our management team due to compensation restrictions
The Company’s ability to retain key officers and employees may be negatively impacted by recent legislation
and regulation affecting the financial services industry. On February 17, 2009, the ARRA was signed into law. While
the Treasury must promulgate regulations to implement the restrictions and standards set forth in the new law, the
ARRA, among other things, significantly expands the executive compensation restrictions previously imposed by the
EESA. Such restrictions apply to any entity that has received or will receive financial assistance under the TARP,
and will generally continue to apply for as long as any obligation arising from financial assistance provided under
TARP, including preferred stock issued under the Capital Purchase Program, remains outstanding. As a result of the
Company’s participation in the TARP Capital Purchase Program, the restrictions and standards set forth in the
ARRA are applicable to the Company. Such restrictions and standards may impact management’s ability to retain
key officers and employees as well as the Company’s ability to compete with financial institutions that are not
subject to the same limitations as the Company under the ARRA.
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ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company has no unresolved staff comments as of the filing date of this 2008 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. As of December 31, 2008, the Company operated in 61 locations
throughout the five states of Virginia, West Virginia, North and South Carolina, and Tennessee. The Company owns
47 of its banking offices while others are leased or are located on leased land. The Company also operates ten
insurance offices throughout North Carolina and Virginia, including its headquarters in High Point, North Carolina.
The Company owns one of its insurance offices and leases the remaining locations. There are no mortgages or liens
against any property of the Company. 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. Although 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 or the results of operations 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 2008.
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, 2008, was 2,461 and outstanding shares totaled
11,567,449. The number of common stockholders is measured by the number of recordholders. The Company’s
common stock trades on the NASDAQ Global Select market under the symbol “FCBC”.
Cash dividends for 2008 totaled $1.12 per share and $1.08 per share 2007. Total dividends paid for the current
and prior years totaled $12.45 million and $12.08 million, respectively.
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.
2008
2007
High Low
High Low
Sales Price Per Share
First quarter
Second quarter
Third quarter
Fourth quarter
17
$ 34.89 $ 28.00 $ 42.30 $ 35.19
28.89
34.89
25.40
39.00
30.07
38.00
27.79
25.54
23.49
39.21
37.45
38.85
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Cash Dividends Per Share
First quarter
Second quarter
Third quarter
Fourth quarter
Total
2008
2007
$ 0.28 $ 0.27
0.27
0.28
0.27
0.28
0.28
0.27
$ 1.12 $ 1.08
As a condition to the Company’s participation in the Treasury’s Capital Purchase Program, the Company’s
ability to declare or pay dividends on any of its shares is restricted. Specifically, the Company may not declare
dividend payments on common, junior preferred, or pari passu preferred shares if it is in arrears on the dividends on
the Series A Preferred Stock. Further, the Company may not increase the dividends on its Common Stock above the
amount of the last quarterly cash dividend per share declared prior to October 14, 2008, which was $0.28 per share,
without the Treasury’s approval until the third anniversary of the investment unless all of the Series A Preferred
Stock has been redeemed or transferred.
The Company’s stock repurchase plan, as amended, allows the purchase and retention of up to 1,100,000 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 Company made no open market
purchases of its equity securities during the fourth quarter of 2008. The maximum number of shares that may yet be
purchased under the plan was 616,215 at December 31, 2008.
As a condition to the Company’s participation in the Treasury’s Capital Purchase Program, the Company is
restricted from repurchasing shares of its Common Stock until the earlier of the third anniversary of the date of the
issuance of the Series A Preferred Stock and the date on which the Series A Preferred Stock has been redeemed in
whole or the Treasury has transferred all of the Series A Preferred Stock. As such, the Company does not anticipate
purchasing any shares of its Common Stock under its repurchase plan during 2009.
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Table of Contents
Total Return Analysis
The following chart was compiled by SNL Securities LC, and compares cumulative total shareholder return of
the Company’s Common Stock for the five-year period ended December 31, 2008, with the cumulative total return of
the S&P 500 Index, the NASDAQ Composite index, and the Asset Size & Regional Peer Group. The Asset Size &
Regional Peer Group consists of 53 bank holding companies that are traded on the NASDAQ, OTC Bulletin Board,
and pink sheets with total assets between $1 billion and $5 billion and are located in the Southeast Region of the
United States. The cumulative returns include payment of dividends by the Company.
Total Return Performance
Index
First Community Bancshares, Inc.
S&P 500
NASDAQ Composite
Asset Size & Regional Peer Group
Period Ending
12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08
100.00 112.26 100.23 131.31 109.39 123.88
100.00 110.88 116.33 134.70 142.10 89.53
100.00 108.59 110.08 120.56 132.39 78.72
100.00 115.03 119.74 134.09 94.70 81.49
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ITEM 6.
SELECTED FINANCIAL DATA.
Five-Year Selected Financial Data
2008
At or for the Year Ended December 31,
2006
(Amounts in thousands, except per share data)
2005
2007
2004
Balance Sheet Summary
(at end of period)
Securities(a)
Loans held for sale
Loans, net of unearned income
Allowance for loan losses
Total assets
Deposits
Borrowings
Total liabilities
Stockholders’ equity
Summary of Earnings
Total interest income
Total interest expense
Provision for loan losses
Non-interest income
Investment securities impairment
Non-interest expense
Income from continuing operations before income
taxes
Income tax (benefit) expense
Income from continuing operations
Loss from discontinued operations before income
taxes
Income tax benefit
Loss from discontinued operations
Net income
Dividends on preferred stock
Net income available to common shareholders
811
781
1,024
1,274
15,978
$ 529,393 $ 676,195 $ 528,389 $ 428,554 $ 410,218
1,194
1,298,159 1,225,502 1,284,863 1,331,039 1,238,756
16,339
2,133,314 2,149,838 2,033,698 1,952,483 1,830,822
1,503,758 1,393,443 1,394,771 1,403,220 1,356,719
381,791 517,843 406,556 335,885 274,212
1,912,972 1,932,740 1,820,968 1,757,982 1,647,589
220,342 217,098 212,730 194,501 183,233
14,736
14,549
12,833
$ 110,765 $ 127,591 $ 120,026 $ 109,508 $
35,880
3,706
22,305
—
55,591
48,381
2,706
21,323
—
49,837
44,930
7,422
32,297
29,923
60,516
59,276
717
24,831
—
50,463
271
(2,810 )
3,081
17,135
12,334
29,632
19,102
11,477
28,948
14,331
10,191
26,445
—
—
—
3,081
255
2,826
—
—
—
29,632
—
29,632
—
—
—
28,948
—
28,948
(233 )
(91 )
(142 )
26,303
—
26,303
96,136
26,953
2,671
17,329
—
48,035
18,477
9,786
26,020
(5,746 )
(2,090 )
(3,656 )
22,364
—
22,364
(a) Reflects the reclassification during 2004 of Federal Reserve Bank and Federal Home Loan Bank stock from
Securities Available for Sale to Other Assets, consistent with the 2005-2008 presentation.
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Five-Year Selected Financial Data-continued
Per Share Data
Basic earnings per share
Basic earnings per common share-continuing operations
Basic loss per common share-discontinued operations
Diluted earnings per common share
Diluted earnings per common share-continuing operations
Diluted loss per common share-discontinued operations
Cash dividends
Book value per common share at year-end
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
At or for the Year Ended December 31,
2008
2007
2006
2005
2004
$ 0.26 $ 2.64 $ 2.58 $ 2.33 $ 1.99
0.26 2.64 2.58 2.35 2.32
— — — (0.02 ) (0.33 )
$ 0.25 $ 2.62 $ 2.57 $ 2.32 $ 1.97
0.25 2.62 2.57 2.33 2.29
— — — (0.01 ) (0.32 )
$ 1.12 $ 1.08 $ 1.04 $ 1.02 $ 1.00
$ 15.46 $ 19.61 $ 18.92 $ 17.29 $ 16.29
0.14 % 1.39 % 1.46 % 1.37 % 1.24 %
0.14 % 1.39 % 1.46 % 1.38 % 1.45 %
1.40 % 13.54 % 14.32 % 13.79 % 12.53 %
1.40 % 13.54 % 14.32 % 13.87 % 14.58 %
9.86 % 10.30 % 10.21 % 9.91 % 9.88 %
9.86 % 10.30 % 10.21 % 9.91 % 9.96 %
430.77 % 40.91 % 40.31 % 43.78 % 50.25 %
12.91 % 12.34 % 12.69 % 11.65 % 12.09 %
9.75 % 8.09 % 8.50 % 7.77 % 7.62 %
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Executive Overview
First Community Bancshares, Inc. is a bank holding company that, through its bank subsidiary, 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 and local 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, South
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.
Economy
The local economies in which the Company operates are diverse and span a five-state region. West Virginia and
Southwest Virginia continue to benefit from expanding coal and natural gas operations. 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 national companies relocating and expanding
in the Triad and Central Piedmont areas. The Eastern Virginia local economies have, in recent years, benefited from
a wide array of corporate and government activities and relocations.
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The economies in each of the regions within the Company’s markets have experienced significant declines in
residential development and construction, consistent with national trends. These declines have led to contraction in
residential land development and construction, which have historically been important components of the Company’s
lending activities. The economies of our legacy markets have remained relatively stable and unemployment levels are
among the lowest in the nation as of December 31, 2008.
The capital markets have experienced significant illiquidity throughout 2008 and continuing through the date of
this report. This has had an adverse effect on the valuation of debt securities, including portions of the Company’s
investment securities portfolio.
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.
The expansion of banks and credit unions over recent years, coupled with liquidity pressures brought on in 2008
from the credit market turmoil and recessionary economy, has intensified competitive pressures on core deposit
generation and retention. These pressures on core deposits have continued to put pressure on net interest margin.
Despite strong competition from other banks, credit unions and mortgage companies, the Company has seen success
in newly established offices in Winston-Salem, North Carolina, 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 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 of banking, competitive 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 financial 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 investment security valuation, determination of the allowance
for loan losses, accounting for acquisitions and intangible assets, and accounting for income taxes as the accounting
areas that require the most subjective or complex judgments.
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Investment securities
Management performs an extensive review of the investment securities portfolio quarterly to determine the
cause of declines in the fair value of each security within each segment of the portfolio. The Company uses inputs
provided by an independent third party to determine the fair values of its investment securities portfolio. Inputs
provided by the third party are reviewed and corroborated by management. Evaluations of the causes of the
unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature.
Considerations such as the Company’s intent and ability to hold the securities, recoverability of the invested amounts
over the Company’s intended holding period, severity in pricing decline and receipt of amounts contractually due, for
example, are applied in determining whether a security is other-than-temporarily impaired. If a decline in value is
determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is
recognized.
The impairment evaluations noted above are consistent with the accounting guidance in
EITF 99-20 “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” as amended, SFAS 115
“Accounting for Certain Investments in Debt and Equity Securities,” FASB Staff Position No. 115-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and SEC Staff Accounting
Bulletin No. 59, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities,” to
determine if a security is other than temporarily impaired. Securities deemed to be other than temporarily impaired
are written-down to their current fair values with a charge to earnings. The review process uses a combination of the
severity of pricing declines and the present value of the expected cash flows and compares those results to the current
carrying value. Significant inputs provided by the independent third party such as default and loss severity are
reviewed internally for reasonableness.
Allowance for Loan Losses
The allowance for loan losses is maintained at levels management deems adequate to absorb probable 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. The Company consistently applies a review process to periodically evaluate
loans 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 Company determines the allowance for loan losses by making specific allocations to impaired loans that
exhibit inherent weaknesses and various credit risk factors, and general allocations to commercial, residential real
estate, and consumer loans 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. 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 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.
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Differences between actual loan loss experience and estimates are reflected through adjustments either increasing or
decreasing the loan loss provision based upon current measurement criteria.
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 Financial Accounting
Standards Board (“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.
Goodwill is recorded as the excess of the purchase price, if any, over the fair value of the revalued net assets.
Goodwill is tested annually in the month of November for possible impairment by comparing the fair value of the
unit with its book value, including goodwill. If the fair value of the Company is greater than its book value, no
goodwill impairment exists. However, if the book value of the Company 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. Further testing would use 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.
Recent Acquisitions and Branching Activity
In November 2008, the Company acquired Coddle Creek Financial Corp. (Coddle Creek), headquartered in
Mooresville, North Carolina. Coddle Creek had three full service branch offices located in Mooresville, Cornelius,
and Huntersville, North Carolina. At acquisition, Coddle Creek had total assets of $158.66 million, total loans of
$136.99 million and total deposits of $137.06 million. Under the terms of the merger agreement, shares of Coddle
Creek common stock were exchanged for .9046 shares of the Company’s common stock and $19.60 in cash. The
total deal value, including the cash-out of outstanding stock options, was approximately $32.29 million. Concurrent
with the Coddle Creek acquisition, Mooresville Savings Bank, Inc., SSB, the wholly-owned subsidiary of Coddle
Creek, was merged into the Bank. As a result of the acquisition and preliminary purchase price allocation,
approximately $14.41 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.
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In September 2007, the Company acquired GreenPoint Insurance Group (“GreenPoint”), an insurance agency
located in High Point, North Carolina. As of September 30, 2007, GreenPoint had annualized commission revenues
of approximately $4.60 million. In connection with the initial payment of approximately $1.66 million, the Company
issued 49,088 shares of common stock. Under the terms of the stock purchase agreement, former shareholders of
GreenPoint are entitled to additional consideration aggregating up to $1.45 million in the form of cash or the
Company’s common stock, valued at the time of issuance, if certain future operating performance targets are met. If
those operating targets are met, the value of the consideration ultimately paid will be added to the cost of the
acquisition, which will increase the amount of goodwill related to the acquisition. The acquisition of GreenPoint
added $7.19 million of goodwill and intangibles to the Company’s balance sheet. The Company also assumed
$5.57 million in debt in connection with the acquisition, of which approximately $5.00 million was retired at closing.
Throughout 2008, GreenPoint acquired a total of five insurance agencies. The two largest acquisitions were
Carr & Hyde in Warrenton, Virginia, and REL in Greensboro, North Carolina. GreenPoint issued aggregate cash
consideration of approximately $2.04 million through 2008 in connection with these acquisitions. Acquisition terms
in all instances call for issuing further cash consideration if certain operating performance targets are met. If those
targets are met, the value of the consideration ultimately paid will be added to the cost of the acquisitions.
GreenPoint’s 2008 acquisitions added approximately $2.04 million of goodwill and intangibles to the Company’s
balance sheet.
In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the
time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans
of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.
In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a
registered investment advisory firm located in Bluefield, West Virginia. In connection with the initial payment of
approximately $1.47 million, the Company issued 39,874 shares of common stock. Under the terms of the stock
purchase agreement, former shareholders of IPC are entitled to additional consideration of $1.43 million in the form
of the Company’s common stock if certain future operating performance targets are met. If those operating targets
are met, portions of the value of the consideration ultimately paid will be added to the cost of the acquisition, which
will increase the amount of goodwill related to the acquisition. In December 2008 and 2007, the Company issued
8,361 and 13,401 shares of its common stock, respectively, in connection with the acquisition of IPC.
In June 2006, the Company completed the sale of its Drakes Branch, Virginia, branch location. At the time of
the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of
approximately $1.9 million. The transaction resulted in a pre-tax gain of approximately $702 thousand.
The Company opened seven branches during 2007 and one during 2008. New branches included two offices in
Winston-Salem, North Carolina, two offices in Richmond, Virginia, and new offices in Daniels, Princeton, and
Summersville, West Virginia.
RESULTS OF OPERATIONS
2008 COMPARED TO 2007
Net income for 2008 was $2.83 million, a decrease of $26.81 million from $29.63 million in 2007. Basic and
diluted earnings per share for 2008 were $0.26 and $0.25, respectively, compared with basic and diluted earnings per
share of $2.64 and $2.62, respectively, in 2007. The significant decline in earnings in 2008 reflect a fourth quarter
non-cash pre-tax impairment charge of $29.92 million on certain investment securities. The Company’s key
profitability ratios are return on average assets and return on average equity. Returns on average assets for 2008 and
2007 were 0.14% and 1.40%, respectively.
The Company acquired Coddle Creek, a $158.66 million bank holding company, in November 2008.
Accordingly, the operations of Coddle Creek were not significant to the 2008 results of operations.
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Table of Contents
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 performed on a tax equivalent basis, which provides a
common basis for comparing yields on earning assets exempt from federal income taxes to those assets which are
fully taxable (see the table titled Average Balance Sheets and Net Interest Income Analysis).
Net interest income was $65.84 million for 2008, compared with $68.32 million for 2007. Tax-equivalent net
interest income totaled $69.97 million for 2008, a decrease of $2.82 million from the $72.79 million reported for
2007. The decrease is attributable to a $4.61 million decrease due to volume and a $1.79 million increase due to rate
changes on the underlying assets and liabilities.
During 2008, average earning assets decreased $114.59 million while average interest-bearing liabilities
decreased $45.79 million, in each case over the comparable period. The yield on average earning assets decreased
51 basis points to 6.38% for 2008 from 6.89% for 2007. Short-term market interest rates decreased precipitously
throughout 2008, culminating in a move by the Federal Reserve to create a “range” of zero to 25 basis points as its
target for federal funds. During 2008, the target federal funds rate decreased 400 basis points, and the average bank
prime loan rate decreased in concert. Those decreases were the largest driver in the overall decrease in the
Company’s yield on average earning assets.
Total cost of average interest-bearing liabilities decreased 78 basis points to 2.79% during 2008. The Company’s
time deposit portfolio experienced significant downward repricing during 2008, as many of the higher-rate
certificates were not renewed. The net result was an increase of 27 basis points to net interest rate spread, or the
difference between interest income on earning assets and expense on interest-bearing liabilities. Spread for 2008 was
3.59% compared with 3.32% for 2007. The Company’s tax-equivalent net interest margin of 3.88% for 2008
represents an increase of eight basis points from 3.80% in 2007.
Loan interest income decreased $13.26 million during 2008 as compared with 2007 as volume declined, while
the yield on loans decreased 78 basis points. During 2008, the tax-equivalent yield on available-for-sale securities
increased three basis points to 5.80% while the average balance decreased by $48.55 million as compared with 2007.
Average interest-bearing balances with banks declined $9.17 million during 2008 to $15.49 million, while the
yield decreased 278 basis points to 1.98%. These balances consist primarily of overnight liquidity, and the yield on
these balances is largely affected by changes in the target federal funds rate.
The average total cost of interest-bearing deposits decreased 72 basis points in 2008 compared with 2007. The
average rate paid on interest-bearing demand deposits decreased 14 basis points, while the average rate paid on
savings, which includes money market and savings accounts, decreased 71 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 and retain deposit funding. In 2008, average time deposits decreased
$26.27 million while the average rate paid decreased 75 basis points to 3.69% as compared with 2007. The level of
average non interest-bearing demand deposits decreased $16.79 million to $211.79 million in 2008 compared with
the prior year.
Average federal funds purchased increased $10.17 million in 2008, while the average rate paid on those funds
also decreased, as they are closely tied to the target federal funds rate. Average retail repurchase agreements
decreased $24.20 million in 2008, while the average rate paid on those funds decreased, as they are closely tied to the
target federal funds rate and 3-month LIBOR. Average Federal Home Loan Bank (“FHLB”) advances and other
borrowings decreased $13.84 million while the rate paid on those borrowings decreased 59 basis points in 2008. The
Company reduced end-of-period FHLB advances by $75.00 million during 2008. Other borrowings include the
Company’s trust preferred issuance of $15.46 million, which is indexed to 3-month LIBOR.
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Table of Contents
Earning Assets:
Loans held for
Investment:(2)
Available-for-sale securities
Held-to-maturity securities
Interest-bearing deposits with
banks
Total earning assets
Other assets
Total
Average Balance Sheets and Net Interest Income Analysis
2008
2007
2006
Average
Balance
Yield/ Average
Interest(1) Rate(1) Balance
Yield/ Average
Interest(1) Rate(1) Balance
Yield/
Interest(1) Rate(1)
(Dollars in thousands)
1,199,076 80,305 6.70 % 1,251,028 93,561 7.48 % 1,316,475 97,500 7.41 %
576,864 33,438 5.80 % 625,413 36,113 5.77 % 428,579 23,584 5.50 %
1,708 8.02 %
1,212 7.96 %
849 8.24 %
10,302
15,220
21,298
15,489
306 1.98 %
1,244 4.56 %
1,801,731 114,898 6.38 % 1,916,323 132,061 6.89 % 1,793,641 124,036 6.92 %
244,455
$ 2,046,186
186,639
$ 1,980,280
208,916
$ 2,125,239
1,175 4.76 %
24,662
27,289
Interest-bearing liabilities:
Demand deposits
Savings deposits
Time deposits
462 0.32 %
$ 174,809 $
6,857 1.99 %
312,363
671,729 24,807 3.69 % 697,996 30,974 4.44 % 680,380 26,549 3.90 %
Total interest-bearing deposits 1,158,901 29,792 2.57 % 1,176,821 38,757 3.29 % 1,170,482 33,868 2.89 %
292 0.17 % $ 147,856 $
4,693 1.50 % 330,969
456 0.31 % $ 146,248 $
7,327 2.21 % 343,854
Borrowings:
3,367
Federal funds purchased
5,809 3.47 % 140,623
Retail repurchase agreements
Wholesale repurchase agreements
6,849
2,181 4.36 %
FHLB borrowings and other debt 244,801 10,117 4.13 % 258,644 12,217 4.72 % 200,570
198 5.88 %
4,578 3.26 %
303 4.42 %
9,434 4.70 %
453,902 15,138 3.34 % 481,776 20,519 4.26 % 351,409 14,513 4.13 %
5,773
3,029 2.12 % 167,359
50,000
1,630 3.26 %
15,942
143,159
50,000
362 2.27 %
312 5.40 %
Tota borrowings
Total interest-bearing
liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total
Net interest income
Net interest rate spread(3)
Net interest margin(4)
1,612,803 44,930 2.79 % 1,658,597 59,276 3.57 % 1,521,891 48,381 3.18 %
211,791
19,850
201,742
$ 2,046,186
237,714
18,551
202,124
$ 1,980,280
228,583
19,210
218,849
$ 2,125,239
$ 69,968
$ 72,785
$ 75,655
3.59 %
3.88 %
3.32 %
3.80 %
3.74 %
4.22 %
(1) Fully taxable equivalent at the rate of 35%.
(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 tax equivalent yield on earning assets and cost of funds.
(4) Represents tax equivalent net interest income divided by average interest-earning assets.
27
Table of Contents
Rate and Volume Analysis of Interest
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 changes in interest due to
both rate and volume have been allocated to the volume and rate columns in proportion to dollar amounts.
2008 Compared to 2007
$ Increase/(Decrease) due to
Rate
Total
Volume
2007 Compared to 2006
$ Increase/(Decrease) due to
Volume Rate
Total
Interest Earned On(1):
Loans
Securities available for sale
Securities held to maturity
Interest-bearing deposits with other banks
Total interest-earning assets
Interest Paid On:
Demand deposits
Savings deposits
Time deposits
Federal funds purchased
Retail repurchase agreements
Wholesale repurchase agreements
FHLB borrowings and other long-term debt
Total interest-bearing liabilities
Change in tax-equivalent net interest income
(1) Fully taxable equivalent using a rate of 35%.
Provision for Loan Losses
(Amounts in thousands)
$ (3,770 ) $ (9,486 ) $ (13,256 ) $ (4,906 ) $ 967 $ (3,939 )
140 (2,675 ) 11,314 1,215 12,529
(2,815 )
(496 )
(407 )
(363 )
(69 )
(338 )
(869 )
(7,330 ) (9,833 ) (17,163 ) 5,794 2,231 8,025
(484 )
(130 )
44
(531 )
(12 )
61
75
(11 )
712
108
(164 )
(272 )
(392 ) (2,242 ) (2,634 )
(1,130 ) (5,037 ) (6,167 )
50
(25 )
(751 ) (2,029 ) (2,780 )
(551 )
(6 )
5
(242 )
470
702 3,723 4,425
114
129
(15 )
318 1,231
913
(4 ) 1,878
(551 ) 1,882
40 2,783
(629 ) (1,471 ) (2,100 ) 2,743
(2,719 ) (11,627 ) (14,346 ) 6,132 4,763 10,895
(338 ) $ (2,532 ) $ (2,870 )
$ (4,611 ) $ 1,794 $ (2,817 ) $
—
The provision for loan losses for 2008 was $7.42 million, an increase of $6.71 million when compared with
2007. The increase in loan loss provision between the periods is primarily attributable to rising loss factors as net
charge-offs escalated during 2008. Qualitative risk factors were also higher, reflective of the higher risk of inherent
loan losses due to rising unemployment, recessionary pressures, and devaluations of various categories of collateral,
including real estate and marketable securities, Net charge-offs for 2008 and 2007 were $5.45 million and
$2.43 million, respectively. Expressed as a percentage of average loans, net charge-offs increased to 0.45% for 2008
from 0.19% in 2007.
Noninterest Income
Noninterest income consists of all revenues which are not included in interest and fee income related to earning
assets. Noninterest income for 2008, exclusive of the $29.92 million other-than-temporary impairment charge, was
$32.30 million compared with $24.83 million in 2007. Non-interest income for 2008 was bolstered by the addition of
insurance revenues from 2008 acquisitions, as well as significantly higher deposit service charges, a result of new
retail marketing strategies.
Wealth management income, which includes fees for trust services and commission and fee income generated
by IPC, increased $220 thousand in 2008 compared with 2007, largely a result of the increases in revenues at IPC.
Service charges on deposit accounts increased $2.68 million as a result of increased transaction fees and a larger
28
Table of Contents
number of fee-based deposit accounts. Other service charges, commissions and fees reflected an increase of $648
thousand in 2008 compared with 2007, due mainly to increased debit card interchange income and ATM service fees.
Insurance commissions earned were $4.99 million in 2008, compared with $1.14 million in 2007. The Company
acquired its insurance subsidiary, GreenPoint Insurance Group, Inc., in September 2007. Income for the insurance
subsidiary is derived primarily from commissions earned on the sale of policies.
Other operating income for 2008 was $3.00 million, a decrease of $1.42 million from 2007. The largest
components of that difference are a decreases in revenue from bank-owned life insurance and FHLB stock dividends
of $470 thousand and $332 thousand, respectively, as well as a one-time gain of $298 thousand resulting from the
Company’s exit from a state banking association insurance partnership in 2007.
During 2008, the Company also recognized securities gains of $1.90 million, an increase of $1.49 million over
gains recognized in 2007.
Noninterest Expense
Total noninterest expense was $60.52 million for 2008, an increase of $10.05 million over 2007. Salaries and
benefits increased approximately $4.03 million. During 2008, total full-time equivalent employees increased to 638
from 615 at December 31, 2007. Full-time equivalent employees are calculated using the number of hours worked.
Greenpoint accounted for approximately 50 full-time equivalent employees at year-end 2008 compared with 51 at
year-end 2007. Total full-time equivalent employees at the Bank and IPC remained relatively stable increasing by
only the 22 full-time equivalent employees in acquisition of Coddle Creek. Health insurance costs increased $660
thousand, or 39.77%, and 401(k) employer matching costs increased $288 thousand, or 30.54%, both due mostly to
the addition of GreenPoint. The Company also deferred $1.10 million less in loan origination costs than in 2007.
Occupancy expenses increased $922 thousand compared with 2007, due to the full year effect of new branches,
the full-year impact of GreenPoint and its acquisitions, and the partial year effect of Coddle Creek. Furniture and
equipment expenses increased $370 thousand, due mainly to a increase of $609 thousand in depreciation and
amortization expense from 2007 to 2008.
During 2008, the Company prepaid a $25.00 million FHLB advance. The expense associated with that
prepayment was $1.65 million. The Company also repaid $50.00 million without a prepayment penalty.
All other operating expense accounts increased $3.09 million in 2008 compared with 2007. Contributing to the
increase in operating expenses were increased advertising and new account promotions of $550 thousand and
consulting expense of $821 thousand. Legal fees also increased $267 thousand in 2008 compared with 2007 as the
Company realized increased expenses relating to its acquisition transactions and the issuance of new preferred stock.
Professional fees also increased $241 thousand as the Company outsourced its internal audit function near mid-year
2007.
The Company uses an efficiency ratio that is a non-GAAP financial measure of operating expense control and
efficiency of operations. Management believes this 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 noninterest 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 efficiency
ratio used by the Company may not be comparable to efficiency ratios reported by other financial institutions.
In general, the efficiency ratio used by the Company is noninterest expenses as a percentage of net interest
income plus noninterest income. Noninterest expenses used in the calculation exclude amortization of intangibles and
non-recurring expenses. Income for the ratio is increased for the favorable effect of tax-exempt income (see Average
Balance Sheets and Net Interest Income Analysis), and excludes securities gains and losses, which vary widely from
period to period without appreciably affecting operating expenses, non-recurring gains and losses, and
other-than-temporary impairment charges. The measure is different from the GAAP-based efficiency ratio, which
also is presented in this report, which is calculated using noninterest expense and income amounts as shown on the
29
Table of Contents
face of the Consolidated Statements of Income. Both types of efficiency ratio calculations are set forth and are
reconciled in the table below.
Our (non-GAAP) efficiency ratios for continuing operations for 2008, 2007, and 2006 were 57.54%, 51.20%,
and 51.05%, respectively. The following table details the components used in calculation of the efficiency ratios.
GAAP-based efficiency ratio
Noninterest expenses
Net interest income plus noninterest income
GAAP-based efficiency ratio
Our efficiency ratio
Noninterest expenses — GAAP-based
Less non-GAAP adjustments:
Foreclosed property expense
Amortization of intangibles
Prepayment penalties on FHLB advances
Other non-core, non-recurring expense items
Adjusted non-interest expenses
Net interest income plus noninterest income — GAAP-based
Plus non-GAAP adjustment:
Tax-equivalency
Less non-GAAP adjustments:
Security gains
Other-than-temporary security impairments
Branch sale gains
Other non-core, non-recurring income items
Adjusted net interest income plus noninterest income
Our efficiency ratio
Income Tax Expense
2008
2007
(Dollars in thousands)
2006
$ 60,516 $ 50,463 $ 49,837
$ 68,209 $ 93,146 $ 92,968
88.72 % 54.18 % 53.61 %
$ 60,516 $ 50,463 $ 49,837
(382 )
(689 )
(185 )
(467 )
(248 )
(410 )
(1,647 ) — —
(581 )
57,747 49,711 48,598
68,209 93,146 92,968
(100 )
(51 )
4,133 4,470 4,010
(411 )
(1,899 )
(75 )
29,923 — —
— — (1,035 )
(676 )
(104 )
—
100,366 97,101 95,192
57.54 % 51.20 % 51.05 %
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
income on state and municipal securities which are exempt from federal income tax, certain dividend payments
which are deductible by the Company, and tax credits generated by investments in low income housing and historical
building rehabilitation.
Consolidated income taxes for 2008 was a benefit of $2.81 million compared with an expense of $12.33 million
in 2007. The effective tax rate for 2008 is not meaningful due to the level of pre-tax income and the effective tax rate
for 2007 was 29.39%.
2007 COMPARED TO 2006
Net income for 2007 was $29.63 million, up $684 thousand from $28.95 million in 2006. Basic and diluted
earnings per share for 2007 were $2.64 and $2.62, respectively, compared with basic and diluted earnings per share
of $2.58 and $2.57, respectively, in 2006.
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The Company’s key profitability ratios are return on average assets and return on average equity. Returns on
average assets for 2007 and 2006 were 1.39% and 1.46%, respectively. The returns on average equity for 2007 and
2006 were 13.54% and 14.32%, respectively.
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 performed on a tax equivalent basis, which provides a
common basis for comparing yields on earning assets exempt from federal income taxes to those assets which are
fully taxable (see the table titled Average Balance Sheets and Net Interest Income Analysis).
Net interest income was $68.32 million for 2007, compared with $71.65 million for 2006. Tax-equivalent net
interest income totaled $72.79 million for 2007, a decrease of $2.87 million from the $75.66 million reported for
2006. The decrease is attributable to a $338 thousand decrease due to volume and a $2.53 million decrease due to
rate changes on the underlying assets and liabilities.
During 2007, average earning assets increased $122.68 million while average interest-bearing liabilities
increased $136.71 million, in each case over the comparable period. The yield on average earning assets decreased
three basis points to 6.89% for 2007 from 6.92% for 2006. Short-term market interest rates were very stable from
August 2006 through July 2007. That stability positively impacted the rate earned on loans and securities, as new
loan production and new securities purchased through September 2007 were being added at rates generally higher
than those added in 2006. During, the last four months of 2007, the Federal Reserve’s target federal funds rate was
decreased 100 basis points, and the average bank prime loan rate decreased in concert. Those decreases were the
largest driver in the slight decrease in the Company’s yield on average earning assets.
Total cost of average interest-bearing liabilities increased 39 basis points to 3.57% during 2007. The Company’s
time deposit portfolio experienced significant upward repricing during 2007, as many of the certificates written in a
lower market rate environment matured and then repriced at a higher interest rate. The net result was a decrease of
42 basis points to net interest rate spread, or the difference between interest income on earning assets and expense on
interest-bearing liabilities. Spread for 2007 was 3.32% compared with 3.74% for 2006. The Company’s tax-
equivalent net interest margin of 3.80% for 2007 represents a decrease of 42 basis points from 4.22% in 2006.
Loan interest income decreased $3.94 million during 2007 as compared with 2006 as volume declined, while the
yield on loans increased seven basis points. During 2007, the tax-equivalent yield on available-for-sale securities
increased 27 basis points to 5.77% while the average balance increased by $196.83 million as compared with 2006.
The average tax-equivalent yield increased due to the addition of higher-rate securities and the sales, maturities, and
calls of lower-rate securities.
Average interest-bearing balances with banks declined $2.63 million during 2007 to $24.66 million, while the
yield increased 20 basis points to 4.76%. These balances include overnight liquidity and a small portfolio of time
deposits purchased in 2002. The yield on these balances is largely affected by changes in the target federal funds rate.
The average total cost of interest-bearing deposits rose 40 basis points in 2007 compared with 2006. The average
rate paid on interest-bearing demand deposits decreased one basis point, while the average rate paid on savings,
which includes money market and savings accounts, increased 22 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 and retain deposit funding. In 2007, average time deposits decreased $17.62 million while the
average rate paid increased 54 basis points to 4.44% as compared with 2006. The level of average non interest-
bearing demand deposits decreased $9.13 million to $228.58 million in 2007 compared with the prior year.
Average federal funds purchased and repurchase agreements increased $72.29 million in 2007, due mostly to
increases in the balances of repurchase agreements. The average rate paid on those funds also increased, as they are
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Table of Contents
closely tied to the target federal funds rate and 3-month LIBOR. Average Federal Home Loan Bank (“FHLB”)
advances increased $57.98 million while the rate paid on those borrowings increased one basis point in 2007. Other
borrowings remained steady in 2007, but the rate paid increased 111 basis points because the majority of such
borrowings consist of the Company’s trust preferred borrowing, which is indexed to 3-month LIBOR.
Provision for Loan Losses
The provision for loan losses for 2007 was $717 thousand, a decrease of $1.99 million when compared with
2006. The decrease in loan loss provision between the periods is primarily attributable to changes in specific
allocations, decreases in commercial and consumer installment loan volume, reductions in net charge-offs, overall
improved asset quality, and changes in various qualitative risk factors. Net charge-offs for 2007 and 2006 were
$2.43 million and $2.89 million, respectively. Expressed as a percentage of average loans, net charge-offs decreased
to 0.19% for 2007 from 0.22% in 2006.
Noninterest Income
Noninterest income consists of all revenues which are not included in interest and fee income related to earning
assets. Noninterest income for 2007 was $24.83 million compared with $21.32 million in 2006. Wealth management
income, which includes fees for trust services and commission and fee income generated by IPC, increased
$1.07 million in 2007 compared with 2006, largely a result of the November 2006 acquisition of IPC.
Service charges on deposit accounts increased $1.15 million as a result of increased transaction fees and a larger
number of fee-based deposit accounts. Other service charges, commissions and fees reflected an increase of $608
thousand in 2007 compared with 2006, due mainly to increased debit card interchange income and ATM service fees.
The Company acquired its insurance subsidiary, GreenPoint Insurance Group, Inc., in September 2007.
Essentially all income for the insurance subsidiary is derived from commissions earned on the sale of policies. Since
acquisition, commissions earned on the sale of policies by GreenPoint in 2007 were $1.14 million.
Other operating income for 2007 includes a gain of $298 thousand resulting from the Company’s departure from
a state banking association insurance operation. The Company was contractually required to exit the operation upon
acquisition of GreenPoint. Other operating income for 2006 includes $1.04 million in gains from the sale of branch
locations, as well as a $676 thousand recovery relating to a 1997 payment system fraud loss. The remaining
components of other operating income increased $621 thousand compared with 2006. During 2007, the Company
also recognized securities gains of $411 thousand, an increase of $336 thousand over gains recognized in 2006.
Noninterest Expense
Total noninterest expense was $50.46 million for 2007, an increase of $626 thousand over 2006. Salaries and
benefits decreased approximately $1.02 million due to the Company’s efforts on expense control and efficiency and
the implementation of a branch staffing model. During 2007, total full-time equivalent employees decreased to 615
from 624 at December 31, 2006. Full-time equivalent employees are calculated using the number of hours worked.
Greenpoint accounted for approximately 51 full-time equivalent employees at year-end 2007. Total full-time
equivalent employees at the Bank and IPC decreased by 60 compared with 2006.
Occupancy expenses increased $112 thousand compared with 2006, as the Company opened new branches and
acquired GreenPoint. Furniture and equipment expenses decreased $96 thousand, due mainly to a decrease of $90
thousand in depreciation and amortization expense from 2006 to 2007.
All other operating expense accounts increased $1.63 million in 2007 compared with 2006. Contributing to the
increase in operating expenses were increased new account promotions of $245 thousand and consulting expense of
$728 thousand. In 2007, service fees related to clearing costs for IPC also increased $339 thousand compared with
2006 and reflecting the full year impact in 2007. Professional fees also increased $207 thousand in 2007 compared
with 2006 as the Company outsourced its internal audit function near mid-year 2007.
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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
income on state and municipal securities which are exempt from federal income tax, certain dividend payments
which are excludable from taxable income, and tax credits generated by investments in low income housing and
historical building rehabilitation.
Consolidated income taxes for 2007 were $12.33 million, a 29.39% effective tax rate, compared with
$11.48 million, a 28.39% effective tax rate for 2006. The effective tax rate was higher during 2007 due mostly to
lower levels of available tax credits than in 2006.
FINANCIAL POSITION
Available-for-Sale Securities
Available-for-sale securities were $520.72 million at December 31, 2008, compared with $664.12 million at
December 31, 2007, a decrease of $143.40 million. The decrease is result of lower security valuations and net
portfolio reductions of $29.27 million. At December 31, 2008, the average life and duration of the portfolio were
5.0 years and 3.6, respectively. Average life and duration improved from December 31, 2007, at 6.9 years and 4.7,
respectively.
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, timing and amount of contractual cash
flows, 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 noninterest income in the Consolidated Statements of
Income.
As of December 31, 2008, the Company recognized a pre-tax non-cash impairment charge of $14.47 million
which stems from a 2006 vintage collateralized mortgage obligation. The Company’s analysis of the bond showed
probable losses of $1.69 million, or 6.76%, of the $25.00 million par value of the security. U.S. GAAP requires
banks to write down securities with probable losses to estimated market values, irrespective of the portion of the loss
in value attributable to credit quality.
The Company performed extensive cash flow analyses of each of its pooled trust preferred investment securities.
As of December 31, 2008, one of the securities demonstrated probable adverse change in cash flow. This resulted in
a pre-tax other-than-temporary impairment charge of $15.46 million. Total pre-tax, non-cash impairment charges of
$29.92 million are reflected in non-interest income for the year ending December 31, 2008.
The Company does not believe any unrealized loss remaining in the investment portfolio, individually or in the
aggregate, as of December 31, 2008, 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. Based on currently
available information, the Company believes the recorded declines in the value of these securities at December 31,
2008 and 2007, are attributable to changes in market interest rates, a weakened outlook for the banking system, and
the severe market dislocation experienced throughout 2008.
Included in available-for-sale securities is a portfolio of trust-preferred securities with a total market value of
approximately $66.05 million as of December 31, 2008. That portfolio is comprised of single-issue securities and
pooled trust-preferred securities. The single-issue securities are trust-preferred issuances from large banking
institutions, A-rated or higher, and had a total market value of approximately $33.54 million as of December 31,
2008, compared with their adjusted cost basis of approximately $55.49 million.
At December 31, 2008, the total market value of the pooled trust-preferred securities was approximately
$32.51 million, compared with an adjusted cost basis of approximately $93.27 million. The collateral underlying
these securities is comprised 86% of bank trust-preferred securities and subordinated debt issuances of over 500
33
Table of Contents
banks nationwide. The remaining collateral is from insurance companies and real estate investment trusts. The
securities carry variable rate structures that float at a prescribed margin over 3-month LIBOR. During 2008, certain
of these experienced a credit rating downgrade from one rating agency, and certain of these securities are on negative
watch by one or more rating firms. The Company has modeled the expected cash flows from the pooled trust-
preferred securities and, at present, does not expect any of the remaining securities to have an adverse cash flow
effect under any of the scenarios modeled due to the existence of other subordinate classes within the pools.
The following table provides details regarding the type and credit ratings within the securities portfolios as of
December 31, 2008. In the case of different ratings, the lower rating was utilized.
Available for sale
Agency securities
Agency mortgage-backed securities
Non-Agency mortgage-backed securities:
AAA
B
Total
Municipals:
AAA
AA
A
BBB
Not rated
Total
Par
Value
Fair
Value
Unrealized
Gains/(Losses)
Amortized Recognized Cumulative
in OCL
Cost
OTTI
(Amounts in thousands)
$ 53,435 $ 54,818 $ 53,425 $
211,203 216,962 212,315
1,393 $
4,647
—
—
7,475
5,766
7,423
25,000 10,750 10,750
32,475 16,516 18,173
(1,657 )
—
— 14,467
(1,657 ) 14,467
6,738
6,716
6,729
62,885 62,056 62,926
55,932 54,051 55,158
31,610 30,280 31,500
6,729
163,885 159,419 163,042
6,720
6,316
(13 )
(870 )
(1,107 )
(1,220 )
(413 )
(3,623 )
—
—
—
—
—
—
—
—
—
Single issuer bank trust preferred securities:
AA
A
Total
Pooled trust preferred securities:
39,425 24,214 38,745
9,327 16,747
17,130
56,555 33,541 55,492
(14,531 )
(7,420 )
(21,951 )
A
BBB
BB
B
Total
Equity securities
Total
Held to maturity
Municipals:
AA
A
BBB
Total
50,223
19,286
9,000
9,117 34,853
3,831 19,377
9,038
5,163
30,000 14,401 30,000
108,509 32,512 93,268
7,979
$ 626,062 $ 520,723 $ 603,694 $
6,955
$ 3,680 $ 3,725 $ 3,664 $
3,792
1,214
$ 8,945 $ 8,802 $ 8,670 $
4,050
1,215
3,859
1,218
(25,736 ) 15,456
—
(15,546 )
—
(3,875 )
(15,599 )
—
(60,756 ) 15,456
—
(1,024 )
(82,971 ) $ 29,923
61 $
67
4
132 $
—
—
—
—
Although the Company has both the intent and ability to hold the securities to maturity or recovery, the
Company closely monitors this portfolio due to the substantial market discounts. The market discounts reflect the
34
Table of Contents
credit market disruption in bank subordinated debt instruments and the possibility of future negative credit events
within the banking sector, which could affect collateral within certain of the pools and single-issue securities.
Monitoring for other-than-temporary impairment (“OTI”) is dependent on the aforementioned assumptions regarding
future credit events and the general strength of the banking industry as it deals with credit losses in the current
recessionary real estate market. Acceleration of bank losses and the possibility of unforeseen bank failures could
result in changes in the Company’s outlook for these securities and possible future OTI. Accordingly, there can be no
assurance that continued deterioration of credit portfolios within certain of those banks will not lead to unanticipated
deferrals of interest payments and defaults beyond those assumed in the Company’s impairment testing. At present,
cash flow modeling indicates varying ability to absorb additional deferrals and defaults before incurring breaks in
interest or principal for the various pools.
At December 31, 2008, the Company held separate issuances of trust preferred securities from one issuer which
had book and market values of $28.68 million and $17.64 million, respectively.
The following table details amortized cost and fair value of available-for-sale securities as of December 31,
2008, 2007, and 2006.
2008
December 31,
2007
2006
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
U.S. Government agency securities
States and political subdivisions
Single issuer trust preferred securities
Pooled trust preferred securities
Mortgage-backed securities
Equities
Total
Held-to-Maturity Securities
(Amounts in thousands)
$ 53,425 $ 54,818 $ 136,791 $ 139,237 $ 117,777 $ 116,061
154,047
163,042
41,419
55,491
43,614
93,269
144,754
230,488
8,475
7,979
$ 603,694 $ 520,723 $ 674,937 $ 664,120 $ 508,423 $ 508,370
152,189
41,545
43,535
146,444
6,933
159,419
33,542
32,511
233,478
6,955
186,834
55,422
109,309
177,984
8,597
188,536
51,549
99,076
176,727
8,995
Investment securities classified as held-to-maturity are comprised primarily of high-grade state and municipal
bonds. The portfolio totaled $8.67 million at December 31, 2008, compared with $12.08 million at December 31,
2007. This decrease is reflective of continuing maturities and calls within the portfolio. The market value of
held-to-maturity investment securities was 101.52% and 101.85% of book value at December 31, 2008 and 2007,
respectively.
The average final maturity of the held-to-maturity investment portfolio decreased to 4.3 years at December 31,
2008, from 5.5 years at December 31, 2007, with the tax-equivalent yield increasing to 7.97% at December 31, 2008,
from 7.94% at year-end 2007. The weighted-average expected maturity, based on market assumptions for
prepayment, was five months and six months at December 2008 and 2007, respectively. The average maturity data
differs from final maturity data because of the use of assumptions as to anticipated prepayments, and is generally a
more accurate indicator of true average life of the investment.
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The following table details amortized cost and fair value of held-to-maturity securities at December 31, 2008,
2007, and 2006.
2008
Amortized
Cost
December 31,
2007
Fair Amortized
Value
Cost
Fair
Value
2006
Amortized
Cost
Fair
Value
States and political subdivisions
Corporate Notes
Mortgage-backed securities
Total
Loans Held for Sale
(Amounts in thousands)
$ 8,670 $ 8,802 $ 11,699 $ 11,922 $ 19,638 $ 19,970
374
6
$ 8,670 $ 8,802 $ 12,075 $ 12,298 $ 20,019 $ 20,350
—
—
375
6
375
1
375
1
—
—
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, 2008, the Company held $1.02 million of loans for sale to the secondary
market, up from $811 thousand at December 31, 2007. The gross notional amount of outstanding commitments to
originate mortgage loans for customers at December 31, 2008, was $10.48 million on 71 loans. The Company sells
these mortgages on a best-efforts basis and generates non-interest income through origination fees and yield spread
gains.
Loans Held for Investment
Total loans held for investment increased $72.66 million to $1.30 billion at December 31, 2008, from
$1.23 billion at December 31, 2007, primarily as a result of the addition of $136.99 million in Coddle Creek loans,
which was partially offset by lower loan production and large payoffs throughout 2008. The average loan to deposit
ratio decreased to 87.48% for 2008, compared with 89.02% for 2007. Average loans held for investment for 2008 of
$1.20 billion decreased $51.95 million when compared with the average for 2007 of $1.25 billion.
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 2004 through 2008.
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
2008
2007
December 31,
2006
(Amounts in thousands)
2005
2004
85,034 $
96,261 $ 106,645 $ 110,211 $
$
407,638
130,610
602,573
66,259
6,046
1,298,160
1
1,298,159
15,978
99,302
453,899
112,705
457,417
113,639
2,012
1,238,974
218
1,238,756
16,339
$ 1,282,181 $ 1,212,669 $ 1,270,314 $ 1,316,303 $ 1,222,417
421,067
158,566
506,370
88,679
3,549
1,284,876
13
1,284,863
14,549
464,510
143,976
504,387
106,206
1,808
1,331,098
59
1,331,039
14,736
386,112
163,310
498,345
75,450
6,027
1,225,505
3
1,225,502
12,833
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The Company maintained no foreign loans in the periods presented. Although the Company’s loans are made
primarily in the five-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, 2008.
The following table details the maturities and rate sensitivity of the Company’s loan portfolio at December 31,
2008.
Commercial, financial and agricultural
Real estate — commercial
Real estate — construction
Real estate — mortgage
Consumer
Other
Rate Sensitivity:
Predetermined rate
Floating- or adjustable-rate
Allowance for Loan Losses
Remaining Maturities
Over
One Year One to Over Five
and Less Five Years Years
Total
Percent
(Amounts in thousands)
$ 12,648 $ 56,876 $ 15,510 $
85,034 6.55 %
18,722 228,229 160,687 407,638 31.40 %
25,493 93,129 11,988 130,610 10.06 %
16,052 132,434 454,087 602,573 46.42 %
66,259 5.10 %
8,155 49,696
6,046 0.47 %
735
3,213
$ 84,283 $ 561,099 $ 652,778 $ 1,298,160 100.00 %
8,408
2,098
$ 36,920 $ 409,711 $ 331,262 $ 777,893 59.92 %
47,363 151,388 321,516 520,267 40.08 %
$ 84,283 $ 561,099 $ 652,778 $ 1,298,160 100.00 %
The allowance for loan losses is increased by charges to earnings in the form of provisions charged to current
earnings and by recoveries of prior loan charge-offs, and decreased by loan 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 amount that management deems adequate to absorb probable losses. Additional information regarding the
determination of the allowance for loan losses can be found in Note 1 of the Notes to Consolidated Financial
Statements, included in Item 8 hereof.
The allowance for loan losses was $15.98 million at December 31, 2008, compared with $12.83 million at
December 31, 2007, an increase of $3.15 million. The increase in the allowance was primarily influenced by the
affect of net charge-off activity during the year, which totaled $5.45 million as of December 31, 2008, as compared
to $2.43 million as of December 31, 2007, on provision expense. Three loan relationships accounted for
approximately $1.8 million of total 2008 net charge-offs. The three relationships had been previously identified as
impaired by management with a combined specific reserve allocation established equivalent to the amount charged-
off. Collection activity continues on all three relationships. Additionally, the allowance methodology takes into
consideration trends in delinquency and non-accrual loans; both of which exhibited an increasing trend during the
year. Management considers the allowance adequate based upon its analysis of the portfolio as of December 31,
2008; however, no assurance can be made that additions to the allowance for loan losses will not be required in
future periods.
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Table of Contents
The following table details loan charge-offs and recoveries by loan type for the five years ended December 31,
2004 through 2008.
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
Ratio of net charge-offs to average loans outstanding
Ratio of allowance for loan losses to total loans
2007
2008
Years Ended December 31,
2006
(Dollars in thousands)
$ 12,833 $ 14,549 $ 14,736 $ 16,339 $ 14,624
1,169 — — — 1,786
2005
2004
4,349 2,245 1,953 5,017 1,925
1,200
723
1,822 1,226 1,356 1,534 1,526
7,371 4,295 4,543 6,936 4,174
824 1,234
385
1,388
76
461
879 1,032 1,413
188
125
535
418
493
448
727
90
615
1,925 1,862 1,650 2,019 1,432
5,446 2,433 2,893 4,917 2,742
717 2,706 3,706 2,671
7,422
— — —
(392 ) —
$ 15,978 $ 12,833 $ 14,549 $ 14,736 $ 16,339
0.45 %
0.19 %
0.22 %
0.38 %
0.24 %
outstanding
1.23 %
1.05 %
1.13 %
1.11 %
1.32 %
(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 and the percent of loans in each
category to total loans for the five years ended December 31, 2008.
2008
2007
December 31,
2006
(Dollars in thousands)
2005
2004
Commercial, financial and
agricultural
Real estate — mortgage
Consumer
Unallocated
$ 6,442 48 % $ 7,441 53 % $ 8,418 53 % $ 9,993 58 % $ 11,700 57 %
7,038 46 % 3,699 41 % 3,858 39 % 2,462 34 % 2,084 34 %
2,025 6 % 1,693 6 % 2,273 8 % 2,281 8 % 2,555 9 %
473
—
—
—
—
Total
$ 15,978 100 % $ 12,833 100 % $ 14,549 100 % $ 14,736 100 % $ 16,339 100 %
38
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Risk Elements
Non-performing assets include loans on non-accrual status, loans contractually past due 90 days or more and
still accruing interest, and other real estate owned. The levels of non-performing assets for the last five years ending
December 31, 2008, are presented in the following table.
Non-accrual loans
Loans 90 days or more past due and still accruing interest
Total non-performing loans
Other real estate owned
Total non-performing assets
Non-performing loans as a percentage of total loans
Non-performing assets as a percentage of total loans and other
2005
2007
2004
2008
December 31,
2006
(Dollars in thousands)
$ 12,763 $ 2,923 $ 3,813 $ 3,383 $ 5,168
— — —
11 —
12,763 2,923 3,813 3,394 5,168
1,326 545 258 1,400 1,419
$ 14,089 $ 3,468 $ 4,071 $ 4,794 $ 6,587
0.98 % 0.24 % 0.30 % 0.25 % 0.42 %
real estate owned
1.08 % 0.28 % 0.32 % 0.36 % 0.53 %
Allowance for loan losses as a percentage of non-performing
loans
125.2 % 439.0 % 381.6 % 434.2 % 316.2 %
Allowance for loan losses as a percentage of non-performing
assets
113.4 % 370.0 % 357.4 % 307.4 % 248.0 %
Total non-performing assets were $14.09 million at December 31, 2008, compared with $3.47 million at
December 31, 2007, an increase of $10.62 million. Non-accrual loans increased by $9.84 million to $12.76 million at
December 31, 2008, compared with 2007. The increase in non-accrual loans was largely driven by the addition of
two commercial loan relationships and the Coddle Creek acquisition. The first of the two commercial loan
relationships is a $2.92 million hotel loan secured by a hotel facility in North Carolina. The bank has established a
specific reserve allocation based upon its impairment analysis and anticipates liquidation of the collateral to be
completed late in the first quarter. The second commercial loan relationship is to a commercial and residential land
developer in the Richmond, Virginia, area that is principally comprised of three loans totaling $2.41 million. The
bank had previously evaluated the loans for impairment and had established specific reserve allocations accordingly.
At year-end, the loans were written down in amount equivalent to the specific allocation. Liquidation of two of the
loans is anticipated to be completed late in the first quarter. Approximately $2.81 million in non-accrual loans were
acquired in the Coddle Creek loan portfolio, with the largest non-accrual loan totaling $261 thousand. The non-
accrual loan balance was anticipated as a result of pre-acquisition due diligence.
Ongoing activity within the classification and categories of non-performing loans continues to include
collections on delinquent loans, foreclosures, and movements into or out of the non-performing classification as a
result of changing customer business conditions. There were no loans 90 days past due and still accruing at
December 31, 2008 and 2007. Other real estate owned increased $781 thousand to $1.33 million at December 31,
2008, and is carried at the lesser of estimated net realizable value or cost.
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.
The Company has considered all impaired loans in the evaluation of the adequacy of the allowance for loan
losses at December 31, 2008. The following table presents additional detail of non-performing and restructured
39
Table of Contents
loans for the five years ended December 31, 2008. Additional information regarding nonperforming loans can be
found in Note 5 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.
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
2008
2007
December 31,
2006
(Amounts in thousands)
$ 12,763 $ 2,923 $ 3,813 $ 3,383 $ 5,168
—
—
—
—
11
2005
2004
113
245
272
302
354
458
89
301
179
397
286
380
161
439
293
There are no outstanding commitments to lend additional funds to borrowers related to restructured loans.
Deposits
Total deposits were $1.50 billion at December 31, 2008, an increase of $110.32 million from $1.39 billion at
December 31, 2007. $137.06 million of the increase is attributable to the acquisition of Coddle Creek. Noninterest-
bearing demand deposits decreased during 2008 by $24.38 million while interest-bearing demand deposits increased
$31.55 million. Savings deposits, which consist of money market accounts and savings accounts, decreased
$18.11 million during 2008 while time deposits increased $121.26 million, primarily attributable to Coddle Creek.
Movement among product types during the year reflects a general migration toward interest-bearing and higher
yielding account types as customers searched for yield opportunities in a falling rate environment.
Average total deposits decreased slightly to $1.37 billion for 2008. Average interest-bearing demand deposits
increased $26.95 million during 2008. Average noninterest-bearing demand deposits and savings deposits decreased
$16.79 million and $18.61 million during 2008, respectively. Average time deposits decreased $26.27 million in
2008. In 2008, the average rate paid on interest bearing deposits was 2.57%, down 72 basis points from 3.29% in
2007. Throughout 2008, the Company decreased its higher-rate certificates of deposit and money market accounts.
The increase in interest-bearing demand deposits can be attributed to growth in the Company’s fee-based, interest-
bearing checking accounts and associated rewards program.
Borrowings
The Company’s borrowings consist primarily of overnight federal funds purchased from the FHLB and other
sources, securities sold under agreements to repurchase, and term FHLB borrowings. This category of liabilities
represents wholesale sources of funding and liquidity for the Company.
Short-term borrowings decreased on average approximately $14.03 million for 2008 compared with the prior
year as a result of decreasing funding needs. There were no federal funds purchased at December 31, 2008, and
$18.50 million, at December 31, 2007. Repurchase agreements were $165.91 million and $207.43 million at
December 31, 2008 and 2007, respectively. Retail repurchase agreements are sold to customers as an alternative to
available deposit products and commercial treasury accounts. At December 31, 2008 and 2007, wholesale repurchase
agreements totaled $50.00 million. The weighted-average rate of those long-term, wholesale repurchase agreements
was 4.32% and 4.30% at December 31, 2008 and 2007, respectively. The underlying securities included in retail
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 repurchase agreements. Balances and rates paid on
short-term borrowings used in daily operations are summarized as follows:
At year-end
Average during the year
Maximum month-end balance
2008
Amount Rate
2007
Amount Rate
(Dollars in thousands)
$ 165,914 2.36 % $ 225,927 4.32 % $ 208,885 3.70 %
209,101 2.40 % 223,132 3.72 % 150,839 3.37 %
282,110
2006
Amount Rate
273,920
208,885
At December 31, 2008, FHLB borrowings included $200.00 million in convertible and callable advances. The
weighted-average interest rate of all advances was 3.70% and 4.38% at December 31, 2008 and 2007, respectively.
$50.00 million of the advances are hedged by an interest rate swap to approximate a fixed rate of 4.34%. After
considering the effect of the interest rate swap, the weighted-average interest rate of all advances was 3.84% at
December 31, 2008. At December 31, 2008, the FHLB advances had maturities between eight and thirteen years.
Also included in other indebtedness is $15.46 million of junior subordinated debentures issued by the Company
in October 2003 through FCBI Capital Trust, an unconsolidated trust subsidiary, with an interest rate of three-month
LIBOR plus 2.95%. The debentures mature in October 2033 and are currently callable.
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 $392.34 million at December 31, 2008, is comprised of the following: cash on hand and
deposits with other financial institutions of $46.44 million; unpledged available-for-sale securities of
$143.17 million; held-to-maturity securities due within one year of $452 thousand; FHLB credit availability of
$106.28 million; federal funds lines availability of $76.00 million; and holding company line of credit availability of
$20.00 million. As a result of the continuing national credit crisis which developed in 2008, the Company’s FHLB
credit availability declined as the FHLB increased collateral pledging requirements.
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 these
funds to meet ongoing commitments, to pay maturing savings certificates and savings withdrawals, fund loan
commitments and maintain a portfolio of securities.
Since the Company is a holding company and does not conduct operations, its primary sources of liquidity are
dividends upstreamed from the Bank and borrowings from outside sources. Banking regulations limit the amount of
dividends that may be paid by the Bank. See Note 15 — Regulatory Capital Requirements and Restrictions of the
Notes to Consolidated Financial Statements included in Item 8 hereof regarding such dividends. At December 31,
2008, the Company had liquid assets, including cash and investment securities, totaling $13.65 million, and a holding
company line of credit of $20.00 million. Additionally, as a result of the Company’s participation in the TARP
Capital Purchase Program, the ability of the Company to declare or pay dividends or distributions on shares of its
Common Stock is subject to restrictions, including a restriction against increasing cash dividends above the amount
of the last quarterly cash dividend per share declared prior to October 14, 2008, which was $0.28 per share, without
the express permission of the Treasury. These restrictions will terminate on the earlier of (a) the third anniversary of
the date of issuance of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has been
redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties.
At December 31, 2008, approved loan commitments outstanding amounted to $167.32 million. Certificates of
deposit scheduled to mature in one year or less totaled $515.74 million. Management believes that the Company has
adequate resources to fund outstanding commitments and could either adjust rates on certificates of deposit in order
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Table of Contents
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, 2008.
Deposits without a stated maturity(1)
Federal funds borrowed and overnight
security repurchase agreements
Certificates of Deposit(2)(3)
Term security repurchase agreements
FHLB advances(2)(3)
Trust preferred indebtedness
Leases
Total
Total Payments Due by Period
Total
Less than
One year
One to
Three Years
Three to
Five Years
More than
Five Years
(Amounts in thousands)
$ 694,406 $ 694,406 $
— $ — $
—
87,682
841,411
96,990
285,904
45,706
2,599
—
74,273
56,196
243,041
39,204
184
$ 2,054,698 $ 1,351,062 $ 201,590 $ 89,148 $ 412,898
87,682
535,076
23,518
8,400
1,218
762
—
175,445
5,597
17,085
2,436
1,027
—
56,617
11,679
17,378
2,848
626
(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, 2008. 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, 2008.
Amount of Commitment Expiration Per Period
Less than
One Year
(1)
Three to
Three Years Five Years
(Amounts in thousands)
One to
More than
Five Years
Total
Commitments to extend credit Commercial,
financial and agricultural
Real estate — commercial
Real estate — residential
Real estate — construction
Consumer lines of credit
Other
Total unused commitments
Financial letters of credit
Performance letters of credit
Total letters of credit
2,304
1,463
4,859
47,838
—
$ 24,767 $ 8,095 $ 12,303 $ 1,109 $ 3,260
1,493
16,471
64,935
78,077
3,966
31,494
15
48,338
—
146
$ 199,293 $ 64,559 $ 45,702 $ 15,363 $ 73,669
10
$ 1,493 $
64
1,351
74
563
6,166
7,523
2
—
12,111
5,513
15,146
483
146
530 $
944
1,474 $
$ 2,844 $ 1,269 $
946 $
323
20
27 $
7 $
(1) Lines of credit with no stated maturity date are included in commitments for less than one year.
42
Table of Contents
The Company has a pay fixed and receive variable interest rate swap that effectively fixes $50.00 million of
FHLB borrowings at 4.34% for a period of five years. The derivative transaction is effective and performing as
originally expected.
Stockholders’ Equity
Total stockholders’ equity increased $3.24 million to $220.34 million at December 31, 2008. The increase in
equity in 2008 was due mainly to comprehensive net loss of $42.15 million less preferred and common dividends of
$255 thousand and $12.45 million, respectively, and net additions of treasury stock at a cost of $1.76 million.
Issuance of the Series A Preferred Stock to the Treasury added $40.42 million, net, to stockholders’ equity, and the
acquisition of Coddle Creek added approximately $19.14 million.
Risk-based capital guidelines and the leverage ratio measure capital adequacy of banking institutions. At
December 31, 2008, the Company’s Tier I capital ratio was 11.92% compared with 11.45% in 2007. The Company’s
total risk-based capital-to-asset ratio was 12.91% at December 31, 2008, compared with 12.34% at December 31,
2007. Both of these ratios are well above the current minimum level of 8% prescribed for bank holding companies by
the Federal Reserve Board. The leverage ratio is the measurement of total tangible equity to total assets. The
Company’s leverage ratio at December 31, 2008, was 9.75% versus 8.09% at December 31, 2007, both of which are
well above the minimum levels prescribed by the Federal Reserve Board. See Note 15 of the Notes to Consolidated
Financial Statements in Item 8 hereof.
Wealth 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 $416 million and $480 million at December 31, 2008 and 2007, respectively. The
decrease in assets under management is largely due to decreases in the market value of account assets throughout
2008. 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 Company also offers investment advisory services through the Bank’s wholly-owned subsidiary, IPC,
which reported assets under management of $432 million and $360 million at December 31, 2008 and 2007,
respectively. The increase over 2007 includes the addition of several large accounts. IPC utilizes the Raymond James
investment platform, which provides all settlement and clearing services.
Insurance Services
The Company offers insurance services through its subsidiary GreenPoint. Revenues are derived mainly from
commissions paid on policies sold. Commission revenue was $4.99 million for 2008 compared to $1.14 million for
2007. The Company acquired GreenPoint late in 2007. GreenPoint is an acquisitive agency taking advantage of a
number of local independent insurance agencies with principals evaluating exit strategies. GreenPoint made two
large acquisitions during 2008, REL Insurance in Greensboro, North Carolina, and Carr & Hyde in Warrenton,
Virginia. Those two agencies added combined annualized revenues of over $3 million.
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Table of Contents
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 the result of “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
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, 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 repricing term 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 in a neutral sensitivity position.
The Company has established policy limits for tolerance of interest rate risk that allow for no more than a 10%
reduction in the next twelve months’ projected net interest income based on the income simulation compared with
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.
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Table of Contents
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, 2008 and 2007. The model
simulates plus and minus 200 basis point changes from the base case rate simulation. 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 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. As of December 31, 2008, the Federal Open Market Committee set a target range for federal
funds of 0 to 25 basis points, rendering a complete downward shock of 200 basis points as not realistic and not
meaningful. In the downward rate shocks presented, benchmark interest rates are dropped with floors near 0%.
Rate Sensitivity Analysis
Increase (Decrease)
in Interest Rates
(Basis Points)
200
100
(100)
Increase (Decrease)
in Interest Rates
(Basis Points)
200
100
(100)
(200)
Change in
Net Interest
Income
%
Change
Change in
Market Value
of Equity
%
Change
(Dollars in thousands)
$
1,479
1,493
1,874
2.3 $
2.3
2.9
(8,040 )
719
(21,443 )
(3.7 )
0.3
(9.9 )
Change in
Net Interest
Income
%
Change
Change in
Market Value
of Equity
$
(3,124 )
(327 )
(449 )
(1,657 )
(4.2 ) $
(0.4 )
(0.6 )
(2.2 )
(30,894 )
(5,315 )
(11,128 )
(32,008 )
%
Change
(10.7 )
(1.8 )
(3.9 )
(11.1 )
2008
2007
45
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms on Consolidated Financial Statements
Management’s Assessment of Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Management’s Assessment of Internal Control
Over Financial Reporting
47
48
49
50
51
87
88
89
46
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2008
2007
(Amounts in thousands,
except share and per share
data)
Cash and due from banks
Interest-bearing balances with banks
Total cash and cash equivalents
ASSETS
Securities available for sale (amortized cost of $603,694, 2008; $674,937, 2007)
Securities held to maturity (fair value of $8,802, 2008; $12,298, 2007)
Loans held for sale
Loans held for investment, net of unearned income
Less allowance for loan losses
Net loans held for investment
Premises and equipment, net
Other real estate owned
Interest receivable
Goodwill
Other intangible assets
Other assets
Total Assets
LIABILITIES
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
$
15,978
8,670
1,024
39,310 $
7,129
46,439
50,051
2,695
52,746
520,723 664,120
12,075
811
1,298,159 1,225,502
12,833
1,282,181 1,212,669
48,383
55,024
545
1,326
12,465
10,084
66,310
83,192
3,746
6,420
118,231
75,968
$ 2,133,314 $ 2,149,838
$ 199,712 $ 224,087
1,304,046 1,169,356
1,503,758 1,393,443
21,454
27,423
18,500
—
165,914 207,427
215,877 291,916
1,912,972 1,932,740
Total Liabilities
Stockholders’ Equity
Preferred stock, par value undesignated; 1,000,000 shares authorized; 41,500 shares issued
and outstanding in 2008 and none in 2007
40,419
—
Common stock, $1 par value; shares authorized: 25,000,000; shares issued: 12,051,234 in
2008 and 11,499,018 in 2007; shares outstanding: 11,567,449 in 2008 and 11,069,646
in 2007
Additional paid-in capital
Retained earnings
Treasury stock, at cost
Accumulated other comprehensive loss
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See Notes to Consolidated Financial Statements.
47
12,051
11,499
128,526 108,825
107,231 117,670
(13,613 )
(7,283 )
220,342 217,098
$ 2,133,314 $ 2,149,838
(15,368 )
(52,517 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2008
Years Ended December 31,
2007
(Amounts in thousands,
except share and per share data)
2006
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
Insurance commissions
Investment securities impairments
Net gains on sale of securities
Other operating income
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Occupancy expense of bank premises
Furniture and equipment expense
Prepayment penalties on FHLB advances
Other operating expense
Total noninterest expense
Income before income taxes
Income tax (benefit) expense
Net income
Dividends on preferred stock
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Dividends declared per common share
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
$
80,224 $
22,714
7,521
306
110,765
93,501 $
24,725
8,190
1,175
127,591
97,460
13,951
7,371
1,244
120,026
29,792
5,252
9,886
44,930
65,835
7,422
58,413
4,100
14,067
4,248
4,988
(29,923 )
1,899
2,995
2,374
38,757
9,760
10,759
59,276
68,315
717
67,598
3,880
11,387
3,600
1,142
—
411
4,411
24,831
33,868
6,977
7,536
48,381
71,645
2,706
68,939
2,811
10,242
2,992
—
—
75
5,203
21,323
25,848
4,180
3,370
—
17,065
50,463
41,966
12,334
29,632
—
29,632 $
2.64 $
2.62 $
1.08 $
29,876
5,102
3,740
1,647
20,151
60,516
271
(2,810 )
3,081
255
2,826 $
0.26 $
0.25 $
1.12 $
26,867
4,068
3,466
—
15,436
49,837
40,425
11,477
28,948
—
$
28,948
$
2.58
$
2.57
1.04
$
11,058,076 11,204,676 11,204,875
11,134,025 11,292,871 11,279,480
See Notes to Consolidated Financial Statements.
48
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
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
Gain on sale of loans
Equity-based compensation expense
Deferred income tax (benefit) expense
Decrease (increase) in interest receivable
Excess tax benefit from stock-based compensation
Prepayment penalty
(Increase) decrease in other assets
Increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sales of securities available for sale
Proceeds from maturities and calls of securities available for sale
Proceeds from maturities and calls of held to maturity securities
Purchase of securities available for sale
Purchase of bank-owned life insurance
Net decrease (increase) in loans made to customers
Cash used in divestitures and acquisitions, net
Purchase of premises and equipment
Proceeds from sale of equipment
Net cash used in investing activities
Cash flows from financing activities
Net (decrease) increase in demand and savings deposits
Net increase (decrease) in time deposits
Net increase (decrease) in FHLB and other borrrowings
Prepayment penalty
Net increase (decrease) in federal funds purchased
Net (decrease) increase in securities sold under agreement to repurchase
Net proceeds from the issuance of preferred stock
Proceeds from the exercise of stock options
Excess tax benefit from stock-based compensation
Acquisition of treasury stock
Dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental information — Noncash items
Transfers of loans to other real estate
Years Ended December 31,
2006
2007
2008
(Amounts in thousands)
$
3,081 $ 29,632 $ 28,948
717
3,276
467
534
(357 )
7,422
3,885
689
(161 )
(1,839 )
2,706
3,366
410
699
(1,329 )
(32,704 ) (42,598 ) (33,565 )
32,672 42,822 34,243
(185 )
427
465
(1,928 )
(201 )
—
215
769
37,603 32,449 35,040
(181 )
260
(12,647 )
3,071
(85 )
1,647
32,534
(41 )
(254 )
271
216
(324 )
(327 )
—
(3,407 )
1,781
—
7,907
3,417
128,888 12,010 14,185
87,144 28,635 23,515
4,221
(171,446 ) (211,321 ) (139,624 )
— (25,000 )
58,473 56,623 40,610
(5,364 ) (22,046 )
(5,709 )
402
95,796 (126,144 ) (109,446 )
(4,661 )
(6,040 ) (15,160 )
526
21
—
(1,647 )
2,158 (17,215 )
(52,079 )
24,788
(3,649 ) 35,551
(76,039 ) 93,272 68,440
—
(18,500 ) 10,800 (74,800 )
6,242 77,369
(41,513 )
—
41,409
1,305
464
201
85
(4,566 )
(4,222 )
(12,452 ) (12,079 ) (11,659 )
(139,706 ) 88,682 74,626
220
52,746 57,759 57,539
$ 46,439 $ 52,746 $ 57,759
—
781
327
(9,170 )
(5,013 )
(6,307 )
$
2,653 $
1,342 $
1,281
(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
49
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Additional
Accumulated
Other
Preferred Common Paid-in Retained Treasury Comprehensive
Stock
Stock
Earnings Stock
(Amounts in thousands, except share and per share information)
Capital
(Loss) Income Total
Balance January 1, 2006
Comprehensive income:
Net income
Other comprehensive income
$ — $ 11,496 $ 108,573 $ 82,828 $ (7,625 ) $
(771 ) $ 194,501
—
—
— 28,948
—
— 28,948
Change in unrealized gain on securities available for sale of $1,242, net of $497
tax expense
—
—
—
—
—
745
745
Less reclassification adjustment for losses realized in net income of $10, net of $4
tax benefit
Unrealized gain on derivative securities of $441, net of $177 tax expense
Total comprehensive income, net of tax
Common dividends declared ($1.04 per share)
Purchase of 145,161 treasury shares at $31.46 per share
Acquisition of Stone Capital Management (2,706 shares)
Acquisition of Investment Planning Consultants (39,874 shares)
Distribution of treasury stock for ESOP (27,733 shares)
Equity-based compensation
Tax benefit from exercise of stock options
Common stock options exercised (63,655 shares)
Balance December 31, 2006
Comprehensive income:
Net income
Other comprehensive income
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 28,948
—
—
— (11,659 )
—
— (4,566 )
—
—
—
—
85
—
— 1,248
217
—
867
—
16
—
160
—
267
—
—
—
335
—
—
— 1,992
(687 )
— 11,499 108,806 100,117 (7,924 )
(6 )
264
(6 )
264
1,003 29,951
— (11,659 )
(4,566 )
—
88
—
1,465
—
883
—
427
—
335
—
—
1,305
232 212,730
—
—
— 29,632
—
— 29,632
Change in unrealized loss on securities available for sale of $11,028, net of $4,411
tax benefit
—
—
—
—
—
(6,617 )
(6,617 )
Less reclassification adjustment for gains realized in net income of $263, net of
$105 tax expense
Unrealized loss on derivative securities of $1,760, net of $704 tax benefit
Total comprehensive income, net of tax
Common dividends declared ($1.08 per share)
Purchase of 287,500 treasury shares at $31.89 per share
Acquisition of GreenPoint Insurance Group (49,088 shares)
Acquisition of Investment Planning Consultants (13,401 shares)
Equity-based compensation
Tax benefit from exercise of stock options
Common stock options exercised (45,665 shares)
Balance December 31, 2007
Comprehensive income:
Net income
Other comprehensive income
Change in unrealized loss on securities available for sale of $100,626, net of
$39,244 tax benefit
Reclassification adjustment for net losses realized in net income of $29,607, net of
$11,547 tax expense
Change in unrealized loss on derivative securities of $1,974, net of $770 tax
benefit
Change related to employee benefit plans of $1,161, net of $453 tax benefit
Total comprehensive income, net of tax
Cumulative effect of change in accounting principle
Preferred stock issuance, net
Common stock warrant issuance
Preferred dividend, net
Common dividends declared ($1.12 per share)
Purchase of 132,100 treasury shares at $31.96 per share
Acquisition of Coddle Creek (552,216 shares)
Acquisition of GreenPoint Insurance Group (7,728 shares)
Acquisition of Investment Planning Consultants (8,361 shares)
Contribution of treasury stock to 401(k) plan (37,775 shares)
Equity-based compensation
Tax benefit from exercise of stock options
Common stock options exercised (22,323 shares)
Balance December 31, 2008
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 29,632
—
—
— (12,079 )
—
— (9,170 )
—
—
— 1,524
133
—
425
—
30
—
102
—
169
—
—
—
336
—
—
— 1,430
(649 )
— 11,499 108,825 117,670 (13,613 )
158
158
(1,056 )
(1,056 )
(7,515 ) 22,117
— (12,079 )
(9,170 )
—
1,657
—
455
—
271
—
336
—
781
—
(7,283 ) 217,098
—
—
—
3,081
—
—
3,081
—
—
—
—
—
(61,382 ) (61,382 )
—
—
—
—
—
18,060 18,060
—
—
(91 )
1,105
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,081
(813 )
—
—
(255 )
— (12,452 )
—
552 18,588
22
(26 )
8
244
127
(276 )
—
— (4,222 )
—
—
245
—
—
266
— 1,200
16
—
—
—
740
—
$ 40,419 $ 12,051 $ 128,526 $ 107,231 $ (15,368 ) $
40,395
—
24
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,204 )
(708 )
(1,204 )
(708 )
(45,234 ) (42,153 )
(813 )
— 40,304
1,105
—
(231 )
— (12,452 )
—
(4,222 )
— 19,140
267
—
240
—
1,208
—
260
—
127
—
464
—
(52,517 ) $ 220,342
See Notes to Consolidated Financial Statements
50
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED 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. Effective
January 1, 2008, the Company operates within two business segments, community banking and insurance services.
Use of Estimates
In preparing consolidated financial statements in conformity with generally accepted accounting principles,
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 reported amounts of revenues and expenses during the reporting period.
Financial statement items requiring the significant use of estimates and assumptions include, but are not limited to,
fair values of investment securities and the allowance for loan losses. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, time deposits with other banks, federal funds sold,
and interest-bearing balances on deposit with the Federal Home Loan Bank (“FHLB”) that are available for
immediate withdrawal. Interest and income taxes paid were as follows:
Interest
Income Taxes
2008
2007
(Amounts in thousands)
$ 46,381 $ 58,797 $ 46,241
9,717
8,777
12,097
2006
Pursuant to agreements with the Federal Reserve Bank, the Company maintains a cash balance of approximately
$1.0 million in lieu of charges for check clearing and other services.
Trading Securities
At December 31, 2008 and 2007, no securities were held for trading purposes and no trading account was
maintained.
Investment Securities
Securities to be held for indefinite periods of time, including securities that management intends to use as part of
its asset/liability management strategy and that may be sold in response to changes in interest rates, changes in
prepayment risk, or other similar factors, are classified as available-for-sale and are recorded at estimated fair value.
Unrealized appreciation or depreciation in fair value above or below amortized cost is included in stockholders’
equity, net of income taxes, and is entitled “Other Comprehensive Income (Loss).” Premiums and discounts are
51
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
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.
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.
Management performs an extensive review of the investment securities portfolio quarterly to determine the
cause of declines in the fair value of each security within each segment of the portfolio. The Company uses inputs
provided by an independent third party to determine the fair values of its investment securities portfolio. Inputs
provided by the third party are reviewed and corroborated by management. Evaluations of the causes of the
unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature.
Considerations such as the Company’s intent and ability to hold the securities, recoverability of the invested amounts
over the Company’s intended holding period, severity in pricing decline and receipt of amounts contractually due, for
example, are applied in determining whether a security is other-than-temporarily impaired. If a decline in value is
determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is
recognized.
The impairment evaluations noted above are consistent with the accounting guidance in
EITF 99-20 “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” as amended, SFAS 115
“Accounting for Certain Investments in Debt and Equity Securities,” FASB Staff Position No. 115-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and SEC Staff Accounting
Bulletin No. 59, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities,” to
determine if a security is other than temporarily impaired. Securities deemed to be other than temporarily impaired
are written down to their current fair values with a charge to earnings. The review process uses a combination of the
severity of pricing declines and the present value of the expected cash flows and compares those results to the current
carrying value. Significant inputs provided by the independent third party such as default and loss severity are
reviewed internally for reasonableness.
Loans Held for Sale
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 fair value of the rate-lock commitment
derivatives are determined by reference to quoted prices for loans with similar coupon rates and terms. Gains and
losses on the sale of those loans are included in other income.
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
52
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
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 levels management deems adequate to absorb probable 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. The Company consistently applies a review process to periodically 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 Company determines the allowance for loan losses by making specific allocations to impaired loans that
exhibit inherent weaknesses and various credit risk factors. General allocations to commercial, residential real estate,
and consumer 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. 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 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.
Differences between actual loan loss experience and estimates are reflected through adjustments either increasing or
decreasing the loan loss provision based upon current measurement criteria.
Long-term Investments
Certain long-term equity investments representing less than 20% ownership are accounted for under the cost
method, 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. In accordance with the cost method, 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. The Company has determined that fair value measurement is not practical, and further,
nothing has come to the attention of the Company that would indicate impairment of any of these investments.
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, 2008 and 2007, the Bank owned approximately $13.17 million and
$16.89 million in FHLB stock, respectively, which is classified as other assets. Because of the redemption
53
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
provisions of the FHLB stock, the Company estimates that fair value approximates cost resulting in no impairment at
December 31, 2008 or 2007.
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 lesser of the useful life or 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 noninterest 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 was $83.19 million and $66.31 million at
December 31, 2008 and 2007, 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 four to ten years while the weighted average remaining life of these core deposits
is approximately 8.0 years. As of December 31, 2008 and 2007, the balance of core deposit intangibles was
$6.41 million and $4.59 million, respectively, while the corresponding accumulated amortization was $3.79 million
and $3.41 million, respectively. The net unamortized balance of identified intangibles associated with acquired
deposits was $3.02 million and $1.18 million at December 31, 2008 and 2007, respectively. The acquisition of
Greenpoint, and its continued acquisitions, added $1.35 million of goodwill and $1.14 million in other identified
intangible assets for the period ended December 31, 2008. The acquisition of Investment Planning Consultants, Inc.
added a total of $240 thousand of goodwill for the period ended December 31, 2008. Annual amortization expense of
all intangibles for 2009 and the succeeding four years are approximately $962 thousand, $869 thousand, $864
thousand, $672 thousand, and $598 thousand, respectively.
The Company reviews and tests goodwill for potential impairment on an annual basis in November. Goodwill is
tested for impairment by comparing the fair value of the unit with its book value, including goodwill. If the fair value
of the Company is greater than its book value, no goodwill impairment exists. However, if the book value of the
Company 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.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The progression of the Company’s goodwill and intangible assets for continuing operations for the three years
ended December 31, 2008, is detailed in the following table:
Balance at December 31, 2005
Acquisitions and dispositions, net
Amortization
Balance at December 31, 2006
Acquisitions
Amortization
Balance at December 31, 2007
Acquisitions
Other Adjustments
Amortization
Balance at December 31, 2008
Other Assets
Other
Goodwill
Intangibles
(Amounts in thousands)
$ 59,182 $ 1,937
472
953
(348 )
—
2,061
60,135
2,152
6,175
(467 )
—
3,746
66,310
3,362
15,990
—
892
—
(689 )
$ 83,192 $ 6,419
In addition to deferred tax assets, other assets included $40.78 million and $37.20 million in cash surrender
value of life insurance and $13.17 million and $16.89 million in FHLB stock at December 31, 2008 and 2007,
respectively.
In connection with the bank-owned life insurance, the Company has also entered into Life Insurance
Endorsement Method Split Dollar Agreements with certain of the individuals whose lives are insured. Under Split
Dollar 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. 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. 2008 expenses
associated with split dollar agreements were $126 thousand.
Securities Sold Under Agreements to Repurchase
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 provided 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 allowance for 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
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
principal and interest payments. Accrual of interest on impaired loans is generally continued unless the loan becomes
delinquent 90 days or more.
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 $447 thousand at December 31, 2008, and net deferred costs
were $574 thousand at December 31, 2007.
Advertising Expenses
Advertising costs are generally expensed as incurred. Amounts recognized for the three years ended
December 31, 2008, are detailed in Note 16 — Other Operating Expenses.
Equity-Based Compensation
The cost of employee services received in exchange for equity instruments including options and restricted stock
awards generally are measured at fair value at the grant date. 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.
Income Taxes
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
income on state and municipal securities which are exempt from federal income tax, income on bank-owned life
insurance, and tax credits generated by investments in low income housing and rehabilitation of historic structures.
The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 had no material impact on financial
position or results of operations. The Company includes interest and penalties related to income tax liabilities in
income tax expense. The Company and its subsidiaries’ tax filings for the years ended December 31, 2004 through
2007 are currently open to audit under statutes of limitation by the Internal Revenue Service and various state tax
departments.
During 2005 and 2006, the Company invested in limited partnerships formed to perform the rehabilitation of
properties certified as historic structures by the National Park Service. The Company’s investment in these
partnerships generates federal and state historic tax credits. The associated credits are realized and the balance of the
investment is written off at the time the buildings are placed in service. As of December 31, 2008, all buildings
associated with the partnership investments were in service.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary
differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is
more likely than not that the tax benefits will not be realized.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Earnings Per Share
Basic earnings per share is determined by dividing net income available to common shareholders by the
weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income
available to common shareholders by the weighted average shares outstanding increased by the dilutive effect of
stock options. Basic and diluted net income per common share calculations follow:
2008
For the Year Ended December 31,
2007
(Amounts in thousands, except share and per share
data)
2006
Net income available to common shareholders
Weighted average shares outstanding
Dilutive shares for stock options
Contingently issuable shares
Common stock warrants
Weighted average dilutive shares outstanding
Basic earnings per share
Diluted earnings per share
Variable Interest Entities
2,826 $
29,632 $
$
11,058,076
53,680
22,269
—
11,134,025
$
$
0.26 $
0.25 $
11,204,676
65,320
22,875
—
11,292,871
2.64 $
2.62 $
28,948
11,204,875
74,605
—
—
11,279,480
2.58
2.57
The Company maintains ownership positions in various entities which it deems variable interest entities
(“VIE’s”) as defined in FIN 46R. 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 46R. The carrying value of VIE’s was
$1.50 million and $1.89 million at December 31, 2008 and 2007, respectively. The Company’s maximum possible
loss exposure was $1.51 million and $1.93 million at December 31, 2008 and 2007, respectively. Management does
not believe losses resulting from its involvement with the entities discussed above will be material.
Derivative Instruments
The Company enters into derivative transactions principally to protect against the risk of adverse price or
interest rate movements on the value of certain assets and liabilities and on future cash flows. In addition, certain
contracts and commitments are defined as derivatives under generally accepted accounting principles.
Under the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended, all derivative instruments are carried at fair value on the balance sheet. SFAS 133 provides special hedge
accounting provisions, which permit the change in the fair value of the hedged item related to the risk being hedged
to be recognized in earnings in the same period and in the same income statement line as the change in the fair value
of the derivative.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value
hedges under SFAS 133. Derivative instruments designated in a hedge relationship to mitigate exposure to variability
in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The
Company formally documents all relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking each hedge transaction.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Other Recent Accounting Developments
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (“SFAS 162”). This statement establishes a framework for selecting
accounting principles to be used in preparing financial statements that are presented in conformity with US GAAP.
SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles,” and is not expected to have an impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). This statement requires enhanced
disclosures about an entity’s derivative and hedging activities in order to improve the transparency of financial
reporting. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS 161 on its disclosures.
In December 2007, the FASB revised Statement No. 141, “Business Combinations” (“SFAS 141R”). This
statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree at the acquisition date, measured at their fair values as of that date. This statement recognizes
and measures the goodwill acquired in the business combination or a gain from a bargain purchase. This statement
also defines the acquirer as the entity that obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquiree achieves control. Additionally, this statement determines
what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. The Company adopted SFAS 141R effective January 1, 2009.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires
an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability
for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of
the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in
comprehensive income. The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year ending after December 15, 2006. The requirement to
measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial
position is effective for fiscal years ending after December 15, 2008.
In September 2006, the Emerging Issues Task Force reached a consensus regarding EITF 06-4, “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for
endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement
periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified
benefit to an employee that is limited to the employee’s active service period with an employer. On January 1, 2008,
the Company made a cumulative effect adjustment to equity of $813 thousand in connection with the adoption of
EITF 06-4.
The Company adopted Financial Accounting Standards Board Staff Position EITF Issue No 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20.” This FSP was finalized in January 2009 and
applied to years ended after December 15, 2008. This standard amended the impairment guidance in EITF 99-20 to
that of FASB Statement No. 115 by removing the requirement of management to consider a
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
market participant’s assumptions about cash flows in assessing whether or not an adverse change in previously
anticipated cash flows has occurred. The adoption impacted the analysis performed by the Company to determine
other than temporary impairment for certain collateralized debt obligations.
Note 2. Merger, Acquisitions and Branching Activity
On November 14, 2008, the Company completed the acquisition of Coddle Creek Financial Corp (“Coddle
Creek”), based in Mooresville, North Carolina. Coddle Creek had three full service locations in Mooresville,
Cornelius, and Huntersville, North Carolina. At acquisition, Coddle Creek had total assets of approximately
$158.66 million, loans of approximately $136.99 million, and deposits of approximately $137.06 million. Under the
terms of the merger agreement, shares of Coddle Creek were exchanged for .9046 shares of the Company’s common
stock and $19.60 in cash, for a total purchase price of approximately $32.29 million. As a result of the acquisition
and preliminary purchase price allocation, approximately $14.41 million in goodwill was recorded, which represents
the excess purchase price over the fair market value of the net assets acquired and identified intangibles. Because the
results of operations of Coddle Creek are not significant, pro forma information is not being provided.
In September 2007, the Company completed the acquisition of GreenPoint Insurance Group, Inc.
(“GreenPoint”), an insurance agency located in High Point, North Carolina. In connection with the initial payment of
approximately $1.66 million, the Company issued 49,088 shares of its common stock. Under the terms of the stock
purchase agreement, former shareholders of GreenPoint are entitled to additional consideration aggregating up to
$1.45 million in the form of cash or the Company’s common stock, valued at the time of issuance, if certain future
operating performance targets are met. If those operating targets are met, portions of the value of the consideration
ultimately paid will be added to the cost of the acquisition, which will increase the amount of goodwill related to the
acquisition. The Company also assumed $5.57 million in debt in connection with the acquisition, of which
approximately $5.00 million was paid off at closing. Through December 31, 2008, the Company issued 7,728 shares
of Common Stock as additional consideration adding approximately $267 thousand to goodwill.
Throughout 2008, GreenPoint acquired a total of five agencies. The two largest were Carr & Hyde in Warrenton,
Virginia, and REL in Greensboro, North Carolina. GreenPoint issued cash consideration of approximately
$2.04 million through 2008 in connection with the acquisitions. Acquisition terms in all instances call for issuing
further cash consideration if certain operating performance targets are met. If those targets are met, the value of the
consideration ultimately paid will be added to the cost of the acquisitions. GreenPoint’s 2008 acquisitions added
approximately $2.04 million of goodwill and intangibles to the Company’s balance sheet.
In December 2006, the Company completed the sale of its Rowlesburg, West Virginia, branch location. At the
time of the sale, the branch had deposits and repurchase agreements totaling approximately $10.6 million and loans
of approximately $2.2 million. The transaction resulted in a pre-tax gain of approximately $333 thousand.
In November 2006, the Company completed the acquisition of Investment Planning Consultants, Inc. (“IPC”), a
registered investment advisory firm. In connection with the initial payment of approximately $1.47 million, the
Company issued 39,874 shares of Common Stock. Under the terms of the stock purchase agreement, former
shareholders of IPC are entitled to additional consideration of up to $1.43 million in the form of the Company’s
Common Stock if certain future operating performance targets are met. If those operating targets are met, portions of
the value of the consideration ultimately paid will be added to the cost of the acquisition, which will increase the
amount of goodwill arising in the acquisition. Through December 31, 2008, the Company issued 21,762 shares of
Common Stock as additional consideration adding approximately $695 thousand to goodwill.
In June 2006, the Company completed the sale of its Drakes Branch, Virginia, branch location. At the time of
the sale, the branch had deposits and repurchase agreements totaling approximately $16.4 million and loans of
approximately $1.9 million. The transaction resulted in a pre-tax gain of approximately $702 thousand.
59
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The following table summarizes the net cash provided by or used in acquisitions and divestitures during the
three years ended December 31, 2008.
2008
2007
2006
(Amounts in thousands)
Fair value of investments acquired
Fair value of loans acquired
Fair value of premises and equipment acquired
Fair value of other assets
Fair value of deposits assumed
Fair value of other liabilities assumed
Purchase price in excess of net assets acquired
Total purchase price
Less non-cash purchase price
Less cash acquired
Net cash paid for acquisition
Book value of assets sold
Book 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
$
136,035
4,505
23,872
(137,606 )
(4,967 )
15,991
39,099
19,647
14,792
$
$
1,269 $ — $ —
—
—
—
—
232
382
—
—
(1,167 )
(17 )
1,488
7,838
1,703
7,053
1,465
1,658
18
32
220
— $ — $ (4,678 )
27,164
—
(1,035 )
—
21,451
—
395
—
—
20
— $ — $ 21,826
—
—
—
—
—
4,660 $ 5,363 $
$
Note 3. Participation in U.S. Treasury Capital Purchase Program
On November 21. 2008, the Company entered into a Letter Agreement, which incorporates by reference the
Securities Purchase Agreement — Standard Terms (the “Purchase Agreement”), with the U.S. Department of the
Treasury (“Treasury”). Pursuant to the terms of the Purchase Agreement, the Company issued and sold to the
Treasury (i) 41,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the
“Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 176,546 shares of the Company’s common
stock, par value $1.00 per share (the “Common Stock”), for an aggregate purchase price of $41.50 million in cash.
The Series A Preferred Stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5.00% per
annum for the first five years, and 9.00% per annum thereafter. The Series A Preferred Stock is generally non-voting.
The Warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise
price of $35.26. Pursuant to the Purchase Agreement, Treasury has agreed not to exercise voting power with respect
to any share of Common Stock issued upon exercise of the Warrant.
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. In accordance with the terms of the Purchase
Agreement, the Company registered the Series A Preferred Stock, the Warrant, and the shares of Common Stock
underlying the Warrant with the Securities and Exchange Commission (the “SEC”). Neither the Series A Preferred
Stock nor the Warrant are subject to any contractual restrictions on transfer, except that Treasury may only transfer
or exercise one-half of the Warrant shares prior to the earlier of the redemption of 100% of the Series A Preferred
Stock and December 31, 2009.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Pursuant to the terms of the Purchase Agreement, upon issuance of the Series A Preferred Stock, the ability of
the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for
consideration, shares of its Common Stock is subject to restrictions, including a restriction against increasing cash
dividends above the amount of the last quarter cash dividend per share declared prior to October 14, 2008, which was
$0.28 per share, without express permission of the Treasury. These restrictions will terminate on the earlier of (a) the
third anniversary date of the Series A Preferred Stock and (b) the date on which the Series A Preferred Stock has
been redeemed in whole or the Treasury has transferred all of the Series A Preferred Stock to third parties.
Based on a Black-Scholes-Merton options pricing model, the Warrant has been assigned a fair value of $4.44
per underlying share, or $784 thousand in the aggregate, as of November 21, 2008. As a result, $1.10 million was
recorded as the discount on the preferred stock obtained above and will be accreted as a reduction in net income
available for common shareholders over the next five years at approximately $215 thousand to $219 thousand per
year. For purposes of these calculations, the fair value of the Warrant as of November 21, 2008, was estimated using
the Black-Scholes-Merton option pricing model and the following assumptions:
Risk free interest rate
Expected life
Expected dividend yield
Expected volatility
Weighted average fair value
3.20%
10 years
4.17%
29.11%
$4.44
At issuance, a value of $40.40 million was assigned to the Series A Preferred Stock and will be accreted up to
the redemption amount of $41.50 million at November 21, 2013.
Note 4. 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, 2008
Amortized Unrealized Unrealized
Cost
Gains
Losses
(Amounts in thousands)
Fair
Value
U.S. Government agency securities
States and political subdivisions
Trust-preferred securities
Mortgage-backed securities
Equities
Total
U.S. Government agency securities
States and political subdivisions
Trust-preferred securities
Mortgage-backed securities
Equities
Total
61
$ 53,425 $ 1,393 $
163,042
148,760
230,488
7,979
— $ 54,818
159,419
66,053
233,478
6,955
$ 603,694 $ 7,263 $ (90,234 ) $ 520,723
(4,487 )
(82,707 )
(1,659 )
(1,381 )
864
—
4,649
357
December 31, 2007
Amortized Unrealized Unrealized
Cost
Gains
Losses
(Amounts in thousands)
Fair
Value
$ 136,791 $ 2,446 $
186,834
164,731
177,984
8,597
— $ 139,237
188,536
150,625
176,727
8,995
$ 674,937 $ 6,743 $ (17,560 ) $ 664,120
(965 )
(14,106 )
(2,073 )
(416 )
2,667
—
816
814
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The amortized cost and estimated fair value of available-for-sale securities by contractual maturity, at
December 31, 2008, 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 contractual 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
6.01 %
6.63 %
6.01 %
4.25 %
5.13 %
3.68 %
(Dollars in thousands)
$
$
$
$
940
— $
940 $
— $
—
5,403
5,403
—
— 84,036
84,036
—
53,425
72,663 148,760 274,848
53,425 $ 163,042 $ 148,760 365,227
230,488
7,979
$ 603,694
4.70 %
16.52
6.29 %
10.45
2.55 %
24.52
5.82 %
12.75
945
— $
945 $
— $
—
5,447
5,447
—
83,278
— 83,278
—
54,818
69,749 66,053 190,620
54,818 $ 159,419 $ 66,053 280,290
233,478
6,955
$ 520,723
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, 2008
Amortized Unrealized Unrealized Fair
Value
Cost
Gains
Losses
(Amounts in thousands)
133 $
133 $
(1 ) $ 8,802
(1 ) $ 8,802
$ 8,670 $
$ 8,670 $
States and political subdivisions
Total
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
December 31, 2007
Amortized Unrealized Unrealized
Cost
Gains
Fair
Value
Losses
(Amounts in thousands)
States and political subdivisions
Other securities
Mortgage-backed securities
Total
$ 11,699 $
375
1
$ 12,075 $
—
—
223 $ — $ 11,922
375
1
223 $ — $ 12,298
—
—
The amortized cost and estimated fair value of securities by contractual maturity, at December 31, 2008, 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
Total amortized cost
Tax equivalent purchase yield
Average contractual maturity (in years)
Fair Value Maturity:
Within one year
After one year through five years
After five years through ten years
After ten years
Total fair value
States
and
Tax
Equivalent
Purchase
Yield
(Dollars in thousands)
Political
Subdivisions
7.94 %
7.85 %
8.13 %
$
$
$
$
450
4,570
3,650
—
8,670
7.97 %
4.24
452
4,629
3,721
—
8,802
The carrying value of securities pledged to secure public deposits and for other purposes required by law were
$377.56 million and $426.41 million at December 31, 2008 and 2007, respectively.
In 2008, net gains on the sale of securities were $1.90 million. Gross gains were $2.84 million while gross losses
were $938 thousand. In 2007, net gains on the sale of securities were $411 thousand. Gross gains were $540
thousand while gross losses were $128 thousand.
63
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED 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, 2008
and 2007. 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.
Description of Securities
U. S. Government agency securities
States and political subdivisions
Trust-preferred securities
Mortgage-backed securities
Equity securities
Total
Description of Securities
U. S. Government agency securities
States and political subdivisions
Trust-preferred securities
Mortgage-backed securities
Equity securities
Total
Less than 12 Months
Fair
Value
Unrealized Fair
Value
Losses
December 31, 2008
12 Months or Longer
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
(Amounts in thousands)
— $ — $ — $
$
— $
86,344
—
48,440
2,167
— $ —
(2,949 ) 16,413 (1,539 ) 102,757 (4,488 )
— 60,260 (82,707 ) 60,260 (82,707 )
(1 ) 48,483 (1,659 )
4,368 (1,381 )
$ 136,951 $ (5,768 ) $ 78,917 $ (84,467 ) $ 215,868 $ (90,235 )
(1,658 )
43
(1,161 ) 2,201
(220 )
Less than 12 Months
December 31, 2007
12 Months or Longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(Amounts in thousands)
(900 ) 12,287
— $ 1,999 $ — $ 1,999 $ —
$
— $
40,461
(965 )
129,006 (12,431 ) 21,994 (1,675 ) 151,000 (14,106 )
(108 ) 63,393 (1,965 ) 71,384 (2,073 )
(416 )
(345 )
$ 179,727 $ (13,784 ) $ 101,432 $ (3,776 ) $ 281,159 $ (17,560 )
7,991
2,269
(65 ) 52,748
1,759
4,028
(71 )
As of December 31, 2008, the Company recognized a non-cash impairment charge of $14.47 million which
stems from a 2006 vintage collateralized mortgage obligation. The Company’s analysis of the bond showed probable
losses of $1.69 million, or 6.76%, of the $25.00 million par value of the security. Additionally, one of the Company’s
pooled trust preferred securities showed an adverse change in cash flow, resulting in a pre-tax other-than-temporary
impairment charge of $15.46 million. Total pre-tax, non-cash impairment charges of $29.92 million are reflected in
non-interest income.
Included in available-for-sale securities is a portfolio of trust-preferred securities with a total market value of
approximately $66.05 million as of December 31, 2008. That portfolio is comprised of single-issue securities and
pooled trust-preferred securities. The single-issue securities are trust-preferred issuances from some of the largest
banks in the nation, composite A-rated or higher, and had a total market value of approximately $33.54 million as of
December 31, 2008, compared with their adjusted cost basis of approximately $55.49 million.
At December 31, 2008, the total market value of the pooled trust-preferred securities was approximately
$32.51 million, compared with an adjusted cost basis of approximately $93.27 million. The collateral underlying
these securities is comprised of 86% of bank trust-preferred securities and subordinated debt issuances of over 500
banks nationwide. The remaining collateral is from insurance companies and real estate investment trusts. The
securities carry variable rate structures that float at a prescribed margin over 3-month LIBOR. During 2008, certain
of these experienced a credit rating downgrade from one rating agency, and certain of these securities are on negative
watch by one or more rating firms. The Company has modeled the expected cash flows from the pooled trust-
preferred securities and, at present, does not expect any of the remaining securities to have an adverse cash flow
effect under any of the scenarios modeled due to the existence of other subordinate classes within the pools.
64
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At December 31, 2008, the combined depreciation in value of the 310 individual securities in an unrealized loss
position was approximately 17.04% of the combined reported value of the aggregate securities portfolio. At
December 31, 2007, the combined depreciation in value of the 159 individual securities in an unrealized loss position
was approximately 2.69% of the combined reported value of the aggregate securities portfolio. Management does not
believe any individual unrealized loss as of December 31, 2008, represents other-than-temporary impairment. The
Company has the ability to hold these securities until such time as the value recovers or the securities mature.
Furthermore, the Company believes that portions of the change in value are attributable to changes in market interest
rates and the current state of illiquidity within the market for securitized assets.
Note 5. 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
Total loans
2008
2007
(Amounts in thousands)
$ 407,638 $ 386,112
163,310
130,610
498,345
602,573
96,261
85,034
75,447
66,258
6,027
6,046
$ 1,298,159 $ 1,225,502
In the normal course of business, the Company’s subsidiary bank has made loans to directors and executive
officers of the Company and its subsidiaries. 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 $5.98 million and $5.05 million at December 31, 2008
and 2007, respectively. During 2008, approximately $4.30 million in new loans and increases were made and
repayments on such loans to officers and directors totaled $3.38 million. There were no changes due to changes in
composition of the Company’s board members and executive officers.
At December 31, 2008 and 2007, customer overdrafts totaling $2.10 million and $3.23 million, respectively,
were reclassified as loans.
Note 6. Allowance for Loan Losses
Activity in the allowance for loan losses was as follows:
Balance at January 1
Provision for loan losses
Acquisition balance
Loans charged off
Recoveries credited to allowance
Net charge-offs
Balance at December 31
65
2006
2008
2007
(Amounts in thousands)
$ 12,833 $ 14,549 $ 14,736
2,706
7,422
—
1,169
(4,543 )
(7,371 )
1,650
1,925
(5,446 )
(2,893 )
$ 15,978 $ 12,833 $ 14,549
717
—
(4,295 )
1,862
(2,433 )
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Management analyzes the loan portfolio regularly for concentrations of credit risk, including concentrations in
specific industries and geographic location. At December 31, 2008, commercial real estate loans comprised 31.40%
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 that 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 were made and collateralized in Virginia, West Virginia, North
Carolina, Tennessee and the surrounding region. Although sections of the West Virginia and Southwestern Virginia
economies are closely related to natural resources, they are supplemented by service industries. The Company’s
presence in five states, Virginia, West Virginia, North Carolina, South Carolina, and Tennessee, provides additional
diversification against geographic concentrations of credit risk.
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
2006
2008
2007
(Amounts in thousands)
$ 13,300 $ 4,325 $ 5,786
3,813
12,764
4,070
4,795
1,531
678
6,410
14,914
390
793
1,716
8,505
2,923
3,129
880
4,762
237
1,196
There were no loans past due 90 days and still accruing interest at December 31, 2008, 2007, and 2006.
Note 7. Premises and Equipment
Premises and equipment are comprised of the following as of December 31:
Land
Bank premises
Equipment
Less: accumulated depreciation and amortization
Total
2008
2007
(Amounts in thousands)
$ 14,841
$ 18,634
42,608
47,147
28,087
29,968
85,536
95,749
37,153
40,725
$ 48,383
$ 55,024
Total depreciation and amortization expense for three years ended December 31, 2008, was $3.88 million,
$3.28 million, and $3.37 million, respectively.
The Company began construction on seven branches over the last two years. The primary contractor for
construction of two of those branches is a firm which has a preferred shareholder who is an immediate family
member of two directors of the Company. All branch construction contracts involving the related party were let
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
pursuant to a competitive bidding process. Total payments to the related party were $606 thousand and $703
thousand for 2008 and 2007, respectively. There were no payments to the related party in 2006.
The Company also enters into land and building leases for the operation of banking and loan production 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, 2008:
Year Ended December 31:
2009
2010
2011
2012
2013
Later years
Total
(Amounts in
thousands)
762
$
596
432
346
280
183
2,599
$
Total lease expense for the three years ended December 31, 2008, was $1.01 million, $981 thousand, and
$1.02 million, 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:
2009
2010
2011
2012
2013
Later years
Total
Note 8. Deposits
(Amounts in
thousands)
172
$
157
123
54
50
274
830
$
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
67
2008
2007
(Amounts in thousands)
$ 185,117 $ 153,570
167,296
144,017
160,395
165,560
608,470
708,954
100,398
79,625
$ 1,304,046 $ 1,169,356
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
At December 31, 2008, the scheduled maturities of certificates of deposit are as follows:
2009
2010
2011
2012
2013 and thereafter
(Amounts in
thousands)
$ 515,742
101,631
63,822
24,396
103,761
$ 809,352
Time deposits of $100 thousand or more were $286.74 million and $246.63 million at December 31, 2008 and
2007, respectively.
At December 31, 2008, 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)
$ 56,644
49,237
98,565
82,295
$ 286,741
Included in total deposits are deposits by related parties in the total amount of $25.48 million and $30.70 million
at December 31, 2008 and 2007, respectively.
Note 9. Borrowings
The following table details borrowings as of December 31:
Federal funds purchased
Securities sold under agreements to repurchase
FHLB borrowings
Subordinated debt
Other debt
Total
2008
2007
(Amounts in thousands)
— $ 18,500
$
207,427
165,914
275,888
200,000
15,464
15,464
564
413
$ 381,791 $ 517,843
Securities sold under agreements to repurchase include $115.91 million and $157.43 million of retail overnight
and term repurchase agreements and $50.00 million of wholesale repurchase agreements at December 31, 2008 and
2007, respectively.
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, 2008, credit availability with the FHLB totaled
approximately $106.28 million. Advances from the FHLB are secured by stock in the FHLB of Atlanta, qualifying
loans of $301.98 million, mortgage-backed securities, and certain investment securities of $42.58 million. The FHLB
advances are subject to restrictions or penalties in the event of prepayment.
68
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
FHLB borrowings include $200.00 million and $275.00 million in convertible and callable advances at
December 31, 2008 and 2007, respectively. The callable advances may be called, or 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 credit product, or converted to an
adjustable rate advance. At December 31, 2007, the Company also held non-callable term advances of $888
thousand. The weighted-average contractual rate of the FHLB advances was 3.70% at December 31, 2008.
At December 31, 2008, the FHLB advances have approximate contractual final maturities between nine and
thirteen years. The scheduled maturities of the advances are as follows:
2009
2010
2011
2012
2013
2014 and thereafter
(Amounts in
thousands)
—
$
—
—
—
—
200,000
$ 200,000
In January 2006, the Company entered into a derivative swap instrument where it receives LIBOR-based
variable interest payments and pays fixed interest payments. The notional amount of the derivative swap is
$50.00 million and effectively fixes a portion of the FHLB borrowings at approximately 4.34%. After considering
the effect of the interest rate swap, the effective weighted average interest rate of the FHLB borrowings was 3.70%
and 4.30% at December 31, 2008 and 2007, respectively.
Also included in borrowings is $15.46 million of junior subordinated debentures (the “Debentures”) issued by
the Company in October 2003 to an unconsolidated trust subsidiary, FCBI Capital Trust (the “Trust”), with an
interest rate of three-month LIBOR plus 2.95%. The Trust was able to purchase the Debentures through the issuance
of trust preferred securities which had substantially identical terms as the Debentures. The Debentures mature on
October 8, 2033, and are currently callable. The net proceeds from the offering were contributed as capital to the
Company’s subsidiary bank to support further growth.
The Company has committed to irrevocably and unconditionally guarantee the following payments or
distributions with respect to the trust preferred securities to the holders thereof to the extent that the Trust has not
made such payments or distributions: (i) accrued and unpaid distributions, (ii) the redemption price, and (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, in each case to the extent the Trust has
funds available.
69
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Note 10. Income Taxes, Continuing Operations
The components of income tax benefit and expense from continuing operations consist of the following:
2008
Years Ended December 31,
2007
(Amounts in thousands)
2006
Current tax expense
Federal
State
Deferred tax (benefit) expense
Federal
State
Total income tax (benefit) expense
$ 8,577 $ 10,777 $ 9,883
1,129
1,260
11,012
9,837
1,341
12,118
418
(11,350 )
47
(1,297 )
(12,647 )
465
$ (2,810 ) $ 12,334 $ 11,477
194
22
216
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, 2008 and 2007 are as follows:
Deferred tax assets:
Allowance for loan losses
Unrealized losses on AFS securities
Unrealized loss on derivative security
Securities impairments
Deferred compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Odd days interest deferral
Fixed assets
Other
Total deferred tax liabilities
Net deferred tax assets
2008
2007
(Amounts in
thousands)
$ 6,299 $ 5,311
4,327
33,208
1,298
528
—
11,670
2,741
4,120
1,920
1,188
$ 58,515 $ 14,095
$ 6,209 $ 3,263
2,023
1,710
1,196
1,675
1,758
1,358
10,952
8,240
$ 47,563 $ 5,855
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, as well as the utilization of
available tax credits. State and municipal bond income represent the most significant permanent tax difference.
70
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The reconciliation of the statutory federal tax rate and the effective tax rates from continuing operations for the
three years ended December 31, 2008, is as follows:
For Years Ended
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
Note 11. Employee Benefits
Employee Stock Ownership and Savings Plan
2007
2008
35.00 % 35.00 % 35.00 %
2006
(871.99 )
2.33
(202.24 )
(1036.90 )% 29.39 % 28.39 %
(5.95 ) (5.79 )
2.12 1.89
(1.78 ) (2.71 )
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 were made through 2006 at the
discretion of the Board of Directors, and allocated to plan participants on the basis of relative compensation. The plan
was frozen to future contributions for periods after 2006. Substantially all plan assets are invested in common stock
of the Company. The Company reports the contributions to the plan as a component of salaries and benefits. All
contributions made after 2006 have been made to employee savings feature of the plan. Accordingly, there were no
contributions to the Employer Stock Fund in 2008 or 2007. Total expense recognized by the Company related to the
Employer Stock Fund within the KSOP was $254 thousand in 2006. The Employer Stock Fund held 418,322 and
423,941 shares of the Company’s common stock at December 31, 2008 and 2007, respectively.
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. Under the 401(k) feature, the Company
makes matching contributions to employee deferrals at levels determined by the board on an annual basis. The cost
of Company’s 100% matching contributions to qualified deferrals under the 401(k) savings component of the KSOP
was $1.23 million, $942 thousand, and $902 thousand in 2008, 2007 and 2006, respectively. In 2008, the Company
made its matching contribution in Company common stock, while the 2007 and 2006 contributions were made in
cash.
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. 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 risk of loss to $85 thousand and $4.30 million for individual and aggregate claims,
respectively. Total Company expenses under the plan were $2.32 million, $1.66 million, and $1.62 million in 2008,
2007 and 2006, 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, 2008 and
2007, was approximately $484 thousand and $494 thousand, respectively. The annual expenses associated with
71
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
these agreements were $60 thousand, $60 thousand and $64 thousand for 2008, 2007 and 2006, 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 these
agreements. 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 $1.12 million and $1.03 million at December 31, 2008 and 2007,
respectively.
Executive Retention Plan
The Company maintains an Executive Retention Plan for key members of senior management. The Executive
Retention Plan provides for a defined benefit at normal retirement targeted at 35% of projected final base salary.
Benefits under the Executive Retention Plan become payable at age 62. The associated benefit accrued as of year-end
2008 and 2007 was $2.95 million and $1.58 million, respectively, while the associated expense incurred in
connection with the Executive Retention Plan was $294 thousand, $110 thousand, and $131 thousand for 2008, 2007,
and 2006, respectively. During 2008, the Company amended the plan to convert from an index benefit based on
performance of related life insurance policies to a defined benefit based on years of service. The amendment allowed
for consideration of prior service. In connection with the amendment, the Company changed its method of
accounting to defined benefit accounting and recognized an additional gross liability of $1.16 million related to prior
service cost that was recognized through other comprehensive income, and will amortized over approximately eleven
years.
As the change in the plan was effective at year-end, there are no components of periodic pension cost for the
year ended 2008. The discount rate and rate of compensation increases assumed as of December 31, 2008, were
6.50% and 3.00%, respectively. The Executive Retention Plan is an unfunded plan, and as such there are no plan
assets. At December 31, 2008, the actuarial benefit plan obligation was $2.95 million.
Projected benefits payments are expected to be paid as follows:
2009
2010
2011
2012
2013
2014 through 2017
(Amounts in
thousands)
59
$
59
59
175
236
1,313
1,901
$
Directors Supplemental Retirement Plan
The Company maintains a 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. The associated benefit
accrued as of year-end 2008 and 2007 was $1.43 million and $1.41 million, respectively, while the associated
expense incurred in connection with the Directors Plan was $161 thousand, $195 thousand and $366 thousand for
2008, 2007 and 2006, respectively.
72
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Note 12. Equity-Based Compensation
Stock Options
The Company maintains share-based compensation plans 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.
At the 2004 Annual Meeting, the Company’s 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. Non-qualified and incentive stock options, as
well as restricted and unrestricted stock may continue to be awarded under the 2004 Plan. Vesting under the 2004
Plan is generally over a three-year period.
In 2001, the Company also instituted a plan to grant stock options to non-employee directors (the “Directors
Option Plan”). The options granted pursuant to the Plan expire at the earlier of ten 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. Options under the Directors Option 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 Directors
Option Plan set at 108,900 shares (adjusted for the 10% stock dividends paid in 2002 and 2003). The Company
granted 6,050 options under this plan during 2008.
In 1999, the Company instituted the 1999 Stock Option Plan (the “1999 Plan”). Options under the 1999 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 2003). The
options granted under the 1999 Plan represent the rights to acquire the option shares with deemed grant dates of
January 1st for each year beginning with the initial year granted and the following four anniversaries. All stock
options granted pursuant to the 1999 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 1999
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 1999 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.
The Company also has options from various option plans other than described above (the Prior Plans); however,
no common shares of the Company are available for grants under the Prior Plans. Awards outstanding under the Prior
Plans will remain in effect in accordance with their respective terms.
SFAS 123R requires the cash flows from the tax benefits resulting from tax deductions in excess of the
compensation expense recognized for those options and restricted stock (“excess tax benefits”) to be classified as
financing cash flows. Excess tax benefits totaling $85 thousand, $327 thousand, and $201 thousand are classified as
financing cash inflows for 2008, 2007, and 2006, respectively.
During the three years ended December 31, 2008, the Company recognized pre-tax compensation expense
related to total equity-based compensation of approximately $260 thousand, $271 thousand, and $427 thousand,
respectively. The Company recognizes equity-based compensation on a straight-line pro-rata basis, so that the
percentage of the total expense recognized for an award is never less than the percentage of the award that has
vested.
As of December 31, 2008, there was approximately $143 thousand in unrecognized compensation cost related to
unvested stock options. That cost is expected to be recognized over a weighted average period of 0.7 years. The
actual compensation cost recognized will differ from this estimate due to a number of items, including new awards
granted and changes in estimated forfeitures.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
A summary of the Company’s stock option activity, and related information for the year ended December 31,
2008, is as follows:
Outstanding at January 1, 2008
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable at December 31, 2008
Weighted
Weighted
Average
Average Remaining Aggregate
Option Exercise Contractual
Term (Years)
Shares
Price
Intrinsic
Value
(In thousands)
272,114 $ 23.81
29.10
6,050
20.09
23,323
26.54
2,750
252,091 $ 24.25
233,625 $ 23.67
10.4 $
10.4 $
2,678
2,616
The fair value of options was estimated at the date of grant using the Black-Scholes-Merton option pricing
model and certain assumptions. Expected volatility is based on the weekly historical volatility of our stock price over
the expected term of the option. Expected dividend yield is based on the ratio of the most recent dividend rate paid
per share of the Company’s common stock to recent trading price of the Company’s common stock. The expected
term is generally calculated using the “shortcut method.”. The risk-free interest rate is based on the U.S. Treasury
yield curve at the time of grant for the period equal to the expected term of the option.
The fair values of grants made during the three years ended December 31, 2008, were estimated using the
following weighted-average assumptions:
Volatility
Expected dividend yield
Expected term (in years)
Risk-free rate
2007
2006
2008
29.11 % 28.33 % 28.95 %
3.64 % 3.28 % 3.00 %
10.00 6.00 6.23
2.96 % 4.74 % 4.80 %
The weighted average grant-date fair value of options granted during the three years ended December 31, 2008,
was $7.74, $8.14, and $9.16, respectively. The aggregate intrinsic value of options exercised during the three years
ended December 31, 2008, was approximately $310 thousand, $913 thousand, and $830 thousand, respectively.
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. Compensation costs related to these types of awards are
consistently reported for all periods presented.
74
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The following table summarizes the changes in the Company’s nonvested shares for the year ended
December 31, 2008.
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2008
Weighted
Average
Grant-Date
Shares Fair Value
1,700 $ 36.20
36.42
900
35.00
500
—
—
36.58
2,100
As of December 31, 2008, there was approximately $37 thousand in unrecognized compensation cost related to
unvested stock awards. That cost is expected to be recognized over a weighted average period of 0.5 years. The
actual compensation cost recognized will differ from this estimate due to a number of items, including new awards
granted and changes in estimated forfeitures.
Note 13. 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 amounts 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.
75
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Financial instruments whose contract amounts represent credit risk at December 31, 2008 and 2007, are
commitments to extend credit (including availability of lines of credit) of $199.29 million and $225.41 million,
respectively, and standby letters of credit and financial guarantees of $2.84 million and $3.60 million, respectively.
The Company has issued, through FCBI Capital Trust (the “Trust”), $15.00 million of trust preferred securities
in a private placement. In connection with the issuance of the trust preferred securities, the Company has committed
to irrevocably and unconditionally guarantee the following payments or distributions with respect to the trust
preferred securities to the holders thereof to the extent that the Trust has not made such payments or distributions and
has the funds therefor: (i) accrued and unpaid distributions, (ii) the redemption price, and (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.
Note 14. Derivative Instruments and Hedging Activities
The Company uses derivative instruments primarily to protect against the risk of adverse price or interest rate
movements on the value of certain assets and liabilities and on future cash flows. These derivatives may consist of
interest rate swaps, floors, caps, collars, futures, forward contracts, and written and purchased options. Derivative
instruments represent contracts between parties that usually require little or no initial net investment and result in one
party delivering cash or another type of asset to the other party based on a notional amount and an underlying as
specified in the contract.
The Company entered into an interest rate swap derivative accounted for as a cash flow hedge in January 2006.
The $50.00 million notional amount pay fixed, receive variable interest rate swap was a liability with an estimated
fair value of $3.40 million and $1.32 million at December 31, 2008 and 2007, respectively. The Company pays a
fixed rate of 4.34% and receives a LIBOR-based floating rate from the counterparty. The cash flow hedge is
accounted for under the shortcut method provided for in SFAS 133. Under the shortcut method, the gains and losses
associated with the market value fluctuations of the interest rate swap are included in other comprehensive income.
Note 15. Regulatory Capital Requirements and Restrictions
The primary source of funds for dividends paid by the Company is dividends received from its subsidiary 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
would exceed the year’s net income, as defined, plus retained net profit of the two preceding years. Dividends from
the Company’s banking subsidiary are restricted and subject to prior approval of the Comptroller of the Currency.
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 Bank’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, 2008, the Company and the Bank met all capital
adequacy requirements to which they are subject. As of December 31, 2008 and 2007, the most recent notifications
from regulators 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.
76
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The Company’s and the Bank’s capital ratios as of December 31, 2008 and 2007, are presented in the following
table.
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.
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, 2008
To Be Well
For Capital
Adequacy
Purposes
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio
(Dollars in thousands)
Actual
Amount Ratio
$ 213,949 12.91 % $ 132,591 8.00 %
191,104 11.69 % 130,762 8.00 % $ 163,452 10.00 %
N/A N/A
197,600 11.92 % 66,296 4.00 %
174,755 10.69 % 65,381 4.00 % 98,071 6.00 %
N/A N/A
197,600 9.75 % 84,629 4.00 %
174,755 8.71 % 80,232 4.00 % 100,290 5.00 %
N/A N/A
December 31, 2007
To Be Well
For Capital
Adequacy
Purposes
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio
(Dollars in thousands)
Actual
Amount Ratio
$ 182,476 12.34 % $ 118,276 8.00 %
167,865 11.44 % 117,398 8.00 % $ 146,748 10.00 %
N/A N/A
169,258 11.45 % 59,138 4.00 %
154,826 10.55 % 58,699 4.00 % 88,049 6.00 %
N/A N/A
169,258 8.09 % 83,639 4.00 %
154,826 7.44 % 83,233 4.00 % 104,041 5.00 %
N/A N/A
At December 31, 2008 and 2007, $15.46 million in subordinated debt is treated as Tier 1 capital for bank
regulatory purposes for the Company.
Note 16. Other Operating Expenses
Included in other operating expenses are certain costs, the total of which exceeds one percent of combined
interest income and noninterest income. Following are such costs for the years indicated:
Advertising and public relations
Service fees
Telephone and data communications
77
2006
Years Ended December 31,
2008
2007
(Amounts in thousands)
$ 2,166 $ 1,616 $ 1,265
1,682
3,557
1,403
1,505
3,031
1,372
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Note 17. Fair Value
Financial Instruments Measured at Fair Value
Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” (“SFAS 157”) for financial assets and financial liabilities. In accordance with FASB Staff Position
No. 157-2, “Effective Date of FASB Statement No. 157,” the Company will delay application of SFAS 157 for non-
financial assets and non-financial liabilities until January 1, 2009. In October 2008, the FASB issued Staff Position
No. 157-3 (“FSP 157-3”) to clarify the application of SFAS 157 in a market that is not active and to provide key
considerations in determining the fair value of a financial asset when the market for that financial asset is not active.
FSP 157-3 was effective upon issuance, including prior periods for which financial statements were not issued.
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the
asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal
market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous,
market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow
for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent,
(ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income
approach and/or the cost approach. The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets and liabilities. The income approach uses valuation
techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a
discounted basis. The cost approach is based on the amount that currently would be required to replace the service
capacity of an asset, or the replacement cost. Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be
observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the
reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in those circumstances. In that regard, SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs —
Level 2 Inputs —
Level 3 Inputs —
Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date.
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, inputs other than quoted prices that are observable for the asset or liability, such as
interest rates, volatilities, prepayment speeds, and credit risks, or inputs that are derived
principally from or corroborated by market data by correlation or other means.
Unobservable inputs for determining the fair values of assets or liabilities that reflect an
entity’s own assumptions about the assumptions that market participants would use in pricing
the assets or liabilities.
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
A description of the valuation methodologies used for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value
effective January 1, 2008.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not
available, fair value is based upon third party models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These
adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among
other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. While management believes the Company’s valuation
methodologies are appropriate and consistent with other market participants, the use of different methodologies or
assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date.
Securities Available-for-Sale: Securities classified as available-for-sale are reported at fair value utilizing
Level 1, Level 2, and Level 3 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted
prices are available in an active market. This includes securities, such as U.S. Treasuries, whose value is based on
quoted market prices in active markets for identical assets.
Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value
measurements from an independent pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution
data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other
things.
Securities are classified as Level 3 within the valuation hierarchy in certain cases when there is limited activity
or less transparency to the valuation inputs. These securities include certain pooled trust preferred securities. In the
absence of observable or corroborated market data, internally developed estimates that incorporate market-based
assumptions are used when such information is available.
Fair value models may be required when trading activity has declined significantly or does not exist, prices are
not current or pricing variations are significant. The Company’s fair value from third party models utilize modeling
software that uses market participant data and knowledge of the structures of each individual security to develop cash
flows specific to each security. The fair values of the securities are determined by using the cash flows developed by
the fair value model and applying appropriate market observable discount rates. The discount rates are developed by
determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums for illiquidity developed
based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to
LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at
higher rates due to the addition of a deal specific credit premium. Finally, internal fair value model pricing and
external pricing observations are combined by assigning weights to each pricing observation. Pricing is reviewed for
reasonableness based on the direction of the specific markets and the general economic indicators.
Other Assets and Associated Liabilities: Securities held for trading purposes are recorded at fair value and
included in “other assets” on the consolidated balance sheets. Securities held for trading purposes include assets
related to employee deferred compensation plans. The assets associated with these plans are generally invested in
equities and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair
value of the obligation to the employee, which corresponds to the fair value of the invested assets.
Derivatives: Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer
quotations based on observable data to value its derivatives.
79
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment
is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized
discounting criteria.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring
basis as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized
to measure fair value:
Fair Value Measurements Using
Level 1 Level 2
Level 3 Fair Value
Total
Available-for-sale securities
Deferred compensation assets
Derivative assets
Deferred compensation liabilities
Derivative liabilities
(In thousands)
$ 6,811 $ 485,845 $ 28,067 $ 520,723
2,637
2,637
—
192
2,637
2,637
3,523
—
—
—
—
—
—
192
—
3,523
The following table presents additional information about financial assets and liabilities measured at fair value at
December 31, 2008, on a recurring basis and for which Level 3 inputs are utilized to determine fair value:
Balance, January 1, 2008
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)
Included in other comprehensive income
Purchases, issuances, and settlements
Transfers in and/or out of Level 3
Balance, December 31, 2008
Available-for-Sale
Securities
(In thousands)
$
—
—
—
—
28,067
28,067
$
At December 31, 2008, the Company changed its valuation technique for certain pooled trust preferred
securities. Previously, the Company relied on prices compiled by third party vendors using observable market data,
or Level 2, to determine the values of these securities. SFAS 157 assumes that fair values of financial assets are
determined in an orderly transaction and not a forced liquidation or distressed sale at the measurement date. Based on
financial market conditions, the Company felt that the fair values obtained from third party vendors reflected forced
liquidation or distressed sales for these trust preferred securities. Therefore, the Company estimated fair value based
on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and
liquidity risks. The change in the valuation technique for these trust preferred securities resulted in an initial transfer
of $28.07 million into Level 3 financial assets. There were no gains or losses for the year included in earnings
attributable to the change in unrealized gains or losses relating to assets and liabilities using Level 3 still held at
December 31, 2008.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances, for example, when there is evidence of impairment. The fair value of loans considered impaired and
collateral dependent was $5.98 million at December 31, 2008.
Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include
reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets
measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at
80
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-
lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these
fair value measurements beginning January 1, 2009.
Fair Value of Financial Instruments
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 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.
December 31, 2008
December 31, 2007
Carrying
Amount
Fair
Carrying
Amount
Value
(Amounts in thousands)
Fair
Value
Assets
Cash and cash equivalents
Investment Securities
Loans held for sale
Loans held for investment
Derivative financial assets
Deferred compensation assets
Liabilities
Demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Federal funds purchased
Securities sold under agreements to repurchase
FHLB and other indebtedness
Derivative financial liabilities
Deferred compensation liabilities
46,439 $
46,439 $
52,746 $
$
529,393
1,024
1,282,181
192
2,637
529,525
1,026
1,276,479
192
2,637
676,195
811
1,212,669
—
3,418
52,746
676,418
813
1,202,396
—
3,418
199,712
185,117
309,577
809,352
—
165,914
215,877
3,523
2,637
199,712
185,117
309,577
824,068
—
177,454
242,223
3,523
2,637
224,087
153,570
327,691
688,095
18,500
207,427
291,916
1,320
3,418
224,087
153,570
327,691
688,503
18,500
207,427
286,087
1,320
3,418
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.
Investment Securities and Deferred Compensation Assets and Liabilities:
Fair values are determined in the same manner as described above.
81
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Loans:
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The estimated fair value of loans held for investment is measured based upon discounted future cash flows using
current rates for similar loans applying a discount for illiquidity. 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.
Derivative Financial Instruments:
The estimated fair value of derivative financial instruments is based upon the current market price for similar
instruments.
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 and repurchase agreements with fixed maturities and rates, fair value has
been estimated by discounting future cash flows based on interest rates currently being offered on instruments with
similar characteristics and maturities.
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 18. Accumulated Other Comprehensive Loss
The components of the Company’s accumulated other comprehensive loss, net of income taxes, as of
December 31, 2008 and 2007, were as follows:
December 31, 2007
December 31, 2008
Unrealized
Loss
on Securities
Unrealized
Loss
on Cash Flow
Hedge Derivative
Benefit
Plan
Liability
Accumulated
Comprehensive
Loss
(Amounts in thousands)
$
(6,491 ) $
$ (49,813 ) $
(792 ) $ — $
(1,996 ) $ (708 ) $
(7,283 )
(52,517 )
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Note 19. Parent Company Financial Information
Condensed financial information related to First Community as of December 31, 2008 and 2007, and for each of
the years ended December 31, 2008, 2007, and 2006, is as follows:
Condensed Balance Sheets
Assets
Cash
Securities available for sale
Loans
Investment in subsidiary
Other assets
Total assets
Liabilities
Other liabilities
Long-term debt
Total liabilities
Stockholders’ Equity
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
Cash dividends received from subsidiary bank
Other income
Operating expense
Income tax benefit (expense)
Equity in undistributed earnings of subsidiary
Net income
Dividends on preferred stock
Net income available to common shareholders
83
December 31,
2008
2007
(Amounts in thousands)
$ 2,038 $ 2,880
6,877
11,609
1,000
—
217,307
211,529
6,108
8,167
$ 234,343 $ 233,172
603 $
$
15,464
16,067
610
15,464
16,074
—
40,419
11,499
12,051
108,795
128,526
117,670
105,165
(13,583 )
(15,368 )
(7,283 )
(52,517 )
218,276
217,098
$ 234,343 $ 233,172
2006
2008
Years Ended December 31,
2007
(Amounts in thousands)
$ 22,383 $ 26,408 $ 15,775
354
2,104
(2,049 )
(2,200 )
1,237
24
13,631
(19,230 )
28,948
3,081
—
255
$ 2,826 $ 29,632 $ 28,948
2,853
(2,106 )
(545 )
3,022
29,632
—
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary
Loss (gain) on sale of securities
(Increase) 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
Proceeds from sale of securities available for sale
Investment in subsidiary
Other, net
Net cash provided by (used in) investing activities
Cash flows from financing activities
Issuance of preferred stock
Issuance of common stock
Acquisition of treasury stock
Dividends paid
Other, net
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note 20. Segment Information
2008
Years Ended December 31,
2007
(Amounts in thousands)
2006
$ 3,081 $ 29,632 $ 28,948
19,230
625
(2,059 )
(7 )
2,471
23,341
(3,022 )
(447 )
(2,678 )
996
—
24,481
(13,631 )
(62 )
63
455
(3 )
15,770
(13,117 )
3,324
(40,000 )
(1,042 )
(50,835 )
(3,217 )
4,671
(5,397 )
(2,390 )
(6,333 )
(1,881 )
2,210
—
3
332
—
41,500
1,518
606
(4,566 )
(4,222 )
(11,659 )
(12,452 )
1,772
1,220
(12,935 )
26,652
3,167
(842 )
2,880
1,344
$ 2,038 $ 2,880 $ 4,511
—
1,117
(9,170 )
(12,079 )
353
(19,779 )
(1,631 )
4,511
Effective January 1, 2008, the Company operates within two business segments, community banking and
insurance services. The Community Banking segment includes both commercial and consumer lending and deposit
services. This segment provides customers with such products as commercial loans, real estate loans, business
financing and consumer loans. This segment also provides customers with several choices of deposit products
including demand deposit accounts, savings accounts and certificates of deposit. In addition, the Community
Banking segment provides wealth management services to a broad range of customers. The Insurance Services
segment is a full-service insurance agency providing commercial and personal lines of insurance.
84
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FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
The following table sets forth information about the reportable operating segments and reconciliation of this
information to the consolidated financial statements at and for the year ended December 31, 2008.
Community
Banking
Insurance
Services
Parent/
Elimination
Total
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Provision for income taxes
Net income
End of period goodwill and other intangibles
End of period assets
(In thousands)
(49 ) $
$
66,703 $
7,422
(4,730 )
57,704
(3,153 )
(3,802 )
65,835
7,422
2,374
60,516
271
(2,810 )
3,081
$
$
89,612
$ 2,103,445 $ 12,111 $ 17,758 $ 2,133,314
—
5,042
4,371
622
183
439 $
78,869 $ 10,743 $
(819 ) $
—
2,062
(1,559 )
2,802
809
1,993 $
— $
649 $
Note 21. Supplemental Financial Data (Unaudited)
Quarterly earnings for the years ended December 31, 2008 and 2007, are as follows:
2008
Quarter Ended
March 31
June 30
Sept 30
Dec 31
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Net securities gains (losses)
Other expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
Preferred dividends
Net income (loss) available to common shareholders
Per share:
Basic earnings
Diluted earnings
Dividends
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
85
(Amounts in thousands, except per share data)
$ 29,547 $ 27,433 $ 26,550 $ 27,235
10,708
13,187
16,527
16,360
2,701
323
13,826
16,037
(22,140 )
7,321
1,820
(234 )
15,033
16,283
(23,581 )
8,895
(9,561 )
2,583
(14,020 )
6,312
—
255
$ 6,312 $ 6,238 $ 4,551 $ (14,275 )
10,808
16,625
937
15,688
7,574
150
14,759
8,653
2,415
6,238
—
10,227
16,323
3,461
12,862
7,720
163
14,441
6,304
1,753
4,551
—
$ 0.57 $ 0.57 $ 0.42 $
$ 0.57 $ 0.56 $ 0.41 $
$ 0.28 $ 0.28 $ 0.28 $
11,030
11,108
10,992
11,073
10,957
11,034
(1.27 )
(1.27 )
0.28
11,252
11,252
Table of Contents
FIRST COMMUNITY BANCSHARES, INC.
NOTES TO CONSOLIDATED STATEMENTS — (Continued)
2007
Quarter Ended
March 31
June 30
Sept 30
Dec 31
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
Per share:
Basic earnings
Diluted earnings
Dividends
Weighted average basic shares outstanding
Weighted average diluted shares outstanding
86
(Amounts in thousands, except per share data)
$ 30,686 $ 31,979 $ 32,732 $ 32,194
15,051
13,671
17,143
17,015
717
—
16,426
17,015
7,847
5,086
202
129
13,394
12,158
11,081
10,072
2,948
3,328
$ 7,124 $ 7,439 $ 7,316 $ 7,753
15,589
17,143
—
17,143
5,970
50
12,836
10,327
3,011
14,965
17,014
—
17,014
5,517
30
12,075
10,486
3,047
$ 0.63 $ 0.66 $ 0.65 $ 0.70
$ 0.63 $ 0.66 $ 0.65 $ 0.69
$ 0.27 $ 0.27 $ 0.27 $ 0.27
11,121
11,259
11,206
11,347
11,261
11,320
11,179
11,230
Table of Contents
- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
To the Audit Committee of the Board of Directors and the Stockholders
First Community Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of First Community Bancshares, Inc. and its
Subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income,
changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,
2008. These consolidated financial statements are the responsibility of the Company’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 consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First Community Bancshares, Inc. and its Subsidiaries as of December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2008 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted in 2008 the recognition
and disclosure provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements ,
Financial Accounting Standards Board Staff Position No. 157-3, Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active, Emerging Issues Task Force 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, and
Financial Accounting Standards Board Staff Position EITF Issue No 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20 .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated March 13, 2009 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Asheville, North Carolina
March 13, 2009
87
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MANAGEMENT’S ASSESSMENT OF 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, 2008. Dixon Hughes PLLC, independent
registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s internal
control over financial reporting.
The Report of Independent Registered Public 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.
/s/ John M. Mendez
John M. Mendez
President and Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
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Table of Contents
- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
To the Board of Directors and Stockholders
First Community Bancshares, Inc.
We have audited First Community Bancshares, Inc. and Subsidiaries (the “Company”) internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’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, included in the accompanying Management’s
Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included 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. 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, First Community Bancshares, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements of First Community Bancshares, Inc. as of and for the year
ended December 31, 2008, and our report dated March 13, 2009, expressed an unqualified opinion on those
consolidated financial statements. As discussed in Note 1 to the consolidated financial statements, the Company
adopted in 2008 the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 157,
Fair Value Measurements , Financial Accounting Standards Board Staff Position No. 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, Emerging Issues Task Force
06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements, and Financial Accounting Standards Board Staff Position EITF Issue No
99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 .
Asheville, North Carolina
March 13, 2009
89
Table of Contents
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company conducted 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 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 Public Accounting Firm on Management’s Assessment of 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.
None.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The required information concerning directors and executive officers has been omitted in accordance with
General Instruction G. Such information regarding directors and executive officers will be set forth under the
headings of “Election of Directors”, “Continuing Directors”, and “Executive Officers who are not Directors” of the
Proxy Statement relating to the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act has been omitted in accordance with
General Instruction G. Such information will be set forth under the heading of “Section 16(a) Beneficial Ownership
Reporting Compliance” of the Proxy Statement relating to the 2009 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, as well as all employees
and directors of the Company. A copy of the Company’s Code of Ethics is available on the Company’s website at
www.fcbinc.com. Since its adoption, there have been no waivers of the code of ethics related to any of the above
officers.
Information relating to the Audit Committee and the Audit Committee Financial Expert has been omitted in
accordance with General Instruction G. Such information regarding the Audit Committee and the Audit Committee
90
Table of Contents
Financial Expert will be set forth under the heading “Report of the Audit Committee” of the Proxy Statement relating
to the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.
The Company has not made any material changes to the procedures by which stockholders may recommend
nominees to the Company’s board of directors.
BOARD OF DIRECTORS, FIRST COMMUNITY BANCSHARES, INC.
Franklin P. Hall
Businessman; Senior Partner, Hall & Family Law Firm;
Commonwealth of Virginia Delegate
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
Allen T. Hamner, Ph.D.
Retired Professor of Chemistry, West Virginia Wesleyan
College
Robert E. Perkinson, Jr.
Past Vice President-Operations, MAPCO Coal, Inc. —
Virginia Region
Richard S. Johnson
President, The Wilton Companies
William P. Stafford
President, Princeton Machinery Service, Inc.
I. Norris Kantor
Of Counsel, Katz, Kantor & Perkins, Attorneys-at-Law
William P. Stafford, II
Attorney at Law, Brewster, Morhous, Cameron, Caruth,
Moore, Kersey & Stafford, PLLC
John M. Mendez
President and Chief Executive Officer, First Community
Bancshares, Inc.; Chief Executive Officer, First
Community Bank, N. A.
EXECUTIVE OFFICERS, FIRST COMMUNITY BANCSHARES, INC.
John M. Mendez
President and Chief Executive Officer
E. Stephen Lilly
Chief Operating Officer
David D. Brown
Chief Financial Officer
Robert L. Buzzo
Vice President and Secretary
91
Table of Contents
BOARD OF DIRECTORS, FIRST COMMUNITY BANK, N. A.
W. C. Blankenship, Jr.
Agent, State Farm Insurance
D. L. Bowling, Jr.
President, Best Energy, Inc.
Juanita G. Bryan
Homemaker
John M. Mendez
President and Chief Executive Officer, First
Community Bancshares, Inc.; Chief Executive Officer,
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 E. Perkinson, Jr.
Past Vice President-Operations, MAPCO Coal, Inc. —
Virginia Region
Robert L. Buzzo
Vice President and Secretary, First Community Bancshares, Inc.;
President, First Community Bank, N. A.
Clyde B. Ratliff
President, Gasco Drilling, Inc.
C. William Davis
Attorney-at-Law, Richardson & Davis
William P. Stafford
President, Princeton Machinery Service, Inc.
Franklin P. Hall
Businessman; Senior Partner, Hall & Family Law Firm;
Commonwealth of Virginia Delegate
William P. Stafford, II
Attorney at Law, Brewster, Morhous, Cameron, Caruth,
Moore, Kersey & Stafford, PLLC
Allen T. Hamner, Ph.D.
Retired Professor of Chemistry, West Virginia Wesleyan
College
Frank C. Tinder
President, Tinder Enterprises, Inc. and Tinco Leasing
Corporation
Richard S. Johnson
President, The Wilton Companies
Dale F. Woody
President, Woody Lumber Company
I. Norris Kantor
Of Counsel, Katz, Kantor & Perkins, Attorneys-at-Law
ITEM 11.
EXECUTIVE COMPENSATION.
The information called for by Item 11 has been omitted in accordance with General Instruction G. Such
information will be set forth under the heading of “Compensation Discussion and Analysis” of the Proxy Statement
relating to the 2009 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
2009 Annual Meeting of Stockholders and is incorporated herein by reference.
92
Table of Contents
Information regarding our compensation plans under which the Company’s equity securities are authorized for
issuance as of December 31, 2008 is included in the table which follows.
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by
security holders
Total
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
42,000 $
30.49
210,091
252,091
23.00
101,343
36,301
137,644
For additional information regarding equity compensation plans, see Note 12 — Equity Based Compensation of
the Notes to Consolidated Financial Statements included in Item 8 hereof.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information called for by Item 13 has been omitted in accordance with General Instruction G. Such
information shall be set forth under the heading of “Transactions With Directors and Officers” of the Proxy
Statement relating to the 2009 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information called for by Item 14 has been omitted in accordance with General Instruction G. Such
information shall be set forth under the heading of “Audit Fees” of the Proxy Statement relating to the 2009 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
(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 13, 2009, are incorporated by
reference from 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 consolidated financial statements or related notes.
(b) Exhibits
Exhibit No.
2 .1
Agreement and Plan of Merger dated July 31, 2008, among First Community Bancshares, Inc. and
Coddle Creek Financial Corp.(21)
Articles of Incorporation of First Community Bancshares, Inc., as amended.(1)
3 (i)
3 (ii) Certificate of Designation Series A Preferred Stock(22)
3 (iii) Bylaws of First Community Bancshares, Inc., as amended.(17)
4 .1
Specimen stock certificate of First Community Bancshares, Inc.(3)
Exhibit
93
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Exhibit
Exhibit No.
Indenture Agreement dated September 25, 2003.(11)
4 .2
Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25, 2003.(11)
4 .3
Preferred Securities Guarantee Agreement dated September 25, 2003.(11)
4 .4
Form of Certificate for the Series A Preferred Stock(22)
4 .5
Warrant to purchase 176,546 shares of Common Stock of First Community Bancshares, Inc(22)
4 .6
10 .1
First Community Bancshares, Inc. 1999 Stock Option Contracts(2) and Plan.(4)
10 .1.1 Amendment to First Community Bancshares, Inc. 1999 Stock Option Plan.(11)
10 .2
10 .3
First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan.(5)
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and John
M. Mendez.(6)
First Community Bancshares, Inc. 2000 Executive Retention Plan, as amended.(24)
First Community Bancshares, Inc. Split Dollar Plan and Agreement.(2)
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan.(2)
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. Second Amendment
(B.W. Harvey, Sr. — October 19, 2004).(14)
First Community Bancshares, Inc. Wrap Plan.(7)
Reserved.
Form of Indemnification Agreement between First Community Bancshares, Inc., its Directors and
Certain Executive Officers.(9)
Form of Indemnification Agreement between First Community Bank, N. A, its Directors and Certain
Executive Officers.(9)
10 .4
10 .5
10 .6
10 .6.1
10 .7
10 .8
10 .9
10 .10
10 .11 Reserved.
10 .12 First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan (10) and Award Agreement.(13)
10 .13 Reserved.
10 .14 First Community Bancshares, Inc. Directors Deferred Compensation Plan.(7)
10 .15
First Community Bancshares, Inc. Deferred Compensation and Supplemental Bonus Plan For Key
Employees.(15)
Employment Agreement dated November 30, 2006, between First Community Bank, N. A. and Ronald
L. Campbell.(19)
Employment Agreement dated September 28, 2007, between GreenPoint Insurance Group, Inc. and
Shawn C. Cummings.(20)
Securities Purchase Agreement by and between the United States Department of the Treasury and First
Community Bancshares, Inc. dated November 21, 2008.(22)
Employment Agreement dated December 16, 2008, between First Community Bancshares, Inc. and
David D. Brown.(23)
Statement regarding computation of earnings per share.(16)
Computation of Ratios.
Subsidiaries of Registrant — Reference is made to “Item 1. Business” for the required information.
Consent of Dixon Hughes PLLC, Independent Registered Public Accounting Firm for First Community
Bancshares, Inc.
10 .16
10 .17
10 .18
10 .19
11
12 *
21
23 .1*
31 .1* Rule 13a-14(a)/a5d-14(a) Certification of Chief Executive Officer.
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 from the Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed on
August 5, 2005.
(2) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed on
August 14, 2002.
94
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(3) 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.
(4) 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.
(5) The option 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.
(6) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated and filed December 16,
2008. The Registrant has entered into substantially identical agreements with Robert L. Buzzo and E. Stephen
Lilly, with the only differences being with respect to title and salary.
(7) Incorporated by reference from the Current Report on Form 8-K dated August 22, 2006, and filed August 23,
2006.
(8) Reserved.
(9) 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, E. Stephen Lilly, David D. Brown, and Gary R. Mills. Incorporated by
reference from the Annual Report on Form 10-K for the period ended December 31, 2003, filed on March 15,
2004, and amended on May 19, 2004.
(10) Incorporated by reference from the 2004 First Community Bancshares, Inc. Definitive Proxy filed on March 19,
2004.
(11) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended September 30, 2003,
filed on November 10, 2003.
(12) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended March 31, 2004, filed
on May 7, 2004.
(13) Incorporated by reference from the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed on
August 6, 2004.
(14) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2004, and
filed on March 16, 2005. Amendments in substantially similar form were executed for Directors Clark, Kantor,
Hamner, Modena, Perkinson, Stafford, and Stafford II.
(15) Incorporated by reference from the Current Report on Form 8-K dated October 24, 2006, and filed October 25,
2006.
(16) Incorporated by reference from Footnote 1 of the Notes to Consolidated Financial Statements included herein.
(17) Incorporated by reference from Exhibit 3.1 of the Current Report on Form 8-K dated February 14, 2008, filed
on February 20, 2008.
(18) Reserved
(19) Incorporated by reference from Exhibit 2.1 of the Form S-3 registration statement filed May 2, 2007.
(20) Incorporated by reference from the Annual Report on Form 10-K for the period ended December 31, 2007, filed
on March 13, 2008.
(21) Incorporated by reference from Exhibit 2.1 of the Current Report on Form 8-K dated and filed July 31, 2008.
(22) Incorporated by reference from the Current Report on Form 8-K dated November 21, 2008, and filed
November 24, 2008.
(23) Incorporated by reference from Exhibit 10.2 of the Current Report on Form 8-K dated and filed December 16,
2008. The Registrant has entered into substantially identical agreements with Gary R. Mills, Martyn A. Pell, and
Robert L. Schumacher, with the only differences being with respect to title, salary, term, and payment upon
termination after a change in control.
(24) Incorporated by reference from Exhibit 10.1 of the Current Report on Form 8-K dated December 30, 2008, and
filed January 5, 2009.
95
Table of Contents
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 13th day of
March, 2009.
SIGNATURES
First Community Bancshares, Inc.
(Registrant)
By: /s/ John M. Mendez
John M. Mendez
President and Chief Executive Officer
By: /s/ David D. Brown
David D. Brown
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/ David D. Brown
David D. Brown
/s/ Franklin P. Hall
Franklin P. Hall
/s/ Allen T. Hamner
Allen T. Hamner
/s/ Richard S. Johnson
Richard S. Johnson
/s/ I. Norris Kantor
I. Norris Kantor
/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, President and
Chief Executive Officer
March 13, 2009
Chief Financial Officer
March 13, 2009
Director
Director
Director
Director
Director
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
Chairman of the Board of Directors
March 13, 2009
Director
March 13, 2009
96
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 Shareholders’ Equity
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-performing Assets
Allowance for Loan Losses to Non-performing Loans
Net Interest Margin
=
=
Net Income Available to Common
Shareholders/Weighted Average Common Shares
Outstanding
Net Income Available to Common
Shareholders/Weighted Average Diluted Shares
Outstanding
Dividends Paid to Common Shareholders/Average
Common Shares Outstanding
Total Common Shareholders’ Equity/Common
Shares Outstanding
= Net Income/Average Assets
= Net Income/Average Shareholders’ Equity
=
=
=
Noninterest Expense/(Net Interest Income Plus
Noninterest Income)
= Average Net Loans/Average Deposits Outstanding
Dividends Declared/Net Income Available to
Common Shareholders
=
= 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 plus 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 plus
Performing Loans)
Tax Equivalent Net Interest Income/Average Earning
Assets
=
=
=
=
=
=
=
97
Exhibit 23.1
- CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -
The Board of Directors and Stockholders
First Community Bancshares, Inc.
We consent to the incorporation by reference in the registration statements pertaining to the 2004 Omnibus
Stock Option Plan (Form S-8, No. 333-120376); the Commonwealth Bank 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, 333-31338); the Employee Stock Ownership and Savings Plan (Form S-8, No. 333-63865); the
Investments Planning Consultants Inc. acquisition (Form S-3, No. 333-142558); the Stone Capital Management
acquisition (Form S-3, No. 333-104384); the Universal Shelf Registration (Form S-3, No. 333-153692); the Capital
Purchase Program Warrant Resale (Form S-3, No. 333-156365); and the Greenpoint Insurance Group, Inc.
acquisition (Form S-3, No. 333-148279) of First Community Bancshares, Inc. and Subsidiaries (the “Company”) of
our reports dated March 13, 2009, with respect to the consolidated financial statements of the Company and the
effectiveness of internal control over financial reporting, which reports appear in the Company’s 2008 Annual Report
on Form 10-K.
Our audit report on the consolidated financial statements refers to the adoption of the recognition and disclosure
provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, Financial
Accounting Standards Board Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active , Emerging Issues Task Force 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, and Financial Accounting
Standards Board Staff Position EITF Issue No 99-20-1, Amendments to the Impairment Guidance of EITF Issue
No. 99-20 .
Asheville, North Carolina
March 13, 2009
98
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.
Date: March 13, 2009
/s/ John M. Mendez
John M. Mendez
Chief Executive Officer
99
Exhibit 31.2
I, David D. Brown, 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.
Date: March 13, 2009
/s/ David D. Brown
David D. Brown
Chief Financial Officer
100
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, 2008, 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.
First Community Bancshares, Inc.
/s/ John M. Mendez
John M. Mendez
Chief Executive Officer
/s/ David D. Brown
David D. Brown
Chief Financial Officer
101
Dated this 13th day of March, 2009.