Item 1. BUSINESS
GENERAL
First Community Bancshares, Inc. ("FCBI" or the "Company", "Corporation" or "Registrant") is a one-bank holding company incorporated in the State of Nevada and serves as the holding company for First Community Bank, N. A. ("FCBNA" or the "Bank",) a national association that conducts commercial banking operations within the states of Virginia, West Virginia and North Carolina. United First Mortgage, Inc. ("UFM"), acquired in the latter part of 1999, is a wholly owned subsidiary of FCBNA and serves as a wholesale and retail distribution channel for FCBNA's mortgage banking business segment. First Community Bancshares, Inc. and its wholly-owned subsidiary have total assets of approximately $1.2 billion at December 31, 2000 and conduct commercial and mortgage banking business throughout the three-state area of Virginia, West Virginia and North Carolina through the 33 branches of FCBNA and 10 mortgage brokerage offices which are located throughout the state of Virginia.
In October 2000, the Company's wholly owned banking subsidiary, FCBNA, acquired Citizens Southern Bank, Inc. ("Citizens") located in Beckley, West Virginia. Citizens, a retail banking business, provided two additional branches to the existing operating facilities of the Bank. The Citizens operations are currently located in a geographic region, adjacent to areas presently served by the Bank.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements with respect to the financial condition, results of operations and business of FCBI. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of FCBI, and on the information available to management at the time that these disclosures were prepared. Many factors could cause the Company's actual results to differ materially from the results contemplated by the forward-looking statements. Some factors which could negatively affect the results include, among others, the following possibilities: (1) general economic conditions, either nationally or within the Company's markets, could be less favorable than expected, (2) changes in market interest rates could affect interest margins and profitability, (3) competitive pressures could be greater than anticipated, (4) legal or accounting changes could affect the Company's results, (5) acquisition cost savings may not be realized or the anticipated income may not be achieved, and (6) adverse changes could occur in the securities and investments markets; (7) legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which FCBI is engaged; (8) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than FCBI.
All statements other than statements of historical fact included in this Annual Report on form 10-K and the accompanying Annual Report to shareholders which is incorporated herein by reference, including statements in the Message to Stockholders and in Management's Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such information involves risks and uncertainties that could cause actual results differing from those projected in the forward-looking information.
Forward-looking statements made herein reflect management's expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Currently, the Registrant is a bank holding company and the banking operations are expected to remain the principal business and major source of revenue. The Registrant 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 Registrant also considers and evaluates options for growth and expansion of the existing subsidiary banking operations.
The Registrant 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 Supervision and Regulation of this item.
FIRST COMMUNITY BANK, N. A. (A NATIONAL ASSOCIATION)
At December 31, 2000, the principal assets of FCBI included all of the outstanding shares of common stock of FCBNA, Bluefield, Virginia. FCBNA is a nationally chartered bank organized under the banking laws of the United States. FCBNA engages in general commercial and retail banking business in West Virginia, Virginia and North Carolina through 33 branch facilities. It provides safe deposit services and makes all types of loans, including commercial, mortgage and personal loans. FCBNA also provides trust services and its deposits are insured by the FDIC. FCBNA is a member of the Federal Reserve System and is a member of the Federal Home Loan Bank (FHLB) of Atlanta. Regulatory oversight of the banking subsidiary is conducted by the Office of the Comptroller of the Currency (OCC). FCBNA, through its wholly owned subsidiary, UFM, provides for the origination and sale of mortgages to secondary sources. The required information concerning reportable segments and the required disclosures is incorporated herein by reference to Note 17 of the financial statements included in the Annual Report to Shareholders.
COMPETITION
The financial services industry is highly competitive and dramatic change continues to occur. FCBI's banking subsidiary competes actively with national and state banks, savings and loan associations, securities dealers, mortgage bankers, finance companies and insurance companies. Competition for financial products and services continues to grow as clients select from a variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate which affects competition by eliminating some regional and local institutions.
MARKET AREA
As described above, the market region served by the Company and its subsidiary consists of West Virginia, Virginia and North Carolina. The area's economic base is diverse and primarily consists of manufacturing, mining, general services, agricultural, wholesale/retail trade, and financial services. Due to the diverse geographic region and industries served, FCBI believes its current market area is economically strong and will support consistent growth in assets and deposits into the future. Management feels that its community bank approach to providing personalized client service offers a competitive advantage, which strengthens the Corporation's ability to serves its markets and effectively provide products and services to the businesses and individuals in these markets.
LENDING ACTIVITIES
The Company's banking subsidiary generates revenues primarily through the investment of borrowed and deposited funds in earning assets. These assets are comprised of securities available for sale, investment securities, short-term investment vehicles and loans to businesses and individuals. Average loans represent approximately 73% of average earning assets and present a higher level of credit risk to the Company when contrasted with investment securities.
The principal lending activities of the bank are concentrated primarily within its market areas in West Virginia, Virginia, North Carolina and the surrounding mid-Atlantic area. These are areas with which bank personnel are most acquainted and are within reasonable distances of the bank that allows for timely communications with customers as well as periodic inspections of collateral.
Loan portfolios total $822.8 million at December 31, 2000 and are comprised of commercial, real estate and consumer loans including home equity loans. Commercial and commercial real estate loans comprise 38% 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. Collateral securing these loans includes equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Underwriting standards require a comprehensive review and independent evaluation of virtually all commercial loans by Credit Administration and Loan Committees prior to approval with updates to these credit reviews performed periodically on a quarterly or annual basis depending on the size of the loan relationship.
The mortgage offices of UFM provide a distribution outlet for origination and sale of loans to wholesale and retail purchasers. UFM originates residential mortgage loans through its production offices located in eastern Virginia. Risks associated with this lending function include interest rate risk, which is mitigated through the utilization of financial instruments to offset and equalize the effect of changing interest rates. In conjunction with the utilization of these financial instruments (also commonly referred to as derivatives), the Company has adopted Financial Accounting Standards Board ("FASB") Statement No. 133, as amended, effective January 1, 2001. FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activity" established accounting and reporting standards for derivative instruments and for hedging activities. UFM uses financial instruments to manage its pipeline of loans from the point of the loan commitment to the subsequent sale to an outside investor who purchases the loan. As a result of the timing from origination to sale, and the likelihood of changing interest rates, forward commitments are placed to substantially lock the expected margin on the sale of the loan. Both the forward commitment to purchase the security and the underlying rate lock commitment are both considered independent or stand alone derivatives and, as such, will be independently recorded on the balance sheet at their respective market value. The forward commitments are not presently used as a hedge within the meaning of FASB Statement No. 133. Due to the limited use of derivatives, the adoption did not have a material impact on the Company's financial statements. However, UFM anticipates that its level of involvement in derivative contracts will increase, and is utilizing a management tool that measures effectiveness of the pipeline hedge contracts and minimizes the potential volatility of losses.
EMPLOYEES
The Registrant and its subsidiary, FCBNA, employed 484 employees at December 31, 2000. Additionally, UFM employed 86 people in the mortgage subsidiary. Management considers employee relations to be excellent.
SUPERVISION AND REGULATION
GENERAL
The Registrant is a bank holding company within the meaning of the Bank Holding Act of 1956 (Act), as amended, and is registered as such with the Board of Governors of the Federal Reserve System. The Registrant is required to file with the Board of Governors quarterly reports of the Registrant and the
subsidiary and such other information as the Board of Governors may require. The Federal Reserve makes periodic examinations of the Registrant typically on an annual basis. The Act requires every bank holding company to obtain prior approval of the Board of Governors before acquiring substantially all the assets or direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned. The Act also prohibits a bank holding company, with certain exceptions, from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities.
Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the Federal Reserve Board is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the communities served by that bank, including low and moderate-income neighborhoods. Further, such assessment is also required of any bank holding company which has applied to (i) charter a National bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of a federally-regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve Board will assess the record of each subsidiary of the applicant bank holding company, and such records may be the basis for denying the application or imposing conditions in connection with approval of the application. On July 1, 1995, the federal bank regulators amended the CRA regulations to simplify enforcement of the CRA by substituting the prior twelve assessment categories with three performance categories for use in calculating CRA ratings. The federal bank regulators will evaluate banks under the lending, investment, and service tests. Additional data collection and reporting requirements under the Home Mortgage Disclosure Act are imposed on institutions that accept mortgage loan applications within metropolitan statistical areas.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") was enacted by Congress on August 9, 1989. Among the more significant consequences of FIRREA with respect to bank holding companies is the impact of the "cross-guarantee" provision and the significantly expanded enforcement powers of bank regulatory agencies. Under the cross-guarantee provision, if one depository institution subsidiary of a multi-unit holding company fails or requires FDIC assistance, the FDIC may assess a commonly controlled depository institution for the estimated losses suffered by the FDIC. While the FDIC's claim is junior to the claims of non-affiliated depositors, holders of secured liabilities, general creditors, and subordinated creditors, it is superior to the claims of shareholders. Among the significantly expanded enforcement powers of the bank regulatory agencies are the powers to (i) obtain cease and desist orders, (ii) remove officers and directors, (iii) approve new directors and senior executive officers of certain depository institutions, and (iv) assess criminal and civil money penalties for violations of law, regulations. or conditions imposed by, or agreements with, regulatory agencies.
The earnings of the Corporation's subsidiary, and therefore the earnings of the Corporation, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the OCC and the FDIC. In addition, there are numerous governmental requirements and regulations that affect the activities of the Corporation and its subsidiary.
PAYMENT OF DIVIDENDS
The Corporation is a legal entity separate and distinct from its banking subsidiary. A major portion of the revenues of the Corporation result from amounts paid as dividends to the Corporation by its national bank subsidiary. The prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of such bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debts in excess of the bank's allowance for loan losses.
In addition, the Corporation and its banking subsidiary are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
CAPITAL ADEQUACY
Under the risk-based capital requirements for bank holding companies, the minimum requirement for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is eight percent. At least half of the total capital is to be composed of common stockholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles ("tier 1 capital" and together with tier 2 capital "total capital"). The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance ("tier 2 capital"). At December 31, 2000, the Corporation's tier 1 capital and total capital ratios were 11.68 percent and 12.93 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets less certain amounts ("leverage ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio of from at least four to five percent. The Corporation's leverage ratio at December 31, 2000, was 8.37 percent. The guidelines also provide that bank holding companies 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. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity.
The Corporation's subsidiary bank is subject to similar capital requirements adopted by the Comptroller of the Currency. The capital ratios of the bank subsidiary of the Corporation are set forth in Note 13 in the Annual Report and are incorporated herein by reference.
SUPPORT OF SUBSIDIARY BANK
The Federal Deposit Insurance Corporation Improvement Act, as amended ("FDICIA"), among other things, imposes liability on an institution the deposits of which are insured by the FDIC, such as the Corporation's subsidiary bank, for certain potential obligations to the FDIC incurred in connection with other FDIC-insured institutions under common control with such institution.
Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Comptroller is authorized to require payment of the deficiency by assessment upon the bank's stockholders, pro rata, and to the extent necessary, if any such assessment is not paid by any stockholder after three months notice, to sell the stock of such stockholder to make good the deficiency. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary. This support may be required at times when, absent such Federal Reserve Board policy, the Corporation may not find itself able to provide it.
Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
DEPOSITOR PREFERENCE STATUTE
Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver.
BORROWINGS BY THE CORPORATION
The banking subsidiary of the Registrant is subject to certain restrictions by regulatory bodies which limit the amounts and the manner in which it may loan funds to the Registrant. The bank is further subject to restrictions on the amount of dividends that can be paid to the Registrant in any one calendar year without prior approval by primary regulators. Payment of dividends by the subsidiary bank to the Registrant cannot exceed net profits, as defined, for the current year combined with net profits for the two preceding years. In addition, any distribution that might reduce the bank's equity capital to unsafe levels or which, in the opinion of regulatory agencies, or is not in the best interests of the public, could be prohibited. (For additional information concerning these restrictions, see Note 13 of the Notes to the 2000 Consolidated Financial Statements incorporated herein by reference.)
PROMPT CORRECTIVE ACTION
The FDICIA, among other things, requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier will depend upon where its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.
Federal regulatory authorities have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the total capital ratio, the tier 1 capital ratio and the leverage ratio. Under the regulations, an FDIC-insured bank will be: (i) "well capitalized" if it has a total capital ratio of ten percent or greater, a tier 1 capital ratio of six percent or greater and a leverage ratio of five percent or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of eight percent or greater, a tier 1 capital ratio of four percent or greater and a leverage ratio of four percent or greater (three percent in certain circumstances) and is not "well capitalized"; (iii) "undercapitalized" if it has a total capital ratio of less than eight percent, a tier 1 capital ratio of less than four percent or a leverage ratio of less than four percent (three percent in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than six percent, a tier 1 capital ratio of less than three percent or a leverage ratio of less than three percent; and (v) "critically undercapitalized" if its tangible equity is equal to or less than two percent of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2000, the Corporation's deposit-taking subsidiary bank had capital levels that qualify it as being "well capitalized" under such regulations.
The FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized". "Undercapitalized" depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became "undercapitalized", and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized".
"Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. A bank that is not "well capitalized" is subject to certain limitations relating to so-called "brokered" deposits.
RECENT LEGISLATION
GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Act") is the most significant financial services legislation in 60 years, and is the culmination of decades of effort to restructure the financial services industry in the United States. The most significant change wrought by the act is to allow affiliations among banks, securities firms and insurance companies. The act is complex and far-reaching and deals with a multitude of additional banking, insurance and financial services issues, and is intended to modernize the nation's financial services industry. The following discussion is a brief overview of some of the points of interest that have an impact on the Company and is not intended to represent the entirety of the "Act."
Among other things, the "Act" is designed to allow greater savings to consumers by increasing competition and reforming the Federal Home Loan Bank System by providing a source of funds for community banks to make loans to small businesses and farmers.
The "Act" repeals two sections of the Glass-Steagall Act, which restrict banks and their affiliates from being affiliated with companies engaged in the business of underwriting and dealing in securities. The Act authorizes financial holding companies ("FHC") and FHC affiliates to engage in activities that are "financial in nature or incidental to financial in nature," or activities that are "complementary to financial activities." In addition, the Act blesses as "financial in nature" the acquisition of interests in and control of any company," whether financial or not," through securities underwriting, merchant banking, or insurance company investments." In the case of securities affiliates, the investment must be part of a bona fide underwriting or merchant or investment banking activity, including investment activities engaged in for the purpose of appreciation and ultimate resale or disposition of the investment. In the case of insurance companies, the portfolio investment must be made in the ordinary course of business of the insurance company in accordance with relevant state law governing such investments. The "Act" authorizes the Federal Reserve Board to determine, for bank holding company affiliates, what activities are financial in nature or incidental to financial in nature, or complementary to a financial activity.
The legislation also amends the Community Reinvestment Act to provide that an election of a bank
holding company ("BHC") to become an FHC will not be effective if any of the holding company's subsidiary insured depository institutions has received a less than "satisfactory" rating in its most recent Community Reinvestment Act examination. In addition, the Act amends the Bank Holding Company Act to require the appropriate Federal banking agency to prohibit an FHC or insured depository institution from commencing any new activities or acquiring companies engaged in expanded activities "financial in nature" (other than merchant banking or insurance portfolio investment activities), if any insured depository institution affiliate has failed to receive in its last examination at least a "satisfactory" CRA rating. Certain activities of new FHCs have been grandfathered to allow companies that previously engaged in non-financial activities to do so.
Title II of the Act amends the federal securities laws to provide for functional regulation of bank securities activities. Title III of the Act deals with insurance issues and is divided into four subparts: State Regulation of Insurance, Redomestication of Mutual Insurers, National Association of Registered Agents and Brokers, and Rental Car Agency Insurance Activities.
The privacy provisions encompassed under Title IV of the Act govern the activities of "financial institutions," which include banks, savings associations, credit unions, broker-dealers, investment companies, investment advisers and insurance companies.
FAIR DISCLOSURE RULES UNDER REGULATION FD
On October 23, 1999, a new set of rules went into effect that has wide-ranging impact on how public companies share information with investors. Known as "Regulation FD" (for "Fair Disclosure"), the rule ends a practice known as "selective disclosure" that many companies used in the past to provide information to Wall Street and investment professionals before making it available to the general public. Regulation FD represents the SEC's first attempt at direct regulation of informal communications between public companies and investment professionals.
In an attempt to comply with Regulation FD, companies are reconsidering the information and the dissemination methods they use to provide such information to analysts and the investment public. No longer can a company have a conversation with an analyst and provide any information that is not available to the general public. The new regulations cover a wide range of information including topics addressing earnings to business development issues concerning new products and delivery methods. Additionally, the new rules create the need for tighter control over material non-public information by placing greater liability on all Company representatives who have access to this information, including directors, officers, employees and others with access to material nonpublic information. Additionally, areas addressed by Regulation FD include but are not limited to issues addressing the timing of information dissemination, Securities Act and liability issues and the timing of information. The requirements of this new regulation are very detailed and complex and are not presented as a part of this discussion in their entirety.
The long-term effect of fair disclosure is likely to be beneficial to individual investors, regardless of what happens in the short term as companies and analysts determine how to best comply with the new rules. However, at the crux of the disclosure rules is the underlying theme that the investment public should be on an even and fair playing field when any material and non-public information is disclosed.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings of the Registrant and its subsidiary are affected by the monetary policies of the Federal Reserve System. An important function of the Federal Reserve System is to regulate the National supply of credit in order to deal with economic conditions. The instruments employed by the Federal Reserve are open market operations of U.S. Government securities, changes in the discount rate on member bank borrowings, changes in Federal Funds rates and changes in reserve requirements. These policies
influence, in various ways, the level of the company's investments, loans and deposits and rates earned on its earning assets and interest rates paid on liabilities.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL
A.& B. AVERAGE BALANCE SHEETS-NET INTEREST INCOME ANALYSIS (AMOUNTS IN THOUSANDS, EXCEPT %)
(1) Fully Taxable Equivalent-Using the Federal statutory rate of 35%.
(2) Non-accrual loans are included in average balances outstanding but with no related interest income.
(3) Represents the difference between the yield on earning assets and cost of funds.
(4) Represents tax equivalent net interest income divided by average interest earning assets.
C. RATE AND VOLUME ANALYSIS OF INTEREST (1)
(1) Fully taxable Equivalent using the federal statutory rate of 35%.
The preceding table sets forth a summary of the changes in interest earned and paid resulting from changes in volume of earning assets and paying liabilities and changes in rates thereon. For purposes of this analysis, the change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts.
II. Investment Portfolio
A. Amortized Cost of Investment Securities Held to Maturity:
Market Value of Securities Available for Sale:
B. Maturity and Yields:
The required information is incorporated by reference to pages 32 through 34 of the 2000 Annual Report.
C. There are no issues included in obligations of states and political subdivisions or other securities that exceed ten percent of stockholders' equity.
III. Loan Portfolio
A. Loan Summary:
B. Maturities and Rate Sensitivity of Loan Portfolio at December 31, 2000:
C. Risk Elements: The required information for risk elements is included below and incorporated by reference to pages 17 and 36 of the 2000 Annual Report.
Nonperforming Assets:
Management believes that the extent of problem loans at December 31, 2000 is disclosed as non-performing assets or delinquent loans in the preceding charts. However, there can be no assurance that future circumstances, such as further erosion of economic conditions and the related potential effect that such erosion may have on certain borrowers' ability to continue to meet payment obligations, will not lead to an increase in problem loan totals. Management believes that the non-performing asset carrying values will be substantially recoverable, taking into consideration the adequacy of the applicable collateral and, in certain cases, partial write-downs which have been taken and allowances that have been established.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. 1. Summary of Loan Loss Experience:
A. 2. The required information is incorporated by reference to pages 15 and 16 of the 2000 Annual Report.
B. Allocation of Reserve for Loan Losses:
(Amounts in Thousands, Except Percent Data)
The percentages in the table above represent the percent of loans in each category of total loans.
V. Deposits
A. The required information for average deposits and rates paid by type is included on page 12 of this report.
B. Not applicable.
C. Not applicable.
D. The required information is incorporated by reference to page 37 of the 2000 Annual Report and as follows:
Maturities of Time Deposits $100,000 or more:
(Amounts in Thousands) -------- Three Months or Less $ 45,234
Over Three to Six Months 22,699
Over Six to Twelve Months 39,514
Over Twelve Months 29,174
-------- Total $136,621 ========
E. Not applicable.
VI. Return on Equity and Assets
A. The required information is incorporated by reference to page 8 of the 2000 Annual Report.
VII. Short-Term Borrowings
A. Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings:
The Company uses various short-term funding sources including term repurchase agreements, structured term borrowings from the FHLB, customer repurchase agreements and Federal funds purchased. The Company's short-term borrowings and rates paid are summarized as follows:
B. Long-Term Advances From the FHLB and Long-Term Debt
The Company's banking subsidiary is a member of the FHLB and as such has the ability to obtain advances from the FHLB. The Company had long-term advances from the FHLB (original maturities in excess of one year) of $10 million with a weighted average rate of 6.01% at December 31, 2000 and December 31, 1999. The advances from the FHLB are secured by certain qualifying first mortgage loans, stock in the FHLB, mortgage-backed securities and certain other investment securities.
ITEM 2.
ITEM 2. PROPERTIES
The principal offices of the Corporation and FCBNA are located at One Community Place, Bluefield, Virginia, where the Company owns and occupies approximately 36,000 square feet of office space. Additional details regarding the physical location and number of banking offices is located on pages 52 - 53 in the 2000 Annual Report and incorporated herein by reference. The Corporation's banking
subsidiary owns in fee 30 offices while others are leased or are located on leased land. United First Mortgage, Inc., a wholly-owned subsidiary of FCBNA, maintains ten leased office facilities in eastern Virginia throughout a geographic area ranging from Virginia Beach, Virginia to Harrisonburg, Virginia.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The required information is incorporated by reference from Note 12 of Notes to Consolidated Financial Statements appearing on page 40 of the 2000 Annual Report.
ITEM 4.
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 2000.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Market Price of Common Stock
The Company's common stock has historically traded in the over-the-counter market; however, on March 1, 2001, the Company began trading on the Nasdaq SmallCap Market under the symbol FCBC. The following table shows the approximate high and low bids as known to the Company or reported by local brokers for each quarter in 1999 and 2000. Also, presented below are the book value and cash dividends paid per share as of and for each quarter of 1999 and 2000. The number of common stockholders of record on December 31, 2000 was 2,449 and outstanding shares totaled 9,040,370.
Bid Book ------------------- Value Cash Dividends 2000 High Low Per Share Per Share - ---- ------------------- --------- ---------
First Quarter $21.00 $17.25 $12.02 $0.22 Second Quarter 18.88 15.00 12.25 0.23 Third Quarter 16.13 15.00 12.69 0.23 Fourth Quarter 17.00 14.00 13.35 0.27 ----- $0.95 -----
- ---- First Quarter $23.20 $20.70 $11.75 $0.20 Second Quarter 22.90 18.50 11.60 0.21 Third Quarter 23.50 18.88 11.74 0.22 Fourth Quarter 21.38 18.00 11.86 0.25 ----- $0.88 -----
The Company has historically paid dividends on a quarterly basis and currently intends to continue to pay such dividends in the foreseeable future. However, there can be no assurance that dividends will be paid in the future. The declaration and payment of future dividends will depend upon, among other things, the Company's earnings and financial condition, and the general economic and regulatory climate.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The required information is incorporated by reference to page 8 of the 2000 Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The required information is incorporated by reference to pages 5 through 24 of the 2000 Annual Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is incorporated by reference to pages 19 through 22 of the 2000 Annual Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is incorporated by reference to pages 26 through 47 of the 2000 Annual Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
A Form 8-K was previously filed on February 28, 2000 and is incorporated herein by reference.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information concerning directors has been omitted in accordance with General Instruction G. Such information regarding directors appears on pages 3, 4, 5, and 6 of the Proxy Statement relating to the 2001 Annual Meeting of Stockholders and is incorporated herein by reference.
A portion of the information relating to executive officers has been omitted in accordance with General Instruction G. Such information regarding executive officers appears on pages 7 and 9 through 11 of the Proxy Statement relating to the 2001 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The required information concerning management remuneration has been omitted in accordance with General Instruction G. Such information appearing on pages 7 and 9 through 11 of the Proxy Statement relating to the 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information concerning security ownership of certain beneficial owners and management has been omitted in accordance with General Instruction G. Such information appearing on page 6 of the Proxy Statement relating to the 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information concerning certain relationships and related transactions has been omitted in accordance with General Instruction G. Such information appearing on pages 5 and 6 of the Proxy Statement relating to the 2001 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The Consolidated Financial Statements of First Community Bancshares, Inc. and subsidiaries together with the independent Auditors' Report dated January 26, 2001 are incorporated by reference to pages 26 through 48 of the 2000 Annual Report which is included herein as Exhibit 13.
(2) Financial Statement Schedules
All applicable financial statement schedules required by Regulation S-X are included in the Notes to the 2000 Consolidated Financial Statements.
(b) Reports on Form 8-K filed during the last quarter of the period covered by this report were as follows:
On October 20, 2000 a report on Form 8-K was filed in conjunction with announcement of the Company's third quarter operating results.
On October 31, 2000 a report on Form 8-K was filed relative to the acquisition and merger of Citizens Southern Bank, Inc. into the registrant's wholly owned subsidiary, FCBNA.
On December 7, 2000, a report on Form 8-K was filed with advance disclosures of the content of a meeting with analysts in order to meet fair disclosure requirements.
(c) Exhibits:
(3) Articles of Incorporation and Bylaws
The Registrant's Articles of Incorporation and By-laws were previously filed as exhibits (3)(i) and (3)(ii), respectively, with the Annual Report on Form 10-K for the year ending 12/31/97 in connection with the change of corporate domicile to a Nevada corporation.
(11) Statement Regarding Computation of Per Share Earnings
The statement regarding computation of per share earnings is included as Note 1 of the Notes to Consolidated Financial Statements in the 2000 Annual Report to Stockholders and is incorporated herein by reference.
(13) Annual Report to Security Holders
(21) Subsidiary of Registrant:
First Community Bank, N.A. (a National Association organized under the laws of the United States)
(23)(a) Independent Auditors' Consent - Ernst & Young LLP
(23)(b) Independent Auditors' Consent - Deloitte & Touche LLP
(99) Report of Deloitte & Touche LLP, Independent Auditors
SIGNATURES
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.
BY: /s/ John M. Mendez ------------------------------------- President and Chief Executive 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.
BY: /s/ Kenneth P. Mulkey ------------------------------------- Principal Accounting Officer