FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2004
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from:__________________ to __________________
Commission File Number: 0-19297
First Community Bancshares, Inc.
Nevada
(State or other jurisdiction of incorporation or organization) |
55-0694814
(I.R.S. Employer Identification No.) |
One Community Place, Bluefield, Virginia 24605 | ||
(Address of principal executive offices) (Zip Code) |
(276) 326-9000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 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.
Indicate by check mark whether Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class | Outstanding at July 30, 2004 | |||
Common Stock, $1 Par Value
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11,228,357 |
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First Community Bancshares, Inc.
FORM 10-Q
INDEX
REFERENCE
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Item 1. Financial Statements
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Exhibit 10.13 | ||||||||
Exhibit 15 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
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PART I. ITEM 1. Financial Statements
FIRST COMMUNITY BANCSHARES, INC.
See Notes to Consolidated Financial Statements.
3
FIRST COMMUNITY
BANCSHARES, INC.
See Notes to Consolidated Financial Statements.
4
FIRST COMMUNITY
BANCSHARES, INC.
See Notes to Consolidated Financial Statements.
5
FIRST COMMUNITY
BANCSHARES, INC.
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Financial Statements
The unaudited consolidated balance sheet as of June 30, 2004, the unaudited
consolidated statements of income for the six and three months ended June 30,
2004 and 2003 and the consolidated statements of cash flows and changes in
stockholders equity for the six months ended June 30, 2004 and 2003 have been
prepared by the management of First Community Bancshares, Inc. (FCBI or the
Company). In the opinion of management, all adjustments (including normal
recurring accruals) necessary to present fairly the financial position of FCBI
and subsidiaries at June 30, 2004 and its results of operations, cash flows,
and changes in stockholders equity for the three months ended June 30, 2004
and 2003 have been made. These results are not necessarily indicative of the
results of consolidated operations that might be expected for the full calendar
year.
The consolidated balance sheet as of December 31, 2003 has been extracted from
the audited financial statements included in the Companys 2003 Annual Report
to Stockholders on Form 10-K. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been omitted
in accordance with standards for the preparation of interim financial
statements. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the 2003 Annual Report of
FCBI on Form 10-K.
A more complete and detailed description of FCBIs significant accounting
policies is included within Footnote 1 to the Companys Annual Report on Form
10-K for December 31, 2003. In addition, the Companys required disclosure of
the application of critical accounting policies is included within the
Application of Critical Accounting Policies section of Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations included herein.
The following is an update of certain required disclosures pursuant to the
requirements of Financial Accounting Standards Board (FASB) Statement 148.
Summary of Significant Accounting Policy Update for Certain Required
Disclosures: Stock Options
The Company has in existence a stock option plan for certain executives and
directors accounted for under the intrinsic value method. Because the exercise
price of the Companys employee/director stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. 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 (in the
money) there is an economic incentive for the shares to be exercised and an
increase in the dilutive effect on earnings per share results.
A new Omnibus Stock Option Plan was approved at the annual 2004 shareholder
meeting to be used in conjunction with retention, recruitment and hiring of
employees. 42,000 option shares and an additional 5,000 stock awards were
granted and reserved for future issuance in May 2004 subject to acceptance of
agreements by the optionees. The maximum number of grants and awards under
this Plan is limited to 200,000 shares.
7
Assuming use of the fair value method of accounting for stock options, pro
forma net income and earnings per share for the six and three month periods
ended June 30, 2004 and 2003 would have been estimated as follows:
Note 2. Discontinued Operations
On July 8, 2004 First Community announced the termination of a previously announced
sale of its mortgage subsidiary. While the mortgage banking subsidiary
continues to be held for sale, termination of the previously announced sale led
to the elimination of the wholesale portion of the mortgage companys business
and a substantial downsizing of the remaining retail division. In connection
with the exit of its wholesale mortgage banking business and as previously
reported, the Company recorded impairment charges of $933,000 in the second
quarter of 2004 (bringing total impairment charges to $1,385,000 for the first
six months of 2004) to reduce the carrying value of the subsidiary to its
estimated fair value less costs to sell. To facilitate its decision to exit the
wholesale mortgage banking business, First Community has provided management
and professional resources to settle the mortgage companys wholesale interest
rate lock commitments; has overseen a transition in management at the mortgage
company; and has taken steps to reduce overhead for the companys remaining
mortgage business, which will be offered through its retail network. The
strategic decision to exit the wholesale mortgage business will reduce the
Companys exposure to risk associated with the large fluctuations previously
experienced in the volume-driven, wholesale business and its hedged interest
rate lock commitments and closed loans. The change in strategic direction and
decision to exit the wholesale mortgage business will permit the Company to focus its resources
on its core community banking business, which has continued to grow and
perform. The results of operations of the mortgage company are reported as
discontinued operations. The loss from discontinued operations was $1.9
million or $0.17 per diluted share for the second quarter of 2004 and $3.3
million or $0.29 per diluted share for the six months ended June 30, 2004.
The business related to UFM is accounted for as discontinued operations and,
therefore, the results of operations and cash flows have been removed from the
Companys results of continuing operations in accordance with FAS 144 for all
periods presented in this document. The results of UFM are presented as
discontinued operations in a separate category on the income
8
statement
following results from continuing operations. The income from discontinued
operations for the six months and three months ended June 30, 2004 and 2003,
respectively, is as follows:
9
All assets and liabilities of UFM were classified as discontinued
as of the June
30, 2004 and December 31, 2003 periods presented in this report. The major
asset and liability categories of discontinued operations are as follows:
Note 3. Mergers, Acquisitions and Branch Development
After the close of business on March 31, 2004, the Company acquired PCB
Bancorp, Inc., a Tennessee-chartered bank holding company (PCB Bancorp)
headquartered in Johnson City, Tennessee. PCB Bancorp had six full service
branch offices located in Johnson City, Kingsport and surrounding areas in
Washington and Sullivan Counties in East Tennessee. At acquisition, PCB
Bancorp had total assets of $171.0 million, total loans of $128.0 million and
total deposits of $150.0 million. These resources were included in the
Companys financial statements beginning with the second quarter of 2004.
Under the terms of the merger agreement, shares of PCB Bancorp common stock
were purchased for $40.00 per share in cash. The total deal value, including
the cash-out of outstanding stock options, was approximately $36.0 million.
Concurrent with the PCB Bancorp acquisition, Peoples Community Bank, the
wholly-owned subsidiary of PCB Bancorp, was merged into First Community Bank,
N.A., (the
Bank) a wholly-owned subsidiary of First Community Bancshares, Inc. As a result of the acquisition and preliminary purchase price
allocation, approximately $21.3 million in goodwill has been recorded which
represents the excess of the purchase price over the fair market value of the
net assets acquired and identified intangibles.
On June 6, 2003, the Company acquired The CommonWealth Bank, a
Virginia-chartered commercial bank (CommonWealth). CommonWealths four
branch facilities located in the Richmond, Virginia metro area were
simultaneously merged with and into the Bank. The completion of this
transaction resulted in the addition of $136.5 million in assets, including
$120.0 million in loans and added an additional $105.0 million in deposits to
the Bank. As a result of the purchase price allocation, approximately $14.1
million of goodwill was recorded.
In the second and third quarters of 2003, the Company opened three de novo
branches in Winston-Salem, North Carolina. The Company also opened two
additional loan production offices during the first quarter of 2004 in Mount
Airy and Charlotte, North Carolina and opened, or were in the process of
opening, two new loan production offices in Blacksburg and Norfolk, Virginia.
The Company does not anticipate that these new offices will be profitable until
market development has proven
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successful and adequate loan balances and
corresponding loan revenue are established to support the added facilities,
infrastructure and other operating costs of these branches and offices.
In January 2003, the Bank completed the acquisition of
Stone Capital Management, Inc. (Stone Capital), based in Beckley, West Virginia. This acquisition expanded
the Banks operations to include a broader range of financial services,
including wealth management, asset allocation, financial planning and
investment advice. Stone Capital at December 31, 2003 had total assets of $59
million under management and continues to operate under its name. Stone
Capital was acquired through the issuance of 8,409 shares of Company common
stock, which represented 50% of the total consideration. In 2003, Stone
Capital exceeded the annual revenue requirement outlined in the acquisition
agreement and another 2,541 shares were paid to the original shareholders
subsequent to December 31, 2003. The balance of the remaining consideration
($175,000) is payable over the next two years in the form of Company common
stock, subject to the achievement of minimum requirements set forth in the
acquisition agreement. As a result of the purchase price allocation,
approximately $360,000 of goodwill was recorded.
Note 4. Borrowings
Federal Home Loan Bank (FHLB) borrowings and other indebtedness are comprised
of $107.3 million in convertible and callable advances and $34.4 million of
noncallable term advances from the FHLB of Atlanta. The callable advances may
be 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. Prepayment of the
advances may result in substantial penalties based upon the differential
between contractual note rates and current advance rates for similar remaining
time periods.
The following schedule details the contractual terms of outstanding FHLB
advances, rates and corresponding final maturities at June 30, 2004. Also
included in the table are the fair value adjustments related to debt
obligations acquired in the CommonWealth Bank and Peoples Community Bank
acquisitions. The unamortized premium of approximately $420,000 is being
amortized as interest expense over the anticipated life of the borrowings and
is reflected as an adjustment to the effective rate paid.
11
In addition to the FHLB borrowings listed in the foregoing table, the Company
issued through FCBI Capital Trust, a business trust subsidiary, $15.0 million
of trust preferred securities in September 2003 at a variable rate indexed to
the 3 Month LIBOR rate + 2.95%. The securities mature on October 8, 2033 and
are callable beginning October 8, 2008.
The Companys wholly owned mortgage subsidiary, United First
Mortgage, Inc. (UFM),
also maintained a warehouse line of credit with a third party which was entered
into in the third quarter of 2003 and used to fund mortgage loan inventory.
The maximum line available under this credit facility was $15 million with a
maturity of August 10, 2004, and carries an interest rate of New York Prime,
adjusting as the prime rate changes. UFM had an outstanding balance at June
30, 2004 of $4.7 million which was reported in liabilities related to
discontinued operations. The outstanding amount on this line was paid off
subsequent to June 30, 2004.
Other various debt obligations of the Company were approximately $26,000 at
June 30, 2004.
Note 5. 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 effect on the financial condition, results of
operations or cash flows of the Company.
In May, 2004, the Company was named a party to an action filed in the Circuit
Court of Nicholas County, West Virginia by Fidelity & Guaranty Life Insurance
Company seeking to determine the rights of the Companys banking subsidiary and
members of the LeRose family to $1,000,000 in life insurance proceeds paid on a
life insurance policy previously assigned to the Bank as partial collateral for
a multimillion indebtedness due and owing to the bank as a consequence of a
kiting scheme. The life insurance proceeds have been paid by the insurance
company into a court-administered account for ultimate distribution to the
rightful owner.
The Company conducts mortgage banking operations through UFM, which is
discussed more fully under Note 2 Discontinued Operations. The majority of
loans originated by UFM are sold to larger national investors on a service
released basis. Loans are sold under loan sales agreements which contain
various repurchase provisions. These repurchase provisions give rise to a
contingent liability for loans which could subsequently be submitted to UFM for
repurchase. The principal events which could result in a repurchase obligation
are (i.) the discovery of fraud or material inaccuracies in a sold loan file and
(ii.) a default on the first payment due after a loan is sold to the investor,
coupled with a ninety day delinquency in the first year of the life of the
loan. Other events and variations of these events could result in a loan
repurchase obligation under terms of other loan sales agreements. The volume
of contingent loan repurchases, if any, is largely dependent on the quality of
loan underwriting and systems employed by UFM for quality control in the
production of mortgage loans. To date, loans submitted for repurchase have not
been material and have not had a material adverse effect on the results of
operations, financial condition or liquidity of UFM or the Company.
UFM also originates government guaranteed FHA and VA loans that are also sold
to third party investors. The Department of Housing and Urban Development
(HUD) periodically audits loan files of government guaranteed loans and may
require UFM to execute indemnification agreements on loans which do not meet
certain predefined underwriting guidelines or may require the repurchase of the
underlying loan. To date, the number of required indemnification agreements,
or loan repurchases have not been material and no subsequent losses have been
incurred. Loan indemnifications and repurchases under the FHA, VA and VHDA
loan programs have not had a material adverse effect on the financial
condition, results of operations or cash flows of UFM or the Company.
UFM is subject to net worth requirements issued by HUD. Failure to meet these
minimum capital requirements can result in certain mandatory and possibly
additional discretionary actions that, if undertaken, could have a direct
material effect on UFMs operations. UFM was in compliance with HUDs minimum
net worth requirement at June 30, 2004. UFMs adjusted tangible net worth for
HUD purposes was $712,000 at June 30, 2004, which exceeded the HUD requirement.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These instruments involve, to varying
degrees, elements of credit and interest rate risk beyond the amount recognized
on the balance sheet. The contractual amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments. The Companys 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.
12
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
customers 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 managements credit evaluation of the counterparties. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. To the extent deemed necessary, collateral of varying types and
amounts is held to secure customer performance under certain of those letters
of credit outstanding.
Financial instruments whose contract amounts represent credit risk at June 30,
2004 are commitments to extend credit (including availability of lines of
credit) of $128.4 million and standby letters of credit and financial
guarantees written of $8.1 million. In addition, at June 30, 2004, UFM had
commitments to originate loans of $44.6 million. Of these commitments, the
fallout/pullthrough model employed by UFM identified $29.1 million that are
anticipated to close.
In September 2003, the Company issued, through FCBI Capital Trust, $15.0
million of trust preferred securities in a private placement. In connection
with the issuance of the preferred securities, the Company has committed to
irrevocably and unconditionally guarantee the following payments or
distributions with respect to the preferred securities to the holders thereof
to the extent that FCBI Capital Trust has not made such payments or
distributions and has the funds therefore: (i) accrued and unpaid distributions,
(ii) the redemption price, and (iii) upon a dissolution or termination of the
trust, the lesser of the liquidation amount including all accrued and unpaid
distributions or the amount of assets of the trust remaining available for
distribution.
Note 6. Other Comprehensive Income
The Company currently has one component of other comprehensive income, which is
comprised of unrealized gains and losses on securities available for sale,
detailed as follows:
Note 7. Recent Accounting Developments
On March 9, 2004, the SEC issued SAB 105, Application of Accounting Principles
to Loan Commitments to inform registrants of the Staffs view that the fair
value of the recorded loan commitments, that are required to follow derivative
accounting under Statement 133,
Accounting for Derivative Instruments and
Hedging Activities
, should not consider the expected future cash flows related
to the associated servicing of the future loan. The provisions of SAB 105 must
be applied to loan commitments accounted for as derivatives that are entered
into after March 31, 2004. Though the Company sold its loans through the
discontinued segment on a servicing released basis, the Company adopted the
provisions of SAB 105 on January 1, 2004 and this had the impact of reducing
the fair value of such instruments by $252,000.
In December 2003, the AICPA issued Statement of Position (SOP) 03-3
Accounting for Certain Loans or Debt Securities Acquired in a Transfer"
. This
statement, which is effective for loans acquired in fiscal years beginning
after December 15, 2004, addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investors initial investment in loans or debt securities (loans) acquired in a
transfer if those differences are attributable, at least in part, to credit
quality. This standard will require a fair value measure of loans acquired and
as such no corresponding loss
13
reserve will be permitted on loans acquired in a
transfer that are within the scope of SOP 03-3. The impact of the Standard is
prospective and will require new recognition and measurement techniques upon
adoption.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. On May 6, 2004,
the Federal Reserve issued a proposed rule that would continue to allow trust
preferred securities, such as the Trust, to constitute Tier 1 capital for bank
holding companies. The proposed rules would impose stricter quantitative and
qualitative limits on the Tier 1 treatment of trust preferred securities.
Currently, trust preferred securities and qualifying perpetual preferred stock
are limited in the aggregate to no more than 25% of a holding companys core
capital elements. The proposed rule would amend the existing limit by
providing that restricted core capital elements (including trust preferred
securities and qualifying perpetual preferred stock) can be no more than 25% of
core capital, net of goodwill. It is possible that the Federal Reserve rules
will not be adopted as proposed and that the Federal Reserve will conclude that
trust preferred securities should no longer be treated as Tier 1 regulatory
capital. At June 30, 2004, $15 million in trust preferred securities issued by
FCBI Capital Trust were outstanding and treated as Tier 1 capital for bank
regulatory purposes. If FCBIs outstanding trust preferred securities at June
30, 2004 were not treated as Tier 1 capital at that date, FCBIs Tier 1
leverage capital ratio would have declined from 6.97% to 6.14%, its Tier 1
risk-based capital ratio would have declined from 10.20% to 8.99%, and its
total risk-based capital ratio would have declined from 11.48% to 10.26% as of
June 30, 2004. These reduced capital ratios would continue to meet the
applicable well capitalized Federal Reserve capital requirements.
Note 8. Earnings per Share
The following schedule details earnings and shares used in computing basic and
diluted earnings per share for the six and three months ended June 30, 2004 and
2003.
Note 9. Provision and Allowance for Loan Losses
The Companys lending strategy stresses quality growth diversified by product,
geography, and industry. All loans made by the Company are subject to common
credit standards and a uniform underwriting system. Loans are also subject to
an annual review process which varies based on the loan size and type. The
Company utilizes this ongoing review process to evaluate loans for changes in
credit risk. This process serves as the primary means by which the Company
evaluates the adequacy of the loan loss allowance. The total loan loss
allowance is divided into the following categories: i) specifically identified
losses on loan relationships which are on non-accrual status, ninety days past
due or more and loans with elements of credit weakness, and ii) formula
allowances and special allocations addressing other qualitative factors
including industry concentrations, economic conditions, staffing and other
conditions.
14
Specific allowances are established to cover loan relationships, which are
identified as having significant cash flow weakness and for which a collateral
deficiency may be present. The allowances established under the specific
identification method are judged based upon the borrowers estimated cash flow
and projected liquidation value of related collateral.
Formula allowances, based on historical loss experience, are available to cover
homogeneous groups of loans not individually evaluated. The formula allowance
is developed and evaluated against loans in general by specific category
(commercial, mortgage, and consumer). The allowance is developed for each loan
category based upon a review of historical loss percentages for the Company and
other qualitative factors. The calculated percentage is considered in
determining the estimated allowance excluding any relationships specifically
identified and individually evaluated. While consideration is given to credit
weaknesses for specific loans and classifications within the various categories
of loans, the allowance is available for all loan losses.
In developing the allowance for loan losses, the Company also considers various
inherent risk factors, such as current economic conditions, the level of
delinquencies and non-accrual loans, trends in the volume and term of loans,
anticipated impact from changes in lending policies and procedures, and any
concentration of credits in certain industries or geographic areas. In
addition, management continually evaluates the adequacy of the allowance for
loan losses and makes specific adjustments to the allowance based on the
results of risk analysis in the credit review process, the recommendation of
regulatory agencies, and other factors, such as loan loss experience and
prevailing economic conditions.
15
Report of Independent Registered Public Accounting Firm
The Audit Committee of the Board of Directors
We have reviewed the accompanying condensed consolidated balance sheet of First
Community Bancshares, Inc. and subsidiary (the Company) as of June 30, 2004,
and the related consolidated statements of income for the three month and six
month periods ended June 30, 2004 and 2003 and the consolidated statements of
cash flows and changes in stockholders equity for the six month periods ended
June 30, 2004 and 2003. These financial statements are the responsibility of
the Companys management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
referred to above for them to be in conformity with U. S. generally accepted
accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) the consolidated balance
sheet of the Company as of December 31, 2003, and the related consolidated
statements of income, cash flows and changes in stockholders equity for the
year then ended (not presented herein) and in our report dated March 9, 2004,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2003, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Ernst & Young LLP
August 6, 2004
16
First
Community Bancshares, Inc.
The following discussion and analysis is provided to address information about
the Companys financial condition and results of operations. This discussion
and analysis should be read in conjunction with the 2003 Annual Report to
Shareholders on Form 10-K and the other financial information included in this
report.
The Company is a multi-state bank holding company headquartered in Bluefield,
Virginia with total assets of $1.85 billion at June 30, 2004. FCBI provides
financial, trust and investment advisory services to individuals and
commercial customers through 52 full-service banking locations in the four
states of Virginia, West Virginia, North Carolina and Tennessee and two trust
and investment management offices. First Community Bank is also the parent of
Stone Capital Management, Inc., a SEC registered investment advisory firm,
which offers wealth management and investment advice and United First Mortgage,
Inc., which operates 4 retail mortgage offices in Virginia. First Community
Bancshares, Inc.s common stock is traded on the NASDAQ National market under
the symbol FCBC.
FORWARD LOOKING STATEMENTS
The Company may from time to time make written or oral forward-looking
statements, including statements contained in its filings with the Securities
and Exchange Commission (SEC) (including this Quarterly Report on Form 10-Q
and the Exhibits hereto and thereto), in its reports to stockholders and in
other communications 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 Companys 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 Companys 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 Companys financial
performance to differ materially from that expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System; inflation, interest rate, market and monetary fluctuations; the
timely development of competitive new products and services of the 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 Companys 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 Companys non-interest or fee income being less
than expected; unanticipated regulatory or judicial proceedings; changes in
consumer spending and saving habits; and the success of the Company at managing
the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
First Communitys consolidated financial statements are prepared in accordance
with U. S. generally accepted accounting principles and conform to general
practices within the banking industry. First Communitys financial position
and results of operations are affected by managements application of
accounting policies, including judgments made to arrive at the carrying value
of assets and liabilities and amounts reported for revenues, expenses and
related disclosures. Different assumptions in the application of these policies
could result in material changes in First Communitys consolidated financial
position and/or consolidated results of operations.
Estimates, assumptions, and judgments are necessary principally when assets and
liabilities are required to be recorded at estimated fair value, when a decline
in the value of an asset carried on the financial statements at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability needs to be recorded based upon the probability of
occurrence of a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and
the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by third
party sources, when available. When third party information is not available,
valuation adjustments are estimated in good faith by management primarily
through the use of internal modeling techniques and/or appraisal estimates.
17
First Communitys accounting policies are fundamental to understanding
Managements Discussion and Analysis of Financial Condition and Results of
Operations. The following is a summary of First Communitys more subjective
and complex critical accounting policies. In addition, the disclosures
presented in the Notes to the Consolidated Financial Statements and in
managements discussion and analysis, provide information on how significant
assets and liabilities are valued in the financial statements and how those
values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses, the valuation of loans held for sale and the
valuation of derivative instruments utilized in mortgage banking and hedging
activity to be the accounting areas that require the most subjective or complex
judgments.
Allowance for Loan Losses:
The allowance for loan losses is established and
maintained at levels management deems adequate to cover losses inherent in the
portfolio as of the balance sheet date and is based on managements evaluation
of the risks in the loan portfolio and changes in the nature and volume of loan
activity. Estimates for loan losses are determined by analyzing historical
loan losses, current trends in delinquencies and charge-offs, plans for problem
loan resolution, the opinions of FCBIs regulators, changes in the size and
composition of the loan portfolio and industry information. Also included in
managements estimates for loan losses are considerations with respect to the
impact of economic events, the outcome of which are uncertain. These events
may include, but are not limited to, a general slowdown in the economy,
fluctuations in overall lending rates, political conditions, legislation that
may directly or indirectly affect the banking industry and economic conditions
affecting specific geographic areas in which First Community conducts business.
As more fully described in the Notes to the Consolidated Financial Statements
and in the discussion included in the Allowance for Loan Losses section of
Managements Discussion and Analysis, the Company determines the allowance for
loan losses by making specific allocations to impaired loans and loan pools
that exhibit inherent weaknesses and various credit risk factors. Allocations
to loan pools are developed giving weight to risk ratings, historical loss
trends and managements 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 the
Companys credit administration department 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 and commercial real
estate portfolios require more specific analysis of individually significant
loans and the borrowers underlying cash flow, business conditions, capacity
for debt repayment and the valuation of secondary sources of payment
(collateral). This analysis may result in specifically identified weaknesses
and corresponding specific impairment allowances.
The use of various estimates and judgments in the Companys ongoing evaluation
of the required level of allowance can significantly impact the Companys
results of operations and financial condition and may result in either greater
provisions against earnings to increase the allowance or reduced provisions
based upon managements current view of portfolio and economic conditions and
the application of revised estimates and assumptions.
Loans Held for Sale, Derivative Instruments and Hedging Activities:
UFMs
operations, currently included as discontinued operations, provided a
distribution outlet for the sale of loans produced by UFMs wholesale division
(terminated in July 2004) and retail operations. It originates residential
mortgage loans through its production offices located in Eastern Virginia and
sells the majority of its loans through pooled commitments to national
investors on a servicing released basis. Through June 30, 2004, UFM also
acquired loans from a network of wholesale brokers for subsequent resale to
these national investors. UFM originates all loans with the intent to sell.
Loans held for sale are stated at the lower of cost or market (LOCOM). The
LOCOM analysis on pools of homogeneous loans is applied on a net aggregate
basis. Interest income with respect to loans held for sale is accrued on the
principal amount outstanding. LOCOM valuation techniques applicable to loans
held for sale are based on estimated market price indications for similar
loans. Pricing estimates are established by participating mortgage purchasers
and prevailing economic conditions. The majority of the loans held for sale
have established market pricing indications. The loans held for sale portfolio
originated by UFM at June 30, 2004 was $18.4 million compared to $17.7 million
at December 31, 2003.
Risks associated with this lending function include interest rate risk, which
is mitigated through the utilization of financial instruments (commonly
referred to as derivatives) to assist in offsetting the effect of changing
interest rates. The Company accounts for these instruments in accordance with
FASB Statement No. 133, as amended Accounting for Derivative Instruments and
Hedging Activity. This Statement established accounting and reporting
standards for derivative instruments and for hedging activities. UFM uses
forward mortgage contracts and options (short position sales and options) to
manage interest rate risk in the pipeline of loans and interest rate lock
commitments (RLCs) from the point of the loan commitment
18
to the subsequent
allocation and delivery to outside investors. As a result of the timing from
origination to sale, and the likelihood of changing interest rates, forward commitments and options are
placed with counter-parties to attempt to counter the effect of changing
interest rates. The options and forward commitments to sell securities are
considered to be derivatives and, as such, are recorded on the consolidated
balance sheets at fair value. The changes in the fair value of derivatives are
reflected in the consolidated statements of income as gain or loss.
The fair value of the RLCs is based on prevailing interest rates, and the
assumed probability of closing (pull-through). The assumption of a given
pull-through percentage enters into the determination of the volume of
derivative contracts. Pull-through assumptions are continually monitored for
changes in the interest rate environment and characteristics of the pool of
RLCs. Differences between pull-through assumptions and actual pull-through
could result in a mismatch in the volume of security contracts corresponding to
RLCs and lead to volatility in profit margins on the loan products ultimately
delivered. As more fully described in Note 7, to the Notes to Consolidated
Financial Statements under Recent Accounting Developments, effective January 1,
2004, the Company adopted the valuation techniques used to measure loan
commitments in recent guidance issued by the SEC in Staff Accounting Bulletin
(SAB) 105. SAB 105 indicates that the value of internally generated loans
has little or no value at inception separate from the servicing intangible that
is created upon subsequent sale of the loan. Management applied SAB 105 in the
first quarter of 2004 through the elimination of the servicing component of the
sales price for the RLC valuation, which had a negative impact of $252,000 on
the market value of the commitments outstanding.
The valuation of RLCs is considered critical because of the impact of borrower
behavior and the impact that this behavior pattern will have on the
pull-through ratio during times of significant rate volatility. Customer
behavior is modeled by a mathematical tool based upon historical pull-through
experience; however, substantial volatility can be experienced, as has been the
case over the last year, as a result of the general movement in mortgage rates.
As a result, pull-through has varied significantly over this time period.
While customer behavior is difficult to model, the mathematical tool utilized
by UFM incorporates volatility derived from market data in an attempt to
anticipate borrower reaction to market rate movements and the corresponding
desired security coverage.
At June 30, 2004, UFM held an investment in forward mortgage contracts with a
notional value of $27.0 million and mortgage-backed security put options
totaling $3.0 million. These instruments are collectively referred to as
hedging instruments or securities. These contracts hedge interest rate risk
associated with RLCs and closed loans not allocated to a forward commitment of
$35.5 million. At June 30, 2004, the fair value of the securities was a
liability of $267,000, which represents a $51,000 decrease in the fair value of
the liability since December 31, 2003. The fair value of the RLCs at June 30,
2004 declined $288,000 from the fair value at December 31, 2003 including
$252,000 related to the adoption of SAB 105.
For the six months ended June 30, 2004, the Company recognized $833,000 in
gains on forward mortgage derivative contracts to originate and sell $282.4
million in loans, compared to the first six months of the prior year in which
$472.3 million in loans were originated for sale with underlying forward
mortgage contracts that cost $3.3 million. The lower cost of forward mortgage
contracts between the two periods is reflective of the volatility of the
pricing of these types of contracts during times of significant interest rate
volatility. Although the pricing of the contracts was favorable to the Company
in the current period, UFMs pricing and margin on loans sold were
substantially less favorable as a result of the market pricing dynamics and
significant competitive forces. The significant decrease in hedging cost as
well as the market price of loans sold, demonstrate the potential volatility to
earnings and the sensitivity to pull-through assumptions. The cost of these
derivative contracts is included as a component of the (loss) income from
discontinued operations in the consolidated statements of income.
RECENT ACQUISITIONS AND BRANCHING ACTIVITY
The Company acquired PCB Bancorp, Inc., a Tennessee-chartered bank holding
company (PCB Bancorp) after the close of business on March 31, 2004. PCB
Bancorp has six full service branch offices located in Johnson City, Kingsport
and surrounding areas in Washington and Sullivan Counties in East Tennessee.
PCB Bancorp had total assets of $171 million, loans of $128 million and total
deposits of $150 million as of the date of the merger. The assets, liabilities
and results of operations have been included in the Companys financial
statements beginning with the second quarter 2004.
Under the terms of the acquisition agreement, shares of PCB Bancorp common
stock were purchased for $40.00 per share in cash. The total deal value,
including the cash-out of outstanding stock options, was approximately $36.0
million. Concurrent with the PCB Bancorp acquisition, Peoples Community Bank,
the wholly-owned subsidiary of PCB Bancorp, was merged into First Community
Bank, N.A., a wholly-owned subsidiary of the Company.
In June 2003, the Company acquired CommonWealth, a Virginia-chartered
commercial bank for total consideration of approximately $23.2 million. The
merger was accomplished through the exchange of .9015 shares of the Companys
common stock valued at $30.50, cash, or a combination of the Companys stock
and cash equivalent to $30.50 for each share of
19
CommonWealth common stock. At
acquisition, CommonWealth had total assets of $136.5 million, net loans of
$120.0 million and total deposits of $105.0 million.
In February 2004, as part of the Companys planned expansion into the Central
Piedmont area of North Carolina, the Company opened two loan production offices
in Charlotte and Mount Airy, North Carolina. The Charlotte office has since
been converted to a full-service branch. Also, in the second quarter of 2004,
two new loan production offices were opened, or were in the process of being
opened in Norfolk and Blacksburg, Virginia.
In the second and third quarters of 2003, the Company opened three de novo
branches in Winston-Salem, North Carolina. The Company does not anticipate
that these branches will be profitable until market development has proven
successful and adequate loan balances and corresponding loan revenue are
established to support the added facilities, infrastructure and other operating
costs of these branches.
In January 2003, the Bank completed the acquisition of Stone Capital, based in
Beckley, West Virginia. This acquisition expanded the Banks operations to
include a broader range of financial services, including wealth management,
asset allocation, financial planning and investment advice. Stone Capital at
June 30, 2004 had total assets of $67.4 million under management and continues
to operate under its name. Stone Capital was acquired through the issuance of
8,409 shares of Company common stock, which represents 50% of the total
consideration. In 2003, Stone Capital exceeded the annual revenue requirement
outlined in the acquisition agreement and another 2,541 shares were paid to the
original shareholders subsequent to December 31, 2003. The balance of the
remaining consideration ($175,000) is payable over the next two years in the
form of Company common stock, subject to the achievement of minimum revenue
requirements set forth in the acquisition agreement.
RESULTS OF OPERATIONS
General
Net income for the six months ended June 30, 2004 was $9.9 million or $0.87 per
diluted share compared with $13.7 million or $1.25 per diluted share for the
six months ended June 30, 2003. Income from continuing operations for the six
months ended June 30, 2004 was $13.2 million, versus $12.8 million for the six
months ended June 30, 2003. Contributing to this increase in income from
continuing operations was a $3.0 million or 9.9% increase in net interest
income and a $2.3 million or 34.6% increase in non-interest income. Return on
average equity from continuing operations for the first six months of 2004 was
14.98% compared to 16.25% for the first six months of last year. Return on
average assets from continuing operations was 1.52% compared to 1.73% for the
first six months of 2003.
On July 8, 2004 First Community announced the termination of a previously announced
sale of its mortgage subsidiary. While the mortgage banking subsidiary
continues to be held for sale, termination of the previously announced sale led
to the elimination of the wholesale portion of the mortgage companys business
and substantial downsizing of the remaining retail division. In connection
with the exit of its wholesale mortgage banking business and as previously
reported, the company recorded impairment charges of $933,000 in the second
quarter of 2004 (and $1,385,000 for the first six months of 2004) to reduce the
carrying value of the subsidiary to its estimated fair value less costs to
sell. To facilitate its decision to exit the wholesale mortgage banking
business, First Community has provided management and professional resources to
settle the mortgage companys wholesale interest rate lock commitments; has
overseen a transition in management at the mortgage company; and has taken
steps to reduce overhead for the Companys remaining mortgage business, which
will be offered through its retail network. The strategic decision to exit the
wholesale mortgage business will reduce the Companys exposure to risk
associated with the large fluctuations previously experienced in the
volume-driven, wholesale business and its hedged interest rate lock commitments
and closed loans. The change in strategic direction and decision to exit the
wholesale mortgage business will permit the Company to focus its resources on
its core community banking business, which has continued to grow and perform.
The results of operations of the mortgage company are reported as discontinued
operations. The loss from discontinued operations was $1.9 million or $0.17
per diluted share for the second quarter of 2004 and $3.3 million or $0.29 per
diluted share for the six months ended June 30, 2004.
Net Interest IncomeYear-to-date Comparison (See Table I)
Net interest income, the largest contributor to earnings, was $33.6 million for
the six months ended June 30, 2004 compared to $30.6 million for the
corresponding period in 2003. For purposes of the following discussion,
comparison of net interest income is done on a tax equivalent basis, which
provides a common basis for comparing yields on earning assets exempt from
federal income taxes to those which are fully taxable. As indicated in Table
I, tax equivalent net interest income totaled $35.8 million for the six months
ended June 30, 2004, an increase of $3.4 million from the $32.4 million
reported in the first six months of 2003. This $3.4 million increase was based
on an $8.4 million increase in volume as earning assets were added to the
portfolio which was partially offset by a $5.0 million reduction due to rate
changes on the underlying assets as asset yields fell in the declining rate
environment. Management was able to help counter the effect of the declining
asset yield through aggressive management of deposit rates. Average earning
assets increased $220.3 million while interest-bearing liabilities
20
increased
$201.2 million. As indicated in Table I, the yield on average earning assets
decreased 61 basis points from 6.69% for the six months ended June 30, 2003 to
6.08% for the six months ended June 30, 2004. However, this decrease was
largely offset by a 47 basis point decline in the cost of funds during the same period
leaving the net interest rate spread (the difference between interest income on
earning assets and expense on interest bearing liabilities) lower at 4.20%
compared to 4.34% for the same period last year. The Companys tax equivalent net
interest margin of 4.48% for the six months ended June 30, 2004 decreased 25
basis points from 4.73% in 2003.
The largest contributor to the decrease in the yield on average earning assets
in 2004, on a volume-weighted basis, was the decrease in the overall tax
equivalent yield on loans held for investment of 77 basis points from the prior
year to 6.68%, as loans repriced downward in response to the declining rate
environment while the average balance increased $172.3 million. The decline in
asset yield is attributable to the current interest rate environment which
creates refinancing or repricing incentives for fixed rate borrowers to lower
their current borrowing costs. In addition, due to the volume of loans
directly tied to prime and other indices that are either adjustable
incrementally or are variable rate advances, asset yields have declined in
response to rate cuts and drops in the prime loan rate which began in 2001.
During the six months ended June 30, 2004, the taxable equivalent yield on
securities available for sale decreased 50 basis points to 4.65% while the
average balance increased by $57.8 million. Consistent with the current rate
environment, the Company and the securities industry as a whole have
experienced rapid turnover in securities as higher yielding securities are
either called or prepaid as the refinancing opportunity presents itself.
Although the total portfolio grew by $57.8 million from June 30, 2003, the
relative rate on securities acquired since that time has declined
substantially. The increasing average security balance is the result of
continued reinvestment of available funds largely through bank
acquisitions. The June 30, 2004 average balance of investment securities held to maturity
decreased by $2.9 million to $37.3 million while the yield decreased only 10
basis points to 7.99% compared to the June 30, 2003 year-to-date average yield
of 8.09%.
Compared to the June 30, 2003 average interest-bearing balances with banks of
$41.2 million, these funds decreased $4.2 million while the yield decreased 9
basis points to 1.47%.
The Company actively manages its product pricing by staying abreast of the
current economic climate and competitive forces in order to enhance repricing
opportunities available with respect to the liability side of its balance
sheet. In doing so, the cost of interest-bearing liabilities decreased by 47
basis points from 2.35% for the six months ended June 30, 2003 to 1.88% for the
same period of 2004 while the average volume increased $201.2 million. Active
deposit liability pricing management is performed weekly.
When comparing the six months ended June 30, 2004 to the corresponding period
of the prior year, the 2004 average balance of FHLB and other short-term
convertible and callable borrowings increased by $71.2 million in 2004 to
$126.2 million while the rate decreased 228 basis points to 4.47%, the result
of the addition of balances acquired with the CommonWealth and PCB
acquisitions
and the addition of new advances at lower rates which partially funded the PCB
acquisition. The average balance of all other borrowings increased $7 million
for the first six months of 2004 versus 2003 as a result of the issuance of $15
million in trust preferred securities late in the third quarter of
2003 while
the rate paid decreased 105 basis points.
Average fed funds and repurchase agreements increased $9.1 million at June 30,
2004, while the average rate decreased 65 basis points compared to the same
period in 2003. In addition, the average balances of interest-bearing demand
and savings deposits increased $71.2 million and $26.4 million, respectively, for the
six months ended June 30, 2004 while the corresponding average rate paid on
these deposit categories declined 21 and 13 basis points, respectively.
Average time deposits increased $16.4 million while the average rate paid
decreased 59 basis points from 3.05% in 2003 to 2.46% in 2004. The level of
average non-interest-bearing demand deposits increased $40.0 million to $204.3
million at June 30, 2004 compared to the corresponding period of the prior
year. Average interest bearing deposits and non-interest bearing demand
deposits for the acquired CommonWealth Bank branches totaled $64.9 million and
$25.6 million at June 30, 2004 and $8.8 million and $4.9 million at June 30, 2003.
Included in the June 30, 2004 average balances related to the PCB acquisition
for interest-bearing and non-interest bearing deposits were $67.7 million and
$9.0 million at June 30, 2004, respectively.
Net Interest Income Quarterly Comparison (See Table II)
Net interest income for the quarter ended June 30, 2004 was $17.6 million
compared to $15.5 million for the same period in 2003, an increase of $2.1
million. Likewise, tax equivalent net interest income increased $2.5 million
from $16.4 million for the quarter ended June 30, 2003, to $18.9 million for
the quarter ended June 30, 2004 (refer to Table II). A 46 basis point decrease
in the rate paid on interest-bearing liabilities partially offset a 53 basis
point decline in the average rate earned on interest-earning assets, resulting
in a decrease in the net interest margin of 18 basis points to 4.51% for the
quarter ended June 30, 2004. While the net interest margin decreased, average
earning assets increased $277.6 million in the second quarter of 2004 compared
to the second quarter of 2003 resulting in the improvements in net interest
income. The largest increases in average earning assets included increases in
average loans held for investment of $240.9 million and securities available for sale
of $55.5 million. In the second quarter of 2004, average interest-bearing
deposits with banks decreased $13.2 million and Fed Funds Sold decreased
$427,000. The $2.4 million increase in net
21
interest income was achieved
through the combined effect of changes in volume and corresponding rates on the
underlying assets and liabilities. Earnings attributable to the net volume
increase in earning assets over paying liabilities was approximately $9.4
million while the effect of declining rates represented an offsetting net
reduction of approximately $6.9 million for a combined effect on net
interest income of $2.4 million. The volume driven increase in net interest
income is largely attributable to the PCB acquisition which contributed $1.3
million in net interest income in the second quarter of 2004 following the
March 31, 2004 consummation.
As previously mentioned, the impact of the declining interest rate environment
continued to reduce asset yields as assets repriced into lower interest rate
products and as securities were replaced with lower yielding instruments
reflecting the lower rate environment. This refinancing/repricing scenario is
reflected in all categories of interest earning assets. Management continues
to focus on margin enhancement by funding the balance sheet growth with lower
priced deposits and borrowings without significantly extending balance sheet
duration (the weighted average maturity) in anticipation of future rate
increases.
Similar to the decline in asset yields created by the current interest rate
cycle, deposit and borrowing costs also have been adjusted when possible to
obtain this benefit on the liability side of the balance sheet. As previously
mentioned, management continues to strive for lower cost funding in light of
falling asset yields. Management monitors the overall performance of assets
and interest-bearing liabilities through the Companys product management
group. Total interest-bearing liabilities increased $256.4 million with
average interest-bearing deposits increasing $174.2 million. The average rate
on paying liabilities and deposits dropped 46 and 51 basis points,
respectively. For the same periods, average Fed Funds purchased and repurchase
agreements increased $11.7 million while the average rate decreased 56 basis
points. Average short-term borrowings increased $63.6 million while the rate
decreased 163 basis points and long-term borrowings increased $7.0 million
while the rate decreased 107 basis points.
22
23
24
Provision and Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to absorb
probable loan losses inherent in the loan portfolio. The allowance is
increased by charges to earnings in the form of provisions for loan losses and
recoveries of prior loan charge-offs, and decreased by loans charged off. The
provision for loan losses is calculated to bring the allowance to a level,
which, according to a systematic process of measurement, reflects the amount
needed to absorb probable losses within the portfolio.
Management performs monthly assessments to determine the appropriate level of
allowance. Differences between actual loan loss experience and estimates are
reflected through adjustments that are made by either increasing or decreasing
the loss provision based upon current measurement criteria. Commercial,
consumer and mortgage loan portfolios are evaluated separately for purposes of
determining the allowance. The specific components of the allowance include
allocations to individual commercial credits and allocations to the remaining
non-homogeneous and homogeneous pools of loans. Managements allocations are
based on judgment of qualitative and quantitative factors about both macro and
micro economic conditions reflected within the portfolio of loans and the
economy as a whole. Factors considered in this evaluation include, but are not
necessarily limited to, probable losses from loan and other credit
arrangements, general economic conditions, changes in credit concentrations or
pledged collateral, historical loan loss experience, and trends in portfolio
volume, maturities, composition, delinquencies, and non-accruals. While
management has attributed the allowance for loan losses to various portfolio
segments, the allowance is available for the entire portfolio.
The allowance for loan losses was $16.2 million on June 30, 2004, compared to
$14.6 million at December 31, 2003 and $15.7 million on June 30, 2003. The
allowance for loan losses represents 614% of non-performing loans at June 30,
2004, versus 489% and 597% at December 31, 2003 and June 30, 2003,
respectively. When other real estate is combined with non-performing loans,
the allowance equals 337% of non-performing assets at June 30, 2004 versus 288%
and 290% at December 31, 2003 and June 30, 2003, respectively. The increase in
the allowance since June 2003 and December 2003 is primarily attributable to
the acquisition of PCB and the application of various changes in risk factors
specific to this portfolio. The allowance attributable to the PCB portfolio at
the date of acquisition was $1.8 million.
FCBIs allowance for loan loss activity for the six and three month periods
ended June 30, 2004 and 2003 are as follows:
Based on the allowance for loan losses of approximately $16.2 million, $14.6
million and $15.7 million at June 30, 2004,
December 31, 2003, and June 30,
2003, respectively, the allowance to loans held for investment ratio was 1.36%
at June 30, 2004, 1.43% at December 31, 2003 and 1.53% for June 30, 2003.
Management considers the allowance adequate based upon its analysis of the
portfolio as of June 30, 2004.
The provision for loan losses for the six month period ended June 30, 2004
decreased to $1.3 million when compared to the six month period ending June 30,
2003 at $1.9 million. The decrease is largely attributable to improving asset
quality and loan loss history, changes in risk factors assigned and a decline
in volume within certain portfolio segments. Net charge-offs for the first six
months of 2004 were $1.5 million, down 31.8% from $2.2 million for the
corresponding period in 2003. Expressed as a percentage of average loans held
for investment, net charge-offs decreased from 0.24% for the six months ended
June 30, 2003 to 0.14% for the same period of 2004. The decrease in net
charge-offs is primarily attributable to an approximate $1 million charge-off
that occurred during the first quarter 2003. Net charge-offs for the quarters
ended June 30, 2004 and June 30, 2003 were $885,000 and $966,000, or 0.08% and
0.10%, respectively, of average loans held for investment.
Non-interest Income
Non-interest income consists of all revenues which are not included in interest
and fee income related to earning assets. Total non-interest income increased
approximately $2.3 million, or 37.8%, from $6.5 million for the six months
ended June 30, 2003 to $8.8 million for the corresponding period in 2004. The largest contributor
to the increase was the result of security gains of
25
$1.4 million realized
upon the decision to capture appreciation inherent in a $25.0 million
portion of the corporate bond sector of the Companys
available-for-sale investment portfolio, the market value of which
continued to decline in step with the flattening of the Treasury
yield curve. The proceeds from the sale of these securities provided
sufficient liquidity to pay-off overnight borrowings and assisted the
Company in funding increased loan demand. Along with
an increase in deposits stemming from bank acquisitions, service charges on
deposit accounts increased $454,000 or 11.9% while other service charges,
commissions and fees reflected gains of $203,000 or 19% and all other operating
income increased $364,000.
Total non-interest income of $5.6 million for the second quarter of 2004
increased $2.1 million compared to the second quarter of 2003.
$1.4 million of
this increase was the aforementioned security gains realized in June 2004.
Service charges on deposit accounts and other service charges, commissions and
fees increased $556,000 in aggregate while all other non-interest income
increased $366,000.
As mentioned previously, UFMs operating income was previously reported as
non-interest income from the Companys mortgage banking segment but is now
reported as discontinued operations in the Companys Consolidated Financial
Statements.
Non-interest Expense
Non-interest expense totaled $23.1 million for the six months ended June 30,
2004, increasing $5.6 million, or 32.2% over the same period of 2003. This
increase is primarily attributable to a $3.3 million increase in salaries and
benefits as a result of the addition of CommonWealth Bank in June 2003
($836,000), the acquisition of PCB in the second quarter of 2004 ($589,000),
the salaries and benefits associated with three North Carolina de novo branches
opened in late 2003, the opening of two new North Carolina loan
production offices in the first quarter of 2004 ($661,000), and two new loan
production offices in Virginia ($41,000), as well as a general increase in
salaries and benefits as staffing needs at several locations were satisfied in
order to support added corporate services and continued branch growth.
In 2004, occupancy and furniture and equipment expense increased by $768,000
compared to 2003. The general level of occupancy cost grew largely as a result
of the CommonWealth Bank acquisition ($188,000), the PCB acquisition
($183,000),
increases in depreciation and insurance costs associated with new de
novo branches ($115,000) and depreciation associated with continued investment
in operating equipment and technology infrastructure.
All other operating expense accounts increased $1.5 million, compared to 2003.
Included were increases in other operating expenses largely related to the
additional costs associated with the opening of three new branches in
Winston-Salem and two loan production offices in Charlotte and Mount Airy,
North Carolina ($190,000), the opening of two loan production offices in
Virginia, the acquisition of The CommonWealth Bank in Richmond, Virginia
($108,000) and the Tennessee acquisition of PCB ($173,000).
As mentioned in the year-to-date discussion, other non-interest expenses were
significantly impacted by the Companys acquisition and branching activity.
Total non-interest expense for the quarter ended June 30, 2004 increased $3.5
million over the same period in 2003. $1.9 million of this increase was an
increase in salaries and benefits. Occupancy and furniture and fixtures
increased $479,000 in aggregate, and amortization of intangibles increased
$60,000. All other operating expenses increased $1.1 million.
Income Taxes
The effective income tax rate continues to benefit from the utilization of
tax-exempt municipal securities. Municipal securities, which have offered an
attractive tax equivalent yield, have assisted in mitigating the effect of the
declining interest rate environment. The Companys effective tax rate was
28.1% for the six months ended June 30, 2004 and 28.9% for the six months ended
June 30, 2003. Tax benefit (expense) associated with discontinued operations
was ($952,000) and $606,000 for the six months ended June 30, 2004 and 2003,
respectively, and ($502,000) and $333,000 for the three months ended June 30,
2004 and 2003.
FINANCIAL POSITION
Securities
Securities held to maturity totaled $36.2 million at June 30, 2004, a decrease
of $1.8 million from December 31, 2003, the result of paydowns, maturities and
calls within the portfolio during the first six months of 2004. The market
value of investment securities held to maturity was 103.8% and 105.4% of book
value at June 30, 2004 and December 31, 2003, respectively. Recent trends in
interest rates have the effect of reducing the portfolio market value since
December 31, 2003 since the market value of debt securities reacts inversely to
rate movements. Securities available for sale were $429.5 million
26
at June 30, 2004 compared to $444.2 million at December 31, 2003, a decrease of
$14.7 million. This change reflects the purchase of $74.2 million in
securities, $36.4 million in maturities and calls, proceeds from sales of $25
million, the acquisition of $28 million with the PCB purchase, a market value
decrease of approximately $11.6 million, the continuation of larger pay-downs
of $42.3 million on mortgage-backed securities and collateralized mortgage
obligations triggered by the low interest rate environment and approximately
$1.6 million bond premium amortization. Securities available for sale are
recorded at their estimated fair market value. The unrealized gain or loss,
which is the difference between amortized cost and estimated market value, net
of related deferred taxes, is recognized in the stockholders equity section of
the balance sheet as either accumulated other comprehensive income or loss.
The unrealized losses after taxes of $2.0 million at June 30, 2004, represent a
decrease of $7.0 million from the $5.0 million gain at December 31, 2003, the
result of market value adjustments in reaction to rate movements on similar
instruments as well as gains realized on sales completed in the first six
months of 2004.
Although substantial reinvestment has been made in the available for sale
security portfolio, the Company has attempted to maintain a shorter portfolio
duration (the cash-weighted term to maturity of the portfolio) to reduce the
sensitivity of the bonds price to changes in interest rates and lessen interest
rate risk. The longer the duration, the greater the impact of changing market
rates for similar instruments. At June 30, 2004, the average estimated life of
the investment portfolio was 4.7 years (reflective of currently anticipated
prepayments). This compares to 4.2 years at December 31, 2003. The
approximate 5 month increase in average duration reflects the substantial
amount of portfolio replacement over the last six months and investment in
longer-term municipal securities.
Loan Portfolio
Loans Held for Sale:
As mentioned previously in this report, the loans held for
sale by UFM are carried as assets related to discontinued operations on the
balance sheet and have been removed from continuing operations. The remaining
balance of loans held for sale, $774,000, is held by the Bank through the newly
acquired branches in Tennessee.
Loans Held for Investment:
Total loans held for investment increased
$160.8 million to $1.19 billion at June 30, 2004 from the $1.03 billion level
at both December 31, 2003 and June 30, 2003, largely the result of the PCB
acquisition ($134.3 million). Considering the $169.5 million increase in
deposits ($152.8 million from the PCB acquisition) along with the $160.8
million increase in loans during the first six months of 2004, the loan to
deposit ratio increased slightly at June 30, 2004 compared to the December 31,
2003 level. The loan to deposit ratio was 85.1% on June 30, 2004, 83.7% on
December 31, 2003 and 81.7% on June 30, 2003.
2004 year to date average loans held for investment of $1.09 billion increased
$172 million when compared to the average for the first six months of 2003 of
$920 million. This increase was largely due to the June 6, 2003 CommonWealth
acquisition (approximately $105 million) as well as the PCB acquisition
(approximately $66 million).
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 as of June 30, 2004, December 31, 2003
and June 30, 2003.
Loan Portfolio Overview
27
Non-Performing Assets
Non-performing assets include loans on non-accrual status, loans contractually
past due 90 days or more and still accruing interest, other real estate owned
(OREO) and repossessions. Non-performing assets were $4.9 million at June
30, 2004, $6.2 million at March 31, 2004 and $5.6 million at June 30, 2003.
The percentage of non-performing assets to total loans, OREO and repossessions
was 0.4% for the quarters ended June 30, 2004 and March 31, 2004, compared to
0.5% at June 30, 2003.
The following schedule details non-performing assets by category at the close
of each of the last five quarters:
At June 30, 2004, non-accrual loans decreased $958,000 from March 31, 2004,
while ninety day past due and accruing loans remained at zero. Ongoing
activity within the classification and categories of non-performing loans
continues to include collections on delinquencies, foreclosures and movements
into or out of the non-performing classification as a result of changing
customer business conditions. The $958,000 decrease in non-accrual loans during
the second quarter of 2004 is largely the result of an elimination through
write-down, foreclosure and sale of a commercial real estate loan in the amount
of $903,000, while certain non-accrual loans were paid, moved to a current
status as a result of improved performance, or were liquidated through
foreclosure or repossession. OREO decreased $405,000 at June 30, 2004 from
March 31, 2004 as a result of liquidation of real estate or write-down to fair
market value. Other real estate owned is carried at the lesser of estimated
net realizable fair market value or cost.
In addition to loans which are classified as non-performing and impaired, the
Company closely monitors certain loans which could develop into problem loans.
These potential problem loans present characteristics of weakness or
concentrations of credit to one borrower. Among these loans at June 30, 2004
was a loan of $12.8 million which warrants close monitoring of a borrower
within the hospitality industry. The loan represents the retained portion of a
$16 million total loan shared with a participating bank. The loan is secured
by real estate improved with a national franchise hotel and parking building in
a major southeast city. The loan is further secured by the guarantee of the
principals of the borrowing entity. This loan, which was originated in 1999,
performed according to terms until it displayed delinquency in February and
March 2003 and was subsequently brought current. The loan remains current as
to principal and interest at June 30, 2004. This loan does, however,
represent one of the Companys largest credits and is within an industry which
has suffered from declining performance in recent years.
The Company is also monitoring a $3.1 million loan to a hospitality borrower
for a new property opened in 2003. The construction and opening of the hotel
which secures this loan was delayed and occupancy has not reached projected
levels necessary to adequately fund current debt service requirements. The
loan is guaranteed by the principals and is senior to a $1.3 million loan by
the SBA. The $3.1 million senior loan experienced delinquency during the
second quarter. The borrower requested conversion to interest only payments
for a period of one year to allow for stabilization of occupancy and cash flow
for the property. The Company delayed consideration of the modification
request until the principals restored the loan to current status. Subsequent
payments of principal and interest were made by the borrower which brought the
loan current. The Company has since modified the loan to allow for interest
only payments and the loan has remained current since modification.
These loans were appropriately considered in evaluating the adequacy of the
allowance for loan losses.
Deposits and Other Borrowings
Total deposits have grown $169.5 million or 13.8% since year-end 2003, largely
the result of the PCB acquisition in April, 2004 ($152.8 million). In terms of
composition, non-interest-bearing deposits increased $31.2 million ($17.8
million PCB acquisition) or 16.08%. Interest-bearing demand deposits increased $84.5
million ($79.2 million PCB), savings deposits increased $34.3 million
($31.2 million PCB) and time deposits increased $19.5 million ($24.6 million
PCB) bringing total interest-bearing deposit growth to $138.3 million ($135.0
million PCB acquisition) or 13.41% from December 31, 2003.
28
The Company acquired an additional $7.1 million in borrowed funds from the FHLB
with the acquisition of PCB. These increases together with a decrease due to
the repayment of a line of credit used to fund mortgages held by UFM brought
the Companys borrowings at June 30, 2004 to $107.3 million in convertible and
callable advances and $34.4 million of noncallable term advances from the FHLB
of Atlanta. For further discussion of FHLB borrowings, see Note 4 to the
unaudited consolidated financial statements included in this report. In
addition, FCBI issued trust preferred securities in September 2003 of $15.0
million which are also included in the total borrowings of the Company.
Stockholders Equity
Total stockholders equity was $171.4 million at June 30, 2004, decreasing $3.6
million from the $175.0 million reported at December 31, 2003 through earnings
of $9.9 million less dividends paid of $5.6 million, a decrease in other
comprehensive income of $7 million, increases of $88,000 due to Stone Capital
payments, a $149,000 increase due to stock option exercises and a net decrease
due to treasury share transactions of $1.2 million.
The Federal Reserves risk based capital guidelines and leverage ratio measure
capital adequacy of banking institutions. Risk-based capital guidelines weight
balance sheet assets and off-balance sheet commitments based on inherent risks
associated with the respective asset types. At June 30, 2004, the Companys
total risk adjusted capital-to-asset ratio was 11.48% versus 14.55% at December
31, 2003. The Companys leverage ratio at June 30, 2004 was 6.97% compared
with 8.83% at December 31, 2003. Both the risk adjusted capital-to-asset ratio
and the leverage ratio exceed the current well-capitalized levels prescribed
for banks of 10% and 5%, respectively.
PART I. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Liquidity and Capital Resources
The Company maintains a significant level of liquidity in the form of cash and
cash equivalent balances ($56.3 million), investment securities available for
sale ($429.5 million) and Federal Home Loan Bank credit availability of
approximately $411.2 million. Cash and cash equivalents as well as advances
from the Federal Home Loan Bank are immediately available for satisfaction of
deposit withdrawals, customer credit needs and operations of the Company.
Investment securities available for sale represent a secondary level of
liquidity available for conversion to liquid funds in the event of
extraordinary needs. The Company also maintains approved lines of credit with
correspondent banks as backup liquidity sources.
The Company maintains a liquidity policy as a means to manage the liquidity
risk process and associated risk. The policy includes a Liquidity Contingency
Plan that is designed as a tool for the Company to detect liquidity issues
promptly in order to protect depositors, creditors and shareholders. The Plan
includes monitoring various internal and external indicators such as changes in
core deposits and changes in market conditions. It provides for timely
responses to a wide variety of funding scenarios ranging from changes in loan
demand to a decline in the Companys quarterly earnings to a decline in the
market price of the Companys stock. The Plan calls for specific responses
designed to meet a wide range of liquidity needs based upon assessments on a
recurring basis by management and the Board of Directors.
Interest Rate Risk (IRR) and Asset/Liability Management
While the Company continues to strive to decrease its dependence on net
interest income, the Banks profitability is dependent to a large extent upon
its ability to manage its net interest margin. The Bank, like other financial
institutions, is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing
liabilities. The Bank manages its mix of assets and liabilities with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity,
and coordinating its sources and uses of funds. Specific strategies for
management of IRR have included shortening the amortized maturity of fixed-rate
loans and increasing the volume of adjustable rate loans to reduce the average
maturity of the Banks interest-earning assets.
The Companys risk profile continues to reflect a position that is asset
sensitive. The substantial level of prepayments and calls on loans and
securities are consistent with the low rate environment that prevailed over the
past year. In addition, the success of deposit funding campaigns has led to a strong liquidity position as reflected in the level of cash reserves
and due from balances of approximately $56.3 million. The Company continues to
reinvest the funds generated from asset paydowns and prepayments within a
framework that attempts to maintain an acceptable net interest margin in the
current interest rate environment.
29
The discontinued mortgage operations of UFM used investments commonly referred
to as forward transactions and options or derivatives to balance the risk
inherent in interest rate lock commitments made to prospective borrowers. The
pipeline of loans is hedged to mitigate unusual fluctuations in the cash flows
derived upon settlement of the loans with secondary market purchasers and,
consequently, to achieve a desired margin upon delivery. The derivative
financial instruments represented by these hedging transactions are recorded at
fair value in the Consolidated Balance Sheets and the changes in fair value are
reflected in the Consolidated Statements of Income. Until June 30, 2004, UFM
utilized mortgage derivative contracts as an interest rate risk management tool
to hedge against exposure to changing interest rates as loan commitments were
originated. A more complete discussion of loans held for sale, derivative
instruments and hedging activities and the underlying impact is included within
the
Application of Critical Accounting Policies
section of the Managements
Discussion and Analysis included herein. After the close of business on June
30, 2004, a plan was implemented in conjunction with the UFM wholesale line of
business divestiture to cease using hedging instruments on loan production.
The remaining securities in place at June 30, 2004 will be settled through
normal business channels and ongoing rate lock commitments will be given to
borrowers subject to the Companys placement with a purchaser/investor.
The Companys earnings sensitivity measurements completed on a quarterly basis
indicate that the performance criteria, against which sensitivity is measured,
are currently within the Companys defined policy limits. A more complete
discussion of the overall interest rate risk is included in the Companys
annual report on Form 10-K for December 31, 2003.
PART I. ITEM 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer along with the
Companys Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures pursuant to the
Securities Exchange Act of 1934 (Exchange Act) Rule 13a-15(b). Based upon
that evaluation, the Companys Chief Executive Officer along with the Companys
Chief Financial Officer concluded that the Companys 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 Companys periodic SEC filings. There has not been any
change in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
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 SECs 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 Companys
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently a defendant in various legal actions and asserted
claims involving lending and collection activities and other matters in the
normal course of business. While the Company and legal counsel are unable to
assess the ultimate outcome of each of these matters with certainty, they are
of the belief that the resolution of these actions should not have a material
adverse affect on the financial position of the Company.
In May, 2004, the Company was named a party to an action filed in the Circuit
Court of Nicholas County, West Virginia by Fidelity & Guaranty Life Insurance
Company seeking to determine the rights of the Companys banking subsidiary and
members of the LeRose family to $1,000,000 in life insurance proceeds paid on a
life insurance policy previously assigned to the Bank as partial collateral for
a multimillion indebtedness due and owing to the bank as a consequence of a
kiting scheme. The life insurance proceeds have been paid by the insurance
company into a court-administered account for ultimate distribution to the
rightful owner.
30
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(c) Issuer Purchases of Equity Securities
The following table sets forth purchases by the Company (on the open market) of
its equity securities during the three months ended June 30, 2004.
The Companys stock repurchase plan allowing the purchase of up to 436,000
shares was announced September 18, 2001, amended by the Board to
500,000 shares on
March 18, 2003 and again on May 18, 2004 to purchase up to 550,000 shares. The
plan has no expiration date and no plans have expired during the reporting
period. No determination has been made to terminate the plan or to stop
making purchases.
Item 3. Defaults Upon Senior Securities
Not Applicable
31
Item 4. Submission of Matters to a Vote of Security Holders
Proposal 1. Election of Directors:
Proposal 2. Ratification of the 2004 Omnibus Stock Option Plan:
Proposal 3. Ratification of the selection of Ernst & Young LLP as independent auditors:
Item 5. Other Information
32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
33
34
SIGNATURES
Pursuant to the requirements 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.
First Community Bancshares, Inc.
DATE: August 6, 2004
DATE: August 6, 2004
35
Index to Exhibits
36
June 30,
December 31,
2004
2003
(Unaudited)
(Note 1)
$
41,533
$
37,173
14,799
22,136
56,332
59,309
429,478
444,194
36,209
38,020
774
424
1,186,954
1,026,191
16,160
14,624
1,170,794
1,011,567
35,071
29,816
2,166
2,091
8,653
8,327
25,566
17,266
59,297
37,978
2,706
1,363
22,192
22,372
$
1,849,238
$
1,672,727
$
225,241
$
194,046
1,169,788
1,031,490
1,395,029
1,225,536
11,501
11,897
109,252
97,651
125,941
129,616
15,000
15,000
21,130
17,992
1,677,853
1,497,692
11,451,062 and 11,442,348 issued in 2004 and 2003, and
11,215,473 and 11,242,443 outstanding in 2004 and 2003
11,451
11,442
108,078
108,128
61,153
56,894
(7,321
)
(6,407
)
(1,976
)
4,978
171,385
175,035
$
1,849,238
$
1,672,727
Table of Contents
(Amounts in Thousands Except Share and Per Share Data) (Unaudited)
Six Months Ended
Three Months Ended
June 30
June 30
June 30
June 30
2004
2003
2004
2003
$
36,242
$
33,874
$
19,112
$
16,982
6,699
6,519
3,433
3,385
3,343
3,299
1,707
1,642
301
358
104
143
46,585
44,050
24,356
22,152
9,128
10,459
4,813
5,142
3,429
2,718
1,707
1,340
417
297
209
150
12,974
13,474
6,729
6,632
33,611
30,576
17,627
15,520
1,255
1,897
723
1,308
32,356
28,679
16,904
14,212
930
981
512
649
4,261
3,807
2,301
1,986
1,272
1,069
713
472
905
541
610
244
1,449
153
1,438
133
8,817
6,551
5,574
3,484
12,775
9,466
6,662
4,784
1,746
1,456
894
720
1,373
895
747
442
175
114
111
51
7,067
5,566
3,812
2,756
23,136
17,497
12,226
8,753
18,037
17,733
10,252
8,943
4,849
4,969
2,666
2,499
13,188
12,764
7,586
6,444
(4,265
)
1,557
(2,374
)
856
(952
)
606
(502
)
333
$
(3,313
)
$
951
$
(1,872
)
$
523
$
9,875
$
13,715
$
5,714
$
6,967
$
0.88
$
1.25
$
0.51
$
0.63
$
0.87
$
1.25
$
0.50
$
0.63
$
1.17
$
1.17
$
0.67
$
0.59
$
1.16
$
1.17
$
0.67
$
0.59
11,237,225
10,937,927
11,228,956
10,969,748
11,334,096
11,021,010
11,320,415
11,084,847
Table of Contents
(Amounts in Thousands) (Unaudited)
Six Months Ended
June 30
2004
2003
$
13,188
$
12,764
1,255
1,897
1,297
853
175
114
(195
)
(49
)
1,199
1,198
(1,544
)
(157
)
(11,206
)
(304
)
10,856
606
(604
)
(2,419
)
(3,698
)
(1,693
)
6,300
11,519
18,314
26,410
3,601
78,633
64,623
2,347
1,265
(74,177
)
(183,887
)
(32,068
)
20,712
(2,936
)
(4,565
)
329
56
(26,272
)
1,339
(27,734
)
(96,856
)
26,021
12,188
(5,374
)
(444
)
(598
)
27,282
(4
)
(4
)
(1,192
)
(3,062
)
(5,615
)
(5,223
)
13,238
30,737
1,125
(81
)
(1,852
)
(47,886
)
61,552
124,585
$
59,700
$
76,699
$
56,332
$
74,229
3,368
2,470
$
59,700
$
76,699
Table of Contents
(Amounts in Thousands, Except Share and Per Share Information) (Unaudited)
Accumulated
Additional
Other
Common
Paid-in
Retained
Treasury
Comprehensive
Stock
Capital
Earnings
Stock
(Loss) Income
Total
$
9,957
$
58,642
$
79,084
$
(1,982
)
$
6,761
$
152,462
13,715
13,715
1,750
1,750
(5,223
)
(5,223
)
(3,062
)
(3,062
)
8
236
244
390
14,031
14,421
1,035
35,392
(36,427
)
(58
)
336
278
43
680
723
$
11,390
$
108,286
$
51,149
$
(4,028
)
$
8,511
$
175,308
$
11,442
$
108,128
$
56,894
$
(6,407
)
$
4,978
$
175,035
9,875
9,875
(6,954
)
(6,954
)
(5,616
)
(5,616
)
(1,192
)
(1,192
)
3
85
88
6
(135
)
278
149
$
11,451
$
108,078
$
61,153
$
(7,321
)
$
(1,976
)
$
171,385
Table of Contents
Table of Contents
Six Months
Six Months
Three Months
Three Months
Ended
Ended
Ended
Ended
June 30,
June 30,
June 30,
June 30,
2004
2003
2004
2003
(Amounts in Thousands)
$
9,875
$
13,715
$
5,714
$
6,967
(86
)
(78
)
(48
)
(39
)
$
9,789
$
13,637
$
5,666
$
6,928
$
13,188
$
12,764
$
7,586
$
6,444
(86
)
(78
)
(48
)
(39
)
$
13,102
$
12,686
$
7,538
$
6,405
$
0.88
$
1.25
$
0.51
$
0.63
$
0.87
$
1.24
$
0.50
$
0.62
$
0.87
$
1.25
$
0.50
$
0.63
$
0.86
$
1.24
$
0.50
$
0.62
$
1.17
$
1.17
$
0.67
$
0.59
$
1.17
$
1.16
$
0.67
$
0.58
$
1.16
$
1.17
$
0.67
$
0.59
$
1.16
$
1.15
$
0.67
$
0.58
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Six Months Ended
Three Months Ended
June 30,
June 30,
June 30,
June 30,
2004
2003
2004
2003
(Amounts in Thousands)
(Amounts in Thousands)
$
(10,149
)
$
3,059
$
(12,974
)
$
4,257
4,060
(1,224
)
5,190
(1,702
)
(6,089
)
1,835
(7,784
)
2,555
(1,441
)
(143
)
(1,430
)
(133
)
576
58
572
53
(6,954
)
1,750
(8,642
)
2,475
4,978
6,761
6,666
6,036
$
(1,976
)
$
8,511
$
(1,976
)
$
8,511
Table of Contents
For the Six Months Ended
For the Three Months Ended
June 30,
June 30,
June 30,
June 30,
2004
2003
2004
2003
$
13,188
$
12,764
$
7,586
$
6,444
(3,313
)
951
(1,872
)
523
$
9,875
$
13,715
$
5,714
$
6,967
11,237,225
10,937,927
11,228,956
10,969,748
94,330
78,959
88,918
110,602
2,541
4,124
2,541
4,497
11,334,096
11,021,010
11,320,415
11,084,847
$
1.17
$
1.17
$
0.67
$
0.59
(0.29
)
0.08
(0.16
)
0.04
0.88
1.25
0.51
0.63
$
1.16
$
1.17
$
0.67
$
0.59
(0.29
)
0.08
(0.17
)
0.04
0.87
1.25
0.50
0.63
Table of Contents
Table of Contents
First Community Bancshares, Inc.
Table of Contents
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Table of Contents
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in Thousands)
Six Months Ended
Six Months Ended
June 30, 2004
June 30, 2003
Average
Interest
Yield/Rate
Average
Interest
Yield/Rate
Balance
(1)
(1)
Balance
(1)
(1)
$
1,087,558
$
36,148
6.69
%
$
914,231
$
33,731
7.45
%
4,757
145
6.13
%
5,759
219
7.67
%
1,092,315
36,293
6.68
%
919,990
33,950
7.45
%
(15,553
)
(14,163
)
1,076,762
36,293
905,827
33,950
342,468
6,687
3.93
%
296,094
6,501
4.43
%
105,917
3,674
6.98
%
94,480
3,482
7.43
%
448,385
10,361
4.65
%
390,574
9,983
5.15
%
426
12
5.66
%
626
18
5.80
%
36,838
1,469
8.02
%
39,567
1,594
8.12
%
37,264
1,481
7.99
%
40,193
1,612
8.09
%
41,154
300
1.47
%
45,377
350
1.56
%
120
1
0.90
%
1,376
8
1.17
%
1,603,685
48,436
6.08
%
1,383,347
45,903
6.69
%
146,394
103,938
25,356
54,844
$
1,775,435
$
1,542,129
$
281,232
$
683
0.49
%
$
210,077
$
732
0.70
%
208,893
569
0.55
%
182,515
611
0.68
%
619,519
7,576
2.46
%
603,163
9,116
3.05
%
1,109,644
8,828
1.60
%
995,755
10,459
2.12
%
104,087
625
1.21
%
94,964
876
1.86
%
126,172
2,804
4.47
%
54,996
1,842
6.75
%
17,010
417
4.93
%
10,015
297
5.98
%
1,356,913
12,674
1.88
%
1,155,730
13,474
2.35
%
204,264
164,243
15,053
15,370
22,173
48,399
177,032
158,387
$
1,775,435
$
1,542,129
$
35,762
$
32,429
4.20
%
4.34
%
4.48
%
4.73
%
(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 yield on earning assets and cost of funds.
(4)
Represents tax equivalent net interest income divided by average interest earning assets.
Table of Contents
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in Thousands)
Three Months Ended
Three Months Ended
June 30, 2004
June 30, 2003
Average
Interest
Yield/Rate
Average
Interest
Yield/Rate
Balance
(1)
(1)
Balance
(1)
(1)
$
1,166,605
$
19,064
6.57
%
$
926,881
$
16,917
7.33
%
4,957
75
6.09
%
5,399
99
7.35
%
1,171,562
19,139
6.57
%
932,280
17,016
7.33
%
(16,377
)
(13,998
)
1,155,185
19,139
918,282
17,016
361,184
3,426
3.82
%
320,356
3,379
4.23
%
110,116
1,868
6.82
%
95,485
1,729
7.26
%
471,300
5,294
4.52
%
415,841
5,108
4.93
%
423
7
6.66
%
595
6
4.04
%
36,606
758
8.33
%
39,180
797
8.16
%
37,029
765
8.31
%
39,775
803
8.10
%
19,088
102
2.19
%
32,272
141
1.75
%
239
2
0.90
%
666
2
1.20
%
1,682,841
25,302
6.05
%
1,406,836
23,070
6.58
%
163,931
108,462
31,228
54,004
$
1,878,000
$
1,569,302
$
324,301
$
357
0.44
%
$
216,535
$
367
0.68
%
225,149
330
0.59
%
183,840
294
0.64
%
632,861
3,826
2.43
%
607,755
4,483
2.96
%
1,182,311
4,513
1.54
%
1,008,130
5,144
2.05
%
110,834
333
1.21
%
99,182
438
1.77
%
122,474
1,374
4.51
%
58,890
901
6.14
%
17,009
209
4.94
%
10,015
150
6.01
%
1,432,628
6,429
1.80
%
1,176,217
6,633
2.26
%
222,759
167,396
17,786
16,472
28,793
47,595
176,034
161,622
$
1,878,000
$
1,569,302
$
18,873
$
16,437
4.24
%
4.32
%
4.51
%
4.69
%
(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 yield on earning assets and cost of funds.
(4)
Represents tax equivalent net interest income divided by average interest earning assets.
Table of Contents
Table of Contents
Table of Contents
(Dollars in Thousands)
June 30, 2004
December 31, 2003
June 30, 2003
Amount
Percent
Amount
Percent
Amount
Percent
$
64,768
5.46
%
$
69,395
6.76
%
$
58,501
5.70
%
445,446
37.54
%
317,421
30.94
%
346,892
33.80
%
436,364
36.76
%
421,288
41.05
%
418,312
40.75
%
113,314
9.55
%
98,510
9.60
%
73,314
7.14
%
124,742
10.51
%
118,585
11.56
%
128,833
12.55
%
2,320
0.20
%
992
0.10
%
791
0.08
%
$
1,186,954
100.00
%
$
1,026,191
100.00
%
$
1,026,643
100.00
%
$
774
$
18,152
$
46,743
Table of Contents
Table of Contents
Table of Contents
Table of Contents
(a)
Not Applicable
(b)
Not Applicable
Table of Contents
(a)
The Annual Meeting of Stockholders was held on April 27, 2004.
(b)
The following directors were elected to serve a three-year term
through the date of the 2007 Annual Meeting of Stockholders:
Allen T. Hamner, B. W. Harvey, and John M. Mendez
(c)
Three proposals were voted upon at the annual meeting, which
included: 1) the election of the aforementioned directors as Class of
2007; 2) ratification of the 2004 Omnibus Stock Option Plan, and 3)
ratification of the selection of Ernst & Young, Charleston, West
Virginia, as independent auditors for the year ending December 31, 2004.
The results of the proposals and voting are as follows:
Votes For
Votes Withheld
7,727,183
171,070
7,788,181
110,073
7,806,628
91,626
6,399,575
417,709
222,206
858,763
7,827,595
9,190
61,468
(d)
Not Applicable
Not Applicable
Table of Contents
Exhibit No.
Exhibit
Agreement and Plan of Merger dated as of January 27, 2003, and amended as of
February 25, 2003, among First Community Bancshares, Inc., First Community Bank,
National Association, and The CommonWealth Bank. (1)
Articles of Incorporation of First Community Bancshares, Inc., as amended. (2)
Bylaws of First Community Bancshares, Inc., as amended. (2)
Specimen stock certificate of First Community Bancshares, Inc. (7)
Indenture Agreement dated September 25, 2003. (13)
Amended and Restated Declaration of Trust of FCBI Capital Trust dated September 25,
2003. (13)
Preferred Securities Guarantee Agreement dated September 25, 2003. (13)
First Community Bancshares, Inc. 1999 Stock Option Contracts (2) and Plan. (3)
Amendment to the First Community Bancshares, Inc. 1999 Stock Option Plan (14)
First Community Bancshares, Inc. 2001 Non-Qualified Directors Stock Option Plan. (4)
Employment Agreement dated January 1, 2000 and amended October 17, 2000, between
First Community Bancshares, Inc. and John M. Mendez. (2)(5)
First Community Bancshares, Inc. 2000 Executive Retention Plan. (3)
First Community Bancshares, Inc. Split Dollar Plan and Agreement. (3)
First Community Bancshares, Inc. 2001 Directors Supplemental Retirement Plan. (2)
First Community Bancshares, Inc. Wrap Plan. (7)
Employment Agreement between First Community Bancshares, Inc. and J. E. Causey
Davis. (8)
Agreement and Plan of Merger dated as of December 31, 2003 among First Community
Bancshares, Inc., First Community Bank, National Association and PCB Bancorp. (9)
Form of Indemnification Agreement between First Community Bancshares, Inc., its
Directors and Certain Executive Officers. (10)
Form of Indemnification Agreement between First Community Bank, N. A., its
Directors and Certain Executive Officers. (10)
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan. (12)
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan-Stock Award
Agreement
Statement regarding computation of earnings per share. (6)
Code of Ethics. (11)
Acknowledgement of Independent Auditors.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Certification of Chief Executive and Chief Financial Officer Section 1350.
*
Furnished herewith.
(1)
Incorporated by reference to the corresponding exhibit previously filed
as an exhibit to the Form 8-K filed with the Commission on January 28,
2003 and February 26, 2003.
Table of Contents
(2)
Incorporated by reference from the Quarterly Report on Form 10-Q for the
period ended June 30, 2002 filed on August 14, 2002.
(3)
Incorporated by reference from the Annual Report on Form 10-K for the
period ended December 31, 1999 filed on March 30, 2000, as amended April
13, 2000.
(4)
The 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.
(5)
First Community Bancshares, Inc. has entered into substantially identical
agreements with Messrs. Buzzo and Lilly, with the only differences being
with respect to title, salary and the use of a vehicle.
(6)
Incorporated by reference from Footnote 9 of the Notes to Consolidated
Financial Statements included herein.
(7)
Incorporated by reference from the Annual Report on Form 10-K for the
period ended December 31, 2002 filed on March 25, 2003, as amended on March
31, 2003.
(8)
Incorporated by reference from S-4 Registration Statement filed on March
28, 2003.
(9)
Incorporated by reference to the corresponding exhibit previously filed
as an exhibit to the Form 8-K filed with the Commission on December 31,
2003.
(10)
Form of indemnification agreement entered into by the Corporation and by
First Community Bank, N. A. with their respective directors and certain
officers of each including, for the registrant and Bank: John M. Mendez,
Robert L. Schumacher, Robert L. Buzzo, Kenneth P. Mulkey, E. Stephen Lilly
and at the Bank level: Samuel L. Elmore. 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.
(11)
Incorporated by reference from the Annual Report Filed on Form 10-K for
the period ended December 31, 2003 filed on March 26, 2004.
(12)
Incorporated by reference from the 2004 First Community Bancshares, Inc.
Definitive Proxy filed on March 19, 2004.
(13)
Incorporated by reference from the Quarterly Report on Form 10-Q for the
period ended September 30, 2003 filed on November 10, 2003.
(14)
Incorporated by reference from the Quarterly Report on Form 10-Q for the
period ended March 31, 2004 filed on May 7, 2004.
(b)
Reports on Form 8-K
A report on Form 8-K was filed on April 1, 2004 announcing the Companys
completion of the merger between the Company and PCB Bancorp, Inc.
A report on Form 8-K was filed on April 27, 2004 announcing the Companys
first quarter 2004 earnings and proposed sale of the mortgage subsidiary.
A report on Form 8-K was filed on May 19, 2004 announcing that the
Companys Board of Directors updated its authorization of the Stock
Repurchase Program.
A report on Form 8-K was filed on May 19, 2004 announcing the declaration
of the Companys second quarter dividend of $0.25 per share payable on or
about June 30, 2004 to stockholders of record on June 15, 2004.
Table of Contents
John M. Mendez
President & Chief Executive Officer
(Duly Authorized Officer)
Robert L. Schumacher
Chief Financial Officer
(Principal Accounting Officer)
Table of Contents
Exhibit No.
First Community Bancshares, Inc. 2004 Omnibus Stock Option Plan-Stock Award Agreement
Acknowledgement of Independent Auditors
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Certification of Chief Executive and Chief Financial Officer Section 1350.
Exhibit 10.13
FIRST COMMUNITY BANCSHARES, INC.
2004 OMNIBUS STOCK OPTION PLAN
STOCK AWARD AGREEMENT
First Community Bancshares, Inc.
(the Company), pursuant to its 2004 Omnibus
Stock Option Plan (the Plan), hereby grants to Grantee an Award to purchase
the number of shares of the Companys Common Stock set forth below. This Award
is subject to all of the terms and conditions as set forth herein and in this
Stock Award Agreement, and the Plan and the Notice of Exercise, each of which
are attached hereto and incorporated herein in their entirety. Acceptance of
this Award is conditioned upon the Grantees acceptance of the terms of the
Non-Competition and Non-Solicitation Agreement (the Non-Compete) an executed
copy of which also is attached hereto and incorporated herein in its entirety.
May 18, 2004
May 18, 2004
$26.24
See Item 3.Term for Definition
Type of Grant:
|
X Incentive Stock Option 1 | Nonqualified Stock Option | ||
|
Restricted Stock | Performance Award |
Exercise Schedule
:
|
X Vesting Schedule | Alternate Vesting Schedule |
Vesting Schedule
:
|
25% of the shares vest on the date of the Award Grant. Thereafter, 25% of the shares vest on each succeeding one year anniversary of the date of the Award Grant, so that 100% of the Award shall be vested as of the third anniversary of the date of the Award Grant. |
Alternate Vesting Schedule
:
|
||
|
[insert alternate/accelerated vesting schedule here, if applicable] |
Payment:
|
By
one or, as checked off, a combination of the following
items:
|
|
X
Cash or check
|
||
X
By a Broker-assisted transfer
|
||
X By delivery of already-owned shares to Company (cashless exercise)
|
1 If this is an incentive stock option, it (plus your other outstanding incentive stock options) cannot be first exercisable for more than $100,000 in any calendar year. Any excess over $100,000 is a nonqualified stock option.
The details of your Award are as follows:
1. Whole Shares Option Awards . You may exercise your option Award for whole shares of Common Stock.
2. Securities Law Compliance . The exercise of your Award must comply with applicable laws and regulations governing your Award, and you may not exercise your Award, nor do so in any particular manner if the Company determines that such exercise or the manner of exercise would not be in material compliance with such laws and regulations.
3. Term . The term of your Award commences on the Date of Grant and expires upon the earliest of the following:
| three (3) months after the termination of your employment or service with the Company for any reason other than your Disability, death or retirement, provided that if during any part of such three (3) month period your Award is not exercisable solely because of the condition set forth in the preceding paragraph relating to Securities Law Compliance, your Award shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; |
| twelve (12) months after the termination of your employment or service with the Company due to your death, Disability or Retirement; |
| the date you violated the terms of any Other Agreement (identified below); or |
| the tenth (10th) anniversary of the Date of Grant. |
If your Award is an incentive stock option, note that, to obtain the federal income tax advantages associated with an incentive stock option, the Internal Revenue Code requires that at all times beginning on the date of grant of your Award and ending on the day three (3) months before the date of your options exercise, you must be an employee of the Company or an Affiliate, except in the event of your death, Disability or Retirement. The Company has provided for extended exercisability of your Award under certain circumstances for your benefit but cannot guarantee that your Award will necessarily be treated as an incentive stock option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your Award more than three (3) months after the date your employment terminates.
4. Exercise . You may exercise the vested portion of your Award during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.
By exercising your Award you agree that, as a condition to any exercise of your Award, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your Award, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock issued pursuant to a Restricted Stock Award are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.
If your Award is an incentive stock option, by exercising your Award you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your Award that occurs within two (2) years after the date of your Award grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your Award.
By exercising your Award you agree that the Company may require that you not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for the period of time to which you are or remain subject to obligations or other restrictive covenants pursuant to the terms of one or more Additional Agreements (identified below). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period.
5. Transferability . Your Award is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your Award.
6. Company Buyback of Award Shares . In the event the Company, in its sole and reasonable discretion, determines that you have violated the terms of one or more Additional Agreements (identified below), then the Company shall have the right to repurchase from you all or any part of the shares of Common Stock you have acquired pursuant to the exercise of your Awards under the Plan and such repurchase shall be at the price you paid for such shares.
7. Award Not a Service Contract . Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an affiliate, or of the Company or an affiliate to continue your employment. In addition, nothing in your Award shall obligate the Company or an affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an affiliate.
8. Withholding Obligations . At the time you exercise your Award, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a cashless exercise to the extent permitted by the Company and as memorialized hereunder), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an affiliate, if any, which arise in connection with your Award.
Upon your request and subject to approval by the Company, in its sole
discretion, and compliance with any applicable conditions or restrictions of
law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your Award a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law. If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your Award,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your Award. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your Award that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in
connection with such share withholding procedure shall be your sole
responsibility.
You may not exercise your Award unless the tax withholding obligations of the
Company and/or any affiliate are satisfied. Accordingly, you may not be able
to exercise your Award when desired even though your Award is vested, and the
Company shall have no obligation to issue a certificate for such shares of
Common Stock or release such shares of Common Stock from any escrow provided
for herein.
9. Notices . Any notices provided for in your Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
10. Governing Plan Document . Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control.
11. Additional Terms/Acknowledgements: The undersigned Grantee acknowledges receipt of, and understands and agrees to, this Stock Award Agreement and the Plan. Grantee further acknowledges that as of the Date of Award, this Stock Award Agreement and the Plan set forth the entire understanding between Grantee and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) Awards previously granted and delivered to Grantee under the Plan, and (ii) the following agreements only:
Other Agreements:
|
Non-Competition and Non-Solicitation Agreement dated | |
|
day of , 2004 |
Attachments : Plan, Non-Competition and Non-Solicitation Agreement and Notice of Exercise
Exhibit 15
August 6, 2004
To the Board of Directors of First Community Bancshares, Inc.
We are aware of the incorporation by reference in the Registration Statements pertaining to the CommonWealth Bank Amended and Restated Stock Option Plan (Form S-8, No. 333-106338), the 2001 Directors Stock Option Plan (Form S-8, No. 333-75222), the 1999 Stock Option Plan (Form S-8, No. 333-31338) and the Employee Stock Ownership and Savings Plan (Form S-8, No. 63865) of First Community Bancshares, Inc. relating to the unaudited consolidated interim financial statements of First Community Bancshares, Inc. that are included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
/s/ Ernst & Young LLP
Charleston, West Virginia
Exhibit 31.1
CERTIFICATION
I, John M. Mendez, certify that:
Date: August 6, 2004
/s/ John M. Mendez
1.
I have reviewed this quarterly report on Form 10-Q 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 registrants 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)) 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)
Evaluated the effectiveness of the registrants 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
c)
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent functions):
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 registrants
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 registrants
internal control over financial reporting.
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Robert L. Schumacher, certify that:
Date: August 6, 2004
/s/ Robert L. Schumacher
1.
I have reviewed this quarterly report on Form 10-Q 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 registrants 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)) 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)
Evaluated the effectiveness of the registrants 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
c)
Disclosed in this report any change in the registrants
internal control over financial reporting that occurred during the
registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of the registrants
board of directors (or persons performing the equivalent functions):
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 registrants
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 registrants
internal control over financial reporting.
Chief Financial Officer
Exhibit 32
CERTIFICATION
In connection with the Quarterly Report of First Community Bancshares,
Inc. (the Company) on Form 10-Q for the period ended June 30, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the Report),
the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the
undersigneds best knowledge and belief:
(a) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(b) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated this 6th day of August, 2004.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
First Community Bancshares, Inc.
(Company)
/s/ John M. Mendez
John M. Mendez
Chief Executive Officer
/s/ Robert L. Schumacher
Robert L. Schumacher
Chief Financial Officer