First Community Bancshares, Inc.

One Community Place
P. O. Box 989
Bluefield, Virginia 24605-0989

 

March 15, 2010

 

Dear Stockholder,

 

You are invited to attend the 2010 Annual Meeting of Stockholders to be held on Tuesday, April 27, 2010 at Fincastle Country Club, 1000 Country Club Drive, Bluefield, Virginia.

 

The annual meeting will begin with a report of our operations. This report will be followed by discussion and voting on the matters set forth in the accompanying notice of annual meeting and proxy statement and discussion of other business matters properly brought before the meeting.

 

If you plan to attend the meeting, please follow the registration instructions on the last page of this proxy statement. An admission ticket, which is required for admission to the meeting, is included as part of your proxy form.

 

Whether or not you plan to attend, please ensure that your shares are represented at the meeting by promptly voting and submitting your proxy by telephone, by internet, or by completing, signing, dating and returning your proxy form in the enclosed envelope. All persons attending the 2010 Annual Meeting must present an admission ticket and picture identification.

 

Please follow the advance registration instructions on the back cover of this proxy statement regarding details for use of the admission ticket.

 

Very truly yours,

 

William P. Stafford
Chairman of the Board

Table of Contents

 

 

March 15, 2010

 

To the Stockholders:

 

First Community Bancshares, Inc.’s Annual Meeting of Stockholders will be held at Fincastle Country Club, located at 1000 Country Club Drive, Bluefield, Virginia 24605 at 11:30 a.m. local time on Tuesday, April 27, 2010. Following a report of the Corporation’s banking and related business operations, stockholders will:

 

 

Stockholders of record at the close of business on March 1, 2010 will be entitled to vote at the Annual Meeting and any adjournments.

 

Robert L. Buzzo, Secretary

 

 

 

The Board of Directors of First Community Bancshares, Inc. (the “Corporation”, “FCBI”, “First Community”, “we”, “us”, and “our”) solicits the enclosed proxy for use at the Annual Meeting of Stockholders of the Corporation (the “Annual Meeting”), which will be held on Tuesday, April 27, 2010, at 11:30 a.m. local time at Fincastle Country Club, 1000 Country Club Drive, Bluefield, Virginia and at any adjournment thereof.

 

The expenses of the solicitation of the proxies for the Annual Meeting, including the cost of preparing, assembling and mailing the notice, Proxy Statement and return envelopes, the handling and tabulation of proxies received, and charges of brokerage houses and other institutions, nominees or fiduciaries for forwarding such documents to beneficial owners, will be paid by the Corporation. In addition to the mailing of the proxy material, solicitation may be made in person, by telephone or by other means by officers, directors or regular employees of the Corporation.

 

This Proxy Statement and the proxies solicited hereby are being first sent or delivered to stockholders of the Corporation on or about March 15, 2010.

 

Voting

 

Shares of common stock (par value $1.00 per share) (“Common Stock”) represented by proxies in the accompanying form, which are properly executed and returned to the Corporation, will be voted at the Annual Meeting in accordance with the stockholder’s instructions contained therein. In the absence of contrary instructions, shares represented by such proxies will be voted FOR ratification of Dixon Hughes PLLC as the Corporation’s independent registered public accountants, and FOR approval, on a non-binding advisory basis, of the Corporation’s named executive officer compensation.

 

Any stockholder has the power to revoke his proxy at any time before it is voted. A proxy may be revoked at any time prior to its exercise by the filing of written notice of revocation with the Secretary of the Corporation, by delivering to the Corporation a duly executed proxy bearing a later date, or by attending the Annual Meeting and voting in person. However, if you are a stockholder whose shares are not registered in your own name, you will need additional documentation from your record holder to vote personally at the Annual Meeting.

 

The Board of Directors has fixed March 1, 2010 as the record date for stockholders entitled to notice of and to vote at the Annual Meeting. Shares of Common Stock outstanding on the record date are entitled to be voted at the Annual Meeting and the holders of record will have one vote for each share so held in the matters to be voted upon by the stockholders. Each share of Common Stock outstanding as of the record date will be entitled to one vote on each of the proposals set forth in this proxy statement. Treasury shares are not voted. Individual votes of stockholders are kept private, except as appropriate to meet legal requirements. Access to proxies and other individual stockholder voting records is limited to certain employees of First Community and its agents who acknowledge their responsibility to comply with this policy. Stockholders of the Corporation do not have cumulative voting rights. As of the close of business on March 1, 2010, the outstanding shares of the Corporation consisted of 17,765,164 shares of Common Stock and no shares of Preferred Stock.

 

The presence in person or by proxy of a majority of the shares of the Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. Abstentions are considered in determining the presence of a quorum. Directors are elected by a plurality of the votes cast at a stockholders’ meeting with a quorum present. The three persons who receive the greatest number of votes of the holders of Common Stock represented in person or by proxy at the Annual Meeting will be elected directors of the Corporation. Approval of the amendment to the Articles of Incorporation to increase the authorized common stock requires a majority of the outstanding voting capital stock approve the amendment. Approval of the ratification of the independent registered public accountants requires that the number of votes cast in favor of the proposal exceeds the number of votes cast against. Advisory approval of the Corporation’s executive compensation program requires that the number of votes cast in favor of the

proposal exceeds the number of votes cast against. If the shares you own are held in “street name” by a brokerage firm, your brokerage firm, as the record holder of your shares, is required to vote your shares according to your instructions. In order to vote your shares, you will need to follow the directions your brokerage firm provides you. Many brokers also offer the option of voting over the Internet or by telephone, instructions for which would be provided by your brokerage firm on your vote instruction form. Under the current rules of the New York Stock Exchange, or NYSE, if you do not give instructions to your brokerage firm, it will still be able to vote your shares with respect to only the “discretionary” items discussed above, including the ratification of the independent registered public accountants and the advisory approval of the Corporation’s named executive officer compensation. Abstentions and broker non-votes will have no effect on the ratification of the independent registered public accountants or the advisory approval of the Corporation’s named executive officer (“NEO” or “named executives”) compensation. A “broker non-vote” occurs when a bank, broker or other nominee holding shares for a beneficial owner does not vote on a particular proposal because it does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner.

 

Starting this year, the election of directors is a “non-discretionary” item. If you do not instruct your broker how to vote with respect to this item, your broker may not vote with respect to this proposal and those votes will be counted as “broker non-votes”.

 

You can ensure that your shares are voted at the meeting by submitting your instructions by telephone, by internet, or by completing, signing, dating and returning the enclosed proxy form in the envelope provided. Submitting your proxy by any of these methods will not affect your right to attend and vote in person at the meeting. We encourage stockholders to submit their proxies in advance of the meeting. A Stockholder who gives a proxy may revoke it at any time before it is exercised by voting in person at the annual meeting, by submitting a subsequent proxy or by notifying the Corporation in writing of such revocation. If your FCBI shares are held for you in a brokerage, bank or other institutional account, you must obtain a proxy from that entity and bring it with you to submit it with your ballot in order to be able to vote your shares at the meeting.

 

The Board of Directors is comprised of nine directors, including eight non-management directors, currently divided into three classes with staggered terms. All directors have been determined to be independent by the Board of Directors except Mr. Mendez, who is employed by FCBI as President and Chief Executive Officer.

 

At the 2010 Annual Meeting, the current class of directors is nominated to be elected to office until the 2013 Annual Meeting. All nominees are currently serving on the Corporation’s Board of Directors. In the event any nominee is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present Board of Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them for the nominees listed below. All nominees named herein have consented to be named and to serve as directors if elected.

 

No director or executive officer of the Corporation is related to any other director or executive officer of the Corporation by blood, or marriage or adoption, except for Mr. Stafford who is the father of Mr. Stafford, II.

 

A table of each director and nominee, including his age, term of service, and title, is set forth below. A biography describing each director’s and nominee’s qualifications and business background is set forth below the table. Each nominee has consented to be named to, and to serve as, a director if elected. We do not know of any reason why any nominee would be unable to serve as a director. If any nominee is unable to serve, the shares represented by all valid proxies will be voted for the election of such other person as the Board may nominate.

 

Members of the Board of Directors of First Community Bancshares, Inc. are expected to have the appropriate skills and characteristics necessary to function in the Corporation’s current operating environment and contribute to its future direction and strategies. These include legal, financial, management and other relevant skills. In addition,

the Corporation looks to achieve a diversified Board, including members with varying experience, age, perspective, residence and background.

 

 

NOMINEES FOR THE CLASS OF 2013

 

Allen T. Hamner, Professor Emeritus of Chemistry at West Virginia Wesleyan College, Buckhannon, West Virginia.

 

Mr. Hamner is a 1963 graduate of West Virginia Wesleyan College, Buckhannon, West Virginia and a 1969 graduate of Cornell University. Mr. Hamner joined the faculty of West Virginia Wesleyan College in 1969 and retired in 2008.

 

Mr. Hamner’s relevant experience qualifying him for service as a director includes: twenty-two combined years of service on this Board and on a predecessor bank board and committees thereof; the ability to understand and discuss complex financial issues; ten years of service as a member of the Corporation’s audit committee; former treasurer of two private companies; and valuable business acumen and experience as a general contractor in the development of retail spaces.

 

Richard S. Johnson, President and Chief Executive Officer, The Wilton Companies, Richmond, Virginia.

 

Mr. Johnson earned a BS BA degree from the University of Richmond, Richmond, Virginia in 1973, with a concentration in economics and finance, and graduated with a MS degree from Virginia Commonwealth University, Richmond, Virginia in 1977, with a concentration in real estate and urban land development. Mr. Johnson has been the President and Chief Executive Officer of The Wilton Companies, a real estate investment, development, brokerage and management group of companies, since 2002. Prior to joining The Wilton Companies, Mr. Johnson served as President of Southern Financial Corp. of Virginia from 1985 to 2002 and Chairman of the Board of Southern Title Insurance Corporation from 1980 to 1985. Mr. Johnson currently serves as a director of the University of Richmond, Fidelity Group, LLC, City of Richmond Economic Development Authority, the State Fair of Virginia and Grubb & Ellis Apartment REIT. Mr. Johnson previously served as a director of the Children’s Museum of Richmond, Ducks Unlimited, Inc., and Ducks Unlimited Canada.

 

Mr. Johnson’s relevant experience qualifying him for service as a director includes: long-range planning, various aspects of mortgage underwriting, marketing and mortgage portfolio servicing; chairing the Economic Development Authority of the City of Richmond, Virginia; past service as a director and finance committee member of Ducks Unlimited, Inc. and Ducks Unlimited Canada; state and national offices with Ducks Unlimited, Inc. as assistant treasurer and as a member of the audit subcommittee; Vice Chairman of the State Fair of Virginia and Chairman of the Finance Committee. In addition, Mr. Johnson has extensive experience in real estate acquisition, development, finance and management through his executive experience as President of The Wilton Companies.

John M. Mendez, President and Chief Executive Officer, First Community Bancshares, Inc., Bluefield, Virginia.

 

Mr. Mendez attended Marshall University from 1973 to 1975 and graduated from Concord University in May 1978 with a BS in Business Administration with a concentration in Accounting. Mr. Mendez earned his certification as a Certified Public Accountant in 1981. Mr. Mendez joined First Community Bank, N.A. in 1985. Prior to serving as President and Chief Executive Officer of First Community Bancshares, Inc., Mr. Mendez served in the positions of Chief Financial Officer and Chief Administrative Officer. Mr. Mendez served as Audit Manager of Brown, Edwards & Co., CPA’s from 1978 to 1985. Mr. Mendez serves on the Concord University Board of Governors. He previously served as a director for the Community Foundation of the Virginias, the West Virginia Bankers Association, Virginia Bankers Association, and Princeton Community Hospital.

 

Mr. Mendez’ relevant experience qualifying him for service as a director includes: history as a practicing CPA at regional public accounting firm; external audit experience for a variety of businesses with emphasis in the banking sector while engaged in public accounting; familiarity with bank regulations and bank and parent regulatory examination process; writing, communicating and enforcing company, bank and subsidiary policies; success in negotiating and integrating acquired businesses in the execution of a variety of mergers and acquisitions; past service on a variety of boards and audit committees including a 211-bed community hospital; long term service as CFO of a publicly-traded company; and the variety of offices held with increasing management responsibilities during twenty-five years in management of a publicly-traded financial services company.

 

Your Board recommends a vote FOR the nominees set forth above.

 

CONTINUING INCUMBENT DIRECTORS

 

Franklin P. Hall, Retired Commissioner, Virginia Department of Alcoholic Beverage Control, Senior Partner, Hall & Hall, PLC, Richmond, Virginia.

 

Mr. Hall is a 1961 graduate of Lynchburg College, Lynchburg, Virginia, with a BS degree in Mathematics and Business Administration. Mr. Hall also graduated from The American University, Washington, DC, with an MBA degree in 1964 and The American University Law School with a Juris Doctorate degree in 1966. Mr. Hall currently serves as Senior Partner in the Hall and Hall Family Law Firm in Midlothian, Virginia where he has practiced law since 1969. He served as a Delegate in the Virginia General Assembly from 1976 to 2009, and Minority Leader, Virginia House of Delegates from 2002 to 2008. He is a former Chairman of the Board of the Commonwealth Bank in Richmond, Virginia. Mr. Hall has served on the Greater Richmond Chamber of Commerce Foundation Board since 2004. He also has served as a Commissioner for the Virginia Alcohol Beverage Commission.

 

Mr. Hall’s relevant experience qualifying him for service as a director includes: a wide range of business and legal knowledge gained during an active forty-one year law practice; his MBA degree; twenty-five years of service on boards of financial service organizations; thirty years of overseeing the budget for the Common Wealth of Virginia; service as senior member of the Joint Legislative Audit and Review Commission for the Virginia General Assembly; and service as Chair of the House Appropriations Subcommittee on Compensation.

 

I. Norris Kantor, Of Counsel, Katz, Kantor & Perkins, Bluefield, West Virginia.

 

Mr. Kantor received a BA degree in 1953 from the Virginia Military Institute and received a Juris Doctor degree in 1956 from the College of Law at West Virginia University. Mr. Kantor has practiced law for more than fifty years and is currently Of Counsel with the law firm of Katz, Kantor & Perkins, Attorneys-at-Law. He served as a Judge Advocate USAF from 1956 to 1958. Mr. Kantor is a director of Mercer Realty Inc., a real estate management company, and Gomolco, Inc., a real estate holding company. Mr. Kantor currently serves as a member of the board of directors of the following organizations: Bluefield State College Foundation, Secretary of Bluefield State College Research and Development Corp., past President of New River Parkway Authority, the Bluefield Development Authority, and President and Board Member of the Downtown Health and Wellness Center, Inc.

 

Mr. Kantor’s relevant experience qualifying him for service as a director include: a wide range of legal and business experience gained during his more than fifty years as a practicing attorney; his legal work in issuing

numerous utility bonds and refunding of utility bond issues; his ability to understand complex business, legal and financial topics; and twenty years of service as a board member of financial service organizations.

 

A. A. Modena, Retired Executive Vice President and Secretary of First Community Bancshares, Inc.

 

Mr. Modena received a BS degree in Business Administration from Virginia Tech in 1949, a LLB degree from W & L University Law School in 1954, and is a 1961 graduate of the Stonier Graduate School of Banking at Rutgers University. Mr. Modena has been a member of the Virginia State Bar since 1954. Mr. Modena was previously employed by The Flat Top National Bank of Bluefield serving as Vice President & Trust Officer from 1960 to 1969, Senior Vice President & Trust Officer from 1969 to 1976, Executive Vice President and Trust Officer from 1976 to 1993, and President and Chief Executive Officer from 1993 to his retirement in 1994. Mr. Modena served as Executive Vice President of Flat Top Bankshares, Inc. from 1983 to 1990 and Executive Vice President and Secretary of FCFT, Inc. from 1990 to 1994. Mr. Modena’s past banking activities with the West Virginia Bankers Association included serving as Chairman and Member of the Board of Directors, Past Chairman of Group V and Past President of the Trust Division. In the past five years, Mr. Modena has served as a Member of the Faculty Merit Foundation of West Virginia, Inc., Trustee of United Company Investment Fund, Bristol, Virginia, Board of Trustees of Bluefield College, and Board of Directors of Mission West Virginia.

 

Mr. Modena’s relevant experience qualifying him for service as a director includes: a broad range of management and customer service experience in trust and commercial banking for more than fifty years; his legal education; investment experience including formation, management and liquidation of common trust funds; longstanding service as a member of a variety of boards of directors for banks, this Corporation, health service organizations, churches, a wealth management firm and statewide bankers’ association; and his knowledge of bank operations and other financial regulations.

 

Robert E. Perkinson, Jr., Former Vice President-Operations of MAPCO Coal and Alliance Coal Co., Inc., Bluefield, Virginia.

 

Mr. Perkinson received a BS degree in Civil Engineering — Construction Option in 1969 and a Professional degree in Soil Mechanics and Foundation Energy in 1970 from North Carolina State University. Prior to Mr. Perkinson’s employment with MAPCO Coal, he was employed as Vice President — Operations of South Atlantic Coal Co. and worked for J. A. Jones Construction in Charlotte, North Carolina. Upon leaving the employment of MAPCO Coal, Mr. Perkinson served as Acting Executive Director of the Bluefield Sanitary Board for the City of Bluefield from 2007 to 2009 and Mayor of the City of Bluefield, West Virginia. Mr. Perkinson currently serves as Chairman of the Board of Bluefield Regional Medical Center and serves as a member of the Board of Governors of Bluefield State College.

 

Mr. Perkinson’s relevant experience qualifying him for service as a director includes: previous service as member of senior management for various companies in the coal industry; experience in municipal government, including service as executive director of a municipal sanitary board; and service as board chairman for a non-profit regional medical center coupled with approximately twenty years of bank board service.

 

William P. Stafford, President, Princeton Machinery Service, Inc., a machinery manufacturing and repair company.

 

Mr. Stafford is a graduate of the United States Naval Ordinance Laboratory and U.S. Naval Gun Factory. He currently serves as the Chairman of the Board of First Community Bancshares, Inc., and Vice Chairman of the Board of First Community Bank, N. A. He serves as President and Director of the H. P. and Anne S. Hunnicutt Foundation, Inc., and Melrose Enterprises, Ltd., and as a Member of Stafford Farms, LLC. In addition to his current service as President of Princeton Machinery Service, Inc., a machinery manufacturing and repair company, Mr. Stafford previously served as its General Manager. Mr. Stafford also previously served as Member of the West Virginia Legislature, a Director of the West Virginia Division of Natural Resources, a Member of the Mercer County West Virginia Economic Development Authority, and a Member of the Mercer County West Virginia Airport Authority.

Mr. Stafford’s relevant experience qualifying him for service as a director includes: owner and president of a successful machinery manufacturing and repair business; owner and president of several other successful businesses; a director and president of a charitable foundation; extensive familiarity with the history and operation of the Corporation and its predecessor banks; participation and leadership in a wide variety of community and civic organizations; previous experience in elected state and local government offices, and more than twenty years of board service for a publicly traded financial services company.

 

William P. Stafford, II, Attorney, Brewster, Morhous, Cameron, Caruth, Moore, Kersey & Stafford, PLLC.

 

Mr. Stafford is a graduate of Virginia Polytechnic Institute State University, Blacksburg, Virginia, and holds a Bachelor of Science degree in Mechanical Engineering. He received his Juris Doctorate, cum laude, from the Washington & Lee University School of Law, Lexington, Virginia. Mr. Stafford practices as a member of his firm primarily in the areas of commercial transactions, banking, creditor’s rights, creditor bankruptcy, and trusts and estates. Mr. Stafford serves as Director and Corporate Secretary of the H. P. and Anne S. Hunnicutt Foundation, Inc., Princeton Machinery Service, Inc., and Melrose Enterprises, Ltd. He is a member of Stafford Farms, LLC, Vermillion Development, LLC, and Walnut Hill, LLC. Mr. Stafford is a partner in Legal Realty, A Partnership. Mr. Stafford previously served as a member of the West Virginia Infrastructure and Jobs Development Council. Mr. Stafford previously served as a council member and Mayor of the City of Princeton, West Virginia. Mr. Stafford has served, and continues to serve, on numerous civic and community service boards and commissions.

 

Mr. Stafford’s relevant experience qualifying him for service as a director includes: a broad range of regulatory, business, legal and banking related issues encountered in the practice of law; extensive state and municipal government service; extensive civic and community service; and more than fifteen years of board service for the Corporation.

Director Qualifications and Experience.  The following table identifies the experience, qualifications, attributes and skills that the Board considered in making its decision to appoint and nominate directors to the Board. This information supplements the biographical information provided above. The vertical axis displays the primary factors reviewed by the Governance and Nominating Committee in evaluating a board candidate.

 

 

NON-DIRECTOR EXECUTIVE OFFICERS

 

Executive officers who are not directors of the Corporation, including their title, age and date they became an officer of the Corporation is set forth in the chart below, which is followed by a brief biography describing each executive officer’s business experience.

 

Robert L. Buzzo, Vice President and Secretary of the Corporation, President and Director of First Community Bank, N.A., a wholly-owned subsidiary of the Corporation.

 

Mr. Buzzo had been President and a Director of First Community Bank, N. A. since June 2000, and Vice- President and Secretary of the Corporation since June 2000. From October 1994 until June 2000, Mr. Buzzo was the Chief Executive Officer of First Community Bank — Bluefield, a division of First Community Bank, N. A. Prior to 1994, Mr. Buzzo held other leadership positions within the Corporation since he joined the bank in 1973.

 

Stephen Lilly, Chief Operating Officer

 

Mr. Lilly has been Chief Operating Officer of the Corporation and Senior Vice President and Chief Operating Officer of First Community Bank, N. A. since June 2000. Mr. Lilly has been employed by the Corporation since 1997.

 

David D. Brown, V, Chief Financial Officer

 

Mr. Brown has been Chief Financial Officer of the Corporation and Senior Vice President — Finance of First Community Bank, N.A. since May 2006. Mr. Brown served as Financial Reporting Coordinator of the Corporation from April 2005 to May 2006. Prior to joining the Corporation, Mr. Brown was a Corporate Auditor and Audit Manager of United Bankshares, Inc. from September 1999 to April 2005.

 

Gary R. Mills, Chief Credit Officer

 

Mr. Mills has been Chief Credit Officer of the Corporation since 2007, and has worked in Credit Administration since 2005. Mr. Mills has been employed by the Corporation since 1998.

 

Corporate Governance Guidelines.  The Board of Directors’ Governance and Nominating Committee has enacted guidelines to determine director independence and qualifications for directors. The Governance and Nominating Committee Charter is published at the Corporation’s website under the “Governance Documents” tab of the “Corporate Profile” at www.fcbresource.com. This section of the website makes available all of First Community’s governance materials, including various Board committee charters, which are available in print to any Stockholder upon request. The Board regularly reviews corporate governance developments and considers modifications to its governance charter to clarify and augment the Board’s processes, including those relating to risk oversight.

 

The Board’s Role in Risk Oversight.  We believe that each member of our Board of Directors in his or her fiduciary capacity has a responsibility to monitor and manage risks faced by the Corporation. At a minimum, this requires the members of our Board of Directors to be actively engaged in board discussions, review materials provided to them, and know when it is appropriate to request further information from management and/or engage the assistance of outside advisors. Furthermore, because the banking industry is highly regulated, certain risks to the Corporation are monitored by the Board of Directors and the Audit Committee through its review of the Corporation’s compliance with regulations set forth by its regulatory authorities, including the FDIC and recommendations contained in regulatory examinations.

 

Because we believe risk oversight is a responsibility for each member of the Board of Directors, we do not concentrate the Board’s responsibility for risk oversight in a single committee. Instead, each of our committees concentrates on specific risks for which they have an expertise, and each committee is required to regularly report to the Board of Directors on its findings. For example, the audit committee regularly monitors the Corporation’s exposure to certain investment risks, such as the effect of interest rate or liquidity changes, the Corporation’s exposure to certain reputational risks by establishing and evaluating the effectiveness of company programs to report and monitor fraud and by monitoring the Corporation’s internal controls over financial reporting. Our compensation committee’s role in monitoring the risks related to our compensation structure is discussed in further detail below.

Director Independence.  First Community currently has eight independent directors out of nine. The Board has satisfied, and expects to continue to satisfy, its objective that at least a majority of the Board should consist of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with First Community. The Board has established guidelines to assist it in determining director independence (see Appendix A to this Proxy Statement), which conform to the independence requirements of the NASDAQ Stock Exchange listing standards. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination.

 

In the course of the Board’s determination regarding independence, it considers any transactions, relationships and arrangements as required by the corporation’s independence guidelines. In addition, with respect to all directors, the Board considered the amount of First Community’s discretionary charitable contributions to charitable organizations where any of the directors serves as an officer, director or trustee, and determined that First Community’s contributions to each of the charitable organizations constituted less than the greater of $200,000 or five percent of the charitable organization’s annual consolidated gross revenues during the applicable organization’s last completed fiscal year.

 

All members of the Audit Committee, Compensation and Retirement Committee, and Governance and Nominating Committee must be independent directors as defined by NASDAQ. Members of the Audit Committee also must satisfy a separate Securities and Exchange Commission (“SEC”) independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from First Community or its subsidiaries other than their directors’ compensation.

 

Director Candidates, Qualifications and Diversity.  In considering whether to recommend any candidate for inclusion in the Board’s slate of recommended director nominees, including candidates recommended by stockholders, the Governance and Nominating Committee will consider a number of criteria, including, without limitation, the candidate’s integrity, business acumen, age, experience, commitment, diligence, conflicts of interest and the ability to act in the interests of all stockholders. The Governance and Nominating Committee believes diversity should be considered in the director identification and nomination process. The Governance and Nominating Committee seeks nominees with a broad diversity of experience, professions, skills, geographic representation and backgrounds. The Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. The Corporation believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. Nominees are not discriminated against on the basis of race, religion, national origin, sexual orientation, disability or any other basis proscribed by law.

 

Board Leadership Structure.  We separate the roles of CEO and Chairman of the Board in recognition of the differences between the two roles. The CEO is responsible for setting the strategic direction for the Corporation and the day to day leadership and performance of the Corporation, while the Chairman of the Board provides guidance to the CEO and sets the agenda for Board meetings and presides over meetings of the full Board.

 

Standards of Conduct.  All directors, officers and employees of First Community must act ethically at all times and in accordance with the policies comprising First Community’s Standards of Conduct (“Code”), which is published at First Community’s website www.fcbresource.com and available in print to any Stockholder upon request. A waiver of any Standard of Conduct can only be considered by the Board of Directors and may be granted only for just cause in an instance where the underlying ethical objective will not be violated. No waivers were granted to any director or officer during 2009. Amendments to the code will be published on the Corporation’s website, as required by SEC rules. If an actual or potential conflict of interest arises for a director, the director must promptly inform the Board.

 

Communicating Concerns to Directors.  The Audit Committee and the non-management directors have established procedures to enable any employee who has a concern about First Community’s conduct, policies, accounting, internal accounting controls or auditing matters, to communicate that concern directly to the Board through an email or written notification directed to the Chairman of the Audit Committee. Such communications may be confidential or anonymous. A notification explaining how to submit any such communications is provided to all employees at each location of the Corporation and its affiliated businesses and is provided to employees in the employee handbook. The status of any outstanding concern is reported to the non-management directors of the Board periodically by the Chairman of the Audit Committee.

Stockholder Communications.  Stockholders may communicate with all or any member of the Board of Directors by addressing correspondence to the “Board of Directors” or to the individual director and addressing such communication to Robert L. Buzzo, Secretary, First Community Bancshares, Inc., P. O. Box 989, Bluefield, Virginia 24605-0989. All communications so addressed will be forwarded to the Chairman of the Board of Directors (in case of correspondence addressed to the “Board of Directors”) or to the individual director without exception.

 

The Board held nine (9) regular meetings and four (4) special meetings in 2009. No member attended fewer than 75% of the Board meetings and committee meetings on which the member sits. Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of the director’s duties and to attend all regularly scheduled Board, committee, and Stockholder meetings. It is the Board’s policy that the directors should attend our Annual Meeting of Stockholders absent exceptional circumstances. All current directors attended the 2009 Annual Meeting except Chairman Stafford, who was excused for medical reasons.

 

Board Committees

 

The Board of Directors has adopted written charters for its four standing committees: the Audit Committee, the Executive Committee, the Governance and Nominating Committee, and the Compensation and Retirement Committee (the “CRC”). Except for the Executive Committee charter, a current copy of each of the committee charters is available for review and print on our website at www.fcbresource.com.

 

Audit Committee.

 

The members of the Audit Committee are directors Perkinson, who chairs the committee, Hall, Hamner and Johnson. The Board has determined that Mr. Johnson is the “audit committee financial expert”. The Audit Committee is primarily concerned with the integrity of the Corporation’s financial statements, the Corporation’s compliance with legal and regulatory requirements, the independence and qualifications of the independent auditor and the performance of the Corporation’s internal audit function and independent auditor. Its duties include: (1) selection and oversight of the independent auditor; (2) review of the scope of the audit to be conducted by them, as well as the results of their audit; (3) oversight of our financial reporting activities, including our annual report, and the accounting standards and principles followed; (4) discussion with management of its risk assessment and management policies, including risk relating to the financial statements and financial reporting process and key credit risks, liquidity risks, market risks and the steps taken by management to monitor and mitigate such risks; (5) approval of audit and non-audit services provided to the corporation by the independent auditor; (6) review of the organization and scope of our internal audit function and our disclosure and internal controls; and (7) oversight of the Corporation’s compliance program. The Audit Committee held eleven (11) meetings during 2009. The committee’s report is on page 29.

 

Executive Committee.

 

The members of the Executive Committee are directors Stafford, who chairs the committee, Hamner, Kantor, Mendez, Modena, Perkinson and Stafford, II. Except for Mr. Mendez, each member of the Executive Committee is independent. The Executive Committee held one (1) meeting during 2009. The committee, subject to the supervision and control of the Board of Directors, has been delegated substantially all of the powers of the Board to act between meetings of the Board, except for certain matters reserved to the full Board by law.

 

Compensation and Retirement Committee.

 

The members of the CRC are directors Stafford, II, who chairs the committee, Hamner and Modena. This committee’s primary responsibilities include: (1) establishing, reviewing and providing recommendations to the full Board regarding CEO compensation and reviewing and overseeing other senior executive compensation, (2) monitoring management resources, structure, succession planning, development and selection processes and the performance of key executives, (3) reviewing incentive compensation arrangements to ensure that incentive pay

does not encourage unnecessary risk, (4) reviewing and discussing, at least annually, the relationship between risk management policies and practices, corporate strategy and senior executive compensation, and (5) reviewing director compensation and benefits. This committee also administers all incentive and stock option plans for the benefit of such officers and directors eligible to participate in such plans. The Compensation and Retirement Committee held four (4) meetings in 2009. The committee’s report is on page 18.

 

Compensation and Retirement Committee Interlocks and Insider Participation.

 

None of the members of the Compensation and Retirement Committee is or was formerly an officer or employee of our Corporation or any of its subsidiaries, nor did any members have a relationship with us that is disclosable as a “Related-Person Transaction” as defined by the SEC. In addition, none of our executive officers served on any compensation committee or any board of directors of another company, of which any of our Board members was also an executive officer.

 

Governance and Nominating Committee.

 

The members of the Governance and Nominating Committee are directors Modena, who chairs the committee, Hamner and Kantor. The committee’s responsibilities include the selection of director nominees for Board service and the development and review of Governance Guidelines. The committee also (1) oversees the annual self-evaluations of the Board, as well as director performance and Board dynamics; (2) makes recommendations to the Board concerning the structure and membership of the Board committees; and (3) reviews, approves and ratifies transactions with related persons required to be disclosed under SEC rules. This committee held two (2) meetings in 2009.

 

The committee will consider all Stockholder recommendations for candidates for the Board, which should be sent to the Governance and Nominating Committee, c/o Robert L. Buzzo, Secretary of First Community Bancshares, Inc., P. O. Box 989, Bluefield, Virginia 24605-0989. We believe that directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long term interests of the stockholders. We strive to have a Board representing diverse experience with respect to policy making decisions in business, government, education and technology, and in areas that are relevant to the corporation’s overall business activities.

 

The committee also considers candidates recommended by current directors, company officers, employees and others. The committee evaluates all nominees for directors in the same manner and typically bases its initial review on any written materials submitted with respect to the candidate.

 

Meetings of Non-management Directors.

 

The non-management directors met without any management directors or employees present two times last year. Mr. Stafford served as chair of these meetings.

 

This section provides an overview and explanation of the material information relevant to understanding the objectives, policies and philosophy underlying the Corporation’s compensation programs for executives and of the general design philosophy of the Corporation’s compensation policies and practices for employees included in any incentive compensation program. To assist you in understanding certain disclosures that we are required to provide in this section, which we refer to as the “CD&A”, we provide information relating to executive and director compensation in a series of tables and accompanying narrative.

 

2009 Compensation of Executive Officers

 

We believe it is in the Corporation’s best interests to maintain consistency in our compensation philosophy and implementation, but we also believe discretion should be used in times of prosperity as well as times when either the Corporation or the overall economy, or both, are performing below expectations. With this in mind, we believe it is appropriate for some components of compensation to remain level or decline during periods of economic downturn, including periods of reduced earnings and declining stock prices, as was the case in 2008 and 2009.

The CRC and management evaluated and established 2009 executive compensation in the context of the Corporation’s 2008 performance and the current economy coupled with a universal awareness of the current focus placed on executive compensation. While we believe that the compensation of our executive officers has consistently been balanced and fair, we felt the need to take a conservative approach in 2009 and refrained from payment of increases in executive base salary, with one exception, and awarded neither short nor long term incentives to the executives during 2009.

 

Specifically, we decided to compensate the named executives for 2009 as follows:

 

 

Consistent with past practice, going forward we will continue to use discretion coupled with a goals-driven formula to compensate executives. We will not adopt incentives that promote risky behavior for near term rewards. Although we made no incentive awards in 2009, ordinarily, we attempt to use the equity portion of our compensation program to reward behavior that produces steady, long term performance. We believe executive compensation should reflect and be driven by the Corporation’s long- term operating performance and relative stock value compared with similarly situated publicly traded, regional financial services companies.

 

Considerations Used to Determine Chief Executive Officer Compensation for 2009

 

At the beginning of each year, Mr. Mendez develops objectives necessary for the Corporation to be successful. Mr. Mendez presents these objectives to the CRC for its consideration in determining how Mr. Mendez’ performance will be evaluated. These objectives are determined in most part from the Corporation’s annual financial and budget planning sessions, during which the Corporation’s growth opportunities are analyzed and goals and objectives are established for the upcoming year. These goals and objectives include both objective financial metrics and qualitative strategic and operational considerations that are evaluated subjectively, without any formal weighting assigned. The CRC and Mr. Mendez use this process to focus on factors they believe create long term stockholder value. The CRC discusses with Mr. Mendez its considerations regarding Mr. Mendez’ own compensation. During this process, Mr. Mendez solicits input from our Vice President of Human Resources. Mr. Mendez does not participate in the final determination of his own compensation.

 

In determining Mr. Mendez’ compensation for 2009, the CRC considered the Corporation performance and also considered Mr. Mendez’ individual performance in 2008.

 

Although Mr. Mendez did not meet all of the goals and objectives established by the CRC for 2008, the CRC believes that he performed well given the challenging circumstances of the overall economy, particularly in the financial services sector. Financial goals were set before the bulk of the decline in the Corporation’s investment portfolio, which was attributed in large part to significant declines in market values in pooled trust preferred and collateralized mortgage obligations (“CMOs”). The decline in the pooled trust preferred securities was associated with the underperformance and in some cases the failure of underlying banks, which had originally issued into these investment grade securities. Whole loan CMOs also experienced market value diminution due to homeowners’ inability to pay their mortgages as a result of the effects of the recession. Both the pooled trust preferred and the whole loan CMOs were rated as “investment grade” at the time of investment. The Corporation’s banking subsidiary produced continued positive, although decreased, core earnings, and the insurance agency and wealth management subsidiaries performed at or beyond expectations for 2009. Unlike other regional banks, the

Corporation was able to continue to pay cash dividends. Net interest margin and efficiency continue to compare favorably to those of other financial services companies.

 

Beyond financial goals, the CRC expected Mr. Mendez to continue to search for suitable candidates for banking mergers and acquisitions within the Corporation’s footprint; to lead the Corporation’s strategic planning process; and to retain the Corporation’s management team. These goals were all satisfactorily met during 2008.

 

Through the Corporation’s public offering, Mr. Mendez was instrumental in helping the Corporation maintain its well-capitalized balance sheet while attracting additional, respected institutional investors. The public offering made possible the accelerated repayment of TARP funds in less than eight months from issue, plus provided funding for continued expansion of the corporation. Mr. Mendez also successfully completed a desired acquisition to supplement the Corporation’s banking presence in the Winston-Salem, North Carolina market, in line with the Corporation’s strategic plan. In addition, Mr. Mendez led the management team and the Board through an update of the Corporation’s strategic plan.

 

Mr. Mendez has been the Corporation’s CEO since 2000 and has been employed by the Corporation since 1985. He also serves on the Corporation’s Board of Directors. Under his leadership, the Corporation has transformed itself from a community bank into a regional financial services company. The Corporation’s income has been diversified through its acquisition of and continued additions to its insurance agency, Greenpoint Insurance. Despite the difficult economic times in 2009, the Corporation was able to return $4.6 million to common stockholders through dividends and repurchased $167,000 in Treasury shares. As an indication of his alignment with stockholders, Mr. Mendez is the direct and indirect owner of 22,686 shares of the Corporation’s common stock. Mr. Mendez proposed and the CRC agreed that he would receive no bonus or salary increase in 2009. Mr. Mendez proposed these actions because he believed they were appropriate in the current environment. Mr. Mendez was not granted any long term non-cash compensation in 2009 and has received no long term stock based compensation since 2003. His base salary was last increased in 2008.

 

Determining Compensation for Our Other Named Executives in 2009

 

The CRC works in conjunction with Mr. Mendez to establish the base and incentive compensation of other named executive officers. Our goal is to achieve a balance of incentives that retain a qualified group of senior managers and ensure that the Corporation remains competitive over the long term.

 

Each of the other named executives is a leader of an individual business or function of the Corporation. As part of the executive management team, they report directly to Mr. Mendez, who develops the objectives that each individual is expected to achieve, and against which their performance is assessed. Similar to Mr. Mendez, these objectives are reviewed with the CRC and are derived largely from the Corporation’s financial, budget and strategic planning processes.

 

Like Mr. Mendez, the other executives have objectives that include both quantitative financial measurements and qualitative strategic and operational considerations affecting the Corporation and the businesses or function that the named executives lead. Mr. Mendez assesses each named executive officer’s individual performance against the objectives, the Corporation’s overall performance and the performance of the executives’ business or function. Mr. Mendez then makes a compensation recommendation to the CRC for each named executive. The named executives do not play a role in the determination of their compensation except for their discussion with Mr. Mendez regarding their individual performance against predetermined objectives.

 

David D. Brown, V.   Mr. Brown has served as our Chief Financial Officer since 2006. Since he joined the Corporation in 2005, he has assumed increased responsibilities within the accounting and finance function. As the leader of the Corporation’s finance function, Mr. Brown’s financial objectives, focused on the overall performance of the Corporation similar to Mr. Mendez’. Mr. Brown’s strategic and operational goals included organizing the Corporation’s public offering, providing operational support to achieve financial goals and to strengthen the finance function, while maintaining a strong controllership function and improving regulatory relationships.

 

During a very challenging economic environment, Mr. Brown’s leadership was crucial to strengthening the Corporation’s liquidity position. He led new and returning staff to enhance the budgeting process and strengthened the finance function. Based upon Mr. Mendez’ recommendation and the assessment of the CRC, Mr. Brown

received a salary increase of $10,000 and was awarded a long term non-cash incentive of 500 shares of common stock in 2009. Mr. Brown received a similar increase in base salary and long term equity incentive in 2008.

 

Robert L. Buzzo.   Mr. Buzzo has been President and a member of the bank executive team since 2000 and has held other leadership positions since he joined the bank in 1973. Mr. Buzzo’s goals and objectives for 2008 included both bank as well as company goals and objectives, including increasing bank assets, non-interest income, net income and earnings per share, increasing revenues of non-bank affiliates, plus an ongoing focus on managing risk and improving customer service.

 

Although Mr. Buzzo did not meet all of the financial goals established for him for 2008, he adapted to the increasingly negative economic conditions that emerged after establishment of his goals. In spite of the dire national economic trends and material losses realized in the investment portfolio, the core bank earnings (exclusive of securities impairments) and insurance subsidiary’s earnings totaled $16.9 million for 2009 or $1.14 per diluted common share. Mr. Mendez proposed and the CRC approved that Mr. Buzzo receive no bonus or salary adjustment in 2009. Mr. Mendez proposed these actions because he believed they were appropriate in the current environment.

 

E. Stephen Lilly.  Mr. Lilly has served as our Chief Operating Officer since 2000 and has been employed by the Corporation since 1997. His direct reports include the Chief Risk Officer, the Director of Information Technology, the Marketing Director, Vice-President of Cash Management and Treasury Services, Vice-President of Operations, the officer in charge of secondary market lending, and the Vice-President of Branch Administration. Mr. Lilly’s operational goals and objectives for the bank and the Corporation included analysis of the core operating system, improvement of the bank’s array of treasury services, upgrading the bank’s internet banking service, and integration of acquired businesses.

 

Mr. Lilly’s leadership was important in helping the Corporation through the current financial downturn. He provided viable solutions to operational issues and his guidance was critical in helping the Corporation continue its operations in a safe and efficient manner. Consistent with Mr. Mendez’ recommendation and CRC’s approval, Mr. Lilly’s base salary remained unchanged and received no bonus or salary increase in 2009.

 

Gary R. Mills.  Mr. Mills has served as our Chief Credit Officer since 2007 and has been employed by the Corporation since 1998. He is responsible for overseeing and maintaining the Corporation’s $1.3 billion loan portfolio, including maintaining an adequate loan loss reserve, compliance with federal and state lending regulations, managing a staff of forty with seven direct reports, working with regulators and internal and external auditors and participation in presentations to analysts and investors.

 

Mr. Mills’ strategic and operational goals in 2008 included preservation of high credit quality in the loan portfolio, amending and restating loan policy, managing large loan workouts and performing loan portfolio due diligence associated with bank mergers and acquisitions. Although Mr. Mills was unable to meet all of the objectives established for 2008, his diligent efforts allowed the Corporation to maintain its exceptional credit quality, especially when compared to peers, despite serious challenges faced by financial services companies. Mr. Mendez proposed and CRC approved that Mr. Mills receive no bonus or salary increase in 2009.

 

FCBI Compensation Philosophy

 

The goal of our executive compensation program is to retain and reward officers who create long term value for our stockholders. This overriding objective affects all elements of our compensation program. Our compensation program rewards continued financial and operating performance coupled with strong leadership. Our intent is to align the executives’ long term interests with those of our stockholders and to motivate the executive team to continue with the Corporation for long productive careers.

 

Considerations Used to Determine Compensation Program

 

Below is a summary of important considerations by the CRC affecting compensation for the named executives. For 2009, the CRC performed its evaluation of compensation in light of the Corporation’s performance, the current economic recession, and the prevailing public sentiments and concern regarding executive compensation.

Emphasis on Reliable and Relative Performance.  Our compensation program provides pay opportunities for those executives demonstrating superior performance for sustained periods of time. Each of our named executives has served the Corporation for many years and each has held diverse positions with growing levels of responsibility. Relative compensation reflects previous contributions and anticipated future contributions to the Corporation’s long term success. In evaluating sustained performance, we also give weight to the relative performance of each executive in his particular industry segment or function.

 

Emphasizing consistent, long term performance impacts annual discretionary cash bonus and any equity incentive compensation. After assessing each named executive’s past performance, and expected future contribution, as well as the performance of the business or function the executive leads, the CRC uses its judgment in determining the amount of bonus or equity award, if any. We consider the current year as well as past and expected performance in our compensation decisions. This long term view has the effect of moderating compensation levels and annual adjustments and awards.

 

Importance of Corporation Results.  CRC places substantial weight on the named executive’s contribution to the Corporation’s overall financial success, as opposed to limiting its focus strictly to an individual business or function. The CRC is of the opinion that the named executives share the responsibility of supporting the Corporation’s overriding goals and objectives as part of the management team.

 

Judgment versus Formula Driven.  The CRC does not use formulas in determining the level or mix of compensation. We evaluate a wide range of quantitative and qualitative factors, which include consistency in reaching financial and growth targets, the ability to perform in both good and challenging economic times, a history of integrity, evidence that the executive uses good judgment and his ability to lead and create future value for the Corporation.

 

Risk Considerations in Our Compensation Program.  The CRC views the Corporation’s compensation program with a long term focus. The greatest amount of compensation can be achieved over long periods of time through sustained excellent performance. Larger amounts of compensation are typically to be deferred or can only be realized upon retirement. We believe this will provide a strong incentive to manage the Corporation for the long term with a clear message to avoid excessive risk in the near term. We establish goals and objectives with a mix of quantitative and qualitative performance elements in order to avoid excessive weight on one performance measure. The CRC also attempts to balance the various elements of compensation among base salary (current cash payments), deferred cash payments and equity awards. The CRC maintains full discretion to adjust compensation based upon improved performance and adherence to company values.

 

As a result of the Corporation’s participation in the TARP Capital Purchase Program for a portion of 2009, the CRC was required to review the incentive compensation arrangements of the Corporation’s named executive officers with the Corporation’s senior risk officer to ensure that their incentive compensation arrangements do not encourage them to take unnecessary and excessive risks that threaten the value of the Corporation. Even though not expressly required, the CRC Committee also reviewed the compensation arrangements of the Corporation’s other top executives. The CRC concluded that it does not believe that the Corporation’s compensation policies and practices encourages excessive or inappropriate risk taking and instead encourage behaviors that support sustainable long term value creation. In reaching this conclusion, the CRC considered the various metrics and elements of the compensation program. For instance, the CRC does not use highly leveraged, short-term incentives that drive high risk investments at the expense of long term company value. Rather, the Corporation’s annual incentive compensation is based on balanced performance metrics that promote disciplined progress towards longer-term goals.

 

Future Compensation Opportunity.  The CRC’s intentions are to provide a mix of different compensation elements. We consider current compensation versus long term compensation and cash versus equity elements. We view cash payments as reflective of current or recent performance and stock payments as a means to encourage long term behavior and as a means to retain executives. CRC believes that each named executive should have a portion of his compensation at risk based on how well the Corporation operates and how well its stock performs in the long run.

Beginning in 2010, the CRC has begun a more intensive review of the relationship between risk management and incentive compensation to ensure that incentive compensation does not encourage unnecessary and excessive risks. The CRC also reviews the relationship between risk management policies and practices, overall company strategy and executive compensation.

 

Use of Compensation Consultants.  Neither the CRC nor FCBI used a compensation consultant in 2009, or at anytime prior thereto, for any purpose including providing assistance in determining the amount or form of senior executive or director compensation. Recently, because of the enhanced level of regulation and scrutiny on executive compensation, the CRC has sought input from Mathews, Young — Management Consulting (“Mathews Young”) regarding the 2010 incentive compensation plan for non-executive employees of the Corporation, which plan was designed by our Human Resources Department. CRC and the Corporation understands that Mathews Young is the independent consultant of the CRC. The CRC and the Corporation will not use the same consultant. In regard to benchmark data, the CRC considers executive compensation at other similar sized and situated financial service companies as only one of numerous factors in setting pay. The CRC does not target a specific percentile within this group of perceived peers and uses the comparative data only as reference tool after determining the types and amounts of compensation based upon its own evaluation.

 

Employment Agreements.  Our named executives have employment agreements, which include change of control protection for the executives and non-compete and non-solicitation requirements for the protection of the Corporation. The employment agreements with Messrs. Mendez, Buzzo and Lilly were amended and restated as of December 16, 2008 to comply with Section 409A of the Internal Revenue Code and initial employment agreements were entered into with Messrs. Brown and Mills. We describe all of these agreements in more detail below.

 

The amended and restated employment agreement (“agreement”) with Mr. Mendez had an initial term of three years and provided that beginning on the commencement of the employment period under the agreement and on each succeeding January 1st the term of the Agreement will automatically be extended an additional three years, unless the Corporation or Mr. Mendez gives notice that the employment term will not thereafter be extended.

 

Under the agreement, Mr. Mendez’ initial annual base salary was $392,902 as of January 1, 2009; Mr. Mendez’ current base salary remains at $392,902. The Corporation may terminate Mr. Mendez’ employment at any time for “Cause” (as defined in the agreement) without further obligation owed to Mr. Mendez. If the Corporation terminates Mr. Mendez’ employment for any reason other than for “Cause” or if he terminates his employment for “Good Reason” (as defined in the agreement), the Corporation will generally be obligated to continue to provide compensation and benefits specified in the agreement for the balance of the term of the agreement but not less than thirty (30) months following the date of termination. Upon the termination of his employment, Mr. Mendez will be subject to non-competition and non-solicitation restrictions.

 

If Mr. Mendez dies while employed by the Corporation, the Corporation will pay his estate through the end of the month in which his death occurs. If Mr. Mendez’ employment is terminated as a result of permanent disability as determined pursuant to the agreement, then the Corporation has the right to terminate his employment before the end of the applicable term.

 

In the event that there is a change of control of the Corporation and Mr. Mendez’ employment is terminated by the Corporation or he chooses to terminate his employment within two (2) years after such change of control, the Corporation will pay Mr. Mendez severance pay in the form of a lump sum payment of 2.99 times his base salary then in effect on the date of termination.

 

The Corporation also entered into amended and restated employment agreements with Messrs. Buzzo and Lilly as of December 16, 2008, again to effectuate compliance with Section 409A; these agreements contain substantially similar terms and are modeled after Mr. Mendez’ agreement. These agreements supersede and replace the employment agreements for Messrs. Buzzo and Lilly entered into in 2002. Each agreement has an initial term of three years, and, similar to Mr. Mendez’ agreement, each is renewed for an additional three year term each January 1st unless the Corporation or the individual executive gives notice that the employment term will not be extended.

 

Similar to Mr. Mendez’ agreement, in the event that there is a change of control of the Corporation and Messrs. Buzzo’s or Lilly’s employment is terminated by the Corporation or either chooses to terminate his

employment within two (2) years of such change of control, the Corporation will pay that executive severance pay in the form of a lump sum payment of 2.99 times his base salary then in effect on the date of termination.

 

The Corporation also entered initial employment agreements with Messrs. Brown and Mills as of December 16, 2008. These agreements contain substantially similar terms and are modeled after Mr. Mendez’ agreement. Each agreement has an initial term of two years, and is renewed for an additional two-year term each January 1st unless the Corporation or the individual executive gives notice that the employment term will not be extended. Each agreement provides for a lump sum payment of two (2) times base salary in the event of a change of control coupled with terminated employment either without cause by the Corporation or by the executive for “Good Reason” (as defined in the agreement).

 

Compensation Elements Used to Achieve Corporation’s Goals

 

We use the compensation elements discussed below as the means to reward, retain and align executives’ interests with the long term interests of the Corporation and stockholders.

 

Base Salary and Bonus.  The amount of base salary for each named executive depends upon the scope of the executive’s duties, his or her individual performance and length of service, and his or her leadership ability. Current salary impacts our decisions regarding salary adjustments relevant to peers (within and outside this company). Base salaries are reviewed annually. For each named executive officer, the CRC may award discretionary cash bonuses during the first quarter of each year based upon the previous year’s performance based upon the evaluation by CRC and the CEO (except the CEO does not participate in his own bonus determination).

 

Stock Options and Restricted Stock Awards.  The Corporation’s equity incentive program is designed to recognize responsibility, reward excellent performance, retain named executives, and align their interests with those of our stockholders. The CRC has used stock options and stock awards sparingly and determined that no such awards were merited in 2009 due the inability of the Corporation to attain its performance goals and objectives in an admittedly difficult economic cycle.

 

Prior to 2009, non-statutory stock options totaling 332,750 in five installments, each vesting over a seven- year period, were awarded under the 1999 Stock Option Plan (“1999 Plan”). All stock options granted pursuant to the 1999 Plan were fully vested as of the end of 2009. Vested stock options granted pursuant to the 1999 Plan are exercisable up to a period of five years after the date of the grantee’s retirement (provided retirement occurs at or after age 62), disability, or death. If employment is terminated other than by retirement at or after age 62, disability, or death, vested options must be exercised within 90 days after the effective date of termination. An option not exercised within such period will be deemed cancelled. All vested but unexercised options under the 1999 Plan are “out of the money” and have no intrinsic value to the named executive officers.

 

The 2004 Omnibus Stock Option Plan (“2004 Plan”) was adopted by the Board of Directors in January 2004 and approved by the stockholders at the 2004 Annual Meeting. 200,000 shares of common stock were reserved for future issuance pursuant to the 2004 Plan. Grants of incentive stock options and non-qualified stock options under the 2004 Plan generally become vested so that 25% of the award vests as of the date of the grant and 25% vests on each one year anniversary thereafter, so that 100% of such awards is vested as of the third anniversary of the date of grant. No grants were awarded in 2009 to any named executive officer. All vested but unexercised grants under the 2004 Plan are “out of the money” and have no intrinsic value. The 2003 acquisition of The CommonWealth Bank added additional stock options for 120,155 shares of common stock (124,380 shares adjusted by the merger conversion factor of .9015 and the 10% stock dividend in 2003). These options included awards to employees and directors and were issued by The CommonWealth Bank in 12 grants beginning in 1994 and ending in 2002 with adjusted exercise prices ranging from $4.75 to $17.40. The 2009 acquisition of TriStone Community Bank added additional stock options for 148,764 shares of Common Stock. These options included awards to employees and directors and were issued by TriStone Community Bank. Options from these two acquired plans are fully vested and are exercisable for up to ten years following the grant date. At December 31, 2009, 5,436 option shares were outstanding and exercisable under the former CommonWealth Plan and 148,764 option shares were outstanding and exercisable under the former TriStone Plan.

Mr. Brown and Mr. Mills have been granted options and/or restricted stock awards under the 2004 Plan. Mr. Brown has previously been the recipient of awards under the 2004 Plan totaling 1,500 shares of stock and a total of 11,000 options. Mr. Mills has 5,000 options. Options are subject to forfeiture if the executive terminates employment prior to a vesting date. Unexercised vested options are also subject to forfeiture if not exercised within 90 days of early retirement or termination of employment.

 

All stock options under both the 1999 and 2004 Plans have exercise prices not less than fair market value of the common stock on the date of each grant. Stock options under the 1999 Plan vest ratably over seven years, while stock options and restricted stock awards under the 2004 Plan vest ratably over three to four years as recommended by the Board of Directors. The 1999 and 2004 Plans prohibit discounted stock options, reloading of stock options, and stock option repricing. The Corporation does not provide loans to the named executives for purposes of exercising options. The average number of options granted over the past three years as a percentage of basic shares outstanding was less than 1%. Historically, the named executives have not been subject to stock ownership guidelines.

 

Deferred Compensation.  The Corporation offers a qualified defined contribution plan known as the KSOP to most of its employees. However, the named executives are unable to fully participate in the KSOP due to certain restrictions on their deferrals based upon annual testing limits imposed by the Internal Revenue Code. The Corporation provides a non-qualified deferred compensation plan discussed in more detail elsewhere in this proxy statement and referred to as the WRAP plan as a mechanism to allow highly compensated participants to defer a portion of their compensation that cannot otherwise be deferred under the Corporation’s qualified plan. The plan is intended to promote retention by providing a long term savings vehicle on a tax efficient basis.

 

Pension Plans.  The Corporation provides a defined retirement benefit to the named executives and others pursuant to separate agreements, each of which is known as a “Supplemental Executive Retention Plan” (“SERP”). The plan is unfunded and designed to provide a benefit to be paid at age 62, normal retirement age in the SERP. The benefit is targeted at 35% of final compensation projected at an assumed 3% salary progression rate, and subject to an annual benefit limit of $80,000. Vesting under the plan is on a graded schedule as follows: 25% vesting after 5 years of service under the plan; 50% vesting after 10 years of service under the plan; 75% vesting after 15 years of service under the plan; plus an additional 5% vesting for each year of service beyond 15 years under the plan, with full vesting after 20 years of service from plan inception or reaching age 62, whichever occurs first.

 

In connection with the SERP, the Corporation entered into Life Insurance Endorsement Method Split Dollar Agreements with Messrs. Mendez, Buzzo and Lilly. Under these agreements, the Corporation shares 80% of death benefits (after recovery of cash surrender value) with the designated beneficiaries of the executives under life insurance contracts. The Corporation, as owner of the policies, retains a 20% interest in life proceeds after reimbursement to the Corporation of retirement benefits paid and a 100% interest in the cash surrender value of the policies.

 

The Compensation and Retirement Committee has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in the Corporation’s Annual Report on Form 10-K for 2009 and the Corporation’s 2010 proxy statement. This report is provided by the following independent directors, who comprise the Committee:

 

 

William P. Stafford, II (Chairman)
Allen T. Hamner
A. A. Modena

 

2009 SUMMARY COMPENSATION TABLE

 

 

 

 

2009 ALL OTHER COMPENSATION

 

We provide our named executives with additional benefits as shown in the “All Other Compensation” column of the 2009 “Summary Compensation Table” shown above, that we believe are reasonable, competitive and in line with the Corporation’s overall executive program. We provide additional detail of those benefits in the table below.

 

 

 

 

 

2009 Other Benefits

 

The Corporation provides other perquisites and personal benefits that the Corporation and the CRC believe are reasonable and consistent with its overall compensation program to better enable the Corporation to attract and retain superior employees for key positions. The CRC periodically reviews the levels of perquisites and other personal benefits provided to the named executives. Perquisites include the following:

 

Use of Aircraft — The Corporation’s banking subsidiary holds a fractional interest in a private aircraft through its ownership interest (20%) in a LLC. The aircraft is used by the Corporation for travel throughout the subsidiary bank’s branch network, which spans four states, by the named executives, members of the Board and other employees. The Corporation has determined that the aircraft is an efficient use of both capital and personnel time and significantly enhances productivity of key personnel. Personal use of the aircraft is prohibited.

 

Corporate Automobiles/Allowance — In lieu of company vehicles, Messrs. Mendez, Buzzo and Lilly were each provided an annual automobile allowance of $8,400; Mr. Brown and Mr. Mills were provided $6,000 as an auto allowance. Automobile allowances provide a cost effective means of compensation for business travel and shift the burden of maintenance costs to the executive. Taxable auto allowances also avoid time and cost associated with documentation of business and personal use of Corporate vehicles.

 

Country Club Dues — The Corporation advanced country club dues on behalf of Messrs. Mendez ($4,180), Buzzo ($4,000), Lilly ($4,180) and Brown ($4,180) as an added perquisite commensurate with job performance, level of responsibility and as a means to provide the named executives comparable benefits to those available at other similarly located and like-sized companies. The Corporation considers the payment of country club dues to be an appropriate part of the overall compensation packages in order to provide an appropriate setting for the named executives to conduct business on behalf of the Corporation, to socialize with other business and community leaders and to entertain the Corporation’s business customers and prospects. All costs associated with personal use of a country club by the named executive or family members are borne by the individual named executive and not the Corporation.

 

The following table provides information about equity awards granted (if any) to the named executives in 2009: (1) the grant date, (2) estimated future payouts under equity incentive plan awards, (3) the number of shares underlying all other stock awards, (4) all other awards, (5) the exercise price of the stock option awards, which reflects the closing price of company stock on the date of the grant and (6) the grant date fair value of each equity award computed under FASB ASC Topic 718 (formerly SFAS 123R).

 

 

The following table includes information on the current holdings of stock option and stock awards by the named executives. This table includes unexercised and unvested option awards, and vesting conditions that were not satisfied as of December 31, 2009. Each equity grant is shown separately for each named executive. The vesting schedule for each outstanding award is shown following this table, based on the grant date.

 

 

The following table provides information for the named executives on (1) stock option awards exercised during 2009, including the number of shares acquired upon exercise and the value realized at such time, and (2) the number of shares acquired upon the vesting of stock awards and the value realized at such time, before the payment of any applicable withholding tax and brokerage commissions.

 

 

The table below sets forth the details on pension benefits for the named executives under the following plan:

 

The FCBI Executive SERP.  The FCBI SERP is unfunded and not qualified for tax purposes. Refer to page 18 of this proxy statement for a more detailed discussion of the SERP and to Footnote 10 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2009 for discussion of the methodologies and assumptions underlying the projected SERP benefits.

 

 

Deferral of Salary.  Any employee otherwise ineligible to fully participate in the qualified retirement plan (KSOP) and who meet the Internal Revenue Code definition of being “highly compensated”, including the named executives, have historically been eligible to elect to defer up to 75% of their compensation to the FCBI 401(k) WRAP plan. Deferrals to this plan are invested as directed by each participant and are matched at the discretion of the Board of Directors in conjunction with and subject to limits established each year by the Board of Directors for elective deferrals to the KSOP. The Board of Directors authorized a match of 100% of up to 8% of participant salary for 2009 when deferred under the 401(k) plan. The table below provides detail regarding nonqualified deferred compensation of the named executives, which for 2009 included only the deferral of a portion of salaries to the 401(k) WRAP plan. Balances previously deferred by the named executives to a second non-qualified plan, known as the “Deferred Compensation Plan”, have been combined with the 401(k) WRAP deferrals and reported in a single table below:

 

 

 

 

The information below describes the compensation that would become payable under existing plans and agreements based on the executive’s actual termination of employment coupled with the assumption that the named executive’s employment had terminated on December 31, 2009, given the named executive’s compensation, years of service and a presumed age of sixty-two (62).

These benefits are in addition to benefits generally available to other non-executive officers, who are salaried employees, such as distributions under the KSOP and disability insurance benefits. We have estimated the amounts of compensation payable to each named executive under a variety of termination circumstances, including: early retirement, involuntary termination not for cause, termination for cause, termination following a change of control and in the event of the death of the executive.

 

Since a variety of factors might affect the nature and amount of any benefits payable upon the events discussed below, actual amounts may vary from what we have projected.

 

Regardless of the manner in which a named executive’s employment terminates, he may be entitled to receive amounts earned during his term of employment. Such amounts include:

 

 

In the event of an involuntary termination without cause, he would receive severance payments outlined in the respective employment agreement.

 

Payments Made Upon Retirement

 

In the event of the retirement of a named executive, in addition to the items identified above:

 

 

Payments Made Upon Death or Disability

 

In the event of the death or disability of a named executive, in addition to the benefit payments made upon termination or retirement, the named executive or his beneficiaries will receive benefits under the Corporation’s disability plan or executive life insurance plan, as appropriate. In addition, if the named executives had died on December 31, 2009, the survivors of Messrs. Mendez, Buzzo and Lilly would have received projected amounts of $848,451, $716,020, and $460,222, respectively, from the proceeds of individual split dollar life insurance policies on each of these three named executives included in the “Summary of All Other Compensation Table” on page 19. The estimated amounts payable to the beneficiaries are derived by reflecting a deduction for repayment to the Corporation of the cash surrender value of the split dollar life insurance policies and distribution of 80% of the face value of any remaining insurance proceeds to the respective beneficiaries and 20% to the Corporation.

 

Payments Made Upon a Change of Control

 

The Corporation has entered into employment agreements with each of the named executives, which agreements include change of control provisions. Pursuant to these agreements, if an executive’s employment is terminated following a change of control (other than a termination by the Corporation for cause) or if the executive terminates his employment in certain circumstances defined in the agreement, in addition to the benefits listed under the heading “Payments Made Upon Termination”, the named executive will receive a severance payment consisting of 2.0 to 2.99 times current salary.

 

The employment agreements for Messrs. Mendez, Buzzo, Lilly, Brown, and Mills are substantially similar. The form of the agreements was filed as an Exhibit to the Corporation’s Form 8-K filed on December 16, 2008.

Generally, pursuant to these agreements, a change of control is defined as:

 

(i) A change in ownership of the Corporation when one person (or a group) acquires stock that, when combined with stock previously owned, controls more than 50% of the value or voting power of the stock of the Corporation.

 

(ii) A change in the effective control of the Corporation on the date that, during any 12-month period, either (1) any person (or group) acquires stock possessing 30% of the voting power of the Corporation, or (2) a majority of the members of the Board of Directors is replaced by persons whose appointment or election is not endorsed by a majority of the incumbent Board.

 

(iii) A change in ownership of a substantial portion of the assets of the Corporation when a person (or a group) acquires, during any 12-month period, assets of the Corporation having a total gross fair market value equal to 40% or more of the total gross fair market value of all of the Corporation’s assets.

 

 

 

 

 

The compensation and benefit package for non-management directors is intended to fairly compensate directors for work required for the Corporation and to align the directors’ interests with the long term interests of stockholders. The compensation package for the directors is simple, direct and easy to understand from a stockholder perspective. The table below indicates that non-management directors’ compensation includes the following:

 

Cash Compensation.

 

During 2009, non-employee members of the Board of Directors received a retainer of $700 per month. Audit Committee members received a retainer fee of $1,500 per quarter ($2,000 for Chairman). Members of the Executive Committee also receive a fee of $250 per meeting unless held in conjunction with monthly Board meetings, in which case no committee fee is paid. Members of the Governance and Nominating Committee receive a fee of $200 per meeting. Members of the Compensation and Retirement Committee receive a fee of $250 per meeting unless held in conjunction with monthly Board meetings, in which case no committee fee is paid. Non-management directors are reimbursed for travel or other expenses incurred for attendance at Board and committee meetings. Director Mendez, the Corporation’s CEO, receives no Board compensation for service on the Board or committees.

 

Deferral of Cash Compensation.

 

Directors are permitted on an annual basis, prior to the beginning of each calendar year, to choose to elect to defer Board and committee fees to a non-qualified deferred compensation plan established solely for that purpose. Each director electing to defer fees is responsible for the investment of such deferrals and the Corporation does not provide either a preferential investment or interest rate for such deferred compensation. Each director, who has deferred any such compensation, has the ability to access such deferred compensation upon retirement from active Board service.

 

Stock Options.

 

In addition, non-management directors participate in the 2001 Directors’ Stock Option Plan (the “directors’ option plan”). The directors’ option plan was designed to facilitate and encourage investment in the Corporation and for directors to become more closely aligned with the long term interests of stockholders. Non-employee directors have each been granted options to purchase a total 6,050 shares of Common Stock. The outstanding options exercisable at December 31, 2009 by non-management directors were 24,200 shares. The exercise price of each option is the market value of a share of Common Stock on the date of grant adjusted for stock dividends. The options are fully vested and must be exercised within 10 years of grant or two years following the director’s retirement, whichever occurs first. Presuming all directors continue as Board members, these options are scheduled to expire in 2011 with the exception of those granted to Mr. Johnson in 2008.

 

Directors’ Supplemental Retirement Plan.

 

FCBI established a Directors’ Supplemental Retirement Plan (“directors’ SERP” or “plan”) for its non-management directors in 2001. In 2003, as part of its acquisition of The Commonwealth Bank (“Commonwealth”), the Corporation assumed responsibility for administration of a similar plan for the benefit of Director Hall and other former directors and officers of Commonwealth. These plans provide for a benefit upon retirement from Board

service at specified ages depending upon length of service. Benefits under the directors’ SERP become payable at age 70, 75 and 78 depending upon the individual director’s age and original date of election to the Board. Benefits payable under these plans vary based on the age of the director at the date of implementation of the plan.

 

In connection with the directors’ SERP, the Corporation has also entered into Life Insurance Endorsement Method Split Dollar Agreements (the “agreements”) with certain directors covered under the directors’ SERP. Under the agreements, the Corporation shares 80% of death benefits (after recovery of cash surrender value) with the designated beneficiaries of the directors under life insurance contracts referenced in the directors’ SERP. The Corporation as owner of the policies retains a 20% interest in life proceeds and a 100% interest in the cash surrender value of the policies.

 

The directors’ SERP also contains provisions for change of control, as defined, which allows the directors to retain benefits under the plan in the event of a termination of service, other than for cause, during the twelve months prior to a change in control or anytime thereafter, unless the director voluntarily terminates his service within 90 days following the change in control.

 

Insurance.

 

FCBI provides liability insurance for its directors and officers as well as indemnification agreements. The annual cost of the directors and officers insurance is approximately $25,000 and the coverage currently extends until May 10, 2010.

 

No Other Compensation.

 

Non-management directors do not receive any other cash or equity compensation except as set forth above.

 

Director Compensation Table

 

The following table summarizes non-management director compensation for fiscal year 2009.

 

 

The following table includes the stock-based holdings at December 31, 2009 of significant stockholders having beneficial ownership greater than 5%, our directors and the named executives, and our directors and executive officers as a group.

 

 

 

 

 

Review and Approval of Related-Person Transactions.  We review relationships and transactions in which the Corporation and our directors and executive officers or their immediate family members are participants to determine whether such related parties have a direct or indirect material interest in such transaction. Although these policies are not currently in writing, the Corporation’s in-house counsel is primarily responsible for developing and implementing processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining whether a related person has a direct or indirect material interest in the transaction. Part of this process includes a requirement that each director and executive officer respond to an annual proxy statement questionnaire, which is designed to obtain detailed information regarding the directors and officers, including updated information on their backgrounds, which serves as a basis to determine an individual’s qualifications to continue to serve as a director. Responses to the annual “D&O” questionnaire also provide disclosure of related person transactions. When it is determined that a related person transaction may have occurred, it is then scrutinized to establish whether or not such related person transaction is directly or indirectly material, in which case such transaction is then disclosed in this proxy statement pursuant to SEC requirements.

 

In the course of reviewing a disclosable related-person transaction, counsel considers:

 

 

If in-house counsel determines that there is a related person transaction to be disclosed, he reviews it with outside counsel with expertise in SEC matters prior to including it in this proxy. No disclosable related person transactions are reported within this proxy statement other than those discussed below.

 

Related-Person Transactions.  Directors Stafford and Stafford, II are related to a stockholder of an incorporated construction firm, which has on occasion performed construction work for the Corporation. Messrs. Staffords’ relative is neither an officer nor voting stockholder of the construction firm. During 2007 and 2008, the construction firm built a branch office for the Corporation’s subsidiary bank at a cost of $702,437 in 2007 and $594,764 in 2008. The construction firm also performed other work for the Corporation in 2008 and 2009 in the nature of routine repairs and maintenance with total expenditures in each year of $10,850 and $300 respectively. In regard to the branch office construction, the contract for such work was entered into only after completion of a competitive bidding process. These transactions were not deemed to be significant to director Stafford or Stafford, II as they have no financial interest in the construction firm. The Corporation has had occasion to build and improve other office facilities using other construction companies before and since completion of construction of the branch office mentioned above and has determined that this transaction and the other work performed by the construction firm has insignificant importance to both the Corporation and its directors. The amount of such expenditures in each fiscal year was immaterial individually and in the aggregate.

Director Stafford, II serves as a partner of a law firm, which, similar to other firms in other localities, regularly performs legal services each fiscal year for the Corporation. The legal fees paid to this firm in 2009 amounted to $71,180. Mr. Stafford, II performs an insignificant portion of these legal services personally for the Corporation and deems the importance of the relationship with the law firm to be immaterial. The Corporation uses this law firm to a lesser extent than other outside legal counsel and the dollar amounts paid to the law firm are not material.

 

Director Johnson serves as President of a real estate firm, which previously leased space to the Corporation for a bank branch prior to Mr. Johnson becoming a director. Since the date of Mr. Johnson’s appointment as a director, the prior lease space has been abandoned by the Corporation, but an alternate lease agreement of bank branch space has been executed by the Corporation and the real estate firm since Mr. Johnson’s appointment as a director. The real estate company also has occasion to enter into a credit relationships with our subsidiary bank on the same terms and conditions as other comparable loan customers. The amount of lease payments paid and owed by the Corporation to the real estate firm and the amount of loan payments and any outstanding loan balance due and payable by the real estate firm to our subsidiary bank have been determined to be insignificant from both the perspective of the Corporation and the real estate firm. In addition, any business loans made by First Community Bank to the real estate company were determined to be in the usual course of business, with interest rates and terms no better than loans advanced to similar customers of the Bank.