FCBC

Business Context and Reporting Period

Company: First Community Bancshares, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Operations: A multi-state financial holding company operating through its subsidiary, First Community Bank, N.A., and insurance subsidiary, GreenPoint Insurance Group, Inc. The company operates 58 locations across Virginia, West Virginia, North Carolina, South Carolina, and Tennessee.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased significantly compared to the prior year periods. For the three months ended June 30, 2010, net income rose $2.73 million (113%) compared to the same period in 2009. For the six months, it increased $3.96 million (52%).
• Net Interest Income: Increased $2.22 million (13.6%) for the quarter and $4.41 million (13.5%) year-to-date, driven by higher earning assets (partially due to the TriStone acquisition) and lower funding costs.
• Loan Loss Provision: Increased to $3.60 million for the quarter (up from $2.55 million in 2009) and $7.26 million year-to-date (up from $4.70 million in 2009), reflecting higher net charge-offs and qualitative risk factors related to the economic environment.
• Non-Performing Assets (NPA): NPAs increased to $24.78 million (1.10% of total assets) from $15.26 million (0.69%) in the prior year, primarily due to an increase in Other Real Estate Owned (OREO) and non-accrual loans.
• Securities Impairment: Other-than-temporary impairment (OTTI) charges decreased significantly to $185,000 for the quarter and six months, compared to $3.78 million and $3.99 million respectively in 2009.

Outlook, Risks, and Management Commentary

• Restatement and Controls: The company restated prior financial statements due to a computational error in its allowance for loan losses model. Management concluded that disclosure controls and procedures were not effective as of June 30, 2010, due to this material weakness, though the error was corrected in July 2010.
• Regulatory Environment: The company highlighted the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010. Potential impacts include increased costs for deposit insurance, changes to interchange fees, and new capital requirements.
• Liquidity: The company maintains a strong liquidity position with $76.53 million in cash equivalents, $201.09 million in unpledged securities, and approximately $202.41 million in FHLB credit availability.
• Capital: All regulatory capital ratios exceed "well-capitalized" levels. However, the Bank received an Individual Minimum Capital Ratio (IMCR) directive from the OCC requiring specific minimum ratios.
• Dividend Restrictions: Due to prior investment securities impairments, the Bank is currently restricted from paying dividends to the Parent Company.

Investor Verification Checklist

• Restatement Impact: Verify the full extent of the restatement on prior periods and the specific remediation steps taken to address the material weakness in the allowance for loan losses model.
• Asset Quality Trends: Monitor the trajectory of non-performing assets and net charge-offs, particularly in the residential and commercial real estate sectors which comprise the majority of non-performing loans.
• Securities Portfolio: Review the remaining unrealized losses on the investment securities portfolio, specifically the Alt-A residential mortgage-backed securities and trust preferred securities, for potential future OTTI charges.
• Regulatory Compliance: Assess the financial impact of the new Dodd-Frank regulations and the specific requirements of the OCC's Individual Minimum Capital Ratio directive.
• Liquidity Constraints: Confirm the duration of the dividend restriction on the Bank and its impact on the Parent Company's ability to fund operations or return capital to shareholders.