Business Context and Reporting Period
Company: First Community Bancshares, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A multi-state financial holding company operating community banking and insurance services segments across Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. The company operates through its subsidiary, First Community Bank, N.A., and GreenPoint Insurance Group, Inc.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Total Assets | $2,298.3 million | $2,298.3 million | $2,133.3 million |
| Net Interest Income | $17.5 million | $50.3 million | N/A |
| Net Income (Loss) | $(11.3) million | $(3.7) million | N/A |
| Net Income (Loss) Available to Common | $(12.3) million | $(5.8) million | N/A |
| Diluted EPS (Loss) | $(0.71) | $(0.42) | N/A |
| Total Deposits | $1,662.5 million | $1,662.5 million | $1,503.8 million |
| Total Borrowings | $198.9 million | $198.9 million | $215.9 million |
| Cash and Cash Equivalents | $55.3 million | $55.3 million | $46.4 million |
| Stockholders' Equity | $265.5 million | $265.5 million | $220.3 million |
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $11.3 million for the quarter and $3.7 million for the nine-month period, compared to net income of $4.6 million and $17.1 million, respectively, in the prior year periods. The primary driver was significant other-than-temporary impairment (OTTI) charges on securities.
- Securities Impairment: The company recognized $30.8 million in OTTI charges for the quarter and $34.8 million for the nine-month period, primarily related to pooled trust preferred securities and equity securities.
- Acquisitions: On July 31, 2009, the company acquired TriStone Community Bank for approximately $10.8 million, resulting in a $4.5 million gain on acquisition. This contributed to asset growth and deposit increases.
- Loan Portfolio: Loans held for investment increased to $1.40 billion from $1.30 billion at year-end 2008, driven largely by the TriStone acquisition.
- Allowance for Loan Losses: The allowance increased to $17.4 million (1.25% of total loans) from $16.0 million at year-end 2008. Net charge-offs were $2.7 million for the quarter and $6.6 million for the nine-month period.
- Capital: Stockholders' equity increased by $45.2 million (20.5%) from year-end 2008, primarily due to a $61.7 million common stock offering in June 2009 and the TriStone acquisition, partially offset by the net loss.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- OTTI Charges: Significant non-cash impairment losses on investment securities ($30.8M Q3, $34.8M YTD) severely impacted earnings.
- Acquisition Gain: A $4.5 million gain was recognized on the TriStone Community Bank acquisition.
- FDIC Assessments: The company incurred $1.1 million in FDIC premiums for the quarter and $2.6 million YTD. A special assessment of $0.99 million was paid in Q2. A potential prepaid assessment of approximately $10.0 million for 2010-2012 is anticipated.
- Risks and Contingencies:
- FDIC Premiums: Higher deposit insurance premiums and potential special assessments pose a risk to future profitability.
- Asset Quality: Non-performing assets increased to $16.2 million (1.16% of total loans and OREO). Management notes that rising unemployment and recessionary conditions could lead to further loan deterioration.
- Securities Portfolio: The company holds significant amounts of trust preferred securities and mortgage-backed securities in unrealized loss positions. Future OTTI charges remain a risk if economic conditions worsen.
- Interest Rate Risk: The company is in a slightly liability-sensitive position. Net interest margin decreased 22 basis points to 3.68% for the quarter.
- Management Commentary: Management attributes the decline in earnings primarily to securities impairments and increased loan loss provisions. They maintain that the allowance for loan losses is adequate and that liquidity remains strong with $51.9 million in cash and equivalents and $126.2 million in FHLB credit availability.
Investor Verification Checklist
- Verify OTTI Methodology: Confirm the assumptions used in the discounted cash flow models for trust preferred securities and the rationale for the $30.8 million impairment charge.
- Review Non-Performing Assets: Examine the composition of the $16.2 million in non-performing assets, specifically the $7.0 million retained portion of a participated loan identified as a potential problem.
- Assess FDIC Exposure: Calculate the potential impact of the proposed $10.0 million prepaid FDIC assessment on future cash flows and earnings.
- Check Liquidity Restrictions: Note that the Bank is restricted from paying dividends to the parent company due to prior impairment losses; verify the holding company's ability to meet obligations with its $17.1 million cash balance.
- Monitor Loan Quality Trends: Track the trend in net charge-offs and the allowance coverage ratio, given the 0.88% non-accrual loan ratio.