Business Context and Reporting Period
Company: First Community Bancshares, Inc. (FCBC)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: A financial holding company operating primarily through its subsidiary, First Community Bank, N.A., and GreenPoint Insurance Group, Inc. The Company operates 57 banking locations across Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. It offers commercial and consumer banking, wealth management, and insurance services.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Income (Available to Common) | $21.85 million | ($40.86 million) Loss |
| Earnings Per Share (Diluted) | $1.23 | ($2.75) |
| Total Assets | $2.24 billion | $2.27 billion |
| Total Loans (Net) | $1.36 billion | $1.37 billion |
| Total Deposits | $1.62 billion | $1.65 billion |
| Net Interest Income | $73.86 million | $69.25 million |
| Noninterest Income | $40.51 million | ($53.68 million) |
| Noninterest Expense | $69.94 million | $66.62 million |
| Return on Average Assets | 0.97% | -1.83% |
| Return on Average Equity | 8.11% | -16.73% |
| Allowance for Loan Losses | $26.48 million | $24.28 million |
| Non-Performing Assets | $29.65 million | $23.50 million |
| Tier 1 Leverage Ratio | 9.44% | 8.51% |
Material Changes vs. Prior Period
- Profitability Recovery: The Company returned to profitability in 2010 with net income of $21.85 million, a significant turnaround from the $40.86 million net loss in 2009. The 2009 loss was heavily impacted by $90.54 million in pre-tax impairment charges and losses on the sale of securities.
- Net Interest Income: Increased by $4.61 million (6.65%) to $73.86 million, driven by a decrease in the cost of funds (time deposits and borrowings) in a low-rate environment, which improved the net interest margin to 3.90% from 3.74%.
- Noninterest Income: Improved significantly to $40.51 million from a negative $53.68 million in 2009. This was due to net securities gains of $8.27 million in 2010 compared to net losses of $11.67 million in 2009, and the absence of the massive other-than-temporary impairment (OTTI) charges seen in the prior year.
- Asset Quality: Non-performing assets increased to $29.65 million (2.13% of total loans and OREO) from $23.50 million in 2009. Net charge-offs rose to $12.55 million from $9.31 million, reflecting continued economic stress and real estate market weakness.
- Capital Position: Stockholders' equity increased by $17.61 million to $269.88 million. The Company maintained capital ratios well above regulatory minimums, with a Tier 1 risk-based capital ratio of 14.07%.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Environment: The Company faces significant uncertainty regarding the implementation of the Dodd-Frank Act and Basel III capital requirements, which may increase compliance costs and capital requirements. The Bank is subject to an Individual Minimum Capital Ratio directive requiring higher capital ratios than standard regulatory minimums.
- Dividend Restrictions: Due to securities impairments in 2009, the Bank has no retained profits from which to pay dividends. Consequently, the Bank requires OCC approval to pay dividends to the holding company through approximately December 31, 2011.
- Asset Quality Risks: The Company highlights risks associated with the declining real estate market, particularly in its geographic footprint. Commercial and construction lending concentrations pose credit risks if economic conditions worsen. Non-performing assets continue to rise, though at a slower pace than in previous years.
- Unusual Items:
- Goodwill Impairment: Recognized a $1.04 million goodwill impairment charge related to the insurance agency segment in 2010.
- OTTI Charges: Recorded minimal OTTI charges of $134,000 in 2010, a sharp decline from the $78.86 million recorded in 2009.
- Restatement: The Company restated prior period financials (2008-2010) due to a computational error in the allowance for loan losses model, which has since been remediated.
Key Facts for Investor Verification
- Dividend Dependency: Verify the status of the Bank's retained earnings and the timeline for when the Bank can pay dividends to the holding company without OCC approval (expected post-December 2011).
- Non-Performing Asset Trends: Monitor the trajectory of non-performing assets ($29.65 million) and net charge-offs ($12.55 million) to assess if the credit deterioration is stabilizing or accelerating.
- Regulatory Capital Compliance: Confirm the Company's ability to maintain the heightened Individual Minimum Capital Ratio directive (11.50% total risk-based, 10.00% Tier 1 risk-based) imposed by the OCC.
- Securities Portfolio: Review the remaining unrealized losses on available-for-sale securities ($28.45 million) and the potential for future OTTI charges, particularly in the Alt-A residential mortgage-backed securities.
- Internal Controls: Acknowledge the recent restatement due to a material weakness in the allowance for loan losses calculation model and verify the effectiveness of the implemented remedial controls.