FCBC

Business Context and Reporting Period

Company: First Community Bancshares, Inc.
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: A bank holding company operating primarily through its subsidiary, First Community Bank, N.A., across Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. The Company also owns GreenPoint Insurance Group, Inc. and Investment Planning Consultants (IPC).
Key Developments: In November 2008, the Company acquired Coddle Creek Financial Corp. ($158.66 million in assets). In November 2008, the Company participated in the U.S. Treasury's Capital Purchase Program (TARP), issuing $41.50 million of Series A Preferred Stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Earnings Decline: Net income dropped 90% to $3.08 million from $29.63 million in 2007. This was primarily driven by a non-cash, pre-tax impairment charge of $29.92 million on investment securities (specifically collateralized mortgage obligations and pooled trust preferred securities).
• Asset Quality Deterioration: Non-performing assets increased 306% to $14.09 million, driven by a rise in non-accrual loans to $12.76 million. Net charge-offs more than doubled to $5.45 million (0.45% of average loans) from $2.43 million.
• Provision for Loan Losses: Increased significantly to $7.42 million from $717 thousand in 2007 due to rising loss factors and economic conditions.
• Net Interest Margin: Tax-equivalent net interest margin improved slightly to 3.88% from 3.80%, despite a 51 basis point decrease in yield on earning assets, as the cost of funds decreased by 78 basis points.
• Capital Structure: Stockholders' equity increased to $220.34 million, bolstered by the $41.50 million TARP preferred stock issuance, which offset the comprehensive net loss.

Guidance, Outlook, Risks, and Unusual Items

• TARP Restrictions: Participation in the Capital Purchase Program restricts the Company from increasing common dividends above $0.28 per share or repurchasing shares without Treasury consent until the third anniversary of the investment or redemption of the preferred stock.
• Regulatory Capital: The Company and its subsidiary bank remain "well-capitalized" under regulatory standards, with Tier 1 risk-based capital ratios of 11.92% and 10.69%, respectively.
• FDIC Assessments: The Company anticipates significantly higher FDIC deposit insurance premiums in 2009 due to proposed emergency special assessments (potentially $2.87 million) and rate increases.
• Investment Portfolio Risk: The Company holds significant unrealized losses in trust-preferred securities ($82.7 million in unrealized losses on $148.8 million amortized cost). While management does not currently believe these are other-than-temporary, further deterioration in the banking sector could trigger additional impairments.
• Economic Outlook: Management cites a challenging economic environment with declining real estate values and rising unemployment as primary risks to future credit quality and earnings.

Investor Verification Checklist

• Impairment Methodology: Verify the assumptions used to determine that remaining unrealized losses on trust-preferred securities are temporary rather than other-than-temporary.
• Loan Loss Adequacy: Assess whether the $15.98 million allowance for loan losses is sufficient given the 306% increase in non-performing assets and the specific concentration in commercial real estate and construction loans.
• TARP Impact: Confirm the long-term impact of the 5% (rising to 9%) dividend requirement on the Series A Preferred Stock on future earnings available to common shareholders.
• FDIC Costs: Monitor the finalization of FDIC emergency special assessments and their impact on 2009 operating expenses.
• Acquisition Integration: Review the performance of the Coddle Creek acquisition and the integration of its loan portfolio, which included $2.81 million in non-accrual loans at acquisition.