FCBC

Business Context and Reporting Period

Company: First Community Bancshares, Inc. (FCBC)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: A one-bank holding company incorporated in Nevada, operating First Community Bank, N.A. The bank provides commercial and mortgage banking services through 48 full-service branches, 8 loan production offices, and 4 trust/investment offices across Virginia, West Virginia, North Carolina, and Tennessee. In November 2006, the Company acquired Investment Planning Consultants (IPC), an investment advisory firm. The Company elected financial holding company status in December 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 10% to $28.9 million, driven by a $5.8 million reduction in non-interest expenses and improved asset quality, despite a decline in net interest income.
• Net Interest Income: Decreased $2.0 million (tax-equivalent basis) due to a 17 basis point compression in the net interest margin (4.22% vs 4.39%). This was caused by rising short-term interest rates increasing the cost of funds faster than yields on earning assets could adjust.
• Expense Management: Non-interest expenses dropped significantly, primarily due to a $2.6 million reduction in salaries and benefits (employee count decreased from 716 to 602) and the absence of a $3.8 million prepayment penalty on FHLB advances incurred in 2005.
• Asset Quality: Net charge-offs decreased to $2.9 million (0.22% of average loans) from $4.9 million (0.38%) in 2005. The 2005 figure was inflated by a specific $1.5 million loss on a hospitality loan.
• Divestitures: The Company sold three branch locations in 2006 (Rowlesburg, WV; Drakes Branch, VA; and previously Clifton Forge, VA in late 2005), generating pre-tax gains totaling approximately $1.0 million in 2006.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates continued growth through acquisitions and de novo branching, with plans to open two new branches in Winston-Salem, NC, in Q1 2007 and three others by Q4 2007. The Company expects to maintain strong capital positions well above regulatory minimums.
• Interest Rate Risk: The Company is slightly liability-sensitive. Rising interest rates continue to compress net interest margins, though the yield on earning assets increased 50 basis points to 6.92% in response to rate hikes.
• Unusual Items:
  • Acquisition: Acquired IPC in November 2006 for an initial $1.47 million (plus potential earn-out of $1.43 million).
  • Recoveries: Recognized a $676 thousand recovery related to a 1997 payment system fraud loss.
  • Insurance Investment: Earned $976 thousand on a $25 million investment in bank-owned life insurance made in April 2006.
• Risks: Primary risks include interest rate volatility, credit risk concentration in commercial lending and real estate within the four-state region, and regulatory restrictions on dividend payments from the subsidiary bank.

Investor Verification Checklist

• Capital Adequacy: Verify Tier 1 risk-based capital ratio (11.60%) and leverage ratio (8.50%) remain well above the "well-capitalized" thresholds (6.0% and 5.0% respectively).
• Expense Sustainability: Confirm if the $5.8 million expense reduction is sustainable or if it was driven by one-time factors (e.g., lack of 2005 prepayment penalty, workforce reduction).
• Loan Portfolio Quality: Monitor the trend of non-performing assets (down to 0.32%) and the adequacy of the allowance for loan losses (1.13% of total loans) given the concentration in commercial real estate.
• Dividend Capacity: Review the subsidiary bank's retained earnings and regulatory limits on dividends, as the holding company relies on these dividends for operating funds and shareholder payouts.
• Acquisition Integration: Assess the performance of the newly acquired IPC and the potential impact of the contingent consideration ($1.43 million) on future goodwill and earnings.