FCBC

Business Context and Reporting Period

Company: First Community Bancshares, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: A multi-state bank holding company headquartered in Bluefield, Virginia, operating through its subsidiary, First Community Bank, N.A. The company provides financial, trust, and investment advisory services through 60 banking locations and 6 wealth management offices across Virginia, West Virginia, North Carolina, and Tennessee.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 14.6% year-over-year, driven by higher net interest income and noninterest income.
• Net Interest Income: Increased by $313,000 to $18.07 million. While the yield on earning assets rose 53 basis points to 6.77%, the cost of interest-bearing liabilities increased 80 basis points, compressing the net interest margin to 4.32% (down 15 basis points from 4.47% in Q1 2005).
• Noninterest Income: Rose 38% to $5.15 million. This was largely due to a $676,000 restitution payment received from a prior payment systems fraud and increased service charges on deposit accounts.
• Expense Management: Noninterest expenses increased 6.7% to $13.33 million, primarily due to higher salaries and benefits (including $71,000 in stock option expense) and increased legal fees.
• Asset Quality: Non-performing assets decreased significantly to $3.39 million (0.25% of total loans) from $4.85 million at year-end 2005. Net charge-offs declined to $347,000 (0.10% of average loans) from $487,000 in the prior year.
• Liquidity: Cash and cash equivalents more than doubled to $106.0 million, driven by a $48.4 million increase in interest-bearing balances with banks.

Outlook, Risks, and Unusual Items

• Branch Sales: The company entered agreements to sell two branches (Drakes Branch, VA, and Rowlesburg, WV) to Smith River Community Bank and Clear Mountain Bank, respectively. These transactions are expected to generate approximately $1.1 million in combined gains and are subject to regulatory approval.
• Debt Restructuring: In January 2006, the company drew $75 million in new FHLB advances to replace higher-cost debt. An interest rate swap was utilized to fix the rate on $50 million of these advances, expected to save approximately $813,000 annually in interest expense.
• Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) on January 1, 2006. This resulted in a pre-tax income reduction of approximately $71,000 for the quarter, though it had no effect on earnings per share.
• Interest Rate Risk: The company maintains an asset-sensitive position. Simulations indicate that a 200 basis point increase in rates would increase net interest income by $2.05 million, while a 200 basis point decrease would reduce it by $4.96 million.
• Legal Proceedings: The company is involved in various legal actions related to lending and collection but does not expect a material adverse effect on financial condition.

Investor Verification Checklist

• Branch Sale Completion: Verify the closing dates and regulatory approvals for the Drakes Branch and Rowlesburg branch sales to confirm the realization of the projected $1.1 million gain.
• Interest Rate Sensitivity: Monitor the impact of the asset-sensitive balance sheet on net interest income if the Federal Reserve alters interest rate trajectories.
• Loan Portfolio Quality: Track the trend of non-accrual loans and net charge-offs to ensure the improvement in asset quality is sustainable.
• Deposit Growth: Assess the sustainability of the $36 million deposit growth, particularly the shift toward higher-cost time deposits which increased the cost of funds.
• Stock Repurchases: Review the ongoing treasury stock repurchase program, which utilized $2.6 million in the quarter to buy back 81,061 shares.