First Community Bancshares, Inc. Announces Record Fourth Quarter and Annual Earnings

Business Wire, Jan 24, 2006

BLUEFIELD, Va. -- First Community Bancshares, Inc. (NASDAQ: FCBC) (www.fcbinc.com) today reported record earnings of $7.1 million for the fourth quarter of 2005, or $0.63 diluted earnings per share. This represents a 17% increase over fourth quarter 2004 earnings of $6.1 million, or $0.54 diluted earnings per share. Net income for the full year 2005 increased 17% to $26.2 million, or $2.31 diluted earnings per share, compared to $22.4 million, or $1.97 diluted earnings per share in 2004, and represents record annual earnings for the Company. Return on average assets for the fourth quarter of 2005 was 1.42%, which was an increase compared to the last four quarters. Return on average equity for the fourth quarter of 2005 was 14.47%, compared to 13.20% for the same period in 2004.

During the fourth quarter, the Bank sold its Clifton Forge, Virginia branch location. The transaction resulted in a deposit premium of approximately $3.4 million and real estate gains of $1.0 million. According to CEO John M. Mendez, "the decision to sell the Clifton Forge office is part of the Company's continuing effort to increase shareholder value through the ongoing evaluation of the branch network. Capital generated through the sale will be redirected to support continued expansion in the Company's targeted growth markets in the Southeast." During the quarter, the Company opened a loan production office in Kernersville, North Carolina, and has plans to open five de novo branches, convert three loan production offices to full service locations, and open two new loan production offices in 2006 and 2007. Most of these locations will be in the Richmond, Virginia and Winston-Salem, North Carolina metropolitan areas.

Also in the fourth quarter, as previously announced, the Company restructured certain liabilities which will have an immediate positive impact on earnings. First Community prepaid $77 million of FHLB advances and incurred prepayment penalties of approximately $3.8 million. The retired advances had a weighted-average interest rate of 5.96% and maturity of 4.3 years. In January, the Company borrowed $75 million in new adjustable-rate advances from the FHLB, of which $50 million of the advances were hedged by an interest rate swap to approximate a fixed rate of 4.34%. On this portion of the new advances, the Company expects to save over $810 thousand annually in interest expense. The remaining $25 million will float at an interest rate equal to 3-month LIBOR less 45 basis points. The initial interest rate on the floating portion of the FHLB advance is 4.10%, approximately 186 basis points less than the weighted-average rate of the prepaid advances.

Financial Highlights

Fourth Quarter 2005 vs. 2004

--The total loan portfolio grew 7.5% to $1.33 billion with total fourth quarter production of over $200 million, and annual production of over $855 million. Commercial loans grew 8.4% and retail loans grew 6.1% in 2005. The Bank's thirteen de novo and loan production offices contributed $97 million to loan growth in 2005.

--Net interest income was $18.8 million, an improvement of $882 thousand, or 4.9%. The increase was due primarily to an increase of $92 million in the average balance of loans held for investment, part of a $142 million increase in average earning assets.

--The increase in earning assets was funded, in large part, by $70 million growth in average customer deposits within the existing branch network.

--Tax-equivalent net interest margin was 4.29%, down slightly from 4.33% for the third quarter of 2005, and from 4.45% for the fourth quarter of 2004. Like our peers, the margin has been impacted by the flattening of the treasury yield curve.

--Non-interest income was $8.9 million. However, excluding the gain from the branch sale, non-interest income was $4.6 million compared to $4.2 million, an 8.2% increase. The increase reflects continued improvement in the areas of service charges on deposit accounts and all other service charges, commissions and fees. Service charges on deposit accounts increased $264 thousand, or 11%. Other service charges, commissions and fees increased $126 thousand, or 21%.

--Non-interest expense was $17.5 million. However, excluding the FHLB advance prepayment penalty, non-interest expense was $13.7 million, compared to $12.7 million for the fourth quarter of 2004. Most of the 8.5% increase can be attributed to increases in salaries and benefits from the Company's expansion efforts and from increased incentive accruals reflecting 2005 performance, as well as increased health care costs. Excluding the effects of the branch sale gains and the prepayment penalties, the efficiency ratio was 56.0% compared to 54.5%.

--Credit quality remains sound with total delinquencies as a percent of total loans at 0.79% at December 31, 2005, compared with 0.83% at December 31, 2004. The ratio of allowance for credit losses as a percent of loans held for investment was 1.14% compared to 1.32%. The provision for credit losses was $887 thousand compared to the $264 thousand. Net charge-offs were $632 thousand compared to an unusually low $158 thousand for fourth quarter 2004.