First Community Bancshares Inc. in Bluefield, Va., has turned the corner in dealing with its securities portfolio and is now setting its sights on acquisitions in the Southeast.
The $2.3 billion-asset company, which has been a busy acquirer in the past, announced last week that its shareholders have authorized raising up to $200 million of capital. The fresh capital should fortify its position as a consolidator through failed-bank takeovers and M&A deals.
First Community had been working through its problem pools of trust-preferred securities since 2007. In December, it did a deep-cleaning by selling virtually all of what was left — about $60 million worth — and taking an after-tax loss of $26.78 million. With the money-losing securities off its back, the company returned to earnings growth in the first quarter. It reported a profit of $5.28 million, up 13% from the year earlier.
"It is nice to have it behind us," Dave Brown, First Community's chief financial officer, said in an interview, referring to the problems with the securities portfolio. "We are clearly now focused on the business of banking and putting more time and energy into expansion."
The company repaid in July the Treasury Department's $41.5 million investment under the Troubled Asset Relief Program.
Brown said First Community will seek acquisitions in West Virginia, Virginia, South Carolina, Tennessee and North Carolina, where the company has completed two deals in the past two years.
In 2008, it bought Coddle Creek Financial Corp. in Mooresville, Va., for $33.1 million, and in 2009 it purchased TriStone Community Bank in Winston-Salem, N.C., for $10 million in stock.
Analysts said First Community is well-positioned to continue beefing up through acquisitions because its credit quality remains relatively solid, capital ratios are above "well capitalized" levels and the management team is strong.
"Historically, their growth strategy has been one of acquiring and bolting on fee-generating income," said Avi Barak, an analyst at Sandler O'Neill & Partners LP. "It seems like that was on hold until they got the securities handled. Now with Tarp repaid and the securities done, they can focus back on their core competencies."
Meanwhile, the region First Community is targeting should offer plenty of acquisition opportunities, analysts said.
P. Carter Bundy, an analyst at Stifel Nicolaus & Co., said data gathered before first-quarter results were reported showed about 26 institutions, with $8.6 billion in assets, in the target area were operating under a regulatory order or had a Texas ratio of more than 100%, making their survival questionable.
Though it has had its problems, First Community is faring better than many others in the region. At March 31 it had a total risk-based capital ratio of 14.1%, a Tier 1 risk-based capital ratio of 12.9% and a leverage ratio of 9%.
The company largely stayed away from the construction and development lending that tempted many other community banks, and this enabled it to maintain enviable credit quality.
As of March 31, First Community reported a ratio of nonperforming assets to assets of 0.97%, considerably better than the national average of 3.32% for all banks at the end of December and 2.46% for Virginia banks.
"It's a very clean bank from a credit perspective," Bundy said.
In an odd twist, First Community's solid credit quality is linked to the problems it ran into with pools of trust-preferred securities. It curtailed lending on construction projects in 2005 because of the risk. Such lending proved to be fatal for many banks. Instead, the company made what seemed like safe investments in other banks.
Yet it did not foresee the financial collapse that caused many banks to fail and others to defer making payments on the trust-preferred securities they had issued. Typically, an issuer can defer payments for up to five years without defaulting. Though the ability to defer meant regulators allowed issuers to treat the securities as Tier 1 capital, the deferrals and defaults caused the values of such securities to plummet.
Brown said the deterioration in the securities caught First Community off guard because its executives thought they had made safe investments.
"We are a bank, and we know banks, and we know how highly regulated banks are," Brown said, explaining the thinking behind the company's ultimate investment of about $110 million in the securities. "It has to be a safe investment, right?"