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FCBC > SEC Filings for FCBC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for FIRST COMMUNITY BANCSHARES INC /NV/

Form 10-Q for FIRST COMMUNITY BANCSHARES INC /NV/


14-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context suggests otherwise, the terms "First Community," "Company," "we," "our," and "us" refer to First Community Bancshares, Inc. and its subsidiaries as a consolidated entity. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information that will enhance understanding of our Company's financial condition, changes in financial condition, and results of operations. This MD&A contains forward-looking statements and should be read in conjunction with our 2011 Annual Report on Form 10-K (the "2011 Form 10-K") and the other financial information included in this report.

Forward-Looking Statements

We may make forward-looking statements in filings with the Securities and Exchange Commission (the "SEC") including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto in our reports to shareholders and other communications that are made in good faith by our Company pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements with respect to our beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates, and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," and other similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

inflation, interest rate, market and monetary fluctuations;

our timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

the willingness of customers to substitute competitors' products and services for our products and services and vice versa;

the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance) and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act");

the impact of the U.S. Treasury and federal banking regulators' continued implementation of a number of programs to address capital and liquidity in the banking system; further, future and proposed rules, including those that are part of the Basel III process, which are expected to require banking institutions to increase levels of capital; technological changes;

the effect of acquisitions, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

the growth and profitability of our noninterest, or fee, income being less than expected;

unanticipated regulatory or judicial proceedings;

changes in consumer spending and saving habits; and

our success at managing the risks involved in the foregoing.

We caution that the foregoing list of important factors is not all-inclusive. If one or more of the factors affecting these forward-looking statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking statements contained in this Quarterly Report on Form 10-Q and other reports we filed with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not intend to update any forward-looking statements, whether written or oral, to reflect change. All forward-looking statements attributable to our Company are expressly qualified by these cautionary statements. These factors and other risks and uncertainties are discussed in Part II, Item 1A, "Risk Factors," herein, Part I, Item 1A, "Risk Factors," of our 2011 Form 10-K, and Part II, Item 1A, "Risk Factors," of our Current Report on Form 10-Q for the period ended June 30, 2012 ("Second Quarter 2012 Form 10-Q").

Company Overview

Our Company is a financial holding company headquartered in Bluefield, Virginia. We operate through our community bank subsidiary, First Community Bank (the "Bank"), which provides financial, trust, and investment advisory services to individuals and commercial customers through seventy-four locations in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. Our Company is also the parent company of Greenpoint Insurance Group, Inc. ("Greenpoint"), headquartered in High Point, North Carolina, a full-service insurance agency offering commercial and personal lines of insurance through six locations in Virginia, West Virginia, and North Carolina. The Bank is the parent of First Community Wealth Management, a


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registered investment advisory firm that offers wealth management and investment advice with $884 million in aggregate assets under management as of September 30, 2012. These assets are not assets of our Company, but are managed under various fee-based arrangements as fiduciary or agent. We reported total assets of $2.77 billion as of September 30, 2012. Our Common Stock is traded on the NASDAQ Global Select Market under the symbol, "FCBC."

We fund our lending activities primarily through the retail deposit operations of our branch banking network. Retail and wholesale repurchase agreements and borrowings from the Federal Home Loan Bank ("FHLB") provide additional funding as needed. We invest our funds primarily in loans to retail and commercial customers. In addition to loans, we invest a portion of our funds in various debt securities, including those of United States agencies, municipals, and certain corporate notes and debt instruments. We also maintain overnight interest-bearing balances with the Federal Reserve and other correspondent banks. The difference between interest earned on assets and interest paid on liabilities is our primary source of earnings. Our net interest income is supplemented by fees for services, commissions on sales, and various deposit service charges.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") and conform to general practices within the banking industry. Our financial position and results of operations require management to make judgments and estimates to develop the amounts reflected and disclosed in the consolidated financial statements. Different assumptions in the application of these estimates could result in material changes to our consolidated financial position and consolidated results of operations. Estimates, assumptions, and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Our accounting estimates are fundamental to understanding MD&A and the disclosures presented in the Notes to Consolidated Financial Statements and in MD&A provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Our critical accounting estimates are described in detail in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2011 Form 10-K.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, sweeping financial regulatory reform legislation entitled the Dodd-Frank Act was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

Centralizes responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the "CFPB"), responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

Requires financial holding companies, such as our Company, to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be well capitalized and well managed to engage in interstate bank acquisitions.

Imposes comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institutions themselves.

Implements corporate governance revisions, including with regard to executive compensation and proxy access by shareholders.

Makes permanent the $250 thousand limit for federal deposit insurance and provides unlimited federal deposit insurance until January 1, 2013, for noninterest-bearing demand transaction accounts at all insured depository institutions.

Repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

Amends the Electronic Fund Transfer Act to, among other things, give the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and enforces a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Increases the authority of the Federal Reserve Board to examine bank holding companies, such as our Company, and their nonbank subsidiaries.

Another section of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (the "Mortgage Reform Act"), contains new underwriting and servicing standards for the mortgage industry, as well as restrictions on compensation for mortgage originators. In addition, the Mortgage Reform Act grants broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts, or practices relating to residential mortgage loans that the CFPB finds abusive, unfair,


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deceptive, or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure that responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also contains laws affecting the securitization of mortgages, and other assets, with requirements for risk retention by securitizers and requirements for regulating credit rating agencies. Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on our Company, our customers, or the general financial industry. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase costs associated with deposits, as well as place limitations on certain revenues those deposits may generate.

Recent Business Combinations

On June 8, 2012, the Company entered into a purchase and assumption agreement with loss share arrangements with the Federal Deposit Insurance Corporation (the "FDIC") to purchase certain assets and assume substantially all of the customer deposits and certain liabilities of Waccamaw Bank ("Waccamaw"). Waccamaw, a full service community bank headquartered in Whiteville, North Carolina, operated sixteen branches throughout North and South Carolina. At acquisition, Waccamaw had total assets of approximately $500.43 million, loans of approximately $318.32 million, and deposits of approximately $414.13 million. As a result of the acquisition and the preliminary purchase price allocation, approximately $11.66 million was recorded as goodwill, which represents the excess fair market value of the net assets acquired and indentified intangibles over the purchase price. Under the Single-Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement with the FDIC, the FDIC has agreed to cover 80% of most loan and foreclosed real estate losses. All assets acquired and liabilities assumed are recorded at estimated fair value on the date of acquisition. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values may become available.

On May 31, 2012, the Company completed the acquisition of Peoples Bank of Virginia ("Peoples"), based in Richmond, Virginia. Peoples, a full service community bank, operated four branches throughout the Richmond area. At acquisition, Peoples had total assets of approximately $276.88 million, loans of approximately $184.84 million, and deposits of approximately $232.75 million. Under the terms of the merger agreement, shares of Peoples were exchanged for $6.08 in cash and 1.07 shares of the Company's common stock, resulting in a purchase price of approximately $40.28 million. As a result of the acquisition and the preliminary purchase price allocation, approximately $9.10 million was recorded as goodwill, which represents the excess fair market value of the net assets acquired and indentified intangibles over the purchase price. These fair value estimates are considered preliminary, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values may become available.

Results Of Operations

Overview

The following list includes significant developments regarding our Company and operations during the third quarter and first nine months of 2012:

We completed the acquisition of Peoples on May 31, 2012, and the FDIC-assisted acquisition of Waccamaw on June 8, 2012.

Tax equivalent net interest margin increased 71 basis points during the quarter and 28 basis points during the first nine months of 2012 compared with the same periods of 2011.

Net interest income increased $8.73 million, or 49.20%, compared with the third quarter of 2011 and $10.16 million, or 18.89%, compared with the first nine months of 2011.

Net Income

Net income increased $4.74 million, or 89.15%, to $10.06 million for the third quarter of 2012 compared with $5.32 million for the third quarter of 2011. Net income available to common shareholders increased $4.81 million, or 95.53%, to $9.84 million for the third quarter of 2012 compared with $5.03 million for the third quarter of 2011. The increase was largely attributed to the substantial increase in earning assets as a result of the Peoples and Waccamaw acquisitions. Also impacting the third quarter of 2012 was a $2.39 million out-of-period adjustment of historical charge-offs, offset by increases in the net impairment loss recognized on earnings and merger related expenses. Diluted earnings per common share totaled $0.47 for the third quarter of 2012 compared to 0.28 for the third quarter of 2011.

Net income increased $3.34 million, or 19.89%, to $20.14 million for first nine months of 2012 compared with $16.80 million for the first nine months of 2011. Net income available to common shareholders increased $2.97 million, or 18.14%, to $19.35 million for the first nine months of 2012 compared with $16.38 million for the first nine months of 2011. The


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increase was largely attributed to the substantial increase in earning assets as a result of the Peoples and Waccamaw acquisitions, a $2.39 million out-of-period adjustment of historical charge-offs, decreases in the interest paid on deposit accounts, and a reduction to the provision for loan losses, offset by merger related expenses. Diluted earnings per common share totaled $1.00 for the first nine months of 2012 compared to $0.91 for the first nine months of 2011.

During the third quarter of 2012, the Company discovered certain overstatements of loan charge-offs reported in prior periods beginning in 2007 which resulted from not recognizing the impact of interest payments that had been applied to principal for loans that were on non-accrual status. The overstatements of charge-offs resulted in an overstatement of provision for loan losses and corresponding understatement of pre-tax income that totaled $321 thousand, $639 thousand, and $938 thousand for the years ended December 31, 2009, 2010, and 2011, respectively. The total periodic charge-off overstatements from 2007 to year-end 2011 approximated $2.39 million. Management analyzed the error to determine if any of the prior years were materially misstated and determined that they were not. Management also determined that correcting the error in the current year would not materially misstate this year's results. The Company recorded the correction to the prior period understatements in the quarter ended September 30, 2012, through an increase to other income in the amount of $2.39 million.

Net Interest Income - Quarterly Comparison (See Table I)

Net interest income, the largest contributor to earnings, increased $8.73 million, or 49.20%, for the quarter ended September 30, 2012, compared with the same quarter of 2011. For purposes of this discussion, net interest income is presented on a tax equivalent basis to provide a comparison among all types of interest earning assets. The tax equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. The Company uses this measure to monitor net interest income performance and to manage its balance sheet composition. Tax equivalent net interest income increased $8.73 million, or 47.41%, for the quarter ended September 30, 2012, compared with the same quarter of 2011. The increase in tax equivalent net interest income was primarily due to the increase in average earning assets from the Peoples and Waccamaw acquisitions and reductions in the rates paid on interest-bearing deposits resulting from the sustained low rate environment.

Average earning assets increased $471.72 million and average interest-bearing liabilities increased $405.26 million for the quarter ended September 30, 2012, compared with the same quarter of 2011. The yield on average earning assets increased 46 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The average rate paid on interest-bearing liabilities decreased 29 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. Average balances and interest yield/rate changes for earning assets and interest-bearing liabilities resulted in a net interest rate spread that was 75 basis points higher for the third quarter of 2012 compared with the third quarter of 2011. Our net interest margin increased 71 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011.

The tax equivalent yield on loans increased 50 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. Tax equivalent loan interest income increased $8.18 million, or 40.64%, for the quarter ended September 30, 2012, compared with the same quarter of 2011. The increase in interest income on loans was primarily due to the Peoples and Waccamaw acquisitions.

The tax equivalent yield on available-for-sale securities decreased 42 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The decrease was largely due to the sale of higher yielding securities and reinvestment of proceeds from sales, maturities, prepayments, and cash in lower yielding securities. The average balance of held-to-maturity securities continued to decline as securities were called or matured and were not replaced.

The tax equivalent yield on interest-bearing deposits with banks increased 8 basis points for the third quarter of 2012 compared with the third quarter of 2011. Interest-bearing deposits with banks are comprised primarily of excess liquidity kept at the Federal Reserve that bears overnight market rates.

The average balance of interest-bearing demand deposits increased $55.58 million, or 19.87%, and the average rate paid on those deposits decreased 5 basis points for the third quarter of 2012 compared with the third quarter of 2011. The average balance of savings deposits increased $97.07 million, or 24.05%, and the average rate paid on those deposits decreased 3 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The average balance of time deposits increased $223.40 million, or 33.12%, and the average rate paid on those deposits decreased 56 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The average balance of noninterest-bearing demand deposits increased $78.94 million, or 35.15%, for the third quarter of 2012 compared with the third quarter of 2011.

There were no federal funds purchased on average for the third quarters of 2012 and 2011. The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, increased $3.67 million, or 4.33%, and the average rate paid on those funds decreased 5 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The increase in the average balance of retail repurchase agreements was primarily due to a full quarter's effect on the balance sheet of the Peoples and Waccamaw acquisitions. The average balance of wholesale repurchase agreements increased $8.20 million, or 16.39%, and the average rate paid on those funds decreased 4 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The average balance of FHLB advances and other borrowings increased $17.34 million, or 10.45%, and the average rate paid on those funds decreased 19 basis points for the quarter ended September 30, 2012, compared with the same quarter of 2011. The change in the average balances and costs of wholesale repurchase agreements and FHLB advances are due to the Peoples and Waccamaw acquisitions.

Net Interest Income - Year-to-Date Comparison (See Table II)

Net interest income increased $10.16 million, or 18.89%, for the nine months ended September 30, 2012, compared with the same period of 2011. Tax equivalent net interest income increased $9.97 million, or 17.79%, for the nine months ended September 30, 2012, compared with the same period of 2011. The increase in tax equivalent net interest income was


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primarily due to the increase in average earning assets from the Peoples and Waccamaw acquisitions and reductions in the rates paid on interest-bearing deposits resulting from the sustained low rate environment.

Average earning assets increased $188.73 million and average interest-bearing liabilities increased $111.02 million for the nine months ended September 30, 2012, compared with the same period of 2011. The yield on average earning assets remained constant at 5.04% for the nine months ended September 30, 2012, compared with the same period of 2011. The average rate paid on interest-bearing liabilities decreased 29 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. Average balances and interest yield/rate changes for earning assets and interest-bearing liabilities resulted in a net interest rate spread that was 29 basis points higher for the first nine months of 2012 compared with the first nine months of 2011. Our net interest margin increased 28 basis points for the nine months ended September 30, 2012, compared with the same period of 2011.

The tax equivalent yield on loans decreased 4 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. Tax equivalent loan interest income increased $7.86 million, or 12.93%, for the nine months ended September 30, 2012, compared with the same period of 2011. The increase in interest income on loans was primarily due to the Peoples and Waccamaw acquisitions.

The tax equivalent yield on available-for-sale securities decreased 71 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. The decrease was largely due to the sale of higher yielding securities in the prior year and reinvestment of proceeds from sales, maturities, prepayments, and cash in lower yielding securities. The average balance of held-to-maturity securities continued to decline as securities were called or matured and were not replaced.

The tax equivalent yield on interest-bearing deposits with banks increased 13 basis points for the first nine months of 2012 compared with the first nine months of 2011. Interest-bearing deposits with banks are comprised primarily of excess liquidity kept at the Federal Reserve that bears overnight market rates.

The average balance of interest-bearing demand deposits increased $27.95 million, or 10.08%, and the average rate paid on those deposits decreased 14 basis points for the first nine months of 2012 compared with the first nine months of 2011. The average balance of savings deposits increased $24.25 million, or 5.84%, and the average rate paid on those deposits decreased 13 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. The average balance of time deposits increased $56.02 million, or 8.06%, and the average rate paid on those deposits decreased 51 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. The average balance of noninterest-bearing demand deposits increased $61.33 million, or 28.05%, for the first nine months of 2012 compared with the first nine months of 2011. These increased balances during the nine months ended September 30, 2012, were due to the Peoples and Waccamaw acquisitions.

The average balance of federal funds purchased increased $654 thousand for the first nine months of 2012 compared to no federal funds purchased on average for the first nine months of 2011. The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, decreased $6.59 million, or 7.75%, and the average rate paid on those funds decreased 11 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. The decrease in the average balance of retail repurchase agreements was primarily due to lower balances in commercial treasury accounts in the slow economy, which were slightly offset by the Peoples and Waccamaw acquisitions. The average balance of wholesale repurchase agreements increased $4.15 million, or 8.29%, and the average rate paid on those funds decreased 11 basis points for the nine months ended September 30, 2012, compared with the same period of 2011. The average balance of FHLB advances and other borrowings increased $4.59 million, or 2.70%, and the average rate paid on those funds decreased 6 basis points for the nine months ended September 30, 2012, compared with the same period of 2011.

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