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FCBC > SEC Filings for FCBC > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for FIRST COMMUNITY BANCSHARES INC /NV/ | Request a Trial to NEW EDGAR Online Pro

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


10-May-2013

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 2012 Annual Report on Form 10-K (the "2012 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 Annual Report on Form 10-K 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 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 increase minimum acceptable levels of capital for the industry;

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, and Part I, Item 1A, "Risk Factors," of our 2012 Form 10-K.


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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-two 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 five locations in Virginia, West Virginia, and North Carolina. The Bank is the parent of First Community Wealth Management, a registered investment advisory firm that offers wealth management and investment advice with $906 million in aggregate assets under management as of March 31, 2013. 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 $2.72 billion as of March 31, 2013. Our Common Stock is traded on the NASDAQ Global Select Market under the symbol, "FCBC."

We fund our lending and investing 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. 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 and its agencies, municipals, and certain corporate notes, debt instruments, and equity securities. 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 Condensed 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 2012 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.

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.


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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, 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 ("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 $500.64 million, loans of approximately $318.35 million, and deposits of approximately $414.13 million. As a result of the acquisition and the preliminary purchase price allocation, approximately $10.90 million was recorded as goodwill, which represents the excess of the value of the consideration transferred over the fair value of the net assets acquired including indentified intangibles. 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. After the initial acquisition, the Company agreed to purchase four properties totaling $1.80 million from the FDIC.

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 $275.76 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 $10.21 million was recorded as goodwill, which represents the excess of the value of the consideration transferred over the fair market value of the net assets acquired including indentified intangibles. 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 first quarter of 2013:

Tax equivalent net interest margin increased 24 basis points to 4.15% for the first quarter of 2013 compared with the first quarter of 2012.

Net interest income was $23.36 million, an increase of $5.39 million, or 29.95%, compared with the first quarter of 2012.

Total assets grew $517.02 million, or 23.47%, compared with the first quarter of 2012, which includes the Peoples and Waccamaw acquisitions that occurred during the second quarter of 2012.

Total stockholders' equity increased $48.55 million, or 15.65% compared with the first quarter of 2012, which includes the stock issued during the Peoples acquisition.

Net Income

Net income increased $1.14 million, or 19.00%, to $7.14 million for the first quarter of 2013 compared with $6.00 million for the first quarter of 2012. Net income available to common shareholders increased $1.17 million, or 20.37%, to $6.88 million for the first quarter of 2013 compared with $5.72 million for the first quarter of 2012. The increase was largely attributed to the substantial growth in earning assets as a result of the Peoples and Waccamaw acquisitions. Basic and diluted earnings per common share for the first quarter of 2013 were $0.34 and $0.33, respectively, compared to basic and diluted earnings per common share for the first quarter of 2012 of $0.32 and $0.31, respectively.


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Net Interest Income - Quarterly Comparison (See Table I)

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.

Net interest income, the largest contributor to earnings, increased $5.39 million, or 29.95%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Tax equivalent net interest income increased $5.40 million, or 28.92%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. The increase in tax equivalent net interest income was primarily due to growth in average earning assets resulting 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 $432.32 million and average interest-bearing liabilities increased $382.11 million for the quarter ended March 31, 2013, compared with the same quarter of 2012. The yield on average earning assets increased 5 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average rate paid on interest-bearing liabilities decreased 23 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. Average balances and interest yield/rate changes for earning assets and interest-bearing liabilities resulted in a net interest rate spread that was 28 basis points higher for the first quarter of 2013 compared with the first quarter of 2012. Our net interest margin increased 24 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012.

The tax equivalent yield on loans increased 32 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. Tax equivalent loan interest income increased $5.48 million, or 28.24%, for the quarter ended March 31, 2013, compared with the same quarter of 2012. Interest on loans for the first quarter of 2013 also includes accretion related to the Peoples and Waccamaw acquisitions of $831 thousand and $3.01 million, respectively. The Company expects the purchase accounting interest accretion to decline in future periods based on acquired portfolio attrition.

The tax equivalent yield on available-for-sale securities decreased 46 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. This decrease was primarily due to the 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 decreased 10 basis points for the first quarter of 2013 compared with the first quarter of 2012. 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 $70.79 million, or 25.02%, and the average rate paid on those deposits increased 2 basis points for the first quarter of 2013 compared with the first quarter of 2012. The average balance of savings deposits increased $110.33 million, or 27.89%, and the average rate paid on those deposits increased 1 basis point for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of time deposits increased $181.67 million, or 28.64%, and the average rate paid on those deposits decreased 37 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of noninterest-bearing demand deposits increased $93.32 million, or 39.07%, for the first quarter of 2013 compared with the third quarter of 2012.

There were no federal funds purchased on average for the first quarter of 2013, compared to $1.97 million for the first quarter of 2012. The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, increased $3.58 million, or 4.96%, and the average rate paid on those funds decreased 8 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of wholesale repurchase agreements increased $7.65 million, or 15.29%, and the average rate paid on those funds decreased 42 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The average balance of FHLB and other borrowings increased $10.06 million, or 6.07%, and the average rate paid on those funds decreased 24 basis points for the quarter ended March 31, 2013, compared with the same quarter of 2012. The changes in the average balances and costs of wholesale repurchase agreements and FHLB advances were primarily due to the Waccamaw acquisition.


Table of Contents
Table I                                                                    Average Balance Sheets and Net Interest Income Analysis
                                                                                        Three Months Ended March 31,
                                                                      2013                                                        2012
                                                Average                             Average Yield/          Average                             Average Yield/
(Amounts in thousands)                          Balance         Interest (1)           Rate (1)             Balance         Interest (1)           Rate (1)
Assets
Earning assets
Loans (2)                                     $ 1,706,296      $       24,887                  5.92 %     $ 1,394,246      $       19,407                  5.60 %
Securities available-for-sale                     544,681               3,728                  2.78 %         478,358               3,857                  3.24 %
Securities held-to-maturity                           816                  17                  8.45 %           3,237                  62                  7.70 %
Interest-bearing deposits                          98,893                  66                  0.27 %          42,525                  39                  0.37 %

Total earning assets                            2,350,686              28,698                  4.95 %       1,918,366              23,365                  4.90 %
Other assets                                      352,343                                                     255,638

Total assets                                  $ 2,703,029                                                 $ 2,174,004


Liabilities
Interest-bearing deposits
Demand deposits                               $   353,677      $           56                  0.06 %     $   282,887      $           31                  0.04 %
Savings deposits                                  505,917                 155                  0.12 %         395,588                 110                  0.11 %
Time deposits                                     816,060               2,151                  1.07 %         634,390               2,264                  1.44 %

Total interest-bearing deposits                 1,675,654               2,362                  0.57 %       1,312,865               2,405                  0.74 %
Borrowings
Federal funds purchased                                -                   -                     -              1,970                   2                  0.00 %
Retail repurchase agreements                       75,751                 105                  0.56 %          72,171                 115                  0.64 %
Wholesale repurchase agreements                    57,645                 475                  3.34 %          50,000                 468                  3.76 %
FHLB advances and other borrowings                175,937               1,699                  3.92 %         165,874               1,715                  4.16 %

Total borrowings                                  309,333               2,279                  2.99 %         290,015               2,300                  3.19 %

Total interest-bearing liabilities              1,984,987               4,641                  0.95 %       1,602,880               4,705                  1.18 %

Noninterest-bearing demand deposits               332,186                                                     238,863
Other liabilities                                  24,307                                                      21,466

Total liabilities                               2,341,480                                                   1,863,209
Stockholders' equity                              361,549                                                     310,795

Total liabilities and stockholders' equity    $ 2,703,029                                                 $ 2,174,004

Net interest income, tax equivalent                            $       24,057                                              $       18,660

Net interest rate spread (3)                                                                   4.00 %                                                      3.72 %

Net interest margin (4)                                                                        4.15 %                                                      3.91 %

(1) Fully taxable equivalent at the rate of 35% ("FTE"). The FTE basis adjusts for the tax benefits of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and nontaxable amounts.

(2) Nonaccrual loans are included in average balances outstanding but with no related interest income during the period of nonaccrual.

(3) Represents the difference between the yield on earning assets and cost of funds.

(4) Represents tax equivalent net interest income divided by average earning assets.


Table of Contents

The following table summarizes the changes in tax equivalent interest earned and paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year's average rate), (ii) changes in rate (changes in the average rate times the prior year's average volume), and
(iii) changes in rate/volume (change in the average volume column times the change in average rate):

                                                                 Three Months Ended
                                                          March 31, 2013 Compared to 2012
                                                         Dollar Increase (Decrease) due to
                                                                               Rate/
(Amounts in thousands)                            Volume         Rate         Volume         Total
Interest earned on:
Loans (FTE)                                      $  4,344       $ 1,089       $    47       $ 5,480
Securities available-for-sale (FTE)                   535          (551 )        (113 )        (129 )
Securities held-to-maturity (FTE)                     (46 )           6            (5 )         (45 )
Interest-bearing deposits with other banks             51           (10 )         (14 )          27

Total interest earning assets                       4,884           534           (85 )       5,333


Interest paid on:
Demand deposits                                         8            14             3            25
. . .
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