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FCBC > SEC Filings for FCBC > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for FIRST COMMUNITY BANCSHARES INC /NV/

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


8-Nov-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 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 seven locations in Virginia, West Virginia, and North Carolina. The Bank offers wealth management services and investment advice through its Trust Division and First Community Wealth Management, a registered investment advisory firm, with $891 million in combined assets under management as of September 30, 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 $2.65 billion as of September 30, 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 the 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.

Results Of Operations

Overview

The following list includes highlights regarding our Company and operations during the third quarter and first nine months of 2013:

The Company repurchased 204,388 shares during the third quarter and 335,192 shares during the first nine months of 2013.

The non-covered loan portfolio increased $15.73 million compared to year end 2012.

Specific reserves within the allowance for loan losses decreased $329 thousand, or 5.88%, compared to year end 2012 as a result of resolution activity on non-performing loans.

Non-covered nonperforming loans as a percentage of total non-covered loans decreased 10 basis points to 1.87% compared with year end 2012.

Net Income

Net income decreased $4.65 million, or 46.20%, to $5.41 million for the third quarter of 2013 compared with $10.06 million for the third quarter of 2012. Net income available to common shareholders decreased $4.69 million, or 47.65%, to $5.15 million for the third quarter of 2013 compared with $9.84 million for the third quarter of 2012. The decrease was largely attributed to the reduction in loans outstanding, a decrease in loan interest accretion stemming from the Peoples Bank of Virginia ("Peoples") and Waccamaw Bank ("Waccamaw") acquisitions, an increase in FDIC indemnification asset amortization, a one-time contractual severance payment, and a $2.39 million out-of-period adjustment recorded during the third quarter of 2012 to correct the overstatement of charge-offs and corresponding understatement of pre-tax income in prior years. Basic and diluted earnings per common share for the third quarter of 2013 were $0.26 compared to basic and diluted earnings per common share for the third quarter of 2012 of $0.49 and $0.47, respectively.

Net income decreased $2.15 million, or 10.68%, to $17.99 million for the first nine months of 2013 compared with $20.14 million for the first nine months of 2012. Net income available to common shareholders decreased $2.14 million, or 11.04%, to $17.22 million for the first nine months of 2013 compared with $19.35 million for the first nine months of 2012. The decrease was largely attributed to an increase in FDIC indemnification asset amortization, a one-time contractual severance payment, and the out-of-period adjustment recorded during the third quarter of 2012. Basic and diluted earnings per common share for the first nine months of 2013 were $0.86 and $0.85, respectively, compared to basic and diluted earnings per common share for the first nine months of 2012 of $1.03 and $1.00, respectively.

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, decreased $4.13 million, or 15.62%, for the quarter ended September 30, 2013, compared with the same quarter of 2012. Tax equivalent net interest income decreased $4.12 million, or 15.19%, for the third quarter of 2013 compared with the same quarter of 2012. The decrease in tax equivalent net interest income was primarily due to the reduction in balance and yield on average earning assets from the Peoples and Waccamaw acquisitions.


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Average earning assets decreased $120.66 million and average interest-bearing liabilities decreased $141.69 million for the quarter ended September 30, 2013, compared with the same quarter of 2012. The yield on average earning assets decreased 57 basis points for the third quarter of 2013 compared with the same quarter of 2012. The average rate paid on interest-bearing liabilities decreased 8 basis points for the quarter ended September 30, 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 49 basis points lower for the third quarter of 2013 compared with the same quarter of 2012. Our net interest margin decreased 49 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012.

The tax equivalent yield on loans decreased 79 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. Tax equivalent loan interest income decreased $4.83 million, or 17.06%, for the third quarter of 2013 compared with the same quarter of 2012. Interest on loans includes accretion from the Peoples and Waccamaw acquisitions of $3.47 million for the third quarter of 2013 compared to $4.71 million for the same quarter of 2012, of which $1.74 million and $2.14 million, respectively, was actual cash received. Tax equivalent net interest margin, excluding non-cash loan interest accretion, decreased 37 basis points to 3.69% for the quarter ended September 30, 2013, compared with 4.06% for the same quarter of 2012. The tax equivalent yield on loans, excluding non-cash loan interest accretion, decreased 63 basis points to 5.09% for the quarter ended September 30, 2013, compared with 5.72% for the same quarter of 2012. We expect the purchase accounting interest accretion to continue to decline in future periods based on acquired portfolio attrition.

The tax equivalent yield on available-for-sale securities decreased 10 basis points for the quarter ended September 30, 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 increased 8 basis points for the third quarter of 2013 compared with the same 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 $27.25 million, or 8.13%, and the average rate paid on those deposits remained constant at 0.06% for the third quarter of 2013 compared with the same quarter of 2012. The average balance of savings deposits increased $20.12 million, or 4.02%, and the average rate paid on those deposits decreased 3 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. The average balance of time deposits decreased $140.35 million, or 15.63%, and the average rate paid on those deposits decreased 4 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. The average balance of noninterest-bearing demand deposits increased $45.68 million, or 15.05%, for the third quarter of 2013 compared with the same quarter of 2012.

The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, decreased $23.10 million, or 26.11%, and the average rate paid on those funds decreased 33 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. The average balance of wholesale repurchase agreements decreased $8.12 million, or 14.08%, and the average rate paid on those funds increased 3 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. The average balance of FHLB and other borrowings decreased $17.41 million, or 9.50%, and the average rate paid on those funds increased 18 basis points for the quarter ended September 30, 2013, compared with the same quarter of 2012. The changes in the average balances and costs of wholesale repurchase agreements and FHLB advances were due to the payoff of borrowings acquired in the Waccamaw acquisition during the first quarter of 2013.

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

Net interest income increased $4.63 million, or 7.24%, for the nine months ended September 30, 2013, compared with the same period of 2012. Tax equivalent net interest income increased $4.62 million, or 7.00%, for the first nine months of 2013 compared with the same period of 2012. The increase in tax equivalent net interest income was primarily due to the growth in average earning assets from the Peoples and Waccamaw acquisitions and reductions in the rates paid on interest-bearing deposits from the sustained low interest rate environment.

Average earning assets increased $187.20 million and average interest-bearing liabilities increased $149.19 million for the nine months ended September 30, 2013, compared with the same period of 2012. The yield on average earning assets decreased 19 basis points for the first nine months of 2013 compared with the same period of 2012. The average rate paid on interest-bearing liabilities decreased 14 basis points for the nine months ended September 30, 2013, compared with the same period 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 5 basis points lower for the first nine months of 2013 compared with the same period of 2012. Our net interest margin decreased 6 basis points for the nine months ended September 30, 2013, compared with the same period of 2012.


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The tax equivalent yield on loans decreased 13 basis points for the nine months ended September 30, 2013, compared with the same period of 2012. Tax equivalent loan interest income increased $4.06 million, or 5.92%, for the first nine months of 2013 compared with the same period of 2012. Interest on loans include accretion stemming from the Peoples and Waccamaw acquisitions of $11.08 million for the first nine months of 2013 compared to $4.71 million for the same period of 2012, of which $5.23 million and $2.14 million, respectively, was actual cash received. Tax equivalent net interest margin, excluding non-cash loan interest accretion, decreased 24 basis points to 3.73% for the nine months ended September 30, 2013, compared with 3.97% for the same period of 2012. The tax equivalent yield on loans, excluding non-cash loan interest accretion, decreased 37 basis to 5.26% for the nine months ended September 30, 2013, compared with 5.63% for the same period of 2012. 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 34 basis points for the nine months ended September 30, 2013, compared with the same period 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 4 basis points for the nine months ended September 30, 2013, compared with the same period 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 $54.38 million, or 17.83%, and the average rate paid on those deposits increased 1 basis point for the first nine months of 2013 compared with the same period of 2012. The average balance of savings deposits increased $75.00 million, or 17.07%, and the average rate paid on those deposits remained constant at 0.12% for the nine months ended September 30, 2013, compared with the same period of 2012. The average balance of time deposits increased $34.52 million, or 4.60%, and the average rate paid on those deposits decreased 17 basis points for the nine months ended September 30, 2013, compared with the same period of 2012. The average balance of noninterest-bearing demand deposits increased $61.92 million, or 22.11%, for the first nine months of 2013 compared with the same period of 2012.

We reported no average balance of federal funds purchased for the first nine months of 2013, compared to $654 thousand for the same period of 2012. The average balance of retail repurchase agreements, including collateralized retail deposits and commercial treasury accounts, decreased $7.00 million, or 8.92%, and the average rate paid on those funds decreased 13 basis points for the nine months ended September 30, 2013, compared with the same period of 2012. The average balance of wholesale repurchase agreements decreased $1.62 million, or 3.00%, and the average rate paid on those funds decreased 6 basis points for the nine months ended September 30, 2013, compared with the same period of 2012. The average balance of FHLB and other borrowings decreased $5.44 million, or 3.11%, and the average rate paid on those funds remained constant at 4.04% for the nine months ended September 30, 2013, compared with the same period of 2012.


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Average Balance Sheets and Net Interest Income Analysis



Table I                                                                    Average Balance Sheets and Net Interest Income Analysis
                                                                                      Three Months Ended September 30,
                                                                      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)                                     $ 1,694,243      $       23,476                  5.50 %     $ 1,790,489      $       28,305                  6.29 %
Securities available-for-sale                     547,686               3,857                  2.79 %         525,151               3,819                  2.89 %
Securities held-to-maturity                           597                  12                  7.97 %           2,975                  26                  3.48 %
Interest-bearing deposits                          45,259                  42                  0.37 %          89,827                  65                  0.29 %

Total earning assets                            2,287,785              27,387                  4.75 %       2,408,442              32,215                  5.32 %
Other assets                                      356,847                                                     359,348

Total assets                                  $ 2,644,632                                                 $ 2,767,790

Liabilities
Interest-bearing deposits
Demand deposits                               $   362,548      $           58                  0.06 %     $   335,299      $           49                  0.06 %
Savings deposits                                  520,884                 142                  0.11 %         500,761                 171                  0.14 %
Time deposits                                     757,575               1,947                  1.02 %         897,927               2,384                  1.06 %

Total interest-bearing deposits                 1,641,007               2,147                  0.52 %       1,733,987               2,604                  0.60 %
Borrowings
Retail repurchase agreements                       65,382                  34                  0.21 %          88,484                 120                  0.54 %
. . .
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