FCBC - NASDAQ

Greetings and welcome to the First Community Bancshares Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host [indiscernible], Associate Counsel for First Community Bancshares Inc. Thank you. You may begin.

Thank you for joining us this morning for First Community Bancshares’ second quarter 2012 earnings conference call. Any statements made today that are not historical are forward-looking. Please review the language at the end of this morning’s release regarding forward-looking statements as the same information applies to comments made on today’s conference call. With us today is President and Chief Executive Officer, John Mendez; Chief Financial Officer, Dave Brown; and Chief Credit Officer, Gary Mills. At this time, I’d like to turn the conference over to John Mendez.

Thank you [indiscernible]. Good morning everyone. I’d like to again welcome you to the second quarter earnings conference call of First Community. We are very pleased to host the call this morning as we briefly discussed our second quarter 2012 results and our earnings release from earlier this morning. This is John Mendez, Chief Executive Officer for First Community Bancshares and I am joined this morning by Dave Brown, our Chief Financial Officer as well as Gary Mills, our Chief Credit Officer. Following the call, we will take questions from registered callers, so we would like to hear from you if you have something that you feel that we can expand or add color on. I’d like to begin the call this morning with highlights of what has been a very busy, very productive, and somewhat transformative quarter for our company. As you have seen over recent weeks, we have completed two acquisitions since our last call. Actually both of those came within a week of each other beginning with our May 31 closing of the Peoples Bank of Virginia in-market acquisition in Richmond, Virginia and then concluding with our June 8 announcement and closing of the FDIC-assisted acquisition of Waccamaw Bank with 16 branches from Wilmington, North Carolina to Conway, Myrtle Beach, South Carolina, as well as their inland offices in Whiteville, Chadbourn, Tabor City in North Carolina, and Heath Springs in South Carolina. The combination of these two transactions added approximately $600 million in asset base with over $400 million in loans and approximately $500 million in customer deposits. Along with that, we have the addition of 20 full service branches. In the call today, we will attempt to provide information on both of these transactions and the impact to our total organization. The addition of 4 Richmond area branches in Virginia, in-market, brought our Richmond franchise to just over $400 million in assets along with 9 area branches in what we feel are key locations throughout our targeted markets in Western Henrico and in Chesterfield Counties in those markets surrounding the very attractive Metro Richmond market. With this acquisition, we also expanded our sales force with a very seasoned team of five legacy Richmond business bankers. This was, we feel, a perfect complement to our strong, but lean, real estate team in Richmond. The expansion of the branch network from 5 to 9 also gives us a much better retail platform for the expansion of those services including our mortgage and installment lending services as well as personal checking and other investment services. We evaluated Peoples Bank of Virginia as the best small community bank in the market. And that has been an objective of ours for some time. And we are very pleased with the completion of this partnership, which we estimate will be significantly accretive as we bring on cost savings from the transaction. We believe that the bulk of those savings will be in place by the end of the third quarter of this year. In the first full year with cost saves, we have been modeling an approximate 7% to 9% favorable impact to core EPS from that Richmond acquisition. In North Carolina, the Waccamaw transaction represents our first FDIC deal in this cycle. And it adds significantly to our branch count, which now stands at 74 full service offices throughout the company. As I mentioned earlier, adds new markets in the Sandhills and Coastal Regions of North and South Carolina. Many of these branches are in markets that are akin to what we call our legacy Virginia - West Virginia markets with strong deposit market share and heavy retail orientation. In Columbus County, North Carolina, we actually, as a result of the transaction, post the number two market share position in terms of total deposits in market. The Waccamaw transaction was cast with a $15 million asset discount and with a full 80% loss share on all covered assets, that includes all commercial and single family loans as well as other real estate. Additionally, we acquired about $8 million in non-covered consumer installment loans in the Waccamaw field. We believe fairly aggressive on the Waccamaw bid based upon our strong evaluation of the core deposit franchise, and of course, the significant loss coverage by the FDIC. The transaction did not result in a bargain purchase gain and both this and the Richmond transaction added modestly to intangibles, after our preliminary purchase accounting and fair value marks to the loan portfolios. Like the Richmond acquisition, the Waccamaw deal is also expected to be quite accretive to EPS in the first year of operation. Accretion in this transaction is expected to reach double-digits when measured on first quarter earnings run-rate. Combination of the two transactions is expected to be materially accretive to 2013 diluted EPS. We’re very pleased that we were able to add these two banks in Virginia and North Carolina, both within the span of eight days. So, you can imagine that has been quite busy a quarter for us and this represents over $600 million in growth for the quarter, about a 30% addition to the balance sheet. And it brings our total resources today to just over $2.8 billion. I’m very pleased that we are able to do this with no additional capital requirements. In fact, these two transactions represents the expected deployment of excess capital, a portion of which came from our 2011 private placement of $19 million in convertible preferred, which was completed last May. We are now set to work on swift and efficient integration of these additions to capture those forecasted earnings benefits. And obviously this will be the focus of our attention for the remainder of the year. As you’ve seen from our release this morning, we are reporting net income for the quarter of $4.1 million, diluted earnings per share of $0.20, but on a core basis and excluding about $3.4 million perhaps $3.5 million in merger related expenses, we made $6.2 million or $0.31 per share and we gauged this to be our best quarterly performance since 2007 is driven by continued reductions in credit provisions, strong efficiency in operation as well as the impact of the two recent acquisitions. We are very pleased with this very strong start to first half of 2012 with annualized first half return on average assets of 1.09% on a core basis. With that, I’m going to stop. I’m going to turn the call over now to Dave Brown who will have a more detailed look at our financial results for the quarter. Dave?

Thank you, John. Good morning to everyone and thank you again for joining us. As John mentioned earlier, we did really have quite a busy second quarter. Peoples represented a great addition to our Richmond franchise. Waccamaw was an expansion of our footprint, but the core of that franchise is very much like First Community’s with its distinct legacy and growth markets. This morning, we reported common net income for the second quarter of 2012 of $3.8 million or $0.20 per diluted share. Core for the quarter equaled last quarter at $6.2 million and now with despite some higher credit costs this quarter as well as the seasonal insurance premium commission revenues from first quarter. Core ROA and ROE for the quarter were 1.06% and 8.19% respectively. Non-core items of $3.4 million for the quarter were made largely - made up largely of severance costs related to the Peoples executives and service fees and other expenses related to both deals. Margin for the second quarter was 3.93%, which is just a touch above last quarter. Asset yields were down slightly, but funding costs were positively impacted by the acquisitions and purchase accounting adjustments. We made a $1.6 million provision for loan losses for the second quarter. Other real estate costs and net losses amounted to about $270,000. Total credit costs of $1.8 million were marginally higher than $1.7 million reported last quarter. Wealth revenues increased $46,000 or 5% on a linked-quarter basis on better trust and advisory revenues. Linked quarter deposit account service charges increased $316,000 or 10%, but were roughly even with the same quarter last year. Service charges this quarter were positively impacted by the addition of Waccamaw. In their first 22 days, they generated roughly $134,000 in deposit service charges. Other service charges and fees were about even with last quarter. Insurance revenues were down linked-quarter as first quarter is generally buoyed by contingent commission and profit sharing receipts. Our insurance sub really seems to have started the year off well with growth in its core business versus the contingent commissions. And although they were down this year, the contingent commissions were down this year, we do have a smaller overall agency. They have reduced expenses well beyond the declines in revenues. Year-to-date operating income at GreenPoint is actually up $237,000 compared to last year. In the area of non-interest expense, our second quarter efficiency ratio was 57.6% or just a little above last quarter of 57.2%. Total salaries and benefits were 8.9% or $ 8.9 million. However, roughly $111,000 of that is attributable to Peoples and $392,000 of that is attributable to Waccamaw. Specific to Waccamaw, we began to realize annualized cost savings of approximately $1.1 million in salaries and benefits towards the beginning of July as a result of our efficiency measures and moving toward our expected staffing levels to those operations. As we noted earlier, period end total assets grew over $600 million or over 28%. I will note that the fair value marks we have settled on for the Waccamaw and Peoples portfolios right now relate only to the credit portion of those marks. We expect to determine interest rate marks or the accretable discount in the coming week or so. To that end, we did not recognize any accretion or amortization in those loan portfolios for the very short amount of time they were under our wings. At June 30, tangible book value per share was $11.05, a decrease of $0.59 from March 31. That level of book dilution is a little lighter than originally presented at announcement of the deals and I feel we’ll be more than able to make our stated earn back goals. And in fact, during the first month of combined operations, Peoples added $479 thousand pre-tax before the amortization of the CD mark and Waccamaw results added approximately $91,000 before any CD mark amortization. Future results from Waccamaw will be very positively affected by the cost saves achieved earlier this month and the system conversion scheduled for mid-fourth quarter. Bank leverage ratio is estimated to be 9.8% at June 30, using average tangible assets. I do expect that number will decline towards the low to mid-8s for the third quarter as we get the effect of having a full quarter’s asset level in the third quarter. With that, I would like to turn the call over to our Chief Credit Officer, Gary Mills for a little more information on loans. Gary?

Thank you, David and good morning everyone. The total FCB loan portfolio as of June 30 was $1.807 billion as compared to $1.37 billion as of March 31, 2012 representing an increase of approximately $421 million. While substantially all this increase can be attributed to the two acquisitions, it should be noted that the legacy FCB loan portfolio grew approximately $5 million during the quarter. Net of loan marks, the PBV acquired loan portfolio totaled $163 million and the Waccamaw Bank acquired loan portfolio totaled $252 million. The allowance for loan and lease losses for non-covered loans measured $26.17 million at quarter end as compared to $25.8 million, $26.21 million and $26.48 million as of March 31, 2012, year end 2011 and June 30, 2011, respectively. As of June 30, 2012 the allowance as a percentage of non-covered loans was 1.66% representing a decline from 1.86% to 1.88% and 1.93% as of the end of the first quarter year end 2011 and June 30, 2011 respectively. The decline is the result of the addition of non-covered loans from the Peoples acquisition without any related loan loss reserves. GAAP calls for us not to bring across any general reserves with the loan portfolio, non-covered total delinquent loans as a percentage of total non-covered loans were 2.64% at June 30, 2012. Non-covered, non-accrual loans increased to $31.27 million at June 30, 2012 compared with $24.49 million at December 31, 2011 and $22.04 million at June 30, 2011. The increase in non-covered and non-accrual loans can be primarily attributed to the PBV acquisition. As a result of the acquisition, the Bank’s loan portfolio segmentation modestly changed with residential real estate, 1-4 segment now comprising 47% of the total loan portfolio as compared to 50% prior to acquisition. And the commercial real estate segment now represents 36% of the total loan portfolio, as compared to 34% previously. This concludes my prepared remarks. So, I will now turn the call back over to John.

Thank you, David and Garry. And with that I think we will turn the call back to the operator and we can queue up for questions from registered callers.

[Operator Instructions] Our first question is from Catherine Mealor with Keefe, Bruyette & Woods.

Dave can you just help us a little bit with the expenses. I know that we got a partial quarter this quarter with Waccamaw Peoples. And you’re already seeing some cost savings coming through this quarter. Can you just help us think about what your expense saves looks like with Waccamaw Peoples in on for a full quarter plus the incorporation of the total amount of expense savings you think you can get out of both of these deals. Thank you.

I think in terms of the expense saves, I don’t think we’ve actually published anything about that Catherine. I think it’s material, though. And Peoples -- the real expense saves is in terms of the people have largely been incorporated in the first month and what we have referenced there we will pickup on the order of $30,000 to $35,000 a month in data processing cost saves when we phase those guys in and get those - when we get their core converts to ours in late third quarter. The Waccamaw cost saves will largely come - the remaining Waccamaw cost saves will largely come later in the fourth quarter after we get them on to our core system and I think we’ve probably got a couple of branch consolidations that we will see in the coming quarters.

And can you give us any guidance just on Waccamaw alone what that percent costs savings projections are - it is a percentage of their first quarter’s non-interest expense?

Catherine I’m not sure that I have that percentage in front of me. I can get that out on the transcript.

Thank you very much. And then maybe as a quick follow-up what are you thinking on the potential for accretable yield on these two transactions?

I think and this is purely a guess I think Peoples will probably be minimal mostly because the interest rate environment that we’re in and compared to the loans that we’re picking up. And they just didn’t have a book - a significant book of non-performers or impaired loans that we’re picking up. And I hesitate to venture much of a guess on Waccamaw yet until we get that more finalized in the next week or so.

[Operator Instructions] Our next question comes from the line of Charlie Wohlhuter with Raymond James.

A couple of my questions have already been answered. But just a follow-up Gary on the credit picture. What did - how were classified assets -- how did they trend during the second quarter as opposed to first quarter?

Relative to our Legacy portfolio?

Yes Legacy.

Relatively flat. I think if looking -- yes its going to be relatively flat. If you look at on a commercial basis loans that we would have classified, it’s going to be within a couple of million dollars during the quarter.

[Operator Instructions] Our next question comes from the line of Carter Bundy with Stifel, Nicolaus.

Jumping back in on the expense base from Catherine’s question, it looks like you already had a decent bit of expense cut this quarter. And Dave could you and maybe I missed it, but could you remind me you said you already had some cuts at PVAs and would it be fair to say you already had some Waccamaw cuts in the quarter or was that earlier this month that those actually were put in place?

No, there were - we’ve recognized really relatively little in terms of cost saves on the personnel side from Waccamaw as compared to where they were running at acquisition. Most of that came in in probably the first couple of weeks of July. So that’s all - I think it’s about a $1.1 million annualized salaries and benefits save that we’ll see beginning in the third quarter. And then you are right in terms of Peoples the bulk of the dollars and cost saves on personnel side were achieved when we put them on with the execs leaving.

So that was already in there?

Yes.

There will be another drop if you will in personnel cost run rate post-conversion.

That’s right.

Of Peoples which will come until - really into the fourth quarter. Midway probably through the fourth quarter.

Yes.

It’s certainly the bulk of the dollars have been realized on Peoples.

Okay and so you’re going to integrate systems you said likely early fourth, mid-fourth then?

Peoples is slated for towards the end of third quarter and Waccamaw is set for mid-fourth quarter.

That’s helpful. And I guess jumping on to another, the balance sheet here, you acquired a fair amount of liquidity. Peoples certainly had a fair bit of liquidity. You are sitting on a much larger book of securities, pretty nice increase in cash. How do you think about that X interest rate marks in purchase accounting? How do you think about sort of deploying that in an interest rate environment like this?

I think we would rather deploy through loans some securities because most of the securities we look at today are probably going to be in the neighborhood - in probably sub 2% yield. I think Gary alluded a little bit to the fact that the legacy FCB loan portfolio group, we have some modest growth in that portfolio. I think even in this down economic environment, there are some positive opportunities for loan growth. But in terms of using the cash straight out, I think there is probably some more de-leverage that will occur at Peoples and I think that there is the opportunity for some more de-leverage at Waccamaw. We had already de-levered both of those pretty handily in the first month of Peoples operations. I think certificates were down call it $20 million in Waccamaw between wholesale debt and click rate CDs. We got about $90 million of de-leverage there in the first 22 days.

So, you’ve already basically de-levered the Waccamaw balance sheet pretty completely?

Not completely.

Largely.

Largely, I think there is just in terms of what could go away, Carter, I could see another $30 million to $40 million relatively easily.

And then that’s at Waccamaw and Peoples, you said ideally use that to fund loan growth?

Yes, that’s right. And Peoples, I think, they in particular came on as a percentage of their balance sheet with a significant source or amount of cash.

Yes.

And it’s just a matter of, I think if they were very conservative in the way that they looked at investing their liquidity today and they wanted to make sure that they had plenty of liquidity in these credit environments. So, I think it’s really a matter of turning that cash into back into the loan portfolio there.

And that was predominantly cash. Sorry if I’m not 100% sure, but I think that was mostly cash versus securities?

On Peoples, that’s correct. Very, very small securities book.

That’s helpful. And so if we think about interest rate marks, you didn’t - you don’t think Peoples is really going to move the needle much and just don’t really obviously have an idea yet on the Waccamaw purchase accounting?

That’s right. We’ve got our credit marks pretty well said on both portfolios. I think Peoples it’s not going to surprise me to see on that very minimal impact in terms of purchase accounting and the accretion on that portfolio, but Waccamaw, I just asked - until we get those interest rate marks set I hesitate to put much of anything after four years.

And then Gary, a question for you, could you remind me of the net loan balances that came onto the balance sheet after reserves and marks again I’m sorry I missed that.

Yes, just one moment please, the PBV. $163 million and Waccamaw was $252 million.

And that’s on a net basis?

Yes.

Mr. Mendez, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing or additional comments.

Thank you very much. We appreciate the interest this morning. We appreciate you joining us and the questions. I’d like to once again thank you for interest in First Community. We do invite you to continue to follow our company as we work to grow our presence and our impact in the regional financial services industry. I would also like to inform you of upcoming Investor Relations events for the company on July 31. We will be presenting at the KBW Community Bank Investor Conference in New York and in August we’ll be attending the Raymond James Community Bank Conference in Chicago. We hope to see some of you there. If not, we invite you to join those presentations through the sponsored webcast or available archived replay. With that again, thank you for your time and your answers today. Have a great day. Thank you.