Greetings, and welcome to the First Community Bancshares, Inc. First Quarter 2013 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bob Schumacher, General Counsel, First Community Bancshares. Thank you, Mr. Schumacher. You may begin.

Thank you for joining us this morning for First Community Bancshares’ First Quarter 2013 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 earnings 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 call over to John Mendez.

Thank you, Bob, and good morning, and welcome to everyone. Again this is the First Community Bancshares’ first quarter 2013 earnings call. This is John Mendez, President and Chief Executive Officer, and I’m pleased to open the call this morning with some highlights of the recently completed quarter. First, let me say that we’re pleased with our first quarter results, and where we are in terms of operations following our significant 2012 expansion. Earnings results for the quarter are consistent with our expectations in the current environment of low interest rates, and continued slow growth. In that vein, we are using this period to continue to sharpen our operations, build our staffing and continue our focus on improvements on asset quality. In the area of profit performance, we are very pleased with the 15% increase in core earnings for the quarter over the comparable quarter in 2012. Actually, I think that any progression of earnings in this environment is notable. So the double-digit - strong double-digit increase is, we think, quite remarkable. While we consider earnings strong in this environment, we note that we continue to sacrifice a level of earnings improvement as we maintain extremely high levels of liquidity as part of our effort to protect book value, and mitigate interest rate risk. It’s our belief that consistent levels of core earnings, progressed at fair rates of increase, and a sharp focus on positioning the company for the next interest rate cycle is a good strategy at this point in time. So we continue to manage the balance sheet for quality and stability in the current environment while building capital, balance sheet strength, and forward earnings momentum. Capital levels are building nicely. This capital build, along with our complete integration of Waccamaw and Peoples, has put us quickly back…

Thanks, John, and good morning, everyone. Thank you for joining us this morning. Yesterday evening, we reported common net income for the first quarter of 2013 at $6.9 million or $0.33 per diluted share. Core earnings for the quarter remained strong at $7 million. Core ROA and ROE for the quarter were 1.05% and 8.23%, respectively. Net non-core items of about $160,000 were made up of the securities gains and debt repayment gains mostly attributable to the Waccamaw portfolio. Margins for the quarter was 4.15%, it does continue to be positive when impacted by accretion though not quite as much as last quarter. We recognized approximately $3.8 million in accretion compared to what we’ve done last quarter. $1.9 million of the $3.8 million that we recognized this quarter was actually interest received on PGI loans, so margin was actually positively affected by a net $2 million. That makes core net interest margin approximately $3.81 million for the quarter. We did make $1.1 million provision for the loan losses during the first quarter, and other real estate costs and net losses amounted to $625,000, making total credit cost of $1.8 million. That’s up slightly from the $1.5 million reported last quarter and on par with first quarter. Wealth revenues decreased $16,000 on a linked-quarter basis on lower advisory, and trust revenues. Linked quarter deposit account service margins were down significantly. And although service charges continue to be positively impacted by the addition of Waccamaw, first quarter revenues are historically low seasonally, and we continue to see a lower incidence rate of service fees. Other service charges and fees were up $104,000 over the last quarter, and were positively impacted by safety deposit box fees and increased interchange revenues. Insurance revenues were up 37% linked-quarter and up 6% over last year. The…

Thank you, David, and good morning to everyone. Total loans at quarter-end measured $1.689 billion, representing a 21.4% increase as compared to the first quarter of 2012. The approximate $302 million increase can be attributed to the acquisition of Peoples Bank of Virginia and Waccamaw Bank in the second quarter of 2012. Year-to-date through the end of the first quarter, the FCB client portfolio has declined approximately $36 million. Approximately $24 million of the decline can be attributed to the covered loan portfolio, which is principally a result of continued problem loan resolution. The non-covered portfolio declined approximately $12 million during the quarter, with the successful resolution of 2 previously identified problem loan relationships, totaling approximately $7 million, contributing to the decline. The resolution resulted in full payoff with no loss to the bank. Non-accrual loans in the non-covered portfolio were approximately $30 million at quarter end as compared to $23.931 million and $24.617 million as of the fourth quarter of 2012 and the first quarter of 2012, respectively. The increase on non-accrual loans is due to one relationship totaling approximately $6.4 million. The borrower, which operates within the commercial real estate sector has maintained a relationship with the bank dating back to the late 1990s and has historically performed satisfactorily. The bank is actively engaged with the borrower this time to achieve resolution. TDRs within the non-covered portfolio declined approximately $4.4 million, primarily as a result of the seasoning of a $4.4 million restructuring and its migration to performing TDR status. Excluding covered assets, non-performing assets to total assets were 1.43% as of March 31 as compared to 1.42% and 1.41% as of December 31, 2012 and March 31, 2012, respectively. OREOs not covered under loss share declined approximately $1.3 million during the quarter as the bank was able to successfully liquidate an OREO parcel which was a $1.5 million single-family residence in the North Carolina market. The allowance for loan and lease losses totaled $24.850 million or 1.66% of non-covered loans as of the first quarter as compared to $25.770 million or 1.71% and $25.800 million or 1.86% as of December 31 and March 31, 2012, respectively. Provision for the quarter was $1.142 million or 55% of net charge-offs. During the quarter, the bank recorded a partial charge-off of $750,000 on a loan, which was equivalent to the specific reserve which has previously been established to the credit. In spite of the marginal increase in the non-accrual loans and net charge-offs during the quarter, I remain relatively optimistic about the bank continuing to experience positive trends in asset quality metrics. This concludes my prepared remarks. So I will now turn the call back over to John.

Thank you, Dave and Gary. We appreciate that. And at this time, that concludes all of our prepared remarks. And we would like to turn the call back to the conference operator. And if we have some questions queued up, we’d be happy take those at this time.

[Operator Instructions] Our first question today is coming from William Wallace from Raymond James.

My first question is on the indemnification asset. You’ve mentioned an accounting change and then you mentioned improved cash flow estimates. So I’m wondering if you could help me understand how those 2 ties together.

Well, Wally, I think the indem assets went through a quarterly re-estimation and largely, our estimates from the beginning were unchanged. A lot of what is happening with the indem asset; the negative accretion is just the positive experience we were having in the resolution of the Waccamaw credits. There comes -- the cash is coming back to us, basically, 110 and that’s forcing us to write down the indemnification asset. The new accounting standard, we’ll have to do that at about the same time you recognize the accretion on that portion of the portfolio.

Okay. So it doesn’t have to do with the expected life of some of the loans and then having to increase the loss expectation after the loss agreement expires.

No, no, no, no, no.

Okay.

No. Not that we know. In general, we’ve seen really relatively positive experience in resolutions in both the Waccamaw and Peoples portfolios.

So the $1.5 million of negative accretion, does that offset X cash flows that you expect to receive or cash flows that you did receive in the quarter?

It effectively starts to offset cash flows in accretions that we’ve received during the quarter, as well as going back and kind of recognizing what we have recognized through the deals so far. So it’s largely related to, well the indem asset is completely related Waccamaw. The general FASB 91 piece of mark that was on the Peoples’ portfolio is relatively small.

All right. So we’ll probably expect to see some continued noise in that assuming you continue to experience improvement in cash flows whether it’s through pay-offs or just cash flow estimate.

That’s right.

Okay. And now, I’d like to change the subject and just talk a little bit about loan growth. We saw some weakness across the industry, really, this quarter. I’m curious if you could tell me a little bit about how the trends and the production and the pipeline were on a monthly basis through the quarter and then how they’ve started, how they were in April.

Yes. I think from a small business perspective, first off, all 3 phases for the first quarter have been seasonally down. And that’s not to be necessarily unexpected in the first quarter in the winter month. But relatively speaking, small business production continues to be respectable. Where we’re seeing, I guess, more challenges is when you get in the large - with larger commercial loans for us in new loan originations, just the opportunities. And then you we can do identify loans in that space, competition is extremely aggressive, both in rate and structure. Couple that with the problem loan resolution that we’ve been talking about through the Waccamaw portfolios and then some good payoffs that we’ve received. It’s a little difficult to replace those. Now going into April, our retail credit manager has been informing me that applications were up significantly. In fact, we’re seeing applications at run rate now higher than we’ve seen since back in 2008. So the retail resolution mortgage portfolio activity is -- we consider pretty robust at this time. We’re doing it at least 3 months. We’re also seeing some pickup in small business type applications as well.

Excuse me, excuse me - what, I’m sorry, in small business.

Small business, small business loan applications. And small business, for us, is the finest relationships, $750,000 or less.

Okay. And then, lastly, David, the accretion numbers, I just want to check my notes here. So you had $3.8 million of accretion in the first quarter...

Yes.

And I had written down in my notes that you had $3.8 million in the fourth quarter, but that wouldn’t make sense when you’re talking about your core margin.

Yes. I think - I don’t have them right in front of me, Wall, and I have to double check for you. But that quarter accretion is - the $1.9 million or so of what we recognized this quarter is truly - it’s really cash that came in off of those PGI loans. And...

Accelerated accretion.

Well, it was honest income off of this portfolio that it wasn’t necessarily purchased accounting adjustments.

So when you’re adjusting to get your 3.81% estimate of core margin, are you backing up $3.8 million or just the $1.9 million?

About $1.9 million.

[Operator Instructions] Our next question is coming from Catherine Mealor from KBW.

Just a quick follow-up to the core margin question that Wally had. So I see that for you to get to your 3.81%, you’re backing out $1.9 million, not this $3.8 million. How is that comparable to last quarter? When you were doing your core margin last quarter, it looks like that -- last quarter you said the accretion was $3.8 million and that was a core margin of 3.84%. So it looks like all of that $3.8 million from last quarter, that didn’t include any true cash. That means that all of the $3.8 million from last quarter was just purchase accounting adjustment, which is comparable to the $1.9 million this quarter? Is that a fair statement?

I believe so, Catherine. I’ve got -- I have to go back and get last quarter’s information for you, but I believe that’s right.

Okay. All right. Great. And -- I’ll go ahead. And any guidance on where you see the accretion moving over time? I mean it’s -- it came down a lot this quarter from $3.8 million to $1.9 million. As you look for -- as you look forward, how do you think we should model that negative accretion of this TDR?

Yes. I think I’ve actually got that right in front of me, Catherine. We’re kind of projecting out that we’ll be in the range of about $3.4 million in gross accretion for Q2 and it will decline about a couple hundred thousand dollars a quarter from thereon out. How much of that is actual cash that comes in off of the portfolio will kind of remain to be seen, but I would expect it to be at the same ballpark. And then, we’re projecting out, along the same lines, we’re also projecting out some more indemnification asset, negative accretion. It’s declining as well, probably about $1.4 million next quarter and then probably declining, give-or-take $100,000 a quarter thereon out. And now at quarter 2, now at quarter 2, we’re in a position where, I think, we will have an appropriate - shouldn’t have any real negative surprises coming out of that portion of the indem asset.

Got it. Okay. The indemnification asset change in accounting, was that -- is it more that you’re now amortizing that negative, I guess, amortization over a shorter period of time than you had then before? Is that the main gist behind the change in your assumptions?

Well, it is not really too much a change in assumptions. It’s that we are -- the new accounting guidance will have you recognize where you recognized the FASB 91 accretion from the purchase accounting adjustments to the extent that you’re recognizing that on the general portfolio. You should have an offsetting decline in your net asset. And it’s really just. To me, if I look at it, it’s really reflective of just the positive experience that we have. So it kind of confirms the level of accretion in income we recognize on that FASB 91 general population of Waccamaw loans.

Got it. And it was really your first quarter of having any negative high amortization, correct?

It is. It is and a lot of that is driven by the accounting guidance, which has everybody recognize it in the same manner.

Got it. Okay. That makes a lot of sense. And then did you have any shares repurchased in the quarter?

We did. About 69,000 in -- during the first quarter. We were a little bit constrained from where we probably wanted to be in terms of share buyback. But we’ll definitely be back in the market for the second quarter.

[Operator Instructions] If there are no further questions at this time, I’d like to turn the floor back over to management for any further or closing comments.

This is John Mendez again. And with that, we appreciate the questions and your interest this morning. I’d like to continue to invite you to follow our company as we work to grow our presence and impact in the regional financial services sector. Again, thank you for your time today. I hope you all have a wonderful day and a great weekend. Thank you very much on behalf of First Community Bancshares.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.