FIRST COMMUNITY BANKSHARES INC quarterly report, Q2 FY2015

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First Community Bancshares, Inc. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014 unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.

Business context

First Community Bancshares is a community banking and financial holding company operating through banking, wealth management, and insurance businesses. At June 30, 2015, it operated in Virginia, West Virginia, North Carolina, and Tennessee, and reported $2.49 billion in assets. Its core earnings depend on the spread between interest earned on loans and securities and interest paid on deposits and borrowings.

Financial performance and condition

  • Q2 results: Net interest income was $21.07 million, down 4.5% year over year; provision for loan losses was $0.28 million versus $1.28 million. Noninterest income rose 7.0% to $8.14 million, while noninterest expense rose 11.7% to $20.29 million. Net income fell 11.9% to $6.18 million; diluted EPS was $0.33 versus $0.36. Return on average assets was 0.98% and return on average common equity was 7.11%.
  • Six-month results: Net interest income was $41.91 million, down 5.0%; provision was $1.38 million versus $3.07 million. Noninterest income was $14.97 million, up 0.9%, and noninterest expense was $38.07 million, up 1.9%. Net income declined 4.7% to $12.13 million; diluted EPS was $0.64 versus $0.65. Common dividends were $0.26 per share.
  • Margins: Net interest margin on a fully taxable-equivalent basis was 3.90% in Q2 versus 4.08% a year earlier, and 3.85% for the first half versus 4.09%. The company attributed pressure to lower earning-asset yields and balances; acquired-loan purchase-accounting accretion is expected to continue declining as those portfolios run off.
  • Balance sheet: Total assets were $2.49 billion, down 4.5%; total loans held for investment were $1.67 billion, down 1.3%. Deposits were $1.92 billion, down 4.0%, with interest-bearing deposits falling $87.2 million. Stockholders’ equity was $344.6 million, down 1.9%; book value per common share was $18.48.
  • Cash flow and liquidity: First-half operating cash flow was $29.42 million, investing cash flow was negative $48.47 million, and financing cash flow was negative $126.02 million. Cash and cash equivalents declined $145.06 million to $92.60 million, primarily reflecting share repurchases, preferred-stock redemption, securities purchases, and debt repayment. Management also reported $105 million of correspondent-bank federal-funds lines, $9.08 million of Federal Reserve discount-window availability, $441.37 million of unused FHLB capacity, and $131.23 million of unpledged available-for-sale securities.
  • Debt and capital: Total borrowings were $203.16 million, down from $229.74 million. The company repaid $25 million of FHLB advances and incurred a $1.70 million prepayment penalty. Regulatory capital ratios remained above minimums: company CET1 15.13%, Tier 1 15.33%, total risk-based capital 16.58%, and leverage 10.37%. Management stated the company and bank exceeded “well capitalized” standards.
  • Credit quality: The allowance for loan losses was $20.26 million, or 1.22% of total loans. First-half net charge-offs were $1.39 million, down 52.0% year over year. Total nonperforming assets were $29.81 million, or 1.20% of assets, compared with $28.68 million and 1.10% at year-end 2014; they were below $34.91 million at June 2014. Total nonaccrual loans increased to $17.00 million from $12.99 million at year-end, while non-covered nonaccrual loans were below the prior-year level.

Material changes and unusual items

  • The company repurchased 684,407 common shares in the first half, including 345,173 in Q2, at an average Q2 price of $17.08 per share. It also converted or redeemed its remaining Series A preferred stock; none remained outstanding at June 30.
  • The $1.70 million FHLB prepayment penalty contributed to higher Q2 expenses and lower earnings. Other notable items included $1.14 million of after-tax bank-owned life insurance death benefits in Q2 and $3.41 million of first-half FDIC indemnification asset amortization, which reduced noninterest income.
  • Available-for-sale securities increased to $376.19 million from $326.12 million at year-end. Their net unrealized loss was $7.84 million at June 30, compared with a net unrealized loss of $6.83 million at year-end; the first-half after-tax change in other comprehensive income was negative $0.59 million.
  • The company’s FDIC loss-share coverage reimburses 80% of eligible losses on covered Waccamaw assets. Covered loans continued to run off, declining 16.0% from year-end.

Outlook, risks, and contingencies

  • The filing gives no specific earnings or revenue guidance. Management expects acquired-loan accretion to decline as acquired portfolios run off and reports that current modeled interest-rate exposure is within policy limits.
  • Management identified economic conditions, interest-rate and market changes, credit concentrations, regulation and capital requirements, competition, technology, and acquisition performance among factors that could cause actual results to differ from forward-looking statements. It noted improved asset-quality indicators but also potential risk from credit concentrations and uncertainty in estimating the allowance.
  • Off-balance-sheet commitments totaled $220.90 million, including $213.41 million of commitments to extend credit; the reserve for unfunded commitments was $0.33 million. The company is party to ordinary-course legal matters but said it did not expect their resolution to materially affect its financial condition, results, or cash flows.
  • Management reported effective disclosure controls as of June 30, 2015, and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2014 Form 10-K.

Important facts for investors to verify

  • Whether net interest margin and core earnings stabilize as loan yields, securities yields, and acquired-loan accretion change.
  • Whether the rise in nonaccrual loans and nonperforming assets from year-end continues, particularly in commercial real estate and owner-occupied residential exposures.
  • How deposit declines, share repurchases, and securities purchases affect cash levels and liquidity, and whether reported borrowing capacity remains available.
  • The ongoing cost and benefit of debt reduction, including the FHLB prepayment charge and scheduled wholesale borrowing maturities.
  • The sustainability of reported earnings after the insurance death benefit and the effects of FDIC asset amortization and purchase-accounting accretion.