First Community Bancshares, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are primarily with December 31, 2013. Amounts are U.S. dollars. Unless noted, financial statement amounts are in millions.
Business context
First Community is a community banking financial holding company operating in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. Its businesses include commercial and consumer banking, wealth management, and insurance. At quarter-end, it reported 74 locations and $2.61 billion of assets; wealth management and trust assets under management were $697 million and are not company assets.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Interest income | $26.08 million | $28.00 million |
| Net interest income, GAAP | $22.03 million | $23.36 million |
| Net interest margin | 4.10% | 4.15% |
| Net interest margin, excluding noncash purchase-accounting accretion | 3.64% | 3.80% |
| Noninterest income | $7.23 million | $7.86 million |
| Provision for loan losses | $1.79 million | $1.14 million |
| Noninterest expense | $19.18 million | $19.54 million |
| Net income | $5.73 million | $7.14 million |
| Net income available to common shareholders | $5.50 million | $6.88 million |
| Basic / diluted EPS | $0.30 / $0.29 | $0.34 / $0.34 |
| Return on average assets / common equity | 0.86% / 7.02% | 1.03% / 8.11% |
| Operating cash flow | $13.03 million | $5.52 million |
- Balance sheet: Assets were $2,610.3 million, deposits $1,974.7 million, and stockholders’ equity $333.9 million at March 31. Loans held for investment, net of allowance, were $1,708.1 million.
- Liquidity: Cash and cash equivalents were $79.0 million. Management also reported $105.0 million in correspondent-bank lines, $9.1 million in Federal Reserve discount-window availability, $362.4 million of unused FHLB capacity, and $199.3 million of unpledged available-for-sale securities.
- Debt and funding: Total borrowings were $278.4 million, down from $300.4 million at year-end. This included $150.0 million of FHLB borrowings and $112.3 million of repurchase agreements. Federal funds purchased were zero, versus $16.0 million at year-end.
- Capital: The company reported total risk-based capital of 16.24%, Tier 1 risk-based capital of 14.98%, and Tier 1 leverage of 10.13%; management said the company and bank were well capitalized.
Material changes versus comparable periods
- Net income fell 19.8% year over year. Management attributed the decline primarily to lower loan yields: average loan yield declined 52 basis points to 5.40%. Tax-equivalent net interest income decreased 5.7%, while net interest margin declined five basis points.
- Purchase-accounting accretion on acquired loans was $3.12 million, including $0.60 million in cash, compared with $3.84 million, including $1.78 million in cash, a year earlier. Management expects this income to continue declining as acquired portfolios run off.
- Noninterest income declined 8.0%, including lower other operating income and $0.26 million of securities impairment charges. Noninterest expense decreased 1.9%; full-time equivalent employees fell to 706 from 746.
- Non-covered loans grew $29.7 million from year-end and $94.5 million year over year. Non-covered loan growth exceeded covered-loan declines for the fourth consecutive quarter. Total deposits rose $23.9 million from year-end.
- Total nonperforming assets were $38.7 million, essentially unchanged from year-end and below $47.6 million a year earlier. Total nonperforming loans were $24.1 million, compared with $23.9 million at year-end and $36.2 million a year earlier. Non-covered nonperforming loans to non-covered loans rose to 1.43% from 1.31% at year-end, but were below 2.12% a year earlier.
- Operating cash flow rose year over year, while cash and cash equivalents increased $22.4 million during the quarter. The company repurchased 131,500 shares for $2.15 million and paid a $0.12 common dividend per share.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management expects acquired-loan purchase-accounting accretion to decline in future periods. Its interest-rate simulation showed modeled net interest income changes of +1.2% for a +300-basis-point shock, +0.6% for +200, +0.1% for +100, and 0.0% for −100, relative to the base case; management said exposure was within policy limits. These simulations depend on assumptions and are not forecasts.
- Credit risks include possible deterioration in borrowers, collateral values, local economic conditions, or loan-loss estimates. The allowance was $23.8 million; provision expense increased year over year due to specific reserves on impaired loans and portfolio growth. Management considered the allowance adequate but warned future additions may be needed.
- FDIC loss-share agreements cover 80% of most losses on specified acquired loans and foreclosed property. The related indemnification asset was $32.5 million, down from $34.7 million at year-end; its amortization was $1.13 million in Q1.
- The company recorded $264,000 of net securities impairment losses, including $232,000 related to a non-agency mortgage-backed security and $32,000 on equity securities. Available-for-sale securities had $21.2 million of gross unrealized losses at quarter-end, including losses on some securities held for 12 months or longer.
- Off-balance-sheet credit commitments and guarantees totaled $232.3 million, including $226.0 million of commitments to extend credit. The reserve for unfunded commitments was $326,000.
- The company faces ordinary-course legal claims; management believes their resolution should not materially adversely affect financial condition, results, or cash flows. No material change in previously disclosed risk factors was reported. Disclosure controls were concluded effective as of March 31, 2014.
Most important facts for investors to verify
- Whether loan growth can offset continued pressure on loan yields, net interest income, and declining acquired-loan accretion.
- Whether credit quality, nonperforming loans, charge-offs, and required loan-loss provisions improve or deteriorate, particularly in commercial real estate and impaired credits.
- The valuation and credit performance of the securities portfolio, especially non-agency mortgage-backed securities and securities with prolonged unrealized losses.
- The sustainability of liquidity and capital levels alongside repurchases, dividends, and planned repayment of wholesale borrowings.
- The expected duration and financial impact of FDIC loss-share reimbursements and continued amortization of the indemnification asset.