First Community Bancshares, Inc. — Q3 2013 Form 10-Q
Business and period: Community banking holding company operating across Virginia, West Virginia, North Carolina, South Carolina, and Tennessee, with banking, wealth management, and insurance activities. Results cover the three and nine months ended September 30, 2013; balance sheet comparisons are primarily with December 31, 2012. Unless stated otherwise, amounts below are in millions.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income (GAAP) | $22.33 | $26.46 | $68.55 | $63.92 |
| Provision for loan losses | $2.33 | $1.92 | $6.68 | $4.46 |
| Noninterest income | $8.11 | $11.16 | $22.82 | $27.50 |
| Noninterest expense | $20.15 | $20.33 | $58.23 | $56.65 |
| Net income | $5.41 | $10.06 | $17.99 | $20.14 |
| Net income available to common shareholders | $5.15 | $9.84 | $17.22 | $19.35 |
| Diluted EPS | $0.26 | $0.47 | $0.85 | $1.00 |
| Cash dividends per common share | $0.12 | $0.11 | $0.36 | $0.32 |
Margins: Tax-equivalent net interest margin was 3.99% for Q3 versus 4.48% a year earlier, and 4.07% for the first nine months versus 4.13%. Excluding noncash purchase-accounting loan accretion, the margin was 3.69% for Q3 versus 4.06%, and 3.73% year to date versus 3.97%.
Balance sheet and funding at September 30: Total assets were $2,652.7; loans held for investment, net of allowance, were $1,672.0; and deposits were $1,996.6. Equity was $350.9. Borrowings totaled $280.5, including repurchase agreements of $114.6, FHLB borrowings of $150.0, and other debt of $15.8. Compared with year-end 2012, assets declined 2.8%, deposits declined 1.7%, and borrowings declined $33.1. The allowance for loan losses was $24.7, down from $25.8.
Cash flow and liquidity: For the first nine months, operating cash flow was $28.6 versus $47.9 in 2012; investing cash flow was a use of $1.0 versus a source of $233.6, reflecting the prior-year acquisition cash inflow; and financing cash flow was a use of $79.8 versus $163.5. Cash and cash equivalents ended September 30 at $92.6, compared with $144.8 at December 31, 2012. Management reported $265.8 of unpledged available-for-sale securities, $325.7 of unused FHLB capacity, and $114.1 of federal funds lines. The Bank was deemed well capitalized; the Company’s total risk-based capital ratio was 17.80% and the Bank’s was 16.33%.
Material changes and management commentary
- Q3 net income fell 46.2% year over year; nine-month net income fell 10.7%. Management attributed the quarterly decline principally to lower loan balances and yields, reduced accretion from acquired loans, greater amortization of the FDIC indemnification asset, a severance-related item, and a $2.39 million out-of-period income adjustment recorded in Q3 2012. The filing’s discussion of the severance item is not fully clear on timing.
- Quarterly tax-equivalent net interest income declined 15.2%, mainly reflecting lower average earning assets and yields. For the nine-month period, it increased 7.0%, primarily due to acquisition-related average asset growth and lower deposit costs. Management expects purchase-accounting loan accretion to decline as acquired loans run off.
- Net charge-offs were $8.60 million for nine months, up from $4.83 million in 2012; the increase was attributed chiefly to four loan relationships, including a $2.10 million construction and development loan write-down. Annualized net charge-offs rose to 0.76% from 0.46%.
- Credit indicators were mixed: non-covered nonperforming loans to non-covered loans improved to 1.87% from 1.97% at year-end, while total nonperforming assets rose to $45.1 million from $43.3 million, largely alongside growth in covered OREO. Management said non-covered special-mention and substandard loans declined, citing workouts and improvement in the acquired Peoples portfolio.
- Available-for-sale securities were $545.7 million, but fair value was 96.84% of amortized cost versus 99.92% at year-end. Accumulated other comprehensive loss widened by $10.92 million in the first nine months, largely reflecting higher benchmark interest rates and lower securities values.
- The company repurchased 335,192 shares during the first nine months. In October 2013, the board authorized repurchases of up to 3 million shares. Common dividends declared were $0.36 per share for the first nine months.
Outlook, risks, and contingencies
No specific earnings or revenue guidance was provided. Management’s interest-rate simulations indicated exposure within policy limits; a sustained 300-basis-point increase was modeled to raise 12-month net interest income by 10.4%, while a 100-basis-point decrease was modeled to raise it by 0.4%. Management cautioned that actual outcomes may differ because of rates, loan prepayments, customer behavior, and other assumptions. Key risks include local economic conditions, real-estate collateral values, credit losses, interest rates, regulation, acquisition integration and expected savings, and fee-income performance.
At September 30, commitments to extend credit were $209.0 million and standby letters of credit and financial guarantees were $1.77 million; the reserve for unfunded commitments was $326,000. The company reported routine legal matters that management did not expect to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in Q3 credit provisioning and year-to-date net charge-offs signals further deterioration, particularly in commercial real estate and acquired loan pools.
- The pace of acquired-loan runoff and declining purchase-accounting accretion, and their effect on net interest income and margins.
- Whether FDIC indemnification asset amortization and covered-loan/OREO developments will continue to weigh on reported results.
- The sensitivity of securities values, accumulated other comprehensive loss, and earnings to interest-rate movements.
- The precise timing and effect of the severance item and the 2012 out-of-period adjustment; confirm relevant detail in the full MD&A and notes.
- Capital, liquidity, and share-repurchase capacity, including the October authorization, alongside deposit trends and future credit commitments.