Business context and reporting period
First Community Bancshares, Inc. is a regional financial holding company operating community banking, wealth management and insurance businesses across Virginia, West Virginia, North Carolina, South Carolina and Tennessee. This Form 10-K covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. The company completed the Peoples Bank of Virginia acquisition in May and the FDIC-assisted Waccamaw Bank acquisition in June 2012.
Financial performance and condition
| Metric | FY 2012 / year-end | FY 2011 / comparison |
|---|---|---|
| Total assets | $2.729 billion | $2.165 billion |
| Net interest income | $90.1 million | $72.0 million |
| Noninterest income | $36.7 million | $35.5 million |
| Net income | $28.6 million | $20.0 million |
| Net income available to common shareholders | $27.5 million | $19.3 million |
| Diluted earnings per common share | $1.40 | $1.07 |
| Net interest margin (tax-equivalent) | 4.23% | 3.87% |
| Net charge-offs | $6.1 million | $9.3 million |
Return on average assets was 1.10% (0.88% in 2011); return on average common equity was 8.70% (6.81%). Noninterest expense rose 13.7% to $78.4 million, including $5.1 million of merger-related costs. The company reported a 55.96% non-GAAP efficiency ratio, versus 59.56% in 2011.
At year-end, loans held for investment were $1.725 billion before the $25.8 million allowance; net loans were $1.699 billion. Deposits were $2.030 billion and borrowings were $313.6 million. Cash and cash equivalents were $144.8 million. Management reported total available liquidity of $770.4 million, including cash, unpledged securities and unused borrowing lines. Operating cash flow was $59.6 million; investing activities provided $249.5 million and financing activities used $211.6 million.
Company regulatory capital ratios were 16.70% total risk-based, 15.44% Tier 1 risk-based and 9.96% leverage. The Bank was classified as well capitalized; its respective ratios were 15.23%, 13.97% and 8.98%.
Material changes versus the prior comparable period
- Net income rose 42.7%; diluted EPS increased from $1.07 to $1.40. Management attributed much of the increase in net interest income to the acquisitions’ larger earning-asset base and lower deposit costs.
- Loans increased 23.5% and deposits 31.5%, primarily from Peoples and Waccamaw. The acquisitions also increased goodwill by approximately $21.1 million and added branches, employees and integration costs.
- Provision for loan losses declined to $5.7 million from $9.0 million, and net charge-offs fell to $6.1 million from $9.3 million. However, non-covered nonperforming assets increased to $35.7 million from $31.0 million.
- Noninterest expense increased 13.7%; the 2012 total included $5.1 million in merger costs. Securities-sale gains fell to $0.5 million from $5.3 million.
- Common dividends increased to $0.43 per share from $0.40.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said acquisition-related loan-interest accretion is expected to lessen significantly in future periods. Its interest-rate simulation projected net interest income rising 13.2% under an immediate, sustained 300-basis-point increase and remaining roughly level under a 100-basis-point decline; these are model estimates, not guidance.
- Credit and concentration risk: Nonperforming assets including covered assets totaled $43.3 million. Commercial real estate represented 43.5% of the total loan portfolio; most loans were secured by real estate. Management cited continued economic, employment and property-value uncertainty. The allowance was $25.8 million, or 86.07% of non-covered nonperforming loans; there was no allowance for covered loans at year-end.
- Waccamaw loss sharing: The FDIC generally covers 80% of eligible losses on specified acquired loans and foreclosed property. Reimbursement depends on compliance with servicing and reporting requirements and FDIC review; the agreements have differing coverage and recovery periods.
- Unusual accounting correction: A system conversion revealed historical loan charge-offs had been overstated because certain interest payments applied to principal were not recognized. The company recorded a $2.39 million increase to other income in Q3 2012 for the cumulative prior-period correction. Management concluded prior years and the correction in 2012 were not materially misstated.
- Other exposures: Available-for-sale securities had $14.9 million of gross unrealized losses at year-end, including $11.1 million on single-issue trust preferred securities; 2012 OTTI charges were $0.9 million. Goodwill was $104.9 million, with no impairment recorded in 2012. The company disclosed ordinary-course litigation and said it did not expect a material adverse effect. Basel III and other regulatory changes remained subject to implementation.
For the fourth quarter, the filing’s unaudited supplemental data reports net income of $8.4 million, net income available to common shareholders of $8.2 million, basic EPS of $0.41 and diluted EPS of $0.39.
Important facts for investors to verify
- How much of 2012 earnings growth reflects sustainable operating performance versus acquisition timing, purchase-accounting accretion and the $2.39 million prior-period correction.
- Post-acquisition loan quality, especially the Waccamaw covered portfolio, FDIC reimbursement assumptions and compliance with loss-share terms.
- Whether nonperforming assets, troubled debt restructurings and commercial real estate concentrations improve, and whether the allowance remains adequate.
- Integration progress and realized savings from Peoples and Waccamaw compared with merger costs and added operating expenses.
- Deposit retention and repricing needs, including $525.6 million of time deposits scheduled to mature within one year, and the impact on funding costs and liquidity.
- Capital headroom after acquisitions and the effect of final regulatory capital and liquidity rules; also confirm the sustainability of dividends given the Bank’s upstream-dividend restrictions.