First Community Bancshares, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2012 (Q1 2012), not Q4 2012. Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
First Community Bancshares is a community banking holding company operating through First Community Bank, with 54 locations in Virginia, West Virginia, North Carolina, and Tennessee, and related insurance and wealth-management businesses. The company reported one operating segment, Community Banking. This unaudited 10-Q compares the three months ended March 31, 2012 with the same 2011 quarter.
Financial performance and position
- Income: Interest income was $22.68 million, down 7.8% year over year; net interest income was $17.98 million, down 1.6%. Noninterest income was $7.99 million, down 15.9%, reflecting substantially lower securities-sale gains and no 2012 securities impairment charge versus a $0.53 million charge in 2011.
- Profit and per-share results: Net income rose 4.3% to $6.00 million from $5.75 million. Preferred dividends of $0.28 million meant income available to common shareholders declined slightly to $5.72 million from $5.75 million. Basic EPS was $0.32 in both periods; diluted EPS was $0.31 versus $0.32. Common dividends were $0.10 per share.
- Margins: Tax-equivalent net interest margin was 3.91%, down 5 basis points year over year; net interest rate spread was 3.72%, down 6 basis points. Management attributed margin pressure mainly to lower yields on loans and securities, partly offset by lower deposit costs.
- Expenses and credit costs: Noninterest expense fell 10.4% to $16.19 million, and provision for loan losses fell 42.8% to $0.92 million. Net charge-offs were $1.33 million, or 0.38% annualized of average loans, versus $1.61 million and 0.47% a year earlier.
- Cash flow: Operating activities provided $19.65 million, investing activities provided $13.41 million, and financing activities provided $29.26 million. Cash and cash equivalents rose $62.32 million during the quarter to $109.61 million.
- Balance sheet and liquidity: Total assets were $2.20 billion, up 1.8% from year-end 2011. Deposits increased 2.4% to $1.58 billion; loans held for investment declined 0.7% to $1.39 billion. Management reported $109.61 million in cash and deposits, $207.89 million in unpledged available-for-sale securities, $132.94 million in FHLB borrowing capacity, and $94.51 million in federal funds lines. An unsecured committed $15 million credit line was obtained April 10, 2012.
- Debt and capital: Borrowings totaled $290.19 million, including $150 million in FHLB advances and $124.27 million in repurchase agreements. Stockholders’ equity was $310.13 million. At March 31, the Bank’s total risk-based capital ratio was 16.60%, Tier 1 risk-based capital ratio 15.34%, and Tier 1 leverage ratio 10.17%; management said the Bank was well capitalized.
- Credit quality: The allowance for loan losses was $25.80 million, or 1.86% of loans, versus 1.93% a year earlier. Nonperforming assets were $31.11 million, or 1.41% of assets, compared with $24.86 million and 1.11% a year earlier. Nonperforming loans were 1.97% of loans, up from 1.40%; nonaccrual loans were $24.62 million. There were no loans 90 days past due and still accruing interest.
Material changes and notable items
- Deposit and borrowing costs declined by $1.61 million year over year, while net interest income still decreased because asset yields fell. Average earning assets declined $43.17 million; average interest-bearing liabilities declined $132.79 million.
- Operating costs decreased $1.87 million, including lower salaries and FDIC assessments. The company had 619 full-time-equivalent employees, compared with 684 a year earlier. OREO-related expenses and losses rose by $0.57 million to $0.82 million.
- OREO fell to $3.83 million from $5.91 million at year-end, primarily following property sales, but the company recorded a $0.65 million net loss on OREO sales in Q1.
- On March 1, 2012, the company agreed to acquire Peoples Bank of Virginia for approximately $40.6 million in cash and stock. Closing was anticipated in Q3 2012, subject to regulatory and shareholder approvals and other conditions.
- The company issued Series A convertible preferred stock in 2011; its 6% dividend reduced Q1 2012 earnings available to common shareholders and its conversion increased diluted weighted-average shares.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described credit-risk factors as still elevated, citing unemployment, economic weakness, and pressure on commercial and residential real estate values; further delinquencies could raise provisions and the allowance. Interest-rate changes could affect net interest income, although the company said its modeled exposure was within policy limits and relatively neutral overall. Its simulation estimated a 17.4% increase in net interest income under an immediate, sustained 300-basis-point rate rise and a 0.2% decrease under a 100-basis-point decline; management cautioned that actual outcomes may differ from model estimates.
Other risks include the proposed acquisition and its closing and integration, regulatory changes under Dodd-Frank, and the valuation and recovery of securities with unrealized losses. The securities portfolio included $14.76 million of unrealized losses on single-issue trust preferred securities and $5.57 million of accumulated other-than-temporary impairment on non-agency Alt-A mortgage-backed securities; no Q1 2012 OTTI charge was recorded. The company was involved in ordinary-course legal matters and believed their resolution would not materially adversely affect its financial condition, results, or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that the filing period is Q1 2012, despite the request metadata identifying Q4 2012.
- Track whether nonperforming loans and assets continue to rise, especially given impaired commercial real estate exposures and the reported concentration in the five largest nonaccrual relationships.
- Assess whether margin pressure persists as loan and securities yields reset, and whether lower funding costs can continue to offset it.
- Review the Peoples Bank acquisition’s approvals, final terms, financing, expected integration costs, and realized benefits.
- Monitor liquidity, deposit mix, FHLB advance terms and call options, and the availability of contingent funding sources.
- Reconcile common earnings and diluted EPS with preferred dividends and conversion-related dilution; assess the sensitivity of securities valuations and the allowance for loan losses to changing assumptions.