First Community Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; balance-sheet comparisons are to December 31, 2012. Amounts below are in millions unless stated otherwise. The company operates through a community bank, with 72 locations across five states, and also provides insurance and wealth-management services. Wealth-management assets under management were $900 million and are not company assets.
Financial performance and condition
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior date |
|---|---|---|
| Total assets | $2,650.7 | $2,728.9 at Dec. 31, 2012 |
| Total deposits | $1,988.7 | $2,030.2 at Dec. 31, 2012 |
| Total borrowings | $287.1 | $313.6 at Dec. 31, 2012 |
| Stockholders’ equity | $351.9 | $356.3 at Dec. 31, 2012 |
| Net interest income | $22.9 for Q2; $46.2 for six months | $19.5 and $37.5, respectively, in 2012 |
| Net income | $5.4 for Q2; $12.6 for six months | $4.1 and $10.1, respectively, in 2012 |
| Net income available to common shareholders | $5.2 for Q2; $12.1 for six months | $3.8 and $9.5, respectively, in 2012 |
| Diluted EPS | $0.25 for Q2; $0.59 for six months | $0.20 and $0.52, respectively, in 2012 |
| Tax-equivalent net interest margin | 4.07% for Q2; 4.11% for six months | 3.93% and 3.92%, respectively, in 2012 |
- Q2 net interest income rose 17.3% year over year; six-month net interest income rose 23.4%. Management attributed the increase primarily to earning-asset growth from the Peoples and Waccamaw acquisitions and lower deposit funding costs.
- Noninterest income was $6.8 million in Q2, down from $8.3 million, and $14.7 million for six months, down from $16.3 million. FDIC indemnification-asset amortization was $1.7 million in Q2 and $3.2 million year to date; excluding specified securities gains and indemnification amortization, management reported underlying noninterest income growth.
- Noninterest expense was $18.5 million in Q2, down from $20.1 million, but $38.1 million for six months, up from $36.3 million. Lower merger costs helped the quarterly comparison; acquisition-related staffing, occupancy, equipment, and FDIC assessment costs contributed to increases.
- Provision for loan losses was $3.2 million in Q2 and $4.3 million for six months, versus $1.6 million and $2.5 million in 2012. Net charge-offs were $4.9 million in Q2 and $7.0 million year to date, compared with $1.2 million and $2.6 million. Management linked the quarterly increase primarily to four relationships, including a $2.1 million write-down of a construction and development loan.
- Loans held for investment, before allowance, were $1,691.5 million, down from $1,724.7 million at year-end, largely reflecting runoff in FDIC-covered loans. The allowance was $23.1 million, or 1.53% of non-covered loans, versus $25.8 million and 1.70% at year-end.
- Total nonperforming assets were $44.4 million, or 1.68% of assets, versus $43.3 million, or 1.59%, at year-end. Nonaccrual loans were $33.0 million; OREO was $11.2 million. No loans were accruing while 90 or more days past due.
- Six-month operating cash flow was $14.5 million, compared with $28.2 million in 2012. Cash and cash equivalents declined $62.7 million to $82.1 million; investing activities used $1.9 million and financing activities used $75.3 million.
Material changes, outlook, and risks
- Q2 net income available to common shareholders increased 36.6% year over year; six-month common income increased 26.8%. Growth was principally attributed to the acquisitions and higher net interest income.
- Available-for-sale securities were $550.2 million, up from $534.4 million at year-end, but their market value fell to 97.09% of amortized cost from 99.92%. A $9.2 million after-tax Q2 other comprehensive loss, primarily from securities’ unrealized losses as benchmark rates rose, contributed to total comprehensive loss of $3.7 million. Accumulated other comprehensive loss increased to $12.1 million from $1.8 million.
- Management said acquisition-related purchase-accounting loan accretion—$3.8 million in Q2 and $7.6 million for six months—was expected to decline in future periods as acquired loans run off. The filing provides no specific earnings or revenue guidance.
- Interest-rate simulations projected net interest income increases of 10.4% under a +300 basis-point shock, 3.0% under +100 basis points, and 0.9% under −100 basis points over 12 months. Management stated current modeled exposure was within policy limits; actual outcomes may differ as assumptions and market conditions change.
- At June 30, liquidity included $82.1 million of cash and deposits, $275.2 million of unpledged available-for-sale securities, $294.8 million of unused FHLB capacity, and $114.5 million of federal-funds lines. The holding company reported $23.9 million of liquid assets and an undrawn $15 million committed line.
- The Bank was classified as well capitalized. Company total risk-based capital was 17.71% and Bank capital was 16.13%. Basel III capital rules were adopted in July 2013 and are scheduled to take effect beginning January 1, 2015, subject to phase-in; the company warned that requirements could constrain dividends, repurchases, or other capital distributions.
- Credit risks include elevated real-estate and collateral exposure, unemployment and economic conditions, and potential further delinquencies or losses. The FDIC loss-share arrangements cover 80% of most losses on specified acquired assets. Off-balance-sheet commitments to extend credit were $200.7 million; standby letters and guarantees were $4.7 million.
- The company said ordinary-course legal matters were not expected to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher net charge-offs and nonaccrual balances persist, and whether the allowance remains adequate as acquired and non-covered credits evolve.
- How quickly acquisition-related loan accretion declines and whether core net interest income and margin can offset that runoff.
- The impact of interest-rate changes on securities values, accumulated other comprehensive loss, liquidity, and net interest income.
- Deposit trends, available funding capacity, and the timing and cost of borrowings, including callable FHLB advances.
- The effect of Basel III implementation on regulatory capital, dividends, and share repurchases; also verify the assumptions underlying management’s interest-rate simulations and liquidity estimates.