First Community Bancshares, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. Community banking, lending, wealth management and insurance operations across 62 locations in four states. This unaudited filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Amounts below are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income (GAAP) | $21.7 | $22.0 | $63.6 | $66.1 |
| Noninterest income | $7.1 | $7.7 | $22.0 | $22.5 |
| Provision for (recovery of) loan losses | $0.4 | $(2.4) | $1.8 | $0.6 |
| Noninterest expense | $19.0 | $21.5 | $57.1 | $58.8 |
| Net income | $6.3 | $7.0 | $18.4 | $19.8 |
| Diluted EPS | $0.34 | $0.36 | $0.97 | $1.02 |
| FTE net interest margin | 4.05% | 4.06% | 3.92% | 4.08% |
Q3 return on average assets was 1.00% and return on average common equity was 7.18%, versus 1.06% and 8.15%, respectively, a year earlier. Q3 cash dividends were $0.14 per common share; nine-month dividends were $0.40.
- At September 30: total assets were $2,478.1; loans held for investment, net of allowance, $1,670.3; deposits $1,902.9; total borrowings $205.0; liabilities $2,133.3; and stockholders’ equity $344.8.
- Cash flow, nine months: operating activities provided $48.8, investing activities used $72.7, and financing activities used $151.7. Cash and cash equivalents decreased $175.6 to $62.0.
- Liquidity: management reported $62.0 of cash and bank deposits, $105.0 of correspondent-bank federal funds lines, $9.1 of Federal Reserve discount-window availability, $422.4 of unused FHLB capacity, and $138.5 of unpledged available-for-sale securities.
- Capital: company Common Equity Tier 1 ratio was 14.60%, Tier 1 risk-based ratio 14.79%, total risk-based ratio 16.01%, and leverage ratio 10.52%. The company said it exceeded regulatory “well capitalized” thresholds, including fully phased-in Basel III minimums.
Material changes versus comparable periods
- Net income declined 11.1% in Q3 and 7.0% year to date. Management attributed the Q3 decline principally to the $2.8 million year-over-year swing in loan-loss provision, lower noninterest income, and lower net interest income. The prior-year quarter included a recovery after favorable resolution of a problem credit.
- Nine-month GAAP net interest income fell 3.8%; FTE net interest margin narrowed 16 basis points to 3.92%. Management cited lower earning-asset yields and balances; purchase-accounting accretion is expected to decline as acquired loans run off.
- Noninterest expense fell 11.4% in Q3 and 2.9% year to date. Q3 comparison benefited from the absence of the prior-year $3.0 million FHLB prepayment fee and reduced expenses following branch divestitures.
- Non-covered loans grew $33.1 million, or 2.1%, from year-end, while covered loans fell $32.0 million as the acquired Waccamaw portfolio ran off. Total loans held for investment were nearly flat.
- Deposits fell $97.9 million, or 4.9%, from year-end, mainly from lower interest-bearing and time deposits. Total assets declined $129.8 million, or 5.0%.
- Nonperforming loans increased to $18.0 million from $15.7 million at year-end; nonperforming assets were $27.2 million versus $28.7 million. Nonaccrual loans rose to $17.9 million from $13.0 million. The allowance was $20.1 million, 1.19% of loans and 111.87% of nonperforming loans.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management expects acquired-loan purchase-accounting accretion to continue declining with portfolio attrition.
- Management said the allowance was adequate at quarter-end but cautioned that future additions may be required. It identified loan concentrations and changing economic, interest-rate, and borrower conditions as credit risks.
- Interest-rate simulations showed estimated 12-month net interest income changes of -0.8% for an immediate +300 basis-point shock and -2.6% for a -100 basis-point shock. Management said modeled exposure was within policy limits; actual results may differ.
- The company prepaid $25 million of FHLB advances in Q2, paying a $1.70 million penalty, as part of its stated goal of reducing higher-cost wholesale debt. It repurchased 1,018,726 shares during the first nine months for $17.5 million; the Q3 portion was 334,319 shares at an average $17.85. The board increased the repurchase authorization to 5 million shares, with no expiration date.
- All Series A preferred shares were converted or redeemed during 2015; none remained outstanding at quarter-end. Legal matters were described as ordinary-course matters not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming-loan ratios persists, and how collateral values, charge-offs, and reserve assumptions develop.
- The extent to which earnings and net interest margin depend on acquired-loan accretion, and the pace of its expected decline.
- Deposit trends and liquidity after the substantial decline in cash and cash equivalents; confirm availability and terms of stated borrowing sources.
- The sustainability of buybacks and dividends alongside lower equity, deposit outflows, and capital requirements; review current repurchase authorization and share count.
- Interest-rate sensitivity assumptions and actual repricing behavior, particularly given the modeled downside under falling rates.