First Community Bancshares, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. First Community is a community banking and financial holding company operating in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee. Its business includes banking, wealth management, and insurance. The 2012 Peoples and Waccamaw acquisitions materially expanded the company.
Financial performance and position
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Interest income | $28.00 million | $22.68 million in Q1 2012 |
| Net interest income | $23.36 million | $17.98 million in Q1 2012; up 30% |
| Tax-equivalent net interest margin | 4.15% | 3.91% in Q1 2012 |
| Net income | $7.14 million | $6.00 million in Q1 2012; up 19% |
| Net income available to common shareholders | $6.88 million | $5.72 million in Q1 2012; up 20% |
| Diluted earnings per common share | $0.33 | $0.31 in Q1 2012 |
| Operating cash flow | $5.52 million | $20.11 million in Q1 2012 |
| Total assets | $2.72 billion | Down 0.3% from year-end; up 23.5% from Q1 2012 |
| Loans held for investment, before allowance | $1.69 billion | Down 2.1% from year-end; up 21.8% from Q1 2012 |
| Total deposits | $2.05 billion | Up 0.9% from year-end |
| Total borrowings | $287.38 million | $313.55 million at year-end |
| Stockholders’ equity | $358.67 million | $356.32 million at year-end |
Noninterest income was $7.86 million, versus $7.99 million in Q1 2012; this included a $1.54 million negative change in the FDIC indemnification asset. Noninterest expense rose 20.7% to $19.54 million, including higher personnel and occupancy costs associated with the acquisitions. Income tax expense was $3.40 million, and the effective rate was 32.23%.
Material changes and credit quality
- Acquisition-related growth was a major driver of year-over-year asset, loan, earning-asset, and net interest income growth. Management said loan interest included $3.84 million of purchase-accounting accretion tied to Peoples and Waccamaw and expects that accretion to decline as acquired loans run off.
- The allowance for loan losses was $24.85 million, down from $25.77 million at year-end. Q1 provision was $1.14 million; net charge-offs rose to $2.06 million from $1.33 million, and annualized net charge-offs on average non-covered loans increased to 0.56% from 0.38%.
- Total nonperforming assets were $47.59 million, up from $43.27 million at year-end; nonperforming assets were 1.75% of total assets. Nonaccrual loans totaled $34.64 million. Non-covered nonaccrual loans increased, primarily due to one $6.40 million commercial relationship. There were no accruing loans 90 or more days past due.
- Other real estate owned rose to $11.35 million from $9.00 million, mainly reflecting additions to covered OREO. Total troubled debt restructurings were $11.87 million, compared with $12.05 million at year-end.
- Other comprehensive loss was $1.10 million, principally reflecting unrealized investment-security and benefit-plan losses; total comprehensive income was $6.05 million.
Liquidity, debt, capital, and outlook
- Cash and cash equivalents were $167.04 million. Management also reported $256.62 million of unpledged available-for-sale securities, $331.57 million in unused FHLB borrowing capacity, and $114.51 million of federal funds lines available.
- FHLB borrowings were $150.00 million and repurchase-agreement borrowings were $121.51 million. The company prepaid wholesale repurchase agreements and FHLB borrowings during the quarter, reporting a combined $296,000 gain. Callable FHLB advances may be redeemed, but prepayment may carry substantial penalties.
- The Bank was deemed “well capitalized.” At March 31, the Bank’s total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 16.06%, 14.81%, and 9.31%, respectively.
- In the modeled interest-rate scenarios, management estimated net interest income would rise 11.3% under an immediate, sustained 300-basis-point increase and remain roughly level under a further decline of up to 100 basis points. Management cautioned that actual results may differ from model estimates.
- The filing provides no quantified earnings or revenue guidance. Management identified economic conditions, interest rates, credit losses and collateral values, regulation, acquisition integration and expense savings, and fee-income performance as factors that could affect results. It stated that the allowance was adequate but acknowledged future additions may be needed.
- Legal matters arising in the ordinary course were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and net charge-offs continues, especially the status and collateral support of the $6.40 million commercial relationship.
- How acquired-loan accretion runs off and affects future net interest income and margin.
- Whether OREO, covered-loan losses, and FDIC reimbursements develop as estimated under the loss-share arrangements.
- Whether expense growth and acquisition integration support sustainable earnings as the acquired businesses mature.
- How the investment portfolio’s unrealized losses, funding costs, callable borrowings, and interest-rate sensitivity affect liquidity and capital.