First Community Bancshares, Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013. First Community Bancshares is a financial holding company operating a community banking business through First Community Bank, with insurance and wealth-management services. At year-end, it operated 80 locations across Virginia, West Virginia, North Carolina, South Carolina and Tennessee. Comparisons with 2012 are affected by the Peoples Bank of Virginia and Waccamaw Bank acquisitions completed that year.
Financial performance and position
- Income and earnings: Interest income was $109.5 million, down slightly from $109.7 million. Net interest income rose 1.8% to $91.6 million; noninterest income fell 18.9% to $29.8 million. Net income was $23.3 million, down 18.4%; diluted EPS was $1.11 versus $1.40. Net income available to common shareholders was $22.3 million.
- Margins and returns: Net interest margin was 4.09%, down 14 basis points; excluding noncash purchase-accounting accretion, it was 3.76%, down 7 basis points. Return on average assets was 0.84% (1.10% in 2012) and return on average common equity was 6.57% (8.70% in 2012). The GAAP efficiency ratio increased to 65.05% from 61.83%.
- Fourth quarter: 2013 Q4 net income was $5.3 million, with basic EPS of $0.27 and diluted EPS of $0.26; net interest income was $23.1 million. Q4 2012 net income was $8.4 million, diluted EPS $0.40 and net interest income $26.1 million.
- Balance sheet: Total assets were $2.60 billion, down 4.6%; deposits were $1.95 billion, down 3.9%; and loans held for investment were $1.71 billion, down 0.8%. Non-covered loans grew 2.7%, while covered loans declined as the acquired portfolio ran off. Stockholders’ equity was $328.6 million, down 7.8%.
- Credit and allowance: Provision for loan losses was $8.2 million, up from $5.7 million; net charge-offs increased to $10.4 million from $6.1 million. Total nonperforming assets were $38.8 million, down from $43.3 million; non-covered nonperforming assets were $27.8 million, down from $35.7 million. The allowance was $24.1 million, or 1.41% of total loans.
- Cash flow and liquidity: Operating cash flow was $44.5 million. Cash and cash equivalents fell $88.3 million to $56.6 million. Management reported $105.0 million available on correspondent-bank federal-funds lines, $324.3 million of unused FHLB capacity, and $235.1 million of unpledged available-for-sale securities, and considered liquidity adequate.
- Debt and capital: Year-end borrowings were $300.4 million, down from $313.6 million; total liabilities were $2.27 billion. Company total risk-based capital was 16.44%, Tier 1 risk-based capital 15.19%, and leverage 9.95%; the Bank was classified as well capitalized. Common dividends were $0.48 per share for 2013.
Material changes, outlook and risks
- Lower earnings reflected $5.6 million of net amortization on the FDIC indemnification asset, higher loan-loss provision, a $1.07 million contractual severance accrual, and lower other operating income. Lower funding costs and substantially reduced merger expense partly offset these pressures.
- Net interest income benefited from growth in average earning assets, but asset yields and net interest margin declined amid low interest rates. Management expects purchase-accounting accretion on acquired loans to decline in future periods.
- Asset quality indicators improved overall, including lower non-covered nonperforming loans and fewer classified loans, but charge-offs rose. Commercial real estate represented a substantial share of lending; management cited continued stress in commercial and residential real estate and uncertainty in local economies.
- Available-for-sale securities had $26.3 million of gross unrealized losses at year-end, and the securities portfolio’s market value was 95.97% of amortized cost. A $12.9 million after-tax reduction in other comprehensive income contributed to lower equity. Management reported $0.3 million of credit-related securities impairment charges in 2013.
- The Company repurchased 1.74 million common shares for $28.4 million. It also recorded $1.52 million of costs/write-downs associated with seven planned branch closures or consolidations in the first half of 2014.
- A $2.39 million out-of-period adjustment increased 2012 other income to correct overstated prior-period loan charge-offs; management concluded prior years and 2012 were not materially misstated. The 2013 net amortization of the FDIC indemnification asset reflected improved estimated losses on covered loans. FDIC reimbursement depends on covered-asset performance and compliance with loss-share terms.
- No specific earnings or revenue guidance was provided. Management described regional economies as showing positive and stable aspects, while noting reduced residential development and construction activity. Key risks include credit losses, interest-rate changes, deposit competition and funding access, regulatory changes, acquisition integration, and FDIC loss-share estimates. Various legal matters were described as arising in the normal course; management did not expect their resolution to materially adversely affect the Company.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether credit improvement continues and whether the 2013 rise in charge-offs requires additional provisions.
- The assumptions, timing and collectability underlying the $34.7 million FDIC indemnification asset and remaining covered loans and OREO.
- Whether declining purchase-accounting accretion and lower asset yields pressure net interest margin and earnings further.
- The liquidity impact of deposit trends, near-term certificate-of-deposit maturities, and use of borrowings and available facilities.
- The effect of securities valuation changes on AOCI, equity and regulatory capital, particularly given the portfolio’s unrealized losses.
- Whether branch closures, repurchases and dividends remain consistent with capital needs and regulatory constraints.