First Community Bancshares, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. First Community is a community banking holding company operating in Virginia, West Virginia, North Carolina, South Carolina, and Tennessee, with insurance and wealth-management businesses. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $31.54 | $23.05 | $78.40 | $70.98 |
| Net interest income | $26.46 | $17.73 | $63.92 | $53.76 |
| Provision for loan losses | $1.92 | $1.92 | $4.46 | $6.61 |
| Noninterest income | $11.16 | $8.07 | $27.50 | $28.93 |
| Noninterest expense | $20.33 | $16.06 | $56.65 | $51.86 |
| Net income | $10.06 | $5.32 | $20.14 | $16.80 |
| Net income available to common shareholders | $9.84 | $5.03 | $19.35 | $16.38 |
| Diluted EPS | $0.47 | $0.28 | $1.00 | $0.91 |
Q3 net interest income rose 49.2%; nine-month net interest income rose 18.9%. Tax-equivalent net interest margin was 4.48% in Q3 versus 3.77%, and 4.13% for nine months versus 3.85%. Management attributed the gains principally to higher earning assets following the Peoples and Waccamaw acquisitions and lower deposit funding costs. Q3 pretax income was $15.38 million; the nine-month figure was $30.31 million.
Common dividends were $0.11 per share in Q3 and $0.32 for the first nine months, versus $0.10 and $0.30 in the comparable 2011 periods.
Financial position, cash flow, debt and liquidity
- At September 30, total assets were $2.77 billion, deposits $2.06 billion, total liabilities $2.42 billion, and stockholders’ equity $351.81 million. Assets increased 27.9% and deposits 33.7% from year-end 2011, primarily due to the acquisitions.
- Loans held for investment were $1.76 billion, including $221.98 million covered by FDIC loss-share agreements; the allowance for loan losses was $25.84 million. Available-for-sale securities were $517.16 million.
- Cash and cash equivalents were reported as $165.23 million on the balance sheet. Nine-month cash flows were $47.81 million provided by operations, $233.56 million provided by investing, and $163.50 million used in financing. The cash-flow statement reports period-end cash of $165.16 million, a $65,000 difference from the balance sheet amount.
- Borrowings totaled $324.34 million: $146.90 million in repurchase agreements, $161.56 million in FHLB advances, and $15.88 million in other borrowings. The company reported $283.90 million of unused FHLB capacity in the borrowing note. MD&A separately reported $444.90 million of FHLB credit availability.
- Management reported $165.23 million of cash and deposits, $213.54 million of unpledged available-for-sale securities, $114.51 million of federal-funds lines, and adequate working capital for obligations and projected shareholder dividends over the next 12 months. A $15 million unsecured committed line was undrawn.
- The Bank was categorized as well capitalized. At September 30, its total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 14.59%, 13.39%, and 8.67%, respectively, down from 16.12%, 14.86%, and 10.08% at year-end 2011.
Material changes and unusual items
- First Community completed the Peoples Bank of Virginia acquisition on May 31 and the FDIC-assisted Waccamaw Bank acquisition on June 8. Peoples was acquired for approximately $40.28 million; Waccamaw’s acquired assets were subject to an 80% FDIC loss-share arrangement on most covered loan and foreclosed-property losses. The acquisitions added branches, loans, deposits, goodwill, and integration costs; purchase-price allocations remain preliminary.
- Q3 and nine-month results included a $2.39 million increase to other income correcting historical loan charge-off overstatements dating from 2007. Management said prior years and current-year results were not materially misstated. The error was identified during a core-system conversion.
- Merger-related expenses were $0.65 million in Q3 and $4.23 million for the first nine months. Q3 also included $0.94 million of credit impairment charges on a non-agency mortgage-backed security. Nine-month securities-sale gains were $0.27 million, versus $5.24 million in 2011, contributing to lower reported noninterest income year over year.
- Net charge-offs were $2.25 million in Q3 and $4.83 million for nine months, versus $2.00 million and $6.69 million in 2011. Total nonperforming assets were $38.99 million; total nonperforming loans were $29.48 million. Nonaccrual loans were $29.36 million, and other real estate owned was $9.51 million. No accruing loans were 90 days or more past due.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management said modeled interest-rate exposure was within policy limits; its simulation projected net interest income would rise under rate increases and remain roughly level with further declines. The filing cautions that actual outcomes may differ from model estimates.
Management identified economic weakness, unemployment, real-estate collateral values, borrower repayment capacity, interest-rate changes, regulatory developments, and acquisition integration and expected cost savings as risks. It considered the allowance adequate but noted that future deterioration could require additional provision. The Waccamaw FDIC loss-share asset and acquired-loan valuations depend on estimated future cash flows and remain subject to change. Commitments to extend credit were $190.07 million; standby letters of credit and financial guarantees were $4.86 million. The company said ordinary-course legal matters were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Underlying earnings excluding the $2.39 million correction, securities impairment and gains, and acquisition-related costs; also assess integration progress and realized cost savings.
- Credit performance in acquired and legacy portfolios, including nonaccrual trends, delinquency levels, charge-offs, and the adequacy of reserves—particularly as the acquired loans were recorded at fair value without an acquisition-date allowance.
- FDIC loss-share terms, collections, and assumptions supporting the $49.48 million receivable, as well as the final purchase accounting and goodwill for both acquisitions.
- Reconciliation of reported period-end cash ($165.23 million on the balance sheet versus $165.16 million in the cash-flow statement) and of FHLB availability ($283.90 million in the borrowing note versus $444.90 million in MD&A).
- Capital-ratio trends after the acquisitions and the company’s exposure to interest-rate, funding, and regulatory changes.