First Community Bancshares, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010 unless noted. The company is a regional financial holding company operating community banking and insurance businesses across Virginia, West Virginia, North Carolina and Tennessee. It reported $2.21 billion in assets and operated 54 banking locations.
Financial performance and condition
- Q2 earnings: Net income was $5.73 million, up 11.6% from $5.13 million; net income available to common shareholders was $5.60 million, or $0.31 diluted EPS, versus $5.13 million and $0.29. Six-month common income was $11.35 million, or $0.63 per diluted share, compared with $10.41 million and $0.59.
- Interest income and margins: Q2 interest income was $23.34 million and interest expense $5.58 million, producing net interest income of $17.75 million, down 4.3%. Tax-equivalent net interest margin was 3.83%, down 9 basis points year over year. First-half net interest income was $36.03 million, down 3.1%; tax-equivalent margin was 3.89%, down 8 basis points.
- Credit costs: Q2 provision for loan losses was $3.08 million versus $3.60 million; first-half provision was $4.69 million versus $7.26 million. First-half net charge-offs were $4.69 million, compared with $6.53 million.
- Noninterest income and expense: Q2 noninterest income rose to $11.36 million from $8.90 million, including $3.22 million in net securities gains. Noninterest expense increased to $17.74 million from $16.60 million, mainly reflecting higher OREO-related expense and losses. First-half totals were $20.86 million of noninterest income and $35.80 million of noninterest expense.
- Assets and lending: Total assets were $2.206 billion, down 1.7%; loans held for investment were $1.374 billion, down $12.3 million. Securities available-for-sale fell to $349.98 million from $480.06 million. Total stockholders’ equity rose to $302.20 million from $269.88 million.
- Funding, debt and liquidity: Deposits were $1.580 billion, down $41.3 million. Total borrowings were $303.96 million, down $28.1 million; this included $150 million of FHLB advances and $137.78 million of repurchase agreements. Cash and equivalents were $230.62 million, up $118.43 million. Management reported $103.12 million of unpledged available-for-sale securities and about $160.71 million of FHLB borrowing capacity.
- Cash flows: First-half operating cash flow was $24.39 million, investing cash flow provided $148.62 million, and financing activities used $54.58 million. Cash and equivalents increased by $118.43 million. Security sales were a significant source of investing cash.
- Capital: The company raised $18.84 million net from a May private placement of Series A preferred stock. At June 30, total risk-based capital was 17.59%, Tier 1 risk-based capital 16.33%, and Tier 1 leverage 11.00%; the Bank was classified as well-capitalized.
Material changes versus comparable periods
- Common earnings and diluted EPS improved year over year, helped by higher realized securities gains, lower loan-loss provision, and reduced deposit interest expense. Lower interest earned on loans and securities and higher operating expense partly offset these gains.
- Q2 tax-equivalent net interest income declined 4.4%; management attributed the decline mainly to a sustained low-rate environment and lower average earning assets. Average earning-asset yield fell 48 basis points, while the cost of interest-bearing liabilities fell 39 basis points.
- Net securities gains increased materially. Management said first-half gains reflected strategic portfolio gain harvesting; about $967,000 represented recoveries of impairments recorded in 2009. First-half results also included a $527,000 credit impairment charge on a non-agency mortgage-backed security.
- Nonperforming assets were $28.50 million, or 1.29% of assets, down from $29.65 million and 1.32% at year-end, but above $25.98 million and 1.16% a year earlier. Nonaccrual loans rose to $22.04 million from $19.41 million at year-end. OREO increased to $5.59 million from $4.91 million.
- Common dividends were $0.10 per share for Q2, unchanged from the prior-year quarter. The first-half common dividend was $0.20 per share.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described liquidity as strong and said its interest-rate simulations showed a relatively neutral position within policy limits. The simulations projected next-12-month net interest income up 8.3% under an immediate +300-basis-point shock and down 0.5% under a -100-basis-point shock; management cautioned that modeled outcomes are uncertain.
- Credit risks include continued weakness in real estate values, unemployment and borrower repayment capacity. Q2 annualized net charge-offs were 0.90% of average loans, versus 0.69% a year earlier. A $4.60 million hospitality loan was downgraded to substandard during Q2. Management considered the $26.48 million allowance adequate but noted actual losses could differ materially from estimates.
- OREO-related expense and losses were a notable cost pressure: net losses on OREO sales were $1.55 million in Q2 and $1.70 million for the first half. The company reported 49 OREO properties at quarter-end.
- The $25 million FHLB advance prepaid in Q1 generated a $471,000 penalty. Remaining FHLB advances had a weighted-average rate of 4.12% at June 30 and were callable; prepayment could incur penalties.
- Series A preferred shares carry a noncumulative 6% dividend, are convertible into 69 common shares each, and mandatorily convert after five years. The company may redeem them at face value after the third anniversary. The Bank’s dividends to the parent are restricted following prior securities impairments and require regulatory permission; management said parent resources were sufficient for obligations and projected shareholder dividends over the next 12 months and the expected restriction period.
- The Bank converted from a national to a Virginia state charter effective June 28, 2011. The filing says this did not change deposit insurance or banking products. Management also noted that Dodd-Frank implementation and related rulemaking could affect costs and revenue, with the overall impact not yet clear.
- Various legal actions and claims were pending in the ordinary course; management and counsel did not expect their resolution to materially adversely affect the company. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether core earnings can hold up as net interest income and margins face persistent low-rate pressure, and how much reported income depends on securities gains.
- Trends in nonaccrual loans, classified commercial credits, OREO dispositions and costs, and whether the allowance remains adequate as credit conditions evolve.
- The sustainability of deposit funding and liquidity, including deposit declines, pledged securities, and the terms and call risk of FHLB advances and repurchase funding.
- The preferred-stock terms, dividend burden and potential common-share dilution, alongside regulatory limits on Bank-to-parent dividends.
- Future effects of regulatory changes and the state-charter transition; the filing does not quantify their financial impact.