First Community Bancshares, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are in millions unless indicated. The company operates a community banking business, including banking, wealth management, and insurance, across four states.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparison |
|---|---|---|
| Net interest income | $21.111 million | Up 1.3% from $20.839 million in Q1 2015 |
| Noninterest income | $7.903 million | Up 15.6% from $6.836 million |
| Operating revenue (net interest income plus noninterest income) | $29.014 million | Up 4.8% from $27.675 million |
| Provision for loan losses | $1.187 million | Compared with $1.100 million |
| Noninterest expense | $18.814 million | Up 5.8% from $17.780 million |
| Net income / net income available to common shareholders | $6.084 million | Net income up 2.1%; common income up 4.0% from $5.853 million |
| Diluted EPS | $0.34 | Up from $0.31 |
| Return on average assets / common equity | 0.99% / 7.15% | Compared with 0.91% / 6.91% |
| Net interest margin | 4.01% FTE; 3.74% normalized | Normalized margin up 24 basis points year over year |
| Total assets | $2,470.3 million | Up 0.3% from $2,462.3 million |
| Loans held for investment, net of allowance | $1,742.0 million | Up $55.7 million from $1,686.3 million |
| Total deposits | $1,874.7 million | Up slightly from $1,873.3 million |
| Total borrowings | $233.4 million | Up from $219.4 million; included $18.0 million federal funds purchased |
| Stockholders’ equity | $337.6 million | Down 1.6% from $343.0 million |
- Cash flow: Operating activities provided $12.6 million; investing activities used $28.9 million; financing activities provided $4.1 million. Cash and cash equivalents fell $12.2 million to $39.6 million, mainly reflecting loan growth and share repurchases.
- Credit quality: Total nonperforming assets were $26.1 million, down from $27.5 million at year-end and $31.1 million a year earlier. Total nonperforming assets were 1.06% of assets. Non-covered delinquent loans were 1.35% of non-covered loans, down 31 basis points from year-end.
- Allowance: The loan-loss allowance was $20.5 million, or 1.16% of total loans. Net charge-offs were $962,000, down from $1.121 million in Q1 2015. Management considered the allowance adequate but noted future additions may be required.
- Liquidity and capital: The Bank reported $39.6 million of cash and bank deposits, $95.0 million available on correspondent-bank federal funds lines, $9.1 million of Federal Reserve discount-window availability, $382.4 million of unused FHLB capacity, and $115.9 million of unpledged available-for-sale securities. The company’s and Bank’s total risk-based capital ratios were 15.12% and 14.56%, respectively; management said both exceeded applicable well-capitalized standards.
Material changes and notable items
- Non-covered loans grew $62.4 million, or 3.8%, from year-end, led by non-farm, non-residential lending. Covered loans continued to run off, declining $6.5 million.
- Higher deposit service charges, lower FDIC indemnification-asset amortization, and other operating income contributed to noninterest income growth. Other operating income included a $364,000 gain on sale of previously closed branches; property and equipment writedowns offset part of the gain.
- Noninterest expense rose $1.0 million. Salaries and benefits increased $782,000, and other operating expense increased $483,000, including higher OREO-related costs. The net loss on OREO sales was $662,000, versus $177,000 in Q1 2015.
- The company repurchased 487,739 shares for $8.9 million, at an average $18.14 per share. The quarterly common dividend was $0.14 per share, versus $0.13 in Q1 2015.
- Available-for-sale securities declined $27.7 million, mainly from sales of mortgage-backed securities. The portfolio had $12.6 million of gross unrealized losses, including $11.8 million on single-issue trust preferred securities; the company reported no OTTI charges in the quarter.
Outlook, risks and contingencies
- No quantified earnings or operating guidance is provided. Management expects acquired-loan accretion income to decline in future periods as acquired portfolios run off.
- The company agreed to exchange six North Carolina branches, with approximately $130 million of deposits, for seven Southwestern Virginia branches, with approximately $150 million of deposits, and to include up to $175 million of loans. Closing was expected in Q3 2016, subject to regulatory approval and customary conditions.
- Management identified sensitivity to interest rates, local and national economic conditions, regulation, competition, execution of acquisitions and growth in fee income. Its interest-rate model estimated that an immediate, sustained 100-basis-point decline could reduce projected 12-month net interest income by 2.6%; a 300-basis-point increase was modeled to increase it by 0.9%. Results depend on assumptions and may differ from actual outcomes.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $250.1 million; the reserve for unfunded commitments was $326,000. The company stated that ordinary-course litigation was not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of March 31, 2016, and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track whether loan growth—particularly commercial real estate lending—continues without deterioration in delinquencies, nonperforming assets, or charge-offs.
- Review the composition and valuation of the trust preferred securities portfolio and any changes in unrealized losses or impairment conclusions.
- Assess the sustainability of margin improvement as acquired-loan accretion declines and interest rates and funding costs change.
- Confirm the branch-and-loan exchange’s regulatory approval, closing, and realized effects on deposits, loans, and expenses.
- Monitor liquidity and funding costs, including repurchase agreements, FHLB capacity, and the company’s $15 million credit line, which matured in April 2016.
- Evaluate capital and book value impacts from continued share repurchases, dividends, and changes in risk-weighted assets.