First Community Bancshares, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. The company is a community banking holding company operating in five states, with commercial and consumer banking, wealth management, and insurance businesses.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $22.1 | $22.9 | $44.1 | $46.2 |
| Provision for loan losses | $1.3 | $3.2 | $3.1 | $4.3 |
| Noninterest income | $7.6 | $6.8 | $14.8 | $14.7 |
| Noninterest expense | $18.2 | $18.5 | $37.3 | $38.1 |
| Net income | $7.0 | $5.4 | $12.7 | $12.6 |
| Net income available to common shareholders | $6.8 | $5.2 | $12.3 | $12.1 |
| Diluted EPS | $0.36 | $0.26 | $0.65 | $0.59 |
- Q2 earnings improvement reflected lower loan-loss provision and lower FDIC indemnification-asset amortization, partly offset by weaker net interest income. First-half net income was nearly flat year over year: lower FDIC amortization was offset by declining net interest income.
- Tax-equivalent net interest margin was 4.08% in Q2 versus 4.07% a year earlier; for the six months it was 4.09% versus 4.11%. Reported net interest income fell 3.5% in Q2 and 4.6% for the first half. Acquired-loan accretion contributed $2.8 million in Q2 and $5.9 million in the first half; management expects this contribution to continue declining as acquired loans run off.
- Q2 return on average assets was 1.06% and return on average common equity was 8.38%; first-half figures were 0.96% and 7.71%, respectively.
- Operating cash flow was $26.1 million for the first half, compared with $14.5 million in 2013. Cash and cash equivalents increased $40.2 million to $96.8 million; investing activities provided $62.9 million and financing activities used $48.8 million.
Financial position, funding, and asset quality
- At June 30, total assets were $2.575 billion, down 1.0% from year-end 2013. Net loans held for investment were $1.736 billion, up $48.9 million; non-covered loans grew $67.7 million, while covered loans declined. Total deposits were $1.923 billion, down 1.4% from year-end.
- Total borrowings were $286.2 million, down from $300.4 million at year-end. Components included $150 million of FHLB advances, $120.2 million of repurchase agreements, and $15.5 million of subordinated debt. The company reported $367.6 million of unused FHLB capacity, $105 million of correspondent-bank federal funds lines, and $130.4 million of unpledged available-for-sale securities. Holding-company liquid assets were $24.2 million.
- Stockholders’ equity was $342.5 million. The company reported regulatory capital ratios of 16.46% total risk-based capital, 15.20% Tier 1 risk-based capital, and 10.39% Tier 1 leverage; it stated the company and bank exceeded “well capitalized” requirements.
- Total nonperforming loans were $20.4 million and nonperforming assets were $34.9 million. Nonperforming loans were 1.16% of loans and nonperforming assets 1.36% of assets. The allowance for loan losses was $23.9 million; first-half net charge-offs were $2.9 million, down from $7.0 million in 2013. Management considered the allowance adequate but cautioned that future additions may be required.
- Management reported improving credit quality: non-covered and covered classified loans declined from year-end, and non-covered nonaccrual loans were $17.5 million versus $19.2 million at year-end and $29.1 million a year earlier. Four of seven acquired-credit-impaired loan pools were identified as impaired, with $410,000 of cumulative impairment.
- Available-for-sale securities were $398.4 million, down from $519.8 million at year-end; held-to-maturity securities rose to $19.4 million. The filing reported $518,000 of first-half impairment losses in earnings, including credit-related impairment on a non-agency mortgage-backed security and impairment on certain equity holdings. Accumulated other comprehensive loss improved to $6.7 million, primarily due to unrealized securities gains.
Material changes, outlook, and risks
- Q2 noninterest income increased 11.0% year over year, partly reflecting a $536,000 life-insurance death benefit and higher secondary-market income. Excluding specified securities impairment and sales, FDIC amortization, and the nonrecurring insurance benefit, management said Q2 noninterest income declined 0.95%. Noninterest expense fell 2.0%, aided by lower occupancy and equipment costs following branch closures.
- The company said it had announced an 8% increase in the quarterly common dividend. Common dividends declared were $0.24 per share for the first half, the same as in 2013.
- Subsequent events: on August 6, 2014, the bank agreed to sell 13 branches to CresCom Bank, with approximately $230 million of deposits and $59 million of loans; closing was expected in Q4 2014, subject to regulatory approval and customary conditions. The MD&A also reports a pending acquisition of seven branches, with approximately $440 million of deposits. The filing does not clearly state the expected closing timing or combined net effect of these branch transactions.
- On July 30, the company prepaid $35 million of a $50 million FHLB advance due in 2017; the prepayment incurred an approximately $3.05 million pretax penalty.
- No specific earnings or financial guidance was provided. Management identified exposure to economic conditions, interest-rate movements, regulation, competition, acquisition outcomes, and credit quality. Interest-rate simulations showed modeled net interest income increases of 1.2% under a +300-basis-point shock and 0.7% under a −100-basis-point shock; management said exposure remained within policy limits, while noting the model’s assumptions and limitations.
- The company is involved in legal actions arising in the ordinary course of business and said it did not expect them to have a material adverse effect. It reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective as of June 30.
Important facts for investors to verify
- Progress, regulatory approvals, timing, and financial impact of both the 13-branch sale and seven-branch acquisition, including their combined effect on deposits, loans, and operating costs.
- The realized cost and funding consequences of the $35 million FHLB prepayment, including the $3.05 million penalty and any further planned debt actions.
- Whether loan growth is accompanied by sustained improvement in delinquencies, nonaccruals, classified credits, charge-offs, and acquired-loan impairment.
- The durability of earnings given falling net interest income, declining acquired-loan accretion, FDIC indemnification-asset amortization, and nonrecurring items.
- Deposit trends, liquidity availability, securities valuation and impairment assumptions, and continued capital strength.