First Community Bancshares, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014, and income and cash-flow comparisons are with Q1 2014. The company provides community banking, wealth management and insurance services. At quarter-end it reported $2.59 billion in assets and operated 63 locations in Virginia, West Virginia, North Carolina and Tennessee.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $24.10 million | $26.08 million in Q1 2014 |
| Net interest income (GAAP) | $20.84 million | $22.03 million in Q1 2014 |
| Noninterest income | $6.84 million | $7.23 million in Q1 2014 |
| Net income | $5.96 million | $5.73 million in Q1 2014 |
| Net income available to common shareholders | $5.85 million; diluted EPS $0.31 | $5.50 million; diluted EPS $0.29 in Q1 2014 |
| Net interest margin (tax-equivalent) | 3.80% | 4.10% in Q1 2014 |
| Return on average assets / common equity | 0.91% / 6.72% | 0.86% / 7.02% in Q1 2014 |
| Total assets | $2.586 billion | $2.608 billion at December 31, 2014 |
| Loans held for investment, net of allowance | $1.651 billion | $1.669 billion at December 31, 2014 |
| Deposits | $1.991 billion | $2.001 billion at December 31, 2014 |
| Total borrowings | $222.3 million | $229.7 million at December 31, 2014 |
| Stockholders’ equity | $348.2 million | $351.4 million at December 31, 2014 |
Noninterest expense fell 7.3% to $17.78 million, and provision for loan losses declined to $1.10 million from $1.79 million. The effective tax rate was 32.25%, up 134 basis points year over year. The tax-equivalent net interest margin is a non-GAAP measure; the filing reports GAAP net interest income separately.
Cash flows were $18.13 million provided by operating activities, $21.21 million used in investing activities and $27.56 million used in financing activities. Cash and cash equivalents decreased $30.64 million to $207.02 million, primarily reflecting investment purchases, preferred-share redemption and common-stock repurchases.
At quarter-end, reported regulatory capital ratios included a 15.32% common equity Tier 1 ratio and a 16.74% total risk-based capital ratio at the holding company; the Bank’s corresponding figures were 14.00% and 15.25%. Management said capital ratios exceeded applicable minimums and the company was well capitalized. Reported liquidity sources included $207.02 million of cash and deposits, $105 million of correspondent-bank federal funds lines, $420.81 million of unused FHLB borrowing capacity and $90.38 million of unpledged available-for-sale securities.
Material changes versus comparable periods
- Net income rose 4.1% year over year, while diluted EPS increased 6.9%. Management attributed the earnings improvement mainly to lower noninterest expense and loan-loss provision, partly offset by lower net interest income and noninterest income.
- Net interest income declined 5.4% on a GAAP basis. Management cited lower earning-asset yields and reduced purchase-accounting accretion; it expects acquired-loan accretion to continue declining as those portfolios run off.
- Noninterest expense decreased $1.40 million, in part due to branch divestitures completed in Q4 2014, lower staffing and lower legal and problem-loan expenses. Noninterest income fell $398,000, including lower wealth-management revenue and greater FDIC indemnification-asset amortization.
- Total loans held for investment declined $18.38 million from year-end, including a $9.52 million reduction in covered loans. Deposits fell $9.57 million. Available-for-sale and held-to-maturity securities increased $25.34 million and $14.95 million, respectively.
- Asset quality was mixed against year-end: total nonperforming assets increased to $31.09 million from $28.68 million, and total nonperforming loans rose to $18.23 million from $15.72 million. Compared with Q1 2014, nonperforming assets declined from $38.68 million. Net charge-offs were $1.12 million versus $1.87 million in Q1 2014.
- The company converted 12,784 Series A preferred shares into common stock and redeemed the remaining 2,367 shares for $2.37 million, leaving no preferred shares outstanding. It also repurchased 339,234 common shares for an average $16.47 per share. Equity declined from year-end in part due to these capital actions.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said the allowance for loan losses was adequate at March 31, 2015, while noting that changing portfolio performance, economic conditions, interest rates, regulatory views and credit concentrations could require future reserve increases; the amount cannot be reasonably estimated. Non-covered nonaccrual loans rose from year-end, although they were below the prior-year level.
Interest-rate risk remains a key exposure. The company’s model estimated a 3.1% increase in prospective 12-month net interest income under an immediate, sustained 300-basis-point rise and a 0.2% increase under a 100-basis-point decline; management cautioned that actual results may differ from modeled outcomes. Other stated risks include economic conditions in its markets, monetary and regulatory changes, competition, technology, customer behavior, acquisitions and fee-income performance.
Available-for-sale securities had $10.85 million of gross unrealized losses at quarter-end, including $8.75 million on single-issue trust preferred securities; management reported no Q1 2015 OTTI charges on the securities described. Litigation was described as arising in the normal course of business, with management believing resolution would not materially adversely affect the company. Off-balance-sheet commitments totaled $211.51 million, including $203.66 million of commitments to extend credit. The company’s $15 million unsecured line of credit matured in April 2015 and had no balance at quarter-end.
Important facts for investors to verify
- Whether net interest income and margins stabilize as acquired-loan accretion declines and loan yields, funding costs and securities reinvestment rates change.
- Subsequent trends in nonaccrual loans, nonperforming assets, delinquencies, charge-offs and the adequacy of the allowance—particularly given the increase in nonaccrual loans from year-end.
- The credit quality, valuation and potential recovery of the securities portfolio, especially the single-issue trust preferred holdings with sizable unrealized losses.
- How loan and deposit trends, liquidity deployment and borrowing maturities affect funding and capital after the preferred redemption and share repurchases.
- Developments in the maturing credit line, off-balance-sheet commitments, FDIC-covered assets and any legal or regulatory matters.