First Community Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company is a community banking holding company operating through banking, insurance, and wealth-management businesses; it reported $2.50 billion in assets and $770 million in assets under management at quarter-end.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income (GAAP) | $21.69 million | $21.07 million | $42.80 million | $41.91 million |
| Noninterest income | $7.03 million | $8.14 million | $14.93 million | $14.97 million |
| Net income | $6.26 million | $6.18 million | $12.34 million | $12.13 million |
| Diluted earnings per share | $0.36 | $0.33 | $0.70 | $0.64 |
| Net interest margin | 4.08% | 3.90% | 4.04% | 3.85% |
- Management’s normalized net interest margin, excluding noncash acquired-loan accretion, was 3.81% for Q2 and 3.77% for the first half, each 14 and 19 basis points higher, respectively, year over year.
- Noninterest expense was $18.72 million in Q2 and $37.54 million for the first half. The prior-year comparison included $1.70 million of FHLB debt prepayment fees.
- At June 30, total assets were $2.495 billion, up 1.3% from year-end. Loans held for investment, net of unearned income, were $1.802 billion, up 5.6%; non-covered loans grew 6.8%, largely in commercial real estate.
- Deposits were $1.824 billion, down 2.6% from year-end. Total borrowings rose 41.8% to $311.1 million, including $75 million of additional FHLB advances and $42 million of federal funds purchased.
- Cash and cash equivalents totaled $44.3 million, down from $51.8 million at year-end. For the first half, operating cash flow was $25.4 million, investing cash flow was negative $51.8 million, and financing cash flow was $19.0 million; cash declined $7.5 million.
- Stockholders’ equity was $334.2 million, down from $343.0 million, primarily reflecting $19.2 million of share repurchases and $5.0 million of common dividends, partly offset by earnings. Book value per share rose to $19.48 from $18.95.
- Common equity Tier 1 capital ratios were 13.32% at the holding company and 12.65% at the bank; management stated both exceeded “well-capitalized” requirements.
Changes, outlook, and risk factors
- Year-over-year net income rose 1.3% in Q2 and 2.6% for the first half. Higher net interest income and lower expenses were partly offset by higher loan-loss provision and lower noninterest income. Q2 noninterest income fell 13.6%, in part because the 2015 quarter included a $1.14 million life-insurance death benefit.
- The first-half loan-loss provision was $1.91 million versus $1.38 million a year earlier. Net charge-offs were $1.04 million, down from $1.39 million. Nonperforming assets were $23.7 million, down from $27.5 million at year-end; non-covered delinquent loans were 1.26% of non-covered loans. The allowance was $21.1 million, or 1.17% of total loans. Management considered it adequate but cautioned that future additions may be required.
- Management expects acquired-loan accretion income to decline as acquired portfolios run off; the filing provides no specific earnings guidance. Interest-rate simulation estimated a 2.3% decline in net interest income under a 100-basis-point rate decrease and a 0.8% decline under a 300-basis-point increase, subject to model assumptions.
- Liquidity sources included $105 million of correspondent-bank federal funds lines, $9.1 million of Federal Reserve discount-window availability, $385.3 million of unused FHLB capacity, and $143.1 million of unpledged available-for-sale securities. The company also had a $15 million committed line of credit with no balance outstanding.
- Available-for-sale securities totaled $322.7 million. The portfolio included $46.7 million fair value of single-issue trust preferred securities with $9.25 million of unrealized losses, largely attributed to non-credit factors by the company. The company reported an $11,000 impairment charge on equity securities.
- On July 15, 2016, after quarter-end, the bank completed a branch exchange: it acquired seven Virginia branches with about $134 million in deposits and exchanged six North Carolina branches with about $111 million in deposits; the transaction also included about $154 million in loans. Management said the net consolidated impact was immaterial.
- Legal actions were described as arising in the ordinary course of business; management did not expect their resolution to have a material adverse effect. The company reported no material change in previously disclosed risk factors. Key risks include credit quality, local economic conditions, interest-rate movements, regulation, competition, and realizing expected benefits from acquisitions or divestitures.
Most important facts for investors to verify
- Whether loan growth—especially non-farm, non-residential commercial real estate—continues without deterioration in criticized, delinquent, or nonperforming credits, and whether the allowance remains adequate.
- How deposit declines and increased wholesale/FHLB borrowing affect funding costs, liquidity, and net interest margin.
- Whether earnings remain resilient as acquired-loan accretion declines and noninterest income normalizes after the prior-year death benefit.
- The performance and valuation of the trust preferred securities portfolio, including the substantial long-standing unrealized loss position.
- The completed branch exchange’s actual integration, deposit retention, loan performance, and realized costs, as well as the effect of ongoing share repurchases on capital and per-share results.