First Community Bancshares, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The community banking holding company operates banking, wealth management and insurance businesses across five states. This unaudited report covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013. Financial amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income (GAAP) | $22.0 | $22.3 | $66.1 | $68.6 |
| Noninterest income | $7.7 | $8.1 | $22.5 | $22.8 |
| Net income | $7.0 | $5.4 | $19.8 | $18.0 |
| Net income available to common shareholders | $6.8 | $5.2 | $19.1 | $17.2 |
| Diluted EPS | $0.36 | $0.26 | $1.02 | $0.85 |
| Net interest margin (tax-equivalent) | 4.06% | 3.99% | 4.08% | 4.07% |
- Q3 net income rose 30.1% and nine-month net income rose 9.9%. Net income growth reflected substantially lower loan-loss provision expense, partly offset by lower net interest income and the FHLB prepayment charge.
- Q3 noninterest expense was $21.5 million, up 6.5%, including a $3.05 million FHLB debt prepayment fee. Nine-month expense was $58.8 million, up 1.0%, including the same charge. Nine-month salaries and benefits declined $1.28 million.
- Q3 net interest income fell 1.4% year over year; nine-month net interest income fell 3.6%. Management attributed pressure chiefly to lower loan yields and reduced earning assets. Acquired-loan interest accretion was $2.81 million in Q3 and $8.72 million for nine months, and management expects it to decline as acquired loans run off.
- Operating cash flow was $41.4 million for nine months, versus $28.6 million in 2013. Investing activities provided $94.0 million; financing activities used $86.1 million. Cash and cash equivalents increased $49.4 million to $105.9 million.
- At September 30, total assets were $2.55 billion, down 2.0% from year-end; stockholders’ equity was $347.2 million, up 5.7%. Loans held for investment, net of allowance, were $1.742 billion; non-covered loans grew $77.1 million from year-end, while covered loans declined.
- Deposits totaled $1.932 billion, down $18.5 million from year-end. Noninterest-bearing deposits increased $57.8 million, while interest-bearing deposits declined $76.3 million. Borrowings declined $54.9 million to $245.5 million. The company prepaid $35 million of an FHLB advance and incurred the $3.05 million penalty.
- Liquidity included $105.9 million cash and deposits, $105.0 million of correspondent-bank federal funds lines, $9.1 million of Federal Reserve discount-window capacity, $395.4 million of unused FHLB capacity and $91.2 million of unpledged available-for-sale securities.
- Regulatory capital ratios for the company were 16.76% total risk-based, 15.51% Tier 1 risk-based and 10.70% Tier 1 leverage; the Bank’s respective ratios were 14.77%, 13.52% and 9.27%. Both were classified as well capitalized.
Material changes, credit quality and unusual items
- Credit metrics improved: total nonperforming assets fell to $29.3 million from $38.8 million at year-end 2013; nonperforming loans were 0.91% of total loans versus 1.40%. Nonaccrual loans declined to $12.6 million from $22.5 million.
- The quarter included a $2.44 million recovery of loan-loss provision, primarily from release of specific reserves after favorable resolution of a large commercial credit. Net charge-offs were $203,000 for Q3, compared with $1.60 million in Q3 2013. The allowance for loan losses was $21.2 million, or 1.20% of loans; management considered it adequate but cautioned that future additions could be needed.
- Credit quality improvement was not uniform: total troubled debt restructurings increased to $15.2 million from $12.2 million at year-end, and $3.45 million of accruing TDRs were classified as nonperforming. The company also recorded $737,000 of nine-month securities impairment charges, including credit-related impairment on a non-Agency mortgage-backed security.
- Available-for-sale securities declined $168.1 million to $351.7 million; held-to-maturity securities rose to $31.0 million, largely from purchases of short-term bonds intended to help fund maturities of wholesale borrowings. Nine-month other comprehensive income was $8.3 million, mainly from unrealized securities gains.
- On October 24, 2014, after quarter-end, the company completed its purchase of seven Bank of America branches with approximately $318 million in deposits and no loans. It had also agreed to sell 13 branches to CresCom Bank, representing approximately $230 million of deposits and $59 million of loans; the sale was expected to close in Q4 2014.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expects acquired-loan accretion to continue declining and said interest-rate risk was within policy limits. Its rate-sensitivity model estimated net interest income changes ranging from a 0.2% decrease under a 100-basis-point rise to a 1.0% increase under a 100-basis-point decline; actual results may differ because of assumptions, customer behavior and market conditions. Principal risks cited include economic conditions, interest rates, regulation, competition, technology, acquisitions, fee-income performance and credit quality. Management said pending litigation was not expected to have a material adverse effect; off-balance-sheet commitments totaled $230.0 million. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the favorable resolution of the large commercial credit and unusually low provision/recovery are repeatable, and how asset quality and allowance adequacy develop.
- Execution and financial effects of the completed seven-branch acquisition and the pending 13-branch sale, including deposit retention, costs and closing conditions.
- Whether loan growth can offset lower yields and declining acquired-loan accretion, and the resulting trend in net interest margin and earnings.
- Performance and valuation of the non-Agency mortgage-backed securities, related impairment assumptions and exposure to market or credit deterioration.
- Liquidity and capital after planned branch transactions, debt maturities and the FHLB prepayment; also monitor the Series A preferred stock’s mandatory conversion date of May 20, 2016.