First Community Bancshares, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. The company is a community banking and financial services holding company operating in Virginia, West Virginia, North Carolina, and Tennessee.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total interest and noninterest income | $136.1 million | $139.2 million | Down 2.3% |
| Net interest income | $90.8 million | $91.6 million | Down 0.9% |
| Net income | $25.5 million | $23.3 million | Up 9.3% |
| Net income available to common shareholders | $24.6 million | $22.3 million | Up 10.3% |
| Diluted EPS | $1.31 | $1.11 | Up 18.0% |
| Return on average assets | 0.94% | 0.84% | Up 10 basis points |
| Net interest margin, tax-equivalent | 4.11% | 4.09% | Up 2 basis points |
- Margins and operating costs: The reported margin improved slightly, but excluding noncash purchase-accounting accretion and $2.59 million of nonrecurring discount accretion, tax-equivalent net interest margin was 3.68%, down from 3.76%. Noninterest expense increased 4.9% to $82.9 million. The GAAP efficiency ratio rose to 68.58% from 65.05%; the company’s adjusted non-GAAP ratio improved to 58.99% from 59.94%.
- Credit quality: Provision for loan losses charged to operations fell to $145,000 from $8.21 million. Net charge-offs declined to $2.89 million from $10.35 million. The allowance fell 16.0% to $20.23 million. Non-covered nonperforming assets decreased to $19.92 million from $27.79 million; total nonperforming assets, including covered assets, were $28.68 million.
- Balance sheet: Assets were $2.61 billion, deposits $2.00 billion, borrowings $229.7 million, and stockholders’ equity $351.4 million at year-end. Loans held for investment were $1.69 billion; non-covered loans rose 0.5%, while covered loans declined 19.4% as the acquired portfolio ran off. Commercial real estate exposure was significant: $769.61 million, or 45.55% of the total loan portfolio.
- Cash flow and liquidity: Operating cash flow was $41.7 million. Investing activities provided $281.0 million, substantially reflecting branch transactions; financing activities used $141.6 million. Cash and cash equivalents increased $181.1 million to $237.7 million. Management reported $409.2 million of unused FHLB borrowing capacity, $105.0 million of correspondent-bank lines, and other available liquidity sources.
- Capital and distributions: Company total risk-based, Tier 1 risk-based, and leverage ratios were 17.68%, 16.43%, and 10.12%, respectively; the Bank was classified as well capitalized. Common dividends totaled $0.50 per share for 2014. The 6% Series A preferred stock was senior to common stock and mandatorily convertible in May 2016.
Material changes versus 2013
- Net income improved despite lower net interest income, principally because loan-loss provision expense fell sharply, FDIC indemnification asset amortization decreased, and the company recorded a branch-sale gain.
- Asset quality improved: non-covered nonaccrual loans fell $8.61 million, and non-covered nonperforming loans declined to 0.85% of non-covered loans from 1.31%.
- Deposits rose 2.6%; borrowings fell 23.5%, including repayment of $60 million of FHLB advances. The repayment generated a $5.01 million prepayment expense.
- The company acquired seven Bank of America branches and assumed approximately $319 million of deposits, then sold thirteen branches to CresCom, transferring approximately $215 million of deposits and $70 million of loans. The sale generated a reported net gain of $755,000.
- Available-for-sale securities declined 37.3% to $326.1 million, as management shifted earning assets toward loans. The portfolio had $12.26 million of unrealized losses at year-end.
Outlook, commentary, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management’s strategy emphasizes organic growth, potentially supplemented by acquisitions. It expects purchase-accounting accretion to decline as acquired loan portfolios run off.
- Management cited a favorable resolution of a sizable problem credit, which supported discount accretion, reserve reductions, and recovery of prior charge-offs. This benefit, as well as the branch gain, is not necessarily recurring.
- Other notable items included a $1.39 million net securities-sale loss, including the sale of the remaining non-Agency mortgage-backed security, and $737,000 of securities impairment charges. The $5.01 million FHLB prepayment penalty was a substantial expense.
- Key risks include interest-rate sensitivity; commercial real estate and other credit exposures; allowance estimation uncertainty; local economic dependence, including exposure to extractive industries in parts of the region; securities valuation changes; competition; regulatory and compliance costs; and the company’s dependence on Bank dividends for holding-company liquidity. FDIC loss-share reimbursement depends on compliance with agreement terms and FDIC review.
- The company reported normal-course legal proceedings and believed their resolution would not materially affect financial position, results, or cash flows. The independent auditor issued an unqualified financial-statement opinion and an unqualified opinion on internal control; management also concluded controls were effective.
Most important facts for investors to verify
- How much of 2014 earnings improvement came from lower credit costs and the sizable-credit resolution, and whether normalized earnings support the reported EPS growth.
- Whether loan quality continues improving and whether the $20.23 million allowance remains adequate as commercial real estate exposures and regional economic risks evolve.
- The sustainability of net interest income and margin after excluding purchase-accounting and nonrecurring accretion, particularly under changing interest rates.
- Integration, deposit retention, and returns from the seven-branch acquisition, and the final financial effects of the CresCom divestiture and FDIC loss-share portfolio runoff.
- Liquidity and capital following the debt repayment, the effect of Basel III implementation, and the holding company’s capacity to maintain common and preferred dividends.