First Community Bankshares, Inc.
Q1 2012 Earnings Call Transcript

Published: 23 Apr 2012

[Operator:]

Greetings, and welcome to the First Community Bancshares, Inc. First Quarter 2012 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Bob Schumacher, General Counsel for First Community Bancshares, Inc.

[Robert Schumacher:]

Thank you for joining us this morning for First Community Bancshares first quarter 2012 earnings conference call. Any statements made today that are not historical are forward-looking. Please review the language at the end of this morning's earning release regarding forward-looking statements as the same information applies to comments made on today's conference call.

[With us today is President and Chief Executive Officer, John Mendez; Chief Financial Officer, Dave Brown; and Chief Credit Officer, Gary Mills.:]

[At this time, I will turn the conference over to John Mendez.:]

[John Mendez:]

Good morning, and welcome to the first quarter 2012 earnings conference call for First Community Bancshares. We are very pleased to host this call as we briefly discuss our first quarter 2012 results and our earnings release. Following the call, we'll take questions from registered callers.

[I'd like to start the call this morning with a few highlights of what we feel is very strong quarterly performance. As you've seen from our release this morning, we're reporting net income for the quarter of $6 million and diluted earnings per share of $0.31. This is our best core quarterly performance since 2007, and it's driven by reductions in credit provisions and strong efficiency in operations. We're very pleased with this very strong start to the 2012 year.:]

[Return on average assets reached 1.06%, when measured on a core basis that ROA climbs to 1.15% and after excluding certain intangible and merger related expenses. This is the first quarter that we feel we can point to as normalized earnings in this rate environment.:]

[Our credit provisions are at normalized levels at 26 basis points on average loans. There were no investment impairments for the quarter and the balance sheet was invested near capacity with overnight funds averaging just $42.5 million for the quarter.:]

[Further, we feel we have opportunities for continued profit improvement, which are tied to expanded to leverage, growth in loans, yield enhancement in both the loan and investment books, and lastly containment of OREO cost and losses. So despite the solid quarter, we feel that we have many areas of opportunity that remain.:]

[In the area of expanded leverage, we're pleased to announce the Peoples acquisition in Richmond. This will enhance leverage a bit, but more importantly it adds a strong customer base to our Richmond market. It gives us greater scale and efficiency in that market and complements our business and commercial team for greater production in the Richmond metro.:]

[Consolidated loan growth remains somewhat muted today, but we are being very patient in that area looking for the best opportunities in a slow growth and very competitive environment. Actually, we are seeing growth today in the Richmond market, which has experienced 10% year-over-year growth and we believe this could accelerate throughout the year, particularly as we go through the addition of the Peoples lending team.:]

[Likewise in our Bluefield Beckley and Nicholas County, West Virginia markets as well as our Eastern Sea market were also experiencing 8% to 10% year-over-year growth. The only real drag on loan growth has been in our North Carolina market and that has also been exacerbated a bit with several large payoffs that have left us roughly at par with the preceding year.:]

[OREO cost will scale down as we're able to work through several remaining large non-accrual resolutions. OREO balances as you can see are down for the quarter. However, we will migrate some non-accruals through that line over the next several quarters. All-in-all our asset quality remains very good at 1.41% on assets and our allowance for loan losses is at a level, which is supporting lower provisions as indicated by the 26 basis points provision for the quarter.:]

[Again, we're very pleased with the Peoples announcement in Richmond and we continue to look at emerging opportunities to leverage our existing capital as well as build our capital through good whole bank and FDIC assistance opportunities.:]

[With that, I would like to stop here and turn the call over to Dave Brown, who will have a more detailed look at the financial results for the quarter. Dave?:]

[David Brown:]

Thank you, John, and good morning to everyone. This quarter, we reported common net income for first quarter of 2012 of $6 million or $0.31 per diluted share. Core earnings for the quarter came in strong at about $6.2 million. Core ROA and ROE for the quarter were 1.15% and 8.57% respectively. We followed fourth quarter strong net interest margin with 3.91% for the first quarter. We did experience some slippage in asset yields, but we're also carrying a little more cash than we did last quarter, in the first quarter, again show a meaningful decrease in funding cost.

[Time deposit portfolio shrunk by $12.5 million on average, while the yield dropped another 9 basis points. The yield on all interest-bearing funds was 1.18% for the quarter, a decline of 3 basis points from fourth quarter. We made a $922,000 provision for loan losses during the first quarter. Other real estate cost and net losses amount to $821,000, bringing total credit costs for the quarter to $1.7 million.:]

[In noninterest income, we saw wealth revenues increase $76,000 or 9% on a linked-quarter basis on better trust and advisory revenues. Linked-quarter deposit account service charges declined $437,000 or 13%, but we're roughly even with last year. The first quarter is traditionally a slower quarter for the deposit charges. Other service charges and fees were up $156,000 or 11% on better interchange in annual safe deposit box sales.:]

[Interest revenues were up linked quarter because of the contingent commissions and profit-sharing receipts. Contingencies, though, were down $148,000 or about a third from last year, but the real good news is that those declines are beginning to be offset by organic growth in that line of business.:]

[Compared to the fourth quarter, premium commission revenue increased $104,000 or 9%. Both categories within other operating income were down from fourth quarter, but compared to last year the line item was up almost 9%.:]

[In the area of noninterest expense, our first quarter efficiency ratio was 57.2%. Total salaries and benefits were $8.2 million, which is a positive variance to my earlier expectations. I believe our former guidance is pointed towards $9 million through the first quarter, but we were able to keep down salaries and wages and had a great quarter for health insurance costs. Average total FTEs for March were 620 compared to 629 for December and 633 for September.:]

[Looking towards the remainder of 2012, we are currently expecting to see total salaries and benefits in the range of $33.5 million for the full year, as we do see opportunities to strategically add strong human resource in various areas of the company. That $33.5 million is the base First Community and not pro forma for the Peoples acquisition.:]

[OREO expenses and net losses amounted to $821,000, which is up $1 million from the fourth quarter. Most other items and noninterest expense were generally in line with last quarter and with the exception of some merger related expenses incurred in connection with the Peoples deal. At the end of the period, total assets increased $37 million. We experienced some decline in PDM loans; however, average loans were up nearly $2 million compared to last quarter.:]

[CD portfolio declined $12 million between March 31 and December 31, and $13 million on average. At March 31 tangible book value per share was $11.64, an increase of $0.19 from December 31. The company and the bank continue to be very well capitalized as bank leverage ratio approximately 10.1% and we did not repurchase any shares during the first quarter.:]

[With that I would like to turn the call over to our Chief Credit Officer, Gary Mills, for some color on the loan portfolio. Gary?:]

[Gary Mills:]

Thank you, David, and good morning to everyone. I am pleased to comment on what I consider to be a pretty good quarter from a credit perspective. Net charge-offs were $1.33 million for the quarter or 0.38% annualized, which compares favorably to 0.75% recorded in the fourth quarter of 2011 and that 0.46% recorded in the first quarter of 2011. This continues a general trend of declining net charge-offs.

[Consequently, the provision for the first quarter was $922,000 or approximately 69% of net charge-offs. The allowance measured $25.8 million or 1.86% of total loans, which is comparable to the 2011 year-end balance of $26.2 million or 1.88% as well as the March 31, 2011 balance of $26.48 million or 1.93%. Total delinquency of 2.69% was relatively flat as compared to year end total delinquency of 2.62%. Both categories of delinquency, loans 30 days to 89 days past due and non-accrual loans remained flat. I continue to be encouraged by the level of loans in the 30-day to 89-day bucket, as this marks the fifth consecutive quarter that went below 1%.:]

[OREO measured $3.83 million at quarter end, representing a $2 million decline from the yearend balance of $5.91 million. And a $1.82 million decline from the first quarter of 2011 balance of $5.64 million. While other operating expenses associated with OREO were approximately $821,000 they were in line with our expectations for the first quarter, with the level of OREO representing a positive variance to our expectations.:]

[The total loan portfolio measured $1.387 billion at quarter end, as compared to $1.396 billion at year end and $1.376 billion as of the first quarter 2011 respectively. We continue to see good demand in the owner-occupied 1-to-4 family segment driven primarily by refinance activity. This continues a trend experienced most of last year.:]

[Small business application activity also continues to remain brisk. The bank continues to experience some large loan payoffs within the commercial loan portfolio. In the previous call, we forecasted loan growth in the low single-digits and I believe this is still a realistic expectation for 2012.:]

[This concludes my prepared remarks. So I'll now turn the call back over to John.:]

[John Mendez:]

Those are our prepared remarks on the quarter. As you can see we're very pleased. We think these are very encouraging results and with that I'm sure you have some questions and we will be happy to take those at this time. So I'll turn the call back over to our operator so we can begin queuing up some questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of William Wallace with Raymond James.

[William Wallace IV:]

My first question is as far as the on the balance sheet, your loan balances, I notice that there wasn't really any big changes except for in your C&I portfolio where there was about a 12% sequential decline. And I was wondering if there was a big credit in there that went away from you or if that was more utilization trends or something.

[Gary Mills:]

That actually can be attributed primarily to a larger credit that is in process of work out and in through the work out, it's been recharacterized into a different bucket.

[William Wallace IV:]

And where is it recharacterizing to now, OREO?

[Gary Mills:]

It's non-owner occupied commercial real estate.

[William Wallace IV:]

And Gary, in your non-accrual trends, looks like there is some doubt, may be would explain the big decline in the C&I and the increase then in the CRE non-accruals.

[Gary Mills:]

Yes.

[William Wallace IV:]

You have a pretty big sequential increase in here, I guess, the $2.7 million restructuring loans which is restructuring loans within the past 6 months that are non-accrual. So can you talk about what drove that increase?

[David Brown:]

It's primarily being driven by credit relationship out of the North Carolina market. It began exhibiting weakness in payment performance over the last, probably quarter to quarter-and-a-half. I will anticipate that credit this quarter moving to non-accruals and then forward into the liquidation process.

[William Wallace IV:]

Does it have a 114 against it or could we see the charge-offs kick back up?

[David Brown:]

We previously have 114 based on this kind of cash flow. Now that we'll be moving towards liquidation, we'll be evaluating that on a collateral-dependant basis. I would anticipate that the need for specific to increase as a result of that.

[William Wallace IV:]

So all else equal, then we could see the provision expense kick back up the charge-offs perhaps could increase at a greater rate and if you charge-off against some of that specific.

[Gary Mills:]

I think over the next quarter depending on how quickly we're able to get to resolution, you could see charge-offs moving around somewhat. I don't know that that's going to directly translate to dollar-for-dollar impact from provisions.

[Operator:]

Our next question comes from the line of Catherine Mealor with KBW.

[Catherine Mealor:]

Dave, can you talk a little about your expectations for the margin going forward and how much more room on the funding side, do you think you have to protect against while lower asset yield?

[David Brown:]

It's not a lot, I don't think. But where we will get a little of juice is in obviously being as invested as possible, carrying as few dollars as end of cash as we can and then some of the loan growth, because these things--it's not hard to, it wouldn't be out of the realm of reason, I think that we're nearing floor in deposit funding cost. So I think we've got some room that John allude to earlier, to pick up margin just from reallocation of recurring assets.

[Catherine Mealor:]

And maybe that's a question on the loan growth. I know a lot it's from the paydowns in North Carolina. But is the slow loan growth aside from that coming from a lot of competition in your markets or are you just not seeing a lot of demand for good credits?

[Gary Mills:]

I think we're seeing a fair amount of application activity. I don't know that I would characterize all that as good loan demand. I do think that what we have in the pipeline, in the process of closing is encouraging especially for the next quarter or 2. We're seeing some decent credit opportunity by way of cash flow producing commercial real estate. A lot of that's being driven out of Richmond market. It is still extremely competitive. And where we're seeing that the most is in pricing, we're able to structure credits in such a fashion that we're comfortable with the structure, but pricing is extremely competitive.

[Operator:]

[Operator Instructions] Our next question comes from the line of Will Curtiss with Sandler O'Neill.

[William Curtiss:]

I guess some of my questions have been asked. But I'll ask, go back to expenses maybe and broadly, I guess, how should we think about expenses going forward? Would you think that probably the first quarter is a good place to start in terms of run rate expenses, but really just wanted to get your thoughts in general on expenses?

[David Brown:]

I think the first quarter is a good place to start. Like I've said, I don't know that we will continue to see very positive variance to what we were expecting on salaries and benefits. Because I do think, we've got some great opportunities to stack backup out in the markets and lenders where we need some capacity. And then I think in the end, we'll also see some merger. We'll obviously see some merger related expenses coming through in the second and third quarters of this year based on the People feel as well as some travel and other activities we've got for continuing due diligence engagements.

[William Curtiss:]

And do you guys have a target efficiency ratio that you'd like to get to?

[David Brown:]

As little as possible. I think, it's obviously been a while since we've been down to low 50s, high 40s area. We're very comfortable operating there. I think as much as our targeted mid-50 to low-50s efficiency isn't much a numerator problem, it's a denominator problem in that equation. We're going to try to keep the cost as low as possible throughout the organization, but the revenue side is going to help drive that down.

[Operator:]

[Operator Instructions] Our next question comes from the line of Carter Bundy with Stifel, Nicolaus.

[P. Bundy:]

First question I guess would be jumping back to what you were talking about, Gary did I hear you say that your outlook here is that maybe the provision does not jump much from current levels?

[Gary Mills:]

No. I think the question was would we see an increase in net charge-offs as a result for that credit migrating from a TDR into non-accrual to liquidation. And my response was charge-offs will most likely be lumpy over the next few quarters. But that won't necessarily translate into a dollar-for-dollar increase in that provision.

[P. Bundy:]

Related to that specific credit, though?

[Gary Mills:]

Specifically and as a general statement as well.

[P. Bundy:]

And would it be a fair statement to say then that outside of the Carolina market that you're incrementally feeling better about the credit profile right now?

[Gary Mills:]

I think that's a fair statement.

[P. Bundy:]

And is that inclusive of getting in customer financials at year end or are you seeing very recent figures there or is it just a function of markets improving, what gives you sort of that confidence, I guess, that you're see that?

[Gary Mills:]

I think it's a combination of things. I think if you look into our Richmond market and East Tennessee market, I think we've seen some leveling out there and generally improving performance in our units there. Our legacy markets have been pretty steady throughout the cycle, so we are continuing to see relatively steady performance there. And as we said for the number of quarters now the North Carolina does continue to be our hotspot. But I think, we're getting closer to turning the corner. I don't think we've turned the corner. But at least I think I can see the corner now.

[David Brown:]

Yes, it would be fair to say that feeling comes in part from review of our watch list and migration there and the compositions saw a number of growth, we're monitoring just quite some kind of credit weakness. But I think the composition of those may be size of those on average.

[Gary Mills:]

Yes, and I think it's a fair statement. And let me give you some idea, if you look at our 5 largest non-accrual relationships represent about 47% of our non-accrual total. And when you look at those 5 relationships we're at different stages of workout action plans.

[P. Bundy:]

And then if I'm backing into your inflow this quarter, it looks like it was one of the much stronger quarters you've had in a while?

[Gary Mills:]

Agreed.

[P. Bundy:]

And Gary, could you provide, if you can, you're substandard and below loans at quarter end?

[Gary Mills:]

Again, substandards were running at about $77.5 million as compared to $75 million, at year end doubtful was about just an eyelash under $4.5 million as compared to about $2.5 million at year end. If you look at special mention, we had some material improvement there as a result of an upgrade, but at quarter end that was right at $15.9 million as compared to $20.1 million at yearend.

[P. Bundy:]

Moving on to the deposit growth this quarter, is there any color that we can sort of takeaway from the quarter? We've obviously seen deposit mix getting stronger, we've seen balances running off last year, very strong growth this quarter, any sort of color there? What markets that came from?

[David Brown:]

Carter, I think in general it was going to be across all markets and especially our legacy areas. I think our Richmond deposit base is looking much better over the course of the last probably 2 or 3 quarters. And a lot of it is quite frankly, the inflows that we see from tax borrowing season generally get a fairly big bump in these below and low interest bearing kind of accounts as consumers get their tax refunds that comes in and it slowly bleeds out through the course of the next maybe say 4 or 5 months.

[P. Bundy:]

And then on the securities book, Dave, we saw the yields perform a lot better than last quarter on improvement. What is your sort of thought there, given the MBS exposure and given the recent investments you've made going forward?

[David Brown:]

It's going to be difficult to keep the securities yield that high, because we see cash coming off of that portfolio in a pretty good rate. I don't know that we have a particularly rosy or dire outlook for mortgage-backed performance, I think it's going more of the same going forward. I think as you reinvest cash, it obviously is going to be at a little bit lower rate than it is today. But I'd say that's going to be somewhere in the 2% to mid-2% depending on the flavor of investment that you're going towards.

[P. Bundy:]

And it sounds like right now that you might additionally put some money to work in the securities book?

[David Brown:]

I think, outside loan demand creeping up, that the securities book is probably a logical place for that to fall.

[P. Bundy:]

And then from a loan yield perspective, we've seen that book running down about 10 basis points a quarter. And to your point, Gary, to get growth, are you really having to sacrifice on pricing right now?

[Gary Mills:]

Yes. I believe so. I mean it is still extremely competitive for good credit, whether it's on the retail side or the business side.

[P. Bundy:]

And has it not been structured all, but mainly just pricing then?

[Gary Mills:]

I would say the majority of it is good pricing.

[P. Bundy:]

And then a final question, I'll promise, Bob. Share repurchases, I didn't see any this quarter. Any thought on once you get further transaction, if additional transactions don't transpire in the near term, would you buy back shares?

[David Brown:]

I think that's really we would consider that quarterly. I mean it's depending on the price that we're trading at where we can fix shares, that's a pretty good investment for the long-term for the company and helps out a little bit.

[Operator:]

Mr. Mendez, there are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

[John Mendez:]

I would like once again to thank everyone for joining us this morning. We appreciate your interest in First Community. And we invite you to continue to follow our company as we continue to grow our presence and impact in the regional financial services industry.

[I would also like to inform you of upcoming Investor Relations events for the company. In late July we will be presenting at the KBW Financial Services conference in New York. We hope to see some of you there. We invite you to join this presentation through the sponsoring webcast or available archive replays.:]

[Once again, thank you very much and have a great day.:]

[Operator:]

This concludes today teleconference. You may disconnect your lines at this time. Thank you for your participation.