First Community Bankshares, Inc.
Q4 2011 Earnings Call Transcript

Published: 26 Jan 2012

[Operator:]

Thank you for joining us this morning for First Community Bancshares’ Fourth Quarter Earnings Conference Call. Any statements made today that are not historical are forward-looking. Please review the language at the end of yesterday’s earnings release regarding forward-looking statements as the same information applies to comments made on today's conference call.

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

[At this time, I would like to turn it over to Mr. John Mendez.:]

[John Mendez:]

Thank you. And good morning to everyone. Welcome to our Fourth Quarter 2011 Earnings Call for First Community Bancshares. We are very pleased to host the call this morning as we are ready to discuss our fourth quarter 2011 results and our earnings release from yesterday evening.

[This is John Mendez, Chief Executive Officer for First Community Bancshares. And I am joined this morning by Dave Brown, our Chief Financial Officer; and also Gary Mills, our Chief Credit Officer. Following the call, we will take questions from registered callers and hope to be able to provide additional insights there.:]

[Before I hand off to Dave this morning, I would like to comment just briefly on our financial results for the quarter and for the year. I think we highlighted things pretty well in the earnings release, but I do think it is important to note that a number of favorable trends emerged during the fourth quarter.:]

[Almost every key element of our operations showed some level of improvement, from net interest margins to non-interest revenues to operating expenses and loan loss provisions. It’s unfortunate that accounting impairments, to some degree, overshadowed the sum effect of those favorable trends in our bottom line performance. We did incur a non-cash impairment of goodwill in the Insurance segment, as well as an impairment charge on one collateral that was mortgage obligation.:]

[But absent the effect of these non-cash charges, core earnings from banking, wealth and insurance operations showed very strong improvement over the comparable quarter in 2010. Core earnings were up 67% over the fourth quarter of last year and resulted in a core ROA of 0.94%.:]

[So despite our bottom line GAAP results, we still feel very good about operations for the quarter. We also continue to be pleased with the overall level of nonperforming assets. Despite some slight progression in nonaccrual loans, our overall asset quality remained sound and comparatively better than industry averages. In fact our total nonperforming assets remained quite low at 1.57% of total assets.:]

[And with that, I am going to stop and hand off to Dave Brown who will continue with the review our operations for the quarter. Our Chief Financial Officer, David Brown.:]

[David Brown:]

Thank you, John. And good morning to everyone. Yesterday evening we reported common net income for the fourth quarter of $2.9 million or $0.17 a share. Core earnings for the quarter and the year came in strong at $5.1 million and $19.9 million, respectively. I would like to start off with, really, one of the big highlights of the quarter. Net interest margin came in at 3.93%, an increase of 17 basis points from last quarter. Most of the increase was due to being fully invested for the better part of the quarter.

[This is a move we had discussed about 6 months ago, and we were able to settle on most of our securities purchases early in the fourth quarter. To the fourth quarter, again, showed a meaningful decrease of funding costs, time deposit portfolio strengthening by $27.6 million on average while the yield dropped another 9 basis points.:]

[The yield on all interest-bearing funds was 121 for the quarter, that’s a decline of 6 basis points from last quarter. We made a $2.4 million provision for loan losses during the fourth quarter. OREO costs and losses amounted to $694,000, bringing the total credit costs in the quarter to $3.1 million.:]

[Wealth revenues decreased $50,000 on a linked-quarter basis on weaker trust and brokerage revenues. Linked-quarter deposit account service charges grew 1%, and other service charges and fees were about even.:]

[Insurance revenues were down linked quarter because of the sale of the 2 offices, as well a generally difficult environment for insurance sale. We did recognize, roughly, $1.5 million in impairment related to our last non-agency mortgage bonds. And finally, increases in other operating income from last quarter, we are seeing largely in secondary market mortgage income, and gains also in property and a few OREO sales.:]

[In the area of non-interest expenses, our fourth quarter efficiency ratio improved to 54.9%. Total salaries and benefits were down $505,000 from the third quarter. And that decrease was made up of $216,000 in lower salaries and wages and decreased incentive comp accruals of $224,000.:]

[Average total FTEs for December were $629 compared to $633 for September and $669 for June. I still do feel that we won’t see meaningful decreases in total FTEs from here. Rather, we will likely have a few strategic additions and replacements to make out in the branch network.:]

[Looking forward to 2012, we currently issue total salaries and benefits of about $34 million. Those costs are usually front-loaded, so we could see a meaningful increase from fourth to first quarter, with that amount dropping lower as the year goes on.:]

[OREO expenses and losses were $694,000 for the quarter, and that’s roughly in line with third quarter. Ex-OREO costs, other operating costs were roughly in line with last quarter.:]

[Within those other operating costs were increases in marketing expenses offset by lower regulatory assessment. At the end of the period, total assets decreased $55 million. We experienced nice loan growth through the quarter of $21 million, an increase of 1.6% since September 30th non-annualized.:]

[The CD portfolio declined $31 million between December 31st and September 30th and, again, $28 million on average. At December 31st, tangible book was about $11.40, an increase of $0.15 from September 31st. And the company and the bank both continue to be very well capitalized with the bank’s leverage ratio coming in at approximately 10.1% for December 31st.:]

[We did declare a dividend of $0.10 to common shareholders based on the fourth quarter results. And during the fourth quarter, we also did some more repurchase activity. We did buy 33,200 shares at an average price of about $11.70. We will continue to look for opportunities to repurchase the shares. We said at last quarter, we certainly see expansion uses for excess capital, but it is very hard to argue buying shares back at or below tangible book.:]

[That’s all I have prepared, and I’d like to turn it over to our Chief Credit Officer, Gary Mills.:]

[Gary Mills:]

Thank you, David. And good morning, everyone. The FCB loan portfolio at year-end 2011 totaled $1.396 billion, representing a $21 million increase over third quarter and a $10 million increase over year-end 2010. The Loan segment is primarily responsible for the third quarter growth for the Commercial Real Estate segment which grew approximately $11.6 million, and the Owner-occupied Residential 1-to-4 segment which grew an approximately $12 million.

[It’s too premature to determine if this type of quarterly loan growth could be sustained, while we are certainly pleased with the efforts of our market personnel in generating this fourth quarter loan production. The company’s loan quality measures at December 31 continue to compare favorably to industry peers. Total delinquency measured 2.62%, remaining within a fairly tight band of 2.62% at year-end 2010 and 2.12% at June 30, 2011.:]

[Comp position of fourth quarter total delinquency for loans 30 to 89 days past due of $12.1 million or 87 basis points, and nonaccrual loans of $24.5 million or 1.75%. I am especially pleased with the totals of the 30- to 89-day category as the fourth quarter is traditionally a difficult collection quarter. Our collection staff and market personnel are to be commended for this performance.:]

[Net charge-offs for the quarter were $2,638,000 or 0.75% annualized. For the year, net charge-offs totaled approximately $9.3 million as compared to approximately $12.5 million recorded for 2010.:]

[The provision for the fourth quarter and 12 months ended December 31, 2011, totaled $2.44 million and $9.05 million, respectively, which compares favorably to the provision for loan losses for the fourth quarter and 12 months ended December 31, 2010, of $3.69 million and $14.76 million, respectively.:]

[The allowance for loan and lease losses measured $26.205 million or 1.88% of total loans at year-end, as compared to $26.407 million or 1.92% and $26.482 million or 1.91% as of third quarter and year-end 2010, respectively.:]

[The year-end OREO balance of $5.9 million was flat compared to third quarter while representing an increase of $1 million at year-end 2010. While foreclosure activities remained relatively consistent with previous quarters, anticipated sales activity within winter season may decline resulting in some upward movement in OREO balances over the next quarter or so.:]

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

[John Mendez:]

Thank you, David and Gary, for the comments. At this point, we would like to open the call for questions from registered callers. So I will turn the call back to our conference leader to begin polling for questions.

[Operator:]

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

[William Wallace IV:]

I guess my first question is maybe if we could just dig in a little bit more to the increase that you’ve seen in your NPAs. I mean, I kind of see some increases in a handful of different line items, so it doesn’t look like you are seeing lumpiness related to bigger credit. So I am just wondering if you could talk a little bit more about the trends that you are experiencing in your markets?

[Gary Mills:]

Well, this is Gary Mills, and good morning. I think if you look at the movement in non-accruals during the quarter, it can primarily be attributed to 2 loans out of the North Carolina market. Both relate to larger residential real estate loans, they’ll be in a jumbo category. One was a loan that we acquired through acquisition; one was an originating credit through the First Community Bank system over the last couple of years. We have -- and those ones break down to one of the mortgages of approximately 2.8 million, the other one is 1.7 million. With the 1.7 million credit, we have negotiated what we think is a workable modifications workout plan, and we will continue to monitor that credit over the coming months. But it's our anticipation that the borrower will be able to fulfill his obligation under that modification. That loan, actually, as it relates to delinquency was current, but we will maintain that loan in nonaccrual status until we can determine we have satisfactory payment performance. On the other larger credit, it was a nonaccrual at year-end that was delinquent. But post year-end, we have in principle negotiated with the borrower to bring the loan current this quarter. And with circumstances of the borrowers, it’s our anticipation, if we get this finalized, that they will be able to continue to make this payments going forward. So the movement in non-accruals for the quarter is primarily a result of that. That one loan may have also had some impact on a restructured loan because it had formerly been a restructured credit that was performing within terms when it went to nonaccrual. It's obviously not performing within terms again.

[William Wallace IV:]

So that's what drove the increase from roughly $1 million to $3.5 million?

[Gary Mills:]

Yes.

[William Wallace IV:]

And then the $2.8 million, is that going to be a restructured loan, as well, that will come in, in the first quarter?

[Gary Mills:]

The $2.8 million is the movement, it got re-categorized because it was not performing in accordance with terms. It is also in the Nonaccrual segment. It went nonaccrual on us in the quarter. What I would anticipate is, if it performs according to terms, probably a third quarter event of this year, it would come out of nonaccrual and then would cross year-end. When we get 12 months payment, they could then migrate back to performing in accordance with the terms.

[William Wallace IV:]

Okay. And then can you talk a little bit about the trends with your classified assets during the quarter?

[Gary Mills:]

Sure. If you hold on just a second, I'll pull up -- if you look at classified, especially since we have it referring to our watch-list with substandard credit, they were actually flat, as we had some slight increase, very slight as it relates to doubtful credits. I mean classifieds remained relatively flat during the quarter.

[William Wallace IV:]

Okay. And then my last question is as it relates to the securities impairment. I believe you said, Dave, that it was the last non-agency mortgage bond that’s in your portfolio. So my question would be, first, is it carried in held-to-maturity. And if it’s not, were there any changes in the fair value of that in the quarter, or was it purely just an impairment and you’ve already recognized the difference in the fair value market?

[David Brown:]

Well, this is Dave. In terms of pricing, that deal remains relatively steady and priced. What happened was just characteristics of the deal structure itself caused us to call into question getting some of the principal back at the tail-end of the deal. And so we took the $1.5 million in impairment. But you’re right, it was all in OCI already. So it’s really just a re-characterization. We will recognize it in the income statement this quarter, but it was already an equity.

[Operator:]

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

[Catherine Mealor:]

John, can you just update us on what you are seeing on the M&A front, trends you are seeing in your negotiations -- or your conversations with potential sellers?

[John Mendez:]

Catherine, I would say it’s more of the same. We’re continuing to look hard, evaluate opportunities that are out there. But these things take time to mature. We remain confident, we remain very interested, and feel that this will bear fruit. But I think the activity level has remained pretty much at par with what we’ve been seeing, really, in the course of last 12 to 18 months. We’ve invested a lot of time and energy into that, and certainly hope that, that will lead to some further market consolidation.

[Catherine Mealor:]

Okay. And a follow-up about, Gary, your comments on the loan growth this quarter. What is your loan pipeline look like right now? Does it give you a little bit of confidence in your ability to continue the model of loan growth into next quarter?

[Gary Mills:]

If you look at the prior 12 months, a real contributor to volume growth that we have had, and has been one before, primarily in our Occupied segment. And those are portfolio mortgages that were originating within our branch network with terms somewhere between 7 and 15 years. Obviously amortizations are probably 15-years-plus. We continue to see good activity and good demand for those type of products. And it's our anticipation that we will continue to see that. The commercial real estate for the quarter was very active. We were pleased we were able to successfully pull through and book some previously approved loans. And we saw good performance there, in spite of material pay-off as a result of a construction mini firm loans that we had originated a few years ago in multifamily, and the net pay-off there to the bank was probably $8.5 million. It has performed as it should have. We provided the mini firm, and they took it to obtain longer-term financing. I think as you look at the 1-to-4 segment, there's still opportunity there. I think with on the business side, commercial side, it's still what we see as a challenging environment. But we are very encouraged by the activity we've seen over the last couple of quarters.

[Operator:]

Our next question is from the line of Will Curtiss with Sandler O'Neill.

[William Curtiss:]

You may have touched on it earlier, but just wanted to see if you could provide any additional color on the margin, and how you see it playing out over the course of the year?

[David Brown:]

Yes, Will, this is Dave. I think that we’ve consistently said that it will be difficult to maintain margins in this environment, just looking out at what we know from what’s said over the last few quarters. With that said, we did go fully invested, and I can tell you that the November-December margins were basically a hair, we’re straddling 4%. So I think we probably, we can expect to see some stronger margins in 2012 than we did in ’11, but I’ll still contend that it will be difficult to do really well.

[William Curtiss:]

Okay. And most of my other questions have been asked already, but just wanted to see if maybe we could go back to M&A real quick and as it relates to what you are seeing and hearing out there. Have you noticed any change in seller expectations, or are we still kind of where we were over the last 6 months or so?

[John Mendez:]

Will, this is John. I think the market and the environment certainly is wearing on a number of participants. So obviously, that has bearing on what we’re seeing in terms of expectations. But it’s difficult to speak with any specificity on that. But I would make the point that we are certainly well capitalized today. We have a strong need for re-leveraging. So that has us very intent on that business objective. But we have -- we get in position, we conduct diligence, and we continue to process. So the process is important, we follow it, we think discipline is probably the most important aspect of this thing. So we could have 10 opportunities in front of us, but we're going to look for those that are best fit, those that provide the -- that hit our targets in terms of the financial impact and the output. And we’ll maintain that discipline, and we think that, that will pay off in the long run.

[Operator:]

[Operator Instructions] And your next question is from the line of Carter Bundy with Stifel, Nicolaus.

[P. Bundy:]

Dave, first question for you. On the discussion on share repurchases, it was around 33,000 shares this quarter. If M&A does not happen in the near-term, what is your appetite for repurchases? I think you said around tangible book value. And I guess the question is, what tangible book value are you looking at on an if converted basis versus non-converted basis? And secondarily, how much of the excess capital over and above the dividend would you be willing to use that’s generating out of the bank right now?

[David Brown:]

Well, I can answer the first part very, very easily. But carter, we’re looking at if converted on an as converted basis for potential book for those target levels. And honestly, how much we would use? I think we have got to just kind of play that by ear. There are -- we hear of regulatory limits on that, but I am not sure anything is set in stone. Plus I think we’ve got some internal limits. We'd like to have some powder to go out and do this re-leverage that John had spoke of and we have been so intensely focused on.

[John Mendez:]

I will agree, Carter, we’ll play that by ear. And it’s a function of time. And clearly, if we will continue without any success in M&A, it is something we would have to look harder at in the dividend and share repurchase. But we want to preserve our ability today to react if market conditions present, and if those expectations begin to come in, to a point that would allow us to actually bring one or more these deals forward.

[P. Bundy:]

Okay. That's helpful. And then moving on to a question for Gary on loan growth. Could you, just to be clear, you said that you had $8.5 million pay down this quarter that affected net growth?

[Gary Mills:]

That’s correct.

[P. Bundy:]

And what kind of pay-off activity, I guess what has the trend been over the last few quarters? Have we seen the pay-off activity -- it sounds like it was elevated this quarter, but have we seen that general trend slow?

[Gary Mills:]

I would agree with that. We had earlier in the year, early second quarter, we had pretty significant pay-off activity. Other than that and the event that took place at the end of the quarter, end of the year, it’s been relatively normal course of business.

[P. Bundy:]

Okay. That's helpful. And then final question, Dave, back to you on the securities book. It sounds like you -- it obviously looks like you levered up a lot of the excess liquidity. How do you think about that absolute balance going forward, and what kind of investments would you look at today? I think the last quarter or so investments have been 2% to 2.25% range. What are you buying, and how do we think about that book going forward on an absolute basis?

[David Brown:]

Well, I can tell you right now, we’re not buying anything, Carter. We would up the year, we wound up the year pretty well invested and fairly pretty even in terms of borrowed position. So I am not sure that we really have any thoughts about what we buy in the future, but it probably wouldn't be too from what we talked about in the past.

[P. Bundy:]

So, would the idea be on cash flows that are coming off the book, just assuming loan growth does not kind of continue at this pace, would the idea be to replace it with new investments or let it run off?

[David Brown:]

Probably put it into new investments, but I'd much rather do loans.

[P. Bundy:]

Okay. And from a yield perspective, I guess the expectation will be for that to continue to work down given, obviously, the interest rate environment?

[David Brown:]

I think that’s fair to say, Carter.

[John Mendez:]

We had forecast some continued rundown in the investment book over the course of 2010.

[P. Bundy:]

Okay. And then final question on the yield on the securities book. Did you have much acceleration in prepayment to affect that yield on a sequential basis?

[David Brown:]

Carter, off the top of my head, I can’t tell you. But I don’t believe that had much of an impact.

[Operator:]

We have no further questions in queue at this time. I would like to turn the floor back to the management for closing remarks.

[John Mendez:]

Thank you, ladies and gentlemen. Once again, we appreciate your interest in First Community Bancshares. We’re very happy to report our results to you. We look forward to the coming quarters. We appreciate everyone joining us today, and hope you have a great day. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.