First Community Bancshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017 unless noted. First Community is a community banking holding company operating in Virginia, West Virginia, North Carolina, and Tennessee, with banking, wealth management, and insurance activities. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and position
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / Dec. 31, 2017 |
|---|---|---|
| Net income | $8.87 million | $6.20 million, Q1 2017 |
| Diluted EPS | $0.52 | $0.36, Q1 2017 |
| Net interest income | $22.38 million GAAP; $22.84 million FTE | $21.14 million GAAP; $21.64 million FTE, Q1 2017 |
| Net interest margin | 4.38% FTE; 4.03% normalized FTE | 4.17% FTE; 3.95% normalized FTE, Q1 2017 |
| Total assets | $2,428.3 million | $2,388.5 million |
| Loans, net of allowance | $1,773.6 million | $1,797.9 million |
| Total deposits | $1,980.6 million | $1,929.9 million |
| Total borrowings | $79.1 million | $80.1 million |
| Stockholders’ equity | $342.0 million | $350.7 million |
| Allowance for loan losses | $19.5 million | $19.3 million |
Pre-tax income was $11.44 million versus $9.26 million a year earlier. Total interest income was $24.33 million, interest expense $1.95 million, and provision for loan losses $0.50 million. Noninterest income rose to $6.45 million from $5.12 million; noninterest expense increased to $16.89 million from $16.51 million. The effective tax rate fell to 22.46% from 33.00%.
Operating cash flow was $10.83 million, investing cash flow $3.17 million, and financing cash flow $33.18 million. Cash and cash equivalents increased $47.19 million to $205.14 million. Financing cash flow included $11.18 million of dividend payments and $5.41 million of share repurchases. The company declared $0.66 per share in dividends for the quarter, including a one-time special dividend of $0.48 and a regular dividend of $0.18.
At March 31, the company reported regulatory capital ratios of 13.60% CET1, 13.60% Tier 1 risk-based, 14.70% total risk-based, and 10.73% Tier 1 leverage. The Bank’s corresponding ratios were 11.30%, 11.30%, 12.39%, and 8.90%. Both remained classified as well-capitalized. Management reported consolidated liquidity sources including $205.14 million of unencumbered cash, $392.85 million of unused FHLB capacity, $90 million of correspondent-bank lines, and $122.75 million of unpledged available-for-sale securities.
Material changes versus comparable periods
- Net income increased 43.0% year over year and diluted EPS rose 44.4%. Management attributed the earnings improvement to higher net interest and noninterest income and lower income tax expense, partly offset by higher noninterest expense.
- Net interest margin increased 21 basis points on an FTE basis; normalized margin, excluding noncash acquired-loan accretion, increased 8 basis points. Average loans declined 1.8% year over year, while average interest-bearing deposits rose 3.7% and average borrowings fell 49.9%.
- Noninterest income increased 26.0%, largely because net negative amortization of the FDIC indemnification asset declined. Excluding that item, management reported noninterest income growth of 5.9%.
- Loans held for investment, net of unearned income, declined $24.1 million from year-end, while deposits increased $50.7 million. Total assets rose 1.7% from year-end.
- Total nonperforming assets increased to $27.04 million from $21.97 million at year-end; nonperforming loans were $22.35 million versus $19.46 million. Non-covered OREO rose to $4.62 million from $2.41 million.
- Accumulated other comprehensive loss increased by $1.64 million during the quarter, principally from unrealized losses on available-for-sale securities. The portfolio’s available-for-sale fair value was 99.45% of amortized cost at quarter-end, compared with 100.75% at year-end.
- Stockholders’ equity declined 2.5%, reflecting dividends declared of $11.18 million, share repurchases of $5.41 million, and the OCI loss, partly offset by net income.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it considered the allowance for loan losses adequate at March 31, but noted future additions could be required. It described qualitative credit risk factors as stable, while reporting higher nonperforming assets and OREO.
- Management’s rate-sensitivity model estimated that an immediate, sustained 300-basis-point increase would raise 12-month net interest income by 5.9%; a 100-basis-point decrease would reduce it by 5.6%. The filing cautions that model results depend on assumptions and actual results may differ.
- Principal stated risks include local and national economic conditions, interest-rate and market changes, regulation, competition, technology, fee-income performance, and the Company’s ability to manage risk. Management reported no material changes to the risk factors in its 2017 Form 10-K.
- The Tax Cuts and Jobs Act reduced the federal statutory rate from 35% to 21% beginning January 1, 2018, contributing to the lower effective tax rate. The company adopted ASC 606 and several other accounting standards in Q1; it reported no material financial-statement effect from these adoptions.
- The company repurchased 187,300 shares for $5.41 million. It also reported an exhibit concerning an agreement and plan of reincorporation and merger; the summary text does not provide the terms or expected effects of that transaction.
- The company is involved in legal actions in the ordinary course of business and believes their resolution should not materially adversely affect its financial condition, results, or cash flows. Off-balance-sheet commitments totaled $366.1 million, including $230.6 million of commitments to extend credit and $135.5 million of standby letters of credit and financial guarantees.
Important facts for investors to verify
- Whether the increase in nonperforming assets, nonaccrual loans, and OREO persists, and how it affects credit costs and the allowance.
- How much future earnings depend on acquired-loan accretion and reduced FDIC indemnification-asset amortization, versus underlying recurring revenue growth.
- The terms, status, and potential financial or governance effects of the reincorporation and merger agreement listed among the exhibits.
- The sustainability of deposit growth and liquidity sources, and the effect of rising deposit costs or changing interest rates on margins.
- The impact of the special dividend and repurchases on capital, alongside the reported decline in capital ratios from year-end.