First Community Bancshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
First Community Bancshares is a community banking holding company operating through First Community Bank in Virginia, West Virginia, North Carolina and Tennessee, alongside insurance and wealth-management businesses. It reported 45 branches and $906 million in assets under wealth-management arrangements at quarter-end. The company identifies community banking as its single business segment.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparison |
|---|---|---|
| Net interest income (GAAP) | $21.14 million | Up 0.14% from Q1 2016 |
| Total interest income | $23.19 million | Down from $23.55 million |
| Net income | $6.20 million; diluted EPS $0.36 | Net income up 1.94%; diluted EPS up from $0.34 |
| Net interest margin | 4.17% FTE; 3.95% normalized FTE | Up 16 and 21 basis points, respectively |
| Noninterest income | $5.69 million | Down 27.99% |
| Noninterest expense | $17.08 million | Down 9.20% |
| Provision for loan losses | $0.49 million | Down from $1.19 million |
| Total assets / stockholders’ equity | $2,430.5 million / $343.4 million | Assets up 1.85%; equity up 1.28% from year-end |
| Loans held for investment, net of allowance | $1,817.3 million | Down from $1,835.0 million at year-end |
| Total deposits | $1,906.6 million | Up $65.3 million from year-end |
| Total borrowings | $155.9 million | Down from $178.7 million at year-end |
| Cash and cash equivalents | $152.9 million | Up from $76.3 million at year-end |
Cash flow: Q1 operating cash flow was $10.7 million, investing cash flow was $26.3 million provided, and financing cash flow was $39.6 million provided. Cash increased by $76.5 million during the quarter. The filing attributes the change principally to deposit growth and lower loan originations.
Liquidity and capital: Management said liquidity was adequate for obligations, projected dividends and anticipated debt repayments for the next 12 months. Reported sources included $152.85 million of unencumbered cash, $555.78 million of unused FHLB capacity, $90 million of correspondent-bank lines and $24.89 million of unpledged available-for-sale securities. Company and Bank total risk-based capital ratios were 15.49% and 14.47%, respectively; both were classified as well-capitalized. The quarterly common dividend was $0.16 per share.
Material changes and notable items
- Net income rose modestly as lower credit-loss provision and operating costs, plus slightly higher net interest income, more than offset lower noninterest income and higher taxes.
- Noninterest income fell $2.21 million. Insurance commissions declined $1.82 million, primarily because Greenpoint Insurance Agency was sold in Q4 2016. Other operating income also lacked a $357,000 branch-sale gain recorded in Q1 2016.
- Noninterest expense declined $1.73 million, largely from lower salaries and benefits following the 2016 First Bank branch transactions and Greenpoint divestiture; full-time equivalent employees fell to 579 from 660. Higher legal and accounting fees partly offset savings.
- Reported FTE net interest margin improved to 4.17%, but normalized FTE margin, excluding noncash acquired-loan accretion, was 3.95%. Noncash accretion declined to $1.13 million from $1.45 million a year earlier.
- Nonperforming assets increased to $24.19 million from $21.96 million at year-end, principally as non-covered nonaccrual loans rose to $18.54 million from $15.85 million. Total nonperforming loans were 1.06% of loans; the allowance was 94.78% of nonperforming loans.
- The company redeemed $15.46 million of trust preferred securities in January 2017. Total borrowings fell, while deposits increased.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management considered the allowance for loan losses adequate at March 31, but cautioned that future additions may be required. The company’s loss-share coverage on commercial assets acquired in the Waccamaw transaction was scheduled to expire June 30, 2017, with recoveries continuing through June 30, 2019; residential coverage runs through June 30, 2022.
Interest-rate sensitivity modeling estimated a 3.5% increase in 12-month net interest income under an immediate, sustained 300-basis-point rate increase, and a 5.2% decrease under a 100-basis-point decline. These are model estimates, not forecasts; management said exposure remained within policy limits. Key stated risks include economic conditions in the company’s markets, interest-rate and regulatory changes, credit losses, competition, technology, acquisitions and fee-income performance.
The company is involved in legal actions in the ordinary course of business and believes their resolution will not materially adversely affect it, while noting outcomes cannot be assessed with certainty. Off-balance-sheet commitments to extend credit and standby letters of credit or guarantees totaled $331.2 million; the filing notes that contractual amounts do not necessarily represent expected future funding. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets continues, and whether the allowance remains sufficient relative to emerging credit losses.
- How much future earnings depend on acquired-loan accretion and whether underlying normalized margins can be sustained.
- The durability of fee income after the Greenpoint sale, and the extent to which Q1 expense reductions represent ongoing savings.
- Actual liquidity and funding conditions, including deposit trends, borrowing capacity and the effects of the redeemed trust preferred securities.
- Results versus the filing’s modeled interest-rate sensitivity, particularly if rates fall or deposit costs reprice.