Business context and reporting period
First Community Bancshares, Inc. is a financial holding company operating through First Community Bank, insurance subsidiary Greenpoint, and wealth-management services. It reported one Community Banking segment, with 58 locations across Virginia, West Virginia, North Carolina, and Tennessee. This Form 10-K covers the fiscal year ended December 31, 2015; amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net interest income | $84.8 million | $90.8 million |
| Noninterest income | $29.5 million | $30.0 million |
| Noninterest expense | $76.2 million | $82.9 million |
| Provision for loan losses | $2.2 million | $0.1 million |
| Net income | $24.5 million | $25.5 million |
| Net income available to common shareholders | $24.4 million | $24.6 million |
| Diluted EPS | $1.31 | $1.31 |
| Net interest margin (FTE) | 3.93% | 4.11% |
| Return on average assets | 0.97% | 0.94% |
| GAAP efficiency ratio | 66.65% | 68.58% |
- At year-end, total assets were $2.46 billion, loans held for investment were $1.71 billion, deposits were $1.87 billion, borrowings were $219.4 million, and stockholders’ equity was $343.0 million.
- Operating cash flow was $58.5 million. Investing activities used $70.8 million and financing activities used $173.6 million. Cash and cash equivalents fell $185.9 million to $51.8 million.
- Regulatory capital remained strong: the Company’s CET1 ratio was 14.54%, total risk-based capital 15.95%, and leverage ratio 10.62%. The Bank was classified as well capitalized.
- Common dividends were $0.54 per share for the year. The Company repurchased 1.24 million common shares for $21.5 million and redeemed remaining Series A preferred shares for $2.37 million; the rest of the preferred shares converted into common stock.
Material changes versus the prior comparable period
- Net income declined 3.7%. Net interest income fell 6.7%, reflecting lower average earning assets and yields; the FTE margin contracted 18 basis points.
- The loan-loss provision rose to $2.2 million from $145,000. Net charge-offs nevertheless declined to $2.16 million from $2.89 million.
- Noninterest expense fell 8.1%, including lower personnel, occupancy, and other operating costs, partly offset by $1.70 million in FHLB prepayment fees. The GAAP efficiency ratio improved, while the company’s adjusted non-GAAP efficiency ratio increased to 61.89% from 58.99%.
- Non-covered loans grew 3.6% to $1.62 billion, while covered loans declined 32.1% to $83.0 million as the acquired portfolio ran off. Deposits fell 6.4%, mainly from a $160.2 million reduction in time deposits as higher-rate balances ran off.
- Non-covered nonperforming assets increased to $22.8 million from $19.9 million; non-covered nonperforming loans rose to $17.9 million from $13.3 million. Total nonperforming assets, including covered assets, declined slightly to $27.5 million from $28.7 million.
- Available-for-sale securities had $10.6 million in aggregate unrealized losses at year-end, including $8.1 million on single-issue trust preferred securities. No OTTI charges were recognized in 2015.
Outlook, commentary, risks and unusual items
- Management emphasized organic growth, potentially supplemented by strategic acquisitions. No numerical earnings or revenue guidance was provided. Management expected purchase-accounting loan accretion to decline as acquired loans run off.
- Management reported liquidity sources at year-end of $51.8 million in cash and bank deposits, $105.0 million in correspondent-bank lines, $9.1 million in Federal Reserve discount-window capacity, $403.1 million in unused FHLB capacity, and $129.4 million in unpledged available-for-sale securities.
- Interest-rate risk remains significant: earnings depend heavily on net interest income, and management cautioned that actual results may differ from model simulations. The filing’s modeled 12-month net interest income effect ranged from a 1.4% decline under a 300-basis-point rise to a 2.2% decline under a 100-basis-point fall.
- Key risks include credit quality and commercial-real-estate concentration, economic weakness in markets exposed to extractive industries, interest-rate and funding risk, FDIC loss-share compliance and reimbursement timing, regulatory change, competition, cybersecurity, and potential goodwill impairment. Commercial real estate was 45.44% of total loans.
- Unusual items included the $1.70 million FHLB prepayment penalty, increased net amortization of the FDIC indemnification asset to $6.38 million, and a $1.14 million after-tax bank-owned life-insurance death benefit. The FDIC indemnification asset declined to $20.8 million from $27.9 million.
- The Company is involved in legal actions in the normal course of business; management said resolution was not expected to materially affect financial position, results, or cash flows. The filing also disclosed $243.1 million of off-balance-sheet commitments and letters of credit; amounts drawn may create funding or credit exposure.
- Subsequent event: on March 4, 2016, the Company announced a proposed branch exchange with First Bank, involving seven Virginia branches with about $150 million of deposits, six North Carolina branches with about $130 million of deposits, and up to $175 million of loans. Closing was expected in the third quarter of 2016, subject to approvals and conditions.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the rise in non-covered nonaccrual loans and nonperforming assets continues, and whether the $20.2 million allowance remains adequate.
- How quickly deposit balances stabilize after the strategic runoff of time deposits, and whether liquidity sources remain available on acceptable terms.
- Whether net interest margin and earnings withstand rate changes and the expected runoff of acquired-loan accretion.
- The quality, duration, and potential credit exposure of the securities portfolio, particularly the trust preferred holdings and unrealized losses.
- Execution, regulatory approval, and financial effects of the announced 2016 branch and loan exchange; also monitor FDIC loss-share reimbursements and compliance.
- Capacity to sustain dividends and repurchases given regulatory limits, capital needs, and reliance on Bank dividends; the $15 million parent-company credit line was due to mature in April 2016.