First Community Bankshares, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; financial statements are unaudited. The company operates a community banking business through First Community Bank, with 44 branches in Virginia, West Virginia, North Carolina and Tennessee.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $22.99 million | $22.26 million | $45.18 million | $44.64 million |
| Noninterest income | $8.65 million | $7.02 million | $16.73 million | $13.63 million |
| Provision for loan losses | $1.59 million | $0.50 million | $2.81 million | $0.99 million |
| Net income | $10.45 million | $9.07 million | $20.08 million | $17.93 million |
| Diluted EPS | $0.66 | $0.54 | $1.27 | $1.06 |
| FTE net interest margin | 4.72% | 4.25% | 4.66% | 4.30% |
Q2 return on average assets was 1.89% and return on average common equity was 12.57%. FTE figures are non-GAAP measures. The company reported $2.03 million of litigation settlement income in Q2 and $3.70 million year to date; excluding litigation settlements and net FDIC indemnification amortization, noninterest income declined year over year in both periods.
At June 30, total assets were $2.21 billion, down 1.4% from year-end 2018. Loans held for investment, net of unearned income, were $1.72 billion, down 3.1%; deposits were $1.85 billion, down 0.4%. Cash and cash equivalents rose to $156.48 million from $76.87 million. Stockholders’ equity was $333.69 million. The allowance for loan losses was $18.54 million, or 1.09% of total loans.
Six-month operating cash flow was $25.45 million; investing activities provided $109.69 million and financing activities used $55.53 million. Cash increased $79.61 million. The company had $3.08 million of retail repurchase agreements and no long-term borrowings at quarter-end; it repaid its remaining $25 million wholesale repurchase agreement in Q1, citing expected annualized pretax savings of $378,000.
Material changes and management commentary
- Q2 net income rose 15.3% year over year; first-half net income rose 12.0%. Management attributed the increases principally to litigation settlements, partly offset by higher loan-loss provisions.
- Q2 FTE net interest margin increased 47 basis points year over year. Management linked the improvement mainly to paying off higher-cost wholesale debt. Average earning assets and loans declined.
- Nonperforming assets were $21.39 million, or 0.97% of assets, versus $23.96 million, or 1.07%, at year-end. Nonaccrual loans declined to $16.57 million. First-half net charge-offs increased to $2.53 million from $0.68 million a year earlier; management cited several larger loan relationships.
- The company repurchased 426,900 shares for $14.36 million in the first half and declared $0.46 per share in cash dividends. Book value per share was $21.34; tangible book value per share was $15.12. Management said the company and bank exceeded regulatory well-capitalized thresholds; reported company/bank total risk-based capital ratios were 15.42%/14.27%.
- Available-for-sale securities declined to $119.08 million; securities held to maturity matured in Q1, with proceeds used to repay wholesale debt. The remaining insurance agency assets were sold in October 2018, so insurance commission income no longer appears in 2019.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management stated that liquidity and investments were adequate for working capital, projected dividends and anticipated debt repayments over the next 12 months. Available sources included $379.09 million of unused FHLB capacity, $90 million of correspondent-bank lines, $6 million at the Federal Reserve Discount Window, and $93.11 million of unpledged available-for-sale securities.
Management expected to adopt the current expected credit loss standard (CECL) in Q1 2020, but could not reasonably estimate the financial impact. Model validation and parallel runs were planned for the second half of 2019. Interest-rate simulations showed estimated 12-month net interest income changes of +0.5% under a 300-basis-point increase, -4.0% under a 100-basis-point decrease, and -8.6% under a 200-basis-point decrease; management cautioned that actual results may differ from model estimates.
Key risks include local and national economic conditions, interest-rate and market movements, credit quality, regulatory changes, competition, technology, and execution of business strategies. The company disclosed ordinary-course legal matters and did not expect their resolution to materially affect its financial condition, results or cash flows. Off-balance-sheet commitments to extend credit and standby letters of credit/guarantees totaled $329.42 million; the filing notes these amounts do not necessarily represent future cash needs. No material changes to the risk factors in the 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether the $3.70 million in litigation settlements is nonrecurring, and the underlying settlement details.
- Whether higher loan-loss provisions and net charge-offs persist, including trends in commercial real estate, residential, nonperforming loans and troubled debt restructurings.
- Whether loan contraction, deposit mix and borrowing-cost savings continue to support net interest income and margin.
- The expected CECL transition effect and the assumptions used in the new credit-loss model.
- Capital, liquidity, buyback and dividend capacity, including the exposure represented by off-balance-sheet commitments and sensitivity to falling rates.