First Community Bankshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a community banking holding company operating in Virginia, West Virginia, North Carolina, and Tennessee. Financial amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $9.10 million, up 18.9% from $7.65 million a year earlier. Diluted EPS rose to $0.55 from $0.45. Pre-tax income declined to $10.22 million from $11.55 million, while income tax expense fell to $1.12 million from $3.89 million.
- Nine-month earnings: Net income was $27.03 million, up 33.4% from $20.27 million; diluted EPS was $1.61 versus $1.19.
- Revenue and margin: Q3 net interest income was $22.33 million, up 1.2%; total noninterest income was $6.52 million, down 2.8%. Nine-month net interest income was $66.97 million, up 2.3%, and noninterest income was $20.15 million, up 18.0%. Net interest margin on a fully taxable-equivalent basis increased 10 basis points to 4.36% for Q3 and 4.35% for the nine-month period.
- Expenses and credit costs: Q3 noninterest expense rose 10.0% to $18.13 million, including $1.49 million of goodwill impairment and a $1.10 million debt-extinguishment loss. Loan-loss provision was $0.50 million for Q3 and $1.49 million year to date, down from comparable 2017 periods.
- Balance sheet and liquidity: Total assets were $2.27 billion, down 5.0% from year-end 2017. Cash and cash equivalents were $73.68 million, down from $157.95 million; deposits were $1.88 billion, down 2.8%. The company reported $411.31 million of unused FHLB capacity, $90 million of correspondent-bank lines, $6 million available at the FRB Discount Window, and $125.80 million of unpledged available-for-sale securities.
- Debt and capital: Total borrowings declined to $30.15 million from $80.09 million after repayment of the remaining $50 million FHLB advance. Company and bank capital ratios were 13.95% and 12.31% for common equity Tier 1, respectively; both were reported above well-capitalized regulatory thresholds. Stockholders’ equity was $338.40 million, down 3.5% from year-end.
- Cash flow and shareholder returns: Nine-month operating cash flow was $37.15 million and investing cash flow was $21.20 million; financing activities used $142.62 million. Cash fell by $84.27 million. The company repurchased 670,016 shares for $21.29 million and paid $17.68 million in dividends, including a $8.13 million special dividend.
Material changes versus comparable periods
- Q3 net income benefited from lower taxes and higher net interest income, despite higher noninterest expense. The reported Q3 effective tax rate was 10.94%, compared with 33.73% in Q3 2017. Management attributed the tax reduction in part to a $1.67 million reduction in expense after finalizing the 2017 tax returns and deferred-tax revaluation analysis.
- Q3 noninterest expense included one-time charges for the insurance-agency-related goodwill impairment and FHLB prepayment. Management said the prepayment is expected to generate approximately $0.8 million of annualized pre-tax savings.
- Nonperforming assets increased to $25.92 million from $21.97 million at year-end 2017; non-covered OREO increased to $4.75 million from $2.41 million. Net charge-offs were $2.51 million for the first nine months, versus $0.90 million in 2017, with management attributing the increase to one fully reserved single-family owner-occupied loan relationship.
- Available-for-sale securities had net unrealized losses of $2.36 million at September 30, 2018, versus net unrealized losses of $1.03 million at year-end 2017. The company reported no debt-security OTTI charges.
Outlook, commentary, and risks
- The company sold its remaining insurance agency assets to Bankers Insurance, LLC, on October 1, 2018, in exchange for an equity interest in that firm. Management described the move, together with debt reduction and securities sales, as completing a five-year plan to simplify and de-risk the balance sheet and business model.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said available liquidity was adequate for obligations, projected dividends, and anticipated debt repayments over the next 12 months.
- Management considered the allowance for loan losses adequate but noted that future additions may be required. Key disclosed risks include local and national economic conditions, interest-rate changes, credit quality, deposit and funding movements, regulatory changes, competition, and the uncertainty of fair-value and credit-loss estimates.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 100-basis-point rate increase would reduce 12-month net interest income by 0.1%; a 100-basis-point decrease would reduce it by 4.2%. Management said exposure was within policy limits, while cautioning that modeled results depend on assumptions.
- The company completed its reincorporation from Nevada to Virginia on October 2, 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2017 Form 10-K and did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- Whether the insurance-asset sale’s consideration and ongoing equity interest in Bankers Insurance produce the expected strategic and financial benefits.
- How much of earnings growth reflects recurring operations versus the lower tax expense, purchase-accounting accretion, and other unusual items.
- Whether the rise in nonperforming assets, OREO, and net charge-offs continues, and whether the allowance remains adequate as the portfolio changes.
- Whether loan and deposit trends, reduced cash balances, and the FHLB prepayment affect future liquidity, funding costs, and net interest margin.
- The effect of continued share repurchases and dividends on capital, alongside the company’s reported capital ratios and regulatory buffers.