First Community Bankshares, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. The company is a community banking holding company operating 44 branches across Virginia, West Virginia, North Carolina, and Tennessee.
Financial performance and condition
| Metric | FY 2018 / year-end | Comparison |
|---|---|---|
| Net income | $36.34 million | Up $14.86 million, or 69.1%, from 2017 |
| Diluted EPS | $2.18 | Up $0.92 from $1.26 |
| Net interest income | $90.85 million GAAP; $92.67 million FTE | GAAP up 4.2%; FTE up 4.0% |
| Net interest margin | 4.37% GAAP; 4.46% FTE | Each increased 23 basis points |
| Noninterest income / expense | $26.44 million / $69.77 million | Income up 7.6%; expense up 4.3% |
| Provision for loan losses | $2.39 million | Down 13.6% |
| Total assets / loans | $2.24 billion / $1.78 billion | Assets down 6.0%; loans down 2.3% |
| Deposits / borrowings | $1.86 billion / $29.37 million | Deposits down 3.8%; borrowings down 63.3% |
| Cash and cash equivalents | $76.87 million | Down $81.08 million during 2018 |
| Operating / investing / financing cash flow | $49.50 million / $49.40 million / ($179.98 million) | Financing outflow reflected deposit declines, debt repayment, dividends, and share repurchases |
| Capital ratios — Bank | CET1 12.55%; total risk-based 13.62%; leverage 9.98% | Bank remained well-capitalized and above fully phased-in Basel III minimums |
Credit quality: The allowance for loan losses was $18.27 million, or 1.03% of loans, versus $19.28 million, or 1.06%, in 2017. Net charge-offs rose to $3.40 million from $1.44 million. Nonperforming assets increased to $23.96 million from $21.97 million; nonperforming assets were 1.07% of total assets. OREO rose to $3.84 million, including $3.81 million of non-covered properties.
Liquidity: The company reported $76.87 million in unencumbered cash, $402.74 million of unused FHLB borrowing capacity, $90 million of correspondent-bank lines, and $114.87 million of unpledged available-for-sale securities. The parent company had $13.73 million of cash and a fully unused $15 million committed line. Management said resources were adequate for obligations and projected shareholder dividends over the next 12 months.
Material changes versus 2017
- Reported earnings improved sharply, but comparison is affected by the 2017 Tax Reform Act charge: 2017 included $6.55 million of deferred-tax revaluation expense; 2018 included a $1.67 million reduction in tax expense after finalizing the revaluation. The effective tax rate fell to 19.46% from 48.98%.
- Pretax income increased 7.1% to $45.12 million. Higher net interest and noninterest income and lower loan-loss provision were partly offset by higher operating expenses.
- The company prepaid its remaining $50 million FHLB advance, paid a $1.10 million extinguishment loss, and reported expected annualized pretax savings of approximately $800,000. Year-end FHLB borrowings were zero.
- It sold its remaining insurance agency assets in exchange for an equity interest in Bankers Insurance, recording a $1.49 million goodwill impairment. It also completed its reincorporation from Nevada to Virginia.
- Shareholder returns increased: 1,060,312 shares were repurchased for $34.41 million, and $21.09 million of common dividends were paid, including a one-time $0.48-per-share special dividend. Total stockholders’ equity declined 5.1% to $332.86 million.
- Average loans declined 2.3%, while the FTE margin improved. Non-cash acquired-loan accretion contributed $6.39 million to interest income in 2018, up from $5.42 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings, revenue, or margin guidance. Management described its strategy as organic growth supplemented by complementary acquisitions and said the 2018 asset sales and debt repayment completed a five-year effort to simplify and de-risk the community-bank model.
- Key risks include local and national economic conditions, interest-rate changes, competition for loans and deposits, commercial credit concentration, regulatory requirements, liquidity and funding access, cybersecurity and third-party technology dependence, and the ability to realize expected acquisition benefits.
- Commercial business and real estate lending represented a significant share of the portfolio. Management noted that repayment of these loans can depend on borrower cash flows and collateral values; economic weakness in the company’s markets, including energy-related industries, could affect credit performance.
- Interest-rate simulations showed estimated 12-month net interest income changes of negative 0.1% under a +100-basis-point shock, negative 0.6% under +200 basis points, negative 1.3% under +300 basis points, and negative 3.7% under a −100-basis-point shock. The company said modeled exposure was within policy limits; actual results may differ.
- Off-balance-sheet commitments totaled $364.73 million, including $215.24 million to extend credit and $149.49 million of standby letters of credit and financial guarantees. The reserve for unfunded commitments was $66,000.
- The company was a defendant in ordinary-course legal matters and believed their resolution would not materially affect financial position, results, or cash flows. The filing does not identify a material pending contingency amount.
- The company expected to adopt the current expected credit loss standard in 2020 but could not reasonably estimate its effect; it warned adoption could materially change the allowance, equity, regulatory capital, and related controls and disclosures.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Separate underlying operating earnings from the 2017 deferred-tax revaluation charge and 2018 tax adjustment when assessing the 69% reported net-income increase.
- Track loan growth, commercial real estate exposure, nonperforming assets, OREO dispositions, net charge-offs, and allowance adequacy, particularly given higher 2018 charge-offs and nonperforming assets.
- Assess the durability of margin and earnings as acquired-loan accretion declines; verify the $6.39 million 2018 accretion contribution and expected impact of its runoff.
- Monitor deposit trends, funding costs, cash levels, and liquidity capacity after 2018 deposit outflows and the $50 million FHLB advance repayment.
- Evaluate capital and shareholder distributions alongside the special dividend and $34.41 million of repurchases; confirm future dividends remain subject to regulatory and capital constraints.
- Follow the Bankers Insurance equity interest and the remaining FDIC loss-share recoveries, including the stated coverage terms and potential reimbursement uncertainty.