FIRST COMMUNITY BANKSHARES INC quarterly report, Q2 FY2018

Business context and reporting period

First Community Bancshares, Inc. is a financial holding company operating community banking, wealth management and insurance businesses across Virginia, West Virginia, North Carolina and Tennessee. Its 10-Q covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are to December 31, 2017. The Bank operated 44 branches. Trust and wealth-management businesses managed $969 million in assets under fee-based arrangements.

Financial performance and condition

Unless noted otherwise, amounts below are in millions of dollars. Income-statement comparisons are year over year.

• Profitability: Q2 net income rose 41.3%; management reported return on average assets of 1.53% and return on average common equity of 10.68%. The effective tax rate fell to 21.62% from 31.56%, primarily reflecting the Tax Cuts and Jobs Act.
• Margins: Q2 net interest margin was 4.30% on a fully taxable-equivalent basis, down 2 basis points year over year; normalized margin, excluding noncash acquired-loan accretion, increased 5 basis points to 4.04%. For the first half, FTE margin was 4.34% versus 4.25%; normalized margin was 4.03% versus 3.97%.
• Balance sheet: Total assets were $2.35 billion, down 1.7% from year-end. Loans net of unearned income were $1.80 billion, down $18.2 million; deposits were $1.90 billion, down $25.2 million. Available-for-sale securities increased $30.9 million to $196.4 million, largely from Treasury purchases.
• Credit quality: Allowance for loan losses was $19.6 million, or 1.09% of total loans. Nonperforming assets rose to $27.1 million (1.15% of assets) from $22.0 million (0.92%) at year-end. Nonaccrual loans were $22.0 million; OREO increased to $4.85 million from $2.51 million.
• Cash flow and liquidity: First-half operating cash flow was $21.1 million; investing activities used $15.0 million and financing activities used $56.1 million. Cash and cash equivalents declined $50.0 million to $108.0 million, mainly reflecting securities purchases, deposit outflows, repurchases and dividends. Reported available liquidity included $372.0 million of unused FHLB capacity, $90.0 million of correspondent-bank lines, $6.2 million at the FRB Discount Window and $148.7 million of unpledged available-for-sale securities.
• Debt and capital: Borrowings totaled $77.9 million: $25.0 million wholesale repurchase agreements and $50.0 million FHLB advances, plus $2.9 million retail repurchase agreements. Company and Bank total risk-based capital ratios were 14.88% and 13.21%, respectively; management said both remained well capitalized. Total equity declined to $339.1 million.

Material changes versus comparable periods

• First-half net income increased 42.1%, with higher noninterest income, higher net interest income and lower income taxes. Q2 GAAP net interest income was nearly flat, while first-half net interest income rose 2.8%.
• Noninterest income growth was substantially affected by less negative amortization of the FDIC indemnification asset after commercial-loan loss-share coverage expired in 2017. Deposit service charges and other fees also increased. The prior-year comparison included a $0.66 million securities sale loss and $0.46 million in life-insurance death proceeds.
• Noninterest expense increased 1.6% for the first half. Other operating expense rose, including higher property write-downs and OREO-related losses and expenses. First-half net charge-offs increased to $0.68 million from $0.49 million.
• Shareholders received a $0.48-per-share special dividend in addition to regular dividends; first-half dividends paid totaled $14.2 million. The Company repurchased 474,240 shares for $14.7 million, versus 10,602 shares in the prior-year period. The Board increased repurchase-plan authorization by 1.6 million shares in June.

Outlook, risks and unusual items

The filing provides no specific earnings or revenue guidance. Management said cash reserves and investments were expected to cover working capital, projected dividends and anticipated debt repayments for the next 12 months. It considered the loan-loss allowance adequate but cautioned that future additions could be required. Interest-rate, credit, liquidity, economic, regulatory and competitive risks remain relevant; results may differ materially from forward-looking statements.

OREO-related losses and valuation adjustments were notable: non-covered OREO rose during the period, and first-half net losses on OREO sales were $0.77 million versus $0.42 million a year earlier. Securities had $2.31 million of gross unrealized losses at quarter-end; management reported no other-than-temporary impairment charges. The Company reported routine legal proceedings, which it did not expect to have a material adverse effect. No material changes to the 2017 Form 10-K risk factors were reported.

2018 adoption of several accounting standards, including revenue recognition, had no material financial-statement effect. The Company expected to adopt the credit-loss standard in 2020 and was evaluating its impact; it expected lease-standard adoption in 2019 to increase reported assets and liabilities, without a material effect on results.

Important facts for investors to verify

• Whether the increase in nonperforming assets, nonaccrual loans and OREO continues, and how collateral values and loss reserves develop.
• How much future reported earnings depend on FDIC indemnification-asset amortization, acquired-loan accretion and other nonrecurring or comparison-period items.
• Whether loan and deposit trends, funding costs and interest-rate sensitivity support sustainable margins and liquidity.
• The capital and shareholder-return effects of continued repurchases and dividends, including the special dividend and expanded repurchase authorization.
• The filing reports Q2 cash dividends per share of $0.18 and first-half cash dividends per share of $0.84; verify the timing and composition of regular and special dividends when comparing distributions.