Business context and reporting period
First Community Bancshares, Inc. is a financial holding company whose principal subsidiary, First Community Bank, provides community banking across Virginia, West Virginia, North Carolina, and Tennessee. The company also offers wealth management and insurance services. This Form 10-K covers the fiscal year ended December 31, 2016; fourth-quarter results are noted where available.
During 2016, the company exchanged six North Carolina branches for seven Virginia branches with First Bank and sold its Greenpoint insurance subsidiary. It reported one operating segment, Community Banking.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets | $2.386 billion | $2.462 billion |
| Total loans | $1.853 billion | $1.707 billion |
| Deposits | $1.841 billion | $1.873 billion |
| Total borrowings | $178.7 million | $219.4 million |
| Net interest income | $84.9 million | $84.8 million |
| Net income | $25.1 million | $24.5 million |
| Diluted EPS | $1.45 | $1.31 |
| Cash dividends per common share | $0.60 | $0.54 |
- Earnings and revenue: Net income rose 2.4%; diluted EPS increased 10.7%, aided in part by fewer weighted-average shares. Interest income fell to $94.7 million from $96.1 million, while interest expense fell to $9.8 million from $11.3 million. Noninterest income declined 8.3% to $27.1 million, and noninterest expense fell 4.5% to $72.7 million.
- Margins: GAAP net interest margin was 3.91%, up from 3.83%; fully taxable equivalent margin was 4.01%, versus 3.93%. Management’s non-GAAP normalized margin, excluding noncash purchase-accounting accretion, improved to 3.79% from 3.61%.
- Fourth quarter: Net income available to common shareholders was $6.4 million and diluted EPS was $0.38. Net interest income was $21.0 million; provision for loan losses was $0.5 million.
- Credit quality: Nonperforming assets declined to $22.0 million from $27.5 million; nonperforming assets were 0.92% of total assets. Nonaccrual loans were $16.5 million. The allowance for loan losses was $17.9 million, or 0.97% of loans, down from $20.2 million, or 1.19%. Net charge-offs rose to $3.5 million from $2.2 million.
- Cash flow and liquidity: Operating cash flow was $43.1 million; cash and cash equivalents increased $24.5 million to $76.3 million. Management cited adequate parent-company resources for the next twelve months. The bank had $558.8 million of unused FHLB capacity, $105.0 million of correspondent-bank lines, $9.1 million available at the Federal Reserve Discount Window, and $25.8 million of unpledged available-for-sale securities.
- Capital and shareholder returns: Company CET1, total risk-based capital, and Tier 1 leverage ratios were 13.88%, 15.79%, and 11.07%, respectively; the Bank’s were 12.93%, 13.98%, and 9.71%. The Bank was classified as well-capitalized. The company repurchased 1.18 million shares for $23.8 million and paid $10.4 million in common dividends. Year-end book value per common share was $19.95.
Material changes versus the prior comparable period
- Noncovered loans grew 10.6% to $1.796 billion, led by non-farm, non-residential and multifamily real estate lending; covered loans continued to run off. Average loan-to-deposit ratio increased to 96.70% from 86.56%.
- Total assets declined 3.1%, deposits declined 1.7%, and borrowings declined 18.5%. Investment securities fell substantially, with available-for-sale securities down 54.8%, reflecting maturities and sales; the company also directed funds toward loan growth and reduced borrowings.
- Net interest income was nearly flat, but lower provision expense and operating costs supported earnings. Lower insurance commissions and securities impairment losses weighed on noninterest income.
- Asset quality improved overall, particularly through a large reduction in covered other real estate owned. However, net charge-offs increased, including a loss on one commercial real estate relationship.
Outlook, risks, contingencies, and unusual items
- The filing provides no numeric earnings or revenue guidance. Management described local market conditions as relatively stable and said it pursued organic growth alongside selective acquisitions; it also stated the allowance was adequate, while cautioning that future additions may be required.
- Interest-rate risk remains material. The company’s model estimated that a sustained 100-basis-point rate decrease would reduce twelve-month net interest income by 3.1%; a 300-basis-point increase would raise it by 0.6%. These are modeled estimates, not forecasts.
- Commercial lending is a key exposure: commercial business and real estate loans totaled $1.02 billion, or 54.81% of the portfolio, and commercial construction loans were $61.5 million. Credit outcomes depend on borrower cash flows and collateral values.
- Unusual 2016 items included $4.65 million of securities impairment losses after the company decided to sell certain trust-preferred securities to reduce issuer concentrations; a $3.68 million net gain on divestitures; and $730,000 of merger, acquisition, and divestiture expense. The reported result also included $4.77 million of noncash acquired-loan accretion.
- FDIC loss-share coverage on commercial loans was scheduled to expire June 30, 2017, with recoveries continuing through June 30, 2019; single-family coverage extends to 2022. The FDIC indemnification asset declined to $12.2 million from $20.8 million.
- In January 2017, the company redeemed all $15.46 million of its trust preferred securities. It also disclosed $270.0 million of off-balance-sheet commitments, including $261.8 million to extend credit; the reserve for unfunded commitments was $326,000.
- The company was a defendant in ordinary-course legal matters and believed their resolution would not materially affect its financial position, results, or cash flows. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective.
- Principal risks include economic and borrower-credit conditions, interest-rate and funding sensitivity, regulatory and capital requirements, deposit competition, valuation and reserve estimates, cybersecurity and third-party service disruption, and the execution and integration of acquisitions.
Important facts for investors to verify
- Whether commercial real estate growth and the higher loan-to-deposit ratio can be sustained without weakening underwriting or asset quality.
- How elevated net charge-offs and the lower allowance-to-loan ratio compare with subsequent credit performance and management’s loss assumptions.
- Whether normalized margin gains persist as acquired-loan accretion declines and deposits and borrowings reprice in changing rate conditions.
- The realized economics of the branch exchange and Greenpoint sale, including earn-out payments, integration savings, and ongoing insurance commission trends.
- Liquidity and dividend capacity at the parent level, including regulatory limits on Bank dividends; confirm the post-year-end trust-preferred redemption and its funding effects.
- Progress on expiring FDIC loss-share coverage, associated reimbursement claims, and the remaining indemnification asset.