First Community Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited consolidated results. Dollar amounts are in millions unless otherwise noted.
Business context
First Community Bancshares is a financial holding company operating community banking, insurance and wealth-management businesses. Its bank operated 44 branches across Virginia, West Virginia, North Carolina and Tennessee. The company reported one business segment, Community Banking.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $22.05 | $21.12 | $65.49 | $63.92 |
| Noninterest income | $7.14 | $5.90 | $18.30 | $20.83 |
| Noninterest expense | $16.91 | $18.56 | $51.45 | $56.09 |
| Provision for loan losses | $0.73 | Recovery of $1.15 | $2.16 | $0.76 |
| Net income | $7.65 | $6.38 | $20.27 | $18.72 |
| Diluted EPS | $0.45 | $0.37 | $1.19 | $1.07 |
| Net interest margin, FTE | 4.25% | 3.95% | 4.25% | 4.01% |
| Normalized net interest margin, FTE | 4.00% | 3.77% | 3.98% | 3.77% |
Q3 diluted EPS increased 21.6% year over year; nine-month EPS increased 11.2%. Q3 return on average assets was 1.29% and return on average common equity was 8.61%, compared with 1.03% and 7.58%, respectively, in Q3 2016.
At September 30, 2017, total assets were $2,374.8, down from $2,386.4 at December 31, 2016. Loans held for investment, net of allowance, were $1,818.5; deposits were $1,863.8, up from $1,841.3. Stockholders’ equity was $352.6, up from $339.1, and book value per share was $20.76 versus $19.95.
Nine-month operating cash flow was $25.9, investing cash flow was $35.0, and financing cash flow was a use of $32.1. Cash and cash equivalents rose $28.8 to $105.1. The company paid $8.5 in common dividends and repurchased $1.3 of stock during the period.
Total borrowings were $133.8, down from $178.7 at year-end 2016. The company redeemed $15.46 of trust preferred securities in January 2017. It reported $446.3 of unused FHLB borrowing capacity, $90.0 of correspondent-bank lines, $6.2 available at the FRB Discount Window and $73.7 of unpledged available-for-sale securities. A separate $15.0 unsecured holding-company credit line was undrawn and matures in April 2018.
Capital ratios remained well above regulatory minimums. At September 30, the company’s CET1, total risk-based capital and Tier 1 leverage ratios were 13.90%, 14.96% and 11.18%; the bank’s were 12.68%, 13.74% and 10.18%. Management said the bank remained “well-capitalized.”
Material changes versus comparable periods
- Q3 net income rose 19.9%, supported by higher net interest and noninterest income and lower operating expenses; higher loan-loss provision and income tax partly offset the gains.
- For the first nine months, net income increased 8.3%. Net interest income rose 2.4%, while noninterest income fell 12.1%, principally reflecting lower insurance commissions after the 2016 Greenpoint Insurance Agency sale and the absence of the prior-year branch-divestiture gain.
- Q3 2017 noninterest income also compares against Q3 2016, which included $4.64 of securities impairment losses and a $3.07 gain on branch divestiture. No securities impairment charges were recorded in 2017.
- Noninterest expense declined 8.3% for the nine-month period, mainly from lower salaries and benefits and reduced occupancy costs following 2016 branch and business transactions. Average full-time-equivalent employees fell to 569 from 624 year over year.
- Total loans declined 0.8% from year-end, as the covered Waccamaw portfolio ran off; non-covered loans grew 0.6%. Nonperforming loans rose to $19.5 from $16.6 at year-end, and the nonperforming-loan ratio increased to 1.06% from 0.89%. The allowance-to-total-loans ratio rose to 1.05% from 0.97%.
- Noninterest-bearing deposits increased $25.2 from year-end, while total borrowings decreased $44.9. The company also reported that securities’ unrealized loss exposure improved: aggregate depreciation was 0.42% of the investment portfolio, versus 1.51% at year-end 2016.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management described liquidity as adequate for obligations, projected dividends and anticipated debt repayments over the next 12 months, and said interest-rate exposure was within policy limits. Its modeled 12-month net interest income sensitivity at September 30 showed an increase of 1.9% under an immediate, sustained 300-basis-point rate increase and a decrease of 4.8% under a 100-basis-point decrease. These are model estimates, not forecasts.
Key risks cited include economic conditions in the company’s markets, Federal Reserve policy and interest-rate movements, credit and loan-loss estimation, regulatory changes, competition, technology, acquisition outcomes, and the ability to grow fee income. The company noted that significant estimates include the allowance for loan losses, fair values, the FDIC indemnification asset, goodwill and taxes. The FDIC loss-share coverage on commercial loans expired June 30, 2017, although recoveries continue through June 30, 2019; coverage on single-family loans runs through June 30, 2022.
Residential credit warrants attention: nonaccrual loans increased, with single-family owner-occupied loans representing 60.8% of non-covered nonaccrual balances. Residential mortgage loans in foreclosure proceedings rose to $10.0 from $2.5 at year-end. Management considered the allowance adequate, while cautioning that future additions may be required. Total off-balance-sheet commitments to extend credit and letters of credit were $364.3, compared with $345.7 at year-end.
The company is a defendant in ordinary-course legal matters and believes their resolution will not materially adversely affect its financial position, results or cash flows. It reported no material changes to the risk factors in its 2016 Form 10-K. Disclosure controls were concluded to be effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the rise in nonaccrual loans, especially residential real estate exposures and foreclosure proceedings, leads to higher charge-offs or provisions.
- How much of earnings and margin depends on noncash acquired-loan accretion; normalized margin excludes this item and was 4.00% in Q3.
- Whether reduced insurance commissions following the Greenpoint sale are offset by growth in other fee businesses; trust and wealth-management assets under management were $936.
- Whether the bank sustains deposit growth and liquidity while managing the runoff of covered loans and the expiration of commercial FDIC loss-share coverage.
- How interest-rate changes affect net interest income and funding costs; the filing’s sensitivity results rely on assumptions and modeled customer behavior.
- The effect of future credit-loss accounting adoption (ASU 2016-13), which the company expected to implement in the first quarter of 2020; the adoption impact was still under evaluation.