First Community Bancshares, Inc. — Q3 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. First Community is a community banking company operating 45 branches across Virginia, West Virginia, North Carolina, and Tennessee, with wealth management and insurance businesses. Assets under management of $767 million are managed for clients and are not company assets.
Financial performance and condition
- Earnings: Q3 net income was $6.38 million, up 2.0% year over year; diluted EPS was $0.37 versus $0.34. Nine-month net income was $18.72 million, up 1.8%; diluted EPS was $1.07 versus $0.97.
- Revenue and margins: Q3 net interest income was $21.12 million, down 2.5%; noninterest income was $5.90 million, down 16.7%. For the first nine months, net interest income was $63.92 million, up 0.5%, while noninterest income was $20.83 million, down 5.5%. Reported net interest margin was 3.95% for Q3 versus 4.05% a year earlier, and 4.01% for nine months versus 3.92%. Excluding noncash acquired-loan accretion, normalized margin was 3.77% in Q3 versus 3.68%, and 3.77% year to date versus 3.59%.
- Credit costs and asset quality: The company recorded a $1.15 million loan-loss provision recovery in Q3, including a $1.35 million reversal related to loans divested in the branch exchange. Nine-month provision expense was $755,000 versus $1.76 million in 2015. Nonperforming assets were $24.84 million, or 1.01% of assets, versus $27.47 million, or 1.12%, at year-end 2015. The allowance for loan losses was $19.63 million, 1.07% of loans.
- Cash flow: For the first nine months, operating cash flow was $34.79 million, compared with $48.78 million in 2015; investing activities provided $39.57 million, versus $72.68 million used in 2015; financing activities used $60.22 million, versus $151.73 million used. Cash and cash equivalents increased $14.14 million to $65.93 million.
- Balance sheet and liquidity: Total assets were $2.45 billion, down 0.5% from December 31, 2015. Loans before allowance increased $129.84 million, or 7.6%, to $1.84 billion; non-covered loans grew 9.3%. Deposits declined $11.36 million, or 0.6%, to $1.86 billion. The company reported $224.24 million of borrowings, including $118.53 million of repurchase agreements and $90.00 million of FHLB advances. Available liquidity included $65.93 million of cash and bank deposits, $495.15 million of unused FHLB capacity, $105 million of correspondent-bank lines, and $69.04 million of unpledged available-for-sale securities.
- Capital and shareholder returns: Stockholders’ equity was $337.54 million; book value per common share rose to $19.87 from $18.95 at year-end. The company repurchased 1,152,776 shares for $23.09 million year to date and declared common dividends of $0.44 per share. The company and bank exceeded regulatory “well capitalized” standards; the holding-company common equity Tier 1 ratio was 13.26%.
Material changes and unusual items
- On July 15, 2016, the company completed a branch exchange with First Bank: it acquired seven Southwestern Virginia branches and sold six North Carolina branches. The divestiture generated a $3.07 million gain; acquisition and divestiture expenses were $675,000 year to date. The transaction added $149.12 million of loans and $134.31 million of deposits with the acquired branches.
- The company recognized $4.64 million of other-than-temporary impairment losses on debt securities after changing its intent to sell certain trust-preferred securities, primarily to reduce issuer and financial-sector concentrations. This charge and the branch-divestiture gain materially affected noninterest income.
- Available-for-sale securities declined $145.32 million from year-end, primarily due to securities sales. Management said the sales were intended to increase cash reserves and reduce credit concentrations.
- On October 1, 2016, the company sold two insurance offices; management stated the impact was not material to the consolidated financial statements.
Outlook, commentary, and risks
The filing provides no specific earnings or revenue guidance. Management expects acquired-loan accretion income to decline as acquired portfolios run off. Management considered the allowance adequate at quarter-end but cautioned that future additions may be required and that allowance estimates depend on economic, interest-rate, regulatory, and portfolio conditions. The company reported its interest-rate-risk exposure within policy limits; its model estimated net interest income would fall 2.5% under an immediate, sustained 100-basis-point rate decline and rise 1.4% under a 300-basis-point increase. These are model scenarios, not forecasts.
Key disclosed risks include local and national economic conditions, interest-rate movements, credit quality, regulatory changes, technology, competition, and whether acquisitions deliver expected growth or cost savings. The filing reported $268.40 million of commitments to extend credit and standby letters of credit/financial guarantees; actual draws and losses may differ from contractual amounts. The company is involved in ordinary-course legal matters and said it did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth—particularly commercial real estate growth—can be sustained without deterioration in credit quality or higher provisions.
- Trends in nonperforming loans, delinquencies, criticized loans, charge-offs, and allowance adequacy; non-farm, non-residential loans represented 32.46% of the reported loan portfolio.
- The rationale, valuation, and potential further effects of the $4.64 million trust-preferred securities impairment, and whether additional securities sales or impairment charges occur.
- Whether the branch exchange delivers the anticipated cost savings and operating benefits, and how declining acquired-loan accretion affects future margins and earnings.
- Funding mix and liquidity, including deposit trends, FHLB and repurchase-agreement maturities, callable borrowing terms, and the availability of stated backup facilities.
- Capital ratios after share repurchases and growth, and the effect of interest-rate changes on net interest income.