Business context and reporting period
First Community Bancshares, Inc. is a community banking financial holding company operating through First Community Bank and related insurance and wealth-management businesses across Virginia, West Virginia, North Carolina, and Tennessee. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods unless noted. Amounts below are in U.S. dollars.
Financial performance and condition
- Second-quarter earnings: Net income was $6.42 million, up 2.6%; diluted EPS was $0.38, versus $0.36. Net interest income was $22.29 million, up 2.8%. Income before taxes was $9.38 million.
- Six-month earnings: Net income was $12.62 million, up 2.3%; diluted EPS was $0.74, versus $0.70. Net interest income was $43.44 million, up 1.5%.
- Margins: Second-quarter net interest margin was 4.32% on a fully taxable-equivalent basis, versus 4.08%; normalized margin, excluding noncash acquired-loan accretion, was 3.99%, versus 3.81%. Six-month FTE and normalized margins were 4.25% and 3.97%, respectively, compared with 4.04% and 3.77%.
- Revenue and expenses: Second-quarter noninterest income fell 22.1% to $5.48 million, primarily reflecting the Greenpoint Insurance Agency divestiture; noninterest expense fell 6.8% to $17.46 million. For the first half, noninterest income fell 25.2% to $11.17 million and noninterest expense fell 8.0% to $34.54 million. The quarter included a $657,000 securities-sale loss and $459,000 of bank-owned life insurance death proceeds.
- Assets and funding at June 30: Total assets were $2.37 billion, down 0.8% from year-end 2016. Loans net of allowance were $1.82 billion; deposits were $1.86 billion. Cash and cash equivalents were $106.80 million. Total borrowings were $136.01 million, down from $178.71 million at year-end; the company redeemed $15.46 million of trust-preferred securities in January.
- Cash flow and capital: First-half operating cash flow was $17.02 million, investing cash flow was positive $45.79 million, and financing cash flow was negative $32.32 million; cash increased $30.49 million. Stockholders’ equity was $348.78 million. Company and bank capital ratios exceeded regulatory well-capitalized thresholds; the bank’s CET1 ratio was 13.54% and total risk-based capital ratio was 14.69%.
- Credit quality: Nonperforming assets were $24.73 million, or 1.04% of assets, versus $21.96 million, or 0.92%, at year-end. Nonaccrual loans rose to $20.59 million from $16.46 million. The allowance for loan losses was $18.89 million, or 1.03% of loans; first-half net charge-offs were $488,000.
Changes, outlook, risks, and unusual items
- Management attributed higher quarterly earnings mainly to lower expenses and slightly higher net interest income, partly offset by lower noninterest income and a higher loan-loss provision. The first-half provision was lower year over year, at $1.43 million.
- Insurance commissions declined substantially following the 2016 Greenpoint sale. Management also cited higher legal fees; other operating expense rose 7.7% in the quarter and included a property write-down.
- FDIC loss-share coverage on commercial loans expired June 30, 2017, with recoveries continuing through June 30, 2019; coverage on single-family loans runs through June 30, 2022. The FDIC indemnification asset fell to $8.16 million from $12.17 million at year-end, including $2.92 million of first-half net amortization.
- Management said liquidity was adequate for anticipated needs. Available sources included $509.23 million of unused FHLB borrowing capacity, $90 million of correspondent-bank lines, $9.09 million at the FRB Discount Window, and $25.25 million of unpledged available-for-sale securities.
- Interest-rate sensitivity modeling indicated that an immediate, sustained 100-basis-point decline could reduce 12-month net interest income by 4.6%; a 300-basis-point increase could raise it by 1.3%. Management stated exposure was within policy limits. A 25-basis-point federal funds rate increase occurred in June.
- No specific earnings guidance was provided. The filing highlights risks from economic conditions, interest-rate changes, credit losses, regulatory changes, competition, and the ability to manage these risks. Management considered the allowance adequate but cautioned that future additions may be required. Legal matters were not expected to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether rising nonaccrual loans and nonperforming assets, particularly residential and commercial real estate exposures, lead to higher provisions or charge-offs.
- How the end of commercial FDIC loss-share coverage affects future credit costs, indemnification-asset amortization, and reported earnings.
- Whether recurring fee income can offset the ongoing effect of the insurance divestiture and the quarter’s securities-sale loss.
- The sustainability of margin improvement, given the decline in normalized loan yields and the modeled sensitivity to falling rates.
- Whether cash generation, deposit trends, and available borrowing capacity remain sufficient as loans, commitments, and funding costs change.