First Community Bancshares, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company is a regional financial holding company operating First Community Bank across Virginia, West Virginia, North Carolina, and Tennessee, with 44 branches. It also provides wealth management and insurance services.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Interest income | $95.3 million | $94.7 million | Up 0.6% |
| Net interest income | $87.2 million | $84.9 million | Up 2.8%; FTE net interest margin rose to 4.23% from 4.01%. Normalized FTE margin, excluding non-cash acquired-loan accretion, rose to 3.97% from 3.79%. |
| Provision for loan losses | $2.8 million | $1.3 million | Increased $1.5 million |
| Noninterest income | $26.2 million | $27.1 million | Down 3.0%, largely reflecting the prior-year insurance and branch divestitures |
| Noninterest expense | $68.6 million | $72.7 million | Down 5.7%; lower salaries and benefits and the absence of prior-year transaction costs contributed |
| Pre-tax income | $42.1 million | $37.9 million | Up 11.0% |
| Net income / diluted EPS | $21.5 million / $1.26 | $25.1 million / $1.45 | Down 14.5% / $0.19, chiefly due to a $6.55 million tax charge from the Tax Cuts and Jobs Act |
| GAAP efficiency ratio | 60.44% | 64.98% | Improved; non-GAAP ratio was 58.07% versus 61.75% |
| Total assets | $2.39 billion | $2.39 billion | Essentially unchanged |
| Loans, net of unearned income | $1.82 billion | $1.85 billion | Down 1.9%, partly due to runoff of covered loans |
| Deposits | $1.93 billion | $1.84 billion | Up 4.8% |
| Total borrowings | $80.1 million | $178.7 million | Down 55.2%; included repayment of trust preferred securities |
| Cash and cash equivalents | $158.0 million | $76.3 million | Increased $81.6 million |
| Stockholders’ equity | $350.7 million | $339.1 million | Up 3.4% |
Cash flow, liquidity, and capital
- Net cash from operating activities was $39.0 million, versus $43.1 million in 2016. Investing activities provided $65.2 million; financing activities used $22.5 million.
- Management reported $157.95 million of unencumbered cash, $411.2 million of unused FHLB borrowing capacity, $90.0 million available from correspondent bank lines, $6.15 million available through the Federal Reserve discount window, and $114.24 million in unpledged available-for-sale securities.
- Company capital ratios at year-end: CET1 13.98%, total risk-based capital 15.06%, and Tier 1 leverage 11.06%. The Bank’s corresponding ratios were 12.47%, 13.55%, and 9.84%. The Bank was classified as well-capitalized; management said both entities exceeded fully phased-in Basel III requirements.
- Common dividends were $0.68 per share for 2017, compared with $0.60 in 2016. The company repurchased 50,118 shares for $1.26 million.
Material changes and asset quality
- Net charge-offs fell 59.2% to $1.44 million; the allowance for loan losses increased to $19.28 million from $17.95 million. The allowance was 1.06% of total loans, versus 0.97%.
- Nonperforming assets were $21.97 million, broadly unchanged from $21.96 million. Nonperforming loans increased to $19.46 million from $16.58 million; non-covered nonaccrual loans rose 19.8% to $19.00 million. Non-covered OREO declined to $2.41 million from $5.11 million.
- Commercial loans were 58.8% of non-covered loans. Commercial business and real estate lending represented approximately 55.5% of the total loan portfolio, creating exposure to borrower cash flows, collateral values, and local economic conditions.
- Loss-share coverage on commercial loans expired June 30, 2017; covered loan balances fell to $27.95 million from $56.99 million. Single-family loss-share coverage was scheduled to continue through June 30, 2022, with commercial recoveries continuing through June 30, 2019.
- Borrowings declined significantly as certain cash-management accounts moved into interest-bearing deposits. The company redeemed $15.46 million of trust preferred securities in January 2017.
Outlook, commentary, risks, and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The company recorded $6.55 million of expense to revalue deferred tax balances, based on provisional estimates that were still being refined. Management estimated a 2018 effective tax rate of approximately 22%–23%.
- Excluding the tax-revaluation charge, management reported 2017 net income of approximately $28.04 million, up 11.6% from 2016. This is an adjusted comparison, not reported GAAP net income.
- Management described market-area conditions as relatively stable and the allowance as adequate, while noting that future provisions could be required. It reported adequate parent-company cash and investments to meet obligations, projected shareholder dividends, and anticipated debt repayments for the next 12 months.
- Interest-rate sensitivity modeling estimated 12-month net interest income would increase 4.3% under an immediate, sustained +300 basis-point shock and decline 5.1% under a −100 basis-point shock. Management stated modeled exposure was within policy limits; actual outcomes may differ.
- Key risks include credit deterioration, commercial real estate concentration, interest-rate and funding risk, regulatory constraints on bank dividends, competition, cybersecurity and third-party technology dependence, and uncertainty in estimates for loan losses, fair values, taxes, and FDIC reimbursements.
- The company was a defendant in ordinary-course legal matters and believed their resolution would not materially adversely affect its financial position, results, or cash flows. No specific material litigation outcome was identified in the filing text.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Investor facts to verify
- Final tax-return calculations and any subsequent adjustments to the provisional $6.55 million deferred-tax revaluation and the 2018 tax-rate outlook.
- Whether the increase in nonaccrual loans, especially owner-occupied residential credits, persists, and whether the allowance remains adequate as credit conditions evolve.
- Credit exposure and collateral quality in commercial lending, including the large non-farm, non-residential portfolio.
- Expected FDIC reimbursements and remaining obligations after commercial loss-share coverage expired, including claims and recovery timelines.
- Deposit growth, funding costs, borrowing capacity, and sensitivity of net interest income to rate changes.
- Dividend capacity and capital levels at both the holding company and Bank, considering regulatory restrictions and the company’s reliance on Bank dividends.