Update: First Community Bancshares Earnings

| About: First Community (FCBC)


First Community Bancshares reported Q2 '14 earnings.

The results confirm previous view that the bank's earnings were set up for significant improvements due to the accounting for its FDIC receivable.

In addition to hidden earnings power, the bank continues to grow its loan portfolio and has an acquisition pending that will add $440 million in deposits.

For Q2 2014, First Community Bancshares (NASDAQ:FCBC) reported net income up 28% YOY, and up 23% from the first quarter of 2014. Helping the bank's consistently growing bottom line was a significant increase (9.6% annualized growth) in the non-covered loan portfolio, and declining charges for both provisions expenses, and amortization of its FDIC indemnification asset. Down 14% from where shares traded at the beginning of April, FCBC looks even more attractive after the announcement of this quarter's earnings beat.

For the quarter, the company earned $0.36 per share, compared to $0.29 earned in the first quarter of 2014 (up 24.1%), and $0.26 reported for the second quarter of 2013 (up 38.5%). When I initiated coverage in June, I predicted significant earnings improvements tied to declining provision expenses, and the indemnification asset, and that was exactly what happened this quarter. With non-covered nonaccrual loans (including 30 days past due) down to just 1.67% of all non-covered loans, the bank was able to cut its quarterly provision expense to $1.279 million, less than half the charge seen during the same period in 2013 ($3.2 million). In addition to this, the lower balance on the FDIC asset means that the linked amortization charge will continue to fall each quarter, and in this period a charge of $936 thousand was $726 thousand less than the same quarter last year.

With where we are now, I expect less improvement from provision expenses, due to the increasing loan portfolio, but the FDIC asset is still large at $30.9 million (more than 10% of the bank's market cap). Over $6 million in earnings power has been hidden by the accounting for this transaction over the past 4-quarters, but steady decreases in the amortization expense (due to the falling balance) ensures consistent earnings beats over the next year and a half. This, on top of the bank's growing loan portfolio, low level of operating expenses, and announcement to acquire seven branches with $440 million in deposits, only strengthens my conviction that FCBC will continue to outperform. There is no telling how long it will take for the market to take notice, but I'm comfortable collecting my 3.55% dividend while I slowly add more shares.

Disclosure: The author is long FCBC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.