First Community Bankshares, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The company is a community banking financial holding company operating through First Community Bank and wealth management subsidiaries. It reported unaudited results for the three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020 unless noted. The bank operated 50 branches in Virginia, West Virginia, North Carolina and Tennessee.
Key financial metrics
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior period |
|---|---|---|
| Net interest income | $26.28 million GAAP; $26.40 million fully taxable equivalent (FTE) | $27.68 million GAAP; $27.87 million FTE in Q1 2020 |
| Net interest margin | 3.92% GAAP; 3.94% FTE | 4.68% GAAP; 4.71% FTE in Q1 2020 |
| Net income | $14.60 million; diluted EPS $0.82 | $7.87 million; diluted EPS $0.44 in Q1 2020 |
| Profitability ratios | Return on average assets 1.94%; return on average common equity 13.94% | 1.16% and 7.49%, respectively, in Q1 2020 |
| Total assets | $3.14 billion | $3.01 billion at year-end 2020 |
| Loans held for investment | $2.15 billion gross; $2.11 billion net of allowance | $2.19 billion gross; $2.16 billion net at year-end 2020 |
| Deposits | $2.67 billion | $2.55 billion at year-end 2020 |
| Allowance for credit losses | $34.56 million, or 1.61% of loans | $26.18 million before CECL adoption at year-end 2020 |
| Cash and cash equivalents | $628.75 million | $456.56 million at year-end 2020 |
| Stockholders’ equity | $426.00 million; book value per share $24.22 | $426.73 million; $24.08 per share at year-end 2020 |
Cash flow and funding. Q1 operating cash flow was $12.62 million, investing cash flow was $41.44 million, and financing cash flow was $118.13 million, producing a $172.18 million increase in cash. Financing inflows primarily reflected deposit growth. The company reported no long-term borrowings and $1.52 million in repurchase agreements. Available liquidity included $267.02 million of unused FHLB capacity, $6.08 million from the Federal Reserve discount window, $85 million in correspondent-bank lines, and $50.51 million of unpledged available-for-sale securities.
Capital and credit quality. The company and bank were classified as well-capitalized. At March 31, company/bank Common Equity Tier 1 ratios were 14.53%/13.69%, total risk-based capital ratios were 15.79%/14.95%, and leverage ratios were 10.04%/9.46%. Net charge-offs were $725,000. Nonperforming assets were $28.33 million, up from $24.57 million at year-end; nonaccrual loans rose to $26.11 million from $22.00 million.
Material changes versus the prior comparable period
- Net income rose $6.73 million, or 85.5%, year over year. The principal driver was a $4.00 million recovery of credit-loss provision in Q1 2021 versus a $3.50 million provision in Q1 2020; the provision line therefore improved by $7.50 million.
- Net interest income declined $1.40 million, or 5.1%, and FTE net interest margin fell 77 basis points, reflecting the historically low interest-rate environment. Lower deposit costs partly offset reduced asset yields.
- Noninterest income was nearly flat at $7.57 million. Lower deposit service charges were offset by higher other service charges and fees; Q1 2020 included a $385,000 securities-sale gain.
- Noninterest expense fell $2.84 million, or 13.1%, largely because Q1 2020 included $1.89 million of merger expenses. Q1 2021 included $199,000 of FDIC premiums and assessments, versus none in the prior-year quarter.
- Compared with year-end, deposits rose 5.0%, while gross loans declined 1.8%. Cash increased substantially, which management attributed largely to government-stimulus-related deposit inflows.
Outlook, risks, contingencies and unusual items
- No quantified earnings or financial guidance is provided. Management said it believed high capital and liquidity would help the company withstand pandemic-related economic impacts, while cautioning that actual effects remain uncertain.
- The company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $13.11 million and reduced retained earnings by $5.87 million, net of tax. The new methodology makes some prior-period credit-loss comparisons not directly comparable.
- COVID-19 loan deferrals had fallen to $17.48 million from a peak of $436.11 million in June 2020. The company had processed 1,165 PPP loans totaling $85.21 million; $32.73 million had been forgiven by the SBA at quarter-end. Deferred interest and fees may need to be reversed if loans later incur credit losses.
- Management cited continuing risks from pandemic effects, borrower repayment capacity, economic forecasts, interest rates, deposit behavior and funding costs. The filing also discusses technology and cybersecurity, regulatory and legal changes, and execution risks.
- Off-balance-sheet commitments to extend credit were $234.83 million; standby letters of credit and financial guarantees were $182.26 million. The reserve for unfunded commitments was $465,000. The company said ordinary-course legal matters were not expected to have a material adverse effect.
- The board authorized a new repurchase plan for up to 2.4 million shares through January 26, 2024. During Q1, the company repurchased 187,700 shares for approximately $4.99 million and declared dividends of $0.25 per share.
- Management reported effective disclosure controls as of March 31, 2021, and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the $4.00 million provision recovery and improved economic forecasts are sustainable, and how the CECL allowance develops as forecasts and borrower performance change.
- Trends in nonaccrual loans and nonperforming assets, including whether the increase reflects CECL classification changes, underlying borrower deterioration, or both.
- Whether net interest margin stabilizes or declines further as assets reprice, deposit costs adjust, and elevated cash balances are deployed.
- The pace of PPP forgiveness and fee recognition, and whether current or future COVID-19 deferrals generate charge-offs or reversals of accrued income.
- Whether strong reported liquidity and regulatory capital persist alongside share repurchases, dividends, and any deterioration in credit quality.