First Community Bankshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is a community banking and wealth-management holding company operating primarily in Virginia, West Virginia, North Carolina, and Tennessee. Results include Highlands Bankshares, acquired at year-end 2019, so comparisons with 2019 are affected by the acquisition.
Financial performance and condition
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Net interest income (GAAP) | $26.8 million | $80.9 million |
| Noninterest income | $7.6 million | $22.1 million |
| Net income | $8.3 million | $24.4 million |
| Diluted earnings per share | $0.47 | $1.37 |
| Net interest margin (FTE) | 4.10% | 4.33% |
| Return on average assets | 1.11% | 1.14% |
For Q3, net income declined 9.7% year over year; nine-month net income fell 16.6%. Net interest income rose 20.8% for the quarter and 20.0% year to date, substantially reflecting Highlands. The FTE net interest margin declined 46 basis points for Q3 and 30 basis points year to date, principally due to historically low interest rates. Nine-month operating cash flow was $32.0 million, investing cash flow $0.3 million, and financing cash flow $126.3 million; cash and cash equivalents ended at $375.7 million.
At September 30, total assets were $2.95 billion, loans held for investment net of allowance were $2.17 billion, and deposits were $2.49 billion. Deposits increased $162.3 million, or 7.0%, from year-end 2019, including $122.4 million in noninterest-bearing deposits; management attributed significant deposit growth to government stimulus. The company reported no long-term borrowings and $956,000 of repurchase-agreement borrowings. Stockholders’ equity was $419.9 million. Company and Bank total risk-based capital ratios were 15.14% and 14.46%, respectively; management said the Bank remained well-capitalized.
Material changes versus comparable periods
- Provision for loan losses was $4.7 million in Q3, up $4.0 million from Q3 2019; the nine-month provision was $12.0 million, up $8.6 million. The allowance rose to $27.3 million from $18.4 million at year-end, and equaled 1.24% of total loans versus 0.87%.
- Total nonperforming assets increased to $27.4 million from $21.2 million at year-end; nonperforming loans were 1.15% of total loans versus 0.81%. Nonaccrual loans rose to $24.8 million. Management cited acquired Highlands loans and certain commercial real estate migrations, among other factors.
- Noninterest income was nearly unchanged in Q3 but declined 9.3% year to date, partly because 2019 included litigation settlements of $0.9 million in Q3 and $4.6 million for the nine months. Deposit service charges were lower amid pandemic-related disruption.
- Noninterest expense increased 9.9% in Q3 and 17.4% year to date, primarily reflecting Highlands operating costs; nine-month 2020 expense also included $1.9 million of residual merger costs.
- The company repurchased 734,653 shares for $21.9 million during the first nine months, completing its prior authorization in Q1. No shares were repurchased in Q3, and management had deferred consideration of a new authorization to preserve capital. Dividends declared were $0.25 per share in Q3 and $0.75 per share year to date.
Outlook, risks, and unusual items
- COVID-19 and credit: The company modified or deferred 3,362 loans totaling $426.45 million through September 30. Current deferrals were reported as $102.54 million commercial and $13.09 million consumer; the filing also identifies approximately $74.41 million of re-deferrals within those balances. Accrued interest on deferred loans was $1.10 million. Management warned that future credit losses could require reversal of accrued interest and fees, and expects provisions after September 30 to be materially affected by the pandemic. Hotel/motel and retail exposures were identified as higher risk.
- PPP: The company processed 803 Paycheck Protection Program loans totaling $62.74 million in original principal. PPP balances were approximately $61.0 million at quarter-end. The filing warns of possible litigation, SBA guaranty or forgiveness issues, and related credit and reputational risks.
- Allowance accounting: The company elected the CARES Act option to defer CECL adoption. It anticipated a cumulative-effect retained-earnings adjustment of approximately $5.61 million upon adoption, plus an approximately $7.04 million opening allowance adjustment for acquired purchased-credit-deteriorated loans. Timing depends on the applicable deferral period and subsequent rules.
- Liquidity and rates: Management described liquidity and capital as strong. Reported available sources included $322.82 million of unused FHLB capacity, $85.0 million of correspondent-bank lines, $6.08 million at the FRB Discount Window, and $54.80 million of unpledged available-for-sale securities. Low rates pressure asset yields and margins; the company also described work to transition LIBOR-linked contracts.
- Management said it could not predict the pandemic’s full economic impact. The filing also notes possible goodwill impairment, operational and cybersecurity risks, and uncertainty in borrowers’ ability to repay. Existing legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether loan deferrals, re-deferrals, and borrower payment performance translate into higher delinquencies, charge-offs, or additional reserve needs.
- Credit quality and collateral trends in hotel/motel, retail, and acquired Highlands loan portfolios, including the growth in nonaccrual loans and classified credits.
- The timing and realized retained-earnings and allowance effects of CECL adoption, including treatment of acquired credit-deteriorated loans.
- Whether deposit growth persists, how excess liquidity is deployed, and the effect of prolonged low rates on net interest margin.
- PPP loan forgiveness, SBA guaranty compliance, and any related litigation or losses; also confirm subsequent capital allocation and share-repurchase decisions.