First Community Bankshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The company is a community banking and wealth-management holding company operating in Virginia, West Virginia, North Carolina, and Tennessee. Results include Highlands Bankshares, acquired at the close of December 31, 2019.
Financial performance and condition
| Metric | Q1 2020 | Comparable / reference |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $35.23 million | $30.27 million in Q1 2019 |
| Net interest income | $27.68 million | $22.19 million in Q1 2019 |
| Net interest margin | 4.68% GAAP; 4.71% FTE | 4.55% GAAP; 4.60% FTE in Q1 2019 |
| Provision for credit losses | $3.50 million | $1.22 million in Q1 2019 |
| Net income / diluted EPS | $7.87 million / $0.44 | $9.63 million / $0.60 in Q1 2019 |
| Return on average assets / common equity | 1.16% / 7.49% | 1.75% / 11.77% in Q1 2019 |
| Net cash from operating / investing / financing activities | $11.37 million / $80.49 million / $(67.26) million | Cash and equivalents increased $24.60 million |
- At March 31, total assets were $2.739 billion, loans held for investment net of allowance were $2.076 billion, deposits were $2.288 billion, and stockholders’ equity was $411.61 million.
- Cash and cash equivalents were $241.61 million. Total borrowings were $2.35 million, with no long-term borrowings. The company reported $235.67 million of unused FHLB borrowing capacity net of letters of credit, plus other available liquidity sources.
- The allowance for loan losses was $21.14 million, up from $18.43 million at year-end. Nonperforming assets were $23.86 million, or 0.87% of assets; nonaccrual loans were $20.41 million.
- Company and Bank remained “well-capitalized.” At March 31, their total risk-based capital ratios were 14.58% and 14.10%, respectively; leverage ratios were 10.59% and 10.11%.
Material changes versus comparable periods
- Net income declined 18.3% year over year and diluted EPS fell from $0.60 to $0.44. Higher credit-loss provision, Highlands-related costs and increased operating expenses more than offset higher net interest income.
- Net interest income rose 24.8% year over year, primarily reflecting Highlands and higher average loans. Management attributed the 11-basis-point increase in FTE margin mainly to the acquisition.
- Noninterest expense increased 29.1% to $21.66 million, including $1.89 million of residual merger expenses and higher salaries and benefits. Q1 2019 included $1.68 million of litigation settlements, contributing to lower noninterest income in 2020.
- Compared with year-end, assets fell $59.89 million, largely as available-for-sale securities declined $61.82 million, including $51.03 million of securities sales. Deposits declined $41.50 million and loans declined $17.74 million.
- Capital declined from year-end partly because the company repurchased 734,653 shares for approximately $21.87 million and declared $4.59 million in dividends. Management said it suspended further repurchases given the economic outlook.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic had begun to significantly affect its markets, while the eventual duration and financial impact remained uncertain. It expected credit-loss provisions after March 31 to be materially affected by the pandemic and could not estimate the impact of potential reversals of accrued interest and fees on deferred loans.
- Through May 1, the company had modified or deferred payments on 2,176 loans totaling $327.52 million. Management identified hotel/motel and retail portfolios as among the greatest risks. Through May 1, it had closed or obtained SBA approval for 641 PPP loans totaling $58.26 million; PPP guarantees, compliance and related litigation were identified as risks.
- The company recorded $3.50 million of Q1 provision to build reserves for pandemic-related uncertainty. Management considered the allowance adequate but cautioned that further additions could be needed.
- The company elected under the CARES Act to defer compliance with CECL during the permitted period. Upon adoption, it anticipated a roughly $5.61 million cumulative-effect adjustment to retained earnings and a roughly $7.04 million adjustment to the opening allowance related to purchased credit-deteriorated loans.
- There was no formal earnings or full-year numerical guidance in the provided filing text. Management cited strong capital and liquidity, but emphasized uncertainty from COVID-19, borrower repayment capacity, collateral values, loan demand, interest rates and local economic conditions.
- Other items to note: the Highlands acquisition’s purchase price was $86.65 million, with preliminary fair values subject to refinement; the company reported no material adverse expected outcome from ordinary-course litigation; and disclosure controls were assessed as effective.
Important facts for investors to verify
- Subsequent credit performance of the $327.52 million in modified or deferred loans, including whether deferred interest and fees remain collectible.
- Actual future provisions, charge-offs, nonperforming loans and allowance needs as pandemic effects develop.
- PPP loan processing, SBA guarantee eligibility and forgiveness outcomes, and any related claims or litigation.
- CECL adoption timing and the realized retained-earnings and allowance impacts compared with management’s estimates.
- Highlands integration costs, purchase-accounting refinements and expected synergies, as well as capital and liquidity after the share-repurchase suspension.