First Community Bankshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a community banking and wealth-management holding company operating 49 branches in Virginia, West Virginia, North Carolina, and Tennessee. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $25.1 | $26.8 | $77.2 | $80.9 |
| Noninterest income | $8.7 | $7.6 | $25.1 | $22.1 |
| Noninterest expense | $18.8 | $19.2 | $57.0 | $59.7 |
| Credit-loss provision (recovery) | $(1.4) | $4.7 | $(7.6) | $12.0 |
| Net income | $12.6 | $8.3 | $40.6 | $24.4 |
| Diluted earnings per share | $0.73 | $0.47 | $2.32 | $1.37 |
| FTE net interest margin | 3.56% | 4.10% | 3.72% | 4.33% |
Financial position, cash flow, and capital
- Total assets were $3.14 billion at September 30, up 4.3% from year-end 2020. Deposits were $2.67 billion, up 5.0%; loans held for investment before allowance were $2.15 billion, down 1.6%.
- Cash and cash equivalents totaled $635.0 million. For the first nine months, operating cash flow was $36.6 million, investing cash flow $48.7 million, financing cash flow $93.1 million, and cash increased $178.4 million.
- Borrowings were limited to $1.1 million of repurchase agreements; the company reported no long-term borrowings. Unused FHLB capacity was $292.0 million, with additional available FRB discount-window credit of $6.1 million, correspondent lines of $90.0 million, and unpledged securities of $53.6 million.
- Stockholders’ equity was $427.4 million. Company and Bank regulatory capital ratios exceeded required levels; the Bank was classified as well-capitalized. The Bank’s total risk-based capital ratio was 14.80% and Tier 1 leverage ratio 9.10%.
- Quarterly return on average assets was 1.59% and return on average common equity 11.65%. Book value per share was $25.03. The company declared $0.27 per share in Q3 dividends and repurchased 277,386 shares for $8.5 million during the quarter.
Material changes versus comparable periods
- Net income rose 52.5% in Q3 and 66.6% year to date, but the improvement was driven substantially by credit-loss recoveries versus provisions in 2020. Management cited improved economic forecasts and strong credit quality; the provision was a $7.6 million recovery for the first nine months of 2021 versus $12.0 million expense a year earlier.
- Net interest income fell 6.3% in Q3 and 4.5% year to date. The FTE net interest margin declined 54 basis points in Q3 and 61 basis points year to date, primarily reflecting the low-rate environment and lower asset yields. Deposit costs also declined.
- Noninterest income increased 14.2% in Q3 and 13.5% year to date, including stronger service-charge and interchange activity; year-to-date results also included a $1.0 million recovery on an acquired loan. Noninterest expense declined 1.8% in Q3 and 4.6% year to date, partly because 2020 included merger costs.
- Loans declined from year-end, mainly as PPP balances fell with SBA forgiveness. PPP loans outstanding were $26.9 million at September 30, compared with $57.1 million at December 31, 2020. Deposits grew, attributed in part to government stimulus and elevated customer balances.
- Effective January 1, 2021, the company adopted CECL, recording a $13.1 million increase to the loan allowance and a $5.9 million after-tax reduction to retained earnings. Comparative 2020 credit-loss figures use the prior accounting method and are not fully comparable.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said commercial activity had improved but had not returned to pre-pandemic levels, and continued to monitor energy, lodging, restaurant, entertainment, retail, and commercial real-estate borrowers.
- Credit indicators included a 1.05% nonperforming-loan-to-loan ratio and a 1.39% allowance-to-loan ratio. Nonaccrual loans were $22.1 million; current COVID-related deferrals were $4.7 million, down from $32.3 million at year-end 2020. Management cautioned that renewed economic deterioration could require additional provisions or result in charge-offs.
- COVID-related loan accommodations totaled 3,958 loans with original balances of $472.4 million since March 2020. Most were short-term deferrals and were not treated as troubled debt restructurings under the CARES Act provisions. The company also discussed potential costs, implementation burdens, and employee attrition associated with OSHA’s then-proposed vaccination/testing standard.
- The remaining FDIC loss-share agreement was terminated effective September 28, 2021, for a $176,000 payment. This removed the FDIC guarantee on specified loan losses as well as future responsibilities under that agreement.
- Management’s interest-rate simulation estimated that an immediate, sustained 100-basis-point increase could raise 12-month net interest income by 5.7%; this is a model result, not a forecast. The company also identified sensitivity to rates, funding costs, inflation, cyber and technology risks, regulation, and economic conditions.
- In November 2021, after quarter-end, the compensation committee approved exchanging certain unvested restricted-stock awards for options, subject to recipient consent. This followed a shareholder demand letter alleging grants may have exceeded a sublimit in the 2012 equity plan; the company disagreed with the allegation. The filing said the committee acted to ensure compliance during 2021.
- The company reported ordinary-course legal matters that it did not expect to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported profit growth is sustainable without further credit-loss recoveries, and how CECL estimates respond to changes in forecasts and borrower performance.
- Whether net interest margin stabilizes as rates and the mix of cash, loans, and deposits change; assess the assumptions behind management’s rate-sensitivity simulation.
- Credit quality in concentrated commercial real-estate and other pandemic-affected sectors, including performance of deferrals, special-mention loans, and accruing/nonaccrual TDRs.
- Deposit growth and liquidity durability as stimulus-related balances normalize, and whether available borrowing capacity remains accessible on acceptable terms.
- The outcome and financial or governance implications of the shareholder demand concerning the equity-plan sublimit, and the final terms and consent status of the post-quarter award exchanges.