Business context and reporting period
First Community Bankshares, Inc. is a Virginia-based financial holding company operating through First Community Bank. It provides commercial and consumer banking and wealth-management services through 50 branches in Virginia, West Virginia, North Carolina, and Tennessee. This Form 10-K reports the fiscal year ended December 31, 2020; fourth-quarter figures are unaudited.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $3.011 billion | $2.799 billion |
| Loans, year-end | $2.187 billion | $2.114 billion |
| Deposits, year-end | $2.546 billion | $2.330 billion |
| Net interest income | $108.572 million | $89.453 million |
| Net interest margin, FTE | 4.29% | 4.59% |
| Provision for loan losses | $12.668 million | $3.571 million |
| Noninterest income | $29.833 million | $33.677 million |
| Noninterest expense | $79.625 million | $69.763 million |
| Net income | $35.926 million | $38.802 million |
| Diluted EPS | $2.02 | $2.46 |
| Return on average assets | 1.24% | 1.75% |
| Cash and cash equivalents, year-end | $456.561 million | $217.009 million |
- Fourth-quarter 2020 net income was $11.550 million, or $0.65 diluted EPS, versus $9.564 million, or $0.61, in fourth-quarter 2019. Quarterly data are unaudited.
- Net cash from operating activities was $45.844 million, down from $56.655 million. Cash and cash equivalents increased $239.552 million, principally alongside deposit growth; investing activities provided $17.798 million and financing activities provided $175.910 million.
- Year-end borrowings were $964,000, all short-term repurchase agreements; the filing reports no long-term debt outstanding. Total stockholders’ equity was $426.730 million.
- Regulatory capital remained strong: the Bank’s CET1 ratio was 13.57%, total risk-based capital ratio 14.82%, and Tier 1 leverage ratio 9.73%. The Bank was classified as well-capitalized.
- Reported net interest income and margin are GAAP; FTE margin is a non-GAAP measure. The filing reports no separate operating-margin figure.
Material changes versus the prior comparable period
- Net income declined $2.876 million, or 7.41%, while diluted EPS fell 17.88%. Average diluted shares rose to 17.815 million from 15.756 million, reflecting in part the Highlands acquisition completed at year-end 2019.
- Net interest income rose $19.119 million, supported by a larger average loan and earning-asset base and Highlands-related purchase-accounting accretion. The FTE net interest margin nevertheless fell 30 basis points, reflecting historically low rates.
- The provision for loan losses increased $9.097 million, primarily due to pandemic-related economic uncertainty. The allowance rose to $26.182 million from $18.425 million; net charge-offs were $4.911 million versus $3.413 million.
- Noninterest income fell $3.844 million. A $6.995 million litigation settlement had increased 2019 income; 2020 also saw lower deposit service charges amid pandemic disruptions, partly offset by higher card-related and other fees.
- Noninterest expense increased $9.862 million, largely from Highlands-related staffing and branch costs. Deposits rose 9.29%, including a $144.927 million increase in noninterest-bearing deposits, which management attributed largely to government stimulus and changed consumer spending.
- Available-for-sale securities declined to $83.358 million from $169.574 million, reflecting sales, maturities, prepayments, and calls. Cash balances rose substantially; management described stimulus-driven deposit inflows as a key contributor.
Outlook, risks, contingencies, and unusual items
- Management did not provide numerical earnings guidance. It said the pandemic’s duration and economic effects remain uncertain and that further deterioration could increase credit losses, reduce fee and interest income, or affect capital and liquidity.
- At year-end, 3,625 commercial and consumer loans totaling $458.17 million had received COVID-related modifications. Current deferrals were $26.54 million commercial and $5.72 million consumer, down from a $436.11 million peak at June 30, 2020. Deferred interest and fees could require reversal if losses emerge.
- The Bank funded 803 PPP loans with original principal of $62.74 million; $3.94 million, or 6.46%, had been forgiven by the SBA by year-end. The filing identifies possible litigation and SBA-guaranty risks if loan origination, funding, servicing, or forgiveness requirements are not met.
- Management estimated that CECL adoption on January 1, 2021 would produce an allowance for credit losses of approximately $39.29 million and an allowance for unfunded commitments of approximately $576,000, with an estimated after-tax reduction in stockholders’ equity of about $5.87 million. These were estimates subject to changing portfolio and economic assumptions.
- Goodwill was $129.565 million, approximately 30.36% of equity. The October 2020 impairment test found no impairment, but management warned that prolonged adverse economic or market conditions could lead to future impairment.
- Available liquidity sources included $456.56 million in unencumbered cash, $292.92 million of unused FHLB capacity, $85.00 million of correspondent-bank lines, $46.79 million of unpledged available-for-sale securities, and $6.08 million of FRB Discount Window capacity. Parent-company cash was $10.089 million, and it depends principally on Bank dividends, which are subject to regulatory limits.
- Off-balance-sheet commitments totaled $408.430 million, including $229.408 million of credit commitments and $179.022 million of letters of credit and financial guarantees. The reserve for unfunded commitments was $66,000. The Company said ordinary-course legal matters were not expected to have a material adverse effect.
- The Company repurchased 734,653 shares for approximately $21.872 million in 2020, then paused repurchases for the remainder of the year amid pandemic uncertainty. In February 2021, the Board approved a new authorization for up to 2.4 million shares.
Most important facts for investors to verify
- Whether pandemic-related borrower stress causes further deterioration in criticized, nonaccrual, or deferred loans, and whether the $26.182 million allowance proves adequate.
- The realized impact of CECL adoption versus the company’s estimated $39.29 million allowance and $5.87 million after-tax equity reduction.
- How much of 2020 deposit growth is durable after stimulus-related inflows, and whether excess liquidity can be deployed without further pressuring net interest margin.
- Whether Highlands integration delivers the expected operating efficiencies and whether acquisition-related accretion or costs materially affect future earnings.
- The sustainability of earnings and dividends given lower reported profitability, regulatory restrictions on Bank dividends, and the absence of specific forward guidance.