First Community Bankshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company is a community banking financial holding company operating through First Community Bank across Virginia, West Virginia, North Carolina and Tennessee.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $123.1 million | $117.3 million |
| Net interest income | $89.5 million | $90.8 million |
| Net income | $38.8 million | $36.3 million |
| Diluted earnings per share | $2.46 | $2.18 |
| Net interest margin, FTE | 4.59% | 4.41% |
| Return on average assets | 1.75% | 1.56% |
| Return on average common equity | 11.54% | 10.64% |
Net income increased 6.77%; diluted EPS rose 12.84%. Noninterest income grew 27.36% to $33.7 million, including $7.0 million of litigation settlements. Net interest income fell 1.53%, while loan-loss provision increased 49.23% to $3.6 million. Noninterest expense was essentially unchanged at $69.8 million; it included $2.1 million of Highlands-related merger costs.
At year-end, total assets were $2.80 billion, loans $2.11 billion, deposits $2.33 billion, and stockholders’ equity $428.8 million. The allowance for loan losses was $18.4 million, or 0.87% of loans. Total borrowings were $1.6 million, down from $29.4 million. Cash and cash equivalents were $217.0 million. Operating cash flow was $56.7 million; cash increased $140.1 million during the year.
The company reported strong regulatory capital: its CET1 ratio was 14.31% and total risk-based capital ratio 15.21%; the Bank’s corresponding ratios were 12.87% and 13.78%. The Bank was classified as well-capitalized. Reported liquidity sources included $217.0 million of unencumbered cash, $261.5 million of unused FHLB capacity, $85.0 million of correspondent-bank lines, and $141.7 million of unpledged available-for-sale securities.
Material changes and unusual items
- Highlands Bankshares, with reported assets of $563 million, was acquired at close of business on December 31, 2019, for approximately $86.6 million in stock. It added 14 branches and 135 employees; its results did not contribute to 2019 earnings. The acquisition increased year-end assets and deposits substantially and added $36.8 million of goodwill.
- Net interest income declined despite a higher margin, reflecting lower average earning assets and reduced acquired-loan accretion income. FTE net interest margin rose 18 basis points to 4.59%.
- The $7.0 million litigation settlements were a significant nonrecurring contributor to noninterest income. The company also incurred $2.1 million of acquisition costs; further Highlands systems-conversion and integration expenses were expected in 2020.
- Common shares repurchased totaled 487,400 for approximately $16.4 million. Cash dividends were $0.96 per share, versus $0.78 in 2018, when a separate $0.48 special dividend was also paid.
- Nonperforming assets were $21.2 million, or 0.76% of assets, versus $24.0 million, or 1.07%, in 2018. Nonperforming loans improved to 0.81% of total loans; delinquent non-covered loans were $35.6 million, including $8.7 million from Highlands.
Outlook, risks and contingencies
Management cited expected cost savings and business synergies from Highlands, but did not provide quantified earnings guidance. It expected to adopt the current expected credit loss (CECL) standard on January 1, 2020, with a cumulative adjustment to retained earnings; the amount was not disclosed.
Key stated risks include economic weakness in the company’s regional markets, credit losses—particularly in commercial and real estate lending—interest-rate and liquidity risk, competition, regulatory requirements, cybersecurity and third-party technology disruptions, acquisition integration and goodwill impairment, and the planned phaseout of LIBOR after 2021. The filing also identified the potential effects of coronavirus-related disruption as a risk, without quantifying an impact. Management considered the allowance adequate at year-end but noted future additions could be required.
The company was a defendant in ordinary-course legal matters and believed their resolution would not materially adversely affect its financial position, results or cash flows. Management and the auditor reported effective internal control over financial reporting; Highlands, representing 19.8% of year-end assets, was excluded from the control assessment because it was acquired on the final day of the year. The financial statement and internal-control audit opinions were unqualified.
Important facts for investors to verify
- How much of 2019 earnings growth depended on the $7.0 million litigation settlements, and what earnings contribution and integration costs Highlands produces after closing.
- The acquired loan portfolio’s subsequent credit performance, including delinquency trends, impaired-loan estimates and adequacy of the allowance.
- The actual CECL opening adjustment and any related effects on retained earnings, capital ratios and provision expense.
- Whether deposit growth and liquidity remain durable as acquired deposits and time deposits mature, and how interest-rate changes affect net interest income.
- How the LIBOR transition affects the company’s loans, swaps and funding arrangements.