Business context and reporting period
First Community Bankshares, Inc. is a community banking and wealth-management holding company operating across Virginia, West Virginia, North Carolina and Tennessee. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Amounts below are in millions except per-share data and ratios.
Financial performance and condition
- Earnings: Third-quarter net income was $9.16 million, up 0.6%; diluted EPS was $0.58, up 5.5%. Nine-month net income was $29.24 million, up 8.2%; diluted EPS was $1.85 versus $1.61.
- Revenue and margins: Q3 GAAP net interest income was $22.22 million, down 0.5%; FTE net interest margin was 4.56%, up 24 basis points. Nine-month GAAP net interest income was $67.40 million, up 0.6%; FTE margin was 4.63%, up 33 basis points. Noninterest income rose 17.1% to $7.63 million in Q3 and 20.9% to $24.36 million year to date, including litigation settlements.
- Expenses and credit costs: Q3 noninterest expense declined 3.8% to $17.44 million; nine-month expense declined 2.9% to $50.88 million. Provision for loan losses rose to $0.68 million in Q3 from $0.50 million and to $3.48 million for nine months from $1.49 million.
- Returns: Q3 return on average assets was 1.65% and return on average common equity was 10.80%, respectively 10 and 21 basis points above the prior-year quarter. Nine-month measures were 1.76% and 11.70%.
- Balance sheet: Total assets were $2.205 billion, down 1.8% from year-end 2018. Net loans were $1.676 billion, down 4.6%; deposits were $1.837 billion, down 1.0%. Stockholders’ equity was $337.36 million, up 1.4%; book value per share was $21.65.
- Credit quality: Nonperforming assets were $20.25 million, or 0.92% of assets, versus $23.96 million and 1.07% at year-end. Nonaccrual loans were $16.94 million. Allowance for loan losses was $18.49 million, 1.09% of loans and 104.37% of nonperforming loans. Nine-month net charge-offs increased to $3.25 million from $2.51 million.
- Cash flow and liquidity: Nine-month operating cash flow was $39.64 million and investing cash flow was $139.76 million; financing activities used $73.81 million. Cash and cash equivalents increased $105.59 million to $182.46 million. Separately, the parent company reported $17.49 million in cash reserves. The company reported $367.32 million of unused FHLB capacity, $85 million of correspondent-bank lines, $6 million of FRB Discount Window capacity and $90.18 million of unpledged available-for-sale securities.
- Debt and capital: Borrowings fell to $1.86 million from $29.37 million at year-end; no long-term borrowings remained. Company and bank total risk-based capital ratios were 15.79% and 14.36%; both were reported well above regulatory well-capitalized thresholds. Nine-month dividends declared were $11.17 million and share repurchases were $16.36 million.
Material changes versus prior periods
- Q3 earnings were nearly flat despite better EPS: $0.90 million of litigation settlements and the absence of the prior-year securities-sale loss supported income, while $0.59 million of Highlands merger costs and higher loan-loss provision weighed on it.
- Nine-month earnings increased $2.20 million, with $4.60 million of litigation settlements partly offset by a $2.00 million increase in provision expense.
- FTE margin improved as the company reduced higher-cost wholesale funding, but average earning assets and average loans declined. Q3 average loans fell 4.8% year over year; the company attributed lower purchase-accounting accretion to continued runoff of acquired loans.
- The $25 million wholesale repurchase agreement matured and was repaid in Q1 using liquidity; management estimated annualized pretax savings of $378,000. Securities held to maturity also matured, and the proceeds helped repay that borrowing.
- Deposits shifted: noninterest-bearing deposits increased $12.93 million from year-end, while certificates of deposit and IRAs declined. Non-covered nonperforming assets and OREO also declined from year-end.
Outlook, commentary, risks and unusual items
- The company agreed to acquire Highlands Bankshares for stock, at an indicated aggregate value of approximately $91 million. Closing was expected in Q4 2019, subject to Highlands shareholder and regulatory approvals and customary conditions. The filing gives no quantified earnings or cost-savings guidance.
- Management considered the allowance adequate but cautioned that future additions may be required. It described qualitative credit-risk factors as stable; the nine-month increase in provision and net charge-offs, along with commercial real-estate exposure, warrant monitoring.
- The company expected to adopt the CECL credit-loss standard in Q1 2020. It could not reasonably estimate the financial impact; the effect will depend on portfolio mix, credit quality and economic conditions at adoption.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 100-basis-point rate increase would raise 12-month net interest income 0.6%, while a 100-basis-point decrease would reduce it 4.0%. These are model estimates, not forecasts.
- Other unusual items include $4.60 million of year-to-date litigation settlements, the 2018 $1.49 million goodwill impairment and $1.10 million debt-extinguishment loss, and $0.59 million of Q3 2019 merger expenses. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
- Key stated risks include economic conditions in the company’s markets, interest-rate and policy changes, competition, regulation, technology, execution of acquisitions, fee-income performance and the company’s ability to manage risk. The company was also preparing for the potential LIBOR discontinuation after 2021.
Important facts for investors to verify
- Whether the Highlands merger closed as expected, received all required approvals, and delivered the anticipated strategic benefits.
- How much earnings growth depended on litigation settlements, and whether comparable nonrecurring income or merger costs continued in later periods.
- Whether loan balances, credit provision, charge-offs and criticized or nonperforming exposures developed consistently with management’s credit-quality assessment.
- Whether loan and deposit trends, interest-rate movements and acquired-loan runoff sustained the reported margin improvement.
- The eventual CECL adoption adjustment and resulting allowance, capital and earnings effects.
- Capital and liquidity after share repurchases, dividends and any acquisition financing or integration costs.