First Community Bankshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020 unless noted. The company operates a community-banking business through First Community Bank, with 49 branches in Virginia, West Virginia, North Carolina and Tennessee.
Financial performance and position
- Q2 results: Net income was $13.40 million, up 62.7% year over year; diluted EPS was $0.76 versus $0.46. Net interest income was $25.81 million and noninterest income was $8.80 million. Combined, these income lines totaled $34.61 million versus $33.25 million in Q2 2020.
- First-half results: Net income was $28.01 million, up 73.8%; diluted EPS was $1.59 versus $0.90. Net interest income was $52.10 million and noninterest income was $16.37 million, totaling $68.46 million versus $68.48 million in the first half of 2020.
- Margins and returns: Q2 net interest margin was 3.68% on a fully taxable equivalent (FTE) basis, down from 4.22%; first-half FTE margin was 3.81% versus 4.46%. Q2 return on average assets was 1.70% and return on average equity was 12.55%.
- Balance sheet: Total assets were $3.13 billion, up 3.9%. Loans held for investment, net of allowance, were $2.12 billion, down from $2.16 billion; deposits were $2.67 billion, up 4.7%. Cash and cash equivalents were $618.74 million, compared with $456.56 million at year-end.
- Credit and asset quality: The allowance for credit losses (ACL) was $31.86 million, or 1.48% of loans. Nonperforming assets were $25.87 million (0.83% of assets), versus $24.57 million at year-end; nonperforming loans were 1.14% of loans. First-half net charge-offs were $1.20 million.
- Cash flow and liquidity: First-half operating, investing and financing cash flows were $19.71 million, $44.63 million and $97.84 million, respectively; cash increased $162.18 million. Management reported $618.74 million in unencumbered cash, $255.22 million in unused FHLB capacity, $6.08 million available at the Federal Reserve Discount Window, and $85 million in correspondent-bank lines.
- Debt and capital: There were no long-term borrowings; retail repurchase agreements totaled $994,000. Company and bank total risk-based capital ratios were 15.81% and 14.90%, respectively; both were classified as well-capitalized. Stockholders’ equity was $427.53 million.
Material changes and notable items
- Earnings growth primarily reflected lower credit-loss provisioning: Q2 included a $2.23 million provision recovery, compared with a $3.83 million provision in Q2 2020; the first half included a $6.23 million recovery, compared with $7.33 million of provision in first-half 2020. Management attributed the change to improved economic forecasts and credit quality.
- Net interest income declined year over year, and management cited the historically low interest-rate environment. Lower asset yields were partly offset by lower deposit costs. Average deposits and cash balances increased substantially, which management associated in part with government stimulus.
- Noninterest income benefited from a $1.00 million recovery on an acquired loan and higher customer activity-related fees. Q2 also included a $781,000 bank-property write-down and $710,000 of accelerated FDIC indemnification-asset amortization; the company said it did not expect further claims under the relevant loss-share agreements.
- The company adopted CECL on January 1, 2021. Adoption increased the loan ACL by $13.11 million and reduced retained earnings by $5.87 million, net of tax. Prior-period credit-loss measures use the previous accounting method and are not fully comparable.
- COVID-19 loan deferrals fell to $4.02 million from $32.26 million at year-end and $436.11 million a year earlier. PPP loans outstanding were $41.63 million; the company had originated 1,429 PPP loans totaling $92.58 million through quarter-end.
- The board authorized repurchases of up to 2.4 million shares through January 2024. The company repurchased 261,600 shares for $7.98 million in Q2 and 449,300 shares for $12.96 million year to date; it declared $0.50 per share in dividends for the first half.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said capital and liquidity were strong enough to withstand pandemic-related impacts, but cautioned that prolonged or worsening economic conditions could weaken borrowers, increase credit losses, reduce fee and interest income, or raise funding costs. Interest-rate sensitivity models projected higher 12-month net interest income under immediate, sustained rate increases, but management noted model results depend on assumptions and actual outcomes may differ.
Other stated risks include local and U.S. economic conditions, changing interest rates and inflation, regulation, competition, technology and cybersecurity incidents, and acquisition performance. The company reported various legal actions in the ordinary course of business and did not expect their resolution to materially harm its financial condition, results or cash flows. Management 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 reported earnings growth is sustainable if credit-loss recoveries do not recur, and how sensitive the ACL is to revised forecasts and borrower performance.
- Whether net interest margin stabilizes as rates, deposit mix and unusually high cash balances change.
- Trends in nonaccrual loans and nonperforming assets, including the commercial real-estate portfolio and loans affected by CECL reclassification.
- PPP forgiveness and remaining fee recognition, along with any future COVID-related deferrals or charge-offs.
- The effect of share repurchases and dividends on capital, and the resolution and potential financial impact of legal and other contingencies.