First Community Bankshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. Interim financial statements are unaudited.
Business context
First Community is a financial holding company operating community banking through First Community Bank in Virginia, West Virginia, North Carolina, and Tennessee. It reported 44 branches and 518 full-time-equivalent employees. Banking, lending, wealth management, and insurance services comprise its community banking operations.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $9.63 million | $8.87 million, Q1 2018; up 8.6% |
| Diluted EPS | $0.60 | $0.52, Q1 2018 |
| Net interest income (GAAP) | $22.19 million | $22.38 million, Q1 2018; down 0.9% |
| Net interest margin (FTE) | 4.60% | 4.38%, Q1 2018 |
| Provision for loan losses | $1.22 million | $0.50 million, Q1 2018 |
| Noninterest income | $8.08 million | $6.67 million, Q1 2018 |
| Noninterest expense | $16.79 million | $17.12 million, Q1 2018 |
| Operating cash flow | $14.09 million | $10.83 million, Q1 2018 |
| Total assets | $2.24 billion | $2.24 billion at December 31, 2018 |
| Loans, net of allowance | $1.72 billion | $1.76 billion at December 31, 2018 |
| Total deposits | $1.88 billion | $1.86 billion at December 31, 2018 |
| Total borrowings | $3.70 million | $29.37 million at December 31, 2018 |
| Stockholders’ equity | $333.10 million | $332.86 million at December 31, 2018 |
Cash and cash equivalents ended the quarter at $148.55 million, up from $76.87 million. Investing activities provided $71.64 million, including proceeds from securities maturities and loan repayments; financing activities used $14.06 million. The allowance for loan losses was $18.24 million, or 1.05% of total loans. Return on average assets was 1.75% and return on average common equity was 11.77%.
Regulatory capital ratios at March 31 were 14.00% CET1 and 15.09% total risk-based capital at the Company; the Bank reported 12.86% and 13.95%, respectively. Both were classified as well-capitalized. Available liquidity included $397.66 million of unused FHLB capacity, $90 million of correspondent-bank lines, and $105.46 million of unpledged available-for-sale securities.
Material changes and notable items
- Net income rose $0.76 million year over year. Management attributed the increase principally to $1.68 million in litigation settlements, partly offset by a $0.73 million increase in the loan-loss provision. Excluding litigation settlements and net FDIC-asset amortization, noninterest income declined 1.31% year over year.
- The remaining $25 million wholesale repurchase agreement matured and was repaid using current liquidity. Management expects annualized pretax savings of $378,000; the company said this completed a five-year shift away from wholesale debt.
- Loans declined $37.70 million, or 2.14%, from year-end; deposits increased $22.69 million, or 1.22%. The portfolio is concentrated in commercial lending, including $602.21 million of non-farm, non-residential loans.
- Net charge-offs were $1.24 million, versus $0.27 million in Q1 2018. Nonperforming assets were $23.83 million, or 1.06% of assets, compared with $23.96 million, or 1.07%, at year-end. Nonaccrual loans totaled $18.78 million.
- The company repurchased 232,900 shares for $7.78 million and declared dividends of $0.21 per share. Book value per share was $21.06; tangible book value per share was $14.89.
- Lease accounting adoption added a right-of-use asset and lease liability; each was initially $915,000. At quarter-end they were $895,000 and $899,000, respectively, with no material reported impact on financial position or results.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue, or loan-growth guidance. Management stated that cash, investments, and borrowing capacity were adequate for working capital, projected dividends, and anticipated debt repayments over the next 12 months. Management considered the allowance adequate but cautioned that future additions may be needed.
The company expects to adopt CECL in Q1 2020 and could not reasonably estimate its impact; adoption may affect the allowance, retained earnings, regulatory capital, and disclosures. Interest-rate sensitivity modeling indicated that a sustained 100-basis-point decline could reduce 12-month net interest income by 4.1%, and a 200-basis-point decline by 8.7%; modeled increases had little or modest positive impact. These are estimates dependent on assumptions and customer behavior.
Other risks identified include local and national economic conditions, interest-rate and market changes, regulation, competition, technology, acquisition-related performance, and fee-income growth. The company is involved in legal matters in the ordinary course and believes their resolution should not materially adversely affect it. Off-balance-sheet commitments to extend credit and standby letters of credit and guarantees totaled $348.48 million; the reserve for unfunded commitments was $66,000. Disclosure controls were reported effective, with no material quarter changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the $1.68 million litigation settlement is nonrecurring and how earnings perform excluding it.
- Whether loan contraction, elevated provision and net charge-offs, and commercial real-estate concentration affect future credit costs.
- Whether deposit growth and liquidity remain adequate as the company operates with substantially reduced wholesale borrowings.
- The realized benefit of the expected $378,000 annualized pretax savings and the trend in net interest margin and funding costs.
- The eventual CECL transition impact on the allowance, retained earnings, and regulatory capital.
- The continued pace and capital-allocation implications of share repurchases and dividends.