First Community Bancshares: Looks Good Under $19

Prepared by Stephanie, Analyst at BAD BEAT Investing

As we have stated numerous times in our recent financial sector coverage, low rates have weighed, and pressure on bond yields have kept these stocks down. Loan loss provisions are a concern, given the economic woes. Still, we believe in taking a contrarian view and starting to build positions in beaten-down names, and there are some good opportunities in the banks. Another name that we like right now is First Community Bancshares (FCBC). The bank has just reported earnings, and in this column, we check in with this moderately-sized regional bank.

The price is still trading at a huge discount to book value at $19.14 a share, and we want to point out that the dividend has been maintained and is yielding 5.1%, and while the next few quarters will be tough on banks with low rates and the economy recovering, we have been urging buys in the space. The stock would be a tremendous buy under $19 again if it gets there. Let us discuss the key metrics you should be looking for in any bank investment.

Revenue strength

The stock has followed a path similar to that of other regional and major banks. Frankly, we thought the quarter would be worse, though as we will see, EPS was hit but not too hard.

Thanks to continued loan growth, deposit strength, and some past acquisitions, the bank saw revenues continue to improve. In Q3, the company reported a top line that beat consensus estimates slightly, and rose from Q3 2019.

With the present quarter's revenues of $34.5 million, the company registered a 15.4% increase in this metric year-over-year. Many other regional banks have seen flat to down revenues versus last year. The $1 million beat was not much, but given the difficulty of handicapping where results would land, we think this was pretty strong. The bank entered this COVID-19 crisis from a position of strength and that came through in Q3. However, pressure in non-interest income and provision for credit losses weighed on earnings, but they were better than expected.

Earnings performance

The bump in revenues year-over-year was not enough to offset expenditures as well as a large increase in loan loss provisions, from last year. First Community reported net income of $8.27 million, or $0.47 per share, which was a decrease of $0.11, or 19%, from the same quarter of 2019. What investors need to decide is if there will be an improvement or not. Frankly, we think 2021 will be even better based on the trends we are seeing for banks. The company has managed expenses well, but what we are seeing on earnings is all about preparation for potential loan losses. That may keep investors away, and see that earnings have been hit a bit.

Book value improved

The stock's value proposition is attractive when we consider the equity price is actually way below book value now.

The bank's stock is pretty attractive at $19.14 relative to the book value per share at September 30, 2020. It came in then at $23.70, an increase of $0.37 during the year.

While this is of course not as great of a value as we saw in the spring, we think it is still attractive. Further, while tangible book value rose 3% to $15.93 from a year ago and was up over 1% from Q2 2020. We think that if you get shares under $19 in the near future that is a very attractive price. Much of the book value move came from movement in loan and deposits, as well as asset quality.

Loans and deposits grow

We are pleased with the progress on loans and deposits. The bank booked $113.98 million of new residential mortgage loans during the third quarter and the pipeline remains strong at $61.70 million at October 19, 2020. Total loans were $2.17 billion at the end of the quarter, up $400 million from a year ago. The bank saw a $3 billion increase in deposits from last year, or a 35% increase. In addition, loans were up $600 million versus Q3 2019, or up 33%, though flat from the sequential quarter. Growth in loans and deposits is key for any bank, small or large. That is how you make money as a bank. You take in deposits at a low interest rate, and lend at a higher one.

This model has been working for centuries, and will continue to do so well into the future. These results should be considered a strength. While the lower rates have impacted returns, as we have said, the main issue here is the loan loss provisions.

Asset quality

Loan growth is a strength, but only if they are quality loans. Risky loans may offer a higher return but not if the debt cannot be repaid and turns to toxic debts. This quarter saw the loan loss provision increase from a year ago. The bank's provision increased significantly from the first and second quarters, bucking the trend of the overall sector.

Non-performing assets as a percentage of total assets had been improving for some time, but they increased in Q1 and Q2, but have come down in Q3. Non-performing assets this time decreased to $27 million, or 1.14% of total loans and leases from $27.6 million, or 1.19%, in Q2. We want to be very clear. It is important to note this was lower than Q2 2020, despite being up from Q3 2019 which was expected. Despite these issues, the improvement in the efficiency ratio continues to impress us as well.

Bottom line

This was a mixed quarter, but followed the trend of some similar banks, with loan loss provisions driving earnings lower from last year but total revenues increasing. Loans and deposits mostly grew. Despite loan risks, we see shares as a good buy here as the bank still pays a solid dividend, with a yield north of 5% now. It is a great buy under $19 given book value. Let shares fall then consider buying.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.