First Community Bankshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless noted. The company is a community banking holding company operating 53 branches across Virginia, West Virginia, North Carolina, and Tennessee. Its April 2023 acquisition of Surrey Bancorp affects year-over-year comparability.
Financial performance and condition
- Earnings: Net income was $12.85 million, up 9.0% year over year. Basic EPS was $0.70 versus $0.73; diluted EPS was $0.71 versus $0.72. Higher average shares outstanding following the Surrey acquisition contributed to the per-share comparison.
- Net interest: GAAP net interest income increased 7.5% to $31.63 million. Net interest margin was 4.45% GAAP, or 4.47% on a fully taxable-equivalent basis, up 12 basis points year over year. Loan interest income rose $5.79 million; deposit interest expense rose $3.65 million.
- Other income and costs: Noninterest income rose 7.9% to $9.26 million, with interchange income cited as a primary driver. Noninterest expense increased 12.4% to $23.39 million, mainly from salaries and benefits, service fees, and other operating costs; management attributed much of the increase to Surrey branches and staff. Merger expense was zero versus $0.38 million a year earlier.
- Credit costs and asset quality: Provision for credit losses was $1.01 million, down from $1.74 million. Net charge-offs were $1.74 million, or 0.27% of annualized average loans. Nonperforming loans were $19.65 million (0.78% of loans), up from 0.65% a year earlier; the allowance was $35.46 million, or 1.41% of loans, and equaled 180.49% of nonperforming loans.
- Balance sheet: Total assets were $3.24 billion; loans, net of unearned income, were $2.52 billion; deposits were $2.68 billion; and stockholders’ equity was $506.94 million. During the quarter, loans declined $52.47 million and deposits declined $40.11 million. Cash and cash equivalents increased to $248.91 million, principally as securities matured and loans declined.
- Cash flow and liquidity: Operating cash flow was $16.93 million. Investing activities provided $164.11 million, including $118.97 million from securities maturities, prepayments, and calls; financing activities used $48.55 million. The bank had $402.00 million of unused FHLB capacity, $25.54 million available at the FRB Discount Window, $100.00 million of correspondent-bank lines, and $121.70 million of unpledged available-for-sale securities.
- Debt and capital: There were no long-term borrowings; retail repurchase agreements totaled $1.01 million. At March 31, the bank’s CET1, total risk-based capital, and Tier 1 leverage ratios were 13.24%, 14.50%, and 10.24%, respectively. The bank remained classified as well-capitalized. Book value per share was $27.53.
Material changes and notable items
- Available-for-sale securities fell $114.71 million, primarily after $115.75 million of U.S. Treasury notes matured. The portfolio’s fair value was 91.58% of amortized cost, with $15.29 million of gross unrealized losses. Management reported no expected credit loss and no current intent or likely requirement to sell the securities.
- First-quarter share repurchases totaled 89,396 shares for $2.97 million. The company declared dividends of $0.29 per share.
- The Surrey acquisition added approximately $239.08 million of loans at acquisition and increased the scale of operations. The company reported higher loan balances and interest income year over year, alongside higher ongoing operating expenses.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management said higher benchmark rates had supported loan yields and net interest margin, while also noting that interest-rate movements, deposit pricing, and economic conditions could affect results.
- In the company’s modeled 12-month rate scenarios, an immediate, sustained 200-basis-point increase was estimated to raise net interest income 2.0%; a 200-basis-point decrease was estimated to reduce it 3.7%. These are model estimates, not forecasts.
- Key disclosed risks include inflation and interest-rate changes, local and national economic conditions, competition, regulation, cybersecurity and third-party system disruptions, and the sustainability of fee income. The company reported no material changes to the risk factors in its 2023 Form 10-K.
- A putative customer class action alleges improper overdraft and nonsufficient-funds fees. No class has been certified; the bank disputes the allegations and is exploring settlement options. Management said the outcome cannot currently be predicted.
- Off-balance-sheet commitments to extend credit and standby letters of credit and financial guarantees totaled $391.02 million. The filing notes that contractual amounts do not necessarily represent future cash requirements.
Investor verification priorities
- Track deposit levels, funding costs, and loan-to-deposit trends as interest-bearing deposit costs rise.
- Review loan delinquencies, nonperforming loans, charge-offs, and allowance adequacy, particularly in commercial real estate and consumer lending.
- Assess the impact of securities maturities, unrealized losses, and interest-rate changes on liquidity and earnings.
- Monitor whether Surrey-related revenue and operational scale offset higher recurring expenses.
- Check developments in the overdraft-fee litigation and the use of the share-repurchase authorization.