First Community Bankshares, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also reports unaudited fourth-quarter results. First Community is a community banking holding company operating 48 branches across Virginia, West Virginia, North Carolina, and Tennessee.
Financial results and condition
| Metric | 2022 | Prior comparable period |
|---|---|---|
| Net interest income | $112.7 million | $102.5 million in 2021 |
| Net interest margin, FTE | 3.92% | 3.67% in 2021 |
| Noninterest income | $37.2 million | $34.3 million in 2021 |
| Noninterest expense | $83.1 million | $78.7 million in 2021 |
| Provision for credit losses | $6.6 million expense | $8.5 million recovery in 2021 |
| Net income | $46.7 million; diluted EPS $2.82 | $51.2 million; diluted EPS $2.94 |
| Return on average assets / equity | 1.45% / 11.04% | 1.63% / 11.96% in 2021 |
| Total assets | $3.14 billion | $3.19 billion at year-end 2021 |
| Loans held for investment, gross | $2.40 billion | $2.17 billion at year-end 2021 |
| Total deposits | $2.68 billion | $2.73 billion at year-end 2021 |
| Cash and cash equivalents | $170.8 million | $677.4 million at year-end 2021 |
| Total stockholders’ equity | $422.0 million | $427.8 million at year-end 2021 |
- Cash flow: Operating activities provided $59.0 million. Investing activities used $536.8 million, primarily reflecting purchases of available-for-sale securities and loan growth; financing activities used $28.8 million. Cash and cash equivalents declined $506.6 million during the year.
- Margins and funding: The FTE margin rose 25 basis points as asset yields increased; the average cost of interest-bearing deposits fell to 0.09%. Average loan-to-deposit ratio increased to 83.58% from 80.71%.
- Debt and liquidity: Year-end borrowings were $1.9 million, consisting of retail repurchase agreements; no FHLB advances were outstanding. Reported available liquidity included $170.9 million in unencumbered cash, $405.8 million of unused FHLB capacity, $90.0 million in correspondent-bank lines, and $277.9 million in unpledged available-for-sale securities. Management said parent-company cash and short-term securities were adequate for obligations and projected dividends over the next 12 months.
- Capital: The Bank’s CET1, total risk-based capital, and leverage ratios were 11.69%, 12.94%, and 8.79%, respectively. The Bank was classified as well-capitalized.
- Asset quality: Nonperforming loans were 0.70% of loans, down from 1.03%; nonperforming assets were 0.55% of assets. The allowance for credit losses was $30.6 million, or 1.27% of loans. Net charge-offs were $3.9 million, or 0.23% of average loans, versus $3.0 million, or 0.18%, in 2021.
- Investment securities: Available-for-sale securities had a $300.3 million fair value against $320.1 million amortized cost. The resulting unrealized losses contributed to accumulated other comprehensive loss of $15.7 million, compared with $1.5 million at year-end 2021.
Changes versus prior periods and fourth quarter
- Annual net income fell 8.8% from 2021, primarily because the $8.5 million credit-loss recovery in 2021 became a $6.6 million provision in 2022. Higher net interest income partly offset the change.
- Loans grew 10.8% during 2022. Available-for-sale securities increased to $300.3 million from $76.3 million, while total assets declined 1.85%.
- Deposits declined 1.85%, largely due to the sale of the Emporia branch and its $61.1 million of deposits. Excluding that sale, deposits increased $10.5 million.
- Fourth-quarter 2022 net income was $12.6 million, versus $10.6 million in fourth-quarter 2021; diluted EPS was $0.77 versus $0.62. Fourth-quarter 2022 provision expense was $3.4 million, compared with a $0.8 million recovery in the prior-year quarter.
- Common stock repurchases totaled 706,117 shares for $21.3 million in 2022. Repurchases were suspended after the Surrey Bancorp acquisition announcement. Cash dividends were $1.12 per share for the year, versus $1.04 in 2021.
Outlook, risks, and unusual items
- The company agreed to acquire Surrey Bancorp, expected at the filing date to close in the second quarter of 2023. Surrey was expected to add approximately $500 million in assets; the combined company was projected to exceed $3.6 billion in assets. Completion and anticipated benefits remained subject to execution and approvals.
- The Emporia, Virginia branch sale closed in September 2022 and generated a $1.66 million gain. The company also recorded $596,000 of merger expense and $153,000 of divestiture expense.
- Management’s credit-loss estimate incorporated a forecast unemployment range of 3.9% to 4.8%. It estimated that a 1 percentage-point increase in the unemployment forecast would raise the allowance by approximately 11%. Management considered the allowance adequate but warned future additions may be required.
- Interest-rate changes pose risks to net interest income and securities values. The filing’s model estimated that an immediate, sustained 200-basis-point rate decline would reduce 12-month net interest income by 10.4%; a 400-basis-point increase was modeled to raise it by 0.8%. Actual results may differ from model estimates.
- Other stated risks include weaker economic conditions, commercial real estate and business-loan exposure, deposit and funding pressures, cybersecurity and third-party system disruptions, regulatory changes, and uncertainty surrounding the transition from LIBOR. Securities unrealized losses were attributed to market-value changes; management reported no credit-loss provision for securities in 2022.
- The company reported no material adverse effect from ordinary-course litigation anticipated, no goodwill impairment in 2022, and effective internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
- The filing provides no formal earnings or margin guidance. Forward-looking statements are subject to risks and the company disclaims an obligation to update them.
Key facts for investors to verify
- Whether the Surrey Bancorp transaction closed as expected, its final purchase terms, integration costs, and realized benefits.
- Whether deposit levels and funding costs remain stable as the branch-sale effect and higher interest rates work through the balance sheet.
- Whether loan growth is accompanied by changes in delinquency, charge-offs, commercial real estate performance, and the allowance for credit losses.
- How available-for-sale securities values and accumulated other comprehensive loss evolve, and whether any securities sales or credit impairments occur.
- Whether capital and liquidity remain adequate after acquisition financing, dividends, and any resumption of share repurchases.