First Community Bankshares, Inc. — Q2 2023 Form 10-Q
Period: Quarter and six months ended June 30, 2023. The company provides community banking and wealth management services across Virginia, West Virginia, North Carolina, and Tennessee. Amounts below are in millions unless otherwise noted.
Financial performance and condition
- Q2 earnings: Net income was $9.81 million, down 12.5% from $11.21 million a year earlier. Diluted EPS was $0.55 versus $0.67. Six-month net income was $21.60 million, up 4.2%, and diluted EPS was $1.26 versus $1.24.
- Revenue and margins: Q2 net interest income was $32.86 million, up 19.3%; noninterest income was $8.79 million, down 0.8%. Net interest margin was 4.46% on a GAAP basis and 4.48% on a fully taxable equivalent basis, up 70 basis points year over year. Six-month net interest income was $62.27 million, up 18.2%.
- Expenses and credit costs: Q2 provision for credit losses was $4.11 million, versus $0.51 million in Q2 2022. Noninterest expense rose 16.1% to $24.67 million, including $2.01 million of merger costs. Six-month provision was $5.85 million and noninterest expense was $45.48 million, including $2.39 million of merger costs.
- Management-adjusted results: The company reported Q2 net income of $12.95 million, or $0.70 per diluted share, after adjustments for merger costs, provisions, and other nonrecurring items. This is a non-GAAP measure; the filing’s stated adjustment details should be reviewed before comparing it with GAAP results.
- Balance sheet: Total assets were $3.39 billion at June 30, up 8.2% from year-end 2022. Loans held for investment were $2.62 billion before allowance, and deposits were $2.85 billion. Stockholders’ equity was $498.72 million; book value per share was $26.29.
- Cash flow and liquidity: Six-month operating cash flow was $27.78 million versus $28.20 million in 2022. Cash and cash equivalents ended the period at $152.66 million. Management reported $405.85 million of unused FHLB borrowing capacity, $90.00 million of correspondent-bank lines, $6.08 million of FRB Discount Window availability, and $276.49 million of unpledged available-for-sale securities.
- Debt and capital: The company had no long-term borrowings; retail repurchase agreements were $1.35 million. At June 30, the company/bank total risk-based capital ratios were 15.64%/13.76%, and Tier 1 leverage ratios were 11.15%/9.69%. The Bank was classified as well-capitalized.
- Credit quality: Nonperforming loans were $18.63 million, or 0.71% of loans, compared with 0.70% at year-end. The allowance for loan losses was $36.18 million, or 1.38% of loans, versus $30.56 million, or 1.27%, at year-end. Six-month net charge-offs were $2.47 million.
Material changes versus comparable periods
- Q2 net income declined despite higher net interest income, principally due to higher credit-loss provision and operating expenses, including Surrey acquisition costs.
- On April 21, 2023, the company completed its acquisition of Surrey Bancorp for approximately $71.37 million, primarily in company stock. Surrey contributed $466.25 million of assets, including $239.08 million of loans and $403.64 million of deposits, and resulted in $14.38 million of goodwill and $12.70 million of core deposit intangibles.
- Reported loans rose 9.2% and deposits rose 6.5% from year-end, substantially reflecting the acquisition. Excluding Surrey, loans decreased approximately $18.20 million and deposits decreased approximately $229.77 million.
- Average deposit and borrowing costs rose as interest rates increased. Q2 interest expense was $2.01 million versus $0.42 million a year earlier.
- Available-for-sale securities had $18.20 million of gross unrealized losses at June 30. Management said the securities were performing as scheduled, it did not intend to sell them, and it did not consider a credit-loss provision necessary.
Outlook, risks, and unusual items
- The filing provides no specific earnings or financial guidance. Management expects acquisition synergies and cost savings, but those expected benefits are not included in the pro forma figures and are not quantified as a formal outlook.
- Management identifies interest-rate and economic changes, deposit and funding conditions, loan performance, acquisition integration, technology and cybersecurity, and regulatory changes as risks that could affect results. It cautions that forward-looking statements are uncertain.
- The company modeled a 12-month net-interest-income decrease of 2.9% under a 100-basis-point rate decline and 7.0% under a 200-basis-point decline; modeled increases under equivalent rate rises were 0.3% and 0.6%, respectively. Actual results may differ from these simulations.
- The company said it did not expect to be affected by the proposed FDIC special assessment related to certain bank failures, based on the proposal as described in the filing. Legal proceedings in the ordinary course were not expected to have a material adverse effect. No material changes to the prior annual report’s risk factors were reported.
- Q2 included $2.01 million of Surrey-related merger expense and $1.61 million of day-two provision for the acquired Surrey portfolio. The Surrey acquisition also added $2.01 million to the allowance for purchased credit-deteriorated loans.
Important facts for investors to verify
- Whether deposit outflows excluding Surrey stabilize, and how deposit pricing affects funding costs and margins.
- Whether Surrey integration delivers anticipated synergies and whether merger costs or purchase-accounting effects persist.
- Trends in nonaccrual loans, delinquencies, charge-offs, and the adequacy of the allowance as the acquired portfolio seasons.
- Exposure to interest-rate changes and the potential effect of unrealized securities losses on liquidity and capital.
- The reconciliation and assumptions behind management’s adjusted Q2 earnings measure, and subsequent share repurchases and dividends.