First Community Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. The company operates as a community bank, with 48 branches in Virginia, West Virginia, North Carolina, and Tennessee.
Financial performance and position
| Metric | Q3 2022 / Sept. 30, 2022 | Comparable period / change |
|---|---|---|
| Interest income | $29.7 million | $25.8 million in Q3 2021 |
| Net interest income | $29.3 million GAAP; $29.5 million FTE | Up $4.2 million, or 16.7%, GAAP year over year |
| Net interest margin | 4.01% FTE | 3.56% FTE in Q3 2021 |
| Noninterest income | $10.0 million | Up $1.2 million; includes $1.66 million branch-sale gain |
| Noninterest expense | $21.1 million | Up $2.3 million, or 12.3%, year over year |
| Net income / diluted EPS | $13.35 million / $0.81 | Net income up 5.9%; diluted EPS was $0.73 in Q3 2021 |
| Nine-month net income / diluted EPS | $34.08 million / $2.05 | Net income down 16.1%; EPS was $2.32 in 2021 |
| Loans held for investment | $2.36 billion gross; $2.33 billion net of allowance | Gross loans up $197.2 million, or 9.1%, from year-end |
| Deposits | $2.71 billion | Down $19.2 million, or 0.7%, from year-end; excluding the branch sale, up $41.9 million |
| Cash and cash equivalents | $229.1 million | Down from $677.4 million at year-end |
| Stockholders’ equity | $412.3 million | Down $15.5 million from year-end; book value per share $25.33 |
Nine-month cash flow: Operating activities provided $41.5 million; investing activities used $499.1 million, chiefly reflecting securities purchases and loan growth; financing activities provided $9.2 million. Cash and cash equivalents declined $448.3 million to $229.1 million.
Debt and liquidity: No long-term borrowings were outstanding. Repurchase-agreement balances were $2.0 million. Reported available liquidity included $229.1 million unencumbered cash, $422.6 million unused FHLB capacity, $90.0 million correspondent-bank lines, $6.1 million FRB Discount Window capacity, and $271.8 million in unpledged available-for-sale securities.
Credit quality and capital: The allowance for credit losses was $29.4 million, or 1.24% of loans. Nonperforming assets were $17.3 million, or 0.55% of assets, down from $23.2 million at year-end. The company and bank remained well-capitalized; company total risk-based capital was 14.34% and bank total risk-based capital was 12.95%.
Material changes versus comparable periods
- Third-quarter net income increased $743,000 year over year, supported by stronger net interest income and the Emporia branch-sale gain. These gains were partly offset by higher credit-loss provision and compensation costs.
- For the first nine months, net income fell $6.53 million. The provision for credit losses shifted from a $7.63 million recovery in 2021 to a $3.16 million expense in 2022, primarily associated with loan growth.
- Higher market interest rates increased earnings on securities and overnight funds. The Q3 FTE margin rose 45 basis points year over year to 4.01%; the cost of interest-bearing deposits was 0.08% for the quarter.
- Available-for-sale securities increased to $299.6 million from $76.3 million at year-end. Their fair value was 93.22% of amortized cost, with $21.8 million of gross unrealized losses, which management attributed primarily to rising rates.
- Loans grew across the portfolio, led by commercial real estate and construction lending. The loan mix was 58.8% commercial at quarter-end.
Outlook, commentary, and risks
- The filing provides no specific earnings, revenue, or margin guidance. Management described loan demand as strong and stated that liquidity and capital were adequate; it said the company met capital requirements and remained well-capitalized.
- On September 16, 2022, the company sold its Emporia, Virginia branch, transferring $61.05 million of deposits and no loans. It recorded a $1.66 million gain and $153,000 of related expenses.
- Management reported that securities in unrealized-loss positions continued to perform as scheduled, that it did not intend to sell them, and that it did not consider a credit-loss provision necessary. It cautioned that future conditions could lead to a different conclusion.
- Key risks cited include inflation, interest-rate and market fluctuations, economic conditions in the U.S. and local markets, credit losses, deposit and funding conditions, regulatory changes, cybersecurity, and the sustainability of fee income. Management noted that the rate environment and inflation effects are uncertain.
- The company identified $432.3 million of off-balance-sheet commitments and guarantees, with a $1.42 million reserve for unfunded commitments. It reported ordinary-course legal matters that it did not expect to have a material adverse effect.
- Management concluded disclosure controls were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher rates continue to lift net interest income without materially increasing deposit costs or weakening deposit retention.
- How loan growth, borrower performance, delinquency trends, and commercial real-estate concentrations affect future credit provisions and the allowance.
- Whether unrealized losses on available-for-sale securities remain manageable given liquidity needs and any requirement to sell securities.
- How much of reported quarterly earnings depended on the nonrecurring Emporia sale gain, and whether higher compensation and service costs persist.
- Whether reported liquidity sources and capital ratios remain sufficient under adverse funding, interest-rate, or economic scenarios.