First Community Bankshares, Inc. — Q2 2022 Form 10-Q
Business context and period: Community-banking holding company operating 49 branches in Virginia, West Virginia, North Carolina and Tennessee, with wealth-management services. This unaudited filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Unless noted, amounts are in U.S. dollars.
Financial performance and condition
- Revenue and earnings: Q2 net interest income was $27.55 million, up 6.7% year over year; noninterest income was $8.85 million, up 0.7%. Net income was $11.21 million, down 16.3%, and diluted EPS was $0.67 versus $0.76. For the first half, net interest income was $52.70 million and noninterest income was $18.05 million; net income fell 26.0% to $20.73 million and diluted EPS was $1.24 versus $1.59.
- Margins and returns: Q2 net interest margin was 3.78% on a fully taxable-equivalent basis, up 10 basis points from Q2 2021. First-half margin was 3.67%, down 14 basis points year over year. Annualized return on average assets and common equity were 1.38% and 10.61% for Q2, respectively.
- Balance-sheet growth: Total assets were $3.26 billion, up 2.0% since year-end. Loans, net of unearned income, rose 6.2% to $2.30 billion; deposits rose 2.5% to $2.80 billion. Commercial loans were 57.7% of the portfolio, including $752.4 million in non-farm, non-residential loans.
- Credit quality: The allowance for credit losses was $29.75 million, or 1.29% of loans, versus $27.86 million at year-end. First-half provision expense was $2.47 million, compared with a $6.23 million provision recovery in the prior-year period. Nonperforming loans were 0.80% of total loans; nonperforming assets were 0.58% of assets. First-half net charge-offs were $580,000.
- Cash flow and liquidity: For the first half, operating cash flow was $28.20 million, investing cash outflow was $356.66 million, and financing cash inflow was $49.26 million. Cash and cash equivalents declined $279.20 million to $398.24 million, mainly reflecting $236.85 million of securities purchases and $133.40 million of loan growth. The filing reports $427.55 million of unused FHLB capacity, $90 million of correspondent-bank lines and $253.55 million of unpledged available-for-sale securities.
- Debt and capital: The company had no long-term borrowings; repurchase agreements were $2.64 million. Stockholders’ equity was $418.05 million, down 2.3% from year-end. At June 30, company and bank Common Equity Tier 1 ratios were 13.37% and 11.93%; both were classified as well-capitalized under regulatory standards.
Material changes versus comparable periods
- Earnings declined primarily because credit-loss expense replaced the sizable provision recoveries recorded in 2021: Q2 provision was $510,000 versus a $2.23 million recovery; first-half provision was $2.47 million versus a $6.23 million recovery.
- Q2 net interest margin improved year over year, helped by higher overnight-funds yields and lower time-deposit costs. The first-half margin nevertheless declined as loan and securities yields fell overall.
- Available-for-sale securities increased to $287.77 million from $76.29 million at year-end, following substantial purchases. Their fair value was 95.86% of amortized cost, with $12.49 million of gross unrealized losses.
- Operating expenses rose 9.8% in Q2 and 8.0% in the first half, including higher compensation following wage increases and higher core-processing service fees.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management reported strong loan demand and expects liquidity and capital resources to support operations; it cautioned that results depend on economic conditions and interest rates.
- Management’s interest-rate simulation estimated that an immediate, sustained +300-basis-point shock would increase 12-month net interest income by 5.84%, while a -100-basis-point shock would reduce it by 7.68%. These model estimates depend on assumptions and are not forecasts.
- Management attributed securities’ unrealized losses primarily to market conditions, reported that securities continued to perform as scheduled, and said it did not intend to sell them or expect to be required to sell. It recorded no securities credit-loss allowance. Further market declines or liquidity needs could change that assessment.
- The Bank agreed to sell its Emporia, Virginia branch, including associated deposits; closing was expected in Q3 2022. The filing does not quantify the expected financial effect.
- The company repurchased 415,507 shares for $12.04 million in the first half and declared $9.05 million in common dividends. Unrealized securities losses contributed to a $10.11 million first-half other comprehensive loss.
- Risks cited include inflation, interest-rate and market fluctuations, economic weakness, COVID-19 effects, credit losses, regulation, cybersecurity and technology disruptions. Management reported no material change to the risk factors in its 2021 Form 10-K; routine legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether loan growth—particularly commercial real estate exposure—continues without deterioration in risk grades, delinquencies or nonperforming loans.
- How the allowance for credit losses responds to changing forecasts, loan growth and actual charge-offs.
- The effect of rising rates on deposit costs, net interest margin and securities values, including the potential impact of unrealized losses on capital and liquidity.
- Whether earnings growth can offset higher compensation and processing costs after the prior-year credit-provision recoveries roll off.
- Completion and financial impact of the Emporia branch sale, and the continued availability of reported liquidity sources and regulatory capital buffers.