First Community Bankshares, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The company is a Virginia-based financial holding company operating community banking, lending and wealth-management businesses through First Community Bank and related subsidiaries. The unaudited quarter ended March 31, 2022; comparisons below are with Q1 2021 unless otherwise noted. Financial amounts are in U.S. dollars.
Financial performance and condition
- Earnings: Net income was $9.52 million, down 34.8%; diluted EPS was $0.56 versus $0.82. Pretax income was $12.40 million versus $19.03 million.
- Net interest: GAAP net interest income was $25.15 million, down 4.3%. Fully taxable-equivalent net interest margin fell to 3.55% from 3.94%, and the spread declined to 3.52% from 3.88%. Average earning-asset yield declined 45 basis points to 3.62%; the average cost of interest-bearing liabilities decreased 9 basis points to 0.10%.
- Noninterest income and expense: Noninterest income rose 21.5% to $9.19 million, including higher deposit service charges and other operating income. Noninterest expense rose 6.2% to $19.99 million, with salaries and benefits up 7.2% to $11.67 million. The filing cites annualized wage increases of approximately $2.5 million.
- Credit costs and asset quality: The company recorded a $1.96 million provision for credit losses, compared with a $4.00 million provision reversal in Q1 2021. The allowance for credit losses was $28.98 million, or 1.29% of loans. Net charge-offs were $838,000, or 0.15% of annualized average loans. Nonperforming loans were 0.96% of loans, down from 1.03% at year-end 2021 and 1.24% a year earlier.
- Balance sheet and funding: Total assets were $3.24 billion, up 1.6% from year-end 2021. Loans grew 3.6% to $2.24 billion; deposits grew 2.0% to $2.78 billion. Cash and cash equivalents declined to $457.31 million from $677.44 million, primarily as the company invested in securities and funded loan growth.
- Cash flow: Operating activities provided $10.44 million. Investing activities used $276.55 million, including $203.17 million of securities purchases and $78.72 million of net loan growth. Financing activities provided $45.98 million, principally from deposit growth. Cash and cash equivalents declined $220.13 million during the quarter.
- Debt and liquidity: There were no long-term borrowings; repurchase agreements totaled $2.49 million. At quarter-end, reported liquidity sources included $457.31 million of unencumbered cash, $425.09 million of unused FHLB capacity, $90 million of correspondent-bank lines, $6.08 million of FRB Discount Window capacity and $247.33 million of unpledged available-for-sale securities.
- Capital and equity: Company and Bank total risk-based capital ratios were 14.96% and 13.87%, respectively; the Bank remained classified as well-capitalized. Stockholders’ equity was $424.16 million, down 0.85% from year-end, and book value per share was $25.27 versus $25.34. The company repurchased 132,000 shares for $4.09 million and declared $4.54 million of dividends.
Material changes versus comparable periods
- The earnings decline chiefly reflected the swing from a $4.00 million credit-loss provision reversal in Q1 2021 to a $1.96 million provision in Q1 2022, alongside lower net interest income and higher operating expenses.
- Loans grew $78.73 million from year-end, led by commercial lending. Commercial loans represented 57.7% of the portfolio at March 31.
- Available-for-sale securities rose to $268.70 million from $76.29 million at year-end after $203.17 million of purchases. Their fair value was 97.86% of amortized cost, versus 100.02% at year-end; gross unrealized losses were $6.05 million. Management reported no expected credit loss allowance for these securities and said it did not intend, and was not more likely than not required, to sell them before recovery.
- Other comprehensive loss was $4.97 million after tax, primarily reflecting unrealized losses on securities, contributing to lower stockholders’ equity.
- Nonperforming assets declined to $22.48 million from $23.24 million at year-end and $28.33 million a year earlier.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management attributed the quarter’s loan-loss provision mainly to loan growth and described loan demand as strong across several categories.
- Management identified inflation, rising interest rates, economic conditions, COVID-19 effects, competition, regulation, technology and cybersecurity, and execution of acquisitions as risks that could cause actual results to differ from forward-looking statements. It said the timing and impact of inflation and rate increases remain uncertain.
- The company’s rate-sensitivity model estimated that an immediate, sustained 100-basis-point increase would raise 12-month net interest income by 3.31%, while a 300-basis-point increase would raise it by 8.49%; a 100-basis-point decrease would reduce it by 6.89%. These are modeled estimates, not guidance.
- COVID-related loan modifications totaled 4,168 loans with $478.83 million in principal since March 2020; outstanding deferrals were $3.01 million at quarter-end. Management noted that modified commercial loans were generally downgraded to Special Mention and reassessed individually.
- Off-balance-sheet commitments to extend credit and standby letters of credit or guarantees totaled $422.47 million; the reserve for unfunded commitments was $775,000. The company was involved in ordinary-course legal matters and did not expect their resolution to materially affect its financial condition, results or cash flows.
- On March 29, 2022, the Bank agreed to sell its Emporia, Virginia branch, including associated deposits and certain property. The filing does not provide the transaction’s financial impact or completion date.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- Whether loan growth and changing interest rates improve net interest income and margins, given the quarter’s decline in margin and average asset yield.
- Whether asset quality and the allowance remain adequate as the loan portfolio grows, including trends in Special Mention, nonaccrual and delinquent loans.
- How the securities portfolio’s unrealized losses and continued rate movements affect accumulated other comprehensive loss, capital and liquidity.
- The realized effect, timing and terms of the Emporia branch sale, which are not specified in the filing text provided.
- Whether reported liquidity sources and regulatory capital remain sufficient under adverse funding, credit or economic conditions.