FIRST COMMUNITY BANKSHARES INC annual report, FY2021

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First Community Bankshares, Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. First Community is a Virginia-based financial holding company operating through First Community Bank, with 49 branches in Virginia, West Virginia, North Carolina, and Tennessee. Its single reported segment is Community Banking, including wealth management.

Financial performance and condition

  • Profit: Net income was $51.17 million, up 42.43% from $35.93 million. Diluted EPS rose 45.54% to $2.94. Return on average assets was 1.63% (1.24% in 2020); return on average common equity was 11.96% (8.54%).
  • Revenue and margins: GAAP net interest income declined 5.62% to $102.47 million; fully taxable-equivalent net interest income was $102.91 million. FTE net interest margin fell 62 basis points to 3.67%, primarily reflecting low rates and lower acquired-loan accretion. Noninterest income rose 14.98% to $34.30 million.
  • Expenses and taxes: Noninterest expense declined 1.14% to $78.72 million. Income before taxes increased to $66.53 million from $46.11 million; the effective tax rate was 23.09%, versus 22.09%.
  • Credit quality: The company recorded an $8.47 million recovery of credit-loss provision in 2021, versus a $12.67 million provision in 2020. Net charge-offs were $2.96 million, or 0.14% of average loans, compared with $4.91 million, or 0.23%. Nonperforming loans were 1.03% of total loans. The allowance was $27.86 million, or 1.29% of loans, compared with $26.18 million, or 1.20%, at year-end 2020.
  • Balance sheet: Assets rose 6.09% to $3.19 billion. Loans held for investment, net of unearned income, decreased 0.96% to $2.17 billion. Deposits increased 7.19% to $2.73 billion, with demand and savings growth attributed partly to pandemic-related stimulus; time deposits declined. Year-end cash and cash equivalents were $677.44 million, up from $456.56 million.
  • Debt and liquidity: Borrowings were $1.54 million, entirely short-term repurchase agreements, compared with $0.96 million. The Bank reported $411.23 million of unused FHLB capacity, $90 million of correspondent-bank lines, $6.08 million of FRB Discount Window capacity, and $54.14 million of unpledged available-for-sale securities. The parent company reported $17.65 million in cash and short-term investment securities and stated these were adequate for its next 12 months of obligations and projected dividends.
  • Cash flow and capital: Operating, investing, and financing activities provided $48.22 million, $35.35 million, and $137.31 million, respectively; cash increased $220.88 million. Year-end stockholders’ equity was $427.78 million and book value per share was $25.34. The Bank’s CET1, total risk-based capital, and leverage ratios were 13.37%, 14.62%, and 8.94%; it was classified as well-capitalized.

Material changes and unusual items

  • Most of the year-over-year earnings increase reflected the shift from pandemic-driven provisioning in 2020 to the 2021 provision recovery, supported by improved economic forecasts and reported strong credit metrics. Lower net interest income and $3.33 million less acquired-loan accretion partly offset the improvement.
  • The company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $13.11 million and reduced retained earnings by $5.87 million, net of tax. Prior-period credit-loss figures are not directly comparable under the new methodology.
  • Noninterest income included a $1.00 million recovery of an acquired loan written down before acquisition. Conversely, 2020 noninterest income included a $385,000 securities gain, and 2019 included $6.995 million of litigation settlements.
  • The company repurchased 949,386 shares for $28.88 million in 2021 and declared $18.06 million of common dividends. It paid $1.04 per share in annual dividends.
  • Goodwill of $129.57 million was not impaired in the 2021 annual test. Long-term land and building investment impairment charges were $781,000. The remaining FDIC loss-share agreement relating to Waccamaw Bank was terminated in September 2021.
  • COVID-19 loan modifications totaled 4,066 loans and $475.82 million cumulatively; outstanding deferrals fell to $2.92 million from $32.26 million at year-end 2020. PPP loans outstanding were $20.64 million at year-end 2021.

Outlook, risks, and contingencies

The filing gives no quantified earnings, growth, or margin guidance. Management described capital and liquidity as strong and said pandemic-related operating disruption had been minimal, but noted uncertainty about future economic effects and borrower repayment capacity. Principal risks include COVID-19 and local economic conditions, credit deterioration and allowance estimation, interest-rate changes and pressure on net interest margin, deposit outflows or higher-cost funding, cybersecurity and third-party technology disruptions, regulation, and climate/ESG-related effects on customers and regional industries. The company also identified PPP litigation and SBA-guaranty risks. It was a defendant in ordinary-course legal matters and believed their resolution would not materially affect its financial position, results, or cash flows. The external auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.

Investor verification priorities

  • Assess how much of the 2021 earnings increase is attributable to the $8.47 million provision recovery and whether credit performance supports the lower reserve.
  • Track net interest margin, loan yields, acquired-loan accretion, and deposit pricing as rates and balance-sheet mix change.
  • Review commercial real estate exposure, criticized loans, nonperforming TDRs, and the allowance assumptions, including unemployment forecasts.
  • Confirm PPP forgiveness disclosures: the filing reports first-round forgiveness of $56.86 million/93.20% in several sections, but $56.74 million/93.03% in another; it also reports second-round forgiveness separately.
  • Evaluate the durability of stimulus-driven deposit growth, liquidity access, capital levels, and the sustainability of dividends and share repurchases.