First Community Bankshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted. The company operates community banking and wealth management businesses through First Community Bank and affiliates.
Business context and reporting period
The Bank operated 53 branches in Virginia, West Virginia, North Carolina and Tennessee. Its primary earnings source is net interest income, supplemented by service fees and wealth management income. On April 21, 2023, the company completed its acquisition of Surrey Bancorp for approximately $71.37 million, paid primarily in 2.997 million shares. Surrey added approximately $466.25 million of assets, including $239.08 million of loans and $403.64 million of deposits.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $42.97 | $39.29 | $122.61 | $110.04 |
| Net interest income | $33.35 | $29.34 | $95.62 | $82.04 |
| Provision for credit losses | $1.11 | $0.69 | $6.96 | $3.16 |
| Net income | $14.64 | $13.35 | $36.24 | $34.08 |
| Diluted earnings per share | $0.79 | $0.81 | $2.06 | $2.05 |
- Q3 net interest margin was 4.49% on a GAAP basis and 4.51% on a fully taxable-equivalent (FTE) basis, up 50 basis points year over year. Nine-month FTE margin was 4.45%, up 67 basis points.
- Q3 return on average assets was 1.74% and return on average common equity was 11.63%; nine-month figures were 1.49% and 10.25%, respectively.
- At September 30, total assets were $3.284 billion, loans net of allowance were $2.557 billion, deposits were $2.746 billion and stockholders’ equity was $495.67 million.
- Cash and cash equivalents were $113.40 million. Nine-month operating cash flow was $46.83 million; investing activities provided $265.58 million, largely reflecting acquisition-related cash flows, while financing activities used $369.87 million. Cash declined $57.45 million from year-end.
- The company reported no long-term borrowings; repurchase agreements were $1.03 million. Unused FHLB capacity was $382.39 million. Additional disclosed liquidity included $6.08 million of FRB Discount Window capacity, $100 million of correspondent-bank lines and $129.95 million of unpledged available-for-sale securities.
- Company capital ratios at September 30 were 14.64% common equity Tier 1, 15.89% total risk-based capital and 11.08% Tier 1 leverage. The Bank was reported well-capitalized under regulatory standards.
Material changes versus comparable periods
- Q3 net income rose 9.65% year over year, primarily on $4.01 million higher net interest income. Higher loan balances and yields drove loan interest income growth; deposit interest expense also increased materially as rates rose.
- For the first nine months, net income increased 6.33%. Higher net interest income was partly offset by a $3.80 million increase in provision expense, $6.01 million higher noninterest expense and $1.01 million lower noninterest income.
- Q3 noninterest expense increased 8.36%, mainly from salaries and service fees associated in part with Surrey. Nine-month expense included $2.39 million in merger costs. The prior-year periods included a $1.66 million gain on the Emporia branch divestiture, which did not recur in 2023.
- Loans increased $193.28 million from year-end, but excluding Surrey decreased $45.81 million. Deposits increased $67.32 million including Surrey; excluding the acquisition they decreased $336.31 million. Surrey post-merger deposit attrition was reported at $59.80 million.
- Q3 diluted EPS declined from $0.81 to $0.79 despite higher net income, alongside a larger weighted-average share count following the stock-funded acquisition. Nine-month diluted EPS was $2.06 versus $2.05.
Outlook, commentary, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management anticipates further operating savings and business synergies from Surrey, but these are not reflected in the disclosed pro forma results.
- Credit quality: nonperforming loans were 0.71% of loans; nonperforming assets were 0.57% of assets. The allowance for credit losses was $36.03 million, or 1.39% of loans. Nine-month net charge-offs were $3.93 million. Management attributed higher provision expense to economic forecasts, portfolio growth and a $1.61 million “day two” Surrey provision.
- Available-for-sale securities had $21.96 million of gross unrealized losses at September 30; accumulated other comprehensive loss was $17.44 million. Management said securities remained current, it did not expect credit losses, and it did not intend or expect to be required to sell them before recovery. Future market or liquidity conditions could change that assessment.
- Management identifies interest-rate and market movements, local and national economic conditions, deposit behavior, credit losses, regulation, cybersecurity and technology, and acquisition integration among factors that could cause results to differ from forward-looking statements. It reported no material changes to the risk factors in the 2022 Form 10-K.
- A putative customer class action alleges improper overdraft and repeated nonsufficient-funds fees. No class has been certified; the Bank disputes the claims and is exploring settlement, but says it cannot reasonably estimate potential liability. Management believes other ordinary-course legal matters are not expected to have a material adverse effect.
- The proposed FDIC special assessment to recover losses related to certain bank failures was not expected to affect the company under the proposal as described in the filing; the proposal and estimates remained subject to change.
- Disclosure controls were assessed as effective at quarter-end, and no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- How Surrey integration, deposit retention and anticipated synergies develop, and whether acquisition-related costs or fair-value estimates change.
- Whether deposit outflows excluding Surrey continue, and how deposit pricing and funding mix affect net interest margin and liquidity.
- Trends in nonaccrual loans, delinquencies, charge-offs and the allowance, particularly across commercial real estate and consumer portfolios.
- The level and duration of securities’ unrealized losses, available liquidity and management’s ability and intent to hold securities to recovery.
- Future share repurchases, dividends, share-count effects and capital ratios; the filing reports $17.06 million of repurchases and $15.72 million of dividends declared year to date.
- Developments in the overdraft-fee litigation and any final FDIC assessment applicable to the company.