First National Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, serving consumers, small and medium-sized businesses, governmental entities, nonprofits, and estates through lending, deposit, wealth-management, digital, and branch services. The filing covers the unaudited three and six months ended June 30, 2023; comparative periods are June 30, 2022, and December 31, 2022 for balance-sheet items. Amounts are in thousands unless otherwise stated.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total interest and dividend income | $14,286 | $11,839 | $27,814 | $22,863 |
| Net interest income | $10,745 | $11,290 | $21,921 | $21,838 |
| Provision for credit losses | $100 | $400 | $100 | $400 |
| Noninterest income | $2,884 | $2,780 | $5,662 | $5,491 |
| Noninterest expense | $9,158 | $8,918 | $18,358 | $17,562 |
| Net income | $3,505 | $3,835 | $7,354 | $7,564 |
| Diluted EPS | $0.56 | $0.61 | $1.17 | $1.21 |
| Net interest margin | 3.36% | 3.42% | 3.48% | 3.39% |
| Efficiency ratio | 68.37% | 62.69% | 66.91% | 63.50% |
At June 30, 2023, total assets were $1.374 billion, loans were $930.2 million, loans net of the allowance were $921.3 million, securities totaled approximately $310.2 million, and total deposits were $1.242 billion. Shareholders’ equity was $112.9 million.
Cash and interest-bearing deposits totaled $72.1 million. Six-month operating cash flow was $7.9 million, investing cash flow was negative $1.4 million, financing cash flow was negative $1.3 million, and cash and cash equivalents increased $5.2 million to $72.1 million. Available liquidity sources totaled $561.7 million, including $346.7 million of available credit lines; the Bank had no borrowings under those lines at quarter-end.
Subordinated and junior subordinated debt totaled $14.3 million at June 30, 2023. The Bank’s regulatory capital ratios were 14.88% total capital, 13.93% Tier 1 capital, 13.93% common equity Tier 1 capital, and 9.72% Tier 1 leverage. Management stated that the Bank was “well capitalized.”
Material changes versus comparable periods
- Q2 net income declined 9% to $3.5 million, primarily because a $545 thousand decrease in net interest income and a $240 thousand increase in noninterest expense more than offset higher noninterest income and a $300 thousand reduction in credit-loss provisions.
- Six-month net income declined 2% to $7.4 million. Net interest income increased only $83 thousand because a $5.0 million increase in interest income was nearly offset by a $4.9 million increase in interest expense.
- Deposit funding costs rose substantially. Q2 interest expense on deposits increased to $3.4 million from $413 thousand, and the cost of interest-bearing deposits rose to 1.62% from 0.19%. The total cost of deposits increased to 1.14% from 0.17%.
- Deposit composition shifted toward higher-cost time deposits. Time deposits increased $39.4 million from year-end 2022, while noninterest-bearing deposits decreased $31.2 million and savings and interest-bearing demand deposits decreased $7.1 million.
- Loans increased $9.7 million, or 2% annualized, from year-end 2022 and $50.1 million, or 6%, from June 30, 2022. Loans were concentrated in residential real estate, commercial real estate, and commercial and industrial lending.
- Nonperforming assets declined to $722 thousand from $2.9 million at December 31, 2022. Nonaccrual loans were $677 thousand, compared with $2.7 million at year-end.
- The allowance for loan losses was $8.9 million, compared with $7.4 million at year-end 2022, primarily reflecting the initial adoption of CECL. The CECL transition reduced retained earnings by $2.0 million on January 1, 2023.
- Unrealized losses on available-for-sale securities were $23.2 million and on held-to-maturity securities were $12.0 million. Management attributed the losses to interest-rate changes rather than issuer credit concerns and reported that the portfolio was investment grade.
- Accumulated other comprehensive loss improved to $21.4 million from $22.5 million at year-end, while shareholders’ equity increased $4.5 million.
Guidance, outlook, risks, contingencies, and unusual items
The filing provides no formal earnings, revenue, or margin guidance. Management cautioned that interim results are not necessarily indicative of full-year results. The principal near-term earnings pressure is rising deposit pricing and the migration from noninterest-bearing and lower-cost deposits to time deposits. Management expects FDIC assessment expense to be approximately $150 thousand per quarter for the remainder of 2023.
The Company adopted CECL on January 1, 2023, increasing the loan allowance by $2.2 million, establishing a $153 thousand reserve for unfunded commitments, and recording a $132 thousand allowance for held-to-maturity securities. The second-quarter credit-loss provision was $100 thousand, including $45 thousand for loans, $44 thousand for unfunded commitments, and $11 thousand for held-to-maturity securities.
Other notable items included gains from sales of other real estate owned, a bank-owned life insurance death benefit contributing to six-month noninterest income, higher legal and professional costs related to an impaired loan relationship, increased FDIC assessments, recruiting and education costs, and the May 2023 approval of a new stock incentive plan.
Key risks include interest-rate movements, deposit outflows and uninsured deposits, liquidity availability, real-estate concentration, collateral values, credit losses, economic weakness, competition, regulatory changes, cybersecurity, reliance on third-party service providers, and the possibility that the securities portfolio’s unrealized losses or changing rates could affect capital, liquidity, or earnings. Commitments to extend credit were $175.0 million and standby letters of credit were $21.1 million at quarter-end.
The Company reported no material changes to previously disclosed risk factors, no material pending legal proceedings, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit repricing and continued migration into time deposits further compress net interest margin and profitability.
- The stability of total deposits, particularly the estimated $343.0 million of uninsured customer deposits, and the availability and terms of secondary liquidity sources.
- Future credit performance in the concentrated residential and commercial real-estate portfolios, including the $3.2 million of potential problem loans.
- The adequacy of the $8.9 million loan-loss allowance and $197 thousand reserve for off-balance-sheet credit exposures under CECL assumptions.
- The potential capital and liquidity effects of approximately $35.2 million of gross unrealized securities losses.
- Execution of the $5.0 million stock repurchase authorization; $506,498 remained available at June 30, 2023, after 32,301 shares were repurchased during the quarter.