First National Corporation — Q1 2021 Form 10-Q Summary
Business context and reporting period
First National Corporation is the bank holding company for First Bank, which provides commercial, residential, consumer, deposit, and wealth management services primarily in Virginia. This unaudited Form 10-Q covers the three months ended March 31, 2021, with balance sheet comparisons to December 31, 2020 and operating comparisons to the three months ended March 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Comparable / prior period |
|---|---|---|
| Total assets | $1.028 billion at March 31, 2021 | $950.9 million at December 31, 2020 |
| Total loans, net | $630.7 million | $622.4 million at December 31, 2020 |
| Total deposits | $916.1 million | $842.5 million at December 31, 2020 |
| Net interest income | $7.512 million | $7.026 million in Q1 2020 |
| Noninterest income | $2.143 million | $2.099 million in Q1 2020 |
| Net income | $2.436 million | $1.705 million in Q1 2020 |
| Basic and diluted EPS | $0.50 | $0.34 in Q1 2020 |
| Net interest margin | 3.27% | 3.77% in Q1 2020 |
| Efficiency ratio | 64.53% | 66.50% in Q1 2020 |
| Allowance for loan losses | $7.486 million, or 1.17% of total loans | $5.584 million, or 0.96%, at March 31, 2020 |
| Shareholders’ equity | $85.9 million | $84.9 million at December 31, 2020 |
| Cash and cash equivalents | $176.3 million at March 31, 2021 | $127.3 million at December 31, 2020 |
Net income represented approximately 25% of reported net interest income plus noninterest income. The filing does not present a separate GAAP net profit margin.
- Income before taxes increased to $3.005 million from $2.081 million.
- Total interest expense declined to $583 thousand from $1.142 million, primarily due to lower deposit rates.
- Noninterest expense increased 8% to $6.650 million, including $405 thousand of merger-related expenses.
- No provision for loan losses was recorded in Q1 2021, compared with a $900 thousand provision in Q1 2020.
- Operating cash flow was $5.050 million, compared with $3.386 million in Q1 2020. Investing activities used $29.1 million, while financing activities provided $73.0 million, primarily from deposit growth.
- The Bank had $239.0 million of unused borrowing capacity at March 31, 2021, including $162.5 million available from the Federal Home Loan Bank. No FHLB borrowings were outstanding.
- Subordinated debt was $9.992 million and junior subordinated debt was $9.279 million.
- First Bank remained well capitalized, with total risk-based capital of 16.05%, Tier 1 risk-based capital of 14.80%, common equity Tier 1 capital of 14.80%, and Tier 1 leverage of 8.78%.
Material changes versus comparable periods
- Net income increased $731 thousand, or 43%, year over year, driven by higher net interest income, the absence of a loan-loss provision, and modestly higher noninterest income.
- Average earning assets increased 24%, but the net interest margin declined 50 basis points to 3.27%. Lower asset yields, PPP lending at approximately 1%, and a larger balance of low-yielding bank deposits pressured the margin.
- Noninterest income rose 2%. ATM and check card fees, wealth management fees, and other customer service fees increased, while deposit service charges declined 35% because of lower overdraft activity.
- Total assets increased $77.2 million and deposits increased $73.6 million from year-end 2020. The increase reflected PPP loan proceeds, customer stimulus receipts, and higher customer deposits.
- Net loans increased $8.3 million, including $19.8 million of new PPP loans originated in Q1 2021. PPP balances originated in 2020 were $46.5 million at quarter-end.
- Accumulated other comprehensive income declined $916 thousand to $2.482 million, primarily because of unrealized losses on available-for-sale securities, partly offset by gains on cash-flow hedges.
- Investment securities increased $18.5 million from year-end. Unrealized losses on available-for-sale securities increased to $1.238 million, although management attributed the losses to interest-rate movements rather than credit concerns.
Guidance, outlook, commentary, risks and unusual items
- The Company agreed to acquire The Bank of Fincastle for approximately $31.6 million in cash and stock. Closing was expected in Q3 2021, subject to shareholder, regulatory, and other customary approvals. The consideration was expected to include $6.7 million of cash and approximately 1.3 million newly issued shares. Fincastle reported $272.1 million of assets, $197.8 million of net loans, and $239.7 million of deposits at March 31, 2021.
- The Company incurred $405 thousand of merger-related expenses in Q1 2021 and estimated approximately $4.2 million of pre-tax merger costs for 2021. Management expected systems conversion in Q4 2021.
- A purported Fincastle shareholder filed a lawsuit on April 27, 2021 seeking, among other things, to delay or enjoin the merger, require corrective disclosures, and recover damages. Management stated that the claims are without merit and intends to defend them.
- COVID-19 remains the principal operating and credit risk. Management expects continued pressure in retail, lodging, and leisure sectors. Loans in those sectors totaled $62.6 million, or 9.81% of total loans, at March 31, 2021.
- No loans remained in the 90-day COVID-19 payment-deferral program at quarter-end. However, $14.3 million of loans had been modified to permit interest-only payments, primarily in lodging and leisure commercial real estate.
- Nonaccrual loans totaled $6.814 million, or approximately 0.66% of total assets. Troubled debt restructurings totaled $6.0 million, and none were performing under their restructured terms. The Bank had no other real estate owned and no loans over 90 days past due and accruing.
- Management cautioned that future provisions, charge-offs, noninterest expenses, and liquidity pressure could increase if pandemic-related business interruptions continue or borrowers cannot resume regular payments.
- The Company is assessing the future adoption of the current expected credit loss standard, which may materially change credit-loss accounting. The filing does not provide a quantified estimated impact.
- The Bank maintained a pandemic continuity plan and reported no material operational or internal-control issues. Disclosure controls and procedures were concluded to be effective as of March 31, 2021.
Important facts for investors to verify
- Whether the Fincastle acquisition closes on schedule, the final consideration and share issuance, merger costs, goodwill, and post-closing capital ratios.
- The status and potential financial impact of the Fincastle shareholder litigation.
- Performance of the $14.3 million of pandemic-modified loans and credit trends in lodging, leisure, retail, and other commercial real estate exposures.
- Whether the allowance for loan losses remains adequate as pandemic relief expires and the Company prepares for expected-credit-loss accounting.
- Whether deposit growth persists and whether the net interest margin stabilizes after the 50-basis-point year-over-year decline.
- The effect of rising interest rates on available-for-sale securities, liquidity, deposit costs, borrowing costs, and the fair value of the Company’s interest-rate hedges.
- The timing and amount of PPP forgiveness, SBA repayments, and recognition of approximately $1.1 million of expected fees from 2021 PPP originations.