First National Corporation: Q1 2023 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company whose principal subsidiary, First Bank, provides commercial, residential, consumer, deposit, and wealth-management services through 20 branches, a loan production office, customer service centers, digital channels, and ATMs. The filing covers the three months ended March 31, 2023, with comparisons to the three months ended March 31, 2022 and the December 31, 2022 balance sheet.
Key financial metrics
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Total assets | $1.372 billion | $1.369 billion at Dec. 31, 2022 |
| Net interest income | $11.176 million | $10.548 million |
| Noninterest income | $2.778 million | $2.711 million |
| Noninterest expense | $9.200 million | $8.644 million |
| Net income | $3.849 million | $3.729 million |
| Diluted EPS | $0.61 | $0.60 |
| Net interest margin | 3.60% | 3.19% |
| Efficiency ratio | 65.49% | 64.38% |
| Return on average assets | 1.15% | 1.06% |
| Return on average equity | 14.20% | 13.40% |
| Cash and cash equivalents | $77.8 million | $66.9 million at Dec. 31, 2022 |
Loans totaled $918.0 million, down $2.6 million from year-end, while deposits totaled $1.242 billion, essentially unchanged. The allowance for credit losses on loans was $8.7 million, or 0.95% of total loans. Nonperforming assets were $1.8 million, or 0.13% of total assets, versus $2.9 million, or 0.21%, at year-end.
Net cash provided by operating activities was $4.6 million. Investing activities provided $7.2 million, primarily reflecting a net decrease in loans and security maturities. Financing activities used $0.8 million, including $0.9 million of dividends and $0.1 million of share repurchases. Total shareholders’ equity was $111.8 million at March 31, 2023.
Total debt consisted of approximately $5.0 million of subordinated debt and $9.3 million of junior subordinated debt. The Bank had no borrowings on available credit lines and did not use the Federal Reserve Bank Term Funding Program during the quarter.
Material changes versus prior comparable periods
- Net income increased 3%, or $120 thousand, driven by a 6% increase in net interest income and a 2% increase in noninterest income, partly offset by a 6% increase in noninterest expense.
- Total interest income rose 23%, while total interest expense increased 394%, primarily because deposit rates increased and customers shifted balances toward higher-cost accounts.
- Average loans increased approximately $88.7 million year over year, while average interest-bearing deposits at banks decreased approximately $142.7 million. Average earning assets declined 6%.
- The net interest margin expanded 41 basis points to 3.60%, reflecting higher earning-asset yields and a greater proportion of loans, partially offset by higher funding costs.
- Noninterest income benefited from higher deposit service charges, ATM and check-card fees, and other operating income, including a bank-owned life insurance death benefit. Brokered mortgage fees declined to zero from $94 thousand.
- Noninterest expense increased $556 thousand, including higher salaries, marketing, card costs, bank franchise tax, recruiting, training, collections, and customer-account fraud losses.
- Accumulated other comprehensive loss improved by $2.3 million as unrealized securities losses narrowed with market-rate changes. Available-for-sale securities still had $21.3 million of unrealized losses, and held-to-maturity securities had $9.5 million of unrealized losses.
- Cash dividends increased to $0.15 per share from $0.14 per share in the prior-year quarter. The company repurchased 1,557 shares under its $5.0 million repurchase authorization.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- On January 1, 2023, the company adopted CECL. The adoption increased the loan allowance by $2.2 million, established a $132 thousand allowance for held-to-maturity securities and a $153 thousand reserve for unfunded commitments, and reduced retained earnings by $2.0 million net of tax.
- No provision for credit losses was recorded in Q1 2023 or Q1 2022. Q1 2023 net loan charge-offs were approximately $916 thousand, but management stated that prior reserves were sufficient.
- Liquidity sources totaled $471.2 million, including on-balance-sheet liquidity of approximately $142.0 million, available credit lines of $329.1 million, and $91.2 million of eligible held-to-maturity securities for the Bank Term Funding Program.
- Estimated uninsured deposits were $212.3 million, or $135.2 million excluding municipal deposits. Deposit mix shifted from noninterest-bearing and savings accounts toward time deposits.
- The Bank reported regulatory capital ratios well above minimum requirements and qualified as “well capitalized.” The total risk-based capital ratio was 14.88%, the common equity Tier 1 ratio was 13.94%, and the Tier 1 leverage ratio was 9.70%.
- Key risks include interest-rate changes, deposit retention and liquidity, unrealized securities losses, real-estate concentration, credit losses, collateral values, economic conditions, competition, cybersecurity, regulatory changes, and reliance on third-party service providers.
- The company expects its junior subordinated debt to transition from three-month LIBOR to SOFR by June 30, 2023. Its $9.0 million of interest-rate swaps hedge the variable-rate debt.
- Commitments to extend credit were $170.2 million, and outstanding standby letters of credit were $17.6 million. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher deposit costs continue to offset the benefit of higher loan yields and support for the 3.60% net interest margin.
- Trends in uninsured deposits, deposit mix, liquidity availability, and any future use of secured or Federal Reserve funding.
- Credit quality, including the allowance coverage ratio, charge-offs, nonaccrual loans, real-estate exposure, and potential problem loans.
- The effect of CECL estimates, economic forecasts, and future provisions for credit losses.
- The duration and valuation sensitivity of the securities portfolio, including the remaining $30.8 million of aggregate unrealized losses across available-for-sale and held-to-maturity securities.
- The sustainability of noninterest income, including the impact of the nonrecurring bank-owned life insurance death benefit and the absence of brokered mortgage fees.
- Future compliance with regulatory capital requirements and the remaining capacity and pace of the share-repurchase program.