First National Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, which provides commercial, residential, consumer, deposit, and wealth-management services through 20 branches, a loan production office, retirement-community customer service centers, digital channels, and ATMs. The filing covers the unaudited three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Amounts are in thousands unless otherwise stated.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total interest and dividend income | $12,792 | $10,331 | $35,655 | $26,471 |
| Net interest income | $11,727 | $9,738 | $33,565 | $24,745 |
| Noninterest income | $3,027 | $2,648 | $8,518 | $7,226 |
| Noninterest expense | $9,083 | $9,426 | $26,645 | $22,706 |
| Net income | $4,454 | $2,398 | $12,018 | $8,176 |
| Diluted EPS | $0.71 | $0.38 | $1.92 | $1.53 |
| Net interest margin | 3.58% | 3.06% | 3.57% | 3.13% |
| Efficiency ratio | 61.09% | 64.86% | 62.66% | 64.39% |
- Q3 net income increased 86% year over year; nine-month net income increased 47%. Q3 return on average assets was 1.27% and return on average equity was 17.27%; nine-month figures were 1.14% and 15.12%, respectively.
- Q3 net interest income rose 20%, driven by a 16% increase in average loans, a 61% reduction in average interest-bearing bank deposits, and a 52-basis-point increase in net interest margin. Nine-month net interest income rose 36%.
- The provision for loan losses was $200 in Q3 and $600 for the nine-month period, compared with no provision and a $1,000 recovery, respectively, in the prior-year periods.
- At September 30, 2022, total assets were $1.384 billion, loans were $906.5 million, net loans were $900.2 million, deposits were $1.266 billion, and shareholders’ equity was $99.1 million.
- Loans increased 10% from year-end 2021, while interest-bearing deposits in banks declined $104.3 million. Noninterest-bearing demand deposits increased 6% to $438.3 million.
- Cash and cash equivalents were $75.8 million at September 30, 2022, down from $176.0 million at December 31, 2021. Nine-month operating cash flow was $16.8 million, investing cash flow was $(126.9) million, and financing cash flow was $9.8 million.
- Available liquidity included $163.4 million of cash, bank deposits, securities, and loans maturing within one year, plus $300.7 million of available non-deposit funding sources.
- Total debt at September 30, 2022 consisted of $5.0 million of subordinated debt and $9.3 million of junior subordinated debt. The company repaid $5.0 million of subordinated debt on January 1, 2022.
- The Bank reported regulatory capital ratios of 14.18% total risk-based capital, 13.52% Tier 1 capital, 13.52% common equity Tier 1 capital, and 9.27% Tier 1 leverage. Management stated that the Bank was well capitalized.
Material changes versus the prior comparable period
- Loan growth and the changed asset mix increased earning-asset yields. Average loans represented 68% of average earning assets in Q3 2022 versus 60% in Q3 2021, while average interest-bearing bank deposits declined to 6% from 16%.
- PPP income accretion declined to zero in Q3 2022 from $737 and declined to $358 for the nine-month period from $1,800 in the prior-year period.
- Q3 merger-related expenses fell to zero from $1,341. Nine-month merger-related expenses declined to $20 from $2,023, although broader noninterest expense increased 17% for nine months because of the acquired Fincastle operations and SmartBank loan-portfolio operations.
- Noninterest income increased 14% in Q3 and 18% for nine months, led by service charges, ATM and check-card fees, and wealth-management fees. Brokered mortgage fees declined because of lower mortgage-loan originations.
- Accumulated other comprehensive loss changed from $298 of income at year-end 2021 to $(27.8) million at September 30, 2022, primarily from interest-rate-driven unrealized losses on securities. Total equity declined $18.0 million despite higher retained earnings.
- The Bank transferred 24 securities with a $82.2 million book value and $74.4 million market value from available-for-sale to held-to-maturity on September 1, 2022, reducing the effect of future rate movements on reported equity. Total securities had $42.3 million of unrealized losses at quarter-end, which management attributed to market rates rather than credit concerns.
- Credit quality improved in several measures: nonperforming assets declined to $2.1 million from $4.2 million at year-end 2021, impaired loans declined to $566 from $2,304, and troubled debt restructurings declined to $110 from $1.6 million. However, loans more than 90 days past due and accruing increased to $306 from zero.
Outlook, risks, contingencies, and unusual items
- Management did not provide formal quantitative earnings guidance. It stated that interim results are not necessarily indicative of full-year results.
- Management expects to record an approximately $2.9 million gain in the fourth quarter of 2022 from the October 3 sale of an investment in a broker-dealer; the gain was not included in third-quarter results.
- On October 12, 2022, the Board authorized a common-stock repurchase program of up to $5.0 million through December 31, 2023. No repurchases had occurred through November 10, 2022.
- The company is preparing for adoption of the current expected credit loss standard, effective for the company in 2023. Management stated that adoption may materially change credit-loss accounting, but had not quantified the impact.
- Key risks include rising interest rates and securities-market losses, deposit retention and liquidity, real-estate and commercial-loan concentrations, credit losses, economic weakness, competition, regulatory and accounting changes, cyber threats, third-party service reliance, and the transition of certain instruments from LIBOR to SOFR by June 30, 2023.
- Off-balance-sheet commitments included $163.1 million of commitments to extend credit and $21.4 million of standby letters of credit at September 30, 2022.
- The filing reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether the $2.9 million expected fourth-quarter gain from the broker-dealer investment sale was recognized and whether it was subject to subsequent adjustments.
- The effect of CECL adoption on the allowance for loan losses, regulatory capital, earnings, and strategic plans.
- Deposit pricing, deposit composition, liquidity sources, and the effect of further rate increases on net interest margin and unrealized securities losses.
- Trends in nonperforming assets, past-due loans, charge-offs, loan concentrations, and the adequacy of the $6.3 million allowance.
- Progress and costs associated with the LIBOR-to-SOFR transition for junior subordinated debt and related swaps.
- Actual utilization of the $5.0 million stock-repurchase authorization and its effect on capital and per-share results.