First National Corporation — Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, serving commercial, consumer, residential real estate, deposit, wealth management and related customers through Virginia markets and digital channels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The common stock trades on Nasdaq under FXNC.
Key financial metrics
Amounts below are in thousands, except per-share data and ratios.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total interest and dividend income | $14,631 | $12,792 | $42,445 | $35,655 |
| Net interest income | $10,683 | $11,727 | $32,604 | $33,565 |
| Provision for credit losses | $100 | $200 | $200 | $600 |
| Noninterest income | $3,053 | $3,027 | $8,715 | $8,518 |
| Noninterest expense | $9,784 | $9,083 | $28,142 | $26,645 |
| Net income | $3,121 | $4,454 | $10,475 | $12,018 |
| Diluted EPS | $0.50 | $0.71 | $1.67 | $1.92 |
| Net interest margin | 3.35% | 3.58% | 3.44% | 3.57% |
| Efficiency ratio | 70.67% | 61.09% | 68.16% | 62.66% |
| Return on average assets | 0.91% | 1.27% | 1.03% | 1.14% |
| Return on average equity | 10.96% | 17.27% | 12.57% | 15.12% |
- Net income declined 30% in the quarter and 13% year to date. Higher loan yields and interest income were more than offset by sharply higher deposit funding costs.
- At September 30, 2023, total assets were $1.366 billion, including gross loans of $952.5 million, net loans of $943.6 million, available-for-sale securities of $148.2 million and held-to-maturity securities of $149.9 million.
- Total deposits were $1.235 billion, down from $1.241 billion at December 31, 2022. Noninterest-bearing demand and savings/interest-bearing deposits decreased, while time deposits increased by $47.6 million to $184.4 million.
- Shareholders’ equity was $112.0 million, compared with $108.4 million at year-end 2022. Accumulated other comprehensive loss was $24.7 million, primarily reflecting unrealized securities losses.
- Cash and cash equivalents ended the period at $50.1 million, compared with $75.8 million at September 30, 2022. Nine-month operating cash flow was $11.3 million; investing cash flow was negative $18.7 million and financing cash flow was negative $9.5 million.
- Debt consisted of approximately $5.0 million of subordinated debt and $9.3 million of junior subordinated debt. The Company reported no borrowings on available credit lines at September 30, 2023.
Material changes versus comparable periods
- Net interest income fell $1.0 million, or 9%, in the third quarter and $961 thousand, or 3%, for the first nine months. The net interest margin contracted 23 basis points in the quarter and 13 basis points year to date.
- The average yield on loans increased to 5.31% in the quarter and 5.19% year to date, while the cost of interest-bearing deposits increased to 1.82% and 1.52%, respectively. Total cost of funds increased 94 basis points in the quarter and 85 basis points year to date.
- Noninterest expense increased 8% in the quarter and 6% year to date, driven primarily by salaries, legal and professional fees, ATM and card expenses, marketing, FDIC assessments and other operating costs.
- Loans increased $32.0 million, or 5% annualized, from December 31, 2022. The portfolio remained concentrated in residential real estate, commercial real estate and commercial and industrial loans.
- Nonperforming assets were $3.1 million, or 0.23% of total assets, compared with $2.9 million, or 0.21%, at year-end. Nonaccrual loans increased to $3.1 million; other real estate owned declined to zero.
- The allowance for credit losses on loans was $8.9 million at September 30, 2023, compared with $7.4 million at December 31, 2022. The allowance increased partly because of adoption of the CECL methodology, which reduced retained earnings by $2.0 million at January 1, 2023.
- Available-for-sale and held-to-maturity securities had combined gross unrealized losses of approximately $43.6 million, compared with $35.4 million at December 31, 2022. Management attributed the losses to market interest rates rather than issuer credit concerns and stated that it did not intend, or expect to be required, to sell the securities.
- The Company repurchased 37,532 shares under its $5.0 million repurchase authorization during the first nine months, leaving approximately $4.4 million available under the plan at September 30, 2023.
Liquidity, capital, outlook and risks
- Management reported total available liquidity of $532.1 million, including deposits at other banks, securities and available credit lines. Estimated uninsured customer deposits were $346.9 million, or $268.4 million excluding municipal deposits.
- The Bank reported regulatory capital ratios of 14.80% total risk-based capital, 13.86% Tier 1 and common equity Tier 1 capital, and 9.96% Tier 1 leverage. Management stated that the Bank exceeded capital requirements and qualified as well capitalized.
- The filing provides no formal earnings, revenue or margin guidance. Management expects results to remain sensitive to interest rates, deposit pricing, loan demand, credit quality and economic conditions.
- Commitments to extend credit totaled $171.9 million and standby letters of credit totaled $12.1 million. The liability for expected losses on off-balance-sheet exposures was $189 thousand.
- Key risks include deposit outflows and funding costs, interest-rate volatility, unrealized securities losses, concentrations in real estate lending, borrower and collateral deterioration, adequacy of the CECL allowance, competition, regulatory changes, reliance on third-party services, cybersecurity threats and general economic conditions.
- The Company signed two leases in October 2023 for a new Roanoke branch and a replacement Glen Allen loan production office. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether deposit repricing and migration toward higher-cost time deposits continue to compress net interest margin.
- Trends in uninsured deposits, liquidity availability and reliance on secured or unsecured borrowing capacity.
- Credit performance in the commercial real estate, residential real estate and commercial and industrial portfolios, including nonaccrual loans, past-due loans and charge-offs.
- Whether the $8.9 million loan allowance remains adequate under CECL assumptions and changing economic forecasts.
- The potential capital impact of the securities portfolio’s $43.6 million of unrealized losses if interest rates remain elevated or securities must be sold.
- The pace and economics of loan growth, future deposit retention, operating expense growth and the ongoing stock repurchase program.