First National Corporation 10-Q Summary
Business Context and Reporting Period
First National Corporation, a Virginia bank holding company operating primarily through First Bank, filed this unaudited Form 10-Q for the three months ended March 31, 2022. 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 across Virginia markets.
Results reflect the July 1, 2021 acquisition of The Bank of Fincastle and the September 30, 2021 acquisition of the SmartBank Richmond-area loan portfolio and related assets. The quarter’s results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period or prior date |
|---|---|---|
| Total assets | $1.418 billion | $1.389 billion at Dec. 31, 2021 |
| Total loans | $836.4 million; $830.6 million net | $825.1 million; $819.4 million net at Dec. 31, 2021 |
| Total deposits | $1.293 billion | $1.249 billion at Dec. 31, 2021 |
| Net interest income | $10.5 million | $7.5 million in Q1 2021 |
| Net interest margin | 3.19% | 3.27% in Q1 2021 |
| Noninterest income | $2.7 million | $2.1 million in Q1 2021 |
| Noninterest expense | $8.6 million | $6.7 million in Q1 2021 |
| Provision for loan losses | $0 | $0 in Q1 2021 |
| Net income | $3.7 million | $2.4 million in Q1 2021 |
| Diluted EPS | $0.60 | $0.50 in Q1 2021 |
| Return on average assets | 1.06% | 1.00% in Q1 2021 |
| Return on average equity | 13.40% | 11.53% in Q1 2021 |
| Efficiency ratio | 64.38% | 64.49% in Q1 2021 |
Cash Flow, Capital, Debt, and Liquidity
- Operating activities generated $8.6 million of cash, compared with $5.1 million in Q1 2021.
- Investing activities used $73.0 million, primarily reflecting $49.0 million of held-to-maturity securities purchases, $21.1 million of available-for-sale securities purchases, and $10.8 million of net loan growth.
- Financing activities provided $38.2 million, including a $48.6 million increase in demand and savings deposits, partly offset by repayment of $5.0 million of subordinated debt and $817 thousand of dividends.
- Cash and cash equivalents declined to $149.8 million from $176.0 million at December 31, 2021.
- The Company had $4.994 million of subordinated debt and $9.279 million of junior subordinated debt at March 31, 2022. The Company prepaid a separate $5.0 million subordinated note on January 1, 2022.
- Available non-deposit funding totaled $247.1 million, including $147.7 million from the Federal Home Loan Bank, $48.4 million through the Federal Reserve discount window, and $51.0 million of federal funds lines.
- Management stated that the Bank was well capitalized. March 31, 2022 ratios included total capital to risk-weighted assets of 14.44%, common equity Tier 1 capital of 13.79%, and Tier 1 leverage of 8.61%.
Material Changes Versus the Prior Comparable Period
- Net income increased $1.3 million, or approximately 53%, driven mainly by a $3.0 million, or 40%, increase in net interest income and a $568 thousand, or 27%, increase in noninterest income.
- Average earning assets increased $415.1 million, or 44%, primarily due to the Fincastle acquisition and deposit growth. Average loans increased $193.3 million and average securities increased $187.2 million.
- The net interest margin declined eight basis points because lower-yielding securities and interest-bearing deposits grew faster than loans. Loan discount accretion contributed $367 thousand to Q1 2022 interest income, while PPP fee accretion declined to $323 thousand from $599 thousand.
- Noninterest expense increased $2.0 million, or 30%, largely because of acquired employees, branches, customers, and SmartBank-related operations. Merger expenses declined to $20 thousand from $405 thousand.
- Loans, net increased $11.2 million from year-end, while securities increased $43.6 million. Held-to-maturity securities increased $48.2 million as management sought to reduce the effect of market-value changes on shareholders’ equity.
- Shareholders’ equity declined $10.5 million to $106.6 million, primarily because accumulated other comprehensive loss worsened by $13.7 million from unrealized securities losses associated with rising market interest rates.
- Loan quality indicators improved modestly: nonperforming assets declined to $3.9 million, or 0.27% of assets, from $4.2 million, or 0.30%, at year-end. The allowance for loan losses increased to $5.8 million, or 0.70% of loans, from $5.7 million, or 0.69%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects cost savings from the Fincastle integration to be realized during 2022.
- Management expects purchased-loan discount accretion to decline over time and stated that future provisions may be required as discounts accrete or if acquired-loan credit quality deteriorates.
- The securities portfolio had $22.2 million of total unrealized losses at March 31, 2022, compared with $2.7 million at December 31, 2021. Management attributed the losses to interest-rate changes rather than issuer credit concerns and did not intend or expect to sell the securities before recovery of amortized cost.
- COVID-19 remains a disclosed risk to customers, credit quality, business continuity, liquidity, and financial performance. Pandemic-related modified loans totaled $8.9 million and were performing under modified terms at March 31, 2022.
- The Company had $1.6 million of troubled debt restructurings, all considered nonperforming at quarter-end. Nonaccrual loans totaled $2.1 million, and loans more than 90 days past due and accruing totaled $53 thousand.
- PPP loans totaled $2.5 million. The Company believes most will be forgiven and repaid by the SBA, but a change in government guarantees or forgiveness outcomes could require additional reserves.
- Off-balance-sheet commitments included $167.1 million of commitments to extend credit, $17.6 million of standby letters of credit, and $10.9 million of locked-rate mortgage commitments.
- The Company is assessing the future impact of CECL adoption, which is required for the Company beginning in fiscal years and interim periods after December 15, 2022 and could materially change credit-loss accounting. It is also assessing the transition from LIBOR for affected instruments.
- No material changes to previously disclosed risk factors were reported, and no material pending legal proceedings were disclosed. Management concluded that disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Whether the post-acquisition loan and deposit growth can offset the lower net interest margin as interest rates and funding costs rise.
- The sustainability of loan discount accretion, PPP fee accretion, and acquisition-related revenue contributions.
- Whether the $22.2 million of unrealized securities losses remain temporary and how further rate increases could affect tangible equity and liquidity.
- The adequacy of the $5.8 million allowance for loan losses, particularly given real estate concentration, pandemic-related modifications, TDRs, and the pending CECL transition.
- Integration results and expected cost savings from Fincastle, including any effect on expenses, customer retention, and operating efficiency.
- Future deposit trends, use of the $247.1 million of available non-deposit funding, and the impact of higher funding costs on liquidity and net interest income.