First National Corporation (NASDAQ: FXNC) — Q1 2024 Form 10-Q Summary
Business Context and Reporting Period
First National Corporation is a Virginia bank holding company for First Bank, serving consumers, businesses, governmental entities and nonprofits through banking, lending and wealth-management services. The filing covers the unaudited three months ended March 31, 2024, compared with the three months ended March 31, 2023, and the balance sheet as of March 31, 2024, compared with December 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Comparable / Prior Period | Change |
|---|---|---|---|
| Net income | $3.2 million | $3.8 million in Q1 2023 | Down 17% |
| Diluted EPS | $0.51 | $0.61 | Down $0.10 |
| Net interest income | $10.9 million | $11.2 million | Down 3% |
| Provision for credit losses | $1.0 million | None in Q1 2023 | Increased $1.0 million |
| Noninterest income | $4.0 million | $2.8 million | Up 46% |
| Noninterest expense | $9.9 million | $9.2 million | Up 8% |
| Net interest margin | Approximately 3.23%–3.24% | 3.60% | Down approximately 36–37 basis points |
| Return on average assets | 0.90% | 1.15% | Down 25 basis points |
| Return on average equity | 11.07% | 14.20% | Down 313 basis points |
| Efficiency ratio | 65.65% | 65.49% | Slightly higher |
| Total assets | $1.447 billion | $1.419 billion at Dec. 31, 2023 | Up $27.9 million |
| Total loans | $973.0 million | $969.4 million at Dec. 31, 2023 | Up $3.5 million |
| Total deposits | $1.259 billion | $1.234 billion at Dec. 31, 2023 | Up $25.4 million |
| Shareholders’ equity | $117.8 million | $116.3 million at Dec. 31, 2023 | Up $1.5 million |
Interest income increased $2.8 million, led by higher loan yields and interest earned on bank deposits, but interest expense increased $3.1 million. The cost of interest-bearing deposits rose to 2.21% from 1.11% in the comparable period. The $50.0 million Federal Reserve Bank Term Funding Program borrowing increased interest expense and reduced the reported net interest margin by approximately 9 basis points.
Loan growth was concentrated primarily in residential and commercial real estate and commercial and industrial lending. The allowance for credit losses on loans was $12.6 million, or 1.30% of total loans, at March 31, 2024, compared with $8.7 million, or 0.95%, at March 31, 2023. Net charge-offs were $362 thousand in Q1 2024, compared with $915 thousand in Q1 2023.
Cash flow from operating activities was $4.7 million, compared with $4.6 million in Q1 2023. Investing activities provided $22.4 million, primarily from securities maturities, partially offset by loan growth. Financing activities provided $24.4 million, principally from deposit growth. Cash and cash equivalents increased to $138.7 million from $87.2 million at December 31, 2023.
Debt included $50.0 million of other borrowings, $5.0 million of subordinated debt and $9.3 million of junior subordinated debt. The Bank reported a total risk-based capital ratio of 14.45%, a common equity Tier 1 ratio of 13.20% and a Tier 1 leverage ratio of 9.19% at March 31, 2024. Management stated that the Bank exceeded applicable minimum requirements and qualified as well capitalized.
Material Changes Versus Prior Comparable Period
- Net income declined because of lower net interest income, a new $1.0 million credit-loss provision and higher operating expenses.
- Net interest margin contracted as deposit and other funding costs increased faster than earning-asset yields.
- Noninterest income benefited from a recovery on a loan acquired in a 2021 business combination and higher wealth-management fees. The filing does not provide a separate amount for the loan recovery.
- Noninterest expense increased mainly because of higher salaries and employee benefits, legal and professional fees and FDIC assessments.
- Nonaccrual loans increased to $8.0 million from $6.8 million at December 31, 2023 and $1.6 million at March 31, 2023. Commercial and industrial loans represented approximately 90% of nonperforming assets.
- Unrealized losses on available-for-sale securities increased to $22.2 million from $20.7 million at December 31, 2023; management attributed the losses to interest-rate changes rather than issuer credit concerns.
Guidance, Outlook, Risks and Unusual Items
The company expects to complete its acquisition of Touchstone Bankshares in the fourth quarter of 2024, subject to shareholder and regulatory approvals and other customary closing conditions. The transaction has an estimated stock consideration of $47.0 million and is expected to involve issuance of approximately 2.7 million First National shares. Touchstone reported March 31, 2024 assets of $673.2 million, gross loans of $506.0 million and deposits of $557.6 million. Systems conversion is expected in the first quarter of 2025.
No merger-related expenses were incurred in Q1 2024. Management estimates aggregate pretax merger-related expenses of approximately $3.3 million during 2024. The acquisition is expected to add 12 retail bank offices and an administrative office, but Touchstone is not included in First National’s Q1 financial statements.
Liquidity sources totaled $554.8 million at March 31, 2024, including bank deposits, unpledged securities and available credit lines. Estimated uninsured customer deposits totaled $391.9 million, or $308.6 million excluding municipal deposits. Commitments to extend credit totaled $214.7 million, and standby letters of credit totaled $17.0 million.
Primary risks include deposit outflows and funding costs, interest-rate changes, unrealized securities losses, real-estate and commercial credit concentrations, adequacy of the allowance for credit losses, economic weakness, cybersecurity, regulatory changes and competition. Acquisition-specific risks include failure to obtain approvals, delays, integration difficulties, customer or employee attrition, higher-than-expected costs and failure to realize projected synergies.
The filing states that there were no material pending legal proceedings, no material changes to previously disclosed risk factors other than Touchstone-related risks, and no material changes to contractual obligations. Disclosure controls and procedures were deemed effective.
Most Important Facts for Investors to Verify
- Confirm the timing and conditions of the Touchstone transaction, including shareholder and regulatory approvals, share issuance and the estimated $3.3 million of 2024 merger costs.
- Monitor deposit pricing, deposit mix, liquidity sources and uninsured deposits as funding costs remain elevated.
- Assess the trend in nonaccrual commercial and industrial loans, purchased healthcare-professional loans and the allowance for credit losses.
- Evaluate the effect of interest rates on the net interest margin and the $34.1 million of aggregate unrealized losses across available-for-sale and held-to-maturity securities.
- Reconcile reported net interest margin figures of approximately 3.23% and 3.24%, which appear in different sections of the filing and may reflect presentation or calculation-basis differences.
- Review the company’s regulatory capital ratios and liquidity capacity after completion of the planned acquisition.