First National Corporation Reports Second Quarter 2023 Financial Results

STRASBURG, Va., July 26, 2023 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ: FXNC), the bank holding company of First Bank (the “Bank”), reported unaudited consolidated net income of $3.5 million and diluted earnings per common share of $0.56 for the three months ended June 30, 2023. This compared to net income of $3.8 million and diluted earnings per common share of $0.61 for the first quarter of 2023, and net income of $3.8 million and diluted earnings per common share of $0.61 for the second quarter of 2022.

SECOND QUARTER HIGHLIGHTS

Key highlights of the second quarter ended June 30, 2023, are as follows. Comparisons are to the linked quarterly period ended March 31, 2023, unless otherwise stated:

• Tangible book value per common share totaled $17.55, up $2.01 from one year ago
• Deposits were unchanged at $1.2 billion
  
• Noninterest-bearing demand deposits comprised 32% of total deposits
• Return on average assets was 1.02%
• Return on average equity was 12.56%
• Loans increased $12.2 million, or 5% annualized
• Nonperforming assets improved to 0.05% of total assets

“We are pleased with the Company’s performance during the second quarter and for the first half of the year. Our team continued to deliver strong ROA and ROE in spite of rising costs of deposits resulting from the Federal Reserve actions of the last twelve months, while continuing to invest for the future,” said Scott C. Harvard, president, and chief executive officer of First National. During the quarter, we announced the addition of Todd Ross to lead our Roanoke Valley team, began negotiations for a downtown Roanoke location, and negotiated enhancements to our technology delivery systems. First Bank is fortunate that over 30% of deposits reside in noninterest-bearing accounts that we believe are core customer relationships and help to mitigate the pressure on deposit costs. Asset quality remains excellent, with nonperforming assets at historically low levels and little evidence of credit deterioration. Loan growth picked up in the quarter resulting in net loan growth of $12.2 million. We will continue to remain vigilant around credit quality, as well as loan and deposit pricing, as we navigate the impact of Federal Reserve actions on the economy. 

NET INTEREST INCOME

Net interest income decreased by $431 thousand, or 4%, to $10.7 million for the second quarter of 2023, compared to $11.2 million in the first quarter of 2023. Total interest income increased by $758 thousand and was offset by an increase in total interest expense of $1.2 million.

The increase in interest income was attributable to a $374 thousand, or 3%, increase in interest income and fees on loans, and a $415 thousand increase in interest income on deposits in other banks. The increases in interest income were attributable to higher yields on loans and interest-bearing deposits in banks, as well as higher average balances.

The increase in interest expense was attributable to a $1.2 million, or 54%, increase in interest expense on deposits. The higher interest expense on deposits was attributable to a 51-basis point increase in the cost of interest-bearing deposits to 1.62%, and a $27.3 million increase in the average balance of interest-bearing deposits. The increase in deposit costs resulted from increases in the interest rates paid on deposit accounts, as well as a change in the composition of the deposit portfolio. During the second quarter, deposit balances shifted from noninterest-bearing accounts to interest-bearing accounts as average noninterest-bearing deposit balances decreased by $7.3 million during the second quarter, while average time deposit balances increased by $23.7 million.

The net interest margin decreased by 24 basis points to 3.36% as the impact of a 36-basis point increase in the cost of funds was partially offset by a 11-basis point increase in the yield on earning assets. The rising interest rate environment continued to have an unfavorable impact on the net interest margin during the second quarter as the Company’s interest-bearing liabilities repriced greater than its earning assets during the period. The cost of funds increased to 1.13%, compared to 0.77% for the first quarter of 2023.

Net accretion of discounts on purchased loans was included in interest income and fees on loans and totaled $194 thousand in the second quarter of 2023, compared to $145 thousand in the first quarter of 2023.  

NONINTEREST INCOME

Noninterest income totaled $2.9 million for the second quarter of 2023, which was a $106 thousand, or 4%, increase compared to the first quarter of 2023. Service charges on deposits, ATM and check card fees, fees for other customer services, and brokered mortgage fees, increased compared to the first quarter of 2023 and were partially offset by decreases in wealth management fees and income from bank-owned life insurance.

NONINTEREST EXPENSE

Noninterest expense was unchanged at $9.2 million for the second quarter of 2023, compared to the linked quarter. Increases in legal and professional fees, FDIC assessment, and other operating expenses were offset by decreases in salaries and employee benefits and other real estate owned (income) expenses. Other real estate owned income totaled $219 thousand during the second quarter of 2023 from a gain on the sale of a property, which decreased noninterest expense for the period.

ASSET QUALITY

Overview

Nonperforming assets (“NPAs”) as a percentage of total assets improved to 0.05% at June 30, 2023, compared to 0.13% at March 31, 2023, and 0.15% one year ago at June 30, 2022. Loans past due greater than 30 days and still accruing interest as a percentage of total loans also improved to 0.13% at June 30, 2023, compared to 0.20% at March 31, 2023, and 0.19% at June 30, 2022. Net recoveries totaled $96 thousand in the second quarter of 2023, compared to net charge-offs of $915 thousand in the first quarter of 2023, and net charge offs of $26 thousand in the second quarter of 2022. The allowance for credit losses on loans increased to $8.9 million, or 0.95% of total loans at June 30, 2023, compared to $8.7 million, or 0.95% of total loans at March 31, 2023, and $6.2 million, or 0.70% of total loans at June 30, 2022.

Nonperforming Assets

NPAs decreased to $722 thousand at June 30, 2023, compared to $1.8 million at March 31, 2023, and $2.1 million at June 30, 2022, which represented 0.05%, 0.13%, and 0.15% of total assets, respectively. The decrease in NPAs during the second quarter of 2023 was related to the resolution of one impaired loan relationship and the sale of other real estate owned. The following table provides a detailed summary of NPA balances at the periods ended (dollars in thousands):

Past Due Loans

Loan past due greater than 30 days and still accruing interest decreased to $1.2 million, or 0.13% of total loans at June 30, 2023, compared to $1.9 million, or 0.20% of total loans at March 31, 2023, and $1.7 million, or 0.19%, of total loans at June 30, 2022. Of the total past due loans still accruing interest, $226 thousand was past due 90 days or more at June 30, 2023, compared to $47 thousand at March 31, 2023, and $91 thousand at June 30, 2022.

Net Charge-offs (Recoveries)

Net recoveries totaled $96 thousand for the second quarter of 2023, compared to net charge-offs of $915 thousand for the first quarter of 2023, and net charge-offs of $26 thousand for the second quarter of 2022. Net charge-offs for the first quarter of 2023 were primarily attributable to one customer relationship. 

Provision for Credit Losses

The Bank recorded a $100 thousand provision for credit losses in the second quarter of 2023, which was comprised of a $45 thousand provision for credit losses on loans, a $44 thousand provision on unfunded commitments, and an $11 thousand provision on held-to-maturity securities. The provision for credit losses on loans resulted primarily from growth of the loan portfolio. This compared to a provision for credit losses of $400 thousand for the same period of the prior year, which also resulted primarily from growth of the loan portfolio.

Allowance for Credit Losses on Loans

At June 30, 2023, the allowance for credit losses on loans totaled $8.9 million, which was a $141 thousand increase from $8.7 million at March 31, 2023. The increase resulted from an increase in the general reserve component of the allowance for credit losses on loans, while the specific reserve component of the allowance was unchanged at $0.

The following table provides the changes in the allowance for credit losses on loans for the three-month periods ended (dollars in thousands):

The allowance for credit losses on loans as a percentage of total loans totaled 0.95% at June 30, 2023, compared to 0.95% at March 31, 2023, and 0.70% at June 30, 2022. Additionally, the net discount on purchased loans totaled $2.1 million at June 30, 2023, $2.4 million at March 31, 2023, and $2.9 million at June 30, 2022. The net discount on purchased loans was not included in the allowance for credit losses on loans.

Allowance for Credit Losses on Unfunded Commitments

The allowance for credit losses on unfunded commitments totaled $197 thousand at June 30, 2023, compared to $153 thousand at March 31, 2023. The provision for credit losses on unfunded commitments totaled $44 thousand for the second quarter of 2023 and was included in the $100 thousand provision for credit losses reported on the Company’s consolidated income statement.

Allowance for Credit Losses on Securities

The allowance for credit losses on securities totaled $144 thousand at June 30, 2023, compared to $133 thousand on March 31, 2023. Provision for credit losses on securities totaled $11 thousand for the second quarter of 2023 and was included in the $100 thousand provision for credit losses reported on the Company’s consolidated income statement.

LIQUIDITY

Liquidity sources available to the Bank, including interest-bearing deposits in banks, unpledged securities available for sale, at fair value, unpledged securities held-to-maturity, at par, eligible to be pledged to the Federal Reserve Bank through its Bank Term Funding Program, and available lines of credit totaled $561.7 million at June 30, 2023.

The Bank maintains liquidity to fund loan growth and meet the potential demand from its deposit customers, including potential volatile deposits. The estimated amount of uninsured customer deposits totaled $343.0 million at June 30, 2023. Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $257.7 million at June 30, 2023.

BALANCE SHEET

At June 30, 2023, assets totaled $1.4 billion and were unchanged from the prior quarter ended March 31, 2023. Although total assets were unchanged during the second quarter of 2023, the asset composition changed slightly as interest bearing deposits in banks, and securities, available for sale, decreased by $5.5 million and $5.6 million, respectively, while loans increased by $12.2 million.

Total assets decreased $40.5 million, or 3%, compared to the period ended June 30, 2022. Interest bearing deposits in banks and total securities decreased by $50.2 million and $33.5 million, respectively, and were partially offset by a $47.4 million increase in loans, net of the allowance for credit losses.

Loans totaled $930.2 million at June 30, 2023, which was a $12.2 million, or 5% annualized, increase from March 31, 2023, and a $50.1 million, or 6%, increase over June 30, 2022. The growth in loans over the periods did not have a significant impact on the composition of the loan portfolio. The loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate, loans secured by commercial real estate, and commercial and industrial loans, which totaled 36%, 45%, and 12% of the loan portfolio, respectively, at June 30, 2023.

Deposits totaled $1.2 billion at June 30, 2023, and were unchanged compared to the prior quarter ended March 31, 2023. Although total deposits did not change during the second quarter, the deposit composition changed as noninterest-bearing demand deposits and savings and interest-bearing demand deposits decreased $13.9 million and $6.9 million, respectively, while time deposits increased by $21.6 million during the period. 

Deposits decreased $53.8 million compared to the period ended June 30, 2022, and the deposit composition also changed over the prior year. Noninterest-bearing demand deposits decreased from 33% to 32% of total deposits, savings and interest-bearing deposits decreased from 57% to 54% of total deposits, and time deposits increased from 10% to 14% of total deposits over the one-year period.

Shareholders’ equity totaled $112.9 million at June 30, 2023, which was an increase of $1.0 million from March 31, 2023. The increase in total shareholders’ equity was primarily attributable to a $2.6 million increase in retained earnings, which was partially offset by a $1.1 million increase in accumulated other comprehensive loss, net. The Company declared and paid cash dividends of $0.15 per common share during the second quarter of 2023, which was unchanged from the first quarter of 2023. The Company’s common equity to total assets ratio and its tangible common equity to tangible assets ratio increased as of June 30, 2023, compared to March 31, 2023, and June 30, 2022. The Bank is considered well-capitalized.

The following table provides capital ratios at the periods ended:

STOCK REPURCHASE PLAN

The Board of Directors authorized a stock repurchase plan to purchase up to $5.0 million of its common stock during the fourth quarter of 2022. During the three months ended June 30, 2023, the Company repurchased 32,301 shares of its common stock for a total of $481 thousand at a weighted average price of $14.91 per share. For the six months ended June 30, 2023, the Company repurchased 33,858 shares of its common stock for a total of $506 thousand at a weighted average price of $14.96 per share. There were no stock repurchases during the year ended December 31, 2022.

NON-GAAP FINANCIAL MEASURES

In addition to financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company uses certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this document include fully taxable equivalent interest income, the net interest margin, the efficiency ratio, and tangible common equity to tangible assets.

The Company believes certain non-GAAP financial measures enhance the understanding of its business and performance. Non-GAAP financial measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. A reconciliation of tax-exempt net interest income is included at the end of this release.

ABOUT FIRST NATIONAL CORPORATION

First National Corporation (NASDAQ: FXNC) is the parent company and bank holding company of First Bank, a community bank that first opened for business in 1907 in Strasburg, Virginia. The Bank offers loan and deposit products and services through its website, www.fbvirginia.com, its mobile banking platform, a network of ATMs located throughout its market area, a loan production office, a customer service center in a retirement community, and 20 bank branch office locations located throughout the Shenandoah Valley, the central regions of Virginia, the Roanoke Valley, and in the city of Richmond. In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management. First Bank also owns First Bank Financial Services, Inc., which owns an interest in an entity that provides title insurance services. 

FORWARD-LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to the Company’s future operations and are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including the rapidly changing uncertainties related to the COVID-19 pandemic and its potential adverse effect on the economy, our employees and customers, and our financial performance. For details on other factors that could affect expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and other filings with the Securities and Exchange Commission.

CONTACTS

FIRST NATIONAL CORPORATION
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FIRST NATIONAL CORPORATION
Quarterly Performance Summary
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FIRST NATIONAL CORPORATION
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FIRST NATIONAL CORPORATION
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FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
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FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
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(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, gains and losses on disposal of premises and equipment, and merger related expenses by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding gains on sales of securities and gains on other investments.  The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency.  Such information is not prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be construed as such.  Management believes; however, such financial information is meaningful to the reader in understanding operational performance but cautions that such information not be viewed as a substitute for GAAP.

(2) Capital ratios are for First Bank.

(3) Nonperforming assets are comprised of nonaccrual loans and other real estate owned.

(4) Tangible book value is calculated by subtracting goodwill and other intangibles from total shareholders' equity. Tangible book value is a non-GAAP financial measure that management believes provides investors with important information that may be related to the valuation of common stock.

(5) Capital ratios presented are for First National Corporation.

(6)  The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets. The TCE ratio is not required by GAAP or by bank regulations, but is a metric used by management to evaluate the adequacy of the Company’s capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.

(7) Tax-equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21%. See the tables above for tax-equivalent net interest income and reconciliations of net interest income to tax-equivalent net interest income.