First National Corporation — Q1 2018 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 15 branch offices and related delivery channels in Virginia. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to March 31, 2017, and balance sheet comparisons to December 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Comparable Period / Prior Date |
|---|---|---|
| Net income | $2.687 million | $1.543 million in Q1 2017 |
| Basic and diluted EPS | $0.54 | $0.31 in Q1 2017 |
| Net interest income | $6.547 million | $5.992 million in Q1 2017 |
| Net interest margin, tax-equivalent | 3.79% | 3.70% in Q1 2017 |
| Noninterest income | $2.633 million | $1.941 million in Q1 2017 |
| Noninterest expense | $5.866 million | $5.751 million in Q1 2017 |
| Efficiency ratio | 62.39% | 69.52% in Q1 2017 |
| Return on average assets | 1.45% | 0.88% in Q1 2017 |
| Return on average equity | 18.47% | 11.78% in Q1 2017 |
| Total assets | $767.854 million | $739.110 million at December 31, 2017 |
| Total loans, net | $515.664 million | $516.875 million at December 31, 2017 |
| Total deposits | $692.825 million | $664.980 million at December 31, 2017 |
| Shareholders’ equity | $59.693 million | $58.154 million at December 31, 2017 |
Interest income increased to $7.312 million from $6.532 million, while interest expense increased to $765 thousand from $540 thousand. Average earning assets increased 6%, and the reported net interest margin expanded by 9 basis points. The allowance for loan losses was $5.272 million, or 1.01% of total loans, after a $100 thousand provision.
Operating cash flow was $4.436 million, compared with $2.835 million in Q1 2017. Investing activities used $2.755 million, while financing activities provided $27.610 million, primarily from deposit growth. Cash and cash equivalents increased to $69.277 million from $39.986 million at year-end 2017.
Debt consisted of $4.952 million of subordinated debt and $9.279 million of junior subordinated debt. The Bank had no FHLB borrowings and had $131.5 million of unused borrowing capacity, including $79.9 million from the FHLB. Regulatory capital ratios remained well above minimum requirements: total capital to risk-weighted assets was 13.52%, common equity Tier 1 was 12.50%, and Tier 1 leverage was 8.55%.
Material Changes Versus Prior Comparable Period
- Net income increased $1.144 million, or approximately 74%, driven by higher net interest income, noninterest income, and lower income tax expense.
- Net interest income rose $555 thousand, or 9%, due to higher average earning assets and a higher net interest margin.
- Noninterest income rose $692 thousand, or 36%. Bank-owned life insurance income increased $466 thousand, primarily from life insurance benefits related to an employee death. Wealth management fees increased $60 thousand.
- Other operating income included a $126 thousand one-time benefit related to termination and distribution of the pension plan assets.
- Income tax expense declined $112 thousand, or 18%, primarily because the Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%.
- Noninterest expense increased $115 thousand, or 2%, partly because of the Richmond, Virginia branch opened in the fourth quarter of 2017.
- The Company recorded a $100 thousand loan-loss provision versus no provision in Q1 2017. Net charge-offs were $154 thousand in Q1 2018, compared with net recoveries of $130 thousand in Q1 2017.
- Nonperforming assets declined to $682 thousand, or 0.09% of total assets, from $1.263 million, or 0.17%, at December 31, 2017. Other real estate owned was reduced to zero after a sale generating $24 thousand of gain.
- Unrealized losses on securities increased, reducing accumulated other comprehensive income by $961 thousand during the quarter. Management attributed the securities losses to changes in interest rates rather than issuer credit concerns.
Outlook, Risks, Contingencies, and Unusual Items
The filing provides no formal earnings or revenue guidance. Management states that first-quarter results are not necessarily indicative of full-year performance.
- Management expects liquidity to be sufficient for depositors’ requirements and customer borrowing needs. Liquid assets and loans maturing within one year totaled $130.8 million, and non-deposit funding sources totaled $131.5 million.
- Credit risk remains concentrated in real estate-related lending. Total loans were $520.936 million before the allowance, including $222.352 million of other real estate loans and $208.338 million of 1-4 family residential loans.
- Non-accrual loans totaled $682 thousand; loans more than 90 days past due and still accruing totaled $773 thousand. Other potential problem loans totaled $9.0 million.
- Troubled debt restructurings totaled $327 thousand, of which $278 thousand were performing under modified terms.
- Commitments to extend credit, standby letters of credit, and rate-lock commitments totaled $98.1 million. Commitments to extend credit were $81.8 million, standby letters of credit were $10.3 million, and locked-rate mortgage commitments were $6.0 million.
- Key risks include interest-rate changes, competition for loans and deposits, real estate and economic conditions, credit losses, loan concentration, liquidity and funding availability, regulatory changes, cybersecurity, operational disruptions, litigation, and the limited trading market for the Company’s common stock.
- The Company adopted revenue recognition guidance under ASU 2014-09 on January 1, 2018, with no material impact and no adjustment to opening retained earnings. The Company was assessing the future impact of the credit-loss standard under ASU 2016-13, which could materially change credit-loss accounting.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Whether the increase in noninterest income from bank-owned life insurance and the pension-plan termination benefit is nonrecurring.
- Loan delinquency, non-accrual, potential problem loan, and charge-off trends, particularly in the real estate portfolio.
- The adequacy of the $5.272 million allowance for loan losses and the potential effect of adopting the expected-credit-loss standard.
- The sustainability of the 3.79% net interest margin as deposit costs and market interest rates rise.
- The effect of the Richmond branch expansion on future operating expenses and deposit and loan growth.
- The duration and interest-rate sensitivity of the securities portfolio, including $3.690 million of total unrealized losses at March 31, 2018.
- Available borrowing capacity, deposit stability, and the ability to fund loan demand under stressed liquidity conditions.
- Capital ratios and the capital conservation buffer as asset growth, dividends, and share repurchases continue.