First National Corporation — Q1 2015 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, serving individuals, small and medium-sized businesses, governmental entities and nonprofit organizations in Virginia’s Shenandoah Valley and central regions. The unaudited filing covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014 and balance-sheet comparisons to December 31, 2014.
On April 17, 2015, after quarter-end, First Bank acquired six Virginia branches from Bank of America. The transaction added $188 million of deposits, $2.2 million of premises and equipment and 36 employees; no loans were acquired. Total consideration was $6.7 million.
Key financial metrics
| Metric | Q1 2015 | Comparable period or date |
|---|---|---|
| Total assets | $530.4 million | $518.2 million at December 31, 2014 |
| Total loans | $398.5 million | $378.4 million at December 31, 2014 |
| Net loans | $391.7 million | $371.7 million at December 31, 2014 |
| Securities available for sale | $90.9 million | $83.3 million at December 31, 2014 |
| Total deposits | $438.8 million | $444.3 million at December 31, 2014 |
| Shareholders’ equity | $60.3 million | $59.6 million at December 31, 2014 |
| Net interest income | $4.632 million | $4.426 million in Q1 2014 |
| Noninterest income | $1.591 million | $1.616 million in Q1 2014 |
| Noninterest expense | $5.487 million | $4.613 million in Q1 2014 |
| Net income | $544 thousand | $1.146 million in Q1 2014 |
| Net income available to common shareholders | $215 thousand | $926 thousand in Q1 2014 |
| Basic and diluted EPS | $0.04 | $0.19 in Q1 2014 |
| Net interest margin | 3.96% | 3.72% in Q1 2014 |
| Return on average assets | 0.43% | 0.88% in Q1 2014 |
| Return on average equity | 3.67% | 8.53% in Q1 2014 |
| Efficiency ratio | 87.20% | 74.84% in Q1 2014 |
Revenue, profit, cash flow, margins, debt and liquidity
- Interest and dividend income increased to $4.988 million from $4.909 million. Interest expense declined to $356 thousand from $483 thousand, producing a 5% increase in net interest income.
- Loan growth and a reduction in lower-yielding securities and interest-bearing deposits improved the net interest margin to 3.96% from 3.72%. Average total loans increased $31.3 million year over year, while average securities and interest-bearing deposits declined by a combined $41.3 million.
- Net income fell 53% to $544 thousand. Management attributed $419 thousand of first-quarter expense to one-time integration costs for the branch acquisition, primarily stationery and supplies, data processing and postage. Higher staffing and benefit costs also contributed to the decline.
- Net cash provided by operating activities was $1.375 million. Investing activities used $27.948 million, primarily because of a $20.282 million increase in loans and net purchases of securities. Financing activities provided $10.902 million, including $15 million of other borrowings and $1.903 million of increased federal funds purchased.
- Cash and cash equivalents declined to $9.174 million at March 31, 2015 from $24.845 million at December 31, 2014 and $34.123 million at March 31, 2014.
- Other borrowings totaled $15.020 million, compared with $26 thousand at year-end 2014. The $15 million Federal Home Loan Bank borrowing matured April 6, 2015. Trust preferred capital notes totaled $9.279 million.
- Management reported $106.1 million of unused non-deposit funding capacity, including $62.7 million from the Federal Home Loan Bank, $40.0 million of unsecured correspondent-bank lines and $3.4 million through the Federal Reserve Discount Window. Liquid assets and loans maturing within one year totaled $79.2 million.
- The Bank remained well capitalized, with total capital to risk-weighted assets of 18.86%, Tier 1 capital of 17.61%, common equity Tier 1 capital of 17.61% and Tier 1 leverage of 13.17% at March 31, 2015.
Material changes versus the prior comparable period
- Net interest income increased $206 thousand, while noninterest income was essentially unchanged.
- Noninterest expense increased $874 thousand, or 19%, including a $616 thousand increase in salaries and benefits and $398 thousand of identified integration-related stationery, data processing and postage expenses.
- The company recorded no loan-loss provision or recovery in Q1 2015, compared with a $200 thousand recovery in Q1 2014. Net recoveries were $53 thousand in Q1 2015 versus $161 thousand of net charge-offs in Q1 2014.
- The allowance for loan losses was $6.771 million, or 1.70% of total loans, versus $10.283 million, or 2.86%, at March 31, 2014.
- Nonperforming assets declined to $9.1 million, or 1.72% of total assets, from $9.9 million, or 1.91%, at December 31, 2014. Nonaccrual loans declined to $7.2 million from $8.0 million.
- Securities available for sale increased 9% from year-end. Gross unrealized gains increased to $1.1 million, while gross unrealized losses declined to $376 thousand. Management considered the losses temporary and related to interest-rate changes rather than credit concerns.
- Deposits decreased $5.6 million, or 1%, from year-end; noninterest-bearing demand deposits increased $4.9 million, offset by declines in interest-bearing demand, savings and time deposits.
Guidance, outlook, management commentary, risks and unusual items
The filing provides no quantitative earnings or revenue guidance. Management stated that first-quarter results are not necessarily indicative of full-year 2015 performance. The branch acquisition materially expands the franchise: based on March 31 balances, it would have increased assets by approximately 36% and deposits by approximately 43%, while increasing branch locations from 10 to 16.
Management expects the acquisition to be accounted for under the acquisition method; purchase-accounting valuations for real estate, core deposits and potential goodwill were not complete as of the filing date. Integration costs affected Q1 results before the transaction closed.
- Key risks include credit losses, concentrations in residential and commercial real estate, local economic weakness, nonperforming assets, adequacy of the allowance for loan losses, interest-rate changes, competition for loans and deposits, liquidity and funding availability, acquisition integration, operational and technology risks, cybersecurity, regulatory changes, FDIC assessments, litigation and the limited trading market for common stock.
- Nonperforming assets were concentrated in commercial real estate and construction and land development loans. Other potential problem loans totaled $15.7 million at March 31, 2015.
- Commitments to extend credit totaled $61.7 million, standby letters of credit totaled $8.6 million and locked-rate mortgage commitments totaled $2.5 million. Total commitments and contingent liabilities disclosed in the lending discussion were $72.8 million.
- There were $1.8 million of troubled debt restructurings at March 31, 2015, of which $782 thousand were performing under restructured terms. No loans were modified as TDRs during Q1 2015.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of March 31, 2015.
Most important facts for investors to verify
- Final purchase accounting for the six acquired branches, including the deposit premium, core deposit intangible and any goodwill.
- Post-acquisition deposit retention, funding needs, operating expenses and whether integration costs recur.
- Loan-growth quality, particularly construction and commercial real estate exposures, nonaccrual trends and the adequacy of the $6.8 million allowance.
- Liquidity following the decline in cash balances and the April 6, 2015 maturity of the $15 million Federal Home Loan Bank borrowing.
- Impact of the acquisition on capital ratios, earnings per share, preferred-stock dividend obligations and common-shareholder returns.
- Whether the improved net interest margin is sustainable in changing interest-rate and deposit-pricing conditions.