First National Corporation — Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company whose principal subsidiary, First Bank, serves individuals, small and medium-sized businesses, governmental entities and nonprofit organizations in the northern Shenandoah Valley. The filing covers the quarter and six months ended June 30, 2014. The interim financial statements are unaudited.
During the second quarter, the Bank launched its First Mortgage division, which expected to begin originating residential mortgage loans in the third quarter, with most future originations expected to be sold to secondary-market investors.
Key financial metrics
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Net interest income | $4.6 million | $9.1 million |
| Net interest margin | 3.81% | 3.77% |
| Noninterest income | $1.7 million | $3.3 million |
| Noninterest expense | $4.5 million | $9.2 million |
| Provision for/(recovery of) loan losses | $(0.4) million | $(0.6) million |
| Net income | $1.5 million | $2.7 million |
| Net income available to common shareholders | $1.3 million | $2.2 million |
| Basic and diluted EPS | $0.26 | $0.45 |
| Return on average assets | 1.16% | 1.03% |
| Return on average equity | 11.05% | 9.81% |
- Total assets were $525.3 million at June 30, 2014, compared with $522.9 million at December 31, 2013.
- Net loans were $357.5 million, up 3% from $346.5 million at year-end 2013. Total loans were $367.5 million.
- Deposits were $451.2 million, broadly unchanged from $450.7 million at year-end. Noninterest-bearing demand deposits increased 7%, while time deposits declined 6%.
- Cash and cash equivalents ended the six-month period at $19.3 million, down from $31.1 million at June 30, 2013 and from $31.5 million at December 31, 2013.
- Operating cash flow was $1.9 million; investing activities used $14.1 million, primarily reflecting loan growth and securities purchases; financing activities used $18 thousand.
- Available non-deposit funding totaled $103.4 million, including $63.7 million from the Federal Home Loan Bank, $37.0 million of correspondent-bank federal funds lines and $2.7 million through the Federal Reserve Discount Window.
- Other borrowings were $6.0 million and trust preferred capital notes were $9.3 million. The company was current on trust preferred interest payments.
- Shareholders’ equity was $56.7 million, compared with $53.6 million at December 31, 2013.
- Regulatory capital remained strong: consolidated total capital and Tier 1 capital ratios were 18.64% and 17.38%, respectively; First Bank’s ratios were 17.28% and 16.02%.
- The reported efficiency ratio was 71.94% for the quarter and 73.36% year to date.
Material changes versus prior comparable periods
- Second-quarter net income rose to $1.5 million from $261 thousand, while net income available to common shareholders increased to $1.3 million from $31 thousand. Year-to-date net income increased to $2.7 million from $1.2 million.
- Results benefited materially from a $400 thousand loan-loss recovery in the quarter and a $600 thousand recovery year to date, compared with provisions of $2.5 million and $2.3 million, respectively, in the 2013 periods.
- Net interest income decreased modestly, but the net interest margin improved to 3.81% from 3.71% in the quarter and to 3.77% from 3.75% year to date. Lower funding costs more than offset lower asset yields.
- Noninterest income declined on a reported basis because the 2013 period included a $543 thousand one-time gain from termination of a directors’ post-retirement obligation. Excluding that item, noninterest income increased 15% in the quarter and 12% year to date.
- Noninterest expense declined 4% in the quarter and 7% year to date, helped by lower other-real-estate-owned expenses, lower FDIC assessments and the absence of a $206 thousand land-lease termination loss recorded in 2013.
- Nonperforming assets declined to $13.4 million, or 2.55% of total assets, from $14.7 million, or 2.81%, at year-end 2013. Nonaccrual loans declined to $11.2 million from $11.7 million and net OREO declined to $2.2 million from $3.0 million.
- The allowance for loan losses declined to $10.0 million, or 2.72% of total loans, from $10.6 million, or 2.98%, at year-end 2013. Net charge-offs were $38 thousand year to date versus $2.8 million in the comparable 2013 period.
- Wealth-management assets under management increased 10% to $312.6 million; these assets are not included on the consolidated balance sheet.
- Accumulated other comprehensive loss improved to $404 thousand at June 30, 2014 from $1.3 million at year-end 2013, primarily because of gains on available-for-sale securities.
Guidance, outlook, commentary, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management stated that interim results are not necessarily indicative of full-year results.
- Management expects the First Mortgage division to begin originating residential mortgages in the third quarter, with most originations expected to be sold to investors.
- Management believed liquidity was sufficient for depositor requirements and customer borrowing needs. Liquid assets and loans maturing within one year totaled $101.5 million, and 22% of the loan portfolio, or $82.0 million, matured within one year.
- Management anticipated that capital ratios would remain sufficient to meet future well-capitalized requirements under Basel III, which was scheduled to become effective January 1, 2015.
- Credit risk remains concentrated in real estate lending and the northern Shenandoah Valley market. At June 30, 2014, 52% of nonperforming assets related to construction and land development loans and 35% to commercial real estate loans.
- Other potential problem loans totaled $20.3 million, down from $23.5 million at December 31, 2013. Management noted that nonperforming assets could increase if local economic conditions weaken or collateral values decline.
- At June 30, 2014, impaired loans totaled $19.9 million, troubled debt restructurings totaled $2.0 million, and $978 thousand of TDRs were performing under restructured terms.
- Key risks include adverse local economic conditions, borrower repayment risk, collateral-value declines, future loan losses, OREO valuation risk, interest-rate changes, competition, regulatory and accounting changes, cybersecurity breaches, technology implementation, reliance on secondary funding sources and the ability to raise capital.
- Unfunded commitments to extend credit totaled $60.5 million and standby letters of credit totaled $8.7 million. The filing states that no material legal proceedings or material changes to previously disclosed risk factors existed.
- The board declared a quarterly common dividend of $0.025 per share on August 13, 2014, payable September 19, 2014.
Most important facts for investors to verify
- Whether the improvement in profitability is sustainable without recurring loan-loss recoveries and other favorable credit-cost effects.
- Future trends in nonperforming assets, impaired loans, TDRs, potential problem loans and the adequacy of the $10.0 million allowance.
- The effect of real estate concentration and local Shenandoah Valley economic conditions on collateral values and credit losses.
- Whether loan growth and the First Mortgage launch can offset lower loan yields and support net interest income as interest rates change.
- Liquidity availability and collateral requirements under the $103.4 million of unused funding lines, including the $63.7 million FHLB facility.
- The effect of preferred-stock dividends and the increase in the Series A dividend rate to 9% after May 14, 2014 on common-shareholder returns.
- Implementation effects of Basel III and the pending accounting standards identified in the filing, particularly revenue-recognition guidance that management was still evaluating.