First National Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing is unaudited and covers First National Corporation, a Virginia bank holding company, and its banking subsidiary, First Bank. The bank serves individuals, small and medium-sized businesses, governmental entities and nonprofit organizations in Virginia’s northern Shenandoah Valley through 10 branches and related banking, mortgage, trust and investment services.
Financial Highlights
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net interest income | $4.8 million | $5.1 million | $9.9 million | $10.0 million |
| Provision for loan losses | $0.7 million | $3.6 million | $2.7 million | $3.8 million |
| Noninterest income | $1.5 million | $1.5 million | $4.0 million | $2.8 million |
| Noninterest expense | $4.4 million | $4.5 million | $9.3 million | $9.1 million |
| Net income | $0.7 million | $(0.9) million | $1.2 million | $0.1 million |
| Net income available to common shareholders | $0.5 million | $(1.2) million | $0.7 million | $(0.4) million |
| Basic and diluted earnings per share | $0.16 | $(0.40) | $0.24 | $(0.13) |
| Net interest margin | 3.88% | 4.00% | 4.01% | 3.94% |
- Balance sheet: Total assets were $531.2 million at June 30, 2012, compared with $539.1 million at December 31, 2011. Gross loans were $384.1 million, down from $392.4 million; deposits were $458.7 million, down from $469.2 million.
- Cash and liquidity: Cash and cash equivalents ended at $37.6 million, up from $29.5 million at December 31, 2011. Six-month operating cash flow was $4.6 million and investing cash flow was $11.8 million, while financing activities used $8.3 million.
- Available funding: The Bank reported $93.0 million of unused borrowing capacity, including $57.0 million from the Federal Home Loan Bank, $32.0 million of unsecured correspondent-bank lines and $4.0 million through the Federal Reserve Discount Window.
- Capital: Shareholders’ equity increased to $44.7 million from $37.1 million, principally reflecting a $7.6 million common-stock offering. First Bank’s reported June 30 total risk-based capital ratio was 13.18%, Tier 1 risk-based capital ratio was 11.90% and Tier 1 leverage ratio was 8.77%, above “well-capitalized” thresholds.
- Debt: Other borrowings were $14.1 million, down from $19.1 million. Trust preferred capital notes remained $9.3 million, with reported rates of 3.07% and 2.07% on the two issuances.
- Efficiency: The reported non-GAAP efficiency ratio was 70.25% for the quarter and 70.26% year to date, compared with 67.57% and 68.60%, respectively, in the prior-year periods.
Material Changes Versus Prior Comparable Period
- Quarterly net income improved to $694 thousand from a $945 thousand loss, primarily because the loan-loss provision declined by $2.9 million. Year-to-date net income increased to $1.2 million from $58 thousand.
- Net charge-offs declined to $287 thousand in the second quarter and $1.6 million year to date, compared with $2.9 million and $6.1 million, respectively, in the prior-year periods.
- Year-to-date noninterest income increased by $1.2 million, primarily due to $1.1 million of gains on securities sales. These gains were largely nonrecurring in nature and should be distinguished from core fee income.
- Quarterly net interest income declined 6%, and the margin compressed to 3.88%, reflecting higher securities balances, lower loans and a shift toward lower-yielding residential real estate loans. The six-month margin nevertheless increased to 4.01% from 3.94%.
- Gross loans declined 2%, including decreases in other real estate, commercial and industrial, consumer and construction loans, partly offset by a 5% increase in one-to-four-family residential loans.
- Nonperforming assets declined to $16.0 million, or 3.02% of total assets, from $18.2 million, or 3.38%, at December 31, 2011. Nonaccrual loans were $10.6 million and net OREO was $5.4 million.
- Common shares increased materially following the June 29 rights offering and standby investment, which issued 1,945,815 shares and generated net proceeds of $7.6 million. The Company continued to suspend common-stock cash dividends.
Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It cautioned that interim results are not necessarily indicative of full-year performance.
- Credit quality remains the principal risk. Other potential problem loans increased to $53.4 million from $45.1 million at year-end, while $63.95 million of loans were classified as substandard. Nonperforming assets were concentrated in commercial real estate, construction and land development, and residential real estate.
- The allowance for loan losses was $14.0 million, or 3.64% of gross loans, compared with $12.9 million, or 3.30%, at year-end. Management stated that reserves were sufficient but acknowledged that additional provisions may be required if economic conditions, collateral values or borrower performance deteriorate.
- Net OREO declined to $5.4 million, but the Company recorded $569 thousand of OREO loss provisions during the first six months and continued to face valuation and liquidation risks.
- Liquidity depends partly on secondary sources, including FHLB advances, securities and loan sales, correspondent-bank lines and out-of-market time deposits. Commitments to extend credit, standby letters of credit and mortgage rate-lock commitments totaled $62.9 million.
- The Company expects to make a $509 thousand pension contribution during the fourth quarter of 2012.
- The Company filed a registration statement on July 31, 2012 to facilitate a potential public auction of Treasury-held preferred securities. The filing does not state the outcome or timing of any auction.
- Potential future Basel III and Dodd-Frank capital and liquidity requirements could increase regulatory burdens. The Company had not determined the ultimate effect of proposed rules.
- All investment securities were considered investment grade. Unrealized losses were $94 thousand and were considered temporary; the Company stated it did not intend or expect to be required to sell the affected securities.
Investor Verification Priorities
- Verify the sustainability of improved earnings after excluding the $1.1 million year-to-date securities gain and the sharp reduction in loan-loss provisions.
- Review trends in the $53.4 million of other potential problem loans, $21.9 million of impaired loans and $10.6 million of nonaccrual loans.
- Assess whether the $14.0 million allowance adequately covers commercial real estate and construction-related exposure, including the effect of collateral-value changes.
- Monitor loan contraction, deposit mix changes and reliance on secondary funding sources.
- Confirm the effect of the common-stock offering on per-share results, ownership dilution and capital ratios.
- Reconcile the slightly different consolidated capital ratios presented in the capital note and MD&A, which report consolidated total and Tier 1 risk-based ratios using differing figures.
- Track the proposed Treasury preferred-stock auction, future preferred dividends and the possible impact of Basel III treatment of trust preferred securities.