First National Corporation 2011 Form 10-K 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 northern Shenandoah Valley. The filing covers the fiscal year ended December 31, 2011; fourth-quarter information is also presented. The Bank operated 10 offices, 30 ATMs and online banking services.
Financial performance and condition
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total interest and dividend income | $25.6 million | $27.2 million | Down 6% |
| Net interest income | $20.2 million | $20.4 million | Down 1% |
| Net interest margin | 3.98% | 4.07% | Down 9 basis points |
| Provision for loan losses | $12.4 million | $11.7 million | Up 6% |
| Noninterest income | $5.8 million | $6.1 million | Down 5% |
| Noninterest expense | $20.7 million | $20.6 million | Up 1% |
| Net loss | $11.0 million | $3.6 million | Loss increased |
| Net loss available to common shareholders | $11.9 million | $4.5 million | Loss increased |
| Loss per common share | $4.01 | $1.53 | More severe loss |
| Return on average assets | (1.96%) | (0.66%) | Decreased |
| Return on average equity | (22.46%) | (6.52%) | Decreased |
At December 31, 2011, total assets were $539.1 million, net loans were $379.5 million, deposits were $469.2 million and shareholders’ equity was $37.1 million. Gross loans declined to $392.4 million from $435.0 million, while securities increased to $91.7 million from $60.4 million. The efficiency ratio increased to 69.66% from 66.77%, indicating weaker operating efficiency.
Cash flow from operating activities was $10.4 million, compared with $7.3 million in 2010. Investing activities used $0.3 million, and financing activities provided $3.4 million. Cash and cash equivalents increased to $29.5 million from $16.0 million. Management reported $125.0 million of liquid assets and $96.8 million of available non-deposit funding, including $53.3 million from the Federal Home Loan Bank, $35.0 million of correspondent-bank federal funds lines and $8.5 million from the Federal Reserve Discount Window.
Other borrowings totaled $19.1 million and trust preferred capital notes totaled $9.3 million. The Bank was classified as well capitalized. At year-end, the Company’s total risk-based capital ratio was 12.51%, Tier 1 risk-based capital ratio was 11.24% and leverage ratio was 8.45%; all declined from 2010.
Material changes versus the prior comparable period
- Net loss widened primarily because the Company recognized a $6.4 million non-cash income-tax charge after establishing a full $6.1 million valuation allowance against net deferred tax assets.
- Net charge-offs increased sharply to $15.5 million from $2.8 million. The allowance for loan losses declined to $12.9 million, or 3.30% of gross loans, from $16.0 million, or 3.69%.
- Non-performing assets increased to $18.2 million, or 3.38% of total assets, from $14.8 million. Including loans more than 90 days past due and accruing interest, the total was $18.7 million versus $15.4 million.
- Impaired loans declined to $25.9 million from $43.9 million, and other potential problem loans declined to $40.0 million from $73.3 million.
- Other real estate owned increased to $6.4 million from $4.0 million. The Company recorded $1.6 million of OREO valuation provision and $0.9 million of losses on OREO sales.
- Deposits increased 1% as savings and interest-bearing demand deposits rose, while time deposits, including brokered deposits, declined.
- Common dividends were suspended beginning in the third quarter of 2011. The Company remained current on preferred-stock dividends and trust-preferred interest payments.
Guidance, outlook, risks and unusual items
Management expected 2012 noninterest expense, excluding OREO-related items, to remain broadly stable. Net interest income was expected to decrease slightly because of pressure on the net interest margin; noninterest income and local loan and deposit balances were expected to remain relatively stable.
Management planned to reduce non-performing assets through OREO sales and problem-loan restructurings, but stated that additional loan-loss provisions and OREO losses could be required. The loan portfolio is heavily concentrated in real estate, with approximately 90% of loans secured by real estate. Local economic weakness, declining collateral values, borrower defaults, interest-rate changes and limited access to secondary funding sources are material risks.
The Company remains subject to TARP Capital Purchase Program obligations, including preferred-stock dividend priority, compensation and governance restrictions, and potential additional regulatory requirements. Regulatory restrictions required prior approval for dividends by the Company or Bank. The Company also disclosed a defined-benefit pension underfunding of $2.5 million and $62.7 million of commitments to extend credit, standby letters of credit and rate-lock commitments.
Important facts for investors to verify
- Whether non-performing assets, real-estate collateral values and net charge-offs continued to improve after December 31, 2011.
- The adequacy of the $12.9 million loan-loss allowance relative to the $40.0 million of other potential problem loans and the concentrated real-estate portfolio.
- The timing and conditions for reversing the $6.1 million deferred-tax-asset valuation allowance.
- The Company’s ability to maintain well-capitalized status while continuing to absorb losses and fund the underfunded pension obligation.
- Whether common dividends can be reinstated and whether regulatory approval remains required.
- The maturity, collateral requirements and continued availability of Federal Home Loan Bank and other secondary funding sources.
- The impact of TARP, Dodd-Frank, FDIC assessment changes and future capital regulations on profitability, capital and liquidity.