First National Corporation — Q2 2017 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 filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods, and the balance sheet as of June 30, 2017 compared with December 31, 2016.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $6.249 million | $5.796 million | $12.241 million | $11.495 million |
| Noninterest income | $1.978 million | $2.112 million | $3.919 million | $4.055 million |
| Noninterest expense | $5.705 million | $5.883 million | $11.456 million | $12.000 million |
| Net income | $1.756 million | $1.433 million | $3.299 million | $2.532 million |
| Basic and diluted EPS | $0.36 | $0.29 | $0.67 | $0.51 |
| Net interest margin | 3.73% | 3.62% | 3.71% | 3.62% |
| Efficiency ratio | 66.71% | 71.62% | 68.09% | 74.42% |
- Q2 net income increased 23%, while six-month net income increased 30% year over year. Management attributed the improvement primarily to higher net interest income and lower operating expenses.
- Q2 return on average assets was 0.96% and return on average equity was 12.79%; six-month figures were 0.92% and 12.29%, respectively.
- No provision for loan losses was recorded in either 2017 or 2016 for the three- or six-month periods.
- Total assets were $735.7 million, up from $716.0 million at December 31, 2016. Net loans increased 4% to $498.4 million, while total loans before the allowance reached $503.8 million.
- Total deposits rose to $661.8 million from $645.6 million. Securities declined to approximately $142.1 million from $149.7 million as loan growth was partly funded with securities cash flows.
- Shareholders’ equity increased to $56.0 million from $52.2 million. Subordinated and junior subordinated debt totaled $14.2 million at June 30, 2017.
- Six-month operating cash flow was $3.2 million. Investing activities used $9.6 million, primarily because of a $17.6 million increase in net loans, while financing activities provided $16.0 million. Cash and cash equivalents ended at $50.7 million.
Material changes versus prior comparable periods
- Net interest income increased 8% in Q2 and 6% year to date. Average earning assets increased 4%, and the mix shifted toward loans, which represented 73% of average earning assets in Q2 versus 70% in the prior-year quarter.
- Noninterest income declined 6% in Q2 and 3% year to date, primarily because of lower deposit service charges caused by fewer customer overdrafts. Wealth management and ATM/check-card fees partly offset the decline.
- Noninterest expense declined 3% in Q2 and 5% year to date. Lower salaries, employee-related insurance costs and FDIC assessments were partly offset by higher legal and professional fees.
- The allowance for loan losses was $5.4 million, or 1.08% of total loans, versus $5.3 million, or 1.09%, at year-end 2016 and $5.7 million, or 1.23%, at June 30, 2016. Six-month net recoveries were $123 thousand.
- Nonperforming assets increased to $2.2 million, or 0.29% of assets, from $1.8 million, or 0.25%, at year-end. Nonaccrual loans were $1.9 million and other real estate owned was $250 thousand.
- Accumulated other comprehensive loss improved to $96 thousand from $860 thousand, primarily because of after-tax unrealized gains on available-for-sale securities.
Guidance, outlook, risks and unusual items
- Management planned to open a branch in Richmond, Virginia during the fourth quarter of 2017. The filing provides no quantitative earnings or revenue guidance.
- Management stated that liquidity was sufficient. Liquid assets totaled $122.9 million, and available non-deposit funding totaled $123.1 million, including $72.8 million from the Federal Home Loan Bank, $42.0 million in unsecured correspondent-bank lines and $8.3 million through the Federal Reserve Discount Window.
- First Bank was categorized as well capitalized. At June 30, 2017, total capital, Tier 1 capital, common equity Tier 1 capital and Tier 1 leverage ratios were 13.82%, 12.73%, 12.73% and 8.76%, respectively.
- Credit exposure remains concentrated in real estate. Management identified $9.3 million of other potential problem loans, compared with $8.1 million at year-end, and disclosed $375 thousand of troubled debt restructurings, of which $291 thousand were performing under modified terms.
- Off-balance-sheet commitments included $77.6 million of commitments to extend credit, $11.0 million of standby letters of credit and $4.2 million of locked-rate mortgage commitments. Total commitments, including these categories, were approximately $92.8 million.
- The defined-benefit pension plan was frozen and is intended to terminate, subject to regulatory approval. Management previously expected a contribution of approximately $2.1 million upon termination; the timing of approval remains uncertain.
- Key risks include interest-rate changes, credit losses, real-estate concentrations, economic conditions, deposit competition, liquidity and capital availability, cybersecurity, operational disruptions, regulatory changes and the limited trading market for the common stock.
- Management concluded that disclosure controls were effective, with no material changes to internal control over financial reporting. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth and the planned Richmond expansion can be sustained without increasing funding costs or credit risk.
- Trends in nonperforming assets, potential problem loans, troubled debt restructurings, charge-offs and the adequacy of the $5.4 million allowance.
- The effect of rising or falling interest rates on the 3.71% year-to-date net interest margin, deposit pricing and borrower repayment capacity.
- The timing and cash impact of the pension-plan termination and the estimated $2.1 million contribution.
- Whether lower deposit service-charge income is a continuing structural trend and whether wealth management and card-related fees can offset it.
- The final cost, funding requirements and expected returns of the Richmond branch opening and other growth initiatives.