First National Corporation — Form 10-Q Summary
Business Context and Reporting Period
First National Corporation is a Virginia bank holding company for First Bank, serving individuals, businesses, governmental entities and nonprofit organizations through 15 branches, loan production offices, wealth management services and digital channels in Virginia. The unaudited report covers the three and nine months ended September 30, 2017, with comparisons to September 30, 2016 and December 31, 2016.
Key Financial Metrics
| Metric | Q3 2017 | 9M 2017 | Comparable period |
|---|---|---|---|
| Net interest income | $6.4 million | $18.7 million | $5.8 million / $17.3 million |
| Noninterest income | $2.0 million | $5.9 million | $2.3 million / $6.4 million |
| Noninterest expense | $5.8 million | $17.3 million | $5.9 million / $17.9 million |
| Net income | $1.8 million | $5.1 million | $1.7 million / $4.2 million |
| Diluted EPS | $0.37 | $1.04 | $0.34 / $0.86 |
| Net interest margin | 3.79% | 3.74% | 3.57% / 3.61% |
| Efficiency ratio | 66.38% | 67.51% | 68.57% / 72.41% |
At September 30, 2017, total assets were $731.5 million, loans net of allowance were $509.4 million, deposits were $656.3 million and shareholders’ equity was $57.5 million. The allowance for loan losses was $5.3 million, or 1.03% of total loans. No provision for loan losses was recorded in either 2017 comparable period.
Nine-month operating cash flow was $5.5 million, compared with $6.1 million in 2016. Investing activities used $23.3 million, primarily reflecting $28.7 million of net loan growth. Financing activities provided $10.3 million. Cash and cash equivalents declined to $33.6 million from $41.1 million at year-end 2016.
Debt consisted of $4.9 million of subordinated debt and $9.3 million of junior subordinated debt. The Bank had $131.1 million of unused borrowing capacity, including $80.2 million from the Federal Home Loan Bank, and no FHLB borrowings outstanding. The Bank remained well capitalized, with total capital of 13.91%, common equity Tier 1 capital of 12.87% and Tier 1 leverage of 9.06% at September 30, 2017.
Material Changes Versus Prior Comparable Period
- Q3 net income increased $138 thousand, or 8%, while nine-month net income increased $905 thousand, or 21%.
- Net interest income rose 10% in Q3 and 8% year to date, supported by higher average earning assets, loan growth and improved margins. Average loans represented 75% of average earning assets in Q3 versus 71% in the prior-year quarter.
- Noninterest income declined 13% in Q3 and 7% year to date, primarily because of lower deposit service charges and lower other operating income.
- Noninterest expense declined 1% in Q3 and 3% year to date. Year-to-date savings primarily reflected lower salaries and benefits, FDIC assessments and amortization expense.
- Net loans increased $28.7 million, or 6%, from year-end 2016 to $509.4 million. Total deposits increased $10.7 million, or 2%, to $656.3 million.
- Nonperforming assets increased to $2.4 million, or 0.32% of assets, from $1.8 million, or 0.25%, at year-end 2016. Nonaccrual loans increased to $2.1 million from $1.5 million, while OREO remained $250 thousand.
- Net charge-offs were $20 thousand for the first nine months of 2017, compared with $86 thousand of net recoveries in the prior-year period.
- Accumulated other comprehensive loss improved to $253 thousand from $860 thousand at year-end 2016, although Q3 comprehensive income was below net income because of unrealized securities losses.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects future noninterest expenses to increase as a result of the Richmond branch opened during the fourth quarter of 2017, particularly salaries and benefits, occupancy and equipment costs.
Management stated that liquidity was sufficient to meet depositor requirements and customer borrowing needs. Liquid assets and loans maturing within one year totaled $106.3 million, and 14% of the loan portfolio, or $70.7 million, matured within one year.
Principal risks include interest-rate changes affecting net interest income and borrower repayment capacity; concentration in residential and commercial real estate lending; loan growth and potential insufficiency of the allowance; nonperforming assets and potential problem loans; competition for loans and deposits; economic and real estate conditions; regulatory changes; cybersecurity and operational disruptions; reliance on third-party infrastructure; limited trading liquidity in the common stock; and the ability to retain customers and funding sources.
Potential problem loans increased to $9.2 million from $8.1 million at year-end 2016. Troubled debt restructurings declined to $340 thousand from $460 thousand, with $287 thousand performing under restructured terms. Management believed the allowance was adequate but stated that additional provisions could be required due to economic conditions, loan growth or borrower-specific developments.
The defined benefit pension plan was terminated, with IRS approval received October 16, 2017. Plan assets were expected to be distributed February 1, 2018, and the company previously expected a contribution of approximately $2.1 million upon termination. The company reported no material changes in legal proceedings, risk factors or contractual obligations, and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether loan growth, particularly in commercial real estate and purchased consumer loans, is accompanied by sustainable credit quality.
- Future nonperforming assets, potential problem loans, net charge-offs and the adequacy of the $5.3 million allowance.
- The effect of the Richmond branch opening on operating expenses, deposit growth and profitability.
- Whether rising deposit costs or changing interest rates reduce the 3.74% year-to-date net interest margin.
- Liquidity after funding $28.7 million of year-to-date net loan growth and the availability of the $131.1 million in unused borrowing capacity.
- The cash requirement and final funded status associated with the terminated pension plan.
- The impact of pending accounting standards, especially the expected-credit-loss standard, which the company was still assessing.