First National Corporation — Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, which provides commercial and consumer lending, deposit, mortgage, wealth management and related services in Virginia’s Shenandoah Valley and central regions. This unaudited filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $5.8 million | $5.1 million | $11.5 million | $9.7 million |
| Net interest income after loan-loss provision or recovery | $5.8 million | $5.2 million | $11.5 million | $9.8 million |
| Noninterest income | $2.1 million | $2.3 million | $4.1 million | $3.9 million |
| Noninterest expense | $5.9 million | $6.9 million | $12.0 million | $12.3 million |
| Net income | $1.4 million | $0.4 million | $2.5 million | $1.0 million |
| Net income available to common shareholders | $1.4 million | $0.1 million | $2.5 million | $0.3 million |
| Basic and diluted EPS | $0.29 | $0.02 | $0.51 | $0.07 |
| Net interest margin | 3.62% | 3.29% | 3.62% | 3.58% |
| Efficiency ratio | 71.62% | 83.52% | 74.42% | 82.12% |
Approximate net income as a percentage of net interest income plus noninterest income was 18.2% in Q2 2016 versus 5.9% in Q2 2015, and 16.3% for the first six months versus 7.2% in the prior-year period.
- Total assets were $711.3 million at June 30, 2016, up $19.0 million from December 31, 2015.
- Loans, net of allowance, were $459.8 million, up $26.3 million, or 6%; growth was concentrated in other real estate and residential real estate loans.
- Total deposits were $630.3 million, up $3.2 million from year-end 2015.
- Shareholders’ equity was $49.3 million, compared with $46.0 million at December 31, 2015. Accumulated other comprehensive loss improved to $0.6 million from $1.6 million.
- The allowance for loan losses was $5.7 million, or 1.23% of total loans, versus $5.5 million, or 1.26%, at year-end 2015. No provision or recovery was recorded in the 2016 periods; net recoveries were $210 thousand year to date.
- Cash and cash equivalents were $50.7 million at June 30, 2016, compared with $39.3 million at year-end 2015.
- Six-month operating cash flow was $2.2 million, compared with $0.9 million in the prior-year period. Investing activities used $5.8 million, while financing activities provided $15.0 million.
- Bank regulatory capital remained strong: total capital to risk-weighted assets was 13.66%, Tier 1 capital was 12.45%, common equity Tier 1 capital was 12.45%, and Tier 1 leverage was 8.33%. The Bank was categorized as well capitalized.
- Available non-deposit funding totaled $118.6 million, including $74.5 million from the Federal Home Loan Bank of Atlanta. A $12.0 million FHLB borrowing outstanding at June 30, 2016 matured July 1, 2016.
Material changes versus the prior comparable periods
- Quarterly net interest income rose 14% and year-to-date net interest income rose 19%, driven primarily by higher average loans and securities and a shift away from lower-yielding interest-bearing bank deposits.
- Net interest margin increased 33 basis points in Q2 and 4 basis points year to date. Average loans represented 70% of average earning assets in Q2 2016 versus 63% in Q2 2015, while average interest-bearing bank deposits declined from 18% to 6%.
- Q2 noninterest income declined 9%, primarily because the prior-year period included a $201 thousand bargain purchase gain from the 2015 acquisition of six Bank of America branches. Year-to-date noninterest income increased 4%, supported by deposit service charges and ATM and check-card fees.
- Noninterest expense declined 14% in Q2 and 3% year to date. The prior-year periods included $458 thousand of Q2 and $877 thousand of year-to-date acquisition integration costs.
- The elimination of brokerage services at the beginning of 2016 reduced wealth management fees, partially offset by other operating income associated with a three-year noncompete agreement.
- Nonperforming assets declined to $4.5 million, or 0.63% of assets, from $6.5 million, or 0.94%, at December 31, 2015, primarily because net OREO declined from $2.7 million to $442 thousand.
- The company had no preferred stock outstanding at June 30, 2016 following the November 2015 redemption of all Series A and Series B preferred stock. The 2015 comparison includes $328 thousand of quarterly and $657 thousand of year-to-date preferred dividends, which materially reduced income available to common shareholders.
Guidance, outlook, commentary, risks and unusual items
The filing provides no formal earnings or financial guidance. Management stated that liquidity is sufficient to meet depositor requirements and customer borrowing needs, and that the Bank had sufficient reserves for estimated inherent loan losses. Management cautioned that interim results are not necessarily indicative of full-year results.
- Credit risk remains significant because the loan portfolio is concentrated in real estate, including commercial real estate and construction and land development. At June 30, 2016, 56% of nonperforming assets related to commercial real estate and 34% to construction and land development.
- Nonaccrual loans totaled approximately $4.1 million, impaired loans totaled $7.4 million, and one $660 thousand troubled debt restructuring was not performing under its modified terms.
- Other potential problem loans totaled $9.6 million. Management noted that future losses could require additional provisions if economic conditions, collateral values or borrower performance deteriorate.
- Interest-rate changes could affect net interest income, deposit costs, prepayments, loan repayment capacity and the fair value of securities. The securities portfolio had $146 thousand of unrealized losses, which management considered temporary and related to market rates rather than issuer credit concerns.
- Other risks include competition for loans and deposits, execution of growth strategies, operational and cybersecurity risks, regulatory changes, FDIC assessment increases, limited trading liquidity in the common stock and dependence on third-party infrastructure.
- Off-balance-sheet commitments included $61.3 million of commitments to extend credit, $8.8 million of standby letters of credit and $3.6 million of locked-rate mortgage commitments.
- The company disclosed no material pending legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls as of June 30, 2016.
Most important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, construction and land development, is accompanied by stable credit quality and adequate allowance coverage.
- Whether the improvement in earnings is sustainable after excluding the prior-year acquisition costs, bargain purchase gain and preferred dividends.
- The effect of the 2016 elimination of brokerage services on recurring wealth management revenue.
- The maturity and refinancing status of the $12.0 million FHLB borrowing and continued access to the $118.6 million of available non-deposit funding.
- Future effects of interest-rate movements on the net interest margin, deposit pricing and securities’ accumulated other comprehensive income.
- The potential impact of pending accounting standards, particularly the expected-credit-loss and lease standards, which management was still assessing.