First National Corporation — Form 10-Q Summary
Business context and reporting period
First National Corporation is the bank holding company for First Bank, serving the Shenandoah Valley and central Virginia. The unaudited filing covers the three and nine months ended September 30, 2015, with balance-sheet comparisons to December 31, 2014 and operating comparisons to the corresponding 2014 periods.
On April 17, 2015, First Bank acquired six Virginia branches from Bank of America. The transaction added approximately $186.8 million of deposits, $4.5 million of premises and equipment, and six branch locations; no loans were acquired. The Bank increased its branch count from 10 to 16.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Net interest income | $5.4 million | $4.8 million | +14% |
| Noninterest income | $2.2 million | $1.7 million | +36% |
| Noninterest expense | $6.7 million | $4.8 million | +41% |
| Net income | $726 thousand | $1.247 million | -42% |
| Net income available to common shareholders | $398 thousand | $918 thousand | -57% |
| Basic and diluted EPS | $0.08 | $0.19 | Down $0.11 |
| Net interest margin | 3.40% | 3.92% | Down 52 bps |
| Return on average assets | 0.42% | 0.95% | Down 53 bps |
| Return on average equity | 4.80% | 8.64% | Down 384 bps |
| Efficiency ratio | 84.55% | 72.74% | Higher, unfavorable |
For the first nine months, net interest income was $15.1 million versus $13.8 million, noninterest income was $6.1 million versus $5.0 million, and noninterest expense was $19.0 million versus $13.9 million. Net income declined to $1.7 million from $3.9 million, while net income available to common shareholders fell to $729 thousand from $3.1 million; basic and diluted EPS declined to $0.15 from $0.64.
At September 30, 2015, total assets were $688.9 million, loans net of the allowance were $400.8 million, total deposits were $613.9 million, total liabilities were $628.5 million, and shareholders’ equity was $60.4 million. Compared with December 31, 2014, assets increased 33%, net loans increased 8%, deposits increased 38%, and securities increased 96% to $163.4 million.
Cash and cash equivalents were $76.8 million at September 30, 2015, compared with $24.8 million at year-end 2014. Net cash provided by operating activities for the nine months was $3.3 million. Investing activities provided $67.5 million, primarily reflecting the net cash received in the branch acquisition, while financing activities used $18.8 million.
Loan credit metrics improved in several areas. Nonperforming assets were $7.7 million, or 1.12% of total assets, compared with $9.9 million, or 1.91%, at year-end 2014. Nonaccrual loans were $4.9 million and other real estate owned was $2.8 million. The allowance for loan losses was $5.6 million, or 1.37% of total loans, versus $6.7 million, or 1.77%, at December 31, 2014. Net charge-offs were $1.0 million for the first nine months, compared with $228 thousand in the prior-year period.
The Bank had $125.8 million of unused borrowing capacity at September 30, 2015, including $80.8 million from the Federal Home Loan Bank of Atlanta. Liquid assets, including cash, bank deposits, securities and loans maturing within one year, totaled $148.4 million.
At September 30, 2015, the Bank was categorized as well capitalized. Regulatory ratios were 14.59% total capital to risk-weighted assets, 13.34% Tier 1 capital to risk-weighted assets, 13.34% common equity Tier 1 capital to risk-weighted assets, and 7.99% Tier 1 capital to average assets.
Material changes versus comparable periods
- The branch acquisition materially expanded the balance sheet, deposit base, securities portfolio, operating footprint and expense base.
- Net interest income increased because of higher earning-asset balances, but the net interest margin declined as excess acquisition-related liquidity was invested in lower-yielding bank deposits and securities.
- Noninterest income benefited from higher transaction-account fees, ATM and check-card fees, mortgage loan-sale gains, and a $201 thousand bargain purchase gain related to the acquisition.
- Noninterest expense increased substantially because of additional personnel, six new offices, technology and operating costs, core-deposit-intangible amortization, and integration costs. Acquisition integration expenses totaled $897 thousand for the first nine months.
- The allowance for loan losses declined despite loan growth, reflecting management’s assessment of improved collateral values and asset quality. However, net charge-offs increased materially from the prior-year period.
- The efficiency ratio deteriorated to 84.55% for the quarter and 88.05% for the first nine months, compared with 72.74% and 73.15%, respectively.
Outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management states that 2015 interim results are not necessarily indicative of full-year results and expects future performance to depend on successfully integrating the acquired branches, managing growth, controlling expenses, maintaining asset quality and managing interest-rate risk.
Subsequent to quarter-end, the Company issued a $5.0 million subordinated term note due October 1, 2025, bearing fixed interest of 6.75% and intended to qualify as Tier 2 capital. On November 6, 2015, the Company used the note proceeds and other funds to redeem all Series A and Series B preferred stock for an aggregate $14.595 million.
Principal risks include real-estate and construction-loan concentrations, potential insufficiency of the allowance for loan losses, nonperforming assets, interest-rate changes, competition for loans and deposits, acquisition integration, operational and cybersecurity risks, regulatory changes, limited trading liquidity in the common stock, and possible increases in FDIC insurance costs.
The filing reports no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls and procedures. Off-balance-sheet commitments included $62.3 million of commitments to extend credit, $8.8 million of standby letters of credit and $9.0 million of mortgage rate-lock commitments at September 30, 2015.
Important facts for investors to verify
- Whether the acquired branches generate the expected deposit, fee-income and loan-growth benefits relative to their added personnel, occupancy, integration and amortization costs.
- Whether the lower net interest margin persists as acquisition-related cash is redeployed and interest rates change.
- The sustainability of the reduced allowance for loan losses in light of higher net charge-offs, real-estate concentration and remaining nonperforming assets.
- The effect of the November 2015 preferred-stock redemption and the new subordinated debt on future interest expense, capital ratios and common-shareholder earnings.
- Progress in reducing the 84.55% quarterly and 88.05% year-to-date efficiency ratios.
- Actual future cash requirements associated with $80.1 million of credit-related commitments and other contingent obligations.