First National Corporation — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended June 30, 2015. First National Corporation is the bank holding company for First Bank, which provides banking, mortgage, wealth-management and related services in Virginia. The filing is unaudited and should be read with the 2014 Form 10-K.
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 branches, increasing the branch network from 10 to 16. No loans were acquired.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net interest income | $5.1 million | $4.6 million | $9.7 million | $9.1 million |
| Net interest margin | 3.29% | 3.81% | 3.58% | 3.77% |
| Noninterest income | $2.3 million | $1.7 million | $3.9 million | $3.3 million |
| Noninterest expense | $6.9 million | $4.5 million | $12.3 million | $9.2 million |
| Recovery of loan losses | $100 thousand | $400 thousand | $100 thousand | $600 thousand |
| Net income | $444 thousand | $1.5 million | $988 thousand | $2.7 million |
| Net income available to common shareholders | $116 thousand | $1.3 million | $331 thousand | $2.2 million |
| Diluted earnings per common share | $0.02 | $0.26 | $0.07 | $0.45 |
| Return on average assets | 0.27% | 1.16% | 0.34% | 1.03% |
| Return on average equity | 2.97% | 11.05% | 3.32% | 9.81% |
- Total assets were $695.8 million at June 30, 2015, versus $518.2 million at December 31, 2014.
- Loans, net of allowance, were $385.6 million, up from $371.7 million at year-end 2014. Total loans were $391.7 million, with an allowance of $6.1 million, or 1.56% of total loans.
- Deposits were $620.9 million, compared with $444.3 million at December 31, 2014, primarily reflecting the branch acquisition.
- Cash and cash equivalents were $111.1 million at June 30, 2015, compared with $24.8 million at December 31, 2014. Six-month cash flow from operations was $1.0 million.
- Six-month investing cash flow was $96.6 million, including $179.5 million of net cash acquired in the branch transaction, purchases of securities and loan growth. Financing cash flow was negative $11.3 million.
- Total securities were approximately $149.8 million, including $112.5 million of available-for-sale securities and $37.3 million of held-to-maturity securities.
- Trust preferred capital notes totaled $9.3 million. The Bank had $154.3 million of unused borrowing capacity, including $109.1 million from the Federal Home Loan Bank of Atlanta.
- At June 30, 2015, First Bank was categorized as well capitalized. Regulatory ratios included total risk-based capital of 18.28%, Tier 1 risk-based capital of 17.03%, common equity Tier 1 capital of 17.03% and Tier 1 leverage of 10.06%.
Material changes versus prior comparable periods
- Second-quarter net income declined 71% to $444 thousand, while six-month net income declined 63% to $988 thousand. Preferred dividends and accretion further reduced earnings available to common shareholders.
- Net interest income increased 9% in the quarter and 7% year to date, but the net interest margin declined because acquisition-related cash remained invested largely in lower-yielding deposits and securities.
- Noninterest income increased 34% in the quarter and 17% year to date. Higher deposit-account and card-fee revenue reflected the acquired branches; mortgage activity also increased loan-sale income.
- Noninterest expense rose 51% in the quarter and 35% year to date. The filing identifies higher staffing, mortgage and growth-related costs, core-deposit-intangible amortization, and $458 thousand of second-quarter acquisition integration expenses, or $877 thousand for the first six months.
- The acquisition generated a preliminary $201 thousand bargain-purchase gain, included in other operating income.
- Nonperforming assets declined to $9.1 million, or 1.30% of total assets, from $9.9 million, or 1.91%, at December 31, 2014. Non-accrual loans declined to $6.7 million from $8.0 million, while OREO increased to $2.4 million from $1.9 million.
- Net charge-offs increased to $542 thousand in the second quarter and $489 thousand year to date, compared with net recoveries of $123 thousand and $38 thousand, respectively, in the prior-year periods.
- The reported efficiency ratio deteriorated to 92.54% for the quarter and 90.05% year to date, compared with 71.94% and 73.36%, respectively, in the prior-year periods.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects results to be affected by the integration of the acquired branches, deployment of acquisition-related liquidity into higher-yielding assets, expansion into new markets, mortgage growth and the creation of new business lines.
- Management stated that liquidity was sufficient to meet depositor requirements and customer borrowing needs. Liquid assets, including qualifying deposits, securities and loans maturing within one year, totaled $176.7 million.
- Management believed the allowance for loan losses was sufficient at June 30, 2015, but noted that future provisions could be required because of economic conditions, borrower performance, collateral values or changes in management estimates.
- The loan portfolio is concentrated in Virginia real estate, including residential, commercial real estate, and construction and land-development loans. This creates exposure to local real estate and economic conditions.
- Other principal risks include interest-rate changes, competition for loans and deposits, acquisition integration risk, funding availability, regulatory or legislative changes, cybersecurity, operational and technology risks, potential litigation, nonperforming assets and the limited trading market for common stock.
- Commitments to extend credit totaled $60.6 million, standby letters of credit totaled $8.1 million, and locked-rate mortgage commitments totaled $4.5 million at June 30, 2015.
- There were no material changes to previously disclosed risk factors, no material pending legal proceedings beyond ordinary routine litigation, and management concluded that disclosure controls and procedures were effective.
Investor verification points
- Verify whether acquired deposits can be deployed into higher-yielding assets without materially increasing credit or interest-rate risk.
- Track acquisition integration costs, staffing levels, core-deposit-intangible amortization and whether the stated operating synergies are realized.
- Monitor net interest margin, deposit pricing, securities duration and the impact of changing interest rates.
- Review trends in net charge-offs, non-accrual loans, past-due loans, impaired loans, TDRs, OREO and the adequacy of the $6.1 million allowance.
- Assess the sustainability of earnings excluding the preliminary $201 thousand bargain-purchase gain and other acquisition-related items.
- Reconcile the large increase in deposits, cash and securities with loan growth and future liquidity needs.
- Confirm regulatory capital remains well above minimum and prompt-corrective-action thresholds as the acquired balance sheet is integrated.
- Review the terms and dividend burden of the $14.6 million of preferred stock and its effect on common-shareholder returns.