First National Corporation — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 14, 2019. The company is a Virginia bank holding company whose primary subsidiary, First Bank, serves the Shenandoah Valley and central Virginia. The filing includes fourth-quarter data but is an annual report, not a standalone Q4 filing.
Business Context
First Bank provides commercial, residential mortgage, construction, consumer, deposit, and wealth-management services through Virginia branches, digital channels, a loan production office, and a customer service center. At December 31, 2018, the Bank operated 15 branches, employed 160 full-time equivalent employees, and held approximately 10.15% of the deposit market in its served areas.
Financial Performance and Condition
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net interest income | $27.6 million | $25.3 million | +9% |
| Provision for loan losses | $0.6 million | $0.1 million | +$0.5 million |
| Noninterest income | $9.2 million | $8.3 million | +10% |
| Noninterest expense | $23.8 million | $23.3 million | +2% |
| Income before taxes | $12.4 million | $10.2 million | +22% |
| Net income | $10.1 million | $6.4 million | +$3.7 million |
| Diluted earnings per share | $2.04 | $1.30 | +57% |
| Net interest margin | 3.93% | 3.77% | +16 bps |
| Efficiency ratio | 63.05% | 66.42% | Improved |
| Return on average assets | 1.34% | 0.89% | Improved |
| Return on average equity | 16.36% | 11.57% | Improved |
| Balance-sheet metric | December 31, 2018 | December 31, 2017 | Change |
|---|---|---|---|
| Total assets | $753.0 million | $739.1 million | +$13.9 million |
| Loans, net | $537.8 million | $516.9 million | +$21.0 million |
| Securities | $145.0 million | $139.0 million | +$5.9 million |
| Deposits | $670.6 million | $665.0 million | +$5.6 million |
| Shareholders’ equity | $66.7 million | $58.2 million | +$8.5 million |
| Cash and cash equivalents | $28.6 million | $40.0 million | -$11.4 million |
Operating cash flow was $13.8 million, compared with $6.6 million in 2017. Investing activities used $29.8 million, primarily because of a $21.6 million net increase in loans and $27.6 million of securities purchases. Financing activities provided $4.7 million. Cash dividends paid totaled $0.20 per common share, compared with $0.14 in 2017.
Interest expense rose to $3.5 million from $2.4 million, primarily because of higher deposit costs and increased interest on junior subordinated debt. The company had $4.965 million of subordinated debt, bearing fixed interest of 6.75% and maturing in 2025, and $9.279 million of junior subordinated debt with LIBOR-indexed rates. The company was current on interest payments.
Material Changes Versus 2017
- Net income increased 57%, supported by stronger net interest income, higher noninterest income, and the lower 21% corporate tax rate.
- The 2017 results included a $752 thousand deferred-tax remeasurement charge related to the Tax Cuts and Jobs Act; no comparable charge was recorded in 2018.
- Average earning assets increased 4%, while the yield on earning assets increased 31 basis points. Deposit pricing pressure increased the cost of interest-bearing deposits.
- Loans increased 4%, led by construction loans, residential real estate loans, and commercial and industrial loans. Commercial real estate loans declined $2.7 million.
- Net charge-offs increased to $917 thousand from $95 thousand, primarily because of $878 thousand of consumer-loan charge-offs. The allowance declined to $5.0 million, or 0.92% of loans, from $5.3 million, or 1.02%.
- Nonperforming assets increased to $3.2 million, or 0.42% of assets, from $1.3 million, or 0.17%. The 2018 balance consisted entirely of nonaccrual loans; 2017 also included $326 thousand of OREO.
- Unrealized securities losses increased to $3.4 million from $2.1 million, primarily because of market interest-rate changes. Management considered the securities temporarily impaired and attributed the losses to rate movements rather than issuer credit concerns.
- The company completed distribution of its defined-benefit pension plan assets and terminated its employee stock ownership plan during 2018.
- The Bank’s capital remained strong: common equity Tier 1 and Tier 1 ratios were 12.71%, total capital was 13.62%, and the leverage ratio was 9.26%. The Bank was classified as well capitalized.
Fourth-Quarter Information
Fourth-quarter 2018 net income was $2.3 million, or $0.47 diluted earnings per share, compared with $1.3 million, or $0.27 per diluted share, in the fourth quarter of 2017. Fourth-quarter net interest income was $7.2 million, noninterest income was $2.3 million, noninterest expense was $6.1 million, and the provision for loan losses was $0.5 million.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management reported improving economic conditions in its Virginia markets but cautioned that future performance is sensitive to interest rates, economic conditions, competition, deposit pricing, loan demand, and credit quality.
- Credit risk is concentrated in Virginia markets and includes meaningful exposure to commercial real estate, construction, residential real estate, and small and midsize businesses.
- Higher nonperforming loans, charge-offs, or declines in collateral values could require additional provisions and reduce earnings or capital.
- The company relies substantially on customer deposits for liquidity. Available non-deposit funding totaled $128.5 million, including $75.9 million from the Federal Home Loan Bank, $42.0 million of unsecured federal funds lines, and $10.6 million from the Federal Reserve Discount Window.
- At December 31, 2018, liquid assets and loans maturing within one year totaled $111.1 million. The company stated that liquidity was sufficient to meet depositor and borrowing needs.
- Off-balance-sheet credit exposure included $91.1 million of commitments to extend credit and $9.9 million of standby letters of credit. Locked-rate mortgage commitments were $6.4 million.
- Interest-rate risk could pressure the net interest margin as deposit costs rise or the yield curve changes. Certain junior subordinated debt instruments use LIBOR, whose continued availability after 2021 was uncertain.
- The company expects the CECL credit-loss standard to become effective January 1, 2020 and stated that the eventual impact could be material, although it could not yet estimate the amount.
- Additional risks include cybersecurity, third-party service-provider disruptions, regulatory and compliance costs, litigation, competition from larger banks and fintech firms, and limited trading liquidity in the company’s OTC-listed common stock.
The filing reports no material pending legal proceedings. The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the increase in nonperforming assets and net charge-offs during 2018 persists or requires higher loan-loss provisions.
- The composition and performance of the commercial real estate and construction portfolios, including collateral values and concentrations.
- The sustainability of the 3.93% net interest margin as deposit costs and market interest rates change.
- The company’s implementation of CECL and the resulting allowance, earnings, and capital impact beginning in 2020.
- Liquidity under stressed deposit outflows and the availability and collateral requirements of FHLB and other funding lines.
- The economic value and interest-rate sensitivity of the securities portfolio, including $3.4 million of unrealized losses at year-end.
- The terms, repricing exposure, and LIBOR-transition implications of the $9.279 million junior subordinated debt.
- The board’s future dividend policy, given regulatory restrictions, debt seniority, and reliance on dividends from First Bank.