First National Corporation — Q1 2016 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, serving the Shenandoah Valley and central Virginia. The filing covers the unaudited three months ended March 31, 2016, with comparisons to the three months ended March 31, 2015 and the December 31, 2015 balance sheet. First Bank operated 15 branch offices, two loan production offices, a customer service center, and related financial-services subsidiaries.
Financial performance and condition
| Metric | Q1 2016 | Comparable / prior period |
|---|---|---|
| Total interest and dividend income | $6.2 million | $5.0 million in Q1 2015 |
| Net interest income | $5.7 million | $4.6 million in Q1 2015 |
| Net interest margin | 3.63% | 3.96% in Q1 2015 |
| Noninterest income | $1.9 million | $1.6 million in Q1 2015 |
| Noninterest expense | $6.1 million | $5.5 million in Q1 2015 |
| Provision for loan losses | $0 | $0 in Q1 2015 |
| Income before taxes | $1.5 million | $736 thousand in Q1 2015 |
| Net income | $1.1 million | $544 thousand in Q1 2015 |
| Net income available to common shareholders | $1.1 million | $215 thousand in Q1 2015 |
| Basic and diluted EPS | $0.22 | $0.04 in Q1 2015 |
| Return on average assets | 0.64% | 0.43% in Q1 2015 |
| Return on average equity | 9.39% | 3.67% in Q1 2015 |
| Efficiency ratio | 77.32% | 80.52% in Q1 2015 |
Net interest income increased 23%, driven by a larger balance sheet and 34% growth in average earning assets. The net interest margin declined 33 basis points because the mix of earning assets shifted toward lower-yielding securities and interest-bearing deposits following the 2015 branch acquisition.
At March 31, 2016, total assets were $701.0 million, up from $692.3 million at December 31, 2015. Net loans increased 3% to $448.6 million, while total securities declined 5% to approximately $165.5 million. Deposits increased to $633.1 million from $627.1 million. Shareholders’ equity was $47.7 million, compared with $46.0 million at year-end.
Loan quality remained a key monitoring area. Non-accrual loans were $4.3 million, other real estate owned was $2.1 million, and nonperforming assets totaled $6.4 million, or 0.91% of total assets. The allowance for loan losses was $5.5 million, equal to 1.22% of total loans. Net charge-offs were $4 thousand, compared with $53 thousand of net recoveries in Q1 2015.
Cash provided by operating activities was $2.0 million. Investing activities used $7.9 million, primarily because of a $15.1 million increase in loans, partly offset by securities maturities and sales. Financing activities provided $5.9 million, primarily from increased demand and savings deposits. Cash and cash equivalents ended the quarter at $39.3 million, compared with $9.2 million at March 31, 2015.
Liquidity included $107.8 million of liquid assets and $124.6 million of available non-deposit funding, including $80.4 million from the Federal Home Loan Bank of Atlanta. The Bank had no FHLB borrowings at March 31, 2016. Regulatory capital remained strong: total risk-based capital was 13.50%, Tier 1 risk-based capital was 12.30%, common equity Tier 1 capital was 12.30%, and Tier 1 leverage was 8.22%. The Bank was categorized as well capitalized.
Material changes versus prior comparable periods
- Net income doubled to $1.1 million from $544 thousand; Q1 2015 included $419 thousand of branch-acquisition integration expenses.
- Net income available to common shareholders rose to $1.1 million from $215 thousand, partly because preferred stock dividends were eliminated after the November 2015 redemption of all preferred shares.
- Net interest income increased by $1.1 million, while the net interest margin fell from 3.96% to 3.63% because securities and deposits represented a larger share of earning assets.
- Noninterest income increased 22%, primarily from higher deposit service charges and ATM and check-card fees associated with the acquired branch network. Wealth management fees declined $167 thousand following the elimination of brokerage services.
- Noninterest expense increased 11%, reflecting higher salaries, occupancy, equipment, and core-deposit-intangible amortization costs. Acquisition-related integration expenses were absent in Q1 2016.
- Net loans increased $15.1 million during the quarter, led by other real estate loans and residential real estate loans. Nonperforming assets declined modestly from $6.5 million at year-end 2015.
- The securities portfolio declined from $173.5 million to approximately $165.5 million, while unrealized losses improved substantially because of market interest-rate changes.
Outlook, risks, contingencies, and unusual items
The filing provides no quantitative earnings or revenue guidance. Management states that first-quarter results are not necessarily indicative of full-year 2016 results.
- Management believes liquidity and capital are adequate, but future funding needs could be affected by loan growth, deposit retention, market conditions, and availability of secondary funding sources.
- Credit risk remains concentrated in real estate lending, particularly commercial real estate and construction and land-development loans. Management cautions that the allowance may prove insufficient if economic or borrower conditions deteriorate.
- Nonperforming assets, potential problem loans of $10.1 million, collateral values, and the $663 thousand nonperforming troubled-debt-restructuring loan require continued monitoring.
- Interest-rate changes could reduce net interest income, affect securities valuations, alter deposit behavior, and impair borrowers’ repayment capacity.
- Commitments to extend credit totaled $61.7 million, standby letters of credit totaled $7.9 million, and locked-rate mortgage commitments totaled $2.3 million. These amounts do not necessarily represent future cash requirements.
- Other disclosed risks include competition, acquisition integration, operational and cybersecurity risks, regulatory changes, FDIC insurance premiums, limited trading liquidity for the common stock, and potential loss of key personnel.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2016.
Important facts for investors to verify
- Whether loan growth continues without a corresponding increase in nonperforming assets, charge-offs, or required loan-loss provisions.
- The sustainability of the 3.63% net interest margin as the balance-sheet mix and interest-rate environment change.
- Future operating costs associated with the expanded branch network and amortization of the core deposit intangible.
- The quality and concentration of collateral supporting commercial real estate and construction loans.
- Liquidity availability, deposit stability, and continued access to the $124.6 million of non-deposit funding sources.
- Compliance with Basel III capital requirements and maintenance of the Bank’s well-capitalized status.
- The effect of eliminating brokerage services on future wealth-management revenue.