First National Corporation — Q3 2013 Form 10-Q Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company for First Bank, serving individuals, small and medium-sized businesses, governmental entities and nonprofits in the northern Shenandoah Valley. The filing covers the unaudited three and nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Financial condition and key metrics
| Metric | Q3 2013 / Sep. 30, 2013 | Comparable / Prior period |
|---|---|---|
| Total assets | $536.5 million | $532.7 million at Dec. 31, 2012 |
| Gross loans | $366.8 million | $383.6 million at Dec. 31, 2012 |
| Securities available for sale | $105.3 million | $89.5 million at Dec. 31, 2012 |
| Total deposits | $471.3 million | $466.9 million at Dec. 31, 2012 |
| Shareholders’ equity | $43.6 million | $44.9 million at Dec. 31, 2012 |
| Net income, Q3 | $1.24 million | $688 thousand in Q3 2012 |
| Net income available to common shareholders, Q3 | $1.01 million; $0.21 diluted EPS | $462 thousand; $0.09 EPS in Q3 2012 |
| Net income, nine months | $2.48 million | $1.86 million for nine months 2012 |
| Net income available to common shareholders, nine months | $1.80 million; $0.37 diluted EPS | $1.18 million; $0.33 EPS for nine months 2012 |
| Net interest income, Q3 / nine months | $4.63 million / $13.90 million | $4.74 million / $14.61 million |
| Net interest margin, Q3 / nine months | 3.68% / 3.73% | 3.78% / 3.93% |
| Provision for loan losses, Q3 / nine months | $275 thousand / $2.53 million | $805 thousand / $3.46 million |
| Noninterest income, Q3 / nine months | $1.63 million / $5.16 million | $1.61 million / $5.59 million |
| Noninterest expense, Q3 / nine months | $4.65 million / $14.52 million | $4.66 million / $14.00 million |
| Cash and cash equivalents | $37.9 million at Sep. 30 | $31.0 million at Dec. 31, 2012 |
Third-quarter return on average assets was 0.92% and return on average equity was 11.44%, compared with 0.52% and 6.11%, respectively, in Q3 2012. Nine-month return on average assets was 0.62% and return on average equity was 7.48%.
Nine-month cash flow from operating activities was $7.7 million. Investing activities used $4.6 million, primarily reflecting net securities purchases, while financing activities provided $3.8 million. Cash and cash equivalents increased $6.8 million during the nine months.
Debt consisted primarily of $9.3 million of trust preferred capital notes and $6.1 million of other borrowings. The Company was current on trust preferred interest payments. The Bank had $105.7 million of unused borrowing capacity and other available funding sources at September 30, 2013.
Material changes versus prior comparable periods
- Q3 net income increased 80% and diluted EPS increased to $0.21 from $0.09, primarily because the provision for loan losses declined by $530 thousand while noninterest expense was essentially flat.
- Nine-month net income increased 34%, despite a 5% decline in net interest income and an 8% decline in reported noninterest income.
- Net interest margin contracted 10 basis points in Q3 and 20 basis points year to date as yields on loans and securities declined more than funding costs.
- Gross loans declined $16.8 million, or approximately 4%, from year-end 2012. Other real estate and construction loans decreased, while residential, consumer and commercial and industrial loans increased.
- Deposits increased $4.4 million. Noninterest-bearing demand deposits rose $10.5 million and savings and interest-bearing demand deposits rose $8.4 million, partially offset by a $14.5 million decline in time deposits.
- Nonperforming assets declined to $11.8 million, or 2.21% of assets, from $14.0 million, or 2.62%, at year-end 2012. OREO declined to $3.8 million from $5.6 million, while nonaccrual loans declined to $8.0 million from $8.4 million.
- The allowance for loan losses declined to $11.9 million, or 3.24% of gross loans, from $13.1 million, or 3.41%, at year-end 2012. Year-to-date charge-offs were $4.3 million, including one large loan relationship.
- Accumulated other comprehensive loss increased to $4.1 million from $859 thousand, mainly because of $3.2 million of unrealized losses on available-for-sale securities attributable to market interest-rate changes.
- Nine-month results included a $543 thousand gain from terminating a postretirement benefit obligation and a $209 thousand loss on terminating a land lease. The filing also reported no securities gains in 2013 versus $1.3 million in the first nine months of 2012.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management stated that 2013 interim results are not necessarily indicative of full-year results and described improving asset quality, lower credit-loss provisions and sufficient liquidity as favorable developments.
Management maintained a full valuation allowance on net deferred tax assets of approximately $6.7 million. Reversal depends on demonstrating sustainable profitability and sufficient future taxable income; any reversal could materially affect reported taxes, but regulatory capital treatment may remain limited.
Key risks include adverse local or national economic conditions, declining collateral values, additional nonperforming assets and charge-offs, the adequacy of loan-loss and OREO valuation allowances, interest-rate changes, reliance on secondary funding sources, regulatory and accounting changes, FDIC insurance costs, competition, technology and disaster-recovery risks, and the ability to raise capital if needed.
Off-balance-sheet exposures included $58.5 million of commitments to extend credit, $7.6 million of standby letters of credit and $4.3 million of locked-rate mortgage commitments. Management stated that liquidity was sufficient and that no material subsequent events or material changes to previously disclosed risk factors had been identified.
Capital remained above regulatory minimums. At September 30, 2013, consolidated total capital to risk-weighted assets was 16.57% and Tier 1 capital to risk-weighted assets was 15.29%; First Bank reported 14.92% and 13.65%, respectively. The Company did not pay common-stock dividends, while preferred-stock dividends remained current.
Most important facts for investors to verify
- Whether the decline in net interest margin continues and pressures core earnings.
- Whether nonperforming assets, potential problem loans, charge-offs and OREO valuations continue to improve.
- Whether the lower provision for loan losses is sustainable or primarily reflects timing and the resolution of one large loan relationship.
- The quality and duration sensitivity of the securities portfolio, including $2.5 million of unrealized losses at September 30, 2013.
- The timing and regulatory-capital impact of any future reversal of the $6.7 million deferred-tax-asset valuation allowance.
- The effect of preferred dividends and the March 2014 increase in Series A preferred dividend rates from 5% to 9%.
- The availability and collateral requirements of the Bank’s $105.7 million in unused funding capacity and the potential drawdown of $70.5 million of disclosed credit-related commitments.