First National Corporation 2013 Form 10-K Summary
Business context and reporting period
First National Corporation is a Virginia bank holding company whose primary subsidiary, First Bank, provides commercial and consumer lending, deposits, wealth management and related services in the northern Shenandoah Valley of Virginia. The filing covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012 and 2011. The company operated 10 branches, one customer service center and 26 ATMs and had 141 full-time equivalent employees at year-end.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total assets | $522.9 million | $532.7 million | Down $9.8 million |
| Total loans | $357.1 million | $383.6 million | Down $26.5 million |
| Deposits | $450.7 million | $466.9 million | Down $16.2 million |
| Securities | $103.3 million | $89.5 million | Up $13.8 million |
| Net interest income | $18.4 million | $19.3 million | Down 4% |
| Noninterest income | $6.9 million | $7.2 million | Down 3% |
| Noninterest expense | $20.8 million | $19.1 million | Up 9% |
| Net income | $9.9 million | $2.8 million | Up $7.1 million |
| Net income available to common shareholders | $9.0 million | $1.9 million | Up $7.1 million |
| Basic and diluted EPS | $1.83 | $0.48 | Up $1.35 |
| Net interest margin | 3.72% | 3.89% | Down 17 basis points |
| Return on average assets | 1.85% | 0.53% | Improved |
| Return on average equity | 21.87% | 6.80% | Improved |
Cash flow from operating activities was $8.7 million, compared with $12.2 million in 2012. Investing activities provided $8.8 million, principally reflecting a $23.7 million net decrease in loans, while financing activities used $17.0 million, primarily due to a $36.4 million decrease in time deposits and $758 thousand of preferred-stock dividends. Cash and cash equivalents ended at $31.5 million.
The allowance for loan losses declined to $10.6 million, or 2.98% of total loans, from $13.1 million, or 3.41%, in 2012. The company recorded a $425 thousand recovery of loan losses versus a $3.6 million provision in 2012; net charge-offs declined to $2.0 million from $3.4 million.
At year-end, shareholders’ equity was $53.6 million and equity represented 10.24% of assets. The company’s total and Tier 1 risk-based capital ratios were 18.21% and 16.94%, respectively; the bank’s ratios were 16.62% and 15.35%. The bank’s Tier 1 leverage ratio was 10.68%, and management reported that the bank was well capitalized.
Material changes versus the prior comparable period
- Net income increased substantially, but the improvement was driven largely by a $4.8 million income tax benefit from reversing the full valuation allowance on net deferred tax assets.
- Pre-tax income increased to $5.1 million from $3.8 million, helped by the loan-loss recovery, but operating performance was pressured by lower net interest income and higher expenses.
- The net interest margin declined to 3.72% from 3.89% as asset yields fell faster than funding costs. Average loan balances and loan yields decreased, while securities balances increased.
- Noninterest expense rose by $1.6 million. Significant unusual items included a $284 thousand pension settlement charge, a $601 thousand loss on disposal of premises and equipment, and a $263 thousand lease-termination loss.
- Nonperforming assets increased modestly to $14.7 million, or 2.81% of assets, from $14.0 million. Nonaccrual loans increased to $11.7 million from $8.4 million, while OREO declined to $3.0 million from $5.6 million.
- Other potential problem loans declined to $23.5 million from $44.6 million, although impaired loans increased to $21.7 million from $17.0 million. Troubled debt restructurings declined to $1.9 million from $6.3 million.
- Deposits shifted away from time deposits, which declined 23% to $123.8 million, toward noninterest-bearing and interest-bearing demand and savings accounts.
- The company continued to suspend common-stock dividends, a policy in effect since the third quarter of 2011. Preferred-stock dividends remained current.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that it expected to continue reducing nonperforming assets during 2014 through OREO sales and active management of potential problem loans. Management also believed liquidity and capital were sufficient to support operations, asset growth and potential loan charge-offs.
- Credit risk remains concentrated in the local market and in real estate: approximately 90% of loans were secured by real estate. Construction and land-development loans represented 55% of nonperforming assets.
- Further deterioration in local economic or real estate conditions could increase nonaccrual loans, charge-offs, provisions, OREO losses and operating costs. Management identified several large potential problem relationships.
- Liquidity depends partly on secondary funding sources, including Federal Home Loan Bank advances, correspondent-bank lines, securities and loan sales, brokered deposits and out-of-market time deposits.
- Available non-deposit funding totaled $108.4 million at year-end, including $68.3 million of FHLB capacity, $37.0 million of unsecured federal funds lines and $3.1 million of Federal Reserve Discount Window capacity.
- Commitments to extend credit, unfunded lines and standby letters of credit totaled approximately $66.7 million, excluding $1.6 million of locked-rate mortgage commitments. These commitments are not necessarily future cash requirements.
- Trust preferred capital notes totaled $9.3 million and other borrowings totaled $6.1 million. Contractual obligations totaled $6.2 million, largely related to borrowings maturing in 2017 and 2018.
- The company expects to meet Basel III capital requirements, but the transition to higher-quality and potentially higher capital requirements beginning in 2015 could constrain future growth or returns on equity.
- Other material risks include interest-rate sensitivity, regulatory and FDIC assessment changes, cybersecurity and operational disruptions, dependence on key personnel and vendors, competition, limited trading liquidity in the OTC common stock, and restrictions on dividends.
Most important facts for investors to verify
- Whether the $4.8 million tax benefit and reversal of the deferred-tax valuation allowance are sustainable or nonrecurring.
- Current trends in nonaccrual loans, impaired loans, OREO, potential problem loans and real estate collateral values.
- Whether the $10.6 million allowance for loan losses remains adequate as nonaccrual loans increased during 2013.
- Loan and deposit growth, the sustainability of the 3.72% net interest margin and exposure to changing interest rates.
- Access to secondary liquidity sources and the maturity or renewal terms of time deposits and borrowings.
- The effect of Basel III implementation, regulatory requirements and preferred-stock and trust-preferred obligations on common-stock dividends.
- The company’s ability to maintain profitability without relying on unusual items, including tax-allowance reversals, recoveries of loan losses and one-time gains or charges.