First National Corporation — Q1 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 nonprofit organizations in the northern Shenandoah Valley. Operations include lending, deposits, trust and investment advisory services, mortgage origination, and brokerage services through 10 branches and 26 ATMs.
This unaudited quarterly report covers the three months ended March 31, 2013, with comparisons to the three months ended March 31, 2012 and the balance sheet at December 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Comparable / Prior Period |
|---|---|---|
| Total assets | $537.5 million | $532.7 million at December 31, 2012 |
| Net interest income | $4.616 million | $5.080 million in Q1 2012 |
| Net interest margin | 3.80% | 4.14% in Q1 2012 |
| Net income | $983 thousand | $475 thousand in Q1 2012 |
| Net income available to common shareholders | $757 thousand | $250 thousand in Q1 2012 |
| Basic and diluted EPS | $0.15 | $0.08 in Q1 2012 |
| Return on average assets | 0.75% | 0.36% in Q1 2012 |
| Return on average equity | 8.84% | 5.17% in Q1 2012 |
| Noninterest income | $1.501 million | $2.514 million in Q1 2012 |
| Noninterest expense | $5.113 million | $4.904 million in Q1 2012 |
| Cash flow from operating activities | $3.370 million | $1.445 million in Q1 2012 |
| Cash flow from investing activities | $2.271 million | $7.833 million in Q1 2012 |
| Cash flow from financing activities | $2.868 million | $(9.772) million in Q1 2012 |
| Ending cash and cash equivalents | $39.537 million | $29.030 million at March 31, 2012 |
Balance Sheet, Funding, Debt, and Capital
- Gross loans were $382.3 million, down from $383.6 million at December 31, 2012. Net loans were $369.6 million.
- Deposits increased to $470.0 million from $466.9 million. Noninterest-bearing demand deposits increased 7% to $90.8 million, while time deposits declined 3% to $155.0 million.
- Other borrowings totaled $6.1 million, and trust preferred capital notes totaled $9.3 million. The company was current on trust preferred interest payments.
- Unused non-deposit funding sources totaled $106.0 million, including $66.0 million from the Federal Home Loan Bank, $37.0 million in unsecured correspondent-bank lines, and $3.0 million through the Federal Reserve Discount Window.
- Shareholders’ equity was $45.6 million, compared with $44.9 million at December 31, 2012. The company did not pay common dividends.
- At March 31, 2013, consolidated total capital and Tier 1 risk-based capital ratios were 15.82% and 14.55%, respectively. First Bank reported ratios of 14.09% and 12.81%, exceeding stated regulatory minimums.
Material Changes Versus the Prior Comparable Period
- Net income more than doubled, primarily because the company recorded a $250 thousand recovery of loan losses versus a $2.0 million provision in Q1 2012.
- Net interest income declined 9%, or $464 thousand, as interest-earning asset yields fell 61 basis points, partly offset by a 29-basis-point reduction in funding costs.
- Noninterest income declined 40%, primarily because Q1 2012 included $1.117 million of securities-sale gains. Excluding securities gains, noninterest income increased approximately 7%.
- Noninterest expense increased 4%. Salaries and employee benefits increased to $2.634 million, and the company recorded a one-time land-lease termination charge of approximately $209 thousand in the income statement.
- Other real estate owned expenses declined substantially, partially offsetting higher operating costs.
- Nonperforming assets increased to $14.9 million, or 2.77% of assets, from $14.0 million, or 2.62%, at December 31, 2012. Nonaccrual loans increased to $9.7 million from $8.4 million, while net OREO declined to $5.2 million from $5.6 million.
- Impaired loans increased to $19.2 million from $17.0 million, while the allowance for loan losses declined to $12.8 million from $13.1 million.
- Accumulated other comprehensive loss increased to $991 thousand from $859 thousand, reflecting a $132 thousand after-tax unrealized loss on available-for-sale securities.
Credit Quality, Liquidity, Outlook, and Risks
- Management cited favorable trends in past-due, nonaccrual, and classified loans in most categories, but construction and land-development credit quality remained a concern.
- Construction and land-development loans represented 52% of nonperforming assets; commercial real estate represented 32%, residential real estate 12%, and former branch-expansion properties 4%.
- Other potential problem loans totaled $41.4 million, down from $44.6 million at December 31, 2012.
- Loans classified as troubled debt restructurings totaled $6.5 million, of which $4.1 million were performing under restructured terms. No new TDRs were recorded in the quarter.
- Management stated that liquidity was sufficient to meet depositor requirements and customer borrowing needs. Liquid assets and loans maturing within one year totaled $127.3 million.
- No quantitative earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include local economic weakness, real estate collateral values, construction and commercial real estate exposure, future nonperforming-asset losses, adequacy of the loan-loss allowance and OREO valuation allowance, interest-rate changes, FDIC insurance costs, regulatory changes, dependence on secondary funding sources, and limitations on deferred tax assets.
- The deferred tax asset valuation allowance was $6.5 million at March 31, 2013. Reversal depends on demonstrating sustainable profitability and may occur in one event or over time.
- Off-balance-sheet commitments included $55.1 million of commitments to extend credit, $8.4 million of standby letters of credit, and $2.4 million of locked-rate mortgage commitments.
- Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Whether the recovery of loan losses is sustainable or primarily reflects temporary improvements in credit metrics.
- Trends in nonaccrual loans, impaired loans, TDRs, construction exposure, OREO, charge-offs, and the adequacy of related reserves.
- The effect of continued net-interest-margin compression on future earnings.
- Whether noninterest income can remain stable without recurring securities-sale gains.
- The impact of the land-lease termination charge and other unusual items on normalized operating expenses.
- The timing and potential regulatory-capital effects of reversing the $6.5 million deferred tax asset valuation allowance.
- The terms, dividend burden, and future refinancing or redemption considerations associated with preferred stock and trust preferred capital notes.
- The company’s reliance on Federal Home Loan Bank advances, correspondent lines, and other secondary liquidity sources.