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First National Corporation Announces Third Quarter Net Income of $1.2 Million

STRASBURG, Va., Oct. 29, 2014 (GLOBE NEWSWIRE) -- First National Corporation (the "Company") (OTCBB:FXNC), the parent company of First Bank (the "Bank"), reported earnings of $1.2 million, or $0.19 per basic and diluted share, for the quarter ended September 30, 2014.

Operating Highlights for the Third Quarter

  • Return on average assets was 0.95%
  • Net interest margin improved to 3.92%
  • Third consecutive quarter of loan growth
  • Revenue from wealth management increased 22% to $494 thousand
  • Loan Production Office opened in Harrisonburg with experienced business banker
  • Mortgage division expanded to Harrisonburg
  • Book value per share increased from $5.93 to $8.77 per common share
  • Hired new Chief Credit Officer

"During the third quarter, our banking company delivered solid performance while adding new potential sources of revenue and growth. We are excited about our entry into Harrisonburg and the greater Augusta County markets through the addition of First Mortgage and a new commercial loan production office," said Scott C. Harvard, President and CEO of the Company and the Bank. "Double digit growth in noninterest-bearing deposits since year-end, three consecutive quarters of loan growth, and double digit growth in wealth management income validate our commitment to service driven by our philosophy that People Matter."

Third Quarter Earnings

Net income totaled $1.2 million for the third quarter of 2014, which was unchanged compared to the same period of 2013. The return on average assets was 0.95% for the third quarter compared to 0.92% for the same quarter one year ago, and the return on average equity was 8.65% compared to 11.44%.

Net interest income totaled $4.8 million for the quarter, compared to $4.6 million for the same period one year ago. The net interest margin was 3.92% compared to 3.68% for the third quarter of 2013. Revenue from wealth management fees increased by $88 thousand, or 22%, and other operating income increased by $49 thousand, or 57%, comparing the third quarter to the same period one year ago. Increases in other operating income included income from bank owned life insurance that increased by $35 thousand, or 51%, to $103 thousand for the quarter compared to $68 thousand for the same period one year ago. These increases were partially offset by losses on securities transactions totaling $91 thousand. Total noninterest income increased by $29 thousand, or 2% comparing the same periods.

Noninterest expense increased by $105 thousand, or 2%, to $4.8 million for the quarter compared to $4.6 million for the same period in the prior year. Salaries and employee benefits increased by $257 thousand, or 11%, and other operating expenses increased by $173 thousand, or 28%. Increases in salaries and employee benefits were impacted by the launch of First Mortgage, a new division of First Bank that began operations in May, along with the addition of a chief credit officer and three experienced commercial lenders. Increases in other operating expenses were primarily attributable to higher bank franchise tax from higher levels of capital, recruiting expenses, and additional expenses relating to the launch of the new mortgage division. These increases were partially offset by a $275 thousand decrease in expenses from other real estate owned and a $99 thousand decrease in FDIC assessment expense, comparing the third quarter to the same period one year ago.

The Bank recorded a recovery of loan losses totaling $100 thousand during the quarter, which resulted in a total allowance for loan losses of $9.7 million, or 2.59% of total loans at September 30, 2014. The recovery of loan losses was primarily a result of a decrease in the specific allocation from the improvement and resolution of certain impaired loans during the quarter. This compared to a provision for loan losses of $275 thousand and an allowance for loan losses of $11.9 million, or 3.24% of total loans, at the end of the third quarter of 2013.

Year-to-Date Earnings

Net income totaled $3.9 million for the nine months ended September 30, 2014, compared to $2.5 million for the same period of 2013. The return on average assets was 1.00% for the period compared to 0.62% for the same period one year ago, and the return on average equity was 9.41% compared to 7.48% for the same period in 2013.

Net interest income totaled $13.8 million for the period, compared to $13.9 million for the same period one year ago. The net interest margin was 3.82% compared to 3.73% for the same period of 2013. Noninterest income, excluding a one-time gain on termination of a postretirement benefit, increased by $378 thousand, or 8% when comparing the periods. Revenues from service charges on deposits increased $378 thousand, or 24%, and revenues from wealth management increased $217 thousand, or 18%, when comparing the nine months ended September 30, 2014 to the same period of 2013.

Noninterest expense decreased $604 thousand, or 4%, to $13.9 million for the period compared to $14.5 million for the same period in the prior year. Expenses from other real estate owned decreased by $797 thousand and the FDIC assessment expense decreased by $326 thousand, or 46%. These decreases were partially offset by increases in expenses that included other operating expense, which was $213 thousand, or 10%, higher than the nine months ended September 30, 2013 and salaries and employee benefits, which was $243 thousand, or 3% higher than the same period one year ago.

The Bank recorded a recovery of loan losses totaling $700 thousand for the period. The recovery of loan losses was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and improved asset quality. This compared to a provision for loan losses of $2.5 million for the same period of 2013.

Balance Sheet

At September 30, 2014, the Company's total assets were $519.3 million, total loans were $374.9 million, and total deposits were $438.9 million. Due to three consecutive quarters of loan growth, the Company's cash balance decreased in order to fund new loans. The Company also experienced an improvement in the deposit mix with higher levels of non-interest bearing deposits compared to lower levels of time deposits. Both of these changes had a favorable impact on the net interest margin.

Capital and Asset Quality

Substandard loans decreased by $11.0 million, or 35%, to $20.1 million at the end of the third quarter compared to $31.1 million for the same period one year ago. Nonperforming assets decreased to $10.5 million at September 30, 2014 compared to $11.8 million one year ago, and troubled debt restructurings decreased to $796 thousand from $834 thousand, comparing the same periods.

Total shareholders' equity increased $14.0 million to $57.6 million at September 30, 2014, compared to $43.6 million one year ago. The book value per common share was $8.77 at the end of the third quarter. Regulatory capital ratios were higher than previous periods, with the total risk-based capital ratio at 18.91% at September 30, 2014.

Caution about Forward Looking Statements

Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to the Company's future operations and are generally identified by phrases such as "the Company expects," "the Company believes" or words of similar import. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. For details on factors that could affect expectations, see the risk factors and other cautionary language included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and other filings with the Securities and Exchange Commission.

About the Company

First National Corporation, headquartered in Strasburg, Virginia, is the bank holding company of First Bank. First Bank offers loan, deposit, trust and investment products and services from 12 office locations located throughout the Shenandoah Valley region of Virginia. Banking services are also accessed from the Bank's website, www.fbvirginia.com, and from a network of ATMs located throughout its market area. First Bank also owns First Bank Financial Services, Inc., which invests in entities that provide investment services and title insurance.

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
Income Statement September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013
Interest income
Interest and fees on loans $4,536 $4,403 $4,215 $4,422 $4,673
Interest on deposits in banks 3 14 16 16 18
Interest on securities available for sale 622 657 657 636 577
Dividends on restricted securities 20 21 21 19 18
Total interest income $5,181 $5,095 $4,909 $5,093 $5,286
Interest expense
Interest on deposits $343 $373 $400 $458 $572
Interest on federal funds purchased 2 -- -- -- --
Interest on trust preferred capital notes 55 54 54 56 55
Interest on other borrowings 30 30 29 30 30
Total interest expense $430 $457 $483 $544 $657
Net interest income $4,751 $4,638 $4,426 $4,549 $4,629
Provision for (recovery of) loan losses (100) (400) (200) (2,950) 275
Net interest income after provision for (recovery of) loan losses $4,851 $5,038 $4,626 $7,499 $4,354
Noninterest income
Service charges on deposit accounts $655 $642 $630 $654 $627
ATM and check card fees 367 366 335 354 373
Wealth management fees 494 472 484 463 406
Fees for other customer services 94 126 87 89 86
Gains on sale of loans -- -- 3 22 47
Gains (losses) on sale of securities (91) 22 -- -- --
Other operating income 135 96 77 189 86
Total noninterest income $1,654 $1,724 $1,616 $1,771 $1,625
Noninterest expense
Salaries and employee benefits $2,668 $2,554 $2,509 $3,040 $2,411
Occupancy 303 278 315 302 306
Equipment 299 295 304 319 302
Marketing 114 125 109 41 81
Stationery and supplies 84 93 80 66 66
Legal and professional fees 250 246 202 340 237
ATM and check card fees 167 163 163 166 176
FDIC assessment 90 122 172 174 189
Other real estate owned, net (23) (70) 31 380 252
Net losses on disposal of premises and equipment -- -- 2 393 --
Loss on lease termination -- -- -- 263 --
Other operating expense 801 740 726 748 628
Total noninterest expense $4,753 $4,546 $4,613 $6,232 $4,648
Income before income taxes $1,752 $2,216 $1,629 $3,038 $1,331
Income tax provision (benefit) 505 674 483 (4,352) 91
Net income $1,247 $1,542 $1,146 $7,390 $1,240
Effective dividend and accretion on preferred stock 329 260 221 228 229
Net income available to common shareholders $918 $1,282 $925 $7,162 $1,011
Common Share and Per Common Share Data
Net income, basic and diluted $0.19 $0.26 $0.19 $1.46 $0.21
Shares outstanding at period end 4,903,612 4,902,582 4,901,464 4,901,464 4,901,464
Weighted average shares, basic and diluted 4,902,716 4,901,599 4,901,464 4,901,464 4,901,464
Book value at period end $8.77 $8.58 $8.24 $7.96 $5.93
Cash dividends $0.03 $0.03 $ -- $ -- $ --
FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013
Key Performance Ratios
Return on average assets 0.95% 1.16% 0.88% 5.55% 0.92%
Return on average equity 8.65% 11.05% 8.53% 62.92% 11.44%
Net interest margin 3.92% 3.81% 3.72% 3.68% 3.68%
Efficiency ratio (1) 72.74% 71.94% 74.85% 81.40% 69.60%
Average Balances
Average assets $521,611 $531,250 $525,337 $528,475 $535,885
Average earning assets 487,540 496,304 490,521 496,619 505,888
Average shareholders' equity 57,206 55,965 54,460 46,569 43,001
Asset Quality
Loan charge-offs $910 $306 $239 $192 $955
Loan recoveries 720 429 79 1,911 77
Net charge-offs (recoveries) 190 (123) 160 (1,719) 878
Non-accrual loans 8,673 11,221 11,697 11,678 8,000
Other real estate owned, net 1,807 2,221 2,991 3,030 3,833
Nonperforming assets 10,480 13,443 14,688 14,708 11,833
Loans over 90 days past due, still accruing 2,148 325 111 49 2,150
Troubled debt restructurings, accruing 796 978 986 829 834
Special mention loans 18,411 19,807 20,606 19,660 23,226
Substandard loans, accruing 20,088 20,315 21,917 22,909 31,119
Doubtful loans -- -- -- -- --
Capital Ratios
Tier 1 capital $66,302 $64,732 $63,041 $61,800 $56,830
Total capital 71,060 69,455 67,687 66,437 61,565
Total capital to risk-weighted assets 18.91% 18.64% 18.49% 18.21% 16.57%
Tier 1 capital to risk-weighted assets 17.65% 17.38% 17.22% 16.94% 15.29%
Leverage ratio 12.73% 12.22% 12.05% 11.75% 10.61%
Balance Sheet
Cash and due from banks $6,862 $6,587 $7,106 $5,767 $8,649
Interest-bearing deposits in banks 3,885 12,735 27,017 25,741 29,221
Securities available for sale, at fair value 104,643 108,884 110,561 103,301 105,321
Restricted securities, at cost 1,636 1,636 1,636 1,804 1,804
Loans, net of allowance for loan losses 365,155 357,484 349,250 346,449 354,952
Premises and equipment, net 16,175 16,305 16,470 16,642 17,417
Accrued interest receivable 1,327 1,258 1,305 1,302 1,339
Other assets 19,682 20,434 21,250 21,884 17,752
Total assets $519,365 $525,323 $534,595 $522,890 $536,455
Noninterest-bearing demand deposits $103,019 $99,396 $101,813 $92,901 $95,609
Savings and interest-bearing demand deposits 224,655 235,929 239,725 234,054 229,990
Time deposits 111,245 115,873 120,151 123,756 145,664
Total deposits $438,919 $451,198 $461,689 $450,711 $471,263
Federal funds purchased 5,325 -- -- -- --
Other borrowings 6,033 6,039 6,046 6,052 6,058
Trust preferred capital notes 9,279 9,279 9,279 9,279 9,279
Other liabilities 2,231 2,151 2,614 3,288 6,244
Total liabilities $461,787 $468,667 $479,628 $469,330 $492,844
FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013 September 30, 2013
Balance Sheet (continued)
Preferred stock $14,595 $14,595 $14,595 $14,564 $14,525
Common stock 6,130 6,128 6,127 6,127 6,127
Surplus 6,828 6,821 6,813 6,813 6,813
Retained earnings 30,312 29,516 28,286 27,360 20,199
Accumulated other comprehensive loss, net (287) (404) (854) (1,304) (4,053)
Total shareholders' equity $57,578 $56,656 $54,967 $53,560 $43,611
Total liabilities and shareholders' equity $519,365 $525,323 $534,595 $522,890 $536,455
Loan Data
Mortgage loans on real estate:
Construction and land development $29,862 $32,795 $33,876 $34,060 $34,404
Secured by farm land 1,193 1,234 1,257 1,264 1,302
Secured by 1-4 family residential 155,479 151,043 147,541 141,961 142,446
Other real estate loans 153,576 145,249 141,462 144,704 155,389
Loans to farmers (except those secured by real estate) 2,905 3,067 3,060 3,418 2,130
Commercial and industrial loans (except those secured by real estate) 20,038 21,730 20,321 19,385 19,186
Consumer installment loans 4,881 4,859 4,816 4,935 5,420
Deposit overdrafts 248 229 213 279 187
All other loans 6,689 7,284 6,987 7,087 6,363
Total loans $374,871 $367,490 $359,533 $357,093 $366,827
Allowance for loan losses (9,716) (10,006) (10,283) (10,644) (11,875)
Loans, net $365,155 $357,484 $349,250 $346,449 $354,952
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans $4,536 $4,403 $4,215 $4,422 $4,673
Interest income – investments and other 645 692 694 671 613
Interest expense – deposits 343 373 400 458 572
Interest expense – other borrowings 30 30 29 30 30
Interest expense – trust preferred capital notes 55 54 54 56 55
Interest expense – other 2 -- -- -- --
Total net interest income $4,751 $4,638 $4,426 $4,549 $4,629
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans $27 $28 $29 $21 $23
Tax benefit realized on non-taxable interest income – municipal securities 44 49 49 43 39
Total tax benefit realized on non-taxable interest income $71 $77 $78 $64 $62
Total tax-equivalent net interest income $4,822 $4,715 $4,504 $4,613 $4,691
FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Nine Months Ended
Income Statement September 30, 2014 September 30, 2013
Interest and dividend income
Interest and fees on loans $13,154 $14,422
Interest on federal funds sold -- --
Interest on deposits in banks 33 45
Interest and dividends on securities available for sale:
Taxable interest 1,660 1,313
Tax-exempt interest 276 228
Dividends 62 56
Total interest and dividend income $15,185 $16,064
Interest expense
Interest on deposits $1,115 $1,910
Interest on federal funds purchased 2 --
Interest on trust preferred capital notes 163 166
Interest on other borrowings 89 89
Total interest expense $1,369 $2,165
Net interest income $13,816 $13,899
Provision for (recovery of) loan losses (700) 2,525
Net interest income after provision for (recovery of) loan losses $14,516 $11,374
Noninterest income
Service charges on deposit accounts $1,928 $1,550
ATM and check card fees 1,067 1,071
Wealth management fees 1,450 1,233
Fees for other customer services 307 302
Gains on sale of loans 3 171
Gains (losses) on sale of securities available for sale (69) --
Other operating income 309 833
Total noninterest income $4,995 $5,160
Noninterest expense
Salaries and employee benefits $7,731 $7,488
Occupancy 896 980
Equipment 898 889
Marketing 349 304
Stationery and supplies 258 222
Legal and professional fees 699 635
ATM and check card fees 493 502
FDIC assessment 384 710
Other real estate owned, net (62) 735
Net losses on disposal of premises and equipment 2 --
Other operating expense 2,266 2,053
Total noninterest expense $13,914 $14,518
Income before income taxes $5,597 $2,016
Income tax provision (benefit) 1,662 (468)
Net income $3,935 $2,484
Effective dividend and accretion on preferred stock 810 684
Net income available to common shareholders $3,125 $1,800
Common Share and Per Common Share Data
Net income, basic and diluted $0.64 $0.37
Shares outstanding at period end 4,903,612 4,901,464
Weighted average shares, basic and diluted 4,901,931 4,901,464
Book value at period end $8.77 $5.93
Cash dividends $0.05 $ --
FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Nine Months Ended
September 30, 2014 September 30, 2013
Key Performance Ratios
Return on average assets 1.00% 0.62%
Return on average equity 9.41% 7.48%
Net interest margin 3.82% 3.73%
Efficiency ratio 73.15% 72.62%
Average Balances
Average assets $526,044 $535,258
Average earning assets 491,443 504,797
Average shareholders' equity 55,877 44,414
Asset Quality
Loan charge-offs $1,455 $4,300
Loan recoveries 1,227 575
Net charge-offs 228 3,725
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans $13,154 $14,422
Interest income – investments and other 2,031 1,642
Interest expense – deposits 1,115 1,910
Interest expense – other borrowings 89 89
Interest expense – trust preferred capital notes 163 166
Interest expense – other 2 --
Total net interest income $13,816 $13,899
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans $83 $60
Tax benefit realized on non-taxable interest income – municipal securities 142 117
Total tax benefit realized on non-taxable interest income $225 $177
Total tax-equivalent net interest income $14,041 $14,076

(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned expense, loss on land lease termination and net losses on disposal of premises and equipment by the sum of net interest income on a tax equivalent basis and noninterest income excluding gains and losses on sales of securities and gain on termination of postretirement benefit. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 34%. See the table above for the quarterly tax-equivalent net interest income and a reconciliation of net interest income to tax-equivalent net interest income. The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency. Such information is not in accordance with generally accepted accounting principles (GAAP) and should not be construed as such. Management believes such financial information is meaningful to the reader in understanding operational performance, but cautions that such information not be viewed as a substitute for GAAP.

CONTACT: Scott C. Harvard President and CEO (540) 465-9121 sharvard@fbvirginia.com M. Shane Bell Executive Vice President and CFO (540) 465-9121 sbell@fbvirginia.com

Source:First National Corporation