First National Corporation Announces 30% Increase in Earnings

STRASBURG, Va., July 26, 2016 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (OTC:FXNC) today reported earnings of $1.4 million and earnings per share of $0.29 for the second quarter ended June 30, 2016, a 30% increase compared to $1.1 million or $0.22 per share for the first quarter of 2016. Earnings for the second quarter of 2015 were $116 thousand or $0.02 per share.

For the six months ended June 30, 2016, reported earnings totaled $2.5 million or $0.51 per share, compared to $331 thousand or $0.07 per share for the six months ended June 30, 2015. Year-to-date earnings for 2016 were positively impacted by higher revenues from net interest income and noninterest income, combined with lower noninterest expenses. In addition, net income available to common shareholders was favorably impacted by the elimination of dividends on preferred stock. Year-to-date earnings for 2015 were negatively impacted by integration expenses totaling $877 thousand related to the acquisition of six bank branches and the assumption of $186.8 million of deposit liabilities.

Select highlights for the second quarter include:

  • Return on equity increased to 11.90%, compared to 9.39% for the first quarter of 2016, and 2.97% for the second quarter of 2015
  • Net income available to common shareholders increased $334 thousand, or 30%, to $1.4 million compared to the first quarter of 2016, and increased $1.3 million compared to the second quarter of 2015
  • The efficiency ratio improved to 71.64% for the quarter, compared to 77.32% in the prior quarter and 83.52% in the second quarter of 2015
  • Noninterest expense decreased $234 thousand, or 4%, compared to the first quarter of 2016, and decreased $972 thousand, or 14%, compared to the second quarter of 2015
  • Assets per employee increased to $4.2 million, compared to $3.5 million at the end of the second quarter of 2015
  • Net interest income increased $97 thousand, or 2%, compared to the first quarter of 2016, and increased $728 thousand, or 14%, compared to the second quarter of 2015
  • Net loans increased $11.3 million, or 3%, during the quarter, and increased $74.2 million, or 19%, over the prior year
  • Noninterest income increased $169 thousand, or 9%, compared to the first quarter of 2016, and decreased $197 thousand, or 9%, compared to the second quarter of 2015

“We continue to be pleased with the progress being made in our Company since the deposit and branch acquisition that was consummated in the second quarter of 2015,” said Scott C. Harvard, president and chief executive officer of First National. Harvard added, “While we firmly believed the transaction was a significant strategic accomplishment, we recognized that it would take successful execution to drive the long term benefits to the Company. The Company’s performance trends quarter over quarter since the acquisition reflect effective plan execution to date. Last year, the Company embarked on efficiency initiatives that focused on better use of technology and eliminating unnecessary processes and paperwork across the bank. The initiatives lead to improved customer service, higher productivity and reduced expenses. The bank consolidated one branch at the end of 2015 and has announced a second branch closure that will occur at the end of July 2016. Employee productivity has increased significantly as evidenced by the assets-to-employee ratio of $4.2 million at June 30, 2016, compared to $3.5 million one year ago. Successful execution of the deposit acquisition also included deliberate and disciplined deployment of the acquired funds into loan assets. Through the second quarter of this year, we have deployed over 30% of the acquired deposits into loans, positively impacting revenues and earnings, while liquidity remains available for potential loan and earnings growth. I couldn’t be prouder of our entire team as we begin to reap the benefits of their efforts.”

BRANCH ACQUISITION

On April 17, 2015, First Bank (the “Bank”), the Company’s banking subsidiary, completed the acquisition of six banking offices with approximately $186.8 million of deposits in the Shenandoah Valley and central Virginia regions from Bank of America, N.A. (the “Acquisition” or “Branch Acquisition”). The Company incurred integration costs related to the Acquisition, including legal and professional fees, supplies, data processing and postage expenses that totaled $458 thousand for the second quarter of 2015, and $877 thousand for the six month period ended June 30, 2015. The Company did not incur integration costs during 2016.

At June 30, 2016, deposits in the acquired branches totaled $175.2 million, which was 94% of the deposit balances assumed in the Acquisition. The branch acquisition had a positive impact on the cost of funds for the Company. Excluding amortization of the time deposit valuation allowance, the cost of funds for the second quarter of 2016 for acquired branches was 0.22%, compared to the total cost of funds of the Company of 0.30% for the same period. The mix of deposits, which was comprised of a significant amount of noninterest-bearing deposits, remained consistent from the acquisition date through June 30, 2016. The Bank assembled an experienced lending team in its south region that made a meaningful contribution to loan growth during 2015 and in the first half of 2016.

BALANCE SHEET

Total assets of First National increased $10.3 million during the quarter to $711.3 million at June 30, 2016, and increased $15.5 million compared to June 30, 2015. Loans, net of the allowance for loan losses, increased $11.3 million, or 3%, during the quarter to $459.8 million, and increased $74.2 million, or 19%, compared to one year ago. While net loans increased over the prior periods, securities and interest-bearing deposits in banks combined decreased $357 thousand during the quarter to $194.3 million, and decreased $56.2 million compared to balances one year ago.

Total deposits decreased $2.8 million during the quarter to $630.3 million, and were $9.5 million higher than total deposits one year ago. When comparing the deposit portfolios at June 30, 2016, March 31, 2016 and June 30, 2015, there was no significant change in its composition with noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits comprising 25%, 54% and 21% of total deposits, respectively.

Total shareholders’ equity increased $1.6 million during the quarter to $49.3 million. Tangible common equity totaled $47.3 million at June 30, 2016, compared to $45.6 million at March 31, 2016 and $42.1 million at June 30, 2015. The Company exceeded its target capital levels at quarter-end.

NET INTEREST INCOME

Net interest income increased $97 thousand, or 2%, to $5.8 million for the quarter, compared to $5.7 million in the first quarter of 2016, and increased $728 thousand, or 14%, compared to $5.1 million for the second quarter of 2015.

Total interest income increased $87 thousand during the quarter to $6.3 million, compared to the first quarter of 2016 and increased $886 thousand, or 16%, compared to the second quarter of 2015. Interest income increased when compared to the first quarter of 2016 from growth in average earning assets. Compared to the second quarter of 2015, growth in interest income resulted primarily from higher average balances of loans and securities.

Total interest expense decreased $10 thousand during the quarter compared to the first quarter of 2016, and increased $158 thousand, or 49%, compared to the second quarter of 2015. Comparing the second quarter of 2016 to the same period one year ago, the increase in interest expense resulted primarily from interest on deposits and interest on subordinated debt. There was no subordinated debt on the Company’s balance sheet during the second quarter of 2015; therefore, there was no related interest expense during that period.

NONINTEREST INCOME

Noninterest income increased $169 thousand, or 9%, to $2.1 million, compared to $1.9 million for the first quarter of 2016, and decreased $197 thousand when compared to the second quarter of 2015.

When compared to the first quarter of 2016, the increase in noninterest income was primarily attributable to higher revenue from service charges on deposit accounts. The decrease in noninterest income compared to the same period one year ago was primarily attributable to a $201 thousand bargain purchase gain included in other operating income in the second quarter of 2015, which resulted from the Acquisition.

NONINTEREST EXPENSE

Noninterest expense decreased $234 thousand, or 4%, to $5.9 million for the quarter compared to $6.1 million for the first quarter of 2016, and decreased $972 thousand, or 14%, compared to the second quarter of 2015. The decrease in expenses when compared to the first quarter of 2016 was primarily attributable to reductions in legal and professional fees, occupancy, and equipment expense.

Comparing current period results to the second quarter of 2015, the 14% decrease in total noninterest expense was attributable to lower salaries and employee benefit expense, other real estate owned and other operating expenses. The decrease was also attributable to integration expenses from the Acquisition incurred in the second quarter of 2015 totaling $458 thousand. Integration expenses were primarily included in legal and professional, supplies expense, data processing expense, and postage expense.

ASSET QUALITY/LOAN LOSS PROVISION

Credit quality continued to improve during the quarter as nonperforming assets decreased $1.9 million to 0.63% of total assets, compared to 0.91% at March 31, 2016, and 1.30% at June 30, 2015. Loans past due between 30 and 89 days and still accruing was 0.43% of total loans, compared to 0.38% at March 31, 2016 and 0.38% at June 30, 2015.

The Bank did not record provision for loan losses in the first or second quarters of 2016. In the second quarter of 2015, the Bank recorded a recovery of loan losses of $100 thousand. Net recoveries totaled $214 thousand in the second quarter of 2016, compared to net charge-offs of $4 thousand for the first quarter of 2016 and net charge-offs of $542 thousand for the second quarter of 2015. Provision for loan losses was not required in the second quarter of 2016, primarily due to net recoveries of loans charged-off in prior periods and a decrease in the specific reserve component of the allowance for loan losses. The allowance for loan losses totaled $5.7 million at June 30, 2016, $5.5 million at March 31, 2016, and $6.1 million at June 30, 2015, representing 1.23%, 1.22%, and 1.56% of total loans, respectively.

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, 2015, and other filings with the Securities and Exchange Commission.

ABOUT FIRST NATIONAL CORPORATION

First National Corporation (OTC:FXNC) is the parent company and bank holding company of First Bank, a community bank that first opened for business in 1907 in Strasburg, Virginia. The Bank offers loan and deposit products and services through its website, www.fbvirginia.com, its mobile banking platform, a network of ATMs located throughout its market area, two loan production offices, a customer service center in a retirement community, and 15 bank branch office locations located throughout the Shenandoah Valley and central regions of Virginia. In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management. 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 StatementJune 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
Interest income
Interest and fees on loans$ 5,370 $ 5,236 $ 5,056 $ 4,854 $ 4,688
Interest on deposits in banks 62 48 63 61 68
Interest on securities 825 888 884 829 618
Dividends on restricted securities 21 19 18 20 18
Total interest income $ 6,278 $ 6,191 $ 6,021 $ 5,764 $ 5,392
Interest expense
Interest on deposits$ 329 $ 333 $ 302 $ 282 $ 266
Interest on federal funds purchased - 3 - - 1
Interest on subordinated debt 89 90 62 - -
Interest on junior subordinated debt 64 61 59 56 55
Interest on other borrowings - 5 - - 2
Total interest expense$ 482 $ 492 $ 423 $ 338 $ 324
Net interest income$ 5,796 $ 5,699 $ 5,598 $ 5,426 $ 5,068
Recovery of loan losses - - - - (100)
Net interest income after recovery of loan losses$5,796 $5,699 $5,598 $5,426 $5,168
Noninterest income
Service charges on deposit accounts$ 914 $ 780 $ 846 $ 897 $ 752
ATM and check card fees 515 488 520 529 497
Wealth management fees 334 336 496 477 499
Fees for other customer services 137 147 143 172 184
Income from bank owned life insurance 107 86 103 106 90
Net gains (losses) on sales of securities - 6 (3) - -
Net gains on sale of loans 31 21 43 53 50
Other operating income 74 79 50 10 237
Total noninterest income$ 2,112 $ 1,943 $ 2,198 $ 2,244 $ 2,309
Noninterest expense
Salaries and employee benefits$ 3,415 $ 3,444 $ 3,491 $ 3,637 $ 3,597
Occupancy 365 424 400 396 339
Equipment 394 432 398 400 422
Marketing 120 107 94 176 163
Supplies 103 101 93 116 229
Legal and professional fees 156 311 450 243 431
ATM and check card fees 221 205 200 236 190
FDIC assessment 126 122 119 134 64
Bank franchise tax 90 103 130 131 130
Telecommunications expense 115 114 120 131 100
Data processing expense 146 128 157 130 226
Postage expense 57 69 71 73 80
Amortization expense 198 207 216 226 196
Other real estate owned (income) expense, net (49) (72) 92 144 152
Other operating expense 426 422 481 528 536
Total noninterest expense$ 5,883 $ 6,117 $ 6,512 $ 6,701 $ 6,855
Income before income taxes$ 2,025 $ 1,525 $ 1,284 $ 969 $ 622
Income tax expense 592 426 343 243 178
Net income$ 1,433 $ 1,099 $ 941 $ 726 $ 444
Effective dividend and accretion on preferred stock - - 128 328 328
Net income available to common shareholders$1,433 $1,099 $813 $398 $116
Common Share and Per Common Share Data
Net income, basic$ 0.29 $ 0.22 $ 0.17 $ 0.08 $ 0.02
Weighted average shares, basic 4,924,702 4,920,315 4,913,985 4,911,604 4,909,775
Net income, diluted$ 0.29 $ 0.22 $ 0.17 $ 0.08 $ 0.02
Weighted average shares, diluted 4,927,045 4,923,117 4,916,804 4,913,461 4,911,298
Shares outstanding at period end 4,925,599 4,924,539 4,916,130 4,912,662 4,910,826
Tangible book value at period end$ 9.61 $ 9.25 $ 8.87 $ 8.80 $ 8.56
Cash dividends$ 0.03 $ 0.03 $ 0.025 $ 0.025 $ 0.025

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
June 30,
2016
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
Key Performance Ratios
Return on average assets 0.82% 0.64% 0.54% 0.42% 0.27%
Return on average equity 11.90% 9.39% 7.01% 4.80% 2.97%
Net interest margin 3.62% 3.63% 3.53% 3.40% 3.29%
Efficiency ratio (1) 71.64% 77.32% 78.42% 81.38% 83.52%
Average Balances
Average assets$ 705,707 $ 693,783 $ 692,263 $ 691,121 $ 671,199
Average earning assets 654,535 643,358 640,880 642,234 625,197
Average shareholders’ equity 48,443 47,066 53,264 60,043 59,957
Asset Quality
Loan charge-offs$ 136 $ 120 $ 418 $ 637 $ 671
Loan recoveries 350 116 367 83 129
Net charge-offs (recoveries) (214) 4 51 554 542
Non-accrual loans 4,057 4,258 3,854 4,930 6,666
Other real estate owned, net 442 2,112 2,679 2,760 2,407
Nonperforming assets 4,499 6,370 6,533 7,690 9,073
Loans 30 to 89 days past due, accruing 1,979 1,743 1,418 2,084 1,487
Loans over 90 days past due, accruing 11 124 92 147 600
Troubled debt restructurings, accruing - - 317 321 324
Special mention loans 13,392 13,796 16,372 15,706 21,278
Substandard loans, accruing 9,610 10,068 10,265 10,496 10,927
Capital Ratios (2)
Total capital$ 64,375 $ 62,440 $ 61,513 $ 60,232 $ 72,362
Tier 1 capital 58,641 56,920 55,989 55,066 67,400
Common equity tier 1 capital 58,641 56,920 55,989 55,066 67,400
Total capital to risk-weighted assets 13.66% 13.50% 13.86% 14.59% 18.28%
Tier 1 capital to risk-weighted assets 12.45% 12.30% 12.62% 13.34% 17.03%
Common equity tier 1 capital to risk-weighted assets 12.45% 12.30% 12.62% 13.34% 17.03%
Leverage ratio 8.33% 8.22% 8.12% 7.99% 10.06%
Balance Sheet
Cash and due from banks$ 10,518 $ 10,250 $ 8,247 $ 9,890 $ 11,870
Interest-bearing deposits in banks 40,225 29,077 31,087 66,956 99,274
Securities available for sale, at fair value 94,566 99,019 105,559 109,166 112,468
Securities held to maturity, at carrying value 57,401 64,963 66,519 54,276 37,343
Restricted securities, at cost 2,058 1,548 1,391 1,391 1,391
Loans held for sale 1,819 523 323 471 1,978
Loans, net of allowance for loan losses 459,812 448,556 433,475 400,838 385,592
Other real estate owned, net of valuation allowance 442 2,112 2,679 2,760 2,407
Premises and equipment, net 21,126 21,366 21,389 21,493 21,277
Accrued interest receivable 1,612 1,741 1,661 1,543 1,423
Bank owned life insurance 13,935 13,828 11,742 11,627 11,521
Core deposit intangibles, net 1,918 2,115 2,322 2,539 2,765
Other assets 5,916 5,945 5,927 5,945 6,518
Total assets$ 711,348 $ 701,043 $ 692,321 $ 688,895 $ 695,827
Noninterest-bearing demand deposits$ 159,278 $ 161,783 $ 157,070 $ 149,178 $ 147,790
Savings and interest-bearing demand deposits 337,589 334,599 328,945 318,510 322,239
Time deposits 133,479 136,736 141,101 146,219 150,853
Total deposits$ 630,346 $ 633,118 $ 627,116 $ 613,907 $ 620,882
Other borrowings 12,000 - - 7 13
Subordinated debt 4,921 4,917 4,913 - -
Junior subordinated debt 9,279 9,279 9,279 9,279 9,279
Accrued interest payable and other liabilities 5,544 6,029 5,060 5,303 6,214
Total liabilities$ 662,090 $ 653,343 $ 646,368 $ 628,496 $ 636,388

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
June 30,
20
16
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
Balance Sheet (continued)
Preferred stock$ - $ - $ - $ 14,595 $ 14,595
Common stock 6,157 6,156 6,145 6,141 6,139
Surplus 7,021 6,996 6,956 6,922 6,899
Retained earnings 36,676 35,391 34,440 33,917 33,642
Accumulated other comprehensive loss, net (596) (843) (1,588) (1,176) (1,836)
Total shareholders’ equity$ 49,258 $ 47,700 $ 45,953 $ 60,399 $ 59,439
Total liabilities and shareholders’ equity$ 711,348 $ 701,043 $ 692,321 $ 688,895 $ 695,827
Loan Data
Mortgage loans on real estate:
Construction and land development$ 33,232 $ 31,505 $ 33,135 $ 29,935 $ 32,009
Secured by farm land 706 931 964 984 1,025
Secured by 1-4 family residential 196,295 196,165 189,286 179,419 173,265
Other real estate loans 199,456 190,375 180,483 164,677 154,371
Loans to farmers (except those secured by real estate) 492 473 3,056 3,014 2,645
Commercial and industrial loans (except those secured by real estate) 24,229 23,742 20,992 16,936 16,674
Consumer installment loans 4,083 3,854 4,055 4,165 4,341
Deposit overdrafts 334 312 257 421 419
All other loans 6,719 6,719 6,771 6,862 6,972
Total loans$ 465,546 $ 454,076 $ 438,999 $ 406,413 $ 391,721
Allowance for loan losses (5,734) (5,520) (5,524) (5,575) (6,129)
Loans, net$ 459,812 $ 448,556 $ 433,475 $ 400,838 $ 385,592
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans $ 5,370 $ 5,236 $ 5,056 $ 4,854 $ 4,688
Interest income – investments and other 908 955 965 910 704
Interest expense – deposits (329) (333) (302) (282) (266)
Interest expense – other borrowings - (5) - - (2)
Interest expense – subordinated debt (89) (90) (62) - -
Interest expense – junior subordinated debt (64) (61) (59) (56) (55)
Interest expense – other - (3) - - (1)
Total net interest income$ 5,796 $ 5,699 $ 5,598 $ 5,426 $ 5,068
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$ 25 $ 25 $ 26 $ 26 $ 27
Tax benefit realized on non-taxable interest income – municipal securities 73 76 71 60 40
Total tax benefit realized on non-taxable interest income$ 98 $ 101 $ 97 $ 86 $ 67
Total tax-equivalent net interest income$ 5,894 $ 5,800 $ 5,695 $ 5,512 $ 5,135

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Six Months Ended
Income StatementJune 30,
2016
June 30,
2015
Interest income
Interest and fees on loans$ 10,606 $ 9,228
Interest on deposits in banks 110 73
Interest on securities 1,713 1,040
Dividends on restricted securities 40 39
Total interest income $12,469 $ 10,380
Interest expense
Interest on deposits$ 662 $ 566
Interest on federal funds purchased 3 2
Interest on subordinated debt 179 -
Interest on junior subordinated debt 125 109
Interest on other borrowings 5 3
Total interest expense$ 974 $ 680
Net interest income$ 11,495 $ 9,700
Recovery of loan losses - (100)
Net interest income after recovery of loan losses$1,495 $9,800
Noninterest income
Service charges on deposit accounts$ 1,694 $ 1,299
ATM and check card fees 1,003 846
Wealth management fees 670 1,002
Fees for other customer services 284 291
Income from bank owned life insurance 193 164
Net gains (losses) on sales of securities 6 (52)
Net gains on sale of loans 52 105
Other operating income 153 245
Total noninterest income$ 4,055 $ 3,900
Noninterest expense
Salaries and employee benefits$ 6,859 $ 6,722
Occupancy 789 656
Equipment 826 703
Marketing 227 260
Supplies 204 574
Legal and professional fees 467 643
ATM and check card fees 426 345
FDIC assessment 248 131
Bank franchise tax 193 252
Telecommunications expense 229 185
Data processing expense 274 413
Postage expense 126 197
Amortization expense 405 200
Other real estate owned (income) expense, net (121) 116
Other operating expense 848 945
Total noninterest expense$ 12,000 $ 12,342
Income before income taxes$ 3,550 $ 1,358
Income tax expense 1,018 370
Net income$ 2,532 $ 988
Effective dividend and accretion on preferred stock - 657
Net income available to common shareholders$2,532 $331
Common Share and Per Common Share Data
Net income, basic$ 0.51 $ 0.07
Weighted average shares, basic 4,922,509 4,908,386
Net income, diluted$ 0.51 $ 0.07
Weighted average shares, diluted 4,925,082 4,911,179
Shares outstanding at period end 4,925,599 4,910,826
Tangible book value at period end$ 9.61 $ 8.56
Cash dividends$ 0.06 $ 0.05

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Six Months Ended
June 30,
2016
June 30,
2015
Key Performance Ratios
Return on average assets 0.73% 0.34%
Return on average equity 10.66% 3.32%
Net interest margin 3.62% 3.58%
Efficiency ratio (1) 74.43% 82.12%
Average Balances
Average assets$ 699,736 $ 594,099
Average earning assets 648,947 553,243
Average shareholders’ equity 47,762 59,954
Asset Quality
Loan charge-offs$ 256 $ 783
Loan recoveries 466 294
Net charge-offs (recoveries) (210) 489
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$ 10,606 $ 9,228
Interest income – investments and other 1,863 1,152
Interest expense – deposits (662) (566)
Interest expense – other borrowings (5) (3)
Interest expense – subordinated debt (179) -
Interest expense – junior subordinated debt (125) (102)
Interest expense – other (3) (2)
Total net interest income$ 11,495 $ 9,700
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$ 50 $ 53
Tax benefit realized on non-taxable interest income – municipal securities 149 73
Total tax benefit realized on non-taxable interest income$ 199 $ 126
Total tax-equivalent net interest income$ 11,694 $ 9,826

(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, acquisition and integration related expenses, and gains and 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 bargain purchase gain. 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 prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be construed as such. Management believes, however, 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.

(2) All capital ratios reported are for the Bank.

CONTACTS 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