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First National Corporation Announces Fourth Quarter and Full Year Results

STRASBURG, Va., Jan. 25, 2017 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (OTC:FXNC) today reported net income available to common shareholders of $1.7 million and earnings per share of $0.34 for the fourth quarter ended December 31, 2016. This was an $862 thousand increase when compared to earnings for the fourth quarter of 2015, which totaled $813 thousand or $0.17 per share. The increase in net income available to common shareholders resulted primarily from an $867 thousand decrease in noninterest expenses, a $315 thousand increase in net interest income and a $128 thousand decrease in the effective dividend on preferred stock. These changes were offset by a $377 thousand increase in income tax expense and a $71 thousand decrease in noninterest income.

For the year ended December 31, 2016, net income available to common shareholders totaled $5.9 million or $1.20 per share. This was an increase of $4.4 million compared to earnings for the prior year, which totaled $1.5 million or $0.31 per share. The increase in earnings resulted primarily from a $2.5 million increase in net interest income, a $2.1 million decrease in noninterest expenses, a $151 thousand increase in noninterest income and a $1.1 million decrease in the effective dividend on preferred stock. These changes were offset by a $1.4 million increase in income tax expense.

Select highlights for the fourth quarter include:

  • Return on equity increased to 13.08%, compared to 7.01% for fourth quarter of 2015
  • Net income available to common shareholders increased $862 thousand, or 106%, compared to the fourth quarter of 2015
  • The efficiency ratio improved to 67.17%, compared to 78.42% for the fourth quarter of 2015
  • Noninterest expense decreased for the sixth consecutive quarter, and decreased $867 thousand, or 13%, compared to the fourth quarter of 2015
  • Assets per employee increased to $4.5 million, compared to $3.6 million at the end of the fourth quarter of 2015
  • Net interest income increased $315 thousand, or 6%, compared to the fourth quarter of 2015
  • Net loans increased $15.5 million during the quarter, and increased $47.3 million, or 11%, over the prior year
  • Noninterest-bearing demand deposits increased $11.0 million, or 7%, over the prior year.

“Since closing on the branch deposit acquisition in the second quarter of 2015, our banking team has successfully executed on two primary drivers of value of the transaction,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “The first driver was to deploy the newly acquired funds into loans. Loans, net of the allowance for loan losses, increased by $47.3 million during 2016, which followed total loan growth of $61.8 million in 2015. The second primary driver was to gain efficiencies from the larger balance sheet. For the year ended December 31, 2015, the year of the acquisition, the efficiency ratio was 80.92%. Our team was able to improve the efficiency ratio to 71.08% for the year ended December 31, 2016 by reducing non-interest expenses $2.1 million and by increasing revenues $2.7 million. Productivity improved with total assets per employee increasing 25% from $3.6 million to $4.5 million during the year as a result of right sizing our branch network, reducing staffing, and doing more with less by utilizing technology and improving processes.”

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 $908 thousand for the year ended December 31, 2015. The Company did not incur integration costs during 2016.

At December 31, 2016, deposits from the acquired branches totaled $174.8 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. The cost of funds for the fourth quarter of 2016 for acquired branches was 0.22%, compared to the total cost of funds of the Company of 0.31%. The mix of deposits, which was comprised of a significant amount of noninterest-bearing deposits, remained consistent from the acquisition date through the end of 2016. The Bank assembled an experienced lending team in its south region that made a meaningful contribution to loan growth during 2015 and 2016.

BALANCE SHEET

Total assets of First National increased $4.1 million during the quarter to $716.7 million at December 31, 2016, and increased $24.4 million compared to one year ago. Loans, net of the allowance for loan losses, increased $15.5 million during the quarter to $480.7 million, and increased $47.3 million, or 11%, compared to December 31, 2015. While net loans increased over the prior periods, the total of securities and interest-bearing deposits in banks decreased $12.3 million during the quarter to $180.7 million, and decreased $23.8 million compared to one year ago.

Total deposits increased $4.8 million during the quarter to $645.6 million, and were $18.5 million higher than one year ago. When comparing the composition of the deposit portfolio at December 31, 2016 to one year ago, noninterest-bearing demand deposits increased from 25% to 26% of total deposits, while time deposits decreased from 22% to 20%.

Shareholders’ equity totaled $50.7 million at December 31, 2016 compared to $46.0 million one year ago. Tangible common equity totaled $49.2 million at the end of 2016, compared to $43.6 million at December 31, 2015. The Company exceeded its target regulatory capital ratios at year-end.

NET INTEREST INCOME

For the fourth quarter ended December 31, 2016, net interest income increased $315 thousand, or 6%, to $5.9 million, compared to $5.6 million for the fourth quarter of 2015.

Total interest income increased $405 thousand, or 7%, to $6.4 million for the fourth quarter of 2016, compared to the same period of 2015. Interest income increased from growth in total average earning assets and from a change in the composition of earning assets. The change in asset mix resulted from an increase in average loan balances to 72% of average earning assets for the fourth quarter of 2016, up from 65% for the same quarter of 2015. While loan balances increased, the average balance of interest-bearing deposits in banks and securities decreased to 28% of average earning assets, down from 35% when comparing the same periods.

Total interest expense increased $90 thousand, or 21%, to $513 thousand for the fourth quarter of 2016 compared to the same period of 2015. The increase in interest expense resulted primarily from interest on deposits and interest on subordinated debt. The Company had subordinated debt for only a portion of the fourth quarter of 2015, compared to a full quarter in 2016.

For the year ended December 31, 2016, net interest income increased $2.5 million, or 12%, to $23.3 million, compared to $20.7 million for the year ended December 31, 2015.

Total interest income increased $3.1 million, or 14%, to $25.2 million for the year ended December 31, 2016, compared to the same period of 2015. Interest income increased from growth in total average earning assets and from a change in the composition of earning assets. The change in asset mix resulted from an increase in average loan balances to 71% of average earning assets for year ended December 31, 2016, up from 67% one year ago. While loan balances increased, the average balance of interest-bearing deposits in banks and securities decreased to 29% of average earning assets, down from 33% when comparing the same periods.

Total interest expense increased $541 thousand, or 38%, to $2.0 million for the year ended December 31, 2016 compared to the same period of 2015. The increase in interest expense resulted primarily from a full year of interest on subordinated debt as well as higher interest expense on deposits. The Company had subordinated debt for only a portion of the fourth quarter of 2015, compared to the full year of 2016.

NONINTEREST INCOME

For the fourth quarter ended December 31, 2016, noninterest income decreased $71 thousand, or 3%, to $2.1 million, compared to $2.2 million for the fourth quarter of 2015. There were no significant changes in revenue from service charges on deposit accounts or ATM and check card fees. Wealth management fees decreased $143 thousand when comparing the same periods, while other operating income increased $39 thousand. The decrease in wealth management fees resulted from the elimination of brokerage services on January 1, 2016.

For the year ended December 31, 2016, noninterest income increased $151 thousand, or 2%, to $8.5 million, compared to $8.3 million for the year ended December 31, 2015. Service charges on deposit accounts increased $470 thousand, or 15%, and ATM and check card fees increased $142 thousand, or 7%, over the prior year. The increases were attributed to the increase in deposits when comparing the periods. Wealth management fees decreased $613 thousand, or 31%, when comparing 2016 to 2015.

NONINTEREST EXPENSE

Noninterest expense decreased $867 thousand, or 13%, to $5.6 million for the fourth quarter of 2016 compared to the same period of 2015. Several expense categories decreased when comparing the same periods, including salaries and employee benefits, which decreased $584 thousand, or 17%, and legal and professional fees, which decreased $212 thousand, or 47%. The decrease in salaries and employee benefits resulted primarily from lower salaries and wages, insurance and pension expense, which decreased $213 thousand, $204 thousand and $159 thousand, respectively. Salaries and wage expense was lower than the same period in 2015 from a reduction in the number of employees. Insurance expense decreased as a result of changes to the Company’s health insurance plan for 2016 as expense was impacted by the actual amount of claims submitted by employees during the year, as opposed to a fixed cost of insurance for 2015. Pension expense decreased when comparing the periods as a result of an amendment to the defined benefit pension plan and the Company’s intention to terminate the plan. Under the amendment, benefit accruals ceased as of November 30, 2016. Legal and professional fees were higher for the fourth quarter of 2015 primarily from consulting expenses incurred from an efficiency initiative that began during 2015.

Noninterest expense decreased $2.1 million, or 8%, to $23.5 million for the year ended December 31, 2016, compared to $25.6 million for the same period of 2015. Several expense categories decreased when comparing the same periods, including salaries and employee benefits, which decreased $901 thousand, or 7%, legal and professional fees, which decreased $452 thousand, or 34%, and supplies expense, which decreased $333 thousand, or 43%. The decrease in salaries and employee benefits resulted primarily from lower salaries and wage expense, insurance expense and pension expense, which decreased $501 thousand, $314 thousand and $125 thousand, respectively. Legal and professional fees were higher for the year ended December 31, 2015 primarily from legal fees related to integration costs incurred during the Branch Acquisition and consulting expenses incurred from an efficiency initiative. Supplies expense was higher for the year ended December 31, 2015, primarily from integration costs incurred during the Branch Acquisition.

ASSET QUALITY/LOAN LOSS PROVISION

Nonperforming assets decreased to $1.8 million, or 0.25% of total assets, down from $6.5 million or 0.94% of total assets one year ago. Loans past due between 30 and 89 days and still accruing was 0.53% of total loans, compared to 0.32% at December 31, 2015. The allowance for loan losses totaled $5.3 million at December 31, 2016 and $5.5 million at December 31, 2015, representing 1.09% and 1.26% 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 14 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 StatementDecember 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015
Interest income
Interest and fees on loans$5,556 $5,500 $5,370 $5,236 $5,056
Interest on deposits in banks 55 73 62 48 63
Interest on securities 794 749 825 888 884
Dividends on restricted securities 21 20 21 19 18
Total interest income$6,426 $6,342 $6,278 $6,191 $6,021
Interest expense
Interest on deposits$353 $338 $329 $333 $302
Interest on federal funds purchased - - - 3 -
Interest on subordinated debt 91 91 89 90 62
Interest on junior subordinated debt 69 65 64 61 59
Interest on other borrowings - 1 - 5 -
Total interest expense$513 $495 $482 $492 $423
Net interest income$5,913 $5,847 $5,796 $5,699 $5,598
Provision for loan losses - - - - -
Net interest income after provision for loan losses$5,913 $5,847 $5,796 $5,699 $5,598
Noninterest income
Service charges on deposit accounts$877 $941 $914 $780 $846
ATM and check card fees 505 529 515 488 520
Wealth management fees 353 339 334 336 496
Fees for other customer services 154 143 137 147 143
Income from bank owned life insurance 109 123 107 86 103
Net gains (losses) on sales of securities (2) 4 - 6 (3)
Net gains on sale of loans 42 50 31 21 43
Other operating income 89 182 74 79 50
Total noninterest income$2,127 $2,311 $2,112 $1,943 $2,198
Noninterest expense
Salaries and employee benefits$2,907 $3,183 $3,415 $3,444 $3,491
Occupancy 364 380 365 424 400
Equipment 402 406 394 432 398
Marketing 210 125 120 107 94
Supplies 138 108 103 101 93
Legal and professional fees 238 179 156 311 450
ATM and check card fees 211 229 221 205 200
FDIC assessment 72 106 126 122 119
Bank franchise tax 90 89 90 103 130
Telecommunications expense 112 110 115 114 120
Data processing expense 159 160 146 128 157
Postage expense 56 56 57 69 71
Amortization expense 179 187 198 207 216
Other real estate owned expense (income), net - 1 (49) (72) 92
Net loss on disposal of premises and equipment - 8 - - -
Other operating expense 507 526 426 422 481
Total noninterest expense$5,645 $5,853 $5,883 $6,117 $6,512
Income before income taxes$2,395 $2,305 $2,025 $1,525 $1,284
Income tax expense 720 611 592 426 343
Net income$1,675 $1,694 $1,433 $1,099 $941
Effective dividend on preferred stock - - - - 128
Net income available to common shareholders$1,675 $1,694 $1,433 $1,099 $813
Common Share and Per Common Share Data
Net income, basic$0.34 $0.34 $0.29 $0.22 $0.17
Weighted average shares, basic 4,927,728 4,925,753 4,924,702 4,920,315 4,913,985
Net income, diluted$0.34 $0.34 $0.29 $0.22 $0.17
Weighted average shares, diluted 4,933,572 4,929,922 4,926,859 4,923,117 4,916,804
Shares outstanding at period end 4,929,403 4,926,546 4,925,599 4,924,539 4,916,130
Tangible book value at period end$9.98 $9.99 $9.61 $9.25 $8.87
Cash dividends$0.03 $0.03 $0.03 $0.03 $0.025


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015
Key Performance Ratios
Return on average assets 0.94% 0.95% 0.82% 0.64% 0.54%
Return on average equity 13.08% 13.44% 11.90% 9.39% 7.01%
Net interest margin 3.60% 3.57% 3.62% 3.63% 3.53%
Efficiency ratio (1) 67.17% 68.57% 71.62% 77.32% 78.42%
Average Balances
Average assets$711,507 $710,005 $705,707 $693,783 $692,263
Average earning assets 663,982 661,624 654,535 643,358 640,880
Average shareholders’ equity 50,944 50,160 48,443 47,066 53,264
Asset Quality
Loan charge-offs$337 $195 $136 $120 $418
Loan recoveries 48 71 350 116 367
Net charge-offs (recoveries) 289 124 (214) 4 51
Non-accrual loans 1,520 3,521 4,057 4,258 3,854
Other real estate owned, net 250 250 442 2,112 2,679
Nonperforming assets 1,770 3,771 4,499 6,370 6,533
Loans 30 to 89 days past due, accruing 2,583 2,036 1,979 1,743 1,418
Loans over 90 days past due, accruing 116 59 11 124 92
Troubled debt restructurings, accruing - 88 - - 317
Special mention loans 13,073 14,238 13,392 13,796 16,372
Substandard loans, accruing 8,056 8,273 9,610 10,068 10,265
Capital Ratios (2)
Total capital$65,584 $65,759 $64,375 $62,440 $61,513
Tier 1 capital 60,263 60,149 58,641 56,920 55,989
Common equity tier 1 capital 60,263 60,149 58,641 56,920 55,989
Total capital to risk-weighted assets 13.45% 13.90% 13.66% 13.50% 13.86%
Tier 1 capital to risk-weighted assets 12.36% 12.72% 12.45% 12.30% 12.62%
Common equity tier 1 capital to risk-weighted assets 12.36% 12.72% 12.45% 12.30% 12.62%
Leverage ratio 8.48% 8.48% 8.33% 8.22% 8.12%
Balance Sheet
Cash and due from banks$10,106 $8,955 $10,518 $10,250 $8,247
Interest-bearing deposits in banks 30,986 47,902 40,225 29,077 31,087
Securities available for sale, at fair value 94,802 88,323 94,566 99,019 105,559
Securities held to maturity, at carrying value 53,398 55,263 57,401 64,963 66,519
Restricted securities, at cost 1,548 1,548 2,058 1,548 1,391
Loans held for sale 337 1,053 1,819 523 323
Loans, net of allowance for loan losses 480,746 465,224 459,812 448,556 433,475
Other real estate owned, net of valuation allowance 250 250 442 2,112 2,679
Premises and equipment, net 20,785 20,852 21,126 21,366 21,389
Accrued interest receivable 1,746 1,631 1,612 1,741 1,661
Bank owned life insurance 13,928 13,808 13,935 13,828 11,742
Core deposit intangibles, net 1,551 1,730 1,917 2,115 2,322
Other assets 6,539 6,133 5,917 5,945 5,927
Total assets$ 716,722 $ 712,672 $ 711,348 $ 701,043 $ 692,321
Noninterest-bearing demand deposits$168,076 $168,204 $159,278 $161,783 $157,070
Savings and interest-bearing demand deposits 349,067 340,884 337,589 334,599 328,945
Time deposits 128,427 131,654 133,479 136,736 141,101
Total deposits$645,570 $640,742 $630,346 $633,118 $627,116
Other borrowings - - 12,000 - -
Subordinated debt 4,930 4,926 4,921 4,917 4,913
Junior subordinated debt 9,279 9,279 9,279 9,279 9,279
Accrued interest payable and other liabilities 6,195 6,742 5,544 6,029 5,060
Total liabilities$ 665,974 $ 661,689 $ 662,090 $ 653,343 $ 646,368



FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
December 31,
2016
September 30,
2016
June 30,
2016
March 31,
2016
December 31,
2015

Balance Sheet (continued)
Preferred stock$- $- $- $- $-
Common stock 6,162 6,158 6,157 6,156 6,145
Surplus 7,093 7,046 7,021 6,996 6,956
Retained earnings 39,749 38,223 36,676 35,391 34,440
Accumulated other comprehensive loss, net (2,256) (444) (596) (843) (1,588)
Total shareholders’ equity$ 50,748 $ 50,983 $ 49,258 $ 47,700 $ 45,953
Total liabilities and shareholders’ equity$ 716,722 $ 712,672 $ 711,348 $ 701,043 $ 692,321
Loan Data
Mortgage loans on real estate:
Construction and land development$34,699 $34,518 $33,232 $31,505 $33,135
Secured by farm land 688 695 706 931 964
Secured by 1-4 family residential 198,763 196,492 196,295 196,165 189,286
Other real estate loans 210,522 202,148 199,456 190,375 180,483
Loans to farmers (except those secured by real estate) 1,316 737 492 473 3,056
Commercial and industrial loans (except those secured by real estate) 28,665 25,114 24,229 23,742 20,992
Consumer installment loans 4,611 4,283 4,083 3,854 4,055
Deposit overdrafts 264 260 334 312 257
All other loans 6,539 6,587 6,719 6,719 6,771
Total loans$486,067 $470,834 $465,546 $454,076 $438,999
Allowance for loan losses (5,321) (5,610) (5,734) (5,520) (5,524)
Loans, net$ 480,746 $ 465,224 $ 459,812 $ 448,556 $ 433,475
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$5,556 $5,500 $5,370 $5,236 $5,056
Interest income – investments and other 870 842 908 955 965
Interest expense – deposits (353) (338) (329) (333) (302)
Interest expense – other borrowings - (1) - (5) -
Interest expense – subordinated debt (91) (91) (89) (90) (62)
Interest expense – junior subordinated debt (69) (65) (64) (61) (59)
Interest expense – federal funds purchased -
- - (3 ) -
Total net interest income$5,913
$ 5,847 $ 5,796 $ 5,699 $ 5,598
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$24 $26 $25 $25 $26
Tax benefit realized on non-taxable interest income – municipal securities 72
70 73 76 71
Total tax benefit realized on non-taxable interest income$96
$ 96 $ 98 $ 101 $ 97
Total tax-equivalent net interest income$6,009
$ 5,943 $ 5,894 $ 5,800 $ 5,695


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Year Ended
Income StatementDecember 31,
2016
December 31,
2015
Interest income
Interest and fees on loans$21,662 $19,138
Interest on deposits in banks 238 197
Interest on securities 3,256 2,753
Dividends on restricted securities 81 77
Total interest income$25,237 $22,165
Interest expense
Interest on deposits 1,353 1,150
Interest on federal funds purchased 3 2
Interest on subordinated debt 361 62
Interest on junior subordinated debt 259 224
Interest on other borrowings 6 3
Total interest expense$1,982 $1,441
Net interest income$23,255 $20,724
Recovery of loan losses - (100)
Net interest income after recovery of loan losses$23,255 $20,824
Noninterest income
Service charges on deposit accounts 3,512 3,042
ATM and check card fees 2,037 1,895
Wealth management fees 1,362 1,975
Fees for other customer services 581 606
Income from bank owned life insurance 425 373
Net gains (losses) on sales of securities 8 (55)
Net gains on sale of loans 144 201
Other operating income 424 305
Total noninterest income$8,493 $8,342
Noninterest expense
Salaries and employee benefits$12,949 $13,850
Occupancy 1,533 1,452
Equipment 1,634 1,501
Marketing 562 530
Supplies 450 783
Legal and professional fees 884 1,336
ATM and check card fees 866 781
FDIC assessment 426 384
Bank franchise tax 372 513
Telecommunications expense 451 436
Data processing expense 593 700
Postage expense 238 341
Amortization expense 771 642
Other real estate owned (income) expense, net (120) 352
Net loss on disposal of premises and equipment 8 -
Other operating expense 1,881 1,954
Total noninterest expense$23,498 $25,555
Income before income taxes$8,250 $3,611
Income tax expense 2,349 956
Net income$5,901 $2,655
Effective dividend on preferred stock - 1,113
Net income available to common shareholders$5,901 $1,542
Net income, basic$1.20 $0.31
Weighted average shares, basic 4,924,636 4,910,608
Net income, diluted$1.20 $0.31
Weighted average shares, diluted 4,928,184 4,913,174
Shares outstanding at period end 4,929,403 4,916,130
Tangible book value at period end$9.98 $8.87
Cash dividends$0.12 $0.10


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Year Ended
December 31,
2016
December 31,
2015
Key Performance Ratios
Return on average assets 0.84% 0.41%
Return on average equity 12.01% 4.58%
Net interest margin 3.61% 3.52%
Efficiency ratio (1) 71.08% 80.92%
Average Balances
Average assets$705,170 $642,978
Average earning assets 655,913 597,763
Average shareholders’ equity 49,117 57,928
Asset Quality
Loan charge-offs$788 $1,838
Loan recoveries 585 744
Net charge-offs 203 1,094
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$21,662 $19,138
Interest income – investments and other 3,575 3,027
Interest expense – deposits (1,353) (1,150)
Interest expense – other borrowings (6) (3)
Interest expense – subordinated debt (361) (62)
Interest expense – junior subordinated debt (259) (224)
Interest expense – federal funds purchased (3
) (2)
Total net interest income$23,255
$20,724
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$100 $105
Tax benefit realized on non-taxable interest income – municipal securities 291
204
Total tax benefit realized on non-taxable interest income$391
$309
Total tax-equivalent net interest income$23,646 $21,033

(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 tables above for tax-equivalent net interest income and reconciliations 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