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First National Corporation Announces 23% Increase in Second Quarter Net Income

STRASBURG, Va., July 25, 2017 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (OTC:FXNC) today reported net income of $1.8 million and earnings per share of $0.36 for the second quarter ended June 30, 2017. This was a $323 thousand, or 23%, increase when compared to net income of $1.4 million and earnings per share of $0.29 for the second quarter of 2016. The increase in net income resulted primarily from an increase in net interest income and a decrease in noninterest expenses.

For the six months ended June 30, 2017, net income increased $767 thousand, or 30%, to $3.3 million and $0.67 per share, compared to net income of $2.5 million and $0.51 per share for the same period of 2016. The increase in net income resulted primarily from an increase in net interest income and a decrease in noninterest expenses.

Select highlights for the second quarter of 2017:

  • Net income increased 23%
  • Return on equity of 12.79%
  • Return on average assets of 0.96%
  • Net interest margin increased to 3.73%
  • Efficiency ratio improved to 66.71% from 71.62%
  • Net interest income increased $453 thousand, or 8%
  • Noninterest expenses decreased $178 thousand, or 3%
  • Assets-per-employee increased to $4.6 million, up from $4.2 million at June 30, 2016
  • Proposed expansion to Richmond

“Our banking company continued to reap the benefits of the low cost deposit acquisition and branch expansion from 2015 as the funds were deployed into loans in legacy and new markets,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “The combination of the expansion and efficiency initiatives has generated profitable growth and outstanding financial results. During the quarter, First Bank submitted a branch application to further expand the franchise to the Westhampton neighborhood of Richmond. This expansion will begin to bring more coherence to the branch footprint, while providing an introduction into a growing deposit and loan market.”

BALANCE SHEET

Total assets of First National increased $24.3 million to $735.7 million at June 30, 2017, compared to one year ago. While total assets increased, the composition changed as loans, net of the allowance for loan losses, increased $38.6 million, or 8%, and securities and interest-bearing deposits in banks decreased $11.2 million, or 6%. The loan-to-asset ratio increased to 68% at June 30, 2017, up from 65% one year ago, and the loan-to-deposit ratio increased to 76% from 74%.

Total deposits increased $31.5 million, or 5%, to $661.8 million, compared to $630.3 million at June 30, 2016. When comparing the composition of the deposit portfolio at June 30, 2017 to one year ago, noninterest-bearing demand deposits increased from 25% to 27% of total deposits, while time deposits decreased from 21% to 19%.

Shareholders’ equity increased $6.7 million to $56.0 million at June 30, 2017 compared to $49.3 million one year ago, primarily from an increase in retained earnings. Tangible common equity totaled $54.7 million at the end of the second quarter, compared to $47.3 million at June 30, 2016. The Company exceeded its target capital ratios at the end of the quarter and was considered well capitalized.

ANALYSIS OF THE THREE MONTH PERIOD

Net interest income increased $453 thousand, or 8%, to $6.2 million for the quarter, compared to $5.8 million for the same period of 2016.

Total interest income increased $541 thousand, or 9%, to $6.8 million. The increase resulted from higher average earning assets and a higher yield on total earning assets. Earning asset yields increased 14 basis points, primarily from a change in asset composition as average loans increased to 73% of average earning assets for the second quarter, up from 70% for the same period of 2016.

Total interest expense increased $88 thousand, or 18%, to $570 thousand. The increase in interest expense resulted primarily from a 6 basis point increase in the cost of interest-bearing deposits.

Noninterest income totaled $2.0 million, compared to $2.1 million for the same period of 2016. A decrease in service charges on deposits was partially offset by an increase in wealth management revenue and an increase in ATM and check card revenue.

Noninterest expense decreased $178 thousand, or 3%, to $5.7 million. Salaries and employee benefits expense decreased $293 thousand, or 9%, and FDIC assessment decreased $49 thousand. Salaries and employee benefits decreased primarily from a decrease in salaries and wages, insurance, and retirement plan expense. A reduction in the number of employees had a favorable impact on each of these expense categories. These decreases were partially offset by an $89 thousand increase in legal and professional fees, and a $53 thousand increase in other real estate owned expense. Other real estate owned expense totaled $4 thousand for the second quarter of 2017, compared to other real estate income of $49 thousand for the same period of 2016.

ANALYSIS OF THE SIX MONTH PERIOD

Net interest income increased $746 thousand, or 6%, to $12.2 million for the six months ended June 30, 2017, compared to $11.5 million for the same period of 2016.

Total interest income increased $882 thousand, or 7%, to $13.4 million. The increase resulted from higher average earning assets and a higher yield on total earning assets. Earning asset yields increased 12 basis points, primarily from a change in asset composition as average loans increased to 74% of average earning assets for the six month period, up from 70% for the prior year.

Total interest expense increased $136 thousand, or 14%, to $1.1 million. The increase in interest expense resulted primarily from a 5 basis point increase in the cost of interest-bearing deposits.

Noninterest income totaled $3.9 million, compared to $4.1 million for the same period of 2016. A decrease in service charges on deposits was partially offset by an increase in wealth management revenue and an increase in ATM and check card revenue.

Noninterest expense decreased $544 thousand, or 5%, to $11.5 million. Salaries and employee benefits decreased $495 thousand, or 7%, FDIC assessment decreased $92 thousand, and occupancy decreased $74 thousand. These decreases were partially offset by a $127 thousand increase in other real estate owned expense. Other real estate owned expense totaled $6 thousand for the six month period of 2017, compared to other real estate income of $121 thousand for the same period of 2016.

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan loss during the three month and six month periods ended June 30, 2017. Net charge-offs totaled $7 thousand for the second quarter of 2017. For the six month period, net recoveries totaled $123 thousand. Nonperforming assets totaled $2.2 million, or 0.29% of total assets at June 30, 2017, which was an improvement compared to $4.5 million, or 0.63% of total assets, one year ago. The allowance for loan losses totaled $5.4 million at June 30, 2017 and $5.7 million at June 30, 2016, representing 1.08% and 1.23% 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, 2016, 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 StatementJune 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Interest income
Interest and fees on loans$5,933 $5,646 $5,556 $5,500 $5,370
Interest on deposits in banks 86 61 55 73 62
Interest on securities 779 805 794 749 825
Dividends on restricted securities 21 20 21 20 21
Total interest income$ 6,819 $ 6,532 $ 6,426 $ 6,342 $ 6,278
Interest expense
Interest on deposits$405 $383 $353 $338 $329
Interest on subordinated debt 89 89 91 91 89
Interest on junior subordinated debt 76 68 69 65 64
Interest on other borrowings - - - 1 -
Total interest expense$ 570 $ 540 $ 513 $ 495 $ 482
Net interest income$6,249 $5,992 $5,913 $5,847 $5,796
Provision for loan losses - - - - -
Net interest income after provision for loan losses$ 6,249 $ 5,992 $ 5,913 $ 5,847 $ 5,796
Noninterest income
Service charges on deposit accounts$735 $755 $877 $941 $914
ATM and check card fees 527 501 505 529 515
Wealth management fees 355 347 353 339 334
Fees for other customer services 137 140 154 143 137
Income from bank owned life insurance 102 85 109 123 107
Net gains (losses) on sales of securities 13 - (2) 4 -
Net gains on sale of loans 34 33 42 50 31
Other operating income 75 80 89 182 74
Total noninterest income$1,978 $ 1,941 $ 2,127 $ 2,311 $ 2,112
Noninterest expense
Salaries and employee benefits$3,122 $3,242 $2,897 $3,183 $3,415
Occupancy 348 367 364 380 365
Equipment 400 408 402 406 394
Marketing 136 136 210 125 120
Supplies 105 91 138 108 103
Legal and professional fees 245 197 238 179 156
ATM and check card fees 229 162 211 229 221
FDIC assessment 77 79 72 106 126
Bank franchise tax 110 104 90 89 90
Telecommunications expense 108 110 112 110 115
Data processing expense 152 150 159 160 146
Postage expense 74 61 56 56 57
Amortization expense 160 169 179 187 198
Other real estate owned expense (income), net 4 2 - 1 (49)
Net loss on disposal of premises and equipment - - - 8 -
Other operating expense 435 473 507 526 426
Total noninterest expense$5,705 $5,751 $5,635 $5,853 $5,883
Income before income taxes$2,522 $2,182 $2,405 $2,305 $2,025
Income tax expense 766 639 724 611 592
Net income$1,756 $1,543 $1,681 $1,694 $1,433
Common Share and Per Common Share Data
Net income, basic$0.36 $0.31 $0.34 $0.34 $0.29
Weighted average shares, basic 4,940,904 4,935,421 4,927,728 4,925,753 4,924,702
Net income, diluted$0.36 $0.31 $0.34 $0.34 $0.29
Weighted average shares, diluted 4,942,726 4,937,625 4,933,572 4,929,922 4,926,859
Shares outstanding at period end 4,941,604 4,940,766 4,929,403 4,926,546 4,925,599
Tangible book value at period end$11.08 $10.64 $10.26 $9.99 $9.61
Cash dividends$0.035 $0.035 $0.03 $0.03 $0.03


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Key Performance Ratios
Return on average assets 0.96% 0.88% 0.94% 0.95% 0.82%
Return on average equity 12.79% 11.78% 13.04% 13.44% 11.90%
Net interest margin 3.73% 3.70% 3.60% 3.57% 3.62%
Efficiency ratio (1) 66.71% 69.52% 67.05% 68.57% 71.62%
Average Balances
Average assets$730,838 $714,714 $711,834 $710,005 $705,707
Average earning assets 682,132 667,184 663,982 661,624 654,535
Average shareholders’ equity 55,068 53,132 51,295 50,160 48,443
Asset Quality
Loan charge-offs$161 $106 $337 $195 $136
Loan recoveries 154 236 48 71 350
Net charge-offs (recoveries) 7 (130) 289 124 (214)
Non-accrual loans 1,913 1,596 1,520 3,521 4,057
Other real estate owned, net 250 250 250 250 442
Nonperforming assets 2,163 1,846 1,770 3,771 4,499
Loans 30 to 89 days past due, accruing 1,368 2,606 2,583 2,036 1,979
Loans over 90 days past due, accruing 151 119 116 59 11
Troubled debt restructurings, accruing 291 296 300 392 308
Special mention loans 10,378 12,896 13,073 14,238 13,392
Substandard loans, accruing 9,295 7,877 8,056 8,273 9,610
Capital Ratios (2)
Total capital$69,325 $67,264 $65,590 $65,759 $64,375
Tier 1 capital 63,881 61,813 60,269 60,149 58,641
Common equity tier 1 capital 63,881 61,813 60,269 60,149 58,641
Total capital to risk-weighted assets 13.82% 13.53% 13.47% 13.90% 13.66%
Tier 1 capital to risk-weighted assets 12.73% 12.43% 12.38% 12.72% 12.45%
Common equity tier 1 capital to risk-weighted assets 12.73% 12.43% 12.38% 12.72% 12.45%
Leverage ratio 8.76% 8.66% 8.48% 8.48% 8.33%
Balance Sheet
Cash and due from banks$9,801 $10,593 $10,106 $8,955 $10,518
Interest-bearing deposits in banks 40,937 35,246 30,986 47,902 40,225
Securities available for sale, at fair value 89,741 91,907 94,802 88,323 94,566
Securities held to maturity, at carrying value 50,824 51,999 53,398 55,263 57,401
Restricted securities, at cost 1,570 1,570 1,548 1,548 2,058
Loans held for sale 999 - 337 1,053 1,819
Loans, net of allowance for loan losses 498,389 492,319 480,746 465,224 459,812
Other real estate owned, net of valuation allowance 250 250 250 250 442
Premises and equipment, net 20,501 20,709 20,785 20,852 21,126
Accrued interest receivable 1,728 1,753 1,746 1,631 1,612
Bank owned life insurance 14,115 14,013 13,928 13,808 13,935
Core deposit intangibles, net 1,222 1,382 1,551 1,730 1,917
Other assets 5,580 5,555 5,817 6,133 5,917
Total assets$735,657 $727,296 $716,000 $712,672 $711,348
Noninterest-bearing demand deposits$176,780 $173,963 $168,076 $168,204 $159,278
Savings and interest-bearing demand deposits 362,128 353,958 349,067 340,884 337,589
Time deposits 122,920 126,848 128,427 131,654 133,479
Total deposits$661,828 $654,769 $645,570 $640,742 $630,346
Other borrowings - - - - 12,000
Subordinated debt 4,939 4,934 4,930 4,926 4,921
Junior subordinated debt 9,279 9,279 9,279 9,279 9,279
Accrued interest payable and other liabilities 3,644 4,336 4,070 6,742 5,544
Total liabilities$679,690 $673,318 $663,849 $661,689 $662,090



FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

(unaudited)
For the Quarter Ended
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Balance Sheet (continued)
Preferred stock$- $- $- $- $-
Common stock 6,177 6,176 6,162 6,158 6,157
Surplus 7,177 7,155 7,093 7,046 7,021
Retained earnings 42,709 41,126 39,756 38,223 36,676
Accumulated other comprehensive loss, net (96) (479) (860) (444) (596)
Total shareholders’ equity$55,967 $53,978 $52,151 $50,983 $49,258
Total liabilities and shareholders’ equity$735,657 $727,296 $716,000 $712,672 $711,348
Loan Data
Mortgage loans on real estate:
Construction and land development$36,783 $36,024 $34,699 $34,518 $33,232
Secured by farm land 666 676 688 695 706
Secured by 1-4 family residential 205,114 205,623 198,763 196,492 196,295
Other real estate loans 215,076 215,915 210,522 202,148 199,456
Loans to farmers (except those secured by real estate) 511 461 1,316 737 492
Commercial and industrial loans (except those secured by real estate) 30,690 28,731 28,665 25,114 24,229
Consumer installment loans 9,938 5,279 4,611 4,283 4,083
Deposit overdrafts 245 199 264 260 334
All other loans 4,810 4,862 6,539 6,587 6,719
Total loans$503,833 $497,770 $486,067 $470,834 $465,546
Allowance for loan losses (5,444) (5,451) (5,321) (5,610) (5,734)
Loans, net$498,389 $492,319 $480,746 $465,224 $459,812
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$5,933 $5,646 $5,556 $5,500 $5,370
Interest income – investments and other 886 886 870 842 908
Interest expense – deposits (405) (383) (353) (338) (329)
Interest expense – other borrowings - - - (1) -
Interest expense – subordinated debt (89) (89) (91) (91) (89)
Interest expense – junior subordinated debt (76) (68) (69) (65) (64)
Total net interest income$6,249 $5,992 $5,913 $5,847 $5,796
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$18 $19 $25 $26 $25
Tax benefit realized on non-taxable interest income – municipal securities 74 74 71 70 73
Total tax benefit realized on non-taxable interest income$92 $93 $96 $96 $98
Total tax-equivalent net interest income$6,341 $6,085 $6,009 $5,943 $5,894


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,
2017
June 30,
2016
Interest income
Interest and fees on loans$11,579 $10,606
Interest on deposits in banks 147 110
Interest on securities 1,584 1,713
Dividends on restricted securities 41 40
Total interest income$13,351 $12,469
Interest expense
Interest on deposits$788 $662
Interest on federal funds purchased - 3
Interest on subordinated debt 178 179
Interest on junior subordinated debt 144 125
Interest on other borrowings - 5
Total interest expense$1,110 $974
Net interest income$12,241 $11,495
Provision for loan losses - -
Net interest income after provision for loan losses$12,241 $11,495
Noninterest income
Service charges on deposit accounts$1,490 $1,694
ATM and check card fees 1,028 1,003
Wealth management fees 702 670
Fees for other customer services 277 284
Income from bank owned life insurance 187 193
Net gains on sales of securities 13 6
Net gains on sale of loans 67 52
Other operating income 155 153
Total noninterest income$3,919 $4,055
Noninterest expense
Salaries and employee benefits$6,364 $6,859
Occupancy 715 789
Equipment 808 826
Marketing 272 227
Supplies 196 204
Legal and professional fees 442 467
ATM and check card fees 391 426
FDIC assessment 156 248
Bank franchise tax 214 193
Telecommunications expense 218 229
Data processing expense 302 274
Postage expense 135 126
Amortization expense 329 405
Other real estate owned expense (income), net 6 (121)
Other operating expense 908 848
Total noninterest expense$11,456 $12,000
Income before income taxes$4,704 $3,550
Income tax expense 1,405 1,018
Net income$3,299 $2,532
Net income, basic$0.67 $0.51
Weighted average shares, basic 4,938,178 4,922,509
Net income, diluted$0.67 $0.51
Weighted average shares, diluted 4,940,191 4,924,598
Shares outstanding at period end 4,941,604 4,925,599
Tangible book value at period end$11.08 $9.61
Cash dividends$0.07 $0.06


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Six Months Ended
June 30,
2017
June 30,
2016
Key Performance Ratios
Return on average assets 0.92% 0.73%
Return on average equity 12.29% 10.66%
Net interest margin 3.71% 3.62%
Efficiency ratio (1) 68.09% 74.42%
Average Balances
Average assets$722,820 $699,736
Average earning assets 674,699 648,946
Average shareholders’ equity 54,118 47,762
Asset Quality
Loan charge-offs$267 $256
Loan recoveries 390 466
Net recoveries (123) (210)
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$ 11,579 $10,606
Interest income – investments and other1,772 1,863
Interest expense – deposits(788) (662)
Interest expense – other borrowings- (5)
Interest expense – subordinated debt(178) (179)
Interest expense – junior subordinated debt(144) (125)
Interest expense – federal funds purchased - (3)
Total net interest income$ 12,241 $11,495
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$ 37 $50
Tax benefit realized on non-taxable interest income – municipal securities 148 149
Total tax benefit realized on non-taxable interest income$ 185 $199
Total tax-equivalent net interest income$ 12,426 $11,694

(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, 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. 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 First 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