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First National Corporation Announces Increase in Third Quarter Net Income to $1.8 Million

STRASBURG, Va., Oct. 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 $0.37 for the third quarter ended September 30, 2017. This was a $138 thousand, or 8%, increase when compared to net income of $1.7 million and earnings per share of $0.34 for the third 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 nine months ended September 30, 2017, net income increased $905 thousand, or 21%, to $5.1 million and $1.04 per share, compared to net income of $4.2 million and $0.86 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 third quarter of 2017:

  • Return on equity of 12.78%
  • Return on average assets of 1.00%
  • Net loans increased 9% annualized during the quarter
  • Net interest income increased $573 thousand, or 10%
  • Net interest margin increased for the fourth consecutive quarter to 3.79%
  • Nonperforming assets to total assets of 0.32%
  • Efficiency ratio improved to 66.38%
  • Expanded to the Richmond, Virginia market with experienced banking team

“We are pleased with the continued growth of earnings and profitability. Loan growth and disciplined pricing resulted in a $1.3 million increase in revenue from net interest income, while noninterest expenses decreased $590 thousand, when comparing the nine months ended September 30, 2017 to the same period in the prior year,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “Earlier this month, the Company expanded its franchise with the addition of an experienced banking team and a branch office located in the Westhampton neighborhood of Richmond. The recent expansion is expected to contribute to the continued growth of the Company, while diversifying our business into another attractive Virginia market.”

BALANCE SHEET

Total assets of First National increased $18.8 million to $731.5 million at September 30, 2017, compared to one year ago. While total assets increased, the composition of the balance sheet changed as loans, net of the allowance for loan losses, increased $44.2 million, or 9%, and securities and interest-bearing deposits in banks decreased $24.5 million, or 13%. The loan-to-asset ratio increased to 70% at September 30, 2017, up from 66% one year ago, and the loan-to-deposit ratio increased to 78% from 73%.

Total deposits increased $15.5 million, or 2%, to $656.3 million, compared to $640.7 million at September 30, 2016. When comparing the composition of the deposit portfolio at September 30, 2017 to one year ago, noninterest-bearing demand deposits increased $11.1 million, from 26% to 27% of total deposits, while time deposits decreased $5.6 million, from 21% to 19%.

Shareholders’ equity increased $6.6 million to $57.5 million at September 30, 2017 compared to $51.0 million one year ago, primarily from an increase in retained earnings. Tangible common equity totaled $56.5 million at the end of the third quarter, compared to $49.2 million at September 30, 2016. The Company’s wholly-owned banking subsidiary, First Bank, was considered well-capitalized based on regulatory requirements at the end of the third quarter.

ANALYSIS OF THE THREE MONTH PERIOD

Net interest income increased $573 thousand, or 10%, to $6.4 million for the quarter ended September 30, 2017, compared to $5.8 million for the third quarter of 2016. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 3%, and the net interest margin increased 22 basis points to 3.79% for the quarter ended September 30, 2017, compared to 3.57% for the same period in 2016. The increase in the net interest margin resulted from a 28 basis point increase in the yield on total earning assets, which was partially offset by a 6 basis point increase in interest expense as a percent of average earning assets.

The higher yield on earning assets was attributable to an increase in yields from all earning asset classes and a change in the composition of earning assets. Yields increased on loans, securities, and interest-bearing deposits in banks by 12 basis points, 17 basis points and 66 basis points, respectively. A change in the asset composition also favorably impacted the earning asset yield as average loan balances increased to 75% of average earning assets for the quarter ended September 30, 2017, compared to 71% of average earning assets for the same period in 2016.

The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits, with the largest impact coming from a 17 basis point increase in the cost of interest-bearing checking accounts, when comparing the periods.

Noninterest income totaled $2.0 million, compared to $2.3 million for the same period of 2016. This was primarily a result of decreases in service charges on deposits and other operating income. Service charges on deposits decreased $181 thousand, primarily from lower overdraft revenue. The $113 thousand decrease in other operating income was primarily attributable to a $102 thousand life insurance benefit recorded during the third quarter of the prior year. These decreases were partially offset by an increase in wealth management revenue.

Noninterest expense decreased $46 thousand, or 1%, to $5.8 million. Amortization expense decreased $36 thousand, supplies expense decreased $27 thousand, ATM and check card expense decreased $24 thousand, and FDIC assessment decreased $22 thousand. These decreases were partially offset by increases in salaries and employee benefits of $38 thousand, legal and professional fees of $37 thousand, and bank franchise tax of $22 thousand.

ANALYSIS OF THE NINE MONTH PERIOD

For the nine months ended September 30, 2017, net interest income increased $1.3 million, or 8%, to $18.7 million, compared to $17.3 million for the same period in 2016. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 4%, and the net interest margin increased 13 basis points to 3.74% for the nine months ended September 30, 2017, compared to 3.61% for the same period in 2016. The increase in the net interest margin resulted from a 17 basis point increase in the yield on total earning assets, which was partially offset by a 4 basis point increase in interest expense as a percent of average earning assets.

The higher yield on earning assets was attributable to an increase in yields from all earning asset classes and a change in the composition of earning assets. Yields increased on loans, securities, and interest-bearing deposits in banks by 3 basis points, 14 basis points and 35 basis points, respectively. A change in the asset composition also favorably impacted the earning asset yield, as average loan balances increased to 74% of average earning assets for the nine months ended September 30, 2017, compared to 70% of average earning assets for the same period in 2016.

The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits, with the largest impact coming from a 16 basis point increase in the cost of interest-bearing checking accounts, when comparing the periods.

Noninterest income totaled $5.9 million, compared to $6.4 million for the same period of 2016. This was primarily a result of decreases in service charges on deposits and other operating income. Service charges on deposits decreased $385 thousand, primarily from lower overdraft revenue. The decrease in other operating income was primarily attributable to a $102 thousand life insurance benefit recorded in the prior year. These decreases were partially offset by increases in wealth management revenue.

Noninterest expense decreased $590 thousand, or 3%, to $17.3 million. Salaries and employee benefits decreased $457 thousand, or 5%, FDIC assessment decreased $114 thousand, amortization expense decreased $112 thousand, and occupancy decreased $75 thousand. These decreases were partially offset by a $126 thousand increase in net other real estate owned expense and a $58 thousand increase in marketing expense. Other real estate owned expense totaled $6 thousand for the nine month period of 2017, compared to other real estate income of $120 thousand for the same period of 2016.

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan loss during the three month and nine month periods ended September 30, 2017. Net charge-offs totaled $143 thousand for the third quarter of 2017. For the nine month period, net charge-offs totaled $20 thousand. Nonperforming assets totaled $2.4 million, or 0.32% of total assets at September 30, 2017, which was an improvement compared to $3.8 million, or 0.53% of total assets, one year ago. The allowance for loan losses totaled $5.3 million at September 30, 2017 and $5.6 million at September 30, 2016, representing 1.03% and 1.19% 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 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.

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

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
September 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
Income Statement
Interest income
Interest and fees on loans$6,138 $5,933 $5,646 $5,556 $5,500
Interest on deposits in banks92 86 61 55 73
Interest on securities
Taxable interest637 634 662 655 613
Tax-exempt interest148 145 143 139 136
Dividends on restricted securities21 21 20 21 20
Total interest income$7,036 $6,819 $6,532 $6,426 $6,342
Interest expense
Interest on deposits$446 $405 $383 $353 $338
Interest on subordinated debt91 89 89 91 91
Interest on junior subordinated debt79 76 68 69 65
Interest on other borrowings 1
Total interest expense$616 $570 $540 $513 $495
Net interest income$6,420 $6,249 $5,992 $5,913 $5,847
Provision for loan losses
Net interest income after provision for loan losses$6,420 $6,249 $5,992 $5,913 $5,847
Noninterest income
Service charges on deposit accounts$760 $735 $755 $877 $941
ATM and check card fees516 527 501 505 529
Wealth management fees359 355 347 353 339
Fees for other customer services131 137 140 154 143
Income from bank owned life insurance117 102 85 109 123
Net gains (losses) on sales of securities11 13 (2) 4
Net gains on sale of loans54 34 33 42 50
Other operating income69 75 80 89 182
Total noninterest income$2,017 $1,978 $1,941 $2,127 $2,311
Noninterest expense
Salaries and employee benefits$3,221 $3,122 $3,242 $2,897 $3,183
Occupancy379 348 367 364 380
Equipment400 400 408 402 406
Marketing138 136 136 210 125
Supplies81 105 91 138 108
Legal and professional fees216 245 197 238 179
ATM and check card fees205 229 162 211 229
FDIC assessment84 77 79 72 106
Bank franchise tax111 110 104 90 89
Telecommunications expense95 108 110 112 110
Data processing expense153 152 150 159 160
Postage expense62 74 61 56 56
Amortization expense151 160 169 179 187
Other real estate owned expense (income), net 4 2 1
Net loss on disposal of premises and equipment 8
Other operating expense511 435 473 507 526
Total noninterest expense$5,807 $5,705 $5,751 $5,635 $5,853
Income before income taxes$2,630 $2,522 $2,182 $2,405 $2,305
Income tax expense798 766 639 724 611
Net income$1,832 $1,756 $1,543 $1,681 $1,694


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
September 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
Common Share and Per Common Share Data
Net income, basic$0.37 $0.36 $0.31 $0.34 $0.34
Weighted average shares, basic4,943,301 4,940,904 4,935,421 4,927,728 4,925,753
Net income, diluted$0.37 $0.36 $0.31 $0.34 $0.34
Weighted average shares, diluted4,946,128 4,942,726 4,937,625 4,933,572 4,929,922
Shares outstanding at period end4,945,056 4,941,604 4,940,766 4,929,403 4,926,546
Tangible book value at period end$11.42 $11.08 $10.64 $10.26 $9.99
Cash dividends$0.035 $0.035 $0.035 $0.03 $0.03
Key Performance Ratios
Return on average assets1.00% 0.96% 0.88% 0.94% 0.95%
Return on average equity12.78% 12.79% 11.78% 13.04% 13.44%
Net interest margin3.79% 3.73% 3.70% 3.60% 3.57%
Efficiency ratio (1)66.38% 66.71% 69.52% 67.05% 68.57%
Average Balances
Average assets$729,651 $730,838 $714,714 $711,834 $710,005
Average earning assets681,800 682,132 667,184 663,982 661,624
Average shareholders’ equity56,857 55,068 53,132 51,295 50,160
Asset Quality
Loan charge-offs$243 $161 $106 $337 $195
Loan recoveries100 154 236 48 71
Net charge-offs (recoveries)143 7 (130) 289 124
Non-accrual loans2,121 1,913 1,596 1,520 3,521
Other real estate owned, net250 250 250 250 250
Nonperforming assets2,371 2,163 1,846 1,770 3,771
Loans 30 to 89 days past due, accruing1,960 1,368 2,606 2,583 2,036
Loans over 90 days past due, accruing89 151 119 116 59
Troubled debt restructurings, accruing287 291 296 300 392
Special mention loans9,677 10,378 12,896 13,073 14,238
Substandard loans, accruing9,218 9,295 7,877 8,056 8,273
Capital Ratios (2)
Total capital$71,318 $69,325 $67,264 $65,590 $65,759
Tier 1 capital66,017 63,881 61,813 60,269 60,149
Common equity tier 1 capital66,017 63,881 61,813 60,269 60,149
Total capital to risk-weighted assets13.91% 13.82% 13.53% 13.47% 13.90%
Tier 1 capital to risk-weighted assets12.87% 12.73% 12.43% 12.38% 12.72%
Common equity tier 1 capital to risk-weighted assets12.87% 12.73% 12.43% 12.38% 12.72%
Leverage ratio9.06% 8.76% 8.66% 8.48% 8.48%


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
September 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
Balance Sheet
Cash and due from banks$9,162 $9,801 $10,593 $10,106 $8,955
Interest-bearing deposits in banks24,480 40,937 35,246 30,986 47,902
Securities available for sale, at fair value93,102 89,741 91,907 94,802 88,323
Securities held to maturity, at carrying value49,376 50,824 51,999 53,398 55,263
Restricted securities, at cost1,570 1,570 1,570 1,548 1,548
Loans held for sale660 999 337 1,053
Loans, net of allowance for loan losses509,406 498,389 492,319 480,746 465,224
Other real estate owned, net of valuation allowance250 250 250 250 250
Premises and equipment, net20,510 20,501 20,709 20,785 20,852
Accrued interest receivable1,886 1,728 1,753 1,746 1,631
Bank owned life insurance14,232 14,115 14,013 13,928 13,808
Core deposit intangibles, net1,071 1,222 1,382 1,551 1,730
Other assets5,798 5,580 5,555 5,817 6,133
Total assets$731,503 $735,657 $727,296 $716,000 $712,672
Noninterest-bearing demand deposits$179,351 $176,780 $173,963 $168,076 $168,204
Savings and interest-bearing demand deposits350,879 362,128 353,958 349,067 340,884
Time deposits126,032 122,920 126,848 128,427 131,654
Total deposits$656,262 $661,828 $654,769 $645,570 $640,742
Other borrowings
Subordinated debt4,943 4,939 4,934 4,930 4,926
Junior subordinated debt9,279 9,279 9,279 9,279 9,279
Accrued interest payable and other liabilities3,485 3,644 4,336 4,070 6,742
Total liabilities$673,969 $679,690 $673,318 $663,849 $661,689
Preferred stock$ $ $ $ $
Common stock6,181 6,177 6,176 6,162 6,158
Surplus7,238 7,177 7,155 7,093 7,046
Retained earnings44,368 42,709 41,126 39,756 38,223
Accumulated other comprehensive loss, net(253) (96) (479) (860) (444)
Total shareholders’ equity$57,534 $55,967 $53,978 $52,151 $50,983
Total liabilities and shareholders’ equity$731,503 $735,657 $727,296 $716,000 $712,672
Loan Data
Mortgage loans on real estate:
Construction and land development$37,182 $36,783 $36,024 $34,699 $34,518
Secured by farm land657 666 676 688 695
Secured by 1-4 family residential203,896 205,114 205,623 198,763 196,492
Other real estate loans221,497 215,076 215,915 210,522 202,148
Loans to farmers (except those secured by real estate)525 511 461 1,316 737
Commercial and industrial loans (except those secured by real estate)33,922 30,690 28,731 28,665 25,114
Consumer installment loans12,047 9,938 5,279 4,611 4,283
Deposit overdrafts196 245 199 264 260
All other loans4,785 4,810 4,862 6,539 6,587
Total loans$514,707 $503,833 $497,770 $486,067 $470,834
Allowance for loan losses(5,301) (5,444) (5,451) (5,321) (5,610)
Loans, net$509,406 $498,389 $492,319 $480,746 $465,224


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Quarter Ended
September 30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$6,138 $5,933 $5,646 $5,556 $5,500
Interest income – investments and other898 886 886 870 842
Interest expense – deposits(446) (405) (383) (353) (338)
Interest expense – subordinated debt(91) (89) (89) (91) (91)
Interest expense – junior subordinated debt(79) (76) (68) (69) (65)
Interest expense – other borrowings (1)
Total net interest income$6,420 $6,249 $5,992 $5,913 $5,847
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$18 $18 $19 $25 $26
Tax benefit realized on non-taxable interest income – municipal securities76 74 74 71 70
Total tax benefit realized on non-taxable interest income$94 $92 $93 $96 $96
Total tax-equivalent net interest income$6,514 $6,341 $6,085 $6,009 $5,943


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Nine Months Ended
September 30, 2017 September 30, 2016
Income Statement
Interest income
Interest and fees on loans$17,717 $16,106
Interest on deposits in banks239 183
Interest on securities
Taxable interest1,933 2,037
Tax-exempt interest436 425
Dividends on restricted securities62 60
Total interest income$20,387 $18,811
Interest expense
Interest on deposits$1,234 $1,000
Interest on federal funds purchased 3
Interest on subordinated debt269 270
Interest on junior subordinated debt223 190
Interest on other borrowings 6
Total interest expense$1,726 $1,469
Net interest income$18,661 $17,342
Provision for loan losses
Net interest income after provision for loan losses$18,661 $17,342
Noninterest income
Service charges on deposit accounts$2,250 $2,635
ATM and check card fees1,544 1,532
Wealth management fees1,061 1,009
Fees for other customer services408 427
Income from bank owned life insurance304 316
Net gains (losses) on sales of securities24 10
Net gains on sale of loans121 102
Other operating income224 335
Total noninterest income$5,936 $6,366
Noninterest expense
Salaries and employee benefits$9,585 $10,042
Occupancy1,094 1,169
Equipment1,208 1,232
Marketing410 352
Supplies277 312
Legal and professional fees658 646
ATM and check card fees596 655
FDIC assessment240 354
Bank franchise tax325 282
Telecommunications expense313 339
Data processing expense455 434
Postage expense197 182
Amortization expense480 592
Other real estate owned expense (income), net6 (120)
Other operating expense1,419 1,374
Total noninterest expense$17,263 $17,853
Income before income taxes$7,334 $5,855
Income tax expense2,203 1,629
Net income$5,131 $4,226

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)
(unaudited)
For the Nine Months Ended
September 30, 2017 September 30, 2016
Common Share and Per Common Share Data
Net income, basic$1.04 $0.86
Weighted average shares, basic4,939,905 4,923,598
Net income, diluted$1.04 $0.86
Weighted average shares, diluted4,942,189 4,926,380
Shares outstanding at period end4,945,056 4,926,546
Tangible book value at period end$11.42 $9.99
Cash dividends$0.105 $0.09
Key Performance Ratios
Return on average assets0.95% 0.80%
Return on average equity12.47% 11.62%
Net interest margin3.74% 3.61%
Efficiency ratio (1)67.51% 72.41%
Average Balances
Average assets$725,106 $703,173
Average earning assets677,092 653,203
Average shareholders’ equity55,029 48,572
Asset Quality
Loan charge-offs$510 $451
Loan recoveries490 537
Net charge-offs (recoveries)20 (86)
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans$17,717 $16,106
Interest income – investments and other2,670 2,705
Interest expense – deposits(1,234) (1,000)
Interest expense – federal funds purchased (3)
Interest expense – subordinated debt(269) (270)
Interest expense – junior subordinated debt(223) (190)
Interest expense – other borrowings (6)
Total net interest income$18,661 $17,342
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans$55 $76
Tax benefit realized on non-taxable interest income – municipal securities224 219
Total tax benefit realized on non-taxable interest income$279 $295
Total tax-equivalent net interest income$18,940 $17,637

(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.

Source:First National Corporation