INVESTOR RELATIONS
Contact information
First National Corporation,
112 West King Street
Strasburg, VA 22657
(540) 465-9121

Investor Relations Contact
Mr. M. Shane Bell
(540) 465-6130
sbell@fbvirginia.com

Transfer Agent
Broadridge Corporate Issuer Solutions
P.O. Box 1342
Brentwood, NY 11717
Phone: 1-800-685-4509
Fax: 215-553-5402
shareholder@broadridge.com

First National Corporation Announces 40% Increase in Second Quarter Net Income

Company Release - 7/24/2018 7:00 AM ET

STRASBURG, Va., July 24, 2018 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (OTC:FXNC) today reported net income of $2.5 million and earnings per share of $0.49 for the second quarter ended June 30, 2018. This was a $695 thousand, or 40%, increase when compared to net income of $1.8 million and earnings per share of $0.36 for the second quarter of 2017. The increase in net income resulted primarily from a $582 thousand, or 9%, increase in net interest income and a $183 thousand decrease in income tax expense.

Select highlights for the second quarter of 2018:

  • Return on average equity of 16.23%
  • Return on average assets of 1.29%
  • Net interest income increased $582 thousand, or 9%
  • Noninterest-bearing deposits increased $20.1 million, or 11%
  • Net loans increased $27.5 million, or 6%
  • Efficiency ratio of 64.17%

“The Company continued to demonstrate outstanding financial performance in the second quarter,” said Scott C. Harvard, president and chief executive officer of First National.  Harvard added, “The increase in net interest income had a large impact on performance as the Bank experienced both earning asset growth and net interest margin expansion. We were especially pleased with noninterest-bearing demand deposit growth of 11% over last year, which contributed to a low cost of funds. The Bank plans to continue seeking high quality loan and deposit relationships while maintaining focus on efficient operations.”

BALANCE SHEET

Total assets of First National increased $27.7 million to $763.4 million at June 30, 2018, compared to one year ago.  The earning asset composition changed favorably as loans, net of the allowance for loan losses, increased $27.5 million, or 6%, while securities and interest-bearing deposits in banks decreased $1.3 million, or 1%, when comparing the periods.

Total deposits increased $24.7 million, or 4%, to $686.5 million, compared to $661.8 million at June 30, 2017.  The deposit portfolio composition also changed favorably as noninterest-bearing deposits increased $20.1 million, or 11%, savings and interest-bearing deposits increased $5.3 million, and time deposits decreased $629 thousand.  Noninterest-bearing deposits increased to 29% of total deposits compared to 27% one year ago.

Shareholders’ equity increased $5.7 million to $61.6 million, compared to $56.0 million one year ago from retained earnings. Tangible common equity increased $6.2 million, or 11%, to $61.0 million, compared to $54.7 million at June 30, 2017. The Company’s wholly-owned banking subsidiary, First Bank, was considered well-capitalized based on regulatory requirements at the end of the quarter.

ANALYSIS OF THE THREE MONTH PERIOD

Net interest income increased $582 thousand, or 9%, to $6.8 million, compared to $6.2 million for the same period in 2017. The increase resulted from a higher net interest margin and higher average earning assets. Average earning assets increased 5%, and the net interest margin increased 13 basis points to 3.86%, compared to 3.73% for the same period in 2017. 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 15 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 on loans, securities, and interest-bearing deposits in banks, which all benefited from increases in market rates. The 28 basis point increase in the yield on loans had the largest impact on the increase in the yield on earning assets, when comparing the periods.

The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits.  The cost of interest-bearing checking accounts and money market accounts had the largest impact as their costs increased by 25 basis points and 53 basis points, respectively, when comparing the periods.

Noninterest income increased $89 thousand, or 4%, to $2.1 million, compared to $2.0 million for the same period of 2017. Wealth management revenue increased $54 thousand, or 15%, and service charges on deposits increased $49 thousand, or 7%, compared to the same period one year ago.

Noninterest expense increased $159 thousand, or 3%, to $5.9 million, compared to $5.7 million for the same period one year ago. This was primarily attributable to a $105 thousand, or 3%, increase in salaries and employee benefits, a $39 thousand increase in occupancy expense, and a $97 thousand increase in other operating expenses. The increases in salaries and employee benefits and occupancy resulted primarily from the expansion of the Company's banking subsidiary, First Bank, into the Richmond, Virginia market during the fourth quarter of 2017. The increases in expenses were partially offset by a $32 thousand decrease in postage expense and a $40 thousand decrease in amortization expense.

Income before taxes increased by $512 thousand, or 20%, to $3.0 million, compared to the same period one year ago. Although income before taxes increased, income tax expense decreased by $183 thousand because of the new 21% federal corporate income tax rate established by the Tax Cuts and Jobs Act enacted in December 2017.

ANALYSIS OF THE SIX MONTH PERIOD

Net interest income increased $1.1 million, or 9%, to $13.4 million, compared to $12.2 million for the same period in 2017. The increase resulted from a higher net interest margin and higher average earning assets. Average earning assets increased 5%, and the net interest margin increased 12 basis points to 3.83%, compared to 3.71% for the same period in 2017. The increase in the net interest margin resulted from a 24 basis point increase in the yield on total earning assets, which was partially offset by a 13 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 on loans, securities, and interest-bearing deposits in banks, which all benefited from increases in market rates. The 26 basis point increase in the yield on loans had the largest impact on the increase in the yield on earning assets, when comparing the periods.

The increase in interest expense as a percent of average earning assets was primarily attributable to higher interest rates paid on interest-bearing deposits.  The cost of interest-bearing checking accounts and money market accounts had the largest impact as their costs increased by 20 basis points and 51 basis points, respectively, when comparing the periods.

Noninterest income increased $781 thousand, or 20%, to $4.7 million, compared to $3.9 million for the same period of 2017. This was primarily a result of a $441 thousand increase in income from bank owned life insurance, a $153 thousand increase in other operating income, and a $114 thousand increase in wealth management revenue. The increase in income from bank owned life insurance was attributable to a $469 thousand life insurance benefit recorded during the first quarter of 2018. The increase in other operating income was primarily attributable to the termination of the pension plan and the subsequent distribution of plan assets, which increased other operating income by $126 thousand.

Noninterest expense increased $274 thousand, or 2%, to $11.7 million, compared to $11.5 million for the same period one year ago. This was primarily attributable to a $246 thousand, or 4%, increase in salaries and employee benefits, a $72 thousand increase in occupancy expense, and a $137 thousand increase in other operating expenses. The increases in salaries and employee benefits and occupancy resulted primarily from the expansion of First Bank into the Richmond market during the fourth quarter of 2017. The increases in expenses were partially offset by a $84 thousand decrease in telecommunications expense and a $78 thousand decrease in amortization expense. Telecommunication expense decreased primarily from a refund received in the first quarter of 2018 from over-billed services in prior periods.

Income before taxes increased by $1.5 million, or 33%, to $6.2 million, compared to the same period one year ago. Although income before taxes increased, income tax expense decreased by $295 thousand because of the new 21% federal corporate income tax rate established by the Tax Cuts and Jobs Act enacted in December 2017.

LOAN LOSS PROVISION/ASSET QUALITY

There was no provision for loan losses for the three months ended June 30, 2018 and 2017.  Net charge-offs totaled $233 thousand compared to $7 thousand for the same period one year ago.

The provision for loan losses totaled $100 thousand for the six months ended June 30, 2018, compared to no provision for loan losses for the same period one year ago.  Net charge-offs totaled $387 thousand for the six months ended June 30, 2018, compared to net recoveries of $123 for the same period one year ago.

Nonperforming assets totaled $2.4 million, or 0.31% of total assets at June 30, 2018, compared to $2.2 million, or 0.29% of total assets, one year ago. The allowance for loan losses totaled $5.0 million at June 30, 2018 and $5.4 million at June 30, 2017, representing 0.95% and 1.08% 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, 2017, 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, a loan production office, 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            M. Shane Bell
President and CEO            Executive Vice President and CFO
(540) 465-9121            (540) 465-9121 
sharvard@fbvirginia.com           sbell@fbvirginia.com
             

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

 (unaudited)
For the Quarter Ended
 June 30,
2018
 March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
Income Statement         
Interest income         
Interest and fees on loans$6,546  $6,305  $6,365  $6,138  $5,933 
Interest on deposits in banks186  160  96  92  86 
Interest on securities         
Taxable interest776  680  636  637  634 
Tax-exempt interest156  145  147  148  145 
Dividends on restricted securities22  22  21  21  21 
Total interest income$7,686  $7,312  $7,265  $7,036  $6,819 
Interest expense         
Interest on deposits$665  $590  $489  $446  $405 
Interest on subordinated debt89  89  91  91  89 
Interest on junior subordinated debt101  86  80  79  76 
Total interest expense$855  $765  $660  $616  $570 
Net interest income$6,831  $6,547  $6,605  $6,420  $6,249 
Provision for loan losses  100  100     
Net interest income after provision for loan losses$6,831  $6,447  $6,505  $6,420  $6,249 
Noninterest income         
Service charges on deposit accounts$784  $762  $778  $760  $735 
ATM and check card fees555  519  596  516  527 
Wealth management fees409  407  386  359  355 
Fees for other customer services151  153  162  131  137 
Income from bank owned life insurance77  559  408  117  102 
Net gains (losses) on securities    (114)  11  13 
Net gains on sale of loans15  9  51  54  34 
Other operating income76  224  89  69  75 
Total noninterest income$2,067  $2,633  $2,356  $2,017  $1,978 
Noninterest expense         
Salaries and employee benefits$3,227  $3,383  $3,338  $3,221  $3,122 
Occupancy387  400  388  379  348 
Equipment420  423  428  400  400 
Marketing161  109  166  138  136 
Supplies88  80  88  81  105 
Legal and professional fees223  191  228  216  245 
ATM and check card expense211  203  209  205  229 
FDIC assessment66  82  76  84  77 
Bank franchise tax118  115  111  111  110 
Telecommunications expense98  36  103  95  108 
Data processing expense170  162  165  153  152 
Postage expense42  61  14  62  74 
Amortization expense120  131  141  151  160 
Other real estate owned expense (income), net1  (23)  (192)    4 
Net loss on disposal of premises and equipment    252     
Other operating expense532  513  506  511  435 
Total noninterest expense$5,864  $5,866  $6,021  $5,807  $5,705 
Income before income taxes$3,034  $3,214  $2,840  $2,630  $2,522 
Income tax expense583  527  1,523  798  766 
Net income$2,451  $2,687  $1,317  $1,832  $1,756 
                    

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

 (unaudited)
For the Quarter Ended
 June 30,
2018
 March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
Common Share and Per Common Share Data         
Net income, basic$0.49  $0.54  $0.27  $0.37  $0.36 
Weighted average shares, basic4,952,712  4,949,112  4,945,175  4,943,301  4,940,904 
Net income, diluted$0.49  $0.54  $0.27  $0.37  $0.36 
Weighted average shares, diluted4,954,265  4,952,373  4,948,981  4,946,128  4,942,726 
Shares outstanding at period end4,953,356  4,952,575  4,945,702  4,945,056  4,941,604 
Tangible book value at period end$12.31  $11.89  $11.57  $11.42  $11.08 
Cash dividends$0.05  $0.05  $0.035  $0.035  $0.035 
          
Key Performance Ratios         
Return on average assets1.29%  1.45%  0.71%  1.00%  0.96% 
Return on average equity16.23%  18.47%  9.01%  12.78%  12.79% 
Net interest margin3.86%  3.79%  3.86%  3.79%  3.73% 
Efficiency ratio (1)64.17%  62.39%  63.48%  66.38%  66.71% 
          
Average Balances         
Average assets$762,626  $751,164  $736,745  $729,651  $730,838 
Average earning assets715,163  704,947  689,338  681,800  682,132 
Average shareholders’ equity60,592  58,979  57,973  56,857  55,068 
          
Asset Quality         
Loan charge-offs$294  $206  $223  $243  $161 
Loan recoveries61  52  148  100  154 
Net charge-offs233  154  75  143  7 
Non-accrual loans2,330  682  937  2,121  1,913 
Other real estate owned, net68    326  250  250 
Nonperforming assets2,398  682  1,263  2,371  2,163 
Loans 30 to 89 days past due, accruing3,408  2,602  4,223  1,960  1,368 
Loans over 90 days past due, accruing549  773  183  89  151 
Troubled debt restructurings, accruing273  278  282  287  291 
Special mention loans3,988  5,365  5,225  9,677  10,378 
Substandard loans, accruing3,798  9,003  8,863  9,218  9,295 
          
Capital Ratios (2)         
Total capital$71,026  $69,435  $67,624  $71,318  $69,325 
Tier 1 capital65,987  64,163  62,298  66,017  63,881 
Common equity tier 1 capital65,987  64,163  62,298  66,017  63,881 
Total capital to risk-weighted assets13.47%  13.52%  13.12%  13.91%  13.82% 
Tier 1 capital to risk-weighted assets12.52%  12.50%  12.09%  12.87%  12.73% 
Common equity tier 1 capital to risk-weighted assets12.52%  12.50%  12.09%  12.87%  12.73% 
Leverage ratio8.66%  8.55%  8.46%  9.06%  8.76% 
               

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

 (unaudited)
For the Quarter Ended
 June 30,
2018
 March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
Balance Sheet         
Cash and due from banks$13,501  $11,185  $11,358  $9,162  $9,801 
Interest-bearing deposits in banks27,762  58,092  28,628  24,480  40,937 
Securities available for sale, at fair value106,707  93,699  89,255  93,102  89,741 
Securities held to maturity, at carrying value45,701  46,791  48,208  49,376  50,824 
Restricted securities, at cost1,590  1,590  1,570  1,570  1,570 
Loans held for sale1,195  68  438  660  999 
Loans, net of allowance for loan losses525,894  515,664  516,875  509,406  498,389 
Other real estate owned, net of valuation allowance68    326  250  250 
Premises and equipment, net19,633  19,833  19,891  20,510  20,501 
Accrued interest receivable2,073  1,869  1,916  1,886  1,728 
Bank owned life insurance13,787  13,711  13,967  14,232  14,115 
Core deposit intangibles, net679  799  930  1,071  1,222 
Other assets4,774  4,553  5,748  5,798  5,580 
Total assets$763,364  $767,854  $739,110  $731,503  $735,657 
          
Noninterest-bearing demand deposits$196,839  $189,460  $180,912  $179,351  $176,780 
Savings and interest-bearing demand deposits367,399  378,330  361,417  350,879  362,128 
Time deposits122,291  125,035  122,651  126,032  122,920 
Total deposits$686,529  $692,825  $664,980  $656,262  $661,828 
Subordinated debt4,956  4,952  4,948  4,943  4,939 
Junior subordinated debt9,279  9,279  9,279  9,279  9,279 
Accrued interest payable and other liabilities952  1,105  1,749  3,485  3,644 
Total liabilities$701,716  $708,161  $680,956  $673,969  $679,690 
          
Preferred stock$  $  $  $  $ 
Common stock6,192  6,191  6,182  6,181  6,177 
Surplus7,346  7,312  7,260  7,238  7,177 
Retained earnings50,313  48,109  45,670  44,368  42,709 
Accumulated other comprehensive loss, net(2,203)  (1,919)  (958)  (253)  (96) 
Total shareholders’ equity$61,648  $59,693  $58,154  $57,534  $55,967 
Total liabilities and shareholders’ equity$763,364  $767,854  $739,110  $731,503  $735,657 
          
Loan Data         
Mortgage loans on real estate:         
Construction and land development$37,350  $33,941  $35,927  $37,182  $36,783 
Secured by farm land975  848  646  657  666 
Secured by 1-4 family residential211,101  208,338  208,177  203,896  205,114 
Other real estate loans223,387  221,504  221,610  221,497  215,076 
Loans to farmers (except those secured by real estate)476  403  822  525  511 
Commercial and industrial loans (except those secured by real estate)40,467  38,850  37,941  33,922  30,690 
Consumer installment loans12,315  12,140  12,101  12,047  9,938 
Deposit overdrafts231  222  232  196  245 
All other loans4,631  4,690  4,745  4,785  4,810 
Total loans$530,933  $520,936  $522,201  $514,707  $503,833 
Allowance for loan losses(5,039)  (5,272)  (5,326)  (5,301)  (5,444) 
Loans, net$525,894  $515,664  $516,875  $509,406  $498,389 
                    

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

 (unaudited)
For the Quarter Ended
 June 30,
2018
 March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
Reconciliation of Tax-Equivalent Net Interest Income        
GAAP measures:         
Interest income – loans$6,546  $6,305  $6,365  $6,138  $5,933 
Interest income – investments and other1,140  1,007  900  898  886 
Interest expense – deposits(665)  (590)  (489)  (446)  (405) 
Interest expense – subordinated debt(89)  (89)  (91)  (91)  (89) 
Interest expense – junior subordinated debt(101)  (86)  (80)  (79)  (76) 
Total net interest income$6,831  $6,547  $6,605  $6,420  $6,249 
Non-GAAP measures:         
Tax benefit realized on non-taxable interest income – loans$11  $10  $17  $18  $18 
Tax benefit realized on non-taxable interest income – municipal securities41  39  76  76  74 
Total tax benefit realized on non-taxable interest income$52  $49  $93  $94  $92 
Total tax-equivalent net interest income$6,883  $6,596  $6,698  $6,514  $6,341 
                    

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)

 (unaudited)
For the Six Months Ended
 June 30,
2018
 June 30,
2017
Income Statement   
Interest income   
Interest and fees on loans$12,851  $11,579 
Interest on deposits in banks346  147 
Interest on securities   
Taxable interest1,456  1,296 
Tax-exempt interest301  288 
Dividends on restricted securities44  41 
Total interest income$14,998  $13,351 
Interest expense   
Interest on deposits$1,255  $788 
Interest on subordinated debt178  178 
Interest on junior subordinated debt187  144 
Total interest expense$1,620  $1,110 
Net interest income$13,378  $12,241 
Provision for loan losses100   
Net interest income after provision for loan losses$13,278  $12,241 
Noninterest income   
Service charges on deposit accounts$1,546  $1,490 
ATM and check card fees1,074  1,028 
Wealth management fees816  702 
Fees for other customer services304  277 
Income from bank owned life insurance636  195 
Net gains (losses) on securities  13 
Net gains on sale of loans24  67 
Other operating income300  147 
Total noninterest income$4,700  $3,919 
Noninterest expense   
Salaries and employee benefits$6,610  $6,364 
Occupancy787  715 
Equipment843  808 
Marketing270  272 
Supplies168  196 
Legal and professional fees414  442 
ATM and check card expense414  391 
FDIC assessment148  156 
Bank franchise tax233  214 
Telecommunications expense134  218 
Data processing expense332  302 
Postage expense103  135 
Amortization expense251  329 
Other real estate owned expense (income), net(22)  6 
Other operating expense1,045  908 
Total noninterest expense$11,730  $11,456 
Income before income taxes$6,248  $4,704 
Income tax expense1,110  1,405 
Net income$5,138  $3,299 
        

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)        

 (unaudited)
For the Six Months Ended
 June 30,
2018
 June 30,
2017
Common Share and Per Common Share Data   
Net income, basic$1.04  $0.67 
Weighted average shares, basic4,950,922  4,938,178 
Net income, diluted$1.04  $0.67 
Weighted average shares, diluted4,953,328  4,940,191 
Shares outstanding at period end4,953,356  4,941,604 
Tangible book value at period end$12.31  $11.08 
Cash dividends$0.10  $0.07 
    
Key Performance Ratios   
Return on average assets1.37%  0.92% 
Return on average equity17.33%  12.29% 
Net interest margin3.83%  3.71% 
Efficiency ratio (1)63.27%  68.09% 
    
Average Balances   
Average assets$756,959  $722,820 
Average earning assets710,083  674,699 
Average shareholders’ equity59,799  54,118 
    
Asset Quality   
Loan charge-offs$500  $267 
Loan recoveries113  390 
Net charge-offs (recoveries)387  (123) 
    
Reconciliation of Tax-Equivalent Net Interest Income  
GAAP measures:   
Interest income – loans$12,851  $11,579 
Interest income – investments and other2,147  1,772 
Interest expense – deposits(1,255)  (788) 
Interest expense – subordinated debt(178)  (178) 
Interest expense – junior subordinated debt(187)  (144) 
Total net interest income$13,378  $12,241 
Non-GAAP measures:   
Tax benefit realized on non-taxable interest income – loans$21  $37 
Tax benefit realized on non-taxable interest income – municipal securities80  148 
Total tax benefit realized on non-taxable interest income$101  $185 
Total tax-equivalent net interest income$13,479  $12,426 
        

 (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 21% for 2018 and 34% for 2017. 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.

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Source: First National Corporation