News Column

First National Corporation Announces $1.3 Million Increase in Second Quarter Earnings

July 24, 2014

STRASBURG, Va., July 24, 2014 (GLOBE NEWSWIRE) -- First National Corporation (the "Company") (OTCBB:FXNC), the parent company of First Bank (the "Bank"), reported a $1.3 million increase in second quarter earnings. Net income totaled $1.5 million, or $0.26 per basic and diluted share, for the three months ended June 30, 2014, compared to $261 thousand, or $0.01 per basic and diluted share, for the same period in 2013. The Company's earnings for the three-month period resulted in a return on average assets of 1.16% and a return on average equity of 11.05%.

Operating Highlights for the Second Quarter

• Net income increased $1.3 million to $1.5 million• Return on average assets was 1.16%• Revenue from wealth management increased 26% to $472 thousand• "First Mortgage," a new mortgage division, was announced• Assets under management exceeded $300 million for Wealth Management• Substandard loans decreased by $14.2 million, or 41%• Book value per share increased from $5.83 to $8.58 per common share• Cash dividends on common stock were reinstated

During the quarter, the Company announced the launch of First Mortgage, a new mortgage division of First Bank. George Ballew, a seasoned lender, joined the Bank as Chief Executive Officer of the division. The division is headquartered in Staunton, Virginia and provides a strategic opportunity to expand banking operations into a new market. First Mortgage is a natural extension of the Company's core banking franchise.

"Earnings for the quarter were positively impacted by growth in non-interest income combined with a continued focus on managing non-interest expense. Wealth Management reached record levels of assets under management during the quarter and deposit relationships generated significant income to the Company," said Scott C. Harvard, President and CEO of the Company and the Bank. "We are also excited about our First Mortgage initiative in Staunton, Virginia and anticipate the newly formed mortgage division will make additional contributions to non-interest revenue in 2015."

Second Quarter Earnings

Net income totaled $1.5 million for the second quarter of 2014, compared to $261 thousand for the same period of 2013. The return on average assets was 1.16% for the second quarter compared to 0.19% for the same quarter one year ago, and the return on average equity was 11.05% compared to 2.32% for the same period in 2013.

Net interest income totaled $4.6 million for the quarter, compared to $4.7 million for the same period one year ago. The net interest margin was 3.81% compared to 3.71% for the second quarter of 2013. Revenue from service charges on deposit accounts increased by $178 thousand, or 38% and revenue from wealth management fees increased by $97 thousand, or 26%, comparing the second quarter to the same period one year ago. The improvement in wealth management revenue was driven by assets under management that increased by $61 million, or 24%, to $312 million at June 30, 2014 compared to $251 million one year ago. Total noninterest income, excluding a one-time gain on termination of a postretirement benefit, increased by $230 thousand, or 15% comparing the same periods.

Noninterest expense decreased $214 thousand, or 4%, to $4.5 million for the quarter compared to $4.8 million for the same period in the prior year. Expenses from other real estate owned decreased by $446 thousand and the FDIC assessment expense decreased by $58 thousand, or 32%. These decreases were partially offset by increases in expenses that included other operating expense, which was $147 thousand, or 25%, higher than the second quarter of 2013 and salaries and employee benefits, which were $111 thousand, or 5%, higher than the same quarter one year ago. Increases in other operating expenses were primarily attributable to higher bank franchise tax from higher levels of capital, and expenses related to a new feature provided to our checking account customers that provides cash back rewards.

The Bank recorded a recovery of loan losses totaling $400 thousand during the quarter, which resulted in a total allowance for loan losses of $10.0 million or 2.72% of total loans at June 30, 2014. The recovery of loan losses was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and stable asset quality. This compared to a provision for loan losses of $2.5 million and an allowance for loan losses of $12.5 million, or 3.31% of total loans, at the end of the second quarter of 2013.

Year-to-Date Performance

Net income totaled $2.7 million for the six months ended June 30, 2014, compared to $1.2 million for the same period of 2013. The return on average assets was 1.03% for the period compared to 0.47% for the same period one year ago, and the return on average equity was 9.81% compared to 5.57% for the same period in 2013.

Net interest income totaled $9.1 million for the period, compared to $9.3 million for the same period one year ago. The net interest margin was 3.77% compared to 3.75% for the same period of 2013. Noninterest income, excluding a one-time gain on termination of a postretirement benefit, increased by $349 thousand, or 12% when comparing the periods. Revenues from service charges on deposits increased $350 thousand, or 38%, and revenues from wealth management increased $129 thousand, or 16%, when comparing the six months ended June 30, 2014 to the same period of 2013.

Noninterest expense decreased $709 thousand, or 7%, to $9.2 million for the period compared to $9.9 million for the same period in the prior year. Expenses from other real estate owned decreased by $522 thousand and the FDIC assessment expense decreased by $227 thousand, or 44%.

The Bank recorded a recovery of loan losses totaling $600 thousand for the period. The recovery of loan losses was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and stable asset quality. This compared to a provision for loan losses of $2.3 million for the same period of 2013.

Capital and Asset Quality

Substandard loans decreased by $14.2 million, or 41%, to $20.3 million at the end of the second quarter compared to $34.5 million for the same period one year ago. Nonperforming assets increased slightly to $13.4 million at June 30, 2014 compared to $13.2 million one year ago, and troubled debt restructurings increased to $978 thousand from $838 thousand, comparing the same periods.

Total shareholders' equity increased $13.6 million to $56.7 million at June 30, 2014, compared to $43.1 million one year ago. The book value per common share was $8.58 at the end of the second quarter. Regulatory capital ratios were higher than previous periods, with the total risk-based capital ratio at 18.64% at June 30, 2014.

Caution about 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, 2013, and other filings with the Securities and Exchange Commission.

About the Company

First National Corporation, headquartered in Strasburg, Virginia, is the bank holding company of First Bank. First Bank offers loan, deposit, trust and investment products and services from 10 office locations located throughout the northern Shenandoah Valley region of Virginia, which includes Shenandoah County, Warren County, Frederick County and the City of Winchester. Banking services are also accessed from the Bank's website, www.fbvirginia.com, and from a network of ATMs located throughout its market area. 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,

2014
March 31,

2014
December 31,

2013
September 30,

2013
June 30,

2013
Interest income          
Interest and fees on loans  $ 4,403  $ 4,215  $ 4,422  $ 4,673  $ 4,816
Interest on deposits in banks 14 16 16 18 17
Interest on securities available for sale 657 657 636 577 519
Dividends on restricted securities 21 21 19 18 19
Total interest income  $ 5,095  $ 4,909  $ 5,093  $ 5,286  $ 5,371
           
Interest expense          
Interest on deposits  $ 373  $ 400  $ 458  $ 572  $ 632
Interest on trust preferred capital notes 54 54 56 55 55
Interest on other borrowings 30 29 30 30 30
Total interest expense  $ 457  $ 483  $ 544  $ 657  $ 717
           
Net interest income  $ 4,638  $ 4,426  $ 4,549  $ 4,629  $ 4,654
Provision for (recovery of) loan losses (400) (200) (2,950) 275 2,500
Net interest income after provision for (recovery of) loan losses  $ 5,038  $ 4,626  $ 7,499  $ 4,354  $ 2,154
           
Noninterest income          
Service charges on deposit accounts  $ 642  $ 630  $ 654  $ 627  $ 464
ATM and check card fees 366 335 354 373 365
Wealth management fees 472 484 463 406 375
Fees for other customer services 126 87 89 86 128
Gains on sale of loans -- 3 22 47 65
Net gains on sale of securities 22 -- -- -- --
Gain on termination of postretirement benefit -- -- -- -- 543
Other operating income 96 77 189 86 97
Total noninterest income$1,724$1,616$1,771$1,625$2,037
           
Noninterest expense  $ 2,554  $ 2,509  $ 3,040  $ 2,411  $ 2,443
Salaries and employee benefits 278 315 302 306 296
Occupancy 295 304 319 302 288
Equipment 125 109 41 81 113
Marketing 93 80 66 66 81
Stationery and supplies 246 202 340 237 219
Legal and professional fees 163 163 166 176 168
ATM and check card fees 122 172 174 189 180
FDIC assessment (70) 31 380 252 376
Other real estate owned, net          
Net losses on disposal of premises and equipment -- 2 393 -- 3
Loss on lease termination -- -- 263 -- --
Other operating expense 740 726 748 628 593
Total noninterest expense  $ 4,546  $ 4,613  $ 6,232  $ 4,648  $ 4,760
           
Income (loss) before income taxes  $ 2,216  $ 1,629  $ 3,038  $ 1,331  $ (569)
Income tax provision (benefit) 674 483 (4,352) 91 (830)
Net income  $ 1,542  $ 1,146  $ 7,390  $ 1,240  $ 261
Effective dividend and accretion on preferred stock 260 221 228 229 230
Net income available to common shareholders  $ 1,282  $ 925  $ 7,162  $ 1,011  $ 31
           
Common Share and Per Common Share Data          
Net income, basic and diluted  $ 0.26  $ 0.19  $ 1.46  $ 0.21  $ 0.01
Shares outstanding at period end 4,902,582 4,901,464 4,901,464 4,901,464 4,901,464
Weighted average shares, basic and diluted 4,901,599 4,901,464 4,901,464 4,901,464 4,901,464
Book value at period end  $ 8.58  $ 8.24  $ 7.96  $ 5.93  $ 5.83
Cash dividends$ 0.025 $ -- $ -- $ -- $ --
           
           
FIRST NATIONAL CORPORATION          
Quarterly Performance Summary          
(in thousands, except share and per share data)
           
 (unaudited)
 For the Quarter Ended
 June 30,

2014
March 31,

2014
December 31,

2013
September 30,

2013
June 30,

2013
Key Performance Ratios          
Return on average assets 1.16% 0.88% 5.55% 0.92% 0.19%
Return on average equity 11.05% 8.53% 62.92% 11.44% 2.32%
Net interest margin 3.81% 3.72% 3.68% 3.68% 3.71%
Efficiency ratio (1) 71.94% 74.85% 81.40% 69.60% 70.54%
           
Average Balances          
Average assets  $ 531,250  $ 525,337  $ 528,475  $ 535,885  $ 540,081
Average earning assets 496,304 490,521 496,619 505,888 509,940
Average shareholders' equity 55,965 54,460 46,569 43,001 45,096
           
Asset Quality          
Loan charge-offs  $ 306  $ 239  $ 192  $ 955  $ 3,067
Loan recoveries 429 79 1,911 77 289
Net charge-offs (recoveries) (123) 160 (1,719) 878 2,778
Non-accrual loans 11,221 11,697 11,678 8,000 9,091
Other real estate owned, net 2,221 2,991 3,030 3,833 4,084
Nonperforming assets 13,443 14,688 14,708 11,833 13,175
Loans over 90 days past due, still accruing 325 111 49 2,150 1,889
Troubled debt restructurings, accruing 978 986 829 834 838
Special mention loans  19,807 20,606 19,660 23,226 26,432
Substandard loans, accruing 20,315 21,917 22,909 31,119 34,466
Doubtful loans -- -- -- -- --
           
Capital Ratios          
Tier 1 capital  $ 64,732  $ 63,041  $ 61,800  $ 56,830  $ 55,773
Total capital 69,455 67,687 66,437 61,565 60,623
Total capital to risk-weighted assets 18.64% 18.49% 18.21% 16.57% 15.94%
Tier 1 capital to risk-weighted assets 17.38% 17.22% 16.94% 15.29% 14.66%
Leverage ratio 12.22% 12.05% 11.75% 10.61% 10.33%
           
Balance Sheet          
Cash and due from banks  $ 6,587  $ 7,106  $ 5,767  $ 8,649  $ 8,104
Interest-bearing deposits in banks 12,735 27,017 25,741 29,221 23,045
Securities available for sale, at fair value 108,884 110,561 103,301 105,321 105,163
Restricted securities, at cost 1,636 1,636 1,804 1,804 1,805
Loans, net of allowance for loan losses 357,484 349,250 346,449 354,952 365,035
Premises and equipment, net 16,305 16,470 16,642 17,417 17,992
Accrued interest receivable 1,258 1,305 1,302 1,339 1,425
Other assets 20,434 21,250 21,884 17,752 18,170
 Total assets  $ 525,323  $ 534,595  $ 522,890  $ 536,455  $ 540,739
           
Noninterest-bearing demand deposits  $ 99,396  $ 101,813  $ 92,901  $ 95,609  $ 91,946
Savings and interest-bearing demand deposits 235,929 239,725 234,054 229,990 232,763
Time deposits 115,873 120,151 123,756 145,664 151,249
 Total deposits  $ 451,198  $ 461,689  $ 450,711  $ 471,263  $ 475,958
Other borrowings 6,039 6,046 6,052 6,058 6,064
Trust preferred capital notes 9,279 9,279 9,279 9,279 9,279
Other liabilities 2,151 2,614 3,288 6,244 6,377
Total liabilities  $ 468,667  $ 479,628  $ 469,330  $ 492,844  $ 497,678
           
           
FIRST NATIONAL CORPORATION          
Quarterly Performance Summary          
(in thousands, except share and per share data)          
           
 (unaudited)
 June 30,

2014
March 31,

2014
December 31,

2013
September 30,

2013
June 30,

2013
Balance Sheet (continued)          
Preferred stock  $ 14,595  $ 14,595  $ 14,564  $ 14,525  $ 14,485
Common stock 6,127 6,127 6,127 6,127 6,127
Surplus 6,814 6,813 6,813 6,813 6,813
Retained earnings 29,524 28,286 27,360 20,199 19,188
Accumulated other comprehensive loss, net (404) (854) (1,304) (4,053) (3,552)
Total shareholders' equity  $ 56,656  $ 54,967  $ 53,560  $ 43,611  $ 43,061
 Total liabilities and shareholders' equity  $ 525,323  $ 534,595  $ 522,890  $ 536,455  $ 540,739
           
Loan Data          
Mortgage loans on real estate:          
 Construction and land development  $ 32,795  $ 33,876  $ 34,060  $ 34,404  $ 44,305
 Secured by farm land 1,234 1,257 1,264 1,302 1,318
 Secured by 1-4 family residential 151,043 147,541 141,961 142,446 145,628
 Other real estate loans 145,249 141,462 144,704 155,389 158,516
Loans to farmers (except those secured by real estate) 3,067 3,060 3,418 2,130 2,093
Commercial and industrial loans (except those secured by real estate) 21,730 20,321 19,385 19,186 17,608
Consumer installment loans 4,859 4,816 4,935 5,420 5,973
Deposit overdrafts 229 213 279 187 99
All other loans 7,284 6,987 7,087 6,363 1,973
  Total loans  $ 367,490  $ 359,533  $ 357,093  $ 366,827  $ 377,513
Allowance for loan losses (10,006) (10,283) (10,644) (11,875) (12,478)
Loans, net  $ 357,484  $ 349,250  $ 346,449  $ 354,952  $ 365,035
           
Reconciliation of Tax-Equivalent Net Interest Income          
GAAP measures:          
Interest income – loans  $ 4,403  $ 4,215  $ 4,422  $ 4,673  $ 4,816
Interest income – investments and other 692 694 671 613 555
Interest expense – deposits 373 400 458 572 632
Interest expense – other borrowings 30 29 30 30 30
Interest expense – trust preferred capital notes 54 54 56 55 55
Total net interest income  $ 4,638  $ 4,426  $ 4,549  $ 4,629  $ 4,654
Non-GAAP measures:          
Tax benefit realized on non-taxable interest income – loans  $ 28  $ 29  $ 21  $ 23  $ 24
Tax benefit realized on non-taxable interest income – municipal securities 49 49 43 39 39
Total tax benefit realized on non-taxable interest income  $ 77  $ 78  $ 64  $ 62  $ 63
Total tax-equivalent net interest income  $ 4,715  $ 4,504  $ 4,613  $ 4,691  $ 4,717
     
     
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, 2014June 30, 2013
Interest and dividend income    
 Interest and fees on loans  $ 8,618  $ 9,749
 Interest on federal funds sold -- --
 Interest on deposits in banks 30 27
 Interest and dividends on securities available for sale:    
 Taxable interest 1,124 815
 Tax-exempt interest 190 149
 Dividends 42 38
Total interest and dividend income  $ 10,004  $ 10,778
     
Interest expense    
 Interest on deposits  $ 772  $ 1,338
 Interest on trust preferred capital notes 108 111
 Interest on other borrowings 59 59
Total interest expense  $ 939  $ 1,508
     
Net interest income  $ 9,065  $ 9,270
Provision for (recovery of) loan losses (600) 2,250
Net interest income after provision for loan losses  $ 9,665  $ 7,020
     
Noninterest income    
 Service charges on deposit accounts  $ 1,273  $ 923
 ATM and check card fees 700 698
 Wealth management fees 956 827
 Fees for other customer services 213 216
 Gains on sale of loans 3 124
 Net gains on sale of securities available for sale 22 --
 Other operating income 174 747
Total noninterest income  $ 3,341  $ 3,535
     
Noninterest expense    
 Salaries and employee benefits  $ 5,063  $ 5,077
 Occupancy 593 674
 Equipment  599 587
 Marketing 235 223
 Stationery and supplies 174 156
 Legal and professional fees 449 398
 ATM and check card fees 326 326
 FDIC assessment 294 521
 Other real estate owned, net (39) 483
 Net losses on disposal of premises and equipment 2 --
 Other operating expense  1,465 1,425
Total noninterest expense  $ 9,161  $ 9,870
     
Income before income taxes  $ 3,845  $ 685
Income tax provision (benefit) 1,157 (559)
Net income  $ 2,688  $ 1,244
Effective dividend and accretion on preferred stock 481 455
Net income available to common shareholders  $ 2,207  $ 789
     
Common Share and Per Common Share Data     
Net income, basic and diluted  $ 0.45  $ 0.16
Shares outstanding at period end 4,902,582 4,901,464
Weighted average shares, basic and diluted 4,901,532 4,901,464
Book value at period end  $ 8.58  $ 5.83
Cash dividends  $ 0.03  $ -- 
     
     
FIRST NATIONAL CORPORATION    
Year-to-Date Performance Summary    
(in thousands, except share and per share data)
     
 (unaudited)
 For the Six Months Ended
 June 30, 2014June 30, 2013
Key Performance Ratios    
Return on average assets 1.03% 0.47%
Return on average equity 9.81% 5.57%
Net interest margin 3.77% 3.75%
Efficiency ratio 73.36% 74.14%
     
Average Balances    
Average assets  $ 528,321  $ 534,854
Average earning assets 493,428 504,242
Average shareholders' equity 55,229 45,028
     
Asset Quality    
Loan charge-offs  $ 545  $ 3,345
Loan recoveries 507 498
Net charge-offs 38 2,847
     
Reconciliation of Tax-Equivalent Net Interest Income    
GAAP measures:    
Interest income – loans  $ 8,618  $ 9,749
Interest income – investments and other 1,386 1,029
Interest expense – deposits 772 1,338
Interest expense – other borrowings 59 59
Interest expense – trust preferred capital notes 108 111
Total net interest income  $ 9,065  $ 9,270
Non-GAAP measures:    
Tax benefit realized on non-taxable interest income – loans  $ 56  $ 38
Tax benefit realized on non-taxable interest income – municipal securities 98 76
Total tax benefit realized on non-taxable interest income  $ 154  $ 114
Total tax-equivalent net interest income  $ 9,219  $ 9,384


(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned expense, loss on land lease termination and net 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 gain on termination of postretirement benefit. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 34%. See the table above for the quarterly tax-equivalent net interest income and a reconciliation of net interest income to tax-equivalent net interest income. The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency. Such information is not in accordance with generally accepted accounting principles (GAAP) and should not be construed as such. Management believes 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.

CONTACT: Scott C. Harvard President and CEO (540) 465-9121 sharvard@fbvirginia.comM. Shane Bell Executive Vice President and CFO (540) 465-9121 sbell@fbvirginia.com



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Source: First National Corporation


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