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

STRASBURG, Va., July 24, 2018 (GLOBE NEWSWIRE) -- First National Corporation (the "Company" or "First National") 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 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.

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

FIRST NATIONAL CORPORATION
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FIRST NATIONAL CORPORATION
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FIRST NATIONAL CORPORATION
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 ⁽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.