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First National Corporation Announces First Quarter Results

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STRASBURG, Va., April 26, 2016 (GLOBE NEWSWIRE) -- First National Corporation (the "Company" or "First National") (OTC: FXNC) today reported earnings of $1.1 million and earnings per share of $0.22 for the quarter ended March 31, 2016, compared to $813 thousand or $0.17 per share for the fourth quarter of 2015, and $215 thousand or $0.04 per share for the first quarter of 2015. 

"The Company benefited from loan growth, lower expenses and a full quarter with no outstanding preferred stock," said Scott C. Harvard, president and chief executive officer of First National.   "During the first quarter, net interest income and net interest margin increased over prior quarters as the earning asset mix continued to improve from loan growth while the Company was able to maintain its low cost funding.  Expenses decreased again this quarter with lower legal and professional fees and lower other real estate owned expense.  We've been pleased with the execution of our balance sheet strategies that included growing deposits through acquisition, deploying liquidity into the loan portfolio, and reducing the cost of capital by redeeming preferred stock.  Profitability has improved for three consecutive quarters from balance sheet changes and cost reductions.  We continued working on our initiative to streamline, serve and save.  This initiative is being driven by a team of employees from across the Company who are diligently working to improve efficiency by updating processes, improving service to customers, and reducing costs.  The goal of this initiative is to increase capacity for balance sheet growth and to improve profitability."

Select highlights for the first quarter include: 

  • Return on equity increased to 9.39%, compared to 7.01% for the fourth quarter of 2015, and 3.67% for the first quarter of 2015
  • Net income available to common shareholders increased $286 thousand, or 35%, to $1.1 million compared to the fourth quarter of 2015, and increased $884 thousand compared to the first quarter of 2015
  • Net loans increased $15.1 million, or 3%, during the quarter, and increased $56.8 million, or 15%, over the prior year 
  • Net interest margin increased to 3.63% compared to 3.53% for the fourth quarter of 2015
  • Net interest income increased $101 thousand, or 2%, over the fourth quarter of 2015, and increased $1.1 million, or 23%, compared to the first quarter of 2015
  • Noninterest income, excluding gains on sale of securities, decreased by $264 thousand, or 12%, compared to the fourth quarter of 2015, and increased $294 thousand, or 18%, compared to the first quarter of 2015
  • Noninterest expense decreased $395 thousand, or 6%, compared to the fourth quarter of 2015, and increased $630 thousand, or 11%, compared to the first quarter of 2015
  • Effective dividend on preferred stock decreased $128 thousand compared to the fourth quarter of 2015, and decreased $329 thousand compared to the first quarter of 2015

BRANCH ACQUISITION

On April 17, 2015, First Bank (the "Bank"), the Company's banking subsidiary, completed the acquisition of six banking offices with approximately $186.8 million of deposits in the Shenandoah Valley and central Virginia regions from Bank of America, N.A. (the "Acquisition" or "Branch Acquisition").  The Company incurred integration costs related to the acquisition, including legal and professional fees, supplies, data processing and postage expenses that totaled $11 thousand in the fourth quarter of 2015 and $419 thousand in the first quarter of 2015.   The Company did not incur integration costs in the first quarter of 2016.

At March 31, 2016, deposits in the acquired branches totaled $174.6 million, which was 94% of the deposit balances assumed in the acquisition.  The branch acquisition had a positive impact on the cost of funds for the Company.  Excluding amortization of the time deposit valuation allowance, the cost of funds in the first quarter of 2016 for acquired branches was 0.22%, compared to the total cost of funds for the Company of 0.31% for the same period.  The mix of deposits, which was comprised of a significant amount of noninterest-bearing deposits, remained consistent from the acquisition date through March 31, 2016.  The Bank assembled an experienced lending team in its south region that made a meaningful contribution to loan growth during 2015 and in the first quarter of 2016. 

BALANCE SHEET 

Total assets of First National increased by $8.7 million to $701.0 million at March 31, 2016, and increased $170.6 million or 32% compared to March 31, 2015.  Loans, net of the allowance for loan losses increased $15.1 million, or 3%, during the first quarter, and increased $56.8 million or 15% compared to one year ago.  The securities portfolio decreased $7.9 million during the quarter to $165.5 million at March 31, 2016, and increased $72.7 million or 78% compared to one year ago. 

Total deposits increased $6.0 million during the quarter to $633.1 million, and increased $194.3 million, or 44%, compared to one year ago.  At March 31, 2016, December 31, 2015 and March 31, 2015, the composition of the deposit portfolio was unchanged with noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits comprising 25%, 53% and 22% of total deposits, respectively.   

Total shareholders' equity increased $1.7 million during the first quarter.  The Company's redemption of preferred stock in the fourth quarter of 2015 had a positive impact on net income available to common shareholders as there was no effective dividend on preferred stock during the first quarter.  Tangible common equity totaled $45.6 million at March 31, 2016, compared to $43.6 million at December 31, 2015 and $45.6 million at March 31, 2015.  The Company and the Bank exceeded their target capital levels at the end of the quarter. 

NET INTEREST INCOME

Net interest income increased $101 thousand, or 2%, to $5.7 million for the quarter compared to $5.6 million for the fourth quarter of 2015, and increased $1.1 million, or 23%, compared to $4.6 million for the first quarter of 2015. 

Total interest income increased $170 thousand, or 3%, during the quarter compared to the fourth quarter of 2015 and increased $1.2 million, or 24%, compared to the first quarter of 2015.  The growth in interest income compared to the first quarter of 2016 was predominantly due to a change in the mix of earning assets with higher balances of loans and lower balances of securities.  Compared to the first quarter of 2015, the growth in interest income was primarily a result of higher balances of both loans and securities.

Total interest expense increased by $69 thousand, or 16%, during the quarter compared to the fourth quarter of 2015, and increased $136 thousand, or 38%, compared to the first quarter of 2015.  When comparing the first quarter of 2016 to the same period one year ago, the increase in interest expense correlated with the $194.3 million, or 44%, increase in total deposits. 

NONINTEREST INCOME

Noninterest income, excluding net gains on sale of securities, decreased $264 thousand to $1.9 million, compared to $2.2 million for the fourth quarter of 2015, and increased $294 thousand, or 18%, compared to the first quarter of 2015. 

When compared to the fourth quarter of 2015, the decrease in noninterest income was primarily attributable to lower revenue from service charges on deposit accounts and wealth management.  The decrease in revenue from service charges on deposit accounts for the first quarter of the year is believed to be cyclical, as this revenue has historically been lower in the first quarter than any other period of the year.   The decrease in wealth management revenue was attributable to the elimination of brokerage services at the beginning of the year.

The increase in noninterest income compared to the same period one year ago was primarily attributable to the 44% growth in deposit balances when comparing the periods.  Service charges on deposits increased $233 thousand, or 43%, ATM and check card fees increased $139 thousand, or 40%, and fees for other customer services increased $40 thousand, or 37%. 

NONINTEREST EXPENSE

Noninterest expense decreased $395 thousand, or 6%, to $6.1 million for the quarter compared to $6.5 million for the fourth quarter of 2015, and increased $630 thousand, or 11%, compared to the first quarter of 2015.  The decrease in expenses when compared to the fourth quarter of 2015 was primarily attributable to a reduction in legal and professional fees, as well as a reduction in other real estate owned expense.  

Comparing the current period results to the first quarter of 2015, the 11% increase in total noninterest expense was primarily attributable to the impact of the branch acquisition, which increased the number of bank branch locations from 10 to 15 and added a core deposit intangible asset.  Expense categories that increased as a result of the acquisition included salaries and employee benefits, occupancy, equipment, and amortization of the core deposit intangible.

ASSET QUALITY/LOAN LOSS PROVISION 

Credit quality continued to improve during the quarter as nonperforming assets decreased by $162 thousand to 0.91% of total assets, compared to 0.94% at December 31, 2015, and 1.72% at March 31, 2015.  Loans past due between 30 and 89 days was 0.38% of total loans, compared to 0.32% at December 31, 2015 and 0.44% at March 31, 2015.

The Bank did not record provision for loan losses for the first quarter of 2016, the fourth quarter of 2015, or the first quarter of 2015.  Net charge-offs totaled $5 thousand in the first quarter of 2016 and $51 thousand in the fourth quarter of 2015.  The Bank had $53 thousand of net recoveries for the first quarter of 2015. Provision for loan losses was not required for the first quarter of 2016 due to decreases in the specific reserve component of the allowance for loan losses.  The decreases in specific reserve component offset an increase in the general reserve component.  The increase in general reserves was driven by loan growth.  The allowance for loan losses totaled $5.5 million at the end of the first quarter of 2016 and the fourth quarter of 2015, and $6.8 million at March 31, 2015, representing 1.22%, 1.26%, and 1.70% 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, 2015, 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 village, 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 
Quarterly Performance Summary 
(in thousands, except share and per share data) 
  
 (unaudited) 
 For the Quarter Ended 
 March 31, December 31, September 30, June 30, March 31, 
Income Statement2016 2015 2015 2015 2015 
Interest income          
  Interest and fees on loans$  5,236  $  5,056  $  4,854  $  4,688  $  4,540  
  Interest on deposits in banks 48   63   61   68   5  
  Interest on securities 888   884   829   618   422  
  Dividends on restricted securities   19     18     20     18     21  
Total interest income $  6,191  $  6,021  $  5,764  $  5,392  $  4,988  
Interest expense                    
  Interest on deposits$333  $  302  $  282  $  266  $  300  
  Interest on federal funds purchased 3   -   -   1   1  
  Interest on subordinated debt 90   62   -   -   -  
  Interest on junior subordinated debt 61   59   56   55   54  
  Interest on other borrowings   5     -     -     2     1  
Total interest expense$  492  $  423  $338  $  324  $  356  
Net interest income$  5,699  $  5,598  $5,426  $  5,068   $  4,632  
Recovery of loan losses   -     -     -     (100)    -  
Net interest income after recovery of loan losses$5,699  $5,598  $5,426  $5,168  $4,632  
Noninterest income                    
  Service charges on deposit accounts$  780  $  846  $  897  $  752  $  547  
  ATM and check card fees 488   520   529   497   349  
  Wealth management fees 336   496   477   499   503  
  Fees for other customer services 147   143   172   184   107  
  Income from bank owned life insurance 86   103   106   90   74  
  Net gains (losses) on sale of securities 6   (3)  -   -   (52) 
  Net gains on sale of loans 21   43   53   50   55  
  Other operating income   79     50     10     237     8  
Total noninterest income$  1,943  $  2,198  $  2,244  $  2,309  $  1,591  
Noninterest expense                    
  Salaries and employee benefits$  3,444  $  3,491  $  3,637  $  3,597  $  3,125  
  Occupancy 424   400   396   339   317  
  Equipment  432   398   400   422   281  
  Marketing 107   94   176   163   97  
  Supplies 101   93   116   229   345  
  Legal and professional fees 311   450   243   431   212  
  ATM and check card fees 205   200   236   190   155  
  FDIC assessment 122   119   134   64   67  
  Bank franchise tax 103   130   131   130   122  
  Telecommunications expense 114   120   131   100   85  
  Data processing expense 128   157   130   226   187  
  Postage expense 69   71   73   80   117  
  Amortization expense 207   216   226   196   4  
  Other real estate owned, net (72)  92   144   152   (36) 
  Other operating expense   422     481     528     536     409  
Total noninterest expense$  6,117  $  6,512  $  6,701  $  6,855  $  5,487  
                     
Income before income taxes$  1,525  $  1,284  $  969  $  622  $  736  
Income tax expense   426     343     243     178     192  
Net income$  1,099  $  941  $  726  $  444  $  544  
Effective dividend and accretion on preferred stock  -    128   328   328   329  
Net income available to common shareholders$ 1,099  $ 813  $ 398  $ 116  $ 215  
Common Share and Per Common Share Data                     
Net income, basic$  0.22  $0.17  $  0.08  $  0.02  $  0.04  
Weighted average shares, basic 4,920,315   4,913,985   4,911,604   4,909,775   4,906,981  
Net income, diluted$  0.22  $  0.17  $  0.08  $  0.02  $  0.04  
Weighted average shares, diluted 4,923,117   4,916,804   4,913,461   4,911,298   4,911,044  
Shares outstanding at period end 4,924,539   4,916,130   4,912,662   4,910,826   4,909,714  
Book value at period end$9.69  $  9.35  $  9.32  $  9.13  $  9.31  
Cash dividends$   0.03  $  0.025  $  0.025  $  0.025  $  0.025  


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
 
 (unaudited)
  For the Quarter Ended
 March 31, December 31, September 30, June 30, March 31,
 2016 2015 2015 2015 2015
Key Performance Ratios         
Return on average assets 0.64%  0.54%  0.42%  0.27%  0.43%
Return on average equity 9.39%  7.01%  4.80%  2.97%  3.67%
Net interest margin 3.63%  3.53%  3.40%  3.29%  3.96%
Efficiency ratio (1) 77.31%  78.42%  81.38%  83.52%  80.51%
                    
Average Balances                   
Average assets$  693,783  $  692,263  $  691,121  $  671,199  $  516,259 
Average earning assets 643,358   640,880   642,234   625,197   480,490 
Average shareholders' equity 47,066   53,264   60,043   59,957   60,040 
                    
Asset Quality                   
Loan charge-offs$121  $418  $637  $671  $  112 
Loan recoveries 116   367   83   129   165 
Net charge-offs (recoveries) 5   51   554   542   (53)
Non-accrual loans 4,259   3,854   4,930   6,666   7,170 
Other real estate owned, net 2,112   2,679   2,760   2,407   1,949 
Nonperforming assets 6,371   6,533   7,690   9,073   9,119 
Loans 30 to 89 days past due, accruing 1,743   1,418   2,084   1,487   1,763 
Loans over 90 days past due, accruing 124   92   147   600   71 
Troubled debt restructurings, accruing 313   317   321   324   782 
Special mention loans 13,796   16,372   15,706   21,278   22,550 
Substandard loans, accruing 10,068   10,265   10,496   10,927   15,741 
                    
Capital Ratios (2)                   
Total capital$  62,440  $  61,513  $  60,232  $  72,362  $  72,764 
Tier 1 capital 56,920   55,989   55,066   67,400   67,918 
Common equity tier 1 capital 56,920   55,989   55,066   67,400   67,918 
Total capital to risk-weighted assets 13.73%  13.86%  14.59%  18.28%  18.86%
Tier 1 capital to risk-weighted assets 12.52%  12.62%  13.34%  17.03%  17.61%
Common equity tier 1 capital to risk-weighted assets 12.52%  12.62%  13.34%  17.03%  17.61%
Leverage ratio 8.22%  8.12%  7.99%  10.06%  13.17%
                    
Balance Sheet                   
Cash and due from banks$  10,250  $  8,247  $  9,890  $  11,870  $  7,529 
Interest-bearing deposits in banks 29,077   31,087   66,956   99,274   1,645 
Securities available for sale, at fair value 99,019   105,559   109,166   112,468   90,855 
Securities held to maturity, at carrying value 64,963   66,519   54,276   37,343   - 
Restricted securities, at cost 1,548   1,391   1,391   1,391   1,999 
Loans held for sale 523   323   471   1,978   - 
Loans, net of allowance for loan losses 448,556   433,475   400,838   385,592   391,746 
Other real estate owned, net of valuation allowance 2,112   2,679   2,760   2,407   1,949 
Premises and equipment, net 21,366   21,389   21,493   21,277   16,298 
Accrued interest receivable 1,741   1,661   1,543   1,423   1,256 
Bank owned life insurance 13,828   11,742   11,627   11,521   11,431 
Core deposit intangibles, net 2,115   2,322   2,539   2,765   51 
Other assets   5,945     5,927     5,945   6,518     5,650 
  Total assets$  701,043  $  692,321  $  688,895  $  695,827  $  530,409 
                    
Noninterest-bearing demand deposits$  161,783  $  157,070  $  149,178  $  147,790  $  109,927 
Savings and interest-bearing demand deposits 334,599   328,945    318,510    322,239   231,885 
Time deposits   136,736     141,101     146,219     150,853     96,974 
  Total deposits$  633,118  $  627,116  $  613,907  $  620,882  $  438,786 
Federal funds purchased -   -   -   -   1,955 
Other borrowings -   -   7   13   15,020 
Subordinated debt 4,917   4,913   -   -   - 
Junior subordinated debt 9,279   9,279   9,279   9,279   9,279 
Accrued interest payable and other liabilities   6,029     5,060     5,303     6,214     5,057 
Total liabilities$  653,343  $  646,368  $  628,496  $  636,388  $  470,097 


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data) 
          
   (unaudited)
 For the Quarter Ended
 March 31, December 31,  September 30, June 30, March 31,
 2016 2015 2015 2015 2015
          
Balance Sheet (continued)         
Preferred stock$  -  $  -  $  14,595  $  14,595  $  14,595 
Common stock 6,156   6,145   6,141   6,139   6,137 
Surplus 6,996   6,956   6,922   6,899   6,881 
Retained earnings 35,391   34,440   33,917   33,642   33,649 
Accumulated other comprehensive loss, net   (843)    (1,588)    (1,176)    (1,836)    (950)
Total shareholders' equity$  47,700  $  45,953  $  60,399  $  59,439  $  60,312 
  Total liabilities and shareholders' equity$  701,043  $  692,321  $  688,895  $  695,827  $  530,409 
                           
Loan Data                          
Mortgage loans on real estate:                          
  Construction and land development$  31,505  $  33,135  $  29,935  $  32,009  $  33,344 
  Secured by farm land 931   964   984   1,025   1,067 
  Secured by 1-4 family residential 196,165   189,286   179,419   173,265   172,874 
  Other real estate loans 190,375   180,483   164,677   154,371   157,829 
Loans to farmers (except those secured by real estate) 473   3,056   3,014   2,645   2,760 
Commercial and industrial loans (except those secured by real estate) 23,742   20,992   16,936   16,674   18,660 
Consumer installment loans 3,854   4,055   4,165   4,341   4,713 
Deposit overdrafts 312   257   421   419   194 
All other loans   6,719     6,771     6,862     6,972     7,076 
  Total loans$  454,076  $  438,999  $  406,413  $  391,721  $  398,517 
Allowance for loan losses   (5,520)    (5,524)    (5,575)    (6,129)    (6,771)
Loans, net$  448,556  $  433,475  $  400,838  $  385,592  $  391,746 
                           
Reconciliation of Tax-Equivalent Net Interest Income                          
GAAP measures:                          
  Interest income – loans$    5,236  $  5,056  $  4,854  $  4,688  $  4,540 
  Interest income – investments and other   955   965   910   704   448 
  Interest expense – deposits   (333)  (302)  (282)  (266)  (300)
  Interest expense – other borrowings   (5)  -   -   (2)  (1)
Interest expense – subordinated debt   (90)  (62)  -   -   - 
Interest expense – junior subordinated debt   (61)  (59)  (56)    (55)    (54)
Interest expense – other     (3)    -     -     (1)    (1)
Total net interest income$    5,699  $  5,598  $  5,426   $  5,068  $  4,632 
Non-GAAP measures:                          
Tax benefit realized on non-taxable interest income – loans$  25  $  26  $26  $  27  $  26 
Tax benefit realized on non-taxable interest income – municipal securities   76     71     60     40     33 
Total tax benefit realized on non-taxable interest income$    101  $  97  $  86  $  67  $  59 
Total tax-equivalent net interest income$    5,800  $  5,695  $  5,512  $  5,135  $  4,691 
                           

(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, acquisition and integration related expenses, 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 and bargain purchase gain.  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 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 the 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

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