Market Overview

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

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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 banks 186     160     96     92     86  
Interest on securities                  
Taxable interest 776     680     636     637     634  
Tax-exempt interest 156     145     147     148     145  
Dividends on restricted securities 22     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 debt 89     89     91     91     89  
Interest on junior subordinated debt 101     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 fees 555     519     596     516     527  
Wealth management fees 409     407     386     359     355  
Fees for other customer services 151     153     162     131     137  
Income from bank owned life insurance 77     559     408     117     102  
Net gains (losses) on securities         (114)     11     13  
Net gains on sale of loans 15     9     51     54     34  
Other operating income 76     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  
Occupancy 387     400     388     379     348  
Equipment 420     423     428     400     400  
Marketing 161     109     166     138     136  
Supplies 88     80     88     81     105  
Legal and professional fees 223     191     228     216     245  
ATM and check card expense 211     203     209     205     229  
FDIC assessment 66     82     76     84     77  
Bank franchise tax 118     115     111     111     110  
Telecommunications expense 98     36     103     95     108  
Data processing expense 170     162     165     153     152  
Postage expense 42     61     14     62     74  
Amortization expense 120     131     141     151     160  
Other real estate owned expense (income), net 1     (23)     (192)         4  
Net loss on disposal of premises and equipment         252          
Other operating expense 532     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 expense 583     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, basic 4,952,712     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, diluted 4,954,265     4,952,373     4,948,981     4,946,128     4,942,726  
Shares outstanding at period end 4,953,356     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 assets 1.29%     1.45%     0.71%     1.00%     0.96%  
Return on average equity 16.23%     18.47%     9.01%     12.78%     12.79%  
Net interest margin 3.86%     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 assets 715,163     704,947     689,338     681,800     682,132  
Average shareholders' equity 60,592     58,979     57,973     56,857     55,068  
                   
Asset Quality                  
Loan charge-offs $ 294     $ 206     $ 223     $ 243     $ 161  
Loan recoveries 61     52     148     100     154  
Net charge-offs 233     154     75     143     7  
Non-accrual loans 2,330     682     937     2,121     1,913  
Other real estate owned, net 68         326     250     250  
Nonperforming assets 2,398     682     1,263     2,371     2,163  
Loans 30 to 89 days past due, accruing 3,408     2,602     4,223     1,960     1,368  
Loans over 90 days past due, accruing 549     773     183     89     151  
Troubled debt restructurings, accruing 273     278     282     287     291  
Special mention loans 3,988     5,365     5,225     9,677     10,378  
Substandard loans, accruing 3,798     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 capital 65,987     64,163     62,298     66,017     63,881  
Common equity tier 1 capital 65,987     64,163     62,298     66,017     63,881  
Total capital to risk-weighted assets 13.47%     13.52%     13.12%     13.91%     13.82%  
Tier 1 capital to risk-weighted assets 12.52%     12.50%     12.09%     12.87%     12.73%  
Common equity tier 1 capital to risk-weighted assets 12.52%     12.50%     12.09%     12.87%     12.73%  
Leverage ratio 8.66%     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 banks 27,762     58,092     28,628     24,480     40,937  
Securities available for sale, at fair value 106,707     93,699     89,255     93,102     89,741  
Securities held to maturity, at carrying value 45,701     46,791     48,208     49,376     50,824  
Restricted securities, at cost 1,590     1,590     1,570     1,570     1,570  
Loans held for sale 1,195     68     438     660     999  
Loans, net of allowance for loan losses 525,894     515,664     516,875     509,406     498,389  
Other real estate owned, net of valuation allowance 68         326     250     250  
Premises and equipment, net 19,633     19,833     19,891     20,510     20,501  
Accrued interest receivable 2,073     1,869     1,916     1,886     1,728  
Bank owned life insurance 13,787     13,711     13,967     14,232     14,115  
Core deposit intangibles, net 679     799     930     1,071     1,222  
Other assets 4,774     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 deposits 367,399     378,330     361,417     350,879     362,128  
Time deposits 122,291     125,035     122,651     126,032     122,920  
Total deposits $ 686,529     $ 692,825     $ 664,980     $ 656,262     $ 661,828  
Subordinated debt 4,956     4,952     4,948     4,943     4,939  
Junior subordinated debt 9,279     9,279     9,279     9,279     9,279  
Accrued interest payable and other liabilities 952     1,105     1,749     3,485     3,644  
Total liabilities $ 701,716     $ 708,161     $ 680,956     $ 673,969     $ 679,690  
                   
Preferred stock $     $     $     $     $  
Common stock 6,192     6,191     6,182     6,181     6,177  
Surplus 7,346     7,312     7,260     7,238     7,177  
Retained earnings 50,313     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 land 975     848     646     657     666  
Secured by 1-4 family residential 211,101     208,338     208,177     203,896     205,114  
Other real estate loans 223,387     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 loans 12,315     12,140     12,101     12,047     9,938  
Deposit overdrafts 231     222     232     196     245  
All other loans 4,631     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 other 1,140     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 securities 41     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 banks 346     147  
Interest on securities      
Taxable interest 1,456     1,296  
Tax-exempt interest 301     288  
Dividends on restricted securities 44     41  
Total interest income $ 14,998     $ 13,351  
Interest expense      
Interest on deposits $ 1,255     $ 788  
Interest on subordinated debt 178     178  
Interest on junior subordinated debt 187     144  
Total interest expense $ 1,620     $ 1,110  
Net interest income $ 13,378     $ 12,241  
Provision for loan losses 100      
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 fees 1,074     1,028  
Wealth management fees 816     702  
Fees for other customer services 304     277  
Income from bank owned life insurance 636     195  
Net gains (losses) on securities     13  
Net gains on sale of loans 24     67  
Other operating income 300     147  
Total noninterest income $ 4,700     $ 3,919  
Noninterest expense      
Salaries and employee benefits $ 6,610     $ 6,364  
Occupancy 787     715  
Equipment 843     808  
Marketing 270     272  
Supplies 168     196  
Legal and professional fees 414     442  
ATM and check card expense 414     391  
FDIC assessment 148     156  
Bank franchise tax 233     214  
Telecommunications expense 134     218  
Data processing expense 332     302  
Postage expense 103     135  
Amortization expense 251     329  
Other real estate owned expense (income), net (22)     6  
Other operating expense 1,045     908  
Total noninterest expense $ 11,730     $ 11,456  
Income before income taxes $ 6,248     $ 4,704  
Income tax expense 1,110     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, basic 4,950,922     4,938,178  
Net income, diluted $ 1.04     $ 0.67  
Weighted average shares, diluted 4,953,328     4,940,191  
Shares outstanding at period end 4,953,356     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 assets 1.37%     0.92%  
Return on average equity 17.33%     12.29%  
Net interest margin 3.83%     3.71%  
Efficiency ratio (1) 63.27%     68.09%  
       
Average Balances      
Average assets $ 756,959     $ 722,820  
Average earning assets 710,083     674,699  
Average shareholders' equity 59,799     54,118  
       
Asset Quality      
Loan charge-offs $ 500     $ 267  
Loan recoveries 113     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 other 2,147     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 securities 80     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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