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

STRASBURG, Va., April 26, 2017 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (OTC:FXNC) today reported net income of $1.5 million and earnings per share of $0.31 for the first quarter ended March 31, 2017. This was a $444 thousand increase when compared to earnings for the first quarter of 2016, which totaled $1.1 million or $0.22 per share. The increase in net income resulted primarily from a $366 thousand decrease in noninterest expenses and a $293 thousand increase in net interest income.

/EIN News/ -- Select highlights for the first quarter of 2017:

  • Net income increased 40% over first quarter of 2016

  • Return on equity of 11.78%

  • Return on average assets of 0.88%

  • The net interest margin increased to 3.70%

  • Compared to first quarter of 2016, the efficiency ratio improved to 69.52%, from 77.32%

  • Noninterest expenses decreased $366 thousand, or 6%

  • Net interest income increased $293 thousand, or 5%

  • Assets-per-employee increased to $4.6 million, compared to $3.8 million at March 31, 2016

“We are pleased with the performance in the first quarter of 2017 as the Company benefited from higher loan balances and expense reductions compared to last year’s first quarter. The results included a 40% increase in net income, a respectable net interest margin of 3.70%, and a significant improvement in the efficiency ratio,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “Loan growth drove a higher net interest margin and higher interest income on loans. Non-maturity deposit growth helped fund loans and we remain focused on deepening relationships to drive continued loan and deposit growth. We are also pleased with the substantial improvements in productivity, as demonstrated by the assets-per-employee ratio, which reached $4.6 million at the end of the quarter.”

BALANCE SHEET

Total assets of First National increased $11.3 million during the quarter to $727.3 million at March 31, 2017, and increased $26.3 million compared to one year ago.  Loans, net of the allowance for loan losses, increased $11.6 million during the quarter to $492.3 million, and increased $43.8 million, or 10%, compared to March 31, 2016. The total of securities and interest-bearing deposits in banks was unchanged during the quarter at $180.9 million, and decreased $13.9 million compared to one year ago. 

Total deposits increased $9.2 million during the quarter to $654.8 million, and were $21.7 million higher than total deposits at March 31, 2016. When comparing the composition of the deposit portfolio at March 31, 2017 to one year ago, noninterest-bearing demand deposits increased from 26% to 27% of total deposits, while time deposits decreased from 22% to 19%. 

Shareholders’ equity totaled $54.0 million at March 31, 2017 compared to $47.7 million one year ago. Tangible common equity totaled $52.6 million at the end of the first quarter, compared to $45.6 million at March 31, 2016. The Company exceeded its target regulatory capital ratios at the end of the quarter. 

NET INTEREST INCOME

Net interest income increased $293 thousand, or 5%, to $6.0 million for the quarter, compared to $5.7 million for the same period of 2016. 

Total interest income increased $341 thousand, or 6%, to $6.5 million for the quarter, compared to the same period of 2016. The increase resulted from higher average earning asset balances and a higher yield on total earning assets. Earning asset yields increased 10 basis points, primarily from a change in asset composition as average loan balances increased to 74% of average earning assets for the first quarter, up from 69% for the same period of 2016. While loan balances increased, the average balance of securities decreased to 22% of average earning assets, down from 26%, comparing the periods.

Total interest expense increased $48 thousand, or 10%, to $540 thousand for the quarter, compared to the same period of 2016.  The increase in interest expense resulted primarily from a 4 basis point increase in the cost of interest-bearing deposits. 

NONINTEREST INCOME

Noninterest income was unchanged at $1.9 million for the quarter, compared to the same period of 2016. There were no significant changes in the noninterest income categories when comparing the periods.

NONINTEREST EXPENSE

Noninterest expense decreased $366 thousand, or 6%, to $5.8 million for the quarter, compared to the same period of 2016. Salaries and employee benefits expense decreased $202 thousand, or 6%, legal and professional fees decreased $114 thousand, or 37%, and occupancy expense decreased $57 thousand, or 13%.

Salaries and employee benefits decreased primarily from a decrease in salaries and wages, insurance expense, and retirement plan costs. A reduction in the number of employees had a favorable impact on each of these expense categories. Legal and professional fees decreased primarily from consulting expenses that were incurred from an efficiency initiative that occurred during the first quarter of 2016. The decrease in occupancy expense resulted primarily from lower repairs and maintenance expense when comparing the periods. 

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan loss during the quarter. Net recoveries on loans previously charged-off offset the impact of loan growth on the general reserve during the period. Asset quality improved as nonperforming assets totaled $1.8 million, or 0.25% of total assets at March 31, 2017, which was an improvement when compared to $6.4 million, or 0.91% of total assets, one year ago. The allowance for loan losses totaled $5.5 million at March 31, 2017 and $5.5 million at March 31, 2016, representing 1.10% and 1.22% 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, 2016, 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 community, and 14 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
Income Statement March 31,
2017
  December 31,
 2016
  September 30,
 2016
  June 30,
 2016
  March 31,
 2016
Interest income                  
  Interest and fees on loans $ 5,646   $ 5,556     $ 5,500   $ 5,370     $ 5,236  
  Interest on deposits in banks   61     55       73     62       48  
  Interest on securities   805     794       749     825       888  
  Dividends on restricted securities   20     21       20     21       19  
Total interest income  $ 6,532   $ 6,426     $ 6,342   $ 6,278     $ 6,191  
Interest expense                                  
  Interest on deposits $ 383   $ 353     $ 338   $ 329     $ 333  
  Interest on federal funds purchased   -     -       -     -       3  
  Interest on subordinated debt   89     91       91     89       90  
  Interest on junior subordinated debt   68     69       65     64       61  
  Interest on other borrowings   -     -       1     -       5  
Total interest expense $ 540   $ 513     $ 495   $ 482     $ 492  
Net interest income $ 5,992   $ 5,913     $ 5,847   $ 5,796     $ 5,699  
Provision for loan losses   -     -       -     -       -  
Net interest income after provision for loan losses $ 5,992   $ 5,913     $ 5,847   $ 5,796     $ 5,699  
Noninterest income                                  
  Service charges on deposit accounts $ 755   $ 877     $ 941   $ 914     $ 780  
  ATM and check card fees   501     505       529     515       488  
  Wealth management fees   347     353       339     334       336  
  Fees for other customer services   140     154       143     137       147  
  Income from bank owned life insurance   85     109       123     107       86  
  Net gains (losses) on sales of securities   -     (2 )     4     -       6  
  Net gains on sale of loans   33     42       50     31       21  
  Other operating income   80     89       182     74       79  
Total noninterest income $ 1,941   $ 2,127     $ 2,311   $ 2,112     $ 1,943  
Noninterest expense                                  
  Salaries and employee benefits $ 3,242   $ 2,897     $ 3,183   $ 3,415     $ 3,444  
  Occupancy   367     364       380     365       424  
  Equipment    408     402       406     394       432  
  Marketing   136     210       125     120       107  
  Supplies   91     138       108     103       101  
  Legal and professional fees   197     238       179     156       311  
  ATM and check card fees   162     211       229     221       205  
  FDIC assessment   79     72       106     126       122  
  Bank franchise tax   104     90       89     90       103  
  Telecommunications expense   110     112       110     115       114  
  Data processing expense   150     159       160     146       128  
  Postage expense   61     56       56     57       69  
  Amortization expense   169     179       187     198       207  
  Other real estate owned expense (income), net   2     -       1     (49 )     (72 )
  Net loss on disposal of premises and equipment   -     -       8     -       -  
  Other operating expense   473     507       526     426       422  
Total noninterest expense $ 5,751   $ 5,635     $ 5,853   $ 5,883     $ 6,117  
Income before income taxes $ 2,182   $ 2,405     $ 2,305   $ 2,025     $ 1,525  
Income tax expense   639     724       611     592       426  
Net income $ 1,543   $ 1,681     $ 1,694   $ 1,433     $ 1,099  
                                   
Common Share and Per Common Share Data                
Net income, basic $ 0.31   $ 0.34     $ 0.34   $ 0.29     $ 0.22  
Weighted average shares, basic   4,935,421     4,927,728       4,925,753     4,924,702       4,920,315  
Net income, diluted $ 0.31   $ 0.34     $ 0.34   $ 0.29     $ 0.22  
Weighted average shares, diluted   4,937,625     4,933,572       4,929,922     4,926,859       4,923,117  
Shares outstanding at period end   4,940,766     4,929,403       4,926,546     4,925,599       4,924,539  
Tangible book value at period end $ 10.64   $ 10.26     $ 9.99   $ 9.61     $ 9.25  
Cash dividends $ 0.035   $ 0.03     $ 0.03   $ 0.03     $ 0.03  
                                   

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

    (unaudited)
  For the Quarter Ended 
  March 31,
2017
  December 31,
 2016
  September 30,
 2016
  June 30,
 2016
  March 31,
 2016
Key Performance Ratios                  
Return on average assets   0.88 %     0.94 %     0.95 %     0.82 %     0.64 %
Return on average equity   11.78 %     13.04 %     13.44 %     11.90 %     9.39 %
Net interest margin   3.70 %     3.60 %     3.57 %     3.62 %     3.62 %
Efficiency ratio (1)   69.52 %     67.05 %     68.57 %     71.62 %     77.32 %
                   
Average Balances                  
Average assets $ 714,714     $ 711,834     $ 710,005     $ 705,707     $ 693,783  
Average earning assets   667,358       664,156       661,798       654,709       643,531  
Average shareholders’ equity   53,132       51,295       50,160       48,443       47,066  
                   
Asset Quality                  
Loan charge-offs $ 106     $ 337     $ 195     $ 136     $ 120  
Loan recoveries   236       48       71       350       116  
Net charge-offs (recoveries)   (130 )     289       124       (214 )     4  
Non-accrual loans   1,596       1,520       3,521       4,057       4,258  
Other real estate owned, net   250       250       250       442       2,112  
Nonperforming assets   1,846       1,770       3,771       4,499       6,370  
Loans 30 to 89 days past due, accruing   2,606       2,583       2,036       1,979       1,743  
Loans over 90 days past due, accruing   119       116       59       11       124  
Troubled debt restructurings, accruing   296       300       392       308       313  
Special mention loans   12,896       13,073       14,238       13,392       13,796  
Substandard loans, accruing   7,877       8,056       8,273       9,610       10,068  
                   
Capital Ratios (2)                  
Total capital $ 67,264     $ 65,590     $ 65,759     $ 64,375     $ 62,440  
Tier 1 capital   61,813       60,269       60,149       58,641       56,920  
Common equity tier 1 capital   61,813       60,269       60,149       58,641       56,920  
Total capital to risk-weighted assets   13.51 %     13.47 %     13.90 %     13.66 %     13.50 %
Tier 1 capital to risk-weighted assets   12.41 %     12.38 %     12.72 %     12.45 %     12.30 %
Common equity tier 1 capital to risk-weighted assets   12.41 %     12.38 %     12.72 %     12.45 %     12.30 %
Leverage ratio   8.66 %     8.48 %     8.48 %     8.33 %     8.22 %
                   
Balance Sheet                  
Cash and due from banks $ 10,593     $ 10,106     $ 8,955     $ 10,518     $ 10,250  
Interest-bearing deposits in banks   35,246       30,986       47,902       40,225       29,077  
Securities available for sale, at fair value   92,081       94,976       88,497       94,740       99,193  
Securities held to maturity, at carrying value   51,999       53,398       55,263       57,401       64,963  
Restricted securities, at cost   1,570       1,548       1,548       2,058       1,548  
Loans held for sale   -       337       1,053       1,819       523  
Loans, net of allowance for loan losses   492,319       480,746       465,224       459,812       448,556  
Other real estate owned, net of valuation allowance   250       250       250       442       2,112  
Premises and equipment, net   20,709       20,785       20,852       21,126       21,366  
Accrued interest receivable   1,753       1,746       1,631       1,612       1,741  
Bank owned life insurance   14,013       13,928       13,808       13,935       13,828  
Core deposit intangibles, net   1,382       1,551       1,730       1,917       2,115  
Other assets   5,381       5,643       5,959       5,743       5,771  
  Total assets $ 727,296     $ 716,000     $ 712,672     $ 711,348     $ 701,043  
                                         
Noninterest-bearing demand deposits $ 173,963     $ 168,076     $ 168,204     $ 159,278     $ 161,783  
Savings and interest-bearing demand deposits   353,958       349,067       340,884       337,589       334,599  
Time deposits   126,848       128,427       131,654       133,479       136,736  
  Total deposits $ 654,769     $ 645,570     $ 640,742     $ 630,346     $ 633,118  
Other borrowings   -       -       -       12,000       -  
Subordinated debt   4,934       4,930       4,926       4,921       4,917  
Junior subordinated debt   9,279       9,279       9,279       9,279       9,279  
Accrued interest payable and other liabilities   4,336       4,070       6,742       5,544       6,029  
Total liabilities $ 673,318     $ 663,849     $ 661,689     $ 662,090     $ 653,343  
                                       

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

    (unaudited)
  For the Quarter Ended
  March 31,
2017
  December 31,
 2016
  September 30,
 2016
  June 30,
 2016
  March 31,
 2016
                   
Balance Sheet (continued)                  
Preferred stock $ -     $ -     $ -     $ -     $ -  
Common stock   6,176       6,162       6,158       6,157       6,156  
Surplus   7,155       7,093       7,046       7,021       6,996  
Retained earnings   41,126       39,756       38,223       36,676       35,391  
Accumulated other comprehensive loss, net     (479 )       (860 )       (444 )       (596 )       (843 )
Total shareholders’ equity $   53,978     $   52,151     $    50,983     $   49,258     $   47,700  
  Total liabilities and shareholders’ equity $   727,296     $   716,000     $   712,672     $   711,348     $   701,043  
                                                                 
Loan Data                  
Mortgage loans on real estate:                  
  Construction and land development $ 36,024     $ 34,699     $ 34,518     $ 33,232     $ 31,505  
  Secured by farm land   676       688       695       706       931  
  Secured by 1-4 family residential   205,623       198,763       196,492       196,295       196,165  
  Other real estate loans   215,915       210,522       202,148       199,456       190,375  
Loans to farmers (except those secured by real estate)   461       1,316       737       492       473  
Commercial and industrial loans (except those secured by real estate)   28,731       28,665       25,114       24,229       23,742  
Consumer installment loans   5,279       4,611       4,283       4,083       3,854  
Deposit overdrafts   199       264       260       334       312  
All other loans     4,862          6,539           6,587         6,719         6,719  
  Total loans $ 497,770     $ 486,067     $ 470,834     $ 465,546     $ 454,076  
Allowance for loan losses     (5,451 )       (5,321 )        (5,610 )       (5,734 )       (5,520 )
Loans, net $   492,319      $   480,746      $    465,224     $   459,812     $   448,556  
                                                                 
Reconciliation of Tax-Equivalent Net Interest Income                
GAAP measures:                  
  Interest income – loans $ 5,646     $ 5,556     $ 5,500     $ 5,370     $ 5,236  
  Interest income – investments and other   886       870       842       908       955  
  Interest expense – deposits   (383 )     (353 )     (338 )     (329 )     (333 )
  Interest expense – other borrowings   -       -       (1 )     -       (5 )
  Interest expense – subordinated debt   (89 )     (91 )     (91 )     (89 )     (90 )
  Interest expense – junior subordinated debt   (68 )     (69 )     (65 )     (64 )     (61 )
  Interest expense – federal funds purchased   -       -       -       -       (3 )
Total net interest income $ 5,992     $ 5,913     $ 5,847     $ 5,796     $ 5,699  
Non-GAAP measures:                  
Tax benefit realized on non-taxable interest income – loans $ 19     $ 25     $ 26     $ 25     $ 25  
Tax benefit realized on non-taxable interest income – municipal securities   74       71       70       73       76  
Total tax benefit realized on non-taxable interest income $ 93     $ 96     $ 96     $ 98     $ 101  
Total tax-equivalent net interest income $ 6,085     $ 6,009     $ 5,943     $ 5,894     $ 5,800  
                                                                 

 (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 34%. 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 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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