First National Corporation Announces Fourth Quarter and Annual Earnings

STRASBURG, Va., Jan. 29, 2015 (GLOBE NEWSWIRE) -- First National Corporation (the "Company") (OTCQB:FXNC), the parent company of First Bank (the "Bank"), reported annual and quarterly earnings. Net income totaled $7.6 million and net income available to common shareholders totaled $6.5 million, or $1.32 per basic and diluted share, for the year ended December 31, 2014. For the fourth quarter, net income totaled $3.7 million and net income available to common shareholders totaled $3.4 million, or $0.68 per basic and diluted share.

Operating Highlights for 2014

• Return on average assets was 1.45%
• Net interest margin was 3.86%
• Four consecutive quarters of loan growth
• Service charge revenue increased 17% to $2.6 million
• Wealth management revenue increased 13% to $1.9 million
• Non-performing assets decreased by 33%
• Expanded into Harrisonburg and Staunton with mortgage division and loan production offices
• Entered into an agreement to acquire six branch banking offices in Virginia
• Book value per common share increased from $7.96 to $9.17

"We are proud of the Company's financial performance and expansion progress during 2014. Our bankers generated four consecutive quarters of loan growth, improved the Bank's net interest margin, maintained strong noninterest income and improved asset quality while entering new markets and launching a new mortgage division," said Scott C. Harvard, President and CEO of the Company and the Bank. Harvard continued, "We look forward to further expansion and growth of the Bank with the planned acquisition of six bank offices located throughout the Shenandoah Valley and Central Virginia."

Fourth Quarter Earnings

Net income totaled $3.7 million for the fourth quarter of 2014 compared to $7.4 million for the same period of 2013, which included a $4.8 million favorable impact to the income tax provision from elimination of the valuation allowance on net deferred tax assets. The return on average assets was 2.81% for the quarter compared to 5.55% for the same quarter one year ago, and the return on average equity was 25.03% compared to 62.96%.

Net interest income increased $256 thousand to $4.8 million for the fourth quarter, compared to $4.5 million for the same period one year ago, and the net interest margin was 3.96% compared to 3.68%. Noninterest income totaled $2.4 million for the fourth quarter, which was a $678 thousand, or 38% increase compared to the same quarter one year ago. The increase was primarily attributable to net gains on sale of securities of $765 thousand during the fourth quarter of 2014. Revenues from wealth management, service charges on deposits, and ATM and check card fees were relatively stable when compared to the same period one year ago.

Noninterest expenses totaled $4.9 million for the fourth quarter, which was a $1.4 million, or 22% decrease compared to the same period one year ago. The decrease in expenses was mostly attributable to salaries and employee benefit costs that decreased $185 thousand, FDIC assessments that decreased $104 thousand and expenses from other real estate owned that decreased $531 thousand during the fourth quarter of 2014. The decrease in expenses was also attributable to non-recurring items in the fourth quarter of 2013, which included $655 thousand of costs related to a lease termination.

The Bank recorded a recovery of loan losses totaling $3.2 million during the quarter, which resulted in a total allowance for loan losses of $6.7 million or 1.77% of total loans at December 31, 2014. The recovery was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and improved asset quality. The recovery of loan losses totaled $3.0 million and the allowance for loan losses totaled $10.6 million, or 2.98% of total loans, at December 31, 2013.

Annual Earnings

Net income totaled $7.6 million for the year ended December 31, 2014, compared to $9.9 million for the same period one year ago. The return on average assets was 1.45% compared to 1.85% for the same period one year ago, and the return on average equity was 13.49% compared to 21.87%.

Net interest income totaled $18.6 million for the period, compared to $18.4 million for the same period one year ago, and the net interest margin was 3.86% compared to 3.72%.  Noninterest income totaled $7.4 million, which was a $513 thousand or 7% increase compared to $6.9 million for the prior year. The increase in noninterest income was mostly attributable to revenue from service charges on deposits that was $368 thousand or 17% higher, and revenue from the wealth management division that was $219 thousand or 13% higher than the prior year.  

Noninterest expenses decreased $2.0 million, or 9%, to $18.8 million for the year compared to $20.8 million for the prior year. The decrease was attributable to expenses from other real estate owned, which decreased by $1.3 million and FDIC assessments that decreased by $430 thousand.  The decrease in noninterest expenses was also attributable to non-recurring items in 2013, including lease termination costs totaling $864 thousand. These decreases in expenses were partially offset by increases in bank franchise tax, marketing, and data processing.

The Bank recorded a recovery of loan losses totaling $3.9 million for the year, compared to a recovery of loan losses totaling $425 thousand for the prior year.  The recovery was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and improved asset quality.

Balance Sheet

Assets totaled $518.2 million at December 31, 2014. Gross loans increased by $21.3 million or 6%, to $378.4 million during the year while securities decreased $20.4 million to $84.7 million. Growth of the loan portfolio was led by residential real estate loans with balances that increased $21.8 million during the year, followed by multi-family and commercial real estate loans with balances that increased by $6.0 million. These increases were partially offset by a $4.6 million decrease in construction loan balances during the year. Changes in the earning asset mix had a favorable impact on the net interest margin during 2014. 

Noninterest-bearing demand deposits increased $12.1 million, while time deposits and other borrowings decreased $22.0 million and $6.0 million, respectively. The Bank had less reliance on wholesale funding at December 31, 2014 when compared to the prior year. Changes in the funding mix also had a favorable impact on the net interest margin during 2014. 

Capital and Asset Quality

Substandard loans decreased by $7.7 million or 33%, to $15.8 million at the end of the year compared to $23.5 million at the end of the prior year. Nonperforming assets, which includes other real estate owned, decreased 33% to $9.9 million at December 31, 2014 compared to $14.7 million one year ago. Other real estate owned decreased to $1.9 million compared to $3.0 million at the end of the prior year.

Total shareholders' equity increased $6.0 million to $59.6 million at December 31, 2014, compared to $53.6 million one year ago. The book value per common share was $9.17 at the end of the year compared to $7.96 at the prior year end. Regulatory capital ratios were higher than previous periods, with the total risk-based capital ratio increasing to 19.93% compared to 18.21% at the prior year end. 

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, a community bank that first opened for business in 1907.  The Bank offers loan, deposit, and wealth management products and services from 12 office locations located throughout the Shenandoah Valley region of Virginia. Banking services are also accessed from the Bank's website, www.fbvirginia.com, and from a network of ATMs located throughout its market area. The Bank operates divisions under the names First Mortgage and First Bank Wealth Management. First Bank also owns First Bank Financial Services, Inc., which invests in entities that provide investment services and title insurance.

⁽¹⁾ The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, net losses on disposal of premises and equipment, and loss on land lease termination 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 obligation. 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 and yearly 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.