First National Corporation Reports 17% Increase in Fourth Quarter 2019 Net Income

STRASBURG, Va., Jan. 28, 2020 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ:FXNC) reported net income of $2.7 million, or $0.55 per diluted share, for the fourth quarter of 2019, which resulted in a return on average assets of 1.36% and a return on average equity of 14.10%. This was a $395 thousand, or 17%, increase compared to net income for the fourth quarter of 2018, which totaled $2.3 million or $0.47 per diluted share, and a return on average assets of 1.22% and a return on average equity of 14.15%.

For the year ended December 31, 2019, net income totaled $9.6 million, or $1.92 per diluted share, which resulted in return on assets of 1.23% and return on equity of 13.19%. This compares to net income of $10.1 million, or $2.04 per diluted share, for the year ended December 31, 2018.

Highlights for the fourth quarter of 2019:

• Return on average equity of 14.10%
• Return on average assets of 1.36%
• Wealth management revenue increased $53 thousand, or 12%
• Net gains on sale of loans increased $66 thousand  
• Total assets increased 6% to $800.0 million at year end
• Nonperforming assets decreased to 0.18% of assets

“First National Corporation produced strong results in the fourth quarter of 2019 to finish a year of solid performance for the Company,” said Scott C. Harvard, President and CEO of First National. Harvard added, “Although lower market rates and a flat yield curve caused net interest margin compression, we are pleased with six percent loan growth and five percent deposit growth during the year. In addition, wealth management revenue has consistently increased from growth in the number of accounts under management and their market values. Going forward, we plan to focus on operating efficiently and expanding our customer portfolios by offering the latest banking products and delivering superior service.”

BALANCE SHEET

Total assets of First National increased $47.1 million, or 6%, to $800.0 million at December 31, 2019, compared to $753.0 million at December 31, 2018. The earning asset composition was unchanged as loans, net of the allowance for loan losses, increased $31.6 million, or 6%, and securities and interest-bearing deposits in banks increased $16.3 million, or 10%.

Total deposits increased $35.9 million, or 5%, to $706.4 million at December 31, 2019, compared to $670.6 million at December 31, 2018. There was a slight change in the deposit composition as noninterest-bearing deposits was unchanged at 27% of total deposits, while savings and interest-bearing demand deposits increased from 55% to 57% of total deposits and time deposits decreased from 18% to 16% of total deposits.

Shareholders’ equity increased $10.5 million to $77.2 million at December 31, 2019, compared to $66.7 million one year ago, primarily from a $7.8 million increase in retained earnings and a $2.5 million increase in accumulated other comprehensive income. Tangible common equity totaled $77.0 million at the end of the fourth quarter, an increase of 16% compared to $66.2 million one year ago. The Company’s wholly owned subsidiary, First Bank (the “Bank”), was considered well capitalized at December 31, 2019.

ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income decreased $90 thousand, or 1%, to $7.1 million for the fourth quarter of 2019, compared to the same period of 2018. The decrease resulted from a 26 basis point decrease in net interest margin, which was partially offset by a 6% increase in average earning assets. The decrease in the net interest margin resulted from a 10 basis point increase in interest expense as a percent of average earning assets and a 16 basis point decrease in the yield on average earning assets.

The lower yield on average earning assets was primarily attributable to a 14 basis point decrease in the yield on loans. The increase in interest expense was primarily attributable to higher interest rates paid on deposits, as the cost of total interest-bearing deposits increased 16 basis points.

Noninterest income increased $62 thousand, or 3%, to $2.3 million, compared to the same period of 2018. Wealth management fees increased $53 thousand, or 12%, fees for other customer services increased $27 thousand, or 18%, income from bank owned life insurance increased $26 thousand, or 27%, and net gains on sale of loans increased $66 thousand. These increases were partially offset by a $61 thousand, or 7%, decrease in service charges on deposits, and a $63 thousand decrease in other operating income.

Noninterest expense decreased $277 thousand, or 5%, to $5.8 million, compared to the same period one year ago. The decrease was primarily attributable to a $113 thousand, or 3%, decrease in salaries and employee benefits, a $27 thousand, or 17%, decrease in marketing expense, a $32 thousand, or 9%, decrease in legal and professional fees, a $121 thousand decrease in FDIC assessment, and a $38 thousand decrease in amortization expense of core deposit intangibles. These decreases were partially offset by a $53 thousand, or 30%, increase in ATM and check card expense.

ANALYSIS OF THE TWELVE-MONTH PERIOD

Net interest income increased $384 thousand, or 1%, to $28.0 million for the year ended December 31, 2019, compared to $27.6 million for the same period of 2018. The increase resulted from higher average earning asset balances, which was partially offset by a lower net interest margin. Average earning asset balances increased 3%, while the net interest margin decreased 5 basis points to 3.88%. The decrease in the net interest margin resulted from a 17 basis point increase in interest expense as a percent of average earning assets, which was partially offset by a 12 basis point increase in the yield on average earning assets. 

The higher yield on average earning assets was attributable to a change in the average earning asset composition, a 6 basis point increase in the yield on loans, and a 23 basis point increase in the yield on interest-bearing deposits in banks. The change in the earning asset composition favorably impacted the yield on average earning assets as loans increased from 75% to 77% of average earning assets, while interest-bearing deposits in banks and securities decreased from 25% to 23% of average earning assets. The increase in interest expense was primarily attributable to higher interest rates paid on deposits, as the cost of total interest-bearing deposits increased by 26 basis points.

Noninterest income decreased $605 thousand to $8.6 million, compared to the same period of 2018. The decrease was primarily attributable to a $252 thousand, or 8%, decrease in service charges on deposits, a $384 thousand decrease in income from bank-owned life insurance, and a $400 thousand decrease in other operating income. These decreases were partially offset by a $74 thousand, or 3%, increase in ATM and check card fees, a $186 thousand, or 11%, increase in wealth management fees, an $85 thousand, or 14% increase in fees for other customer services, and an $84 thousand increase in net gains on sales of loans.

The decrease in income from bank-owned life insurance resulted from a death benefit recorded in the first quarter of 2018. The decrease in other operating income was impacted by the termination of the Company’s pension plan and subsequent distribution of plan assets in the prior year, which resulted in a one-time increase in other operating income of $126 thousand during the first quarter of 2018, as well as revenue earned during the prior year from a settlement and release agreement related to brokerage services.

Noninterest expense increased $557 thousand, or 2%, to $24.3 million, compared to the same period one year ago. The increase was primarily attributable to a $280 thousand, or 2%, increase in salaries and employee benefits, a $54 thousand, or 3%, increase in occupancy expense, a $103 thousand, or 19%, increase in marketing expense, a $100 thousand, or 10%, increase in legal and professional fees, an $88 thousand, or 11%, increase in ATM and check card expense, a $70 thousand, or 15%, increase in bank franchise tax, and a $202 thousand, or 8%, increase in other operating expense. These increases were partially offset by a $249 thousand decrease in FDIC assessments and a $156 thousand decrease in amortization expense of core deposit intangibles.  

The increase in marketing expense was attributable to strategic initiatives. The increase in legal and professional fees resulted from an increase in investment advisory costs of the wealth management department, legal fees, and consulting expenses related to bank compliance testing and implementation of new accounting standards. The increase in investment advisory costs correlated with the increase in wealth management revenue, when comparing the same periods. The increase in other operating expense was primarily attributable to fraud losses on ATM and debit card transactions and costs of listing the Company’s common stock on the Nasdaq Capital Market stock exchange.   

ASSET QUALITY/LOAN LOSS PROVISION

Provision for loan losses totaled $250 thousand for the fourth quarter of 2019, compared to $500 thousand for the same period of 2018. Net charge-offs totaled $228 thousand for the fourth quarter of 2019, compared to $292 thousand for the fourth quarter of 2018. Nonperforming assets totaled $1.5 million, or 0.18% of total assets at December 31, 2019, compared to $3.2 million, or 0.42% of total assets, one year ago. The allowance for loan losses totaled $4.9 million, or 0.86% of total loans, and $5.0 million, or 0.92% of total loans, at December 31, 2019 and 2018, respectively.

The provision for loan losses totaled $450 thousand for the year ended December 31, 2019, compared to $600 thousand for the year ended December 31, 2018. Net charge-offs totaled $525 thousand for the year ended December 31, 2019, compared to $917 thousand for the same period of 2018.

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, 2018, and other filings with the Securities and Exchange Commission.

ABOUT FIRST NATIONAL CORPORATION

First National Corporation (NASDAQ: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, one loan production office, 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.

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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%. 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.