First National Corporation Announces $1.3 Million Increase in Second Quarter Earnings

STRASBURG, Va., July 24, 2014 (GLOBE NEWSWIRE) -- First National Corporation (the "Company") (OTCBB:FXNC), the parent company of First Bank (the "Bank"), reported a $1.3 million increase in second quarter earnings. Net income totaled $1.5 million, or $0.26 per basic and diluted share, for the three months ended June 30, 2014, compared to $261 thousand, or $0.01 per basic and diluted share, for the same period in 2013. The Company's earnings for the three-month period resulted in a return on average assets of 1.16% and a return on average equity of 11.05%.

Operating Highlights for the Second Quarter

• Net income increased $1.3 million to $1.5 million
• Return on average assets was 1.16%
• Revenue from wealth management increased 26% to $472 thousand
• "First Mortgage," a new mortgage division, was announced
• Assets under management exceeded $300 million for Wealth Management
• Substandard loans decreased by $14.2 million, or 41%
• Book value per share increased from $5.83 to $8.58 per common share
• Cash dividends on common stock were reinstated

During the quarter, the Company announced the launch of First Mortgage, a new mortgage division of First Bank. George Ballew, a seasoned lender, joined the Bank as Chief Executive Officer of the division. The division is headquartered in Staunton, Virginia and provides a strategic opportunity to expand banking operations into a new market. First Mortgage is a natural extension of the Company's core banking franchise.

"Earnings for the quarter were positively impacted by growth in non-interest income combined with a continued focus on managing non-interest expense. Wealth Management reached record levels of assets under management during the quarter and deposit relationships generated significant income to the Company," said Scott C. Harvard, President and CEO of the Company and the Bank. "We are also excited about our First Mortgage initiative in Staunton, Virginia and anticipate the newly formed mortgage division will make additional contributions to non-interest revenue in 2015."

Second Quarter Earnings

Net income totaled $1.5 million for the second quarter of 2014, compared to $261 thousand for the same period of 2013. The return on average assets was 1.16% for the second quarter compared to 0.19% for the same quarter one year ago, and the return on average equity was 11.05% compared to 2.32% for the same period in 2013.

Net interest income totaled $4.6 million for the quarter, compared to $4.7 million for the same period one year ago. The net interest margin was 3.81% compared to 3.71% for the second quarter of 2013. Revenue from service charges on deposit accounts increased by $178 thousand, or 38% and revenue from wealth management fees increased by $97 thousand, or 26%, comparing the second quarter to the same period one year ago. The improvement in wealth management revenue was driven by assets under management that increased by $61 million, or 24%, to $312 million at June 30, 2014 compared to $251 million one year ago. Total noninterest income, excluding a one-time gain on termination of a postretirement benefit, increased by $230 thousand, or 15% comparing the same periods.

Noninterest expense decreased $214 thousand, or 4%, to $4.5 million for the quarter compared to $4.8 million for the same period in the prior year. Expenses from other real estate owned decreased by $446 thousand and the FDIC assessment expense decreased by $58 thousand, or 32%. These decreases were partially offset by increases in expenses that included other operating expense, which was $147 thousand, or 25%, higher than the second quarter of 2013 and salaries and employee benefits, which were $111 thousand, or 5%, higher than the same quarter one year ago. Increases in other operating expenses were primarily attributable to higher bank franchise tax from higher levels of capital, and expenses related to a new feature provided to our checking account customers that provides cash back rewards.

The Bank recorded a recovery of loan losses totaling $400 thousand during the quarter, which resulted in a total allowance for loan losses of $10.0 million or 2.72% of total loans at June 30, 2014. The recovery of loan losses was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and stable asset quality. This compared to a provision for loan losses of $2.5 million and an allowance for loan losses of $12.5 million, or 3.31% of total loans, at the end of the second quarter of 2013.

Year-to-Date Performance

Net income totaled $2.7 million for the six months ended June 30, 2014, compared to $1.2 million for the same period of 2013. The return on average assets was 1.03% for the period compared to 0.47% for the same period one year ago, and the return on average equity was 9.81% compared to 5.57% for the same period in 2013.

Net interest income totaled $9.1 million for the period, compared to $9.3 million for the same period one year ago. The net interest margin was 3.77% compared to 3.75% for the same period of 2013. Noninterest income, excluding a one-time gain on termination of a postretirement benefit, increased by $349 thousand, or 12% when comparing the periods. Revenues from service charges on deposits increased $350 thousand, or 38%, and revenues from wealth management increased $129 thousand, or 16%, when comparing the six months ended June 30, 2014 to the same period of 2013.

Noninterest expense decreased $709 thousand, or 7%, to $9.2 million for the period compared to $9.9 million for the same period in the prior year. Expenses from other real estate owned decreased by $522 thousand and the FDIC assessment expense decreased by $227 thousand, or 44%.

The Bank recorded a recovery of loan losses totaling $600 thousand for the period. The recovery of loan losses was primarily a result of a decrease in the general allocation from an improvement in the historical loss experience and stable asset quality. This compared to a provision for loan losses of $2.3 million for the same period of 2013.

Capital and Asset Quality

Substandard loans decreased by $14.2 million, or 41%, to $20.3 million at the end of the second quarter compared to $34.5 million for the same period one year ago. Nonperforming assets increased slightly to $13.4 million at June 30, 2014 compared to $13.2 million one year ago, and troubled debt restructurings increased to $978 thousand from $838 thousand, comparing the same periods.

Total shareholders' equity increased $13.6 million to $56.7 million at June 30, 2014, compared to $43.1 million one year ago. The book value per common share was $8.58 at the end of the second quarter. Regulatory capital ratios were higher than previous periods, with the total risk-based capital ratio at 18.64% at June 30, 2014.

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. First Bank offers loan, deposit, trust and investment products and services from 10 office locations located throughout the northern Shenandoah Valley region of Virginia, which includes Shenandoah County, Warren County, Frederick County and the City of Winchester. Banking services are also accessed from the Bank's website, www.fbvirginia.com, and from a network of ATMs located throughout its market area. 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 expense, loss on land lease termination and net 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 gain on termination of postretirement benefit. 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 in accordance with generally accepted accounting principles (GAAP) and should not be construed as such. Management believes 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.