First National Corporation Announces Third Quarter Earnings

STRASBURG, Va., Oct. 23, 2019 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ:FXNC) reported net income of $2.5 million, or $0.50 per diluted share, for the third quarter of 2019, which resulted in a return on average assets of 1.27% and a return on average equity of 13.31%. This compared to $2.7 million or $0.54 per diluted share, and a return on average assets of 1.41% and a return on average equity of 16.89% for the third quarter of 2018.

Highlights for the third quarter of 2019:

• Return on average equity of 13.31%

• Return on average assets of 1.27%

• Wealth management revenue increased 13%

• Net interest margin of 3.87%

• Nonperforming assets decreased to 0.20% of assets

“While our company delivered another quarter of excellent financial performance for our shareholders, the challenges of lower interest rates with a flat or inverted yield curve continue to put pressure on the net interest margin,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “We are pleased with loan growth of five percent year-to-date, while underlying asset quality remains very good based on all metrics. Management has seen no trends that would indicate forward deterioration in the underlying businesses in our portfolio.”

BALANCE SHEET

Total assets of First National increased $30.7 million, or 4%, to $777.2 million at September 30, 2019, compared to $746.5 million at September 30, 2018. The earning asset composition changed favorably as loans, net of the allowance for loan losses, increased $31.3 million, or 6%, while securities and interest-bearing deposits in banks decreased $5.6 million, or 4%.

Total deposits increased $18.5 million, or 3%, to $685.6 million at September 30, 2019, compared to $667.1 million at September 30, 2018. There was a slight change in the deposit composition as noninterest-bearing deposits was unchanged at 28% of total deposits, while savings and interest-bearing demand deposits increased from 54% to 55% of total deposits and time deposits decreased from 18% to 17% of total deposits.

Shareholders’ equity increased $11.7 million to $75.3 million at September 30, 2019, compared to $63.7 million one year ago, primarily from a $7.6 million increase in retained earnings and a $3.9 million increase in accumulated other comprehensive income. Tangible common equity totaled $75.1 million at the end of the third quarter, an increase of 19% compared to $63.1 million at September 30, 2018. The Company’s wholly owned subsidiary, First Bank (the “Bank”), was considered well capitalized at September 30, 2019.

ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income was unchanged at $7.1 million for the quarter ended September 30, 2019, compared to the third quarter of 2018. Average earning asset balances increased 4%, while the net interest margin decreased 15 basis points to 3.87%, compared to 4.02% for the same period in 2018. The decrease in the net interest margin resulted from an 18 basis point increase in interest expense as a percent of average earning assets, which was partially offset by a 3 basis point increase in the yield on average earning assets.

The higher yield on average earning assets was attributable to the change in the earning asset composition, as loans increased from 76% to 79% of average earning assets, while interest-bearing deposits in banks and securities decreased from 24% to 21% 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 29 basis points.

Noninterest income was unchanged at $2.2 million, compared to the same period of 2018. Wealth management fees increased $54 thousand, or 13%, ATM and check card fees increased $46 thousand, or 8%, fees for other customer services increased $34 thousand, or 24%, and income from bank owned life insurance increased $24 thousand, or 22%. These increases were partially offset by a $61 thousand, or 7%, decrease in service charges on deposits and a $79 thousand decrease in other operating income. Other operating income decreased primarily as a result of revenue earned during the prior year from a settlement and release agreement related to brokerage services, which is no longer being earned in the current year.

Noninterest expense increased $236 thousand, or 4%, to $6.2 million, compared to the same period one year ago. The increase was primarily attributable to a $185 thousand, or 6%, increase in salaries and employee benefits, an $86 thousand, or 16%, increase in other operating expense, a $20 thousand, or 16%, increase in marketing expense, and an $18 thousand, or 15%, increase in bank franchise tax expense. The increase in other operating expense was attributable to an increase in fraud losses on ATM and debit card transactions. These increases were partially offset by an $84 thousand decrease in FDIC assessments.

ANALYSIS OF THE NINE-MONTH PERIOD

Net interest income increased $474 thousand, or 2%, to $20.9 million for the nine months ended September 30, 2019, compared to $20.5 million for the same period of 2018. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 2%, and the net interest margin increased 2 basis points to 3.91%. The increase in the net interest margin resulted from a 21 basis point increase in the yield on average earning assets, which was partially offset by a 19 basis point increase in interest expense as a percent of average earning assets.

The higher yield on average earning assets was attributable to a change in the earning asset composition, a 13 basis point increase in the yield on loans, and a 53 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 74% to 78% of average earning assets, while interest-bearing deposits in banks and securities decreased from 26% to 22% 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 29 basis points.

Noninterest income decreased to $6.2 million, compared to $6.9 million for the same period of 2018. The decrease was primarily attributable to a $410 thousand decrease in income from bank-owned life insurance, a $337 thousand decrease in other operating income, and a $191 thousand, or 8%, decrease in service charges on deposits. These decreases were partially offset by a $133 thousand, or 11%, increase in wealth management fees, a $62 thousand, or 4%, increase in ATM and check card fees, and a $58 thousand, or 13%, increase in fees for other customer services. 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 $834 thousand, or 5%, to $18.5 million, compared to $17.7 million for the same period one year ago. The increase was primarily attributable to a $393 thousand, or 4%, increase in salaries and employee benefits, a $208 thousand increase in other operating expense, a $132 thousand, or 21%, increase in legal and professional fees, a $130 thousand, or 33%, increase in marketing expense, a $63 thousand, or 5%, increase in occupancy expense, and a $51 thousand, or 15%, increase in bank franchise tax. The increase in other operating expense was attributable to fraud losses on ATM and debit card transactions, costs of listing the Company’s common stock on the Nasdaq Capital Market stock exchange, and higher education and training expenses. The increase in legal and professional fees resulted primarily from legal costs related to an evaluation of strategic initiatives, an increase in investment advisory costs of the wealth management department, 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 marketing expense was attributable to strategic initiatives. These increases were partially offset by a $128 thousand decrease in FDIC assessments.

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan losses recorded during the third quarters of 2019 and 2018. Net charge-offs totaled $83 thousand for the third quarter of 2019 compared to $238 thousand for the same period of 2018. Nonperforming assets totaled $1.6 million, or 0.20% of total assets at September 30, 2019, compared to $2.7 million, or 0.37% of total assets, one year ago. The allowance for loan losses totaled $4.9 million, or 0.86% of total loans, and $4.8 million, or 0.89% of total loans, at September 30, 2019 and 2018, respectively.

The provision for loan losses totaled $200 thousand for the nine-month period ended September 30, 2019, compared to $100 thousand for the same period in 2018. Net charge-offs totaled $297 thousand for the nine months ended September 30, 2019 compared to $625 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.