First National Corporation Announces Second Quarter Earnings

Published

STRASBURG, Va., July 23, 2019 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ:FXNC) reported net income of $2.1 million, or $0.42 per diluted share, for the second quarter of 2019, compared to $2.5 million or $0.49 per diluted share for the second quarter of 2018. The decrease in net income resulted primarily from a $366 thousand increase in noninterest expense and a $200 thousand increase in the provision for loan losses, which were partially offset by a $134 thousand increase in net interest income. Highlights for the second quarter of 2019: Loan growth of $24.4 million during the quarterReturn on average equity of 11.76%Return on average assets of 1.08%Net interest margin of 3.88%Nonperforming assets decreased to 0.23% of assetsTotal assets reached $778.4 million ”We are pleased with second quarter results for the Company, specifically the pick-up in quality loan growth, the continued growth in wealth management assets and income, and the $19 million of deposit growth since year end,” said Scott Harvard, president and chief executive officer of First National. Harvard added, “While the net interest margin improved compared to the same quarterly period in 2018, the margin decreased compared to the linked quarter. We are concerned about the impact of an inverted yield curve on earnings over an extended period. Expenses for the quarter were also impacted by legal fees and marketing expenses related to strategic initiatives, and additional costs related to listing the Company’s stock on Nasdaq." BALANCE SHEET Total assets of First National increased $15.0 million to $778.4 million, compared to $763.4 million at June 30, 2018. The earning asset composition changed favorably as loans, net of the allowance for loan losses, increased $44.1 million, or 8%, while securities and interest-bearing deposits in banks decreased $31.0 million, or 17%. Total deposits increased to $689.8 million, up from $686.5 million at June 30, 2018. The deposit portfolio composition remained relatively stable as noninterest-bearing deposits were 27% and 29% of total deposits at June 30, 2019 and 2018, respectively. Shareholders’ equity increased $11.2 million to $72.8 million at June 30, 2019, compared to $61.6 million one year ago, primarily from an increase in retained earnings. Tangible common equity totaled $72.5 million at the end of the second quarter, an increase of 19% compared to $61.0 million at June 30, 2018. The Company’s wholly owned subsidiary, First Bank (the “Bank”), was considered well capitalized at June 30, 2019. ANALYSIS OF THE THREE-MONTH PERIOD Net interest income increased $134 thousand to $7.0 million for the quarter ended June 30, 2019, compared to $6.8 million for the second quarter of 2018. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 1%, and the net interest margin increased 2 basis points to 3.88% for the quarter ended June 30, 2019, compared to 3.86% for the same period in 2018. The increase in the net interest margin resulted from a 23 basis point increase in the yield on average earning assets, which was partially offset by a 21 basis point increase in interest expense as a percent of average earning assets.  The higher yield on average earning assets was primarily attributable to an 11 basis point increase in the yield on loans and a 59 basis point increase in the yield on interest-bearing deposits in banks. 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 30 basis points, which compared favorably to the 75 basis point increase in the target federal funds rate that occurred between the two periods. Noninterest income decreased slightly to $2.0 million, compared to $2.1 million for the same period of 2018. The decrease was primarily attributable to a $69 thousand decrease in service charges on deposits and a $64 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. These decreases were partially offset by a $49 thousand, or 12%, increase in wealth management fees, and a $22 thousand increase in income from bank-owned life insurance. Noninterest expense increased $366 thousand, or 6%, to $6.2 million, compared to the same period one year ago. The increase was primarily attributable to a $148 thousand, or 5%, increase in salaries and employee benefits, a $102 thousand increase in other operating expense, an $80 thousand increase in legal and professional fees, and a $78 thousand increase in marketing expense. The increase in other operating expense was attributable to additional costs of listing the Company’s common stock on the Nasdaq Capital Market stock exchange during the quarter, as well as higher education and training expenses. The increase in legal and professional fees resulted from legal costs related to strategic initiatives, and consulting expenses related to bank compliance testing and implementation of new accounting standards. The increase in marketing expense was also attributable to strategic initiatives. These increases were partially offset by a $40 thousand decrease in amortization expense and a $31 thousand decrease in FDIC assessments.    ANALYSIS OF THE SIX-MONTH PERIOD Net interest income increased $486 thousand, or 4%, to $13.9 million for the six months ended June 30, 2019, compared to $13.4 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 1%, and the net interest margin increased 10 basis points to 3.93% for the six months ended June 30, 2019, compared to 3.83% for the same period in 2018. The increase in the net interest margin resulted from a 30 basis point increase in the yield on average earning assets, which was partially offset by a 21 basis point increase in interest expense as a percent of average earning assets.  The higher yield on average earning assets was primarily attributable to a 20 basis point increase in the yield on loans and a 65 basis point increase in the yield on interest-bearing deposits in banks. 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, which compared favorably to the 75 basis point increase in the target federal funds rate that occurred between the two periods. Noninterest income decreased to $4.0 million, compared to $4.7 million for the same period of 2018. The decrease was primarily attributable to a $434 thousand decrease in income from bank-owned life insurance, a $258 thousand decrease in other operating income, and a $130 thousand decrease in service charges on deposits. These decreases were partially offset by a $79 thousand increase in wealth management fees.  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 $598 thousand, or 5%, to $12.3 million, compared to $11.7 million for the same period one year ago. The increase was primarily attributable to a $208 thousand, or 3%, increase in salaries and employee benefits, a $130 thousand increase in legal and professional fees, a $122 thousand increase in other operating expense, and a $110 thousand increase in marketing expense. 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 expense correlated with the increase in wealth management revenue, when comparing the same periods.  The increase in other operating expense was attributable to costs of listing the Company’s common stock on the Nasdaq Capital Market stock exchange, as well as higher education and training expenses. The increase in marketing expense was attributable to strategic initiatives. These increases were partially offset by an $81 thousand decrease in amortization expense and a $44 thousand decrease in FDIC assessments.   ASSET QUALITY/LOAN LOSS PROVISION The provision for loan losses totaled $200 thousand for the second quarter of 2019, compared to no provision for loan losses for the second quarter 2018. Net charge-offs totaled $151 thousand for the second quarter of 2019 compared to $233 thousand for the same period of 2018. The provision for loan losses recorded in the second quarter of 2019 was primarily a result of loan growth during the period. Nonperforming assets totaled $1.8 million, or 0.23% of total assets at June 30, 2019, compared to $2.4 million, or 0.31% of total assets, one year ago. The allowance for loan losses totaled $5.0 million, or 0.87% of total loans, and $5.0 million, or 0.95% of total loans, at June 30, 2019 and 2018, respectively. The provision for loan losses totaled $200 thousand for the six-month period ended June 30, 2019, compared to $100 thousand for the same period in 2018. Net charge-offs totaled $214 thousand for the six months ended June 30, 2019 compared to $387 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. CONTACTS Scott C. Harvard M. Shane BellPresident and CEOExecutive Vice President and CFO(540) 465-9121(540) 465-9121sharvard@fbvirginia.comsbell@fbvirginia.com FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands, except share and per share data)  (unaudited)For the Quarter Ended June 30,2019 March 31,2019 December 31,2018 September 30,2018 June 30,2018Income Statement         Interest income         Interest and fees on loans$7,200  $6,996  $7,106  $6,917  $6,546 Interest on deposits in banks133  110  105  88  186 Interest on securities         Taxable interest696  737  771  797  776 Tax-exempt interest159  156  153  156  156 Dividends on restricted securities26  24  24  23  22 Total interest income$8,214  $8,023  $8,159  $7,981  $7,686 Interest expense         Interest on deposits$1,051  $922  $798  $702  $665 Interest on subordinated debt90  89  91  91  89 Interest on junior subordinated debt108  111  105  105  101 Interest on other borrowings—  2  —  —  — Total interest expense$1,249  $1,124  $994  $898  $855 Net interest income$6,965  $6,899  $7,165  $7,083  $6,831 Provision for loan losses200  —  500  —  — Net interest income after provision for loan losses$6,765  $6,899  $6,665  $7,083  $6,831 Noninterest income         Service charges on deposit accounts$715  $701  $814  $818  $784 ATM and check card fees573  517  642  540  555 Wealth management fees458  437  443  423  409 Fees for other customer services153  175  154  143  151 Income from bank owned life insurance99  103  97  107  77 Net gains (losses) on securities—  —  (1) —  — Net gains on sale of loans25  22  23  39  15 Other operating income12  30  107  108  76 Total noninterest income$2,035  $1,985  $2,279  $2,178  $2,067 Noninterest expense         Salaries and employee benefits$3,375  $3,443  $3,306  $3,371  $3,227 Occupancy401  438  424  387  387 Equipment409  420  410  396  420 Marketing239  141  155  123  161 Supplies91  73  91  75  88 Legal and professional fees303  241  343  229  223 ATM and check card expense225  216  178  217  211 FDIC assessment35  69  68  78  66 Bank franchise tax136  130  117  118  118 Telecommunications expense79  83  79  83  98 Data processing expense179  173  173  168  170 Postage expense44  48  51  42  42 Amortization expense80  90  99  108  120 Other real estate owned expense, net—  —  —  2  1 Net loss on disposal of premises and equipment—  —  —  2  — Other operating expense634  533  587  551  532 Total noninterest expense$6,230  $6,098  $6,081  $5,950  $5,864 Income before income taxes$2,570  $2,786  $2,863  $3,311  $3,034 Income tax expense484  525  542  635  583 Net income$2,086  $2,261  $2,321  $2,676  $2,451  FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands, except share and per share data)  (unaudited)For the Quarter Ended June 30,2019 March 31,2019 December 31,2018 September 30,2018 June 30,2018Common Share and Per Common Share Data         Net income, basic$0.42  $0.46  $0.47  $0.54  $0.49 Weighted average shares, basic4,963,737  4,960,264  4,957,055  4,955,162  4,952,712 Net income, diluted$0.42  $0.46  $0.47  $0.54  $0.49 Weighted average shares, diluted4,965,822  4,964,134  4,960,597  4,958,162  4,954,265 Shares outstanding at period end4,964,824  4,963,487  4,957,694  4,956,925  4,953,356 Tangible book value at period end$14.60  $13.97  $13.35  $12.72  $12.31 Cash dividends$0.09  $0.09  $0.05  $0.05  $0.05           Key Performance Ratios         Return on average assets1.08% 1.21% 1.22% 1.41% 1.29%Return on average equity11.76% 13.47% 14.15% 16.89% 16.23%Net interest margin3.88% 3.97% 4.05% 4.02% 3.86%Efficiency ratio (1)67.94% 67.23% 62.99% 62.68% 64.17%          Average Balances         Average assets$773,574  $757,910  $753,112  $750,619  $762,626 Average earning assets724,909  709,690  706,323  703,894  715,163 Average shareholders’ equity71,124  68,089  65,077  62,882  60,592           Asset Quality         Loan charge-offs$219  $228  $374  $295  $294 Loan recoveries68  165  82  57  61 Net charge-offs151  63  292  238  233 Non-accrual loans1,775  1,915  3,172  2,738  2,330 Other real estate owned, net—  —  —  —  68 Nonperforming assets1,775  1,915  3,172  2,738  2,398 Loans 30 to 89 days past due, accruing792  1,002  1,446  2,707  3,408 Loans over 90 days past due, accruing19  133  235  261  549 Troubled debt restructurings, accruing—  259  264  269  273 Special mention loans2,610  1,910  2,078  2,718  3,988 Substandard loans, accruing2,825  3,132  3,522  1,216  3,798           Capital Ratios (2)         Total capital$82,078  $80,780  $74,697  $72,807  $71,026 Tier 1 capital77,083  75,834  69,688  68,006  65,987 Common equity tier 1 capital77,083  75,834  69,688  68,006  65,987 Total capital to risk-weighted assets14.24% 14.49% 13.62% 13.25% 13.47%Tier 1 capital to risk-weighted assets13.37% 13.60% 12.71% 12.38% 12.52%Common equity tier 1 capital to risk-weighted assets13.37% 13.60% 12.71% 12.38% 12.52%Leverage ratio9.96% 10.01% 9.26% 9.07% 8.66% FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands, except share and per share data)  (unaudited)For the Quarter Ended June 30,2019 March 31,2019 December 31,2018 September 30,2018 June 30,2018Balance Sheet         Cash and due from banks$12,354  $10,862  $13,378  $11,370  $13,501 Interest-bearing deposits in banks10,716  31,833  15,240  10,068  27,762 Securities available for sale, at fair value119,510  121,202  99,857  102,748  106,707 Securities held to maturity, at amortized cost18,828  19,489  43,408  44,239  45,701 Restricted securities, at cost1,701  1,701  1,688  1,590  1,590 Loans held for sale675  200  419  516  1,195 Loans, net of allowance for loan losses569,959  545,529  537,847  535,020  525,894 Other real estate owned, net of valuation allowance—  —  —  —  68 Premises and equipment, net20,182  20,282  20,066  19,557  19,633 Accrued interest receivable2,163  2,143  2,113  2,138  2,073 Bank owned life insurance17,193  17,094  13,991  13,894  13,787 Core deposit intangibles, net302  382  472  571  679 Other assets4,801  4,361  4,490  4,743  4,774 Total assets$778,384  $775,078  $752,969  $746,454  $763,364           Noninterest-bearing demand deposits$186,553  $189,261  $181,964  $186,293  $196,839 Savings and interest-bearing demand deposits385,399  377,673  369,383  360,988  367,399 Time deposits117,863  117,290  119,219  119,823  122,291 Total deposits$689,815  $684,224  $670,566  $667,104  $686,529 Other borrowings—  5,000  —  —  — Subordinated debt4,974  4,969  4,965  4,961  4,956 Junior subordinated debt9,279  9,279  9,279  9,279  9,279 Accrued interest payable and other liabilities1,507  1,878  1,485  1,459  952 Total liabilities$705,575  $705,350  $686,295  $682,803  $701,716           Preferred stock$—  $—  $—  $—  $— Common stock6,206  6,204  6,197  6,196  6,192 Surplus7,566  7,515  7,471  7,438  7,346 Retained earnings58,268  56,629  54,814  52,741  50,313 Accumulated other comprehensive income (loss), net769  (620) (1,808) (2,724) (2,203)Total shareholders’ equity$72,809  $69,728  $66,674  $63,651  $61,648 Total liabilities and shareholders’ equity$778,384  $775,078  $752,969  $746,454  $763,364           Loan Data         Mortgage loans on real estate:         Construction and land development$46,281  $48,948  $45,867  $42,982  $37,350 Secured by farmland855  883  880  942  975 Secured by 1-4 family residential225,820  217,527  215,945  211,938  211,101 Other real estate loans236,515  220,513  218,673  223,961  223,387 Loans to farmers (except those secured by real estate)1,006  806  1,035  937  476 Commercial and industrial loans (except those secured by real estate)48,347  45,239  43,570  41,924  40,467 Consumer installment loans11,572  11,890  12,061  12,301  12,315 Deposit overdrafts208  204  275  249  231 All other loans4,350  4,465  4,550  4,587  4,631 Total loans$574,954  $550,475  $542,856  $539,821  $530,933 Allowance for loan losses(4,995) (4,946) (5,009) (4,801) (5,039)Loans, net$569,959  $545,529  $537,847  $535,020  $525,894  FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands, except share and per share data)  (unaudited)For the Quarter Ended June 30,2019 March 31,2019 December 31,2018 September 30,2018 June 30,2018Reconciliation of Tax-Equivalent Net Interest Income        GAAP measures:         Interest income – loans$7,200  $6,996  $7,106  $6,917  $6,546 Interest income – investments and other1,014  1,027  1,053  1,064  1,140 Interest expense – deposits(1,051) (922) (798) (702) (665)Interest expense – subordinated debt(90) (89) (91) (91) (89)Interest expense – junior subordinated debt(108) (111) (105) (105) (101)Interest expense – other borrowings—  (2) —  —  — Total net interest income$6,965  $6,899  $7,165  $7,083  $6,831 Non-GAAP measures:         Tax benefit realized on non-taxable interest income – loans$10  $11  $11  $12  $11 Tax benefit realized on non-taxable interest income – municipal securities42  41  42  41  41 Total tax benefit realized on non-taxable interest income$52  $52  $53  $53  $52 Total tax-equivalent net interest income$7,017  $6,951  $7,218  $7,136  $6,883  FIRST NATIONAL CORPORATIONYear-to-Date Performance Summary(in thousands, except share and per share data)  (unaudited)For the Six Months Ended June 30,2019 June 30,2018Income Statement   Interest income   Interest and fees on loans$14,196  $12,851 Interest on deposits in banks243  346 Interest on securities   Taxable interest1,433  1,456 Tax-exempt interest315  301 Dividends on restricted securities50  44 Total interest income$16,237  $14,998 Interest expense   Interest on deposits$1,973  $1,255 Interest on subordinated debt179  178 Interest on junior subordinated debt219  187 Interest on other borrowings2  — Total interest expense$2,373  $1,620 Net interest income$13,864  $13,378 Provision for loan losses200  100 Net interest income after provision for loan losses$13,664  $13,278 Noninterest income   Service charges on deposit accounts$1,416  $1,546 ATM and check card fees1,090  1,074 Wealth management fees895  816 Fees for other customer services328  304 Income from bank owned life insurance202  636 Net gains on sale of loans47  24 Other operating income42  300 Total noninterest income$4,020  $4,700 Noninterest expense   Salaries and employee benefits$6,818  $6,610 Occupancy839  787 Equipment829  843 Marketing380  270 Supplies164  168 Legal and professional fees544  414 ATM and check card expense441  414 FDIC assessment104  148 Bank franchise tax266  233 Telecommunications expense162  134 Data processing expense352  332 Postage expense92  103 Amortization expense170  251 Other real estate owned expense (income), net—  (22)Other operating expense1,167  1,045 Total noninterest expense$12,328  $11,730 Income before income taxes$5,356  $6,248 Income tax expense1,009  1,110 Net income$4,347  $5,138  FIRST NATIONAL CORPORATIONYear-to-Date Performance Summary(in thousands, except share and per share data)          (unaudited)For the Six Months Ended June 30,2019 June 30,2018Common Share and Per Common Share Data   Net income, basic$0.88  $1.04 Weighted average shares, basic4,962,010  4,950,922 Net income, diluted$0.88  $1.04 Weighted average shares, diluted4,964,988  4,953,328 Shares outstanding at period end4,964,824  4,953,356 Tangible book value at period end$14.60  $12.31 Cash dividends$0.18  $0.10     Key Performance Ratios   Return on average assets1.14% 1.37%Return on average equity12.60% 17.33%Net interest margin3.93% 3.83%Efficiency ratio (1)67.59% 63.27%    Average Balances   Average assets$766,054  $756,959 Average earning assets717,341  710,083 Average shareholders’ equity69,589  59,799     Asset Quality   Loan charge-offs$447  $500 Loan recoveries233  113 Net charge-offs214  387     Reconciliation of Tax-Equivalent Net Interest Income  GAAP measures:   Interest income – loans$14,196  $12,851 Interest income – investments and other2,041  2,147 Interest expense – deposits(1,973) (1,255)Interest expense – subordinated debt(179) (178)Interest expense – junior subordinated debt(219) (187)Interest expense – other borrowings(2) — Total net interest income$13,864  $13,378 Non-GAAP measures:   Tax benefit realized on non-taxable interest income – loans$21  $21 Tax benefit realized on non-taxable interest income – municipal securities83  80 Total tax benefit realized on non-taxable interest income$104  $101 Total tax-equivalent net interest income$13,968  $13,479  (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.  Source: First National Corporation

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