Harry S. Smith, President & CEO
M. Shane Bell, EVP & CFO
FIRST NATIONAL CORPORATION REPORTS FOURTH QUARTER AND
ANNUAL EARNINGS
Strasburg, Virginia(January 22, 2007) --- First National Corporation (OTCBB: FXNC) reported fourth quarter earnings of $1.4 million or $0.49 per basic and diluted share. Earnings for the fourth quarter of 2006 remained unchanged when compared to the same period of 2005. This was the result of net interest income that was unchanged, a 27.9% increase in noninterest income and a 61.2% decrease in the provision for loan losses, offset by a 15.3% increase in noninterest expense when comparing the periods. Return on assets and return on equity were 1.08% and 17.06%, respectively, for the fourth quarter of 2006 compared to 1.23% and 19.55% for the same quarter in 2005. Total assets increased $53.5 million or 11.3% during the year to $528.5 million at December 31, 2006 compared to $475.0 million a year ago. In addition, the Company’s retail investment and trust departments had assets under management that totaled $174.4 million at December 31, 2006.
Harry S. Smith, President and CEO of the Company stated, “We are pleased with the performance of the Company during 2006. Although market conditions and funding challenges have caused net interest margin compression, we are working to improve profitability in future periods. During this period of margin compression, the Company has focused efforts on increasing non-interest income and managing non-interest expenses to deliver increased earnings in future periods. The Company plans to utilize capacity created from two new branch locations before continuing expansion of the retail branch network.”
Net interest income was $4.4 million for both the fourth quarter of 2006 and 2005. The increase in average interest-earning assets was offset by a decline in the net interest margin. The net interest margin decreased 49 basis points to 3.55% for the fourth quarter of 2006, compared to 4.04% for the same quarter of 2005. The inverted yield curve, higher short-term rates and an unfavorable shift in the funding mix increased the cost of funds, decreasing the net interest margin.
Noninterest income increased 27.9% to $1.4 million for the fourth quarter of 2006, compared to $1.1 million for the fourth quarter of 2005. Fees for other customer services increased 34.3% to $548 thousand for the fourth quarter of 2006, compared to $408 thousand for the same period in 2005. This resulted from an increase in fee income from trust and asset management services, check card fees and brokerage services. Noninterest expense increased 15.3% to $3.6 million for the fourth quarter of 2006 compared to $3.1 million for the same period in 2005. Salaries and employee benefits increased 14.7% over the comparable period in 2005 primarily due to the addition of two branch locations during 2006.
Asset quality remained strong in the fourth quarter of 2006 as nonperforming asset balances remained low. Net charge-offs were $6 thousand for the fourth quarter of 2006, compared to $103 thousand for the same period in 2005. The decrease in net charge-offs contributed to a lower loan loss provision of $100 thousand for the fourth quarter of 2006 compared to $258 thousand for the same period in 2005. The allowance for loan losses totaled $4.0 million or 0.93% of total loans at December 31, 2006, compared to $3.5 million or 0.93% of total loans at December 31, 2005.
For the year ended December 31, 2006, net income was $5.8 million or $1.98 per basic and diluted share. This is a 7.6% increase over $5.4 million in net income or $1.84 per basic and diluted share for the same period in 2005. Return on assets was 1.15% for the year ended December 31, 2006 compared to 1.22% for the same period in 2005 and return on equity was 18.42% for the year ended December 31, 2006 compared to 19.48% for the same period in 2005.
Net interest income increased 8.2% to $17.6 million for the year ended December 31, 2006 from $16.2 million for the same period in 2005, primarily due to a 14.4% increase in average interest-earning assets. The net interest margin decreased 23 basis points to 3.73% for the year ended December 31, 2006, compared to 3.96% for the same period in 2005, reflecting an increased cost of funds.
Noninterest income increased 18.3% to $5.2 million for the year ended December 31, 2006 from $4.4 million for the same period in 2005. Fees for other customer services increased 40.1% to $2.0 million for the year ended December 31, 2006, compared to $1.4 million for the same period in 2005. This was attributable to increases in fee income from trust and asset management services, check card fees and brokerage services. Noninterest expense increased 21.2% to $13.8 million for the year ended December 31, 2006, compared to $11.8 million for the same period in 2005. The increase in noninterest expense was primarily the result of an increase in salaries and employee benefits, occupancy and equipment expenses from the expansion of the branch network.
The Company notes to investors that past results of operations do not necessarily indicate future results. Certain factors that affect the Company’s operations and business environment are subject to uncertainties that could in turn affect future results. These factors are identified in the Quarterly Report on Form 10-Q for the period ended September 30, 2006, which can be accessed from the Company’s website atwww.firstbank-va.com, as filed with the Securities and Exchange Commission.
First National Corporation, headquartered in Strasburg, Virginia, is the financial holding company of First Bank. First Bank offers loan, deposit, trust and investment products and services from eleven branch offices in the northern Shenandoah Valley region of Virginia, including Shenandoah County, Warren County, Frederick County and the City of Winchester. First Bank also owns First Bank Financial Services, Inc., which invests in partnerships that provide investment services and title insurance.
FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
| (unaudited) For the Three Months Ended | | (unaudited) For the Year Ended |
Income Statement | 12/31/2006 | | 12/31/2005 | | 12/31/2006 | | 12/31/2005 |
Interest and dividend income | | | | | | | |
Interest and fees on loans | $ 8,030 | | $ 6,414 | | $ 29,688 | | $ 23,284 |
Interest on federal funds sold | 36 | | 5 | | 45 | | 19 |
Interest on deposits in banks | 25 | | 23 | | 111 | | 78 |
Interest and dividends on securities available for sale: | | | | | | | |
Taxable interest | 575 | | 534 | | 2,466 | | 2,079 |
Tax-exempt interest | 108 | | 101 | | 423 | | 409 |
Dividends | 55 | | 40 | | 224 | | 144 |
Total interest and dividend income | $ 8,829 | | $ 7,117 | | $ 32,957 | | $ 26,013 |
| | | | | | | |
Interest expense | | | | | | | |
Interest on deposits | $ 3,553 | | $ 2,119 | | $ 11,638 | | $ 7,091 |
Interest on federal funds purchased | 27 | | 58 | | 246 | | 152 |
Interest on company obligated mandatorily redeemable capital securities | 242 | | 139 | | 764 | | 495 |
Interest on other borrowings | 638 | | 440 | | 2,754 | | 2,048 |
Total interest expense | $ 4,460 | | $ 2,756 | | $ 15,402 | | $ 9,786 |
| | | | | | | |
Net interest income | $ 4,369 | | $ 4,361 | | $ 17,555 | | $ 16,227 |
Provision for loan losses | 100 | | 258 | | 378 | | 838 |
Net interest income after provision for loan losses | $ 4,269 | | $ 4,103 | | $ 17,177 | | $ 15,389 |
| | | | | | | |
Noninterest income | | | | | | | |
Service charges | $ 687 | | $ 688 | | $ 2,730 | | $ 2,610 |
Fees for other customer services | 548 | | 408 | | 2,022 | | 1,443 |
Losses on sale of premises and equipment | - | | - | | - | | (10) |
Gains on sale of loans | 66 | | 79 | | 207 | | 302 |
Gains (losses) on sale of securities | - | | (158) | | 3 | | (140) |
Other operating income | 85 | | 67 | | 209 | | 166 |
Total noninterest income | $ 1,386 | | $ 1,084 | | $ 5,171 | | $ 4,371 |
| | | | | | | |
Noninterest expense | | | | | | | |
Salaries and employee benefits | $ 1,906 | | $ 1,662 | | $ 7,451 | | $ 6,375 |
Occupancy | 212 | | 186 | | 805 | | 721 |
Equipment | 330 | | 257 | | 1,194 | | 962 |
Other operating expense | 1,128 | | 997 | | 4,333 | | 3,776 |
Total noninterest expense | $ 3,576 | | $ 3,102 | | $ 13,783 | | $ 11,834 |
| | | | | | | |
Income before income taxes | $ 2,079 | | $ 2,085 | | $ 8,565 | | $ 7,926 |
Provision for income taxes | 652 | | 654 | | 2,766 | | 2,537 |
Net income | $ 1,427 | | $ 1,431 | | $ 5,799 | | $ 5,389 |
| | | | | | | |
Share and Per Share Data | | | | | | | |
Net income, basic and diluted | $ 0.49 | | $ 0.49 | | $ 1.98 | | $ 1.84 |
Shares outstanding at period end | 2,922,860 | | 2,922,860 | | 2,922,860 | | 2,922,860 |
Weighted average shares, basic and diluted | 2,922,860 | | 2,922,860 | | 2,922,860 | | 2,923,404 |
Book value at period end | $ 11.32 | | $ 10.06 | | $ 11.32 | | $ 10.06 |
Cash dividends | $ 0.13 | | $ 0.12 | | $ 0.49 | | $ 0.45 |
FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
| (unaudited) At or for the Three Months Ended | | (unaudited) At or for the Year Ended |
| 12/31/2006 | | 12/31/2005 | | 12/31/2006 | | 12/31/2005 |
Key Performance Ratios | | | | | | | |
Return on average assets | 1.08% | | 1.23% | | 1.15% | | 1.22% |
Return on average equity | 17.06% | | 19.55% | | 18.42% | | 19.48% |
Net interest margin | 3.55% | | 4.04% | | 3.73% | | 3.96% |
Efficiency ratio(1) | 61.44% | | 54.60% | | 59.95% | | 56.26% |
| | | | | | | |
Asset Quality | | | | | | | |
Loan charge-offs | $ 74 | | $ 172 | | $ 248 | | $ 420 |
Loan recoveries | 68 | | 69 | | 320 | | 234 |
Net charge-offs (recoveries) | 6 | | 103 | | (72) | | 186 |
Nonaccrual loans | 210 | | 202 | | 210 | | 202 |
Nonperforming assets | 721 | | 689 | | 721 | | 689 |
Repossessed assets | 36 | | 77 | | 36 | | 77 |
| | | | | | | |
Average Balances | | | | | | | |
Average assets | $ 523,189 | | $ 460,464 | | $ 504,255 | | $ 440,787 |
Average shareholders’ equity | 33,180 | | 29,036 | | 31,486 | | 27,666 |
| | | | | | | |
| | | | | (unaudited) |
| | | | | 12/31/2006 | | 12/31/2005 |
Capital Ratios | | | | | | | |
Tier 1 capital | | | | | $ 45,767 | | $ 37,766 |
Total capital | | | | | 49,745 | | 41,294 |
Total capital to risk-weighted assets | | | | | 11.32% | | 10.59% |
Tier 1 capital to risk-weighted assets | | | | | 10.42% | | 9.68% |
Leverage ratio | | | | | 8.76% | | 8.20% |
| | | | | | | |
Balance Sheet | | | | | | | |
Cash and due from banks | | | | | $ 10,368 | | $ 9,762 |
Interest-bearing deposits in banks | | | | | 1,759 | | 685 |
Federal funds sold | | | | | 8,430 | | - |
Securities available for sale, at fair value | | | | | 60,340 | | 71,078 |
Loans held for sale | | | | | 105 | | - |
Loans, net of allowance for loan losses | | | | | 423,697 | | 374,322 |
Premises and equipment, net | | | | | 17,603 | | 13,919 |
Interest receivable | | | | | 2,038 | | 1,671 |
Other assets | | | | | 4,147 | | 3,551 |
Total assets | | | | | $ 528,487 | | $ 474,988 |
| | | | | | | |
Noninterest-bearing demand deposits | | | | | $ 83,386 | | $ 82,534 |
Savings and interest-bearing demand deposits | | | | | 167,419 | | 145,132 |
Time deposits | | | | | 184,239 | | 149,991 |
Total deposits | | | | | $ 435,044 | | $ 377,657 |
Federal funds purchased | | | | | - | | 8,217 |
Other borrowings | | | | | 45,750 | | 50,223 |
Company obligated mandatorily redeemable capital securities | | | | | 12,372 | | 8,248 |
Accrued expenses and other liabilities | | | | | 2,222 | | 1,252 |
Total liabilities | | | | | $495,388 | | $445,597 |
FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)
| (unaudited) |
| 12/31/2006 | | 12/31/2005 |
Balance Sheet(continued) | | | |
Common stock | $ 3,653 | | $ 3,653 |
Surplus | 1,465 | | 1,465 |
Retained earnings | 29,102 | | 24,735 |
Accumulated other comprehensive loss, net | (1,121) | | (462) |
Total shareholders’ equity | $ 33,099 | | $ 29,391 |
| | | |
Total liabilities and shareholders’ equity | $ 528,487 | | $ 474,988 |
| | | |
Loan Data | | | |
Mortgage loans on real estate: | | | |
Construction | $ 60,913 | | $ 49,748 |
Secured by farm land | 2,507 | | 2,195 |
Secured by 1-4 family residential | 112,323 | | 99,442 |
Other real estate loans | 168,753 | | 148,805 |
Loans to farmers (except those secured by real estate) | 2,150 | | 1,818 |
Commercial and industrial loans (except those secured by real estate) | 50,854 | | 41,124 |
Consumer installment loans | 24,423 | | 29,444 |
Deposit overdrafts | 233 | | 196 |
All other loans | 5,519 | | 5,078 |
Total loans | $ 427,676 | | $ 377,850 |
Allowance for loan losses | 3,978 | | 3,528 |
Loans, net | $ 423,697 | | $ 374,322 |
(1) The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income excluding securities gains and losses. 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 for 2006 and 2005 is 34%. 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. Net interest income on a tax equivalent basis was $4,434 and $4,438 for the three months ended December 31, 2006 and 2005, respectively, and $17,824 and $16,524 for the year ended December 31, 2006 and 2005, respectively. Noninterest income excluding securities gains and losses was $1,386 and $1,242 for the three months ended December 31, 2006 and 2005, respectively, and $5,168 and $4,511 for the year ended December 31, 2006 and 2005, respectively. 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.
