First National Corporation Reports 80% Increase in Net Income

STRASBURG, Va., Oct. 23, 2013 /PRNewswire/ --First National Corporation (the "Company") (OTCBB: FXNC), the parent company of First Bank (the "Bank"), reported earnings of $1.2 million, or $0.21 per basic and diluted share, for the quarter ended September 30, 2013.

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Selected Financial Highlights

• Strong financial results:
  • Net income of $1.2 million, up 80% from third quarter 2012
  • Return on average assets (ROA) of 0.92%
  • Return on average equity (ROE) of 11.44%
• Continued improvement in asset quality:
  • Nonperforming assets down 17%
  • Classified loans down 29%
  • Provision for loan losses down $530 thousand
• Strong capital levels:
  • Total risk-based capital of 16.57%
  • Tier 1 capital of 15.30%
  • Leverage ratio of 10.61%

"We are extremely pleased with our strong financial performance in the third quarter," said Scott Harvard, President and CEO. "ROA of 0.92% is closer to historical norms, thanks to continued improvement in asset quality, strong revenues and expense management. Our renewed focus on being a trusted advisor for customers has resulted in significant new and expanded relationships in our markets. We believe that community banking remains a business where people and relationships still matter."

Third Quarter Earnings

Net income was $1.2 million for the third quarter of 2013, compared to $688 thousand for the same period of 2012.The increase in earnings for the third quarter was primarily due to lower provision for loan losses from improving asset quality, combined with stable revenues and noninterest expenses. The provision for loan losses decreased $530 thousand compared to third quarter 2012. Return on average assets was 0.92% compared to 0.52% for the third quarter of 2012. Return on average equity was 11.44% for the third quarter of 2013 compared to 6.11% for the third quarter of 2012. After the effective dividend on preferred stock, net income available to common shareholders totaled $1.0 million or $0.21 per basic and diluted share, for the third quarter of 2013, compared to $462 thousand, or $0.09 per basic and diluted share, for the same period of 2012.

Net interest income totaled $4.6 million for the third quarter of 2013, compared to $4.7 million for the same period one year ago. The net interest margin decreased to 3.68%, while average earning assets increased by $3.5 million. Excluding gains on sales of securities, noninterest income was up 13% compared to the same period of 2012, primarily from an increase in service charges on deposits. Including gains on sales of securities, noninterest income remained relatively unchanged at $1.6 million when comparing the two periods.

Noninterest expense remained essentially unchanged at $4.6 million when comparing the third quarter of 2013 to the same quarter in 2012. Marketing, legal and professional, and other operating expenses decreased $204 thousand while expenses related to other real estate owned increased $174 thousand.

Year-to-Date Earnings

Net income totaled $2.5 million for the nine months ended September 30, 2013 compared to $1.9 million for the same period one year ago. Return on average assets was 0.62% and return on average equity was 7.48% for the nine months ended September 30, 2013, compared to 0.47% and 6.18%, respectively, for the same period in 2012.

Net interest income was $13.9 million compared to $14.6 million for same period in 2012. Noninterest income, excluding gains on sale of securities and a one-time gain on termination of a post-retirement obligation, increased 7% to $4.6 million compared to $4.3 million for the same period one year ago. The increase in noninterest income was primarily driven by revenues from bank owned life insurance and trust and investment advisory fees.

Noninterest expense increased 4% to $14.5 million for the nine months ended September 30, 2013 compared to $14.0 million for the same period in 2012. Salaries and employee benefits increased $333 thousand to $7.5 million compared to $7.2 million. Other operating expenses increased $145 thousand to $2.1 million, compared to $1.9 million for the same period one year ago. Other operating expenses increased primarily from the decision to terminate a land lease for branch expansion that resulted in a one-time charge to earnings. Income tax benefit totaled $468 thousand for the nine months ended September 30, 2013. The income tax benefit was impacted by the sale of other real estate owned and loan charge-offs during the period.

Cautionary Statements

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 Annual Report on Form 10-K for the year ended December 31, 2012, which can be accessed from the Company's website at www.fbvirginia.com, as filed 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.

FIRST NATIONAL CORPORATION Quarterly Performance Summary (in thousands, except share and per share data)
	(unaudited) For the Three Months Ended				(unaudited) For the Nine Months Ended
Income Statement	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Interest and dividend income
Interest and fees on loans	$ 4,673		$ 5,189		$ 14,422		$ 16,001
Interest on federal funds sold	-		3		-		12
Interest on deposits in banks	18		11		45		19
Interest and dividends on securities available for sale:
Taxable interest	498		494		1,313		1,542
Tax-exempt interest	79		55		228		228
Dividends	18		19		56		57
Total interest and dividend income	$ 5,286		$ 5,771		$ 16,064		$ 17,859
Interest expense
Interest on deposits	$ 572		$ 928		$ 1,910		$ 2,874
Interest on trust preferred capital notes	55		60		166		182
Interest on other borrowings	30		47		89		192
Total interest expense	$ 657		$ 1,035		$ 2,165		$ 3,248
Net interest income	$ 4,629		$ 4,736		$ 13,899		$ 14,611
Provision for loan losses	275		805		2,525		3,455
Net interest income after provision for loan losses	$ 4,354		$ 3,931		$ 11,374		$ 11,156
Noninterest income
Service charges on deposit accounts	$ 627		$ 544		$ 1,550		$ 1,569
ATM and check card fees	373		369		1,071		1,129
Trust and investment advisory fees	406		365		1,233		1,079
Fees for other customer services	86		78		302		283
Gains on sale of loans	47		51		171		143
Gains on sale of securities available for sale	-		167		-		1,285
Losses on sale of premises and equipment, net	-		2		-		2
Other operating income	86		33		833		95
Total noninterest income	$ 1,625		$ 1,609		$ 5,160		$ 5,585
Noninterest expense
Salaries and employee benefits	$ 2,411		$ 2,398		$ 7,488		$ 7,155
Occupancy	306		333		980		996
Equipment	302		294		889		907
Marketing	81		120		304		293
Stationery and supplies	66		67		222		234
Legal and professional fees	237		293		635		741
ATM and check card fees	176		161		502		480
FDIC assessment	189		176		710		533
Other real estate owned, net	252		78		735		748
Other operating expense	628		737		2,053		1,908
Total noninterest expense	$ 4,648		$ 4,657		$ 14,518		$ 13,995
Income before income taxes	$ 1,331		$ 883		$ 2,016		$ 2,746
Income tax provision (benefit)	91		195		(468)		889
Net income	$ 1,240		$ 688		$ 2,484		$ 1,857
Effective dividend and accretion on preferred stock	229		226		684		677
Net income available to common shareholders	$ 1,011		$ 462		$ 1,800		$ 1,180
Common Share and Per Common Share Data
Net income, basic and diluted	$ 0.21		$ 0.09		$ 0.37		$ 0.33
Shares outstanding at period end	4,901,464		4,901,464		4,901,464		4,901,464
Weighted average shares, basic and diluted	4,901,464		4,901,464		4,901,464		3,623,191
Book value at period end	$ 5.93		$ 6.21		$ 5.93		$ 6.21
Cash dividends	$ -		$ -		$ -		$ -

FIRST NATIONAL CORPORATION Quarterly Performance Summary (in thousands, except share and per share data)
		(unaudited) For the Three Months Ended					(unaudited) For the Nine Months Ended
		September 30, 2013			September 30, 2012		September 30, 2013		September 30, 2012
Key Performance Ratios
Return on average assets		0.92%			0.52%		0.62%		0.47%
Return on average equity		11.44%			6.11%		7.48%		6.18%
Net interest margin		3.68%			3.78%		3.73%		3.93%
Efficiency ratio (1)		69.60%			75.31%		72.62%		71.91%
Average Balances
Average assets		$ 535,885			$ 526,908		$ 535,258		$ 528,239
Average earning assets		505,888			502,418		504,797		501,268
Average shareholders' equity		43,001			44,816		44,414		40,115
Asset Quality
Loan charge-offs		$ 955			$ 799		$ 4,300		$ 2,583
Loan recoveries		77			44		575		240
Net charge-offs		878			755		3,725		2,343
Non-accrual loans		8,000			8,998		8,000		8,998
Other real estate owned, net		3,833			5,323		3,833		5,323
Nonperforming assets		11,833			14,321		11,833		14,321
Loans over 90 days past due, still accruing		2,150			2,176		2,150		2,176
Troubled debt restructurings (accruing)		834			1,578		834		1,578
Special mention loans		23,226			21,719		23,226		21,719
Substandard loans (accruing)		31,119			46,308		31,119		46,308
Doubtful loans		-			-		-		-
							September 30, 2013		September 30, 2012
Capital Ratios
Tier 1 capital							$ 56,830		$ 54,138
Total capital							61,562		59,050
Total capital to risk-weighted assets							16.57%		15.39%
Tier 1 capital to risk-weighted assets							15.30%		14.11%
Leverage ratio							10.61%		10.28%
Balance Sheet
Cash and due from banks							$ 8,649		$ 6,655
Interest-bearing deposits in banks							29,221		19,564
Securities available for sale, at fair value							105,321		95,839
Restricted securities, at cost							1,804		1,973
Loans, net of allowance for loan losses							354,952		366,703
Premises and equipment, net							17,417		19,181
Interest receivable							1,339		1,581
Other assets							17,752		10,186
Total assets							$ 536,455		$ 521,682
Noninterest-bearing demand deposits							$ 95,609		$ 83,916
Savings and interest-bearing demand deposits							229,990		207,058
Time deposits							145,664		165,984
Total deposits							$ 471,263		$ 456,958
Other borrowings							6,058		6,082
Trust preferred capital notes							9,279		9,279
Other liabilities							6,244		4,540
Total liabilities							$ 492,844		$ 476,859

FIRST NATIONAL CORPORATION Quarterly Performance Summary (in thousands, except share and per share data)
		(unaudited)
		September 30, 2013		September 30, 2012
Balance Sheet (continued)
Preferred stock		$ 14,525		$ 14,372
Common stock		6,127		6,127
Surplus		6,813		6,813
Retained earnings		20,199		17,683
Accumulated other comprehensive loss, net		(4,053)		(172)
Total shareholders' equity		$ 43,611		$ 44,823
Total liabilities and shareholders' equity		$ 536,455		$ 521,682
Loan Data
Mortgage loans on real estate:
Construction and land development		$ 34,404		$ 44,725
Secured by farm land		1,302		5,924
Secured by 1-4 family residential		142,446		128,354
Other real estate loans		155,389		169,198
Loans to farmers (except those secured by real estate)		2,130		2,067
Commercial and industrial loans (except those secured by real estate)		19,186		22,149
Consumer installment loans		5,420		7,452
Deposit overdrafts		187		109
All other loans		6,363		774
Total loans		$ 366,827		$ 380,752
Allowance for loan losses		11,875		14,049
Loans, net		$ 354,952		$ 366,703
(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned expenses and the loss on land lease termination by the sum of net interest income on a tax equivalent basis and noninterest income excluding gains and losses on sales of securities and premises and equipment and the gain on termination of the split dollar liability. 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 2013 and 2012 was 34%. Net interest income on a tax equivalent basis was $4,691 and $4,772 for the three months ended September 30, 2013 and 2012, respectively, and $14,076 and $14,750 for the nine months ended September 30, 2013 and 2012, respectively. Adjusted noninterest income was $1,625 and $1,440 for the three months ended September 30, 2013 and 2012, respectively, and $4,617 and $4,298 for the nine months ended September 30, 2013 and 2012, respectively. Adjusted noninterest expense was $4,396 and $4,579 for the three months ended September 30, 2013 and 2012, respectively, and $13,574 and $13,247 for the nine months ended September 30, 2013 and 2012, respectively. 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.

Contact:
Scott C. Harvard		M. Shane Bell
President and CEO		Executive Vice President and CFO
[phone]		[phone]
[e-mail]		[e-mail]

SOURCE First National Corporation