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First National Corporation Reports Third Quarter 2020 Net Income

/EIN News/ -- STRASBURG, Va., Oct. 29, 2020 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ: FXNC), the bank holding company of First Bank (the “Bank”), reported unaudited consolidated net income of $1.8 million, or $0.36 per diluted share, for the third quarter of 2020, which resulted in a return on average assets of 0.74% and a return on average equity of 8.52%. This compares to net income of $2.5 million, or $0.50 per diluted share, and a return on average assets of 1.27% and a return on average equity of 13.31% for the third quarter of 2019. Provision for loan losses of $1.5 million was included in net income for the three-month period ending September 30, 2020, compared to no provision for loan losses for the same period in 2019.

For the nine months ending September 30, 2020, net income totaled $5.7 million, or $1.17 per diluted share, which resulted in a return on average assets of 0.86% and a return on average equity of 9.49%. This compares to net income of $6.8 million, or $1.38 per diluted share, and a return on average assets of 1.19% and a return on average equity of 12.85% for the same period of 2019. Provision for loan losses of $3.2 million and $200 thousand was included in net income for the nine-month periods ending September 30, 2020 and 2019, respectively.

Highlights for the third quarter of 2020:

  • Net interest income increased $503 thousand, or 7%
  • Wealth management revenue increased $96 thousand, or 20%
  • Fees for other customer services increased $146 thousand, or 82%
  • Salaries and employee benefits decreased $58 thousand, or 2%
  • Tangible book value increased 12% to $16.92 per share compared to $15.11 one year ago
  • Loans in the Bank’s deferred payment program decreased to $22.6 million, or 3% of total loans
  • Nonperforming assets totaled $7.0 million, an increase of $5.4 million
  • Provision for loan losses totaled $1.5 million, compared to no provision for same quarter of 2019

“We are pleased the Bank generated solid financial performance in the third quarter with higher net interest income, higher noninterest income and lower noninterest expenses,” said Scott Harvard, president and chief executive officer of First National.” Harvard continued, “While net income was impacted by a provision for loan losses totaling $1.5 million, we believe the provision reflected our diligent ongoing management of credits in the current credit cycle, including specific reserves established for impaired loans to companies that experienced business interruptions attributable to the pandemic. We are also pleased with the significant reduction of loans in the Bank’s deferred loan program, which totaled 3% of total loans at the end of the third quarter, compared to 28% of total loans at June 30, 2020.”

“We continue to be impressed by the efforts of our bankers to adapt to the unusual environment created by the pandemic and are proud of the improvement in net interest income, noninterest income and expense management as a result of their efforts.”

COVID-19 PANDEMIC UPDATE

Operations

During the third quarter, the Bank continued to follow its Pandemic Plan that strives to protect the health of its employees and customers, while continuing to deliver essential banking services. The Bank entered phase two of its Pandemic Plan on July 1, 2020 and re-opened branch lobbies with limited hours for in-person transactions without appointments while it continued to deliver banking services through branch drive throughs, ATMs, and mobile and internet banking platforms.

Paycheck Protection Program

The Bank participated as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to support local small businesses and non-profit organizations. During the second and third quarters of 2020, the Bank originated $76.6 million of PPP loans, received $2.5 million of loan fees, and incurred $535 thousand of loan origination costs. The loan fees are being accreted into earnings evenly over the life of the loans, net of the loan costs, through interest and fees on loans. At September 30, 2020, PPP loan balances totaled $73.7 million with 99% of the loan balances maturing in the second quarter of 2022 and 1% of loan balances maturing in the third quarter of 2025. At September 30, 2020, customers with PPP loan balances totaling $11.3 million had requested debt forgiveness but have not yet received notifications of forgiveness decisions from the SBA.

Loan Payment Deferral Program

In response to the unknown impact of the pandemic on the economy and customers, the Bank created and implemented a loan payment deferral program for individual and business customers beginning in the first quarter of 2020 and provided the opportunity to defer monthly payments for 90 days. Loans participating in the program totaled $22.6 million, or 3% of total loans at September 30, 2020, which was a significant reduction compared to $182.6 million, or 28% of the Bank’s loan balances at June 30, 2020. Interest income continued to accrue to the Bank during the deferral periods.

Asset Quality Impact

The pandemic is expected to have an unfavorable impact on the financial condition of the Bank’s loan customers, and as a result, the Bank has continued the process of identifying credit risk with the goal of mitigating the risk and minimizing future loan charge-offs. Certain sectors of the commercial real estate loan portfolio, including retail shopping, lodging and leisure are expected to experience elevated financial pressure. Those sectors comprised approximately 5%, 5% and 2% of the loan portfolio, respectively, excluding PPP loans at September 30, 2020. The magnitude of the potential decline in the Bank’s loan quality will likely depend on the duration of the pandemic and the extent that the Bank’s customers experience business interruptions. The Bank recorded a provision for loan losses of $1.5 million for the third quarter of 2020, including specific reserves placed on impaired loans impacted by the pandemic. This compared to no provision for loan losses in the third quarter of 2019.

Capital

The stock repurchase plan remained suspended during the third quarter. The Company updates its enterprise risk assessment and capital plans quarterly, and as a result, issued $5.0 million of subordinated debt in June 2020. The purpose of the issuance was primarily to further strengthen holding company liquidity and to remain a source of strength for the Bank in the event of a severe economic downturn. The Company may also use the proceeds of the issuance for general corporate purposes, including the potential repayment of the Company’s existing subordinated debt, which becomes callable in January 2021. The Company declared and paid dividends of $0.11 per share in the third quarter that was unchanged from the dividends declared and paid during the first and second quarters of 2020.

BALANCE SHEET

Total assets of First National increased $165.5 million, or 21%, to $942.7 million at September 30, 2020, compared to $777.2 million at September 30, 2019. Total securities decreased $515 thousand, while loans, net of the allowance for loan losses, increased $74.3 million, or 13%. The growth in the loan portfolio included PPP loans that totaled $73.7 million at the end of the third quarter.

Total liabilities increased $158.6 million, or 23%, to $860.5 million at September 30, 2020, compared to $701.9 million one year ago. The increase in total liabilities was primarily attributable to significant growth in deposits. Total deposits increased $152.8 million, or 22%, to $838.4 million and subordinated debt increased by $5.0 million to $10.0 million at September 30, 2020. Noninterest-bearing demand deposits increased $66.9 million, or 35%, savings and interest-bearing demand deposits increased $104.0 million, or 28%, while time deposits decreased $18.1 million, or 15%. The origination of PPP loans also contributed to the deposit growth as many customers deposited proceeds of the loans in their deposit accounts at the Bank. Although proceeds from PPP loan originations during the second and third quarters contributed to the increase in deposits, the Bank also experienced a significant amount of deposit growth that was not related to PPP loan proceeds. Total deposits increased $152.8 million, while PPP loans totaled $73.7 million at September 30, 2020.

Subordinated debt increased to $10.0 million at September 30, 2020 from a $5.0 million issuance in the second quarter of 2020. The Company issued the debt at a 5.50% fixed-to-floating rate subordinated note due 2030 to an institutional investor. The Note was structured to qualify as Tier 2 capital under bank regulatory guidelines, and the proceeds from the sale of the Note may be utilized to support capital levels at the Bank in the event of a severe economic downturn or for general corporate purposes, including the potential repayment of the Company’s other subordinated debt, which becomes callable in January 2021.

Shareholders’ equity increased $6.9 million, or 9%, to $82.3 million at September 30, 2020, compared to one year ago, from a $6.4 million increase in retained earnings and a $2.3 million increase in accumulated other comprehensive income. These increases were partially offset by $1.7 million decrease in common stock and surplus, which resulted from stock repurchases in the first quarter of 2020 under the Company’s stock repurchase plan.

The Company’s stock repurchase plan was suspended near the end of the first quarter of 2020 due to the potential impact of the pandemic on the economy and the Bank’s customers. The plan remained suspended during the second and third quarters of 2020. The Company paid a cash dividend to common shareholders during the third quarter of $0.11 per share, which was unchanged from the first and second quarters of 2020. The Bank was considered well-capitalized at September 30, 2020.

PERFORMANCE ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $503 thousand, or 7%, to $7.6 million for the third quarter of 2020, compared to the same period of 2019. The increase resulted from a $514 thousand, or 40%, decrease in total interest expense, which was partially offset by an $11 thousand decrease in total interest and dividend income. The net interest margin decreased 46 basis points to 3.41%. The decrease in the net interest margin was offset by growth in average earning assets of $158.3 million, or 22%, and resulted in an increase in net interest income.

The decrease in interest expense was primarily a result of the $548 thousand, or 50%, decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of the $83.6 million, or 17% increase in average interest-bearing deposits was offset by a 49-basis point decrease in the cost of interest-bearing deposits. A 59-basis point reduction of the cost of interest-bearing checking accounts and a 103-basis point reduction of the cost of money market accounts made the largest contributions to the decrease in interest expense.

The decrease in total interest and dividend income resulted from an 81-basis point decrease in the yield on earning assets, which was partially offset by a $158.3 million, or 22%, increase in average earning assets. The decrease in the yield on earning assets resulted from a 19-basis point decrease in the yield on securities, a 48-basis point decrease in the yield on loans, and a 206-basis point decrease in the yield on interest-bearing deposits in banks. The loan yield was negatively impacted by PPP loans earning a 1.00% interest rate. Additionally, the mix of earning assets had an unfavorable impact on the yield on average earning assets as lower yielding interest-bearing deposits in banks increased from 2% to 12% of average earning assets.

Noninterest income increased slightly to $2.2 million compared to the same period of 2019. ATM and check card fees were $83 thousand higher, primarily from an annual incentive payment received during the third quarter from the Bank’s card services provider. The incentive payment is typically received in the fourth quarter. Wealth management fees increased $96 thousand, or 20%, from a larger amount of assets under management. Fees for other customer services were $146 thousand, or 82% higher from an increase in brokered mortgage loan activity. These increases were partially offset by a $311 thousand, or 41%, decrease in service charges on deposits. The Bank first experienced a significant decrease in service charges on deposits in the second quarter of 2020 from lower overdraft fee income, which continued to underperform in the third quarter compared to historical levels. Bank management believes the decrease in overdraft fee income was a result of the significant increase in deposit balances and a decrease in consumer spending.

Noninterest expense decreased $51 thousand, or 1%, to $6.1 million, compared to the same period one year ago. The decrease was primarily attributable to a $58 thousand, or 2%, decrease in salaries and employee benefits, an $80 thousand, or 56%, decrease in marketing expense, a $38 thousand decrease in amortization expense, and a $131 thousand, or 17%, decrease in other operating expense. The decrease in salaries and employee benefits resulted from a decrease in the number of employees as certain vacated employee positions were not replaced. Marketing expense decreased from reduced spending on marketing campaigns. Other operating expense decreased primarily from a decrease in debit card fraud losses and loan collection expense. The decrease in loan collection expense resulted from the recovery of collection costs during the quarter that were incurred in a prior period. These decreases were partially offset by increases in occupancy, equipment, supplies, legal and professional fees, ATM and check card expense, FDIC assessment, and bank franchise tax.

PERFORMANCE ANALYSIS OF THE NINE-MONTH PERIOD

Net interest income increased $1.1 million, or 5%, to $22.0 million for the nine-month period ending September 30, 2020, compared to the same period of 2019. The increase resulted from a $911 thousand, or 25%, decrease in total interest expense, and a $165 thousand, or 1%, increase in total interest and dividend income. The net interest margin decreased 33 basis points to 3.58%. The decrease in the net interest margin was offset by growth in average earning assets of $105.3 million, or 15%, and resulted in an increase in net interest income.

The decrease in total interest expense resulted primarily from an $883 thousand decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of the $58.1 million or 12%, increase in average interest-bearing deposits was offset by a 30-basis point decrease in the cost of interest-bearing deposits. A 49-basis point reduction of the cost of interest-bearing checking accounts and a 65-basis point reduction of the cost of money market accounts made the largest contributions to the decrease in interest expense.

The increase in total interest and dividend income resulted from a $105.3 million, or 15%, increase in average earning assets, which was partially offset by a 56-basis point decrease in the yield on earning assets. The decrease in the yield on earning assets resulted from a 22-basis point decrease in the yield on securities, a 36-basis point decrease in the yield on loans, and a 189-basis point decrease in the yield on interest-bearing deposits in banks. The loan yield was negatively impacted by PPP loans earning a 1.00% interest rate. Additionally, the mix of earning assets had an unfavorable impact on the yield on average earning assets as lower yielding interest-bearing deposits in banks increased from 3% to 8% of average earning assets.

Noninterest income decreased $138 thousand, or 2%, to $6.1 million, compared to the same period of 2019, primarily from a $698 thousand, or 32%, decrease in service charges on deposits. The Bank first experienced a significant decrease in service charges on deposits in the second quarter of 2020 from lower overdraft fee income, which continued to underperform in the third quarter compared to historical levels. Bank management believes the decrease in overdraft fee income was a result of the significant increase in deposit balances and a decrease in consumer spending. This decrease was partially offset by a $62 thousand, or 4%, increase in ATM and check card fees, a $238 thousand, or 17%, increase in wealth management fees, and a $262 thousand, or 52%, increase in fees for other customer services. ATM and check card fees were higher from an annual incentive payment received during the third quarter from the Bank’s card service provider. The incentive payment is typically received in the fourth quarter. Wealth management fees increased from higher amounts of assets under management. Fees for other customer services were higher from an increase in brokered mortgage loan activity.

Noninterest expense decreased $622 thousand, or 3%, to $17.9 million, compared to the same period one year ago. The decrease was attributable to a $265 thousand, or 3%, decrease in salaries and employee benefits, a $280 thousand, or 54%, decrease in marketing expense, a $114 thousand decrease in amortization expense, and a $326 thousand, or 15%, decrease in other operating expense. The decrease in salaries and employee benefits resulted primarily from the deferral of $535 thousand of salary costs to originate PPP loans during the second and third quarters of 2020. Marketing expense decreased from a combination of reduced spending on marketing campaigns during 2020 and elevated expenses during 2019 from the timing of marketing initiatives in the prior year. Other operating expense decreased primarily from lower debit card fraud losses, education and training expenses, travel costs, loan servicing fees, registration and licensing costs, and dues and subscriptions. The decreases in the noninterest expense categories were partially offset by increases in supplies, legal and professional fees, ATM and check card expense, FDIC assessment, bank franchise tax, and data processing expense.

ASSET QUALITY/LOAN LOSS PROVISION

Provision for loan losses totaled $1.5 million for the third quarter of 2020, which resulted in a total allowance for loan losses of $7.8 million, or 1.20% of total loans. Excluding PPP loans, the allowance for loan losses totaled 1.34% of total loans at September 30, 2020. This compared to no provision for loan losses for the same period of 2019 and an allowance for loan losses of $4.9 million, or 0.86% of total loans at September 30, 2019.

The higher provision for loan losses was primarily attributable to an increase in the specific reserve component of the allowance for loan losses, which was partially offset by a decrease in the general reserve component. The increase in the specific reserve component of the allowance for loan losses resulted from a reserve placed on a newly identified impaired loan and an increase in a reserve on an existing impaired loan. The general reserve component decreased primarily from adjustments to qualitative factors as loans participating in the Bank’s loan payment deferral program decreased significantly and economic conditions continued to improve in the third quarter. Net charge-offs of loans also contributed to the provision for loan losses, which totaled $19 thousand for the third quarter of 2020, compared to $83 thousand for the same period of 2019.

Loans that were 30 to 89 days past due and accruing totaled $885 thousand, or 0.14% of total loans at September 30, 2020 compared to $902 thousand, or 0.16% of total loans one year ago. Accruing substandard loans totaled $3.8 million at September 30, 2020 and 2019. Nonperforming assets consisted only of non-accrual loans, which totaled $7.0 million, or 0.74% of total assets at September 30, 2020, compared to $1.6 million, or 0.20% of total assets one year ago.

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. Forward-looking statements involve a number of risks and uncertainties, including the rapidly changing uncertainties related to the COVID-19 pandemic and its potential adverse effect on the economy, our employees and customers, and our financial performance. For details on other 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, 2019, 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, the central regions of Virginia and in the city of Richmond. 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 Bell
President and CEO   Executive Vice President and CFO
(540) 465-9121   (540) 465-9121
shavard@fbvirginia.com
  sbell@fbvirginia.com
     

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Quarter Ended  
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2020     2020     2020     2019     2019  
Income Statement                                        
Interest income                                        
Interest and fees on loans   $ 7,568     $ 7,416     $ 7,203     $ 7,333     $ 7,429  
Interest on deposits in banks     25       16       118       163       97  
Interest on securities                                        
Taxable interest     575       636       670       627       645  
Tax-exempt interest     152       151       151       156       157  
Dividends     23       26       26       27       26  
Total interest income   $ 8,343     $ 8,245     $ 8,168     $ 8,306     $ 8,354  
Interest expense                                        
Interest on deposits   $ 541     $ 676     $ 962     $ 1,042     $ 1,089  
Interest on federal funds purchased                             1  
Interest on subordinated debt     160       91       90       91       90  
Interest on junior subordinated debt     68       67       90       98       103  
Total interest expense   $ 769     $ 834     $ 1,142     $ 1,231     $ 1,283  
Net interest income   $ 7,574     $ 7,411     $ 7,026     $ 7,075     $ 7,071  
Provision for loan losses     1,500       800       900       250        
Net interest income after provision for loan losses   $ 6,074     $ 6,611     $ 6,126     $ 6,825     $ 7,071  
Noninterest income                                        
Service charges on deposit accounts   $ 446     $ 348     $ 681     $ 753     $ 757  
ATM and check card fees     669       550       519       654       586  
Wealth management fees     573       512       525       496       477  
Fees for other customer services     323       237       207       181       177  
Income from bank owned life insurance     131       99       115       123       131  
Net gains (losses) on securities     38                   1        
Net gains on sale of loans     3       26       31       89       34  
Other operating income     18       1       21       44       29  
Total noninterest income   $ 2,201     $ 1,773     $ 2,099     $ 2,341     $ 2,191  
Noninterest expense                                        
Salaries and employee benefits   $ 3,498     $ 3,022     $ 3,589     $ 3,193     $ 3,556  
Occupancy     433       409       402       415       398  
Equipment     439       418       410       406       410  
Marketing     63       74       106       128       143  
Supplies     112       103       89       88       86  
Legal and professional fees     262       301       279       311       231  
ATM and check card expense     259       223       245       231       225  
FDIC assessment     52       60       30       (53 )     (6 )
Bank franchise tax     162       161       153       136       136  
Data processing expense     191       188       184       179       174  
Amortization expense     33       42       52       61       71  
Other real estate owned expense (income), net                       1        
Net losses (gains) on disposal of premises and equipment                 (9 )     14        
Other operating expense     631       612       614       694       762  
Total noninterest expense   $ 6,135     $ 5,613     $ 6,144     $ 5,804     $ 6,186  
Income before income taxes   $ 2,140     $ 2,771     $ 2,081     $ 3,362     $ 3,076  
Income tax expense     386       528       376       646       583  
Net income   $ 1,754     $ 2,243     $ 1,705     $ 2,716     $ 2,493  


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Quarter Ended  
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2020     2020     2020     2019     2019  
Common Share and Per Common Share Data                                        
Net income, basic   $ 0.36     $ 0.46     $ 0.34     $ 0.55     $ 0.50  
Weighted average shares, basic     4,854,144       4,849,719       4,950,887       4,968,574       4,966,641  
Net income, diluted   $ 0.36     $ 0.46     $ 0.34     $ 0.55     $ 0.50  
Weighted average shares, diluted     4,854,649       4,849,719       4,955,970       4,972,535       4,969,126  
Shares outstanding at period end     4,858,217       4,852,187       4,849,692       4,969,716       4,968,277  
Tangible book value at period end   $ 16.92     $ 16.63     $ 16.17     $ 15.50     $ 15.11  
Cash dividends   $ 0.11     $ 0.11     $ 0.11     $ 0.09     $ 0.09  
                                         
Key Performance Ratios                                        
Return on average assets     0.74 %     1.00 %     0.85 %     1.36 %     1.27 %
Return on average equity     8.52 %     11.30 %     8.72 %     14.10 %     13.31 %
Net interest margin     3.41 %     3.59 %     3.77 %     3.79 %     3.87 %
Efficiency ratio (1)     62.35 %     60.34 %     66.50 %     60.50 %     65.65 %
                                         
Average Balances                                        
Average assets   $ 944,390     $ 899,301     $ 806,609     $ 795,391     $ 780,376  
Average earning assets     889,127       836,741       755,173       745,721       730,865  
Average shareholders’ equity     81,894       79,845       78,659       76,424       74,291  
                                         
Asset Quality                                        
Loan charge-offs   $ 115     $ 176     $ 328     $ 281     $ 156  
Loan recoveries     96       88       78       53       73  
Net charge-offs     19       88       250       228       83  
Non-accrual loans     6,974       1,480       1,522       1,459       1,566  
Other real estate owned, net                              
Nonperforming assets     6,974       1,480       1,522       1,459       1,566  
Loans 30 to 89 days past due, accruing     885       1,094       2,901       2,372       902  
Loans over 90 days past due, accruing     6       1       86       97       113  
Troubled debt restructurings, accruing           4,313                    
Special mention loans     510       2,034       6,058       6,069       1,458  
Substandard loans, accruing     3,804       8,616       4,368       3,410       3,758  
                                         
Capital Ratios (2)                                        
Total capital   $ 89,155     $ 88,109     $ 86,849     $ 85,439     $ 83,591  
Tier 1 capital     81,883       81,813       81,265       80,505       78,679  
Common equity tier 1 capital     81,883       81,813       81,265       80,505       78,679  
Total capital to risk-weighted assets     15.34 %     15.20 %     14.98 %     14.84 %     14.57 %
Tier 1 capital to risk-weighted assets     14.09 %     14.11 %     14.02 %     13.99 %     13.71 %
Common equity tier 1 capital to risk-weighted assets     14.09 %     14.11 %     14.02 %     13.99 %     13.71 %
Leverage ratio     8.67 %     9.08 %     10.08 %     10.13 %     10.09 %


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Quarter Ended  
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2020     2020     2020     2019     2019  
Balance Sheet                                        
Cash and due from banks   $ 13,349     $ 17,717     $ 30,551     $ 9,675     $ 11,885  
Interest-bearing deposits in banks     108,857       90,562       17,539       36,110       18,488  
Securities available for sale, at fair value     117,132       123,193       128,660       120,983       114,568  
Securities held to maturity, at amortized cost     15,101       16,211       17,086       17,627       18,222  
Restricted securities, at cost     1,848       1,848       1,848       1,806       1,806  
Loans held for sale           170       621       167       1,098  
Loans, net of allowance for loan losses     640,591       645,220       576,283       569,412       566,341  
Premises and equipment, net     19,548       19,792       19,619       19,747       19,946  
Accrued interest receivable     3,156       3,863       2,124       2,065       2,053  
Bank owned life insurance     17,792       17,661       17,562       17,447       17,324  
Core deposit intangibles, net     43       76       118       170       231  
Other assets     5,316       5,777       4,401       4,839       5,231  
Total assets   $ 942,733     $ 942,090     $ 816,412     $ 800,048     $ 777,193  
                                         
Noninterest-bearing demand deposits   $ 256,733     $ 253,974     $ 197,662     $ 189,623     $ 189,797  
Savings and interest-bearing demand deposits     480,017       470,764       407,555       399,255       376,047  
Time deposits     101,645       114,277       115,410       117,564       119,777  
Total deposits   $ 838,395     $ 839,015     $ 720,627     $ 706,442     $ 685,621  
Subordinated debt     9,987       9,982       4,987       4,983       4,978  
Junior subordinated debt     9,279       9,279       9,279       9,279       9,279  
Accrued interest payable and other liabilities     2,816       3,026       3,001       2,125       1,999  
Total liabilities   $ 860,477     $ 861,302     $ 737,894     $ 722,829     $ 701,877  
                                         
Preferred stock   $     $     $     $     $  
Common stock     6,073       6,065       6,062       6,212       6,210  
Surplus     6,081       5,967       5,899       7,700       7,648  
Retained earnings     66,670       65,451       63,741       62,583       60,314  
Accumulated other comprehensive income (loss), net     3,432       3,305       2,816       724       1,144  
Total shareholders’ equity   $ 82,256     $ 80,788     $ 78,518     $ 77,219     $ 75,316  
Total liabilities and shareholders’ equity   $ 942,733     $ 942,090     $ 816,412     $ 800,048     $ 777,193  
                                         
Loan Data                                        
Mortgage loans on real estate:                                        
Construction and land development   $ 27,472     $ 31,981     $ 40,279     $ 43,164     $ 45,193  
Secured by farmland     533       872       888       900       916  
Secured by 1-4 family residential     234,198       234,188       230,980       229,438       226,828  
Other real estate loans     249,786       247,623       240,486       235,655       232,151  
Loans to farmers (except those secured by real estate)     1,120       711       1,221       1,423       1,461  
Commercial and industrial loans (except those secured by real estate)     124,157       123,995       54,287       48,730       49,096  
Consumer installment loans     7,378       8,401       9,505       10,400       11,040  
Deposit overdrafts     194       170       238       374       263  
All other loans     3,530       3,575       3,983       4,262       4,305  
Total loans   $ 648,368     $ 651,516     $ 581,867     $ 574,346     $ 571,253  
Allowance for loan losses     (7,777 )     (6,296 )     (5,584 )     (4,934 )     (4,912 )
Loans, net   $ 640,591     $ 645,220     $ 576,283     $ 569,412     $ 566,341  


FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Quarter Ended  
    September 30,     June 30,     March 31,     December 31,     September 30,  
    2020     2020     2020     2019     2019  
Reconciliation of Tax-Equivalent Net Interest Income                                        
GAAP measures:                                        
Interest income – loans   $ 7,568     $ 7,416     $ 7,203     $ 7,333     $ 7,429  
Interest income – investments and other     775       829       965       973       925  
Interest expense – deposits     (541 )     (676 )     (962 )     (1,042 )     (1,089 )
Interest expense – federal funds purchased                             (1 )
Interest expense – subordinated debt     (160 )     (91 )     (90 )     (91 )     (90 )
Interest expense – junior subordinated debt     (68 )     (67 )     (90 )     (98 )     (103 )
Total net interest income   $ 7,574     $ 7,411     $ 7,026     $ 7,075     $ 7,071  
Non-GAAP measures:                                        
Tax benefit realized on non-taxable interest income – loans   $ 8     $ 8     $ 10     $ 10     $ 9  
Tax benefit realized on non-taxable interest income – municipal securities     41       40       40       41       43  
Total tax benefit realized on non-taxable interest income   $ 49     $ 48     $ 50     $ 51     $ 52  
Total tax-equivalent net interest income   $ 7,623     $ 7,459     $ 7,076     $ 7,126     $ 7,123  


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Nine Months Ended  
    September 30,     September 30,  
    2020     2019  
Income Statement                
Interest income                
Interest and fees on loans   $ 22,187     $ 21,625  
Interest on deposits in banks     159       340  
Interest on securities                
Taxable interest     1,881       2,078  
Tax-exempt interest     454       472  
Dividends     75       76  
Total interest income   $ 24,756     $ 24,591  
Interest expense                
Interest on deposits   $ 2,179     $ 3,062  
Interest on federal funds purchased           1  
Interest on subordinated debt     341       269  
Interest on junior subordinated debt     225       322  
Interest on other borrowings           2  
Total interest expense   $ 2,745     $ 3,656  
Net interest income   $ 22,011     $ 20,935  
Provision for loan losses     3,200       200  
Net interest income after provision for loan losses   $ 18,811     $ 20,735  
Noninterest income                
Service charges on deposit accounts   $ 1,475     $ 2,173  
ATM and check card fees     1,738       1,676  
Wealth management fees     1,610       1,372  
Fees for other customer services     767       505  
Income from bank owned life insurance     345       333  
Net gains (losses) on securities     38        
Net gains on sale of loans     60       81  
Other operating income     40       71  
Total noninterest income   $ 6,073     $ 6,211  
Noninterest expense                
Salaries and employee benefits   $ 10,109     $ 10,374  
Occupancy     1,244       1,237  
Equipment     1,267       1,239  
Marketing     243       523  
Supplies     304       250  
Legal and professional fees     842       775  
ATM and check card expense     727       666  
FDIC assessment     142       98  
Bank franchise tax     476       402  
Data processing expense     563       526  
Amortization expense     127       241  
Net losses (gains) on disposal of premises and equipment     (9 )      
Other operating expense     1,857       2,183  
Total noninterest expense   $ 17,892     $ 18,514  
Income before income taxes   $ 6,992     $ 8,432  
Income tax expense     1,290       1,592  
Net income   $ 5,702     $ 6,840  


FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)

    (unaudited)  
    For the Nine Months Ended  
    September 30,     September 30,  
    2020     2019  
Common Share and Per Common Share Data                
Net income, basic   $ 1.17     $ 1.38  
Weighted average shares, basic     4,884,805       4,963,571  
Net income, diluted   $ 1.17     $ 1.38  
Weighted average shares, diluted     4,886,668       4,966,384  
Shares outstanding at period end     4,858,217       4,968,277  
Tangible book value at period end   $ 16.92     $ 15.11  
Cash dividends   $ 0.33     $ 0.27  
                 
Key Performance Ratios                
Return on average assets     0.86 %     1.19 %
Return on average equity     9.49 %     12.85 %
Net interest margin     3.58 %     3.91 %
Efficiency ratio (1)     63.04 %     66.93 %
                 
Average Balances                
Average assets   $ 883,741     $ 770,777  
Average earning assets     827,240       721,899  
Average shareholders’ equity     80,228       71,148  
                 
Asset Quality                
Loan charge-offs   $ 619     $ 603  
Loan recoveries     262       306  
Net charge-offs     357       297  
                 
Reconciliation of Tax-Equivalent Net Interest Income                
GAAP measures:                
Interest income – loans   $ 22,187     $ 21,625  
Interest income – investments and other     2,569       2,966  
Interest expense – deposits     (2,179 )     (3,062 )
Interest expense – federal funds purchased           (1 )
Interest expense – subordinated debt     (341 )     (269 )
Interest expense – junior subordinated debt     (225 )     (322 )
Interest expense – other borrowings           (2 )
Total net interest income   $ 22,011     $ 20,935  
Non-GAAP measures:                
Tax benefit realized on non-taxable interest income – loans   $ 26     $ 30  
Tax benefit realized on non-taxable interest income – municipal securities     121       126  
Total tax benefit realized on non-taxable interest income   $ 147     $ 156  
Total tax-equivalent net interest income   $ 22,158     $ 21,091  

(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.

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