First National Corporation Reports Third Quarter 2020 Net Income

Rhea-AI Summary

First National Corporation (NASDAQ: FXNC) reported third-quarter 2020 net income of $1.8 million ($0.36 per diluted share), down from $2.5 million in Q3 2019. The annualized return on assets was 0.74%, with a 0.86% return on equity. A $1.5 million provision for loan losses was noted, contrasting with no provision in Q3 2019. Despite challenges, net interest income rose by 7%, and wealth management revenue grew 20%. Total assets increased by 21% to $942.7 million, mainly driven by deposit growth from Paycheck Protection Program loans, while nonperforming assets surged 5.4 million to $7.0 million.

Positive

• Net interest income increased 7% to $7.6 million.
• Wealth management revenue rose 20%.
• Noninterest income increased 82% from customer fees.
• Tangible book value grew 12% to $16.92 per share.
• Loans in deferred payment program decreased to 3% of total loans.

Negative

• Net income dropped 28% year-over-year.
• Provision for loan losses increased to $1.5 million from none in Q3 2019.
• Nonperforming assets rose by $5.4 million to $7.0 million.
• Service charges on deposits decreased significantly.

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.

FAQ

What were the earnings for First National Corporation in Q3 2020?

First National Corporation reported net income of $1.8 million, or $0.36 per diluted share, for Q3 2020.

How did net income in Q3 2020 compare to Q3 2019 for FXNC?

Net income in Q3 2020 decreased by 28% compared to $2.5 million in Q3 2019.

What was the return on average assets for FXNC in Q3 2020?

The return on average assets was 0.74% for Q3 2020.

What is the trend in nonperforming assets for First National Corporation?

Nonperforming assets increased by $5.4 million to reach $7.0 million in Q3 2020.

How did First National Corporation's provision for loan losses change in Q3 2020?

The provision for loan losses was $1.5 million in Q3 2020, compared to no provision in the same period in 2019.