First National Corporation (the “Company” or “First National”) (NASDAQ: FXNC) reported unaudited consolidated net income of $1.7 million, or $0.34 per diluted share, for the first quarter of 2020, which resulted in a return on average assets of 0.85% and a return on average equity of 8.72%. This was a $556 thousand, or 25%, decrease compared to net income for the first quarter of 2019, which totaled $2.3 million or $0.46 per diluted share, and a return on average assets of 1.21% and a return on average equity of 13.47%.

Highlights for the first quarter of 2020:

  • Provision for loan losses totaled $900 thousand, compared to no provision in Q1 2019
  • Cash and unencumbered securities totaled $133.4 million, or 16% of assets
  • Nonperforming assets decreased to 0.19% of assets
  • Loans increased $30.8 million, or 6%
  • Deposits increased $36.4 million, or 5%
  • Shareholders’ equity increased 13%, or $8.8 million
  • Wealth management revenue increased 20%, or $88 thousand
  • The Company’s banking subsidiary, First Bank (the “Bank”) exceeded all regulatory well-capitalized metrics

“Over the last month, our team of associates has demonstrated an incredible commitment to their customers, their communities, and one another,” said Scott Harvard, president and chief executive officer of First National. Harvard continued, “As the world was being turned upside down by the health crisis, our teammates overcame their own anxieties to support our neighbors and small businesses across our footprint. It has been so heartening to witness their dedication as financial first responders, working overtime to deliver payroll protection funds to small businesses, providing access to deposit accounts via changing delivery channels and reassuring customers, all while supporting their families and each other. We talk often about First Bank being a people business that depends on each employee’s powerful actions to enhance the customer experience. Those actions are occurring daily at First Bank, making all of us proud of how we serve our customers and communities.

“We were pleased with the financial performance of the Company in the first quarter. Expenses were under control while net interest income and noninterest income both improved over the first quarter of 2019. During this crisis, we have earned additional new business through our actions on behalf of small businesses. Looking forward, our team is focused on efficiently and effectively managing programs designed to relieve financial pressure on customers while mitigating what we expect to be increasing credit risk within the loan portfolio. We expect significant pressure on several sectors, including the hospitality and health care industries, which have been constrained by the Virginia governor’s stay at home order and the public’s adoption of social distancing. We are fortunate the Bank’s deposits are built on relationships, on-balance sheet and off-balance sheet liquidity is substantial, and capital levels exceed all regulatory thresholds to be considered well-capitalized.”

COVID-19 PANDEMIC UPDATE

In March 2020, the Bank activated its Pandemic Plan and began taking actions to protect the health of its employees and customers, while continuing to deliver essential banking services to small businesses and individuals. This has been accomplished by limiting access to banking offices and delivering a majority of its services through branch drive throughs, ATMs and mobile banking platforms. Approximately 40% of our employees have been working remotely, while social-distancing and split-shifts have been created for those employees working in the Bank’s facilities. Virtually all meetings are held using audio and/or video conference capabilities. The Company scheduled its annual meeting of shareholders in a virtual meeting online format.

The Company suspended future stock repurchases under its $5.0 million stock repurchase program due to the economic uncertainty caused by the pandemic. The stock repurchase program was previously announced in December 2019. During the first quarter of 2020, the Company repurchased and retired 129,035 shares at an average price paid per share of $16.05, for a total of $2.1 million. The Company will continue to update its enterprise risk assessment and capital plan as the operating environment develops. The Bank was considered well capitalized at March 31, 2020.

In response to the unknown impact of the pandemic on the economy and customers, the Bank implemented a loan payment deferral program for individual and business customers. Customers with favorable risk ratings and payment histories have been given the opportunity to defer monthly payments for 90 days. Approximately 27% of the Bank’s loan balances have participated in the program. There are no program fees and no late payment fees charged during the deferral period for participating loan customers. Interest income continues to accrue to the Bank during the deferral period.

In an effort to support local small businesses and non-profit organizations, the Bank is participating as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) and began accepting loan applications in April. In the first round of funding, the Bank obtained approval of 91% of the 330 loan applications it received prior to the end of funding on April 16, 2020, which totaled $52.1 million. The Bank continues to accept applications for processing in the second round of funding which was approved and signed into law on April 24, 2020. The Bank did not recognize any revenue related to the program during the first quarter of 2020.

In light of the significant increase in unemployment claims and the stress on businesses from stay at home orders, the Bank has been monitoring liquidity on a daily basis. The Bank believes it has sufficient liquidity to meet demand from its customers with on-balance sheet liquidity with cash and unencumbered securities of $133.4 million, or 16% of assets at March 31, 2020, as well as $176.9 million, or 22% of assets, of off-balance sheet liquidity that was available overnight through secured funding sources. All loans originated by the Bank under the PPP are expected to be pledged to the Federal Reserve’s new Paycheck Protection Program Liquidity Facility (“PPPLF”). The Bank plans to borrow funds from the PPPLF to fund PPP loans as needed at an interest rate of 0.35%.

The Bank anticipates the pandemic will have an unfavorable impact on the financial condition of its customers, and as a result, has begun the process of identifying the related credit risk within its loan portfolio with the goal of mitigating the risk and minimizing potential loan charge-offs. We expect significant pressure on several sectors of the loan portfolio, including hospitality, retail shopping and health care. Those sectors comprise approximately 8%, 5% and 4% of the loan portfolio, respectively. The magnitude of the potential decline in the Bank’s loan quality will likely depend on the length and extent that the Bank’s customers experience business interruptions from the pandemic.

The Bank considered the impact of the pandemic on the loan portfolio while determining an appropriate allowance for loan losses, and as a result, recorded a provision for loan losses of $900 thousand for the first quarter of 2020, compared to no provision for loan losses in the first quarter of the prior year. The higher provision for loan losses was primarily attributable to an increase in the general reserve component of the allowance for loan losses. The general reserve was increased through the adjustment of qualitative factors based on recent unfavorable changes in economic indicators, which contributed to the majority of the increase in the provision for loan losses.

BALANCE SHEET

Total assets of First National increased $41.3 million, or 5%, to $816.4 million at March 31, 2020, compared to $775.1 million at March 31, 2019. Total securities increased $5.2 million, or 4%, and loans, net of the allowance for loan losses, increased $30.8 million, or 6%. The Bank increased its cash balances near the end of the first quarter in anticipation of increased demand for cash from its customers expecting to receive stimulus checks as a result of the CARES Act, which was recently signed into law. As a result, cash and due from banks increased $19.7 million, while interest-bearing deposits in banks decreased $14.3 million.

Total deposits increased $36.4 million, or 5%, to $720.6 million at March 31, 2020, compared to $684.2 million at March 31, 2019. Noninterest-bearing demand deposits increased $8.4 million, or 4%, and savings and interest-bearing demand deposits increased $29.9 million, or 8%, while time deposits decreased $1.9 million, or 2%.    

Shareholders’ equity increased $8.8 million, or 13%, to $78.5 million at March 31, 2020, compared to one year ago, primarily from a $7.1 million increase in retained earnings and a $3.4 million increase in accumulated other comprehensive income (loss). These increases were partially offset by $1.8 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. 

ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $127 thousand, or 2%, to $7.0 million for the first quarter of 2020, compared to the same period of 2019. The increase resulted from a 6% increase in average earning assets, which was partially offset by a 20 basis point decrease in the net interest margin. Growth in average earning assets was led by a $30.2 million increase in average loans, net of the allowance for loan losses, followed by a $16.2 million increase in average interest-bearing deposits in banks. The decrease in the net interest margin resulted from a 23 basis point decrease in the yield on average earning assets, which was partially offset by a 3 basis point decrease in interest expense as a percent of average earning assets.

The lower yield on average earning assets was attributable to a 17 basis point decrease in the yield on loans, a 21 basis point decrease on securities, and an 87 basis point decrease on interest-bearing deposits in banks, which were all impacted by lower market rates. The decrease in interest expense as a percentage of average earning assets was attributable to lower interest rates paid on deposits and junior subordinated debt, which were also impacted by lower market rates. The decrease in cost of interest-bearing checking accounts, money market accounts and junior subordinated debt totaled 26 basis points, 10 basis points and 94 basis points, respectively.

Noninterest income increased $114 thousand, or 6%, to $2.1 million, compared to the same period of 2019. The increase was primarily attributable to an $88 thousand, or 20%, increase in wealth management fees, and a $32 thousand, or 18% increase in fees for other customer services. The increase in wealth management fees resulted primarily from higher balances of assets under management during the first quarter of 2020 compared to the same period one year ago. Assets under management increased as a result of new business relationships and from growth in the market values of existing accounts. Fees for other customer services increased due to revenue earned on letter of credit fees. 

Noninterest expense increased $46 thousand, or 1%, to $6.1 million, compared to the same period one year ago. The increase was primarily attributable to a $146 thousand, or 4%, increase in salaries and employee benefits, which was partially offset by a $39 thousand, or 57%, decrease in FDIC assessment, and a $50 thousand, or 8%, decrease in other operating expense. FDIC assessment expense was lower compared to the same period one year ago due to credits that were fully utilized during the first quarter of 2020. Other operating expense decreased from lower education and training costs, debit card losses, and loan servicing fees on purchased loans.

ASSET QUALITY/LOAN LOSS PROVISION

Provision for loan losses totaled $900 thousand for the first quarter of 2020, compared to no provision for loan losses for the same period of 2019. The increase in provision for loan losses was primarily attributable to an increase in the general reserve component of the allowance for loan losses. The general reserve component of the allowance for loan losses was increased through the adjustment of qualitative factors based on recent changes in economic indicators and contributed approximately $700 thousand of the higher provision for loan losses. Net charge offs totaled $250 thousand for the first quarter of 2020, compared to $63 thousand for the first quarter of 2019.  Net charge-offs also contributed to the increased provision for loan losses.

Nonperforming assets totaled $1.5 million, or 0.19% of total assets at March 31, 2020, compared to $1.9 million, or 0.25% of total assets, one year ago. The allowance for loan losses totaled $5.6 million, or 0.96% of total loans, and $4.9 million, or 0.90% of total loans, at March 31, 2020 and 2019, respectively.

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 CORPORATIONQuarterly Performance Summary(in thousands)

  (unaudited)
  For the Quarter Ended
  March 31, December 31, September 30, June 30, March 31,
  2020 2019 2019 2019 2019
Income Statement                    
Interest income                    
Interest and fees on loans $7,203  $7,333  $7,429  $7,200  $6,996 
Interest on deposits in banks  118   163   97   133   110 
Interest on securities                    
Taxable interest  670   627   645   696   737 
Tax-exempt interest  151   156   157   159   156 
Dividends  26   27   26   26   24 
Total interest income $8,168  $8,306  $8,354  $8,214  $8,023 
Interest expense                    
Interest on deposits $962  $1,042  $1,089  $1,051  $922 
Interest on federal funds purchased        1       
Interest on subordinated debt  90   91   90   90   89 
Interest on junior subordinated debt  90   98   103   108   111 
Interest on other borrowings              2 
Total interest expense $1,142  $1,231  $1,283  $1,249  $1,124 
Net interest income $7,026  $7,075  $7,071  $6,965  $6,899 
Provision for loan losses  900   250      200    
Net interest income after provision for loan losses $6,126  $6,825  $7,071  $6,765  $6,899 
Noninterest income                    
Service charges on deposit accounts $681  $753  $757  $715  $701 
ATM and check card fees  519   654   586   573   517 
Wealth management fees  525   496   477   458   437 
Fees for other customer services  207   181   177   153   175 
Income from bank owned life insurance  115   123   131   99   103 
Net gains on securities     1          
Net gains on sale of loans  31   89   34   25   22 
Other operating income  21   44   29   12   30 
Total noninterest income $2,099  $2,341  $2,191  $2,035  $1,985 
Noninterest expense                    
Salaries and employee benefits $3,589  $3,193  $3,556  $3,375  $3,443 
Occupancy  402   415   398   401   438 
Equipment  410   406   410   409   420 
Marketing  106   128   143   239   141 
Supplies  89   88   86   91   73 
Legal and professional fees  279   311   231   303   241 
ATM and check card expense  245   231   225   225   216 
FDIC assessment  30   (53)  (6)  35   69 
Bank franchise tax  153   136   136   136   130 
Data processing expense  184   179   174   179   173 
Amortization expense  52   61   71   80   90 
Other real estate owned expense, net     1          
Net losses (gains) on disposal of premises and equipment  (9)  14          
Other operating expense  614   694   762   757   664 
Total noninterest expense $6,144  $5,804  $6,186  $6,230  $6,098 
Income before income taxes $2,081  $3,362  $3,076  $2,570  $2,786 
Income tax expense  376   646   583   484   525 
Net income $1,705  $2,716  $2,493  $2,086  $2,261 

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

  (unaudited)
  For the Quarter Ended
  March 31, December 31, September 30, June 30, March 31,
  2020 2019 2019 2019 2019
Common Share and Per Common Share Data                    
Net income, basic $0.34  $0.55  $0.50  $0.42  $0.46 
Weighted average shares, basic  4,950,887   4,968,574   4,966,641   4,963,737   4,960,264 
Net income, diluted $0.34  $0.55  $0.50  $0.42  $0.46 
Weighted average shares, diluted  4,955,970   4,972,535   4,969,126   4,965,822   4,964,134 
Shares outstanding at period end  4,849,692   4,969,716   4,968,277   4,964,824   4,963,487 
Tangible book value at period end $16.17  $15.50  $15.11  $14.60  $13.97 
Cash dividends $0.11  $0.09  $0.09  $0.09  $0.09 
                     
Key Performance Ratios                    
Return on average assets  0.85%  1.36%  1.27%  1.08%  1.21%
Return on average equity  8.72%  14.10%  13.31%  11.76%  13.47%
Net interest margin  3.77%  3.79%  3.87%  3.88%  3.97%
Efficiency ratio (1)  66.50%  60.50%  65.65%  67.94%  67.23%
                     
Average Balances                    
Average assets $806,609  $795,391  $780,376  $773,574  $757,910 
Average earning assets  755,173   745,721   730,865   724,909   709,690 
Average shareholders’ equity  78,659   76,424   74,291   71,124   68,089 
                     
Asset Quality                    
Loan charge-offs $328  $281  $156  $219  $228 
Loan recoveries  78   53   73   68   165 
Net charge-offs  250   228   83   151   63 
Non-accrual loans  1,522   1,459   1,566   1,775   1,915 
Other real estate owned, net               
Nonperforming assets  1,522   1,459   1,566   1,775   1,915 
Loans 30 to 89 days past due, accruing  2,901   2,372   902   792   1,002 
Loans over 90 days past due, accruing  86   97   113   19   133 
Troubled debt restructurings, accruing              259 
Special mention loans  6,058   6,069   1,458   2,610   1,910 
Substandard loans, accruing  4,368   3,410   3,758   2,825   3,132 
                     
Capital Ratios (2)                    
Total capital $86,849  $85,439  $83,591  $82,078  $80,780 
Tier 1 capital  81,265   80,505   78,679   77,083   75,834 
Common equity tier 1 capital  81,265   80,505   78,679   77,083   75,834 
Total capital to risk-weighted assets  14.98%  14.84%  14.57%  14.24%  14.49%
Tier 1 capital to risk-weighted assets  14.02%  13.99%  13.71%  13.37%  13.60%
Common equity tier 1 capital to risk-weighted assets  14.02%  13.99%  13.71%  13.37%  13.60%
Leverage ratio  10.08%  10.13%  10.09%  9.96%  10.01%

FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands)

  (unaudited)
  For the Quarter Ended
  March 31, December 31, September 30, June 30, March 31,
  2020 2019 2019 2019 2019
Balance Sheet                    
Cash and due from banks $30,551  $9,675  $11,885  $12,354  $10,862 
Interest-bearing deposits in banks  17,539   36,110   18,488   10,716   31,833 
Securities available for sale, at fair value  128,660   120,983   114,568   119,510   121,202 
Securities held to maturity, at amortized cost  17,086   17,627   18,222   18,828   19,489 
Restricted securities, at cost  1,848   1,806   1,806   1,701   1,701 
Loans held for sale  621   167   1,098   675   200 
Loans, net of allowance for loan losses  576,283   569,412   566,341   569,959   545,529 
Premises and equipment, net  19,619   19,747   19,946   20,182   20,282 
Accrued interest receivable  2,124   2,065   2,053   2,163   2,143 
Bank owned life insurance  17,562   17,447   17,324   17,193   17,094 
Core deposit intangibles, net  118   170   231   302   382 
Other assets  4,401   4,839   5,231   4,801   4,361 
Total assets $816,412  $800,048  $777,193  $778,384  $775,078 
                     
Noninterest-bearing demand deposits $197,662  $189,623  $189,797  $186,553  $189,261 
Savings and interest-bearing demand deposits  407,555   399,255   376,047   385,399   377,673 
Time deposits  115,410   117,564   119,777   117,863   117,290 
Total deposits $720,627  $706,442  $685,621  $689,815  $684,224 
Other borrowings              5,000 
Subordinated debt  4,987   4,983   4,978   4,974   4,969 
Junior subordinated debt  9,279   9,279   9,279   9,279   9,279 
Accrued interest payable and other liabilities  3,001   2,125   1,999   1,507   1,878 
Total liabilities $737,894  $722,829  $701,877  $705,575  $705,350 
                     
Preferred stock $  $  $  $  $ 
Common stock  6,062   6,212   6,210   6,206   6,204 
Surplus  5,899   7,700   7,648   7,566   7,515 
Retained earnings  63,741   62,583   60,314   58,268   56,629 
Accumulated other comprehensive income (loss), net  2,816   724   1,144   769   (620)
Total shareholders’ equity $78,518  $77,219  $75,316  $72,809  $69,728 
Total liabilities and shareholders’ equity $816,412  $800,048  $777,193  $778,384  $775,078 
                     
Loan Data                    
Mortgage loans on real estate:                    
Construction and land development $40,279  $43,164  $45,193  $46,281  $48,948 
Secured by farmland  888   900   916   855   883 
Secured by 1-4 family residential  230,980   229,438   226,828   225,820   217,527 
Other real estate loans  240,486   235,655   232,151   236,515   220,513 
Loans to farmers (except those secured by real estate)  1,221   1,423   1,461   1,006   806 
Commercial and industrial loans (except those secured by real estate)  54,287   48,730   49,096   48,347   45,239 
Consumer installment loans  9,505   10,400   11,040   11,572   11,890 
Deposit overdrafts  238   374   263   208   204 
All other loans  3,983   4,262   4,305   4,350   4,465 
Total loans $581,867  $574,346  $571,253  $574,954  $550,475 
Allowance for loan losses  (5,584)  (4,934)  (4,912)  (4,995)  (4,946)
Loans, net $576,283  $569,412  $566,341  $569,959  $545,529 

FIRST NATIONAL CORPORATIONQuarterly Performance Summary(in thousands)

  (unaudited)
  For the Quarter Ended
  March 31, December 31, September 30, June 30, March 31,
  2020 2019 2019 2019 2019
Reconciliation of Tax-Equivalent Net Interest Income                  
GAAP measures:                    
Interest income – loans $7,203  $7,333  $7,429  $7,200  $6,996 
Interest income – investments and other  965   973   925   1,014   1,027 
Interest expense – deposits  (962)  (1,042)  (1,089)  (1,051)  (922)
Interest expense – federal funds purchased        (1)      
Interest expense – subordinated debt  (90)  (91)  (90)  (90)  (89)
Interest expense – junior subordinated debt  (90)  (98)  (103)  (108)  (111)
Interest expense – other borrowings              (2)
Total net interest income $7,026  $7,075  $7,071  $6,965  $6,899 
Non-GAAP measures:                    
Tax benefit realized on non-taxable interest income – loans $10  $10  $9  $10  $11 
Tax benefit realized on non-taxable interest income – municipal securities  40   41   43   42   41 
Total tax benefit realized on non-taxable interest income $50  $51  $52  $52  $52 
Total tax-equivalent net interest income $7,076  $7,126  $7,123  $7,017  $6,951 

(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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