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 $3.2 million, or $0.65 per diluted share, for the fourth quarter of 2020, which resulted in a return on average assets of 1.31% and a return on average equity of 15.03%. This compares to net income of $2.7 million, or $0.55 per diluted share, and a return on average assets of 1.36% and a return on average equity of 14.10% for the fourth quarter of 2019. Recovery of loan losses of $200 thousand and provision for loan losses of $250 thousand were included in net income for the three-month periods ending December 31, 2020 and 2019, respectively.

For the year ending December 31, 2020, net income totaled $8.9 million, or $1.82 per diluted share, which resulted in a return on average assets of 0.98% and a return on average equity of 10.92%. This compares to net income of $9.6 million, or $1.92 per diluted share, and a return on average assets of 1.23% and a return on average equity of 13.19% for the same period of 2019. Provision for loan losses of $3.0 million and $450 thousand was included in net income for the years ending December 31, 2020 and 2019, respectively.

Highlights for the fourth quarter of 2020:

  • Return on average assets of 1.31%
  • Return on average equity of 15.03%
  • Efficiency ratio of 61.00%
  • Net interest income increased $382 thousand, or 5%
  • Wealth management revenue increased $102 thousand, or 21%
  • Tangible book value increased 13% to $17.47 per share, compared to $15.50 one year ago
  • Nonperforming assets decreased $260 thousand during the quarter to $6.7 million

“Fourth quarter performance provided a strong finish to an otherwise challenging but rewarding year,” said Scott Harvard, president and chief executive officer of First National. Harvard continued, “Financial results for the quarter were exceptional, while performance for the year was surprisingly good considering the business challenges created by the pandemic. Although non-performing assets increased during the year and certain loans were modified to help business customers navigate a difficult operating environment, we are pleased with the Bank’s overall asset quality. Another bright spot in the company has been consistent growth of our wealth management business as wealth management revenue increased by 21% over the same quarter of the prior year. The entire First Bank team demonstrated why bankers are essential workers as they navigated family, health, and work to deliver the personal financial services needed by our small businesses, neighbors and friends.”

COVID-19 PANDEMIC UPDATE

Operations

During the fourth 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. In response to an increasing number of COVID-19 cases in our communities during the fourth quarter, the Bank re-entered phase one of its plan on December 9, 2020 after operating under phase two of its plan since July 1, 2020. Phase one of the plan limits access to banking offices while delivering a majority of its 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 original PPP provided forgivable loans over a five month period before it stopped accepting applications in August of 2020. 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 December 31, 2020, PPP loan balances totaled $64.7 million with 98% of the loan balances maturing in the second quarter of 2022 and 2% of loan balances maturing in the third quarter of 2025. As of December 31, 2020, customers with PPP loan balances totaling $2.0 million had requested debt forgiveness but have not yet received notifications of forgiveness decisions from the SBA.

Congress recently revived the PPP (“new PPP”) as part of the COVID-19 relief bill that was signed into law on December 27, 2020. The Bank began participating as a lender in the new PPP in January of 2021. As of January 25, 2021, the Bank originated $2.1 million of new PPP loans. Loan fees received on new PPP loans will also be accreted into earnings evenly over the life of the loans, net of the loan costs, through interest and fees on loans. These new PPP loans will mature in the first quarter of 2026.

Asset Quality Impact

The pandemic has negatively impacted the financial condition of certain loan customers. The Bank expects certain sectors of its commercial real estate loan portfolio, including retail shopping, lodging and leisure, may experience elevated financial pressure in future periods. Those sectors comprised 5%, 5% and 2% of the loan portfolio, respectively, excluding PPP loans, at December 31, 2020. The Bank also expects that loans in those same sectors of its commercial and industrial loan portfolio may experience financial pressure in future periods. The magnitude of the potential decline in the Bank’s loan quality in future periods will likely depend on the duration of the pandemic and the extent that the Bank’s customers experience business interruptions.

Loan Modifications

In response to the unknown impact of the pandemic on the economy and its customers, the Bank created and implemented a loan payment deferral program for individual and business customers beginning in the first quarter of 2020, which provided them the opportunity to defer monthly payments for 90 days. At June 30, 2020, loans participating in the program totaled $182.6 million. The majority of these loans resumed regular payments during the second half of the year after their deferral periods ended. Loans that remained in the program totaled $1.2 million at December 31, 2020.

During the fourth quarter of 2020, the Bank modified terms of certain loans for customers that continued to be negatively impacted by the pandemic. The loan modifications lowered borrower’s loan payments by allowing interest only payments for periods ranging between 6 and 24 months. All loans modified were in the Bank’s commercial real estate loan portfolio and totaled $14.3 million at December 31, 2020. The loans were comprised of $12.8 million in the lodging sector and $1.5 million in the leisure sector.

Capital

The Company issued $5.0 million of subordinated debt in June 2020 as a result of its enterprise risk management and capital planning. 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 subordinated debt issued in 2015, which became callable on a quarterly basis beginning January 1, 2021. The Company issued the debt at a 5.50% fixed-to-floating rate subordinated note due 2030 to an institutional investor and was structured to qualify as Tier 2 capital under bank regulatory guidelines.

The Company’s stock repurchase plan remained suspended during the fourth quarter of 2020 and ended on December 31, 2020. The Company has not authorized another stock repurchase plan due to the potential impact of the pandemic on the economy and the Bank’s customers. The Company continued to pay cash dividends on common stock of $0.11 per share in the fourth quarter of 2020, which were unchanged from cash dividends paid during the first, second and third quarters of 2020.

BALANCE SHEET

Total assets of First National increased $150.9 million, or 19%, to $950.9 million at December 31, 2020, compared to $800.0 million at December 31, 2019. Total securities increased $15.9 million, while loans, net of the allowance for loan losses, increased $53.0 million, or 9%. The growth in the loan portfolio included PPP loans that totaled $64.7 million at the end of the year.

Total liabilities increased $143.2 million, or 20%, to $866.0 million at December 31, 2020, compared to $722.8 million one year ago. The increase in total liabilities was primarily attributable to significant growth in deposits. Total deposits increased $136.0 million, or 19%, to $842.5 million. Noninterest-bearing demand deposits increased $73.6 million, or 39%, savings and interest-bearing demand deposits increased $79.8 million, or 20%, while time deposits decreased $17.4 million, or 15%. The origination of PPP loans 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 of 2020 contributed to the increase in deposits, the Bank also experienced a significant amount of deposit growth not related to proceeds from PPP loan originations.

Shareholders’ equity increased $7.7 million, or 10%, to $84.9 million at December 31, 2020, compared to one year ago, from a $6.7 million increase in retained earnings and a $2.7 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. The Bank was considered well-capitalized at December 31, 2020.

PERFORMANCE ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $382 thousand, or 5%, to $7.5 million for the fourth quarter of 2020, compared to the same period of 2019. The increase resulted from a $593 thousand, or 48%, decrease in total interest expense, which was partially offset by a $211 thousand decrease in total interest and dividend income. The net interest margin decreased 49 basis points to 3.30%. The decrease in the net interest margin was offset by growth in average earning assets of $158.8 million, or 21%, and resulted in an increase in net interest income.

The decrease in interest expense was primarily a result of the $632 thousand, or 61%, decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of a $79.1 million, or 15% increase in average interest-bearing deposits was offset by a 53-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 108-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 87-basis point decrease in the yield on earning assets, which was partially offset by a $158.8 million, or 21%, increase in average earning assets. The decrease in the yield on earning assets resulted from a 35-basis point decrease in the yield on securities, a 54-basis point decrease in the yield on loans, and a 153-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 5% to 13% of average earning assets.

Noninterest income decreased $189 thousand, or 8%, to $2.2 million compared to the same period of 2019. Service charges on deposits decreased $200 thousand, or 27%, to $553 thousand, and ATM and check card fees decreased $78 thousand, or 12%, to $576 thousand. The decrease in service charges on deposits resulted from a reduction in overdraft fee income, which management believes was a result of the significant increase in deposit balances and a decrease in consumer spending. ATM and check card fees decreased primarily from the timing of an annual incentive payment from the Company’s check card processing vendor, which was received in the fourth quarter of 2019. These decreases were partially offset by wealth management fees, which increased $102 thousand, or 21%, from a higher amount of assets under management.

Noninterest expense increased $90 thousand, or 2%, to $5.9 million, compared to the same period one year ago. The increase was primarily attributable to a $158 thousand increase in FDIC assessment expense. This was partially offset by a $105 thousand decrease in other operating expense, which resulted from lower amounts of fraud losses on check cards, dues and subscriptions, employee training expense, and loan servicing costs.

PERFORMANCE ANALYSIS OF THE TWELVE-MONTH PERIOD

Net interest income increased $1.5 million, or 5%, to $29.5 million for the year ending December 31, 2020, compared to the same period of 2019. The increase resulted from a $1.5 million, or 31%, decrease in total interest expense. Total interest and dividend income was unchanged at $32.9 million. The net interest margin decreased 38 basis points to 3.50%. The decrease in the net interest margin was offset by growth in average earning assets of $118.8 million, or 16%.  

The decrease in total interest expense resulted primarily from a $1.5 million decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of a $63.4 million or 13%, increase in average interest-bearing deposits was offset by a 36-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 77-basis point reduction of the cost of money market accounts made the largest contributions to the decrease in interest expense.

Total interest and dividend income remained unchanged from a $118.8 million, or 16%, increase in average earning assets, which was offset by a 65-basis point decrease in the yield on earning assets. The decrease in the yield on earning assets resulted from a 25-basis point decrease in the yield on securities, a 41-basis point decrease in the yield on loans, and a 175-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 10% of average earning assets.

Noninterest income decreased $327 thousand, or 4%, to $8.2 million, compared to the same period of 2019, primarily from a $898 thousand, or 31%, decrease in service charges on deposits. The decrease in service charges on deposits was attributable to lower overdraft fee income, which is believed to be a result of the significant increase in deposit balances and a decrease in consumer spending. This decrease was partially offset by a $340 thousand, or 18%, increase in wealth management fees, which resulted from higher amounts of assets under management.

Noninterest expense decreased $532 thousand, or 2%, to $23.8 million, compared to the same period one year ago. The decrease was primarily attributable to a $296 thousand, or 45%, decrease in marketing expense and a $431 thousand decrease in other operating expense, which resulted from lower amounts of fraud losses on check cards, dues and subscriptions, employee training expense, and loan servicing costs.

ASSET QUALITY/LOAN LOSS PROVISION

There was a recovery of loan losses of $200 thousand for the fourth quarter of 2020, which was attributable to a decrease in the general reserve and specific reserve components of the allowance for loan losses. The decrease in the general reserve resulted from a decrease in loan balances during the quarter and a favorable change in asset quality. Net charge-offs totaled $92 thousand for the quarter compared to $228 thousand for the same period one year ago. The allowance for loan losses totaled $7.5 million, or 1.19% of total loans at December 31, 2020. Excluding PPP loans, the allowance for loan losses totaled 1.32% of total loans. Provision for loan losses totaled $250 thousand for the same period of 2019 and the allowance for loan losses totaled $4.9 million, or 0.86% of total loans at December 31, 2019.

For the year ended December 31, 2020, provision for loan losses totaled $3.0 million and resulted from increases in the general and specific reserve components of the allowance for loan losses.  The increase in the general reserve resulted from the Bank’s observation of unfavorable changes in economic indicators and consideration of risks associated with modified loans that were negatively impacted by the pandemic. The specific reserve component of the allowance for loan losses increased from reserves placed on newly identified impaired loans. Net charge offs on loans also contributed to the provision for loan losses, which totaled $449 thousand for the year ending December 31, 2020, compared to $525 thousand for the prior year. Provision for loan losses totaled $450 thousand for the year ended December 31, 2019.

Loans 30 to 89 days past due and accruing totaled $996 thousand, or 0.16% of total loans at December 31, 2020 compared to $2.4 million, or 0.41% of total loans one year ago. Accruing substandard loans totaled $1.4 million at December 31, 2020 and $3.4 million at December 31, 2019. Nonperforming assets consisted only of non-accrual loans, which totaled $6.7 million, or 0.71% of total assets at December 31, 2020, compared to $1.5 million, or 0.18% 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 CORPORATIONQuarterly Performance Summary(in thousands, except share and per share data)

    (unaudited)  
    For the Quarter Ended  
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2020     2020     2020     2020     2019  
Income Statement                                        
Interest income                                        
Interest and fees on loans   $ 7,310     $ 7,568     $ 7,416     $ 7,203     $ 7,333  
Interest on deposits in banks     31       25       16       118       163  
Interest on securities                                        
Taxable interest     567       575       636       670       627  
Tax-exempt interest     163       152       151       151       156  
Dividends     24       23       26       26       27  
Total interest income   $ 8,095     $ 8,343     $ 8,245     $ 8,168     $ 8,306  
Interest expense                                        
Interest on deposits   $ 410     $ 541     $ 676     $ 962     $ 1,042  
Interest on subordinated debt     160       160       91       90       91  
Interest on junior subordinated debt     68       68       67       90       98  
Total interest expense   $ 638     $ 769     $ 834     $ 1,142     $ 1,231  
Net interest income   $ 7,457     $ 7,574     $ 7,411     $ 7,026     $ 7,075  
Provision for (recovery of) loan losses     (200 )     1,500       800       900       250  
Net interest income after provision for (recovery of) loan losses   $ 7,657     $ 6,074     $ 6,611     $ 6,126     $ 6,825  
Noninterest income                                        
Service charges on deposit accounts   $ 553     $ 446     $ 348     $ 681     $ 753  
ATM and check card fees     576       669       550       519       654  
Wealth management fees     598       573       512       525       496  
Fees for other customer services     216       323       237       207       181  
Income from bank owned life insurance     124       131       99       115       123  
Net gains on securities     2       38                   1  
Net gains on sale of loans     10       3       26       31       89  
Other operating income     73       18       1       21       44  
Total noninterest income   $ 2,152     $ 2,201     $ 1,773     $ 2,099     $ 2,341  
Noninterest expense                                        
Salaries and employee benefits   $ 3,212     $ 3,498     $ 3,022     $ 3,589     $ 3,193  
Occupancy     422       433       409       402       415  
Equipment     440       439       418       410       406  
Marketing     112       63       74       106       128  
Supplies     90       112       103       89       88  
Legal and professional fees     310       262       301       279       311  
ATM and check card expense     253       259       223       245       231  
FDIC assessment     105       52       60       30       (53 )
Bank franchise tax     161       162       161       153       136  
Data processing expense     196       191       188       184       179  
Amortization expense     24       33       42       52       61  
Other real estate owned expense, net                             1  
Net losses (gains) on disposal of premises and equipment     (20 )                 (9 )     14  
Other operating expense     589       631       612       614       694  
Total noninterest expense   $ 5,894     $ 6,135     $ 5,613     $ 6,144     $ 5,804  
Income before income taxes   $ 3,915     $ 2,140     $ 2,771     $ 2,081     $ 3,362  
Income tax expense     759       386       528       376       646  
Net income   $ 3,156     $ 1,754     $ 2,243     $ 1,705     $ 2,716  
                                         

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

    (unaudited)  
    For the Quarter Ended  
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2020     2020     2020     2020     2019  
Common Share and Per Common Share Data                                        
Net income, basic   $ 0.65     $ 0.36     $ 0.46     $ 0.34     $ 0.55  
Weighted average shares, basic     4,858,288       4,854,144       4,849,719       4,950,887       4,968,574  
Net income, diluted   $ 0.65     $ 0.36     $ 0.46     $ 0.34     $ 0.55  
Weighted average shares, diluted     4,861,208       4,854,649       4,849,719       4,955,970       4,972,535  
Shares outstanding at period end     4,860,399       4,858,217       4,852,187       4,849,692       4,969,716  
Tangible book value at period end   $ 17.47     $ 16.92     $ 16.63     $ 16.17     $ 15.50  
Cash dividends   $ 0.11     $ 0.11     $ 0.11     $ 0.11     $ 0.09  
                                         
Key Performance Ratios                                        
Return on average assets     1.31 %     0.74 %     1.00 %     0.85 %     1.36 %
Return on average equity     15.03 %     8.52 %     11.30 %     8.72 %     14.10 %
Net interest margin     3.30 %     3.41 %     3.59 %     3.77 %     3.79 %
Efficiency ratio (1)     61.00 %     62.35 %     60.34 %     66.50 %     60.50 %
                                         
Average Balances                                        
Average assets   $ 954,810     $ 944,390     $ 899,301     $ 806,609     $ 795,391  
Average earning assets     904,511       889,127       836,741       755,173       745,721  
Average shareholders’ equity     83,545       81,894       79,845       78,659       76,424  
                                         
Asset Quality                                        
Loan charge-offs   $ 165     $ 115     $ 176     $ 328     $ 281  
Loan recoveries     73       96       88       78       53  
Net charge-offs     92       19       88       250       228  
Non-accrual loans     6,714       6,974       1,480       1,522       1,459  
Other real estate owned, net                              
Nonperforming assets     6,714       6,974       1,480       1,522       1,459  
Loans 30 to 89 days past due, accruing     996       885       1,094       2,901       2,372  
Loans over 90 days past due, accruing     302       6       1       86       97  
Troubled debt restructurings, accruing                 4,313              
Special mention loans           510       2,034       6,058       6,069  
Substandard loans, accruing     1,394       3,804       8,616       4,368       3,410  
                                         
Capital Ratios (2)                                        
Total capital   $ 91,243     $ 89,155     $ 88,109     $ 86,849     $ 85,439  
Tier 1 capital     84,032       81,883       81,813       81,265       80,505  
Common equity tier 1 capital     84,032       81,883       81,813       81,265       80,505  
Total capital to risk-weighted assets     15.82 %     15.34 %     15.20 %     14.98 %     14.84 %
Tier 1 capital to risk-weighted assets     14.57 %     14.09 %     14.11 %     14.02 %     13.99 %
Common equity tier 1 capital to risk-weighted assets     14.57 %     14.09 %     14.11 %     14.02 %     13.99 %
Leverage ratio     8.80 %     8.67 %     9.08 %     10.08 %     10.13 %

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

    (unaudited)  
    For the Quarter Ended  
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2020     2020     2020     2020     2019  
Balance Sheet                                        
Cash and due from banks   $ 13,115     $ 13,349     $ 17,717     $ 30,551     $ 9,675  
Interest-bearing deposits in banks     114,182       108,857       90,562       17,539       36,110  
Securities available for sale, at fair value     140,225       117,132       123,193       128,660       120,983  
Securities held to maturity, at amortized cost     14,234       15,101       16,211       17,086       17,627  
Restricted securities, at cost     1,875       1,848       1,848       1,848       1,806  
Loans held for sale     245             170       621       167  
Loans, net of allowance for loan losses     622,429       640,591       645,220       576,283       569,412  
Premises and equipment, net     19,319       19,548       19,792       19,619       19,747  
Accrued interest receivable     2,717       3,156       3,863       2,124       2,065  
Bank owned life insurance     17,916       17,792       17,661       17,562       17,447  
Core deposit intangibles, net     19       43       76       118       170  
Other assets     4,656       5,316       5,777       4,401       4,839  
Total assets   $ 950,932     $ 942,733     $ 942,090     $ 816,412     $ 800,048  
                                         
Noninterest-bearing demand deposits   $ 263,229     $ 256,733     $ 253,974     $ 197,662     $ 189,623  
Savings and interest-bearing demand deposits     479,035       480,017       470,764       407,555       399,255  
Time deposits     100,197       101,645       114,277       115,410       117,564  
Total deposits   $ 842,461     $ 838,395     $ 839,015     $ 720,627     $ 706,442  
Subordinated debt     9,991       9,987       9,982       4,987       4,983  
Junior subordinated debt     9,279       9,279       9,279       9,279       9,279  
Accrued interest payable and other liabilities     4,285       2,816       3,026       3,001       2,125  
Total liabilities   $ 866,016     $ 860,477     $ 861,302     $ 737,894     $ 722,829  
                                         
Preferred stock   $     $     $     $     $  
Common stock     6,075       6,073       6,065       6,062       6,212  
Surplus     6,151       6,081       5,967       5,899       7,700  
Retained earnings     69,292       66,670       65,451       63,741       62,583  
Accumulated other comprehensive income, net     3,398       3,432       3,305       2,816       724  
Total shareholders’ equity   $ 84,916     $ 82,256     $ 80,788     $ 78,518     $ 77,219  
Total liabilities and shareholders’ equity   $ 950,932     $ 942,733     $ 942,090     $ 816,412     $ 800,048  
                                         
Loan Data                                        
Mortgage loans on real estate:                                        
Construction and land development   $ 27,328     $ 27,472     $ 31,981     $ 40,279     $ 43,164  
Secured by farmland     521       533       872       888       900  
Secured by 1-4 family residential     235,814       234,198       234,188       230,980       229,438  
Other real estate loans     246,362       249,786       247,623       240,486       235,655  
Loans to farmers (except those secured by real estate)     637       1,120       711       1,221       1,423  
Commercial and industrial loans (except those secured by real estate)     109,201       124,157       123,995       54,287       48,730  
Consumer installment loans     6,458       7,378       8,401       9,505       10,400  
Deposit overdrafts     143       194       170       238       374  
All other loans     3,450       3,530       3,575       3,983       4,262  
Total loans   $ 629,914     $ 648,368     $ 651,516     $ 581,867     $ 574,346  
Allowance for loan losses     (7,485 )     (7,777 )     (6,296 )     (5,584 )     (4,934 )
Loans, net   $ 622,429     $ 640,591     $ 645,220     $ 576,283     $ 569,412  
                                         

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

    (unaudited)  
    For the Quarter Ended  
    December 31,     September 30,     June 30,     March 31,     December 31,  
    2020     2020     2020     2020     2019  
Reconciliation of Tax-Equivalent Net Interest Income                                        
GAAP measures:                                        
Interest income – loans   $ 7,310     $ 7,568     $ 7,416     $ 7,203     $ 7,333  
Interest income – investments and other     785       775       829       965       973  
Interest expense – deposits     (410 )     (541 )     (676 )     (962 )     (1,042 )
Interest expense – subordinated debt     (160 )     (160 )     (91 )     (90 )     (91 )
Interest expense – junior subordinated debt     (68 )     (68 )     (67 )     (90 )     (98 )
Total net interest income   $ 7,457     $ 7,574     $ 7,411     $ 7,026     $ 7,075  
Non-GAAP measures:                                        
Tax benefit realized on non-taxable interest income – loans   $ 8     $ 8     $ 8     $ 10     $ 10  
Tax benefit realized on non-taxable interest income – municipal securities     43       41       40       40       41  
Total tax benefit realized on non-taxable interest income   $ 51     $ 49     $ 48     $ 50     $ 51  
Total tax-equivalent net interest income   $ 7,508     $ 7,623     $ 7,459     $ 7,076     $ 7,126  
                                         

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

    (unaudited)  
    For the Year Ended  
    December 31,     December 31,  
    2020     2019  
Income Statement                
Interest income                
Interest and fees on loans   $ 29,497     $ 28,958  
Interest on deposits in banks     190       503  
Interest on securities                
Taxable interest     2,448       2,705  
Tax-exempt interest     617       628  
Dividends     99       103  
Total interest income   $ 32,851     $ 32,897  
Interest expense                
Interest on deposits   $ 2,589     $ 4,104  
Interest on federal funds purchased           1  
Interest on subordinated debt     501       360  
Interest on junior subordinated debt     293       420  
Interest on other borrowings           2  
Total interest expense   $ 3,383     $ 4,887  
Net interest income   $ 29,468     $ 28,010  
Provision for loan losses     3,000       450  
Net interest income after provision for loan losses   $ 26,468     $ 27,560  
Noninterest income                
Service charges on deposit accounts   $ 2,028     $ 2,926  
ATM and check card fees     2,314       2,330  
Wealth management fees     2,208       1,868  
Fees for other customer services     983       686  
Income from bank owned life insurance     469       456  
Net gains on securities     40       1  
Net gains on sale of loans     70       170  
Other operating income     113       115  
Total noninterest income   $ 8,225     $ 8,552  
Noninterest expense                
Salaries and employee benefits   $ 13,321     $ 13,567  
Occupancy     1,666       1,652  
Equipment     1,707       1,645  
Marketing     355       651  
Supplies     394       338  
Legal and professional fees     1,152       1,086  
ATM and check card expense     980       897  
FDIC assessment     247       45  
Bank franchise tax     637       538  
Data processing expense     759       705  
Amortization expense     151       302  
Other real estate owned expense, net           1  
Net losses (gains) on disposal of premises and equipment     (29 )     14  
Other operating expense     2,446       2,877  
Total noninterest expense   $ 23,786     $ 24,318  
Income before income taxes   $ 10,907     $ 11,794  
Income tax expense     2,049       2,238  
Net income   $ 8,858     $ 9,556  
                 

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

    (unaudited)  
    For the Year Ended  
    December 31,     December 31,  
    2020     2019  
Common Share and Per Common Share Data                
Net income, basic   $ 1.82     $ 1.92  
Weighted average shares, basic     4,878,139       4,964,832  
Net income, diluted   $ 1.82     $ 1.92  
Weighted average shares, diluted     4,880,266       4,967,932  
Shares outstanding at period end     4,860,399       4,969,716  
Tangible book value at period end   $ 17.47     $ 15.50  
Cash dividends   $ 0.44     $ 0.36  
                 
Key Performance Ratios                
Return on average assets     0.98 %     1.23 %
Return on average equity     10.92 %     13.19 %
Net interest margin     3.50 %     3.88 %
Efficiency ratio (1)     62.52 %     65.28 %
                 
Average Balances                
Average assets   $ 901,216     $ 776,933  
Average earning assets     846,663       727,904  
Average shareholders’ equity     81,093       72,451  
                 
Asset Quality                
Loan charge-offs   $ 784     $ 884  
Loan recoveries     335       359  
Net charge-offs     449       525  
                 
Reconciliation of Tax-Equivalent Net Interest Income                
GAAP measures:                
Interest income – loans   $ 29,497     $ 28,958  
Interest income – investments and other     3,354       3,939  
Interest expense – deposits     (2,589 )     (4,104 )
Interest expense – federal funds purchased           (1 )
Interest expense – subordinated debt     (501 )     (360 )
Interest expense – junior subordinated debt     (293 )     (420 )
Interest expense – other borrowings           (2 )
Total net interest income   $ 29,468     $ 28,010  
Non-GAAP measures:                
Tax benefit realized on non-taxable interest income – loans   $ 34     $ 40  
Tax benefit realized on non-taxable interest income – municipal securities     164       167  
Total tax benefit realized on non-taxable interest income   $ 198     $ 207  
Total tax-equivalent net interest income   $ 29,666     $ 28,217  
                 

(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 is not viewed as a substitute for GAAP.

(2) All capital ratios reported are for First Bank.