FXNC First National Corporation

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 $2.4 million, or $0.50 per diluted share, for the first quarter of 2021, which resulted in return on average assets of 1.00% and return on average equity of 11.53%. This compares to net income of $1.7 million, or $0.34 per diluted share, and return on average assets of 0.85% and return on average equity of 8.72% for the first quarter of 2020.

During the first quarter of 2021, the Company entered into an agreement to acquire The Bank of Fincastle (the “Merger”) and incurred merger related expenses totaling $405 thousand. The merger related expenses were comprised of legal and professional fees and had a $0.07 per share impact to basic and diluted earnings per share for the period. 

Key highlights of the first quarter of 2021 are as follows. Comparisons are to the corresponding period in the prior year unless otherwise stated:

	•	Merger related expenses totaled $405 thousand, which impacted earnings per share by $0.07
	•	Return on average assets of 1.00%
	•	Return on average equity of 11.53%
	•	Efficiency ratio of 64.53%
	•	Net interest income increased $486 thousand, or 7%
	•	Wealth management revenue increased $118 thousand, or 22%
	•	Tangible book value increased 9% to $17.65 per share

“During the first quarter, our banking company exceeded $1.0 billion in assets, announced an agreement to acquire The Bank of Fincastle, absorbed merger related expenses, and delivered excellent financial results,” said Scott Harvard, president and chief executive officer of First National. Harvard continued, “The entire team continues to adopt more efficient delivery processes resulting in the highest levels of productivity in our history. During the quarter, customers continued to take advantage of Bank’s digital delivery channels as the number of accounts opened online increased 88% when compared to same period of 2020 and represented 10% of all accounts opened in the quarter. Growth in net interest income combined with diligent expense management also positively contributed to profitability.”

COVID-19 PANDEMIC UPDATE

Operations

During the first 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 vaccinations that continued to be provided to thousands of people in our market areas, and the decrease in the number of COVID-19 cases in our communities, the Bank entered phase two of its plan in late March 2021 after operating in phase one since early December 2020. After operating for almost four months primarily through branch drive throughs, ATMs, and mobile and internet banking platforms, lobbies re-opened for walk-in customers to conduct their banking business.

Paycheck Protection Program

The Bank continued to participate 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 by providing forgivable loans. During the second and third quarters of 2020, the Bank originated $76.6 million of PPP loans, received $2.5 million of loan fees from the SBA, and incurred $535 thousand of loan origination costs. The PPP stopped accepting applications in August of 2020. The loan fees continue to be accreted into earnings evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans originated in 2020 totaled $46.5 at March 31, 2021, and 99% of the PPP loan balances are scheduled to mature in the second quarter of 2022.

Congress revived the PPP as part of the COVID-19 relief bill that was signed into law on December 27, 2020. The Bank began participating again as a lender in the PPP in January of 2021. During the first quarter of 2021, the Bank originated $19.8 million of PPP loans and incurred $51 thousand of loan origination costs. First Bank expects to receive $1.1 million of loan fees from the SBA as a result of the loan originations. Like the PPP loans originated in 2020, loan fees received will be accreted into earnings evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans that were originated in 2021 totaled $19.8 million at March 31, 2021, and 100% of the PPP loan balances are scheduled to 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 customers in 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%, 4% and 2% of the loan portfolio, respectively, excluding PPP loans, at March 31, 2021. The Bank also expects that loans in those same sectors of its commercial and industrial loan portfolio may also 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. By June 30, 2020, loans participating in the program reached $182.6 million. The majority of these loans resumed regular payments during the second half of 2020 after their deferral periods ended. There were no loans remaining in the program at March 31, 2021.

During the fourth quarter of 2020, the Bank modified terms of certain loans for customers that continued to be negatively impacted by the pandemic by lowering borrower’s loan payments with interest only payments for periods ranging between 6 and 24 months. Modified loans totaled $14.3 million at March 31, 2021, with $14.2 million in the Bank’s commercial real estate loan portfolio and $83 thousand in the commercial and industrial loans portfolio. 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 risk management program 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 that was issued in 2015 and became callable on a quarterly basis beginning January 1, 2021. The Company issued the debt with 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.

After being suspended for most of 2020, the Company’s stock repurchase plan ended on December 31, 2020. The Company has not authorized another stock repurchase plan due to the continued uncertainty and 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 throughout 2020, and in February 2021, it declared a quarterly cash dividend on common stock of $0.12 per share, which was a 9% increase.

BALANCE SHEET

Total assets of First National increased $211.7 million, or 26%, to $1.0 billion at March 31, 2021, compared to $816.4 million at March 31, 2020. Interest-bearing deposits in banks increased $146.8 million, total securities increased $27.2 million, or 18%, and loans, net of the allowance for loan losses, increased $54.4 million, or 9%. These increases were partially offset by a $19 thousand decrease in cash and due from banks. The growth in the loan portfolio included PPP loans that totaled $66.2 million at the end of the first quarter. 

Total liabilities increased $204.3 million, or 28%, to $942.2 million at March 31, 2021, compared to $737.9 million one year ago. The increase in total liabilities was primarily attributable to significant growth in deposits. Total deposits increased $195.4 million, or 27%, to $916.1 million. Noninterest-bearing demand deposits increased $94.6 million, or 48%, savings and interest-bearing demand deposits increased $118.5 million, or 29%, while time deposits decreased $17.6 million, or 15%. The origination of PPP loans during the last twelve-month period 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 contributed to the increase in deposits, the Bank also experienced a significant amount of deposit growth that was not related to proceeds from PPP loan originations.

Shareholders’ equity increased $7.4 million, or 9%, to $85.9 million at March 31, 2021, compared to one year ago, primarily from an increase in retained earnings. The Bank was considered well-capitalized at March 31, 2021.

PERFORMANCE ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $486 thousand, or 7%, to $7.5 million for the first quarter of 2021, compared to the same period of 2020. The increase resulted from a $559 thousand, or 49%, decrease in total interest expense, which was partially offset by a $73 thousand decrease in total interest and dividend income. The net interest margin decreased 50 basis points to 3.27%. The decrease in the net interest margin was offset by growth in average earning assets of $182.0 million, or 24%, and resulted in an increase in net interest income. 

The decrease in interest expense was primarily a result of a $599 thousand, or 62%, decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of an $88.6 million, or 17% increase in average interest-bearing deposits was offset by a 51-basis point decrease in the cost of interest-bearing deposits. A 42-basis point reduction of the cost of interest-bearing checking accounts and a 96-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 85-basis point decrease in the yield on earning assets, which was partially offset by a $182.0 million, or 24%, increase in average earning assets. The decrease in the yield on earning assets resulted from a 46-basis point decrease in the yield on loans and a 120-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 15% of average earning assets.

Noninterest income increased $44 thousand, or 2%, to $2.1 million compared to the same period of 2020. Service charges on deposits decreased $239 thousand, or 35%, which was offset by ATM and check card fees that increased $82 thousand, or 16%, wealth management fees that increased $118 thousand, or 22%, and fees for other customer services that increased $79 thousand, or 38%. The decrease in service charges on deposits resulted from a reduction in overdraft fee income, which the Bank believes may have resulted from the significant increase in deposit balances over the last twelve months. Wealth management fees increased from a higher amount of assets under management, and fees for other customer services increased primarily from fee revenue on brokered mortgage loans sold to the secondary market. 

Noninterest expense increased $506 thousand, or 8%, to $6.7 million, compared to the same period one year ago. The increase was primarily attributable to a $458 thousand increase in legal and professional fees, which included merger related expenses of $405 thousand.

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan losses for the first quarter of 2021, which was attributable to net recoveries of loans previously charged off and no significant changes to the general and specific reserve components of the allowance for loan losses. Net recoveries totaled $1 thousand for the quarter compared to net charge-offs of $250 thousand for the same period one year ago. The allowance for loan losses totaled $7.5 million, or 1.17% of total loans at March 31, 2021. Excluding PPP loans, the allowance for loan losses totaled 1.30% of total loans. Provision for loan losses totaled $900 thousand for the same period of 2020 and the allowance for loan losses totaled $5.6 million, or 0.96% of total loans at March 31, 2020.

Loans 30 to 89 days past due and accruing totaled $906 thousand, or 0.14% of total loans at March 31, 2021 compared to $2.9 million, or 0.50% of total loans one year ago. Accruing substandard loans totaled $1.3 million at March 31, 2021 and $4.4 million at March 31, 2020. Nonperforming assets consisted only of non-accrual loans and totaled $6.8 million, or 0.66% of total assets at March 31. 2021, compared to $1.5 million, or 0.19% 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, 2020, 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
sharvard@fbvirginia.com	sbell@fbvirginia.com

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,
		2021				2020				2020				2020				2020
Income Statement
Interest income
Interest and fees on loans		$	7,143			$	7,310			$	7,568			$	7,416			$	7,203
Interest on deposits in banks			33				31				25				16				118
Interest on securities
Taxable interest			717				567				575				636				670
Tax-exempt interest			180				163				152				151				151
Dividends			22				24				23				26				26
Total interest income		$	8,095			$	8,095			$	8,343			$	8,245			$	8,168
Interest expense
Interest on deposits		$	363			$	410			$	541			$	676			$	962
Interest on subordinated debt			154				160				160				91				90
Interest on junior subordinated debt			66				68				68				67				90
Total interest expense		$	583			$	638			$	769			$	834			$	1,142
Net interest income		$	7,512			$	7,457			$	7,574			$	7,411			$	7,026
Provision for (recovery of) loan losses			—				(200	)			1,500				800				900
Net interest income after provision for (recovery of) loan losses		$	7,512			$	7,657			$	6,074			$	6,611			$	6,126
Noninterest income
Service charges on deposit accounts		$	442			$	553			$	446			$	348			$	681
ATM and check card fees			601				576				669				550				519
Wealth management fees			643				598				573				512				525
Fees for other customer services			286				216				323				237				207
Income from bank owned life insurance			113				124				131				99				115
Net gains on securities			37				2				38				—				—
Net gains on sale of loans			7				10				3				26				31
Other operating income			14				73				18				1				21
Total noninterest income		$	2,143			$	2,152			$	2,201			$	1,773			$	2,099
Noninterest expense
Salaries and employee benefits		$	3,555			$	3,212			$	3,498			$	3,022			$	3,589
Occupancy			447				422				433				409				402
Equipment			431				440				439				418				410
Marketing			106				112				63				74				106
Supplies			88				90				112				103				89
Legal and professional fees			737				310				262				301				279
ATM and check card expense			231				253				259				223				245
FDIC assessment			69				105				52				60				30
Bank franchise tax			168				161				162				161				153
Data processing expense			204				196				191				188				184
Amortization expense			14				24				33				42				52
Other operating expense			600				569				631				612				605
Total noninterest expense		$	6,650			$	5,894			$	6,135			$	5,613			$	6,144
Income before income taxes		$	3,005			$	3,915			$	2,140			$	2,771			$	2,081
Income tax expense			569				759				386				528				376
Net income		$	2,436			$	3,156			$	1,754			$	2,243			$	1,705

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,
		2021				2020				2020				2020				2020
Common Share and Per Common Share Data
Net income, basic		$	0.50			$	0.65			$	0.36			$	0.46			$	0.34
Weighted average shares, basic			4,863,823				4,858,288				4,854,144				4,849,719				4,950,887
Net income, diluted		$	0.50			$	0.65			$	0.36			$	0.46			$	0.34
Weighted average shares, diluted			4,872,097				4,861,208				4,854,649				4,849,719				4,955,970
Shares outstanding at period end			4,868,462				4,860,399				4,858,217				4,852,187				4,849,692
Tangible book value at period end		$	17.65			$	17.47			$	16.92			$	16.63			$	16.17
Cash dividends		$	0.12			$	0.11			$	0.11			$	0.11			$	0.11
Key Performance Ratios
Return on average assets			1.00	%			1.31	%			0.74	%			1.00	%			0.85	%
Return on average equity			11.53	%			15.03	%			8.52	%			11.30	%			8.72	%
Net interest margin			3.27	%			3.30	%			3.41	%			3.59	%			3.77	%
Efficiency ratio (1)			64.53	%			61.00	%			62.35	%			60.34	%			66.50	%
Average Balances
Average assets		$	988,324			$	954,810			$	944,390			$	899,301			$	806,609
Average earning assets			937,199				904,511				889,127				836,741				755,173
Average shareholders’ equity			85,708				83,545				81,894				79,845				78,659
Asset Quality
Loan charge-offs		$	66			$	165			$	115			$	176			$	328
Loan recoveries			67				73				96				88				78
Net charge-offs (recoveries)			(1	)			92				19				88				250
Non-accrual loans			6,814				6,714				6,974				1,480				1,522
Other real estate owned, net			—				—				—				—				—
Nonperforming assets			6,814				6,714				6,974				1,480				1,522
Loans 30 to 89 days past due, accruing			906				996				885				1,094				2,901
Loans over 90 days past due, accruing			—				302				6				1				86
Troubled debt restructurings, accruing			—				—				—				4,313				—
Special mention loans			—				—				510				2,034				6,058
Substandard loans, accruing			1,343				1,394				3,804				8,616				4,368
Capital Ratios (2)
Total capital		$	94,044			$	91,243			$	89,155			$	88,109			$	86,849
Tier 1 capital			86,717				84,032				81,883				81,813				81,265
Common equity tier 1 capital			86,717				84,032				81,883				81,813				81,265
Total capital to risk-weighted assets			16.05	%			15.82	%			15.34	%			15.20	%			14.98	%
Tier 1 capital to risk-weighted assets			14.80	%			14.57	%			14.09	%			14.11	%			14.02	%
Common equity tier 1 capital to risk-weighted assets			14.80	%			14.57	%			14.09	%			14.11	%			14.02	%
Leverage ratio			8.78	%			8.80	%			8.67	%			9.08	%			10.08	%

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,
		2021				2020				2020				2020				2020
Balance Sheet
Cash and due from banks		$	11,940			$	13,115			$	13,349			$	17,717			$	30,551
Interest-bearing deposits in banks			164,322				114,182				108,857				90,562				17,539
Securities available for sale, at fair value			159,742				140,225				117,132				123,193				128,660
Securities held to maturity, at amortized cost			13,424				14,234				15,101				16,211				17,086
Restricted securities, at cost			1,631				1,875				1,848				1,848				1,848
Loans held for sale			—				245				—				170				621
Loans, net of allowance for loan losses			630,716				622,429				640,591				645,220				576,283
Premises and equipment, net			19,087				19,319				19,548				19,792				19,619
Accrued interest receivable			2,609				2,717				3,156				3,863				2,124
Bank owned life insurance			18,029				17,916				17,792				17,661				17,562
Core deposit intangibles, net			5				19				43				76				118
Other assets			6,625				4,656				5,316				5,777				4,401
Total assets		$	1,028,130			$	950,932			$	942,733			$	942,090			$	816,412
Noninterest-bearing demand deposits		$	292,280			$	263,229			$	256,733			$	253,974			$	197,662
Savings and interest-bearing demand deposits			526,012				479,035				480,017				470,764				407,555
Time deposits			97,765				100,197				101,645				114,277				115,410
Total deposits		$	916,057			$	842,461			$	838,395			$	839,015			$	720,627
Subordinated debt			9,992				9,991				9,987				9,982				4,987
Junior subordinated debt			9,279				9,279				9,279				9,279				9,279
Accrued interest payable and other liabilities			6,876				4,285				2,816				3,026				3,001
Total liabilities		$	942,204			$	866,016			$	860,477			$	861,302			$	737,894
Preferred stock		$	—			$	—			$	—			$	—			$	—
Common stock			6,086				6,075				6,073				6,065				6,062
Surplus			6,214				6,151				6,081				5,967				5,899
Retained earnings			71,144				69,292				66,670				65,451				63,741
Accumulated other comprehensive income, net			2,482				3,398				3,432				3,305				2,816
Total shareholders’ equity		$	85,926			$	84,916			$	82,256			$	80,788			$	78,518
Total liabilities and shareholders’ equity		$	1,028,130			$	950,932			$	942,733			$	942,090			$	816,412
Loan Data
Mortgage loans on real estate:
Construction and land development		$	25,720			$	27,328			$	27,472			$	31,981			$	40,279
Secured by farmland			507				521				533				872				888
Secured by 1-4 family residential			236,870				235,814				234,198				234,188				230,980
Other real estate loans			248,357				246,362				249,786				247,623				240,486
Loans to farmers (except those secured by real estate)			436				637				1,120				711				1,221
Commercial and industrial loans (except those secured by real estate)			117,109				109,201				124,157				123,995				54,287
Consumer installment loans			5,684				6,458				7,378				8,401				9,505
Deposit overdrafts			112				143				194				170				238
All other loans			3,407				3,450				3,530				3,575				3,983
Total loans		$	638,202			$	629,914			$	648,368			$	651,516			$	581,867
Allowance for loan losses			(7,486	)			(7,485	)			(7,777	)			(6,296	)			(5,584	)
Loans, net		$	630,716			$	622,429			$	640,591			$	645,220			$	576,283

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,
		2021				2020				2020				2020				2020
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans		$	7,143			$	7,310			$	7,568			$	7,416			$	7,203
Interest income – investments and other			952				785				775				829				965
Interest expense – deposits			(363	)			(410	)			(541	)			(676	)			(962	)
Interest expense – subordinated debt			(154	)			(160	)			(160	)			(91	)			(90	)
Interest expense – junior subordinated debt			(66	)			(68	)			(68	)			(67	)			(90	)
Total net interest income		$	7,512			$	7,457			$	7,574			$	7,411			$	7,026
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans		$	8			$	8			$	8			$	8			$	10
Tax benefit realized on non-taxable interest income – municipal securities			48				43				41				40				40
Total tax benefit realized on non-taxable interest income		$	56			$	51			$	49			$	48			$	50
Total tax-equivalent net interest income		$	7,568			$	7,508			$	7,623			$	7,459			$	7,076

(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, gains and losses on disposal of premises and equipment, and merger related expenses 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.