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 $3.3 million, or $0.69 per diluted share, for the second quarter of 2021, which resulted in return on average assets of 1.31% and return on average equity of 15.33%. This compares to net income of $2.2 million, or $0.46 per diluted share, and return on average assets of 1.00% and return on average equity of 11.30% for the second quarter of 2020.

During the second quarter of 2021, the Company incurred merger related expenses totaling $277 thousand related to the acquisition of The Bank of Fincastle (the “Merger”), which was completed on July 1, 2021. Merger related expenses were comprised primarily of legal and professional fees. Also included in earnings in the second quarter of 2021 was a recovery of loan losses totaling $1.0 million, compared to a provision for loan losses of $800 thousand in the same period of 2020.

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

• Return on average assets of 1.31%
• Return on average equity of 15.33%
• Efficiency ratio of 63.65%
• Noninterest income increased 37% to $2.4 million
• Nonperforming assets decreased to 0.21% of total assets
• Recovery of loan losses totaled $1.0 million
• Merger related expenses totaled $277 thousand

“We are especially pleased with the Company’s financial performance for the second quarter while our team worked to complete the Merger with The Bank of Fincastle on July 1,” said Scott Harvard, president and chief executive officer. Harvard continued. “In addition to a return to superior asset quality metrics, which resulted in a recovery of loan losses, the Bank experienced a 37% increase in noninterest income that was primarily from revenue growth from all banking services. Fee income earned from deposit accounts, wealth management, and other customer services increased, all with double digit growth percentages. The Company also absorbed $277 thousand of merger related expenses during the period. We are delighted with the team of associates who have joined the Bank through the Merger and we are optimistic about prospects for the future.”

COVID-19 PANDEMIC UPDATE

Operations

During the second quarter of 2021, the Bank continued to follow its Pandemic Plan that strives to protect the health of its employees and customers, while continuing to deliver 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 in March 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 that were originated in 2020 totaled $26.1 million at June 30, 2021 and are scheduled to mature in the second and third quarters 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 and second quarters of 2021, the Bank originated $26.2 million of PPP loans, received $1.4 million of loan fees from the SBA, and incurred $65 thousand of loan origination costs. Like the PPP loans originated in 2020, loan fees are being 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 $25.0 million at June 30, 2021 and are scheduled to mature in the first and second quarters 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 1% of the loan portfolio, respectively, excluding PPP loans, at June 30, 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 loan payment deferral program at June 30, 2021.

During the fourth quarter of 2020, and during the first half of 2021, 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 $13.4 million at June 30, 2021, with $13.2 million in the Bank’s commercial real estate loan portfolio and $158 thousand in the commercial and industrial loans portfolio. The loans were comprised of $11.7 million in the lodging sector and $1.7 million in the leisure sector. All modified loans were either performing under their modified terms or resumed regular loan payments as of June 30, 2021.

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 certain factors, which include 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 of $0.12 per share, which was a 9% increase. In May 2021, the Company declared another quarterly cash dividend of $0.12 per share.

BALANCE SHEET

Total assets of First National increased $82.5 million, or 9%, to $1.0 billion at June 30, 2021, compared to $942.1 million at June 30, 2020. The increase was primarily attributable to a $23.8 million, or 26%, increase in interest-bearing deposits in banks, a $93.5 million, or 66%, increase in total securities, which were partially offset by a $33.3 million, or 5%, decrease in loans, net of the allowance for loan losses. The decrease in the loan portfolio included PPP loan balances that decreased $22.2 million, comparing the same periods. 

Total liabilities increased $74.6 million, or 9%, to $935.9 million at June 30, 2021, compared to $861.3 million one year ago. The increase in total liabilities was primarily attributable to growth in deposits. Total deposits increased $75.3 million, or 9%, to $914.3 million. Noninterest-bearing demand deposits increased $36.6 million, or 14%, savings and interest-bearing demand deposits increased $57.2 million, or 12%, while time deposits decreased $18.5 million, or 16%. The origination of PPP loans during the first six months of 2021 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 $7.9 million, or 10%, to $88.7 million at June 30, 2021, compared to one year ago, primarily from an increase in retained earnings. The Bank was considered well-capitalized at June 30, 2021.  PERFORMANCE ANALYSIS OF THE THREE-MONTH PERIOD

Net income totaled $3.3 million, or $0.69 per diluted share, for the second quarter of 2021, which resulted in return on average assets of 1.31% and return on average equity of 15.33%. This compares to net income of $2.2 million, or $0.46 per diluted share, and return on average assets of 1.00% and return on average equity of 11.30% for the second quarter of 2020.

Net interest income increased $84 thousand, or 1%, to $7.5 million for the second quarter of 2021, compared to the same period of 2020. The increase resulted from a $284 thousand, or 34%, decrease in total interest expense, which was partially offset by a $200 thousand decrease in total interest and dividend income. The net interest margin decreased 49 basis points to 3.10%. The decrease in the net interest margin was offset by growth in average earning assets of $140.1 million, or 17%, and resulted in an increase in net interest income. 

The $284 thousand decrease in total interest expense was primarily a result of a $348 thousand, or 51%, decrease in interest expense on deposits, which was partially offset by a $63 thousand increase in interest expense on subordinated debt. The decrease in interest expense on deposits was attributable to reduced interest rates paid on deposits and the increase in interest expense on subordinated debt resulted from a $4.9 million increase in the average balance of subordinated debt.

The $200 thousand decrease in total interest and dividend income was primarily a result of a $342 thousand, or 5%, decrease in interest and fees on loans, which was partially offset by a $121 thousand, or 15%, increase in interest income and dividends on securities. The decrease in interest income on loans was attributable to a 22-basis point decrease in the loan yield, while the increase in interest income on securities resulted from a $47.9 million increase in the average balance of securities.

Noninterest income increased $662 thousand, or 37%, to $2.4 million compared to the same period of 2020. Service charges on deposits increased $99 thousand, or 28%, ATM and check card fees increased $132 thousand, or 24%, wealth management fees increased $145 thousand, or 28%, fees for other customer services increased $70 thousand, or 30%, and other operating income increased $223 thousand. The increase in service charges on deposits resulted from an increase in overdraft fee income, ATM and check card fees increased from an increase in card use by customers, wealth management increased from a higher amount of assets under management, and fees for other customer services increased primarily from fee revenue earned on brokered mortgage loans sold in the secondary market. Other operating income increased primarily from income earned on investments in Small Business Investment Companies.

Noninterest expense increased $1.0 million, or 18%, to $6.6 million, compared to the same period one year ago. The increase was primarily attributable to a $671 thousand increase in salaries and employee benefits and a $182 thousand increase in legal and professional fees. The increase in salaries and employee benefits resulted primarily from $520 thousand of deferred PPP loan origination costs in the prior year. The increase in legal and professional fees was attributable to merger related expenses. Merger related expenses totaled $277 thousand in the second quarter of 2021.

PERFORMANCE ANALYSIS OF THE SIX-MONTH PERIOD

Net income totaled $5.8 million, or $1.19 per diluted share, for the six months ended June 30, 2021, which resulted in return on average assets of 1.15% and return on average equity of 13.44%. This compares to net income of $3.9 million, or $0.81 per diluted share, and return on average assets of 0.93% and return on average equity of 10.01% for the same period of 2020.

Net interest income increased $570 thousand, or 4%, to $15.0 million for the six months ended June 30, 2021, compared to the same period of 2020. The increase resulted from a $843 thousand, or 43%, decrease in total interest expense, which was partially offset by a $273 thousand decrease in total interest and dividend income. The net interest margin decreased 48 basis points to 3.19%. The decrease in the net interest margin was offset by growth in average earning assets of $161.2 million, or 20%, and resulted in an increase in net interest income. 

The $843 thousand decrease in total interest expense was primarily a result of a $947 thousand, or 58%, decrease in interest expense on deposits, which was partially offset by a $127 thousand increase in interest expense on subordinated debt. The decrease in interest expense on deposits was attributable to reduced interest rates paid on deposits, and the increase in interest expense on subordinated debt resulted from a $5.0 million increase in the average balance of subordinated debt.   The $273 thousand decrease in total interest and dividend income was primarily a result of a $402 thousand, or 3%, decrease in interest and fees on loans and a $64 thousand, or 48%, decrease in interest on deposits in banks. These increases were partially offset by a $193 thousand, or 12%, increase in interest income and dividends on securities. The decrease in the interest income on loans was attributable to a 33-basis point decrease in the yield on loans and the decrease in interest on deposits in banks resulted from a 45-basis point decrease in the yield on deposits in banks, while the increase in interest income on securities resulted from a $32.7 million increase in the average balance of securities.

Noninterest income increased $706 thousand, or 18%, to $4.6 million compared to the same period of 2020. ATM and check card fees increased $214 thousand, or 20%, wealth management fees increased $263 thousand, or 25%, fees for other customer services increased $149 thousand, or 34%, and other operating income increased $216 thousand. The increase in ATM and check card fees increased from an increase in card use by customers, wealth management increased from a higher amount of assets under management, and fees for other customer services increased primarily from fee revenue earned on brokered mortgage loans sold in the secondary market. Other operating income increased primarily from income earned on investments in Small Business Investment Companies. The increases were partially offset by a $140 thousand decrease in service charges on deposit accounts, which was a result of a decrease in overdraft fee income.

Noninterest expense increased $1.5 million, or 13%, to $13.3 million, compared to the same period one year ago. The increase was primarily attributable to a $637 thousand increase in salaries and employee benefits and a $640 thousand increase in legal and professional fees. The increase in salaries and employee benefits resulted primarily from $520 thousand of deferred PPP loan origination costs in the prior year. The increase in legal and professional fees was attributable to merger related expenses. Merger related expenses totaled $682 thousand for the six months ended June 30, 2021.

ASSET QUALITY / LOAN LOSS PROVISION

Recovery of loan losses totaled $1.0 million for the second quarter of 2021, which was attributable to a $2.1 million decrease in the specific reserve component of the allowance for loan losses and was partially offset by net charge-offs of $1.0 million. The general reserve component of the allowance for loan losses increased by $89 thousand during the second quarter of 2021 from an increase in the historical loss reserve, which was partially offset by an upgrade to the asset quality qualitative factor. The allowance for loan losses totaled $5.5 million, or 0.89% of total loans at June 30, 2021. Excluding PPP loans, the allowance for loan losses totaled 0.97% of total loans. Provision for loan losses totaled $800 thousand for the same period of 2020, and the allowance for loan losses totaled $6.3 million, or 0.97% of total loans at June 30, 2020.

Recovery of loan losses totaled $1.0 million for the six months ended June 30, 2021, which was also attributable to a $2.1 million decrease in the specific reserve component of the allowance for loan losses, and was partially offset by net charge-offs of $1.0 million for the six month period compared to net charge-offs of $338 thousand for the same period one year ago. Provision for loan losses totaled $1.7 million for the six months ended June 30, 2020.

Loans 30 to 89 days past due and accruing totaled $550 thousand, or 0.09% of total loans at June 30, 2021 compared to $1.1 million, or 0.17% of total loans one year ago. Accruing substandard loans totaled $322 thousand at June 30, 2021 and $8.6 million at June 30, 2020. Nonperforming assets consisted only of non-accrual loans and totaled $2.1 million, or 0.21% of total assets at June 30, 2021, compared to $6.8 million, or 0.66% of total assets at March 31, 2021, and $1.5 million, or 0.16% of total assets at June 30, 2020. The decrease in non-accrual loans during the second quarter was primarily attributable to the resolution of a $4.3 million loan that was partially charged-off.

ACQUISITION OF THE BANK OF FINCASTLE

On July 1, 2021, the Company completed the acquisition of The Bank of Fincastle (“Fincastle”) for an aggregate purchase price of $33.8 million of cash and stock. Fincastle was merged with and into First Bank at the time of the Merger. With the addition of Fincastle, the Company would have had approximately $1.3 billion in assets, $811.8 million in total gross loans outstanding and $1.2 billion in total deposits on a combined basis at June 30, 2021. The former Fincastle branches will continue to operate as The Bank of Fincastle, a division of First Bank, until the systems conversion, which is expected to be completed in October 2021. For the three-month and six-month periods ended June 30, 2021, the Company recorded merger related expenses of $277 thousand and $682 thousand, respectively, in connection with the acquisition of Fincastle. The Company estimates that it will incur aggregate merger related costs of $4.2 million, with the remaining $3.5 million expected to be recorded in the second half of 2021.

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 20 bank branch office locations located throughout the Shenandoah Valley, the central regions of Virginia, the city of Richmond and the Roanoke market area. 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
		June 30,				March 31,				December 31,				September 30,				June 30,
		2021				2021				2020				2020				2020
Income Statement
Interest income
Interest and fees on loans		$	7,074			$	7,143			$	7,310			$	7,568			$	7,416
Interest on deposits in banks			37				33				31				25				16
Interest on securities
Taxable interest			697				717				567				575				636
Tax-exempt interest			215				180				163				152				151
Dividends			22				22				24				23				26
Total interest income		$	8,045			$	8,095			$	8,095			$	8,343			$	8,245
Interest expense
Interest on deposits		$	328			$	363			$	410			$	541			$	676
Interest on subordinated debt			154				154				160				160				91
Interest on junior subordinated debt			68				66				68				68				67
Total interest expense		$	550			$	583			$	638			$	769			$	834
Net interest income		$	7,495			$	7,512			$	7,457			$	7,574			$	7,411
Provision for (recovery of) loan losses			(1,000	)			—				(200	)			1,500				800
Net interest income after provision for (recovery of) loan losses		$	8,495			$	7,512			$	7,657			$	6,074			$	6,611
Noninterest income
Service charges on deposit accounts		$	447			$	442			$	553			$	446			$	348
ATM and check card fees			682				601				576				669				550
Wealth management fees			657				643				598				573				512
Fees for other customer services			307				286				216				323				237
Income from bank owned life insurance			100				113				124				131				99
Net gains on securities			—				37				2				38				—
Net gains on sale of loans			18				7				10				3				26
Other operating income			224				14				73				18				1
Total noninterest income		$	2,435			$	2,143			$	2,152			$	2,201			$	1,773
Noninterest expense
Salaries and employee benefits		$	3,693			$	3,555			$	3,212			$	3,498			$	3,022
Occupancy			399				447				422				433				409
Equipment			433				431				440				439				418
Marketing			138				106				112				63				74
Supplies			77				88				90				112				103
Legal and professional fees			483				737				310				262				301
ATM and check card expense			268				231				253				259				223
FDIC assessment			78				69				105				52				60
Bank franchise tax			172				168				161				162				161
Data processing expense			216				204				196				191				188
Amortization expense			5				14				24				33				42
Other real estate owned expense (income), net			—				—				—				—				—
Other operating expense			668				600				569				631				612
Total noninterest expense		$	6,630			$	6,650			$	5,894			$	6,135			$	5,613
Income before income taxes		$	4,300			$	3,005			$	3,915			$	2,140			$	2,771
Income tax expense			958				569				759				386				528
Net income		$	3,342			$	2,436			$	3,156			$	1,754			$	2,243

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

		(unaudited)
		For the Quarter Ended
		June 30,				March 31,				December 31,				September 30,				June 30,
		2021				2021				2020				2020				2020
Common Share and Per Common Share Data
Net income, basic		$	0.69			$	0.50			$	0.65			$	0.36			$	0.46
Weighted average shares, basic			4,868,901				4,863,823				4,858,288				4,854,144				4,849,719
Net income, diluted		$	0.69			$	0.50			$	0.65			$	0.36			$	0.46
Weighted average shares, diluted			4,873,286				4,872,097				4,861,208				4,854,649				4,849,719
Shares outstanding at period end			4,870,459				4,868,462				4,860,399				4,858,217				4,852,187
Tangible book value at period end		$	18.21			$	17.65			$	17.47			$	16.92			$	16.63
Cash dividends		$	0.12			$	0.12			$	0.11			$	0.11			$	0.11
Key Performance Ratios
Return on average assets			1.31	%			1.00	%			1.31	%			0.74	%			1.00	%
Return on average equity			15.33	%			11.53	%			15.03	%			8.52	%			11.30	%
Net interest margin			3.10	%			3.27	%			3.30	%			3.41	%			3.59	%
Efficiency ratio (1)			63.65	%			64.53	%			61.00	%			62.35	%			60.34	%
Average Balances
Average assets		$	1,026,583			$	988,324			$	954,810			$	944,390			$	899,301
Average earning assets			976,842				937,199				904,511				889,127				836,741
Average shareholders’ equity			87,442				85,708				83,545				81,894				79,845
Asset Quality
Loan charge-offs		$	1,085			$	66			$	165			$	115			$	176
Loan recoveries			64				67				73				96				88
Net charge-offs (recoveries)			1,021				(1	)			92				19				88
Non-accrual loans			2,102				6,814				6,714				6,974				1,480
Other real estate owned, net			—				—				—				—				—
Nonperforming assets			2,102				6,814				6,714				6,974				1,480
Loans 30 to 89 days past due, accruing			550				906				996				885				1,094
Loans over 90 days past due, accruing			5				—				302				6				1
Troubled debt restructurings, accruing			—				—				—				—				4,313
Special mention loans			—				—				—				510				2,034
Substandard loans, accruing			322				1,343				1,394				3,804				8,616
Capital Ratios (2)
Total capital		$	95,856			$	94,044			$	91,243			$	89,155			$	88,109
Tier 1 capital			90,391				86,717				84,032				81,883				81,813
Common equity tier 1 capital			90,391				86,717				84,032				81,883				81,813
Total capital to risk-weighted assets			16.25	%			16.05	%			15.82	%			15.34	%			15.20	%
Tier 1 capital to risk-weighted assets			15.32	%			14.80	%			14.57	%			14.09	%			14.11	%
Common equity tier 1 capital to risk-weighted assets			15.32	%			14.80	%			14.57	%			14.09	%			14.11	%
Leverage ratio			8.78	%			8.78	%			8.80	%			8.67	%			9.08	%

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

		(unaudited)
		For the Quarter Ended
		June 30,				March 31,				December 31,				September 30,				June 30,
		2021				2021				2020				2020				2020
Balance Sheet
Cash and due from banks		$	13,913			$	11,940			$	13,115			$	13,349			$	17,717
Interest-bearing deposits in banks			114,334				164,322				114,182				108,857				90,562
Securities available for sale, at fair value			222,236				159,742				140,225				117,132				123,193
Securities held to maturity, at amortized cost			10,898				13,424				14,234				15,101				16,211
Restricted securities, at cost			1,631				1,631				1,875				1,848				1,848
Loans held for sale			—				—				245				—				170
Loans, net of allowance for loan losses			611,883				630,716				622,429				640,591				645,220
Premises and equipment, net			18,876				19,087				19,319				19,548				19,792
Accrued interest receivable			2,662				2,609				2,717				3,156				3,863
Bank owned life insurance			18,128				18,029				17,916				17,792				17,661
Core deposit intangibles, net			—				5				19				43				76
Other assets			10,032				6,625				4,656				5,316				5,777
Total assets		$	1,024,593			$	1,028,130			$	950,932			$	942,733			$	942,090
Noninterest-bearing demand deposits		$	290,571			$	292,280			$	263,229			$	256,733			$	253,974
Savings and interest-bearing demand deposits			528,002				526,012				479,035				480,017				470,764
Time deposits			95,732				97,765				100,197				101,645				114,277
Total deposits		$	914,305			$	916,057			$	842,461			$	838,395			$	839,015
Subordinated debt			9,992				9,992				9,991				9,987				9,982
Junior subordinated debt			9,279				9,279				9,279				9,279				9,279
Accrued interest payable and other liabilities			2,335				6,876				4,285				2,816				3,026
Total liabilities		$	935,911			$	942,204			$	866,016			$	860,477			$	861,302
Preferred stock		$	—			$	—			$	—			$	—			$	—
Common stock			6,088				6,086				6,075				6,073				6,065
Surplus			6,295				6,214				6,151				6,081				5,967
Retained earnings			73,901				71,144				69,292				66,670				65,451
Accumulated other comprehensive income, net			2,398				2,482				3,398				3,432				3,305
Total shareholders’ equity		$	88,682			$	85,926			$	84,916			$	82,256			$	80,788
Total liabilities and shareholders’ equity		$	1,024,593			$	1,028,130			$	950,932			$	942,733			$	942,090
Loan Data
Mortgage loans on real estate:
Construction and land development		$	25,035			$	25,720			$	27,328			$	27,472			$	31,981
Secured by farmland			495				507				521				533				872
Secured by 1-4 family residential			235,158				236,870				235,814				234,198				234,188
Other real estate loans			244,960				248,357				246,362				249,786				247,623
Loans to farmers (except those secured by real estate)			232				436				637				1,120				711
Commercial and industrial loans (except those secured by real estate)			102,734				117,109				109,201				124,157				123,995
Consumer installment loans			5,179				5,684				6,458				7,378				8,401
Deposit overdrafts			174				112				143				194				170
All other loans			3,381				3,407				3,450				3,530				3,575
Total loans		$	617,348			$	638,202			$	629,914			$	648,368			$	651,516
Allowance for loan losses			(5,465	)			(7,486	)			(7,485	)			(7,777	)			(6,296	)
Loans, net		$	611,883			$	630,716			$	622,429			$	640,591			$	645,220

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

		(unaudited)
		For the Quarter Ended
		June 30,				March 31,				December 31,				September 30,				June 30,
		2021				2021				2020				2020				2020
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans		$	7,074			$	7,143			$	7,310			$	7,568			$	7,416
Interest income – investments and other			971				952				785				775				829
Interest expense – deposits			(328	)			(363	)			(410	)			(541	)			(676	)
Interest expense – subordinated debt			(154	)			(154	)			(160	)			(160	)			(91	)
Interest expense – junior subordinated debt			(68	)			(66	)			(68	)			(68	)			(67	)
Total net interest income		$	7,495			$	7,512			$	7,457			$	7,574			$	7,411
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans		$	8			$	8			$	8			$	8			$	8
Tax benefit realized on non-taxable interest income – municipal securities			57				48				43				41				40
Total tax benefit realized on non-taxable interest income		$	65			$	56			$	51			$	49			$	48
Total tax-equivalent net interest income		$	7,560			$	7,568			$	7,508			$	7,623			$	7,459

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

		(unaudited)
		For the Six Months Ended
		June 30,				June 30,
		2021				2020
Income Statement
Interest income
Interest and fees on loans		$	14,217			$	14,619
Interest on deposits in banks			70				134
Interest on securities
Taxable interest			1,414				1,306
Tax-exempt interest			395				302
Dividends			44				52
Total interest income		$	16,140			$	16,413
Interest expense
Interest on deposits		$	691			$	1,638
Interest on federal funds purchased			—				—
Interest on subordinated debt			308				181
Interest on junior subordinated debt			134				157
Interest on other borrowings			—				—
Total interest expense		$	1,133			$	1,976
Net interest income		$	15,007			$	14,437
Provision for (recovery of) loan losses			(1,000	)			1,700
Net interest income after provision for loan losses		$	16,007			$	12,737
Noninterest income
Service charges on deposit accounts		$	889			$	1,029
ATM and check card fees			1,283				1,069
Wealth management fees			1,300				1,037
Fees for other customer services			593				444
Income from bank owned life insurance			213				214
Net gains (losses) on securities			37				—
Net gains on sale of loans			25				57
Other operating income			238				22
Total noninterest income		$	4,578			$	3,872
Noninterest expense
Salaries and employee benefits		$	7,248			$	6,611
Occupancy			846				811
Equipment			864				828
Marketing			244				180
Supplies			165				192
Legal and professional fees			1,220				580
ATM and check card expense			499				468
FDIC assessment			147				90
Bank franchise tax			340				314
Data processing expense			420				372
Amortization expense			19				94
Other real estate owned expense (income), net			—				—
Other operating expense			1,268				1,217
Total noninterest expense		$	13,280			$	11,757
Income before income taxes		$	7,305			$	4,852
Income tax expense			1,527				904
Net income		$	5,778			$	3,948

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

		(unaudited)
		For the Six Months Ended
		June 30,				June 30,
		2021				2020
Common Share and Per Common Share Data
Net income, basic		$	1.19			$	0.81
Weighted average shares, basic			4,866,376				4,900,303
Net income, diluted		$	1.19			$	0.81
Weighted average shares, diluted			4,872,706				4,902,845
Shares outstanding at period end			4,870,459				4,852,187
Tangible book value at period end		$	18.21			$	16.63
Cash dividends		$	0.24			$	0.22
Key Performance Ratios
Return on average assets			1.15	%			0.93	%
Return on average equity			13.44	%			10.01	%
Net interest margin			3.19	%			3.67	%
Efficiency ratio (1)			64.09	%			63.41	%
Average Balances
Average assets		$	1,009,630			$	852,866
Average earning assets			957,176				795,957
Average shareholders’ equity			86,668				79,356
Asset Quality
Loan charge-offs		$	1,151			$	504
Loan recoveries			131				166
Net charge-offs			1,020				338
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans		$	14,217			$	14,619
Interest income – investments and other			1,923				1,794
Interest expense – deposits			(691	)			(1,638	)
Interest expense – federal funds purchased			—				—
Interest expense – subordinated debt			(308	)			(181	)
Interest expense – junior subordinated debt			(134	)			(157	)
Interest expense – other borrowings			—				—
Total net interest income		$	15,007			$	14,437
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans		$	16			$	18
Tax benefit realized on non-taxable interest income – municipal securities			105				80
Total tax benefit realized on non-taxable interest income		$	121			$	98
Total tax-equivalent net interest income		$	15,128			$	14,535

(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.