GlobeNewswire Inc | Jul 29, 2020 07:00AM EDT

July 29, 2020

STRASBURG, Va., July 29, 2020 (GLOBE NEWSWIRE) -- First National Corporation (the Company or First National) (NASDAQ: FXNC), the bank holding company of First Bank (the Bank), reported unaudited consolidated net income of $2.2 million, or $0.46 per diluted share, for the second quarter of 2020, which resulted in a return on average assets of 1.00% and a return on average equity of 11.30%. This compares to net income of $2.1 million, or $0.42 per diluted share, and a return on average assets of 1.08% and a return on average equity of 11.76% for the second quarter of 2019. Provision for loan losses of $800 thousand and $200 thousand was included in net income for the three-month periods ending June 30, 2020 and 2019, respectively.

For the six months ending June 30, 2020, net income totaled $3.9 million, or $0.81 per diluted share, which resulted in a return on average assets of 0.93% and a return on average equity of 10.01%. This compares to net income of $4.3 million, or $0.88 per diluted share, and a return on average assets of 1.14% and a return on average equity of 12.60% for the same period of 2019. Provision for loan losses of $1.7 million and $200 thousand was included in net income for the six-month periods ending June 30, 2020 and 2019, respectively.

Highlights for the second quarter of 2020:

-- Return on assets of 1.00% and return on equity of 11.30% -- Provision for loan losses totaled $800 thousand compared to $200 thousand in Q2 2019 -- Originated $76.2 million of Payroll Protection Program loans -- Nonperforming assets at 0.16% of assets -- Loans in the Banks deferred payment program totaled $182.6 million -- Subordinated debt issuance of $5.0 million further strengthened holding company liquidity -- Tangible book value increased 14% to $16.63 per share compared to $14.60 one year ago

Our team of associates continued to demonstrate an incredible commitment to their customers, their communities, and one another throughout the second quarter, said Scott Harvard, president and chief executive officer of First National. Harvard continued, Our teammates worked overtime to deliver over $76 million of payroll protection funds to small businesses and provided access to deposit accounts via the drive throughs at branches, through First Banks mobile and internet banking platforms, and with in-person meetings by appointment. On July 1st, we were pleased to re-open branch lobbies for in-person transactions to serve our customers and communities, while taking precautions to help keep our customers and employees healthy.

We were pleased once again with the financial performance of the Company in the second quarter. Expenses decreased, while net interest income improved over the second quarter of 2019. We continued to earn new business customers from our commitment to serving small businesses by participating in the payroll protection program and by offering programs designed to provide financial relief to customers. We still expect significant pressure on loans to borrowers in several sectors, including the hospitality and health care industries, which have been impacted by government orders and the publics adoption of social distancing. The Companys liquidity position continues to be very strong and capital levels exceed all regulatory thresholds to be considered well-capitalized.

COVID-19 PANDEMIC UPDATE

Operations

During the second 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. This was accomplished by limiting access to banking offices and delivering a majority of its services through branch drive throughs, ATMs, and mobile and internet banking platforms. On July 1, 2020, the Bank entered phase two of its Pandemic Plan by re-opening branch lobbies with limited hours for in-person transactions without appointments.

Paycheck Protection Program

The Bank participated as a lender in the U.S. Small Business Administrations (SBA) Paycheck Protection Program (PPP) to support local small businesses and non-profit organizations. During the second quarter of 2020, the Bank originated $76.2 million of PPP loans, received $2.5 million of loan fees, and incurred $520 thousand of loan origination costs. The loan fees are being accreted into earnings evenly over the life of the loans, net of the loan costs, through interest and fees on loans. Approximately 99% of the PPP loan balances mature in 24 months. At June 30, 2020, PPP loan balances totaled $73.3 million and customers had not yet requested debt forgiveness from the SBA on PPP loans.

Loan Payment Deferral Program

In response to the unknown impact of the pandemic on the economy and customers, the Bank created and implemented a loan payment deferral program for individual and business customers in the first quarter of 2020. Customers with favorable risk ratings and payment histories were given the opportunity to defer monthly payments for 90 days. Loans participating in the program totaled $182.6 million, or 28% of the Banks loan balances at June 30, 2020. Interest income continued to accrue to the Bank during the deferral periods.

Asset Quality Impact

The pandemic is expected to have an unfavorable impact on the financial condition of the Banks loan customers, and as a result, the Bank has continued the process of identifying credit risk with the goal of mitigating the risk and minimizing future loan charge-offs. Several sectors of the loan portfolio, including hospitality, retail shopping and health care are expected to experience significant financial pressure. Those sectors comprise approximately 9%, 5% and 4% of the loan portfolio, respectively, excluding PPP loans. The magnitude of the potential decline in the Banks loan quality will likely depend on the duration of the pandemic and the extent that the Banks customers experience business interruptions from the pandemic. The Bank considered the impact of the pandemic on the loan portfolio while determining an appropriate allowance for loan losses, and as a result, recorded a provision for loan losses of $800 thousand for the second quarter of 2020, compared to a $200 thousand provision for loan losses in the second quarter of 2019.

Capital

The stock repurchase plan remained suspended during the second quarter. The Company updated its enterprise risk assessment and capital plans during the quarter, and as a result, the Company issued $5.0 million of subordinated debt in June 2020. The purpose of the issuance was primarily to further strengthen holding company liquidity and remain a source of strength for the Bank during a severe economic downturn. The Company may also use the proceeds of the issuance for general corporate purposes, including the potential repayment of the Companys existing subordinated debt, which becomes callable in January 2021. The quarterly cash dividend to common shareholders was not reduced or eliminated during the second quarter as the Company declared and paid an $0.11 per share dividend that was unchanged from the dividend paid in the first quarter of 2020.

BALANCE SHEET

Total assets of First National increased $163.7 million, or 21%, to $942.1 million at June 30, 2020, compared to $778.4 million at June 30, 2019. Total securities increased $1.2 million, or 1%, and loans, net of the allowance for loan losses, increased $75.3 million, or 13%. Loans, net of the allowance for loan losses, would have increased $2.0 million comparing the same periods, excluding $73.3 million of PPP loans.

Total liabilities increased $155.7 million, or 22%, to $861.3 million at June 30, 2020, compared to $705.6 million one year ago. The increase in liabilities was primarily attributable to significant growth in deposits. Total deposits increased $149.2 million, or 22%, to $839.0 million and subordinated debt increased by $5.0 million to $10.0 million at June 30, 2020. Noninterest-bearing demand deposits increased $67.4 million, or 36%, savings and interest-bearing demand deposits increased $85.4 million, or 22%, while time deposits decreased $3.6 million, or 3%.

Although proceeds from PPP loan originations during the second quarter contributed to the increase in deposits, the Bank also experienced a significant amount of deposit growth that was not related to PPP loan proceeds during the quarter. Total deposits increased $118.4 million, or 16%, during the three-month period ended June 30, 2020, while PPP loans totaled $73.3 million at June 30, 2020.

Subordinated debt increased to $10.0 million during the quarter from a $5.0 million issuance on June 29, 2020. The Company issued the debt at a 5.50% fixed-to-floating rate subordinated note due 2030 to an institutional investor. The Note was structured to qualify as Tier 2 capital under bank regulatory guidelines, and the proceeds from the sale of the Note may be utilized to support capital levels at the Bank in a severe economic downturn or for general corporate purposes, including the potential repayment of the Companys existing subordinated debt, which becomes callable in January 2021.

Shareholders equity increased $8.0 million, or 11%, to $80.8 million at June 30, 2020, compared to one year ago, from a $7.2 million increase in retained earnings and a $2.5 million increase in accumulated other comprehensive income. These increases were partially offset by $1.7 million decrease in common stock and surplus, which resulted from stock repurchases in the first quarter of 2020 under the Companys stock repurchase plan.

The Companys stock repurchase plan was suspended near the end of the first quarter of 2020 due to the potential impact of the pandemic on the economy and the Banks customers and remained suspended during the second quarter. The Company paid a cash dividend to common shareholders during the second quarter of $0.11 per share, which was unchanged from the first quarter. The Bank was considered well-capitalized at June 30, 2020.

ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $446 thousand, or 6%, to $7.4 million for the second quarter of 2020, compared to the same period of 2019. The increase resulted from a 15% increase in average earning assets, which was partially offset by a 29 basis point decrease in the net interest margin from 3.88% to 3.59%. Growth in average earning assets was led by a $69.6 million increase in average loans, followed by a $38.9 million increase in average interest-bearing deposits in banks. The decrease in the net interest margin resulted from a 58 basis point decrease in the yield on average earning assets, which was partially offset by a 29 basis point decrease in interest expense as a percent of average earning assets.

The 58 basis point decrease in the yield on average earning assets was attributable to a 41 basis point decrease in the yield on loans, a 24 basis point decrease on securities, and an 218 basis point decrease on interest-bearing deposits in banks, which were all impacted by lower market rates. The total loan yield was also impacted by the origination of over $76.2 million of PPP loans at a 1.00% interest rate during the second quarter of 2020. The mix of earning assets also had an unfavorable impact on the yield on average earning assets as lower yielding interest-bearing deposits in banks increased from 3% to 7% of average earning assets.

The 29 basis point decrease in interest expense as a percentage of average earning assets was primarily attributable to lower interest rates paid on deposits, which were also impacted by lower market rates. The decrease in the cost of interest-bearing checking accounts and money market accounts totaled 57 basis points and 77 basis points, respectively.

Noninterest income decreased $262 thousand, or 13%, to $1.8 million, compared to the same period of 2019. The decrease was primarily attributable to a $367 thousand, or 51%, decrease in service charges on deposit accounts from lower deposit overdraft fees. This decrease was partially offset by a $54 thousand increase in wealth management fees and an $84 thousand increase in fees for other customer services. The increase in fees for other customer services was a result of fee income from brokered mortgage loans to the secondary market. The increases in wealth management fees resulted primarily from higher balances of assets under management during the second quarter of 2020 compared to the same period one year ago. Assets under management increased as a result of new business relationships and from growth in the market values of existing accounts.

Noninterest expense decreased $617 thousand, or 10%, to $5.6 million, compared to the same period one year ago. The decrease was primarily attributable to a $353 thousand, or 10%, decrease in salaries and employee benefits, a $165 thousand, or 69%, decrease in marketing expense, and a $145 thousand, or 19%, decrease in other operating expense. The decrease in salaries and employee benefits resulted from the $520 thousand deferral of salary costs to originate PPP loans during the second quarter of 2020. Marketing expense decreased from a combination of reduced spending on public relations events in the second quarter of 2020 and elevated expenses in the second quarter of 2019 from the timing of marketing initiatives in the prior year. Other operating expense decreased from lower education and training costs, registration and licensing fees, and travel costs.

ANALYSIS OF THE SIX-MONTH PERIOD

Net interest income increased $573 thousand, or 4%, to $14.4 million for the six months ending June 30, 2020, compared to the same period of 2019. The increase resulted from a 11% increase in average earning assets, which was partially offset by a 26 basis point decrease in the net interest margin from 3.93% to 3.67%. Growth in average earning assets was led by a $49.8 million increase in average loans, followed by a $27.5 million increase in average interest-bearing deposits in banks. The decrease in the net interest margin resulted from a 42 basis point decrease in the yield on average earning assets, which was partially offset by a 17 basis point decrease in interest expense as a percent of average earning assets.

The 42 basis point decrease in the yield on average earning assets was attributable to a 30 basis point decrease in the yield on loans, a 23 basis point decrease on securities, and a 169 basis point decrease on interest-bearing deposits in banks, which were all impacted by lower market rates. The total loan yield was also impacted by the origination of over $76.2 million of PPP loans at a 1.00% interest rate during the second quarter of 2020. The mix of earning assets also had an unfavorable impact on the yield on average earning assets as lower yielding interest-bearing deposits in banks increased from 3% to 6% of average earning assets.

The 17 basis point decrease in interest expense as a percentage of average earning assets was primarily attributable to lower interest rates paid on deposits, which were also impacted by lower market rates. The decrease in the cost of interest-bearing checking accounts and money market accounts totaled 43 basis points and 45 basis points, respectively.

Noninterest income decreased $148 thousand, or 4%, to $3.9 million, compared to the same period of 2019. The decrease was primarily attributable to a $387 thousand, or 27%, decrease in service charges on deposit accounts from lower deposit overdraft fees. This decrease was partially offset by a $142 thousand increase in wealth management fees and a $116 thousand increase in fees for other customer services. The increase in fees for other customer services was a result of fee income from brokered mortgage loans to the secondary market. The increase in wealth management fees resulted primarily from higher balances of assets under management during the six months ended June 30, 2020 compared to the same period one year ago. Assets under management increased as a result of new business relationships and from growth in the market values of existing accounts.

Noninterest expense decreased $571 thousand, or 5%, to $11.8 million, compared to the same period one year ago. The decrease was primarily attributable to a $207 thousand, or 3%, decrease in salaries and employee benefits, a $200 thousand, or 53%, decrease in marketing expense, and a $195 thousand, or 14%, decrease in other operating expense. The decrease in salaries and employee benefits resulted from the deferral of $520 thousand of salary costs to originate PPP loans during the second quarter of 2020. Marketing expense decreased from a combination of reduced spending on public relations events during the six months ending June 30, 2020 and elevated marketing expenses during the same period of 2019 from the timing of marketing initiatives in the prior year. Other operating expense decreased from lower education and training, registration and licensing fees, and travel costs.

ASSET QUALITY/LOAN LOSS PROVISION

Provision for loan losses totaled $800 thousand for the second quarter of 2020, compared to $200 thousand for the same period of 2019. The higher provision for loan losses was primarily attributable to an increase in the general reserve component of the allowance for loan losses. The general reserve component of the allowance for loan losses increased primarily as a result of adjustments to qualitative factors from risks associated with loans participating in the Banks loan payment deferral program and an increase in substandard loans. Net charge offs totaled $88 thousand for the second quarter of 2020, compared to $151 thousand for the second quarter of 2019.

Loans participating in the Banks loan payment deferral program totaled $182.6 million, or 28% of the Banks loan balances at June 30, 2020. Interest income continued to accrue to the Bank during the deferral periods.

Loans that were 30 to 89 days past due totaled $1.1 million, or 0.17% of total loans at June 30, 2020 compared to $792 thousand, or 0.14% of total loans one year ago. Classified assets, which were comprised of substandard loans, totaled $10.1 million, or 1.07% of total assets, at June 30, 2020 compared to $4.6 million, or 0.59% of total assets one year ago.

Nonperforming assets totaled $1.5 million, or 0.16% of total assets at June 30, 2020, compared to $1.8 million, or 0.23% of total assets, one year ago. The allowance for loan losses totaled $6.3 million, or 0.97% of total loans at June 30, 2020, compared to $5.0 million, or 0.87% of total loans at June 30, 2019.

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 Companys 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 Companys 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 BellPresident and CEO Executive Vice President and CFO(540) 465-9121 (540) 465-9121shavard@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 September June 30, 31, 30, 2020 2020 2019 2019 2019Income Statement Interest income Interest and fees $ 7,416 $ 7,203 $ 7,333 $ 7,429 $ 7,200 on loansInterest on 16 118 163 97 133 deposits in banksInterest on securitiesTaxable interest 636 670 627 645 696 Tax-exempt interest 151 151 156 157 159 Dividends 26 26 27 26 26 Total interest $ 8,245 $ 8,168 $ 8,306 $ 8,354 $ 8,214 incomeInterest expense Interest on $ 676 $ 962 $ 1,042 $ 1,089 $ 1,051 depositsInterest on federal ? ? ? 1 ? funds purchasedInterest on 91 90 91 90 90 subordinated debtInterest on junior 67 90 98 103 108 subordinated debtTotal interest $ 834 $ 1,142 $ 1,231 $ 1,283 $ 1,249 expenseNet interest income $ 7,411 $ 7,026 $ 7,075 $ 7,071 $ 6,965 Provision for loan 800 900 250 ? 200 lossesNet interest incomeafter provision for $ 6,611 $ 6,126 $ 6,825 $ 7,071 $ 6,765 loan lossesNoninterest income Service charges on $ 348 $ 681 $ 753 $ 757 $ 715 deposit accountsATM and check card 550 519 654 586 573 feesWealth management 512 525 496 477 458 feesFees for other 237 207 181 177 153 customer servicesIncome from bankowned life 99 115 123 131 99 insuranceNet gains (losses) ? ? 1 ? ? on securitiesNet gains on sale 26 31 89 34 25 of loansOther operating 1 21 44 29 12 incomeTotal noninterest $ 1,773 $ 2,099 $ 2,341 $ 2,191 $ 2,035 incomeNoninterest expense Salaries and $ 3,022 $ 3,589 $ 3,193 $ 3,556 $ 3,375 employee benefitsOccupancy 409 402 415 398 401 Equipment 418 410 406 410 409 Marketing 74 106 128 143 239 Supplies 103 89 88 86 91 Legal and 301 279 311 231 303 professional feesATM and check card 223 245 231 225 225 expenseFDIC assessment 60 30 (53 ) (6 ) 35 Bank franchise tax 161 153 136 136 136 Data processing 188 184 179 174 179 expenseAmortization 42 52 61 71 80 expenseOther real estateowned expense ? ? 1 ? ? (income), netNet losses (gains)on disposal of ? (9 ) 14 ? ? premises andequipmentOther operating 612 614 694 762 757 expenseTotal noninterest $ 5,613 $ 6,144 $ 5,804 $ 6,186 $ 6,230 expenseIncome before $ 2,771 $ 2,081 $ 3,362 $ 3,076 $ 2,570 income taxesIncome tax expense 528 376 646 583 484 Net income $ 2,243 $ 1,705 $ 2,716 $ 2,493 $ 2,086

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, 2020 2020 2019 2019 2019Common Shareand Per Common Share DataNet income, $ 0.46 $ 0.34 $ 0.55 $ 0.50 $ 0.42 basicWeightedaverage shares, 4,849,719 4,950,887 4,968,574 4,966,641 4,963,737 basicNet income, $ 0.46 $ 0.34 $ 0.55 $ 0.50 $ 0.42 dilutedWeightedaverage shares, 4,849,719 4,955,970 4,972,535 4,969,126 4,965,822 dilutedSharesoutstanding at 4,852,187 4,849,692 4,969,716 4,968,277 4,964,824 period endTangible bookvalue at period $ 16.63 $ 16.17 $ 15.50 $ 15.11 $ 14.60 endCash dividends $ 0.11 $ 0.11 $ 0.09 $ 0.09 $ 0.09 Key Performance RatiosReturn on 1.00 % 0.85 % 1.36 % 1.27 % 1.08 %average assetsReturn on 11.30 % 8.72 % 14.10 % 13.31 % 11.76 %average equityNet interest 3.59 % 3.77 % 3.79 % 3.87 % 3.88 %marginEfficiency 60.34 % 66.50 % 60.50 % 65.65 % 67.94 %ratio (1) Average BalancesAverage assets $ 899,301 $ 806,609 $ 795,391 $ 780,376 $ 773,574 Average earning 836,741 755,173 745,721 730,865 724,909 assetsAverageshareholders? 79,845 78,659 76,424 74,291 71,124 equity Asset Quality Loan $ 176 $ 328 $ 281 $ 156 $ 219 charge-offsLoan recoveries 88 78 53 73 68 Net charge-offs 88 250 228 83 151 Non-accrual 1,480 1,522 1,459 1,566 1,775 loansOther realestate owned, ? ? ? ? ? netNonperforming 1,480 1,522 1,459 1,566 1,775 assetsLoans 30 to 89days past due, 1,094 2,901 2,372 902 792 accruingLoans over 90days past due, 1 86 97 113 19 accruingTroubled debtrestructurings, 4,313 ? ? ? ? accruingSpecial mention 2,034 6,058 6,069 1,458 2,610 loansSubstandard 8,616 4,368 3,410 3,758 2,825 loans, accruing Capital Ratios (2)Total capital $ 88,109 $ 86,849 $ 85,439 $ 83,591 $ 82,078 Tier 1 capital 81,813 81,265 80,505 78,679 77,083 Common equity 81,813 81,265 80,505 78,679 77,083 tier 1 capitalTotal capitalto 15.20 % 14.98 % 14.84 % 14.57 % 14.24 %risk-weightedassetsTier 1 capitalto 14.11 % 14.02 % 13.99 % 13.71 % 13.37 %risk-weightedassetsCommon equitytier 1 capitalto 14.11 % 14.02 % 13.99 % 13.71 % 13.37 %risk-weightedassetsLeverage ratio 9.08 % 10.08 % 10.13 % 10.09 % 9.96 %

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

(unaudited) For the Quarter Ended June 30, March 31, December September June 30, 31, 30, 2020 2020 2019 2019 2019Balance Sheet Cash and due from $ 17,717 $ 30,551 $ 9,675 $ 11,885 $ 12,354 banksInterest-bearing 90,562 17,539 36,110 18,488 10,716 deposits in banksSecuritiesavailable for sale, 123,193 128,660 120,983 114,568 119,510 at fair valueSecurities held tomaturity, at 16,211 17,086 17,627 18,222 18,828 amortized costRestricted 1,848 1,848 1,806 1,806 1,701 securities, at costLoans held for sale 170 621 167 1,098 675 Loans, net ofallowance for loan 645,220 576,283 569,412 566,341 569,959 lossesPremises and 19,792 19,619 19,747 19,946 20,182 equipment, netAccrued interest 3,863 2,124 2,065 2,053 2,163 receivableBank owned life 17,661 17,562 17,447 17,324 17,193 insuranceCore deposit 76 118 170 231 302 intangibles, netOther assets 5,777 4,401 4,839 5,231 4,801 Total assets $ 942,090 $ 816,412 $ 800,048 $ 777,193 $ 778,384 Noninterest-bearing $ 253,974 $ 197,662 $ 189,623 $ 189,797 $ 186,553 demand depositsSavings andinterest-bearing 470,764 407,555 399,255 376,047 385,399 demand depositsTime deposits 114,277 115,410 117,564 119,777 117,863 Total deposits $ 839,015 $ 720,627 $ 706,442 $ 685,621 $ 689,815 Subordinated debt 9,982 4,987 4,983 4,978 4,974 Junior subordinated 9,279 9,279 9,279 9,279 9,279 debtAccrued interestpayable and other 3,026 3,001 2,125 1,999 1,507 liabilitiesTotal liabilities $ 861,302 $ 737,894 $ 722,829 $ 701,877 $ 705,575 Preferred stock $ ? $ ? $ ? $ ? $ ? Common stock 6,065 6,062 6,212 6,210 6,206 Surplus 5,967 5,899 7,700 7,648 7,566 Retained earnings 65,451 63,741 62,583 60,314 58,268 Accumulated othercomprehensive 3,305 2,816 724 1,144 769 income (loss), netTotal shareholders? $ 80,788 $ 78,518 $ 77,219 $ 75,316 $ 72,809 equityTotal liabilitiesand shareholders? $ 942,090 $ 816,412 $ 800,048 $ 777,193 $ 778,384 equity Loan Data Mortgage loans on real estate:Construction and $ 31,981 $ 40,279 $ 43,164 $ 45,193 $ 46,281 land developmentSecured by farmland 872 888 900 916 855 Secured by 1-4 234,188 230,980 229,438 226,828 225,820 family residentialOther real estate 247,623 240,486 235,655 232,151 236,515 loansLoans to farmers(except those 711 1,221 1,423 1,461 1,006 secured by realestate)Commercial andindustrial loans(except those 123,995 54,287 48,730 49,096 48,347 secured by realestate)Consumer 8,401 9,505 10,400 11,040 11,572 installment loansDeposit overdrafts 170 238 374 263 208 All other loans 3,575 3,983 4,262 4,305 4,350 Total loans $ 651,516 $ 581,867 $ 574,346 $ 571,253 $ 574,954 Allowance for loan (6,296 ) (5,584 ) (4,934 ) (4,912 ) (4,995 )lossesLoans, net $ 645,220 $ 576,283 $ 569,412 $ 566,341 $ 569,959

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

(unaudited) For the Quarter Ended June 30, March 31, December September June 30, 31, 30, 2020 2020 2019 2019 2019ReconciliationofTax-Equivalent Net InterestIncomeGAAP measures: Interest income $ 7,416 $ 7,203 $ 7,333 $ 7,429 $ 7,200 ? loansInterest income? investments 829 965 973 925 1,014 and otherInterest expense (676 ) (962 ) (1,042 ) (1,089 ) (1,051 )? depositsInterest expense? federal funds ? ? ? (1 ) ? purchasedInterest expense? subordinated (91 ) (90 ) (91 ) (90 ) (90 )debtInterest expense? junior (67 ) (90 ) (98 ) (103 ) (108 )subordinateddebtTotal net $ 7,411 $ 7,026 $ 7,075 $ 7,071 $ 6,965 interest incomeNon-GAAP measures:Tax benefitrealized onnon-taxable $ 8 $ 10 $ 10 $ 9 $ 10 interest income? loansTax benefitrealized onnon-taxable 40 40 41 43 42 interest income? municipalsecuritiesTotal taxbenefit realized $ 48 $ 50 $ 51 $ 52 $ 52 on non-taxableinterest incomeTotaltax-equivalent $ 7,459 $ 7,076 $ 7,126 $ 7,123 $ 7,017 net interestincome

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, 2020 2019 Income Statement Interest income Interest and fees on loans $ 14,619 $ 14,196 Interest on deposits in banks 134 243 Interest on securities Taxable interest 1,306 1,433 Tax-exempt interest 302 315 Dividends 52 50 Total interest income $ 16,413 $ 16,237 Interest expense Interest on deposits $ 1,638 $ 1,973 Interest on subordinated debt 181 179 Interest on junior subordinated debt 157 219 Interest on other borrowings ? 2 Total interest expense $ 1,976 $ 2,373 Net interest income $ 14,437 $ 13,864 Provision for loan losses 1,700 200 Net interest income after provision for loan losses $ 12,737 $ 13,664 Noninterest income Service charges on deposit accounts $ 1,029 $ 1,416 ATM and check card fees 1,069 1,090 Wealth management fees 1,037 895 Fees for other customer services 444 328 Income from bank owned life insurance 214 202 Net gains on sale of loans 57 47 Other operating income 22 42 Total noninterest income $ 3,872 $ 4,020 Noninterest expense Salaries and employee benefits $ 6,611 $ 6,818 Occupancy 811 839 Equipment 828 829 Marketing 180 380 Supplies 192 164 Legal and professional fees 580 544 ATM and check card expense 468 441 FDIC assessment 90 104 Bank franchise tax 314 266 Data processing expense 372 352 Amortization expense 94 170 Net losses (gains) on disposal of premises and (9 ) ? equipmentOther operating expense 1,226 1,421 Total noninterest expense $ 11,757 $ 12,328 Income before income taxes $ 4,852 $ 5,356 Income tax expense 904 1,009 Net income $ 3,948 $ 4,347

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, 2020 2019 Common Share and Per Common Share Data Net income, basic $ 0.81 $ 0.88 Weighted average shares, basic 4,900,303 4,962,010 Net income, diluted $ 0.81 $ 0.88 Weighted average shares, diluted 4,902,845 4,964,988 Shares outstanding at period end 4,852,187 4,964,824 Tangible book value at period end $ 16.63 $ 14.60 Cash dividends $ 0.22 $ 0.18 Key Performance Ratios Return on average assets 0.93 % 1.14 %Return on average equity 10.01 % 12.60 %Net interest margin 3.67 % 3.93 %Efficiency ratio (1) 63.41 % 67.59 % Average Balances Average assets $ 852,866 $ 766,054 Average earning assets 795,957 717,341 Average shareholders? equity 79,356 69,589 Asset Quality Loan charge-offs $ 504 $ 447 Loan recoveries 166 233 Net charge-offs 338 214 Reconciliation of Tax-Equivalent Net Interest IncomeGAAP measures: Interest income ? loans $ 14,619 $ 14,196 Interest income ? investments and other 1,794 2,041 Interest expense ? deposits (1,638 ) (1,973 )Interest expense ? subordinated debt (181 ) (179 )Interest expense ? junior subordinated debt (157 ) (219 )Interest expense ? other borrowings ? (2 )Total net interest income $ 14,437 $ 13,864 Non-GAAP measures: Tax benefit realized on non-taxable interest $ 18 $ 21 income ? loansTax benefit realized on non-taxable interest 80 83 income ? municipal securitiesTotal tax benefit realized on non-taxable $ 98 $ 104 interest incomeTotal tax-equivalent net interest income $ 14,535 $ 13,968

(1)The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, and gains and losses on disposal of premises and equipment by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding gains and losses on sales of securities. Tax-equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21%. See the tables above for tax-equivalent net interest income and reconciliations of net interest income to tax-equivalent net interest income. The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be construed as such. Management believes; however, such financial information is meaningful to the reader in understanding operational performance, but cautions that such information not be viewed as a substitute for GAAP.

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