GlobeNewswire Inc | Oct 29, 2020 07:30AM EDT

October 29, 2020

STRASBURG, Va., Oct. 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 $1.8 million, or $0.36 per diluted share, for the third quarter of 2020, which resulted in a return on average assets of 0.74% and a return on average equity of 8.52%. This compares to net income of $2.5 million, or $0.50 per diluted share, and a return on average assets of 1.27% and a return on average equity of 13.31% for the third quarter of 2019. Provision for loan losses of $1.5 million was included in net income for the three-month period ending September 30, 2020, compared to no provision for loan losses for the same period in 2019.

For the nine months ending September 30, 2020, net income totaled $5.7 million, or $1.17 per diluted share, which resulted in a return on average assets of 0.86% and a return on average equity of 9.49%. This compares to net income of $6.8 million, or $1.38 per diluted share, and a return on average assets of 1.19% and a return on average equity of 12.85% for the same period of 2019. Provision for loan losses of $3.2 million and $200 thousand was included in net income for the nine-month periods ending September 30, 2020 and 2019, respectively.

Highlights for the third quarter of 2020

-- Net interest income increased $503 thousand, or 7% -- Wealth management revenue increased $96 thousand, or 20% -- Fees for other customer services increased $146 thousand, or 82% -- Salaries and employee benefits decreased $58 thousand, or 2% -- Tangible book value increased 12% to $16.92 per share compared to $15.11 one year ago -- Loans in the Banks deferred payment program decreased to $22.6 million, or 3% of total loans -- Nonperforming assets totaled $7.0 million, an increase of $5.4 million -- Provision for loan losses totaled $1.5 million, compared to no provision for same quarter of 2019

We are pleased the Bank generated solid financial performance in the third quarter with higher net interest income, higher noninterest income and lower noninterest expenses, said Scott Harvard, president and chief executive officer of First National. Harvard continued, While net income was impacted by a provision for loan losses totaling $1.5 million, we believe the provision reflected our diligent ongoing management of credits in the current credit cycle, including specific reserves established for impaired loans to companies that experienced business interruptions attributable to the pandemic. We are also pleased with the significant reduction of loans in the Banks deferred loan program, which totaled 3% of total loans at the end of the third quarter, compared to 28% of total loans at June 30, 2020.

We continue to be impressed by the efforts of our bankers to adapt to the unusual environment created by the pandemic and are proud of the improvement in net interest income, noninterest income and expense management as a result of their efforts.

COVID-19 PANDEMIC UPDATE

Operations

During the third 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. The Bank entered phase two of its Pandemic Plan on July 1, 2020 and re-opened branch lobbies with limited hours for in-person transactions without appointments while it continued to deliver banking services through branch drive throughs, ATMs, and mobile and internet banking platforms.

Paycheck Protection Program

The Bank participated as a lender in the U.S. Small Business Administrations (SBA) Paycheck Protection Program (PPP) to support local small businesses and non-profit organizations. During the second and third quarters of 2020, the Bank originated $76.6 million of PPP loans, received $2.5 million of loan fees, and incurred $535 thousand of loan origination costs. The loan fees are being accreted into earnings evenly over the life of the loans, net of the loan costs, through interest and fees on loans. At September 30, 2020, PPP loan balances totaled $73.7 million with 99% of the loan balances maturing in the second quarter of 2022 and 1% of loan balances maturing in the third quarter of 2025. At September 30, 2020, customers with PPP loan balances totaling $11.3 million had requested debt forgiveness but have not yet received notifications of forgiveness decisions from the SBA.

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 beginning in the first quarter of 2020 and provided the opportunity to defer monthly payments for 90 days. Loans participating in the program totaled $22.6 million, or 3% of total loans at September 30, 2020, which was a significant reduction compared to $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. Certain sectors of the commercial real estate loan portfolio, including retail shopping, lodging and leisure are expected to experience elevated financial pressure. Those sectors comprised approximately 5%, 5% and 2% of the loan portfolio, respectively, excluding PPP loans at September 30, 2020. 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. The Bank recorded a provision for loan losses of $1.5 million for the third quarter of 2020, including specific reserves placed on impaired loans impacted by the pandemic. This compared to no provision for loan losses in the third quarter of 2019.

Capital

The stock repurchase plan remained suspended during the third quarter. The Company updates its enterprise risk assessment and capital plans quarterly, and as a result, issued $5.0 million of subordinated debt in June 2020. 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 Companys existing subordinated debt, which becomes callable in January 2021. The Company declared and paid dividends of $0.11 per share in the third quarter that was unchanged from the dividends declared and paid during the first and second quarters of 2020.

BALANCE SHEET

Total assets of First National increased $165.5 million, or 21%, to $942.7 million at September 30, 2020, compared to $777.2 million at September 30, 2019. Total securities decreased $515 thousand, while loans, net of the allowance for loan losses, increased $74.3 million, or 13%. The growth in the loan portfolio included PPP loans that totaled $73.7 million at the end of the third quarter.

Total liabilities increased $158.6 million, or 23%, to $860.5 million at September 30, 2020, compared to $701.9 million one year ago. The increase in total liabilities was primarily attributable to significant growth in deposits. Total deposits increased $152.8 million, or 22%, to $838.4 million and subordinated debt increased by $5.0 million to $10.0 million at September 30, 2020. Noninterest-bearing demand deposits increased $66.9 million, or 35%, savings and interest-bearing demand deposits increased $104.0 million, or 28%, while time deposits decreased $18.1 million, or 15%. The origination of PPP loans also contributed to the deposit growth as many customers deposited proceeds of the loans in their deposit accounts at the Bank. Although proceeds from PPP loan originations during the second and third quarters contributed to the increase in deposits, the Bank also experienced a significant amount of deposit growth that was not related to PPP loan proceeds. Total deposits increased $152.8 million, while PPP loans totaled $73.7 million at September 30, 2020.

Subordinated debt increased to $10.0 million at September 30, 2020 from a $5.0 million issuance in the second quarter of 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 the event of a severe economic downturn or for general corporate purposes, including the potential repayment of the Companys other subordinated debt, which becomes callable in January 2021.

Shareholders equity increased $6.9 million, or 9%, to $82.3 million at September 30, 2020, compared to one year ago, from a $6.4 million increase in retained earnings and a $2.3 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. The plan remained suspended during the second and third quarters of 2020. The Company paid a cash dividend to common shareholders during the third quarter of $0.11 per share, which was unchanged from the first and second quarters of 2020. The Bank was considered well-capitalized at September 30, 2020.

PERFORMANCE ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income increased $503 thousand, or 7%, to $7.6 million for the third quarter of 2020, compared to the same period of 2019. The increase resulted from a $514 thousand, or 40%, decrease in total interest expense, which was partially offset by an $11 thousand decrease in total interest and dividend income. The net interest margin decreased 46 basis points to 3.41%. The decrease in the net interest margin was offset by growth in average earning assets of $158.3 million, or 22%, and resulted in an increase in net interest income.

The decrease in interest expense was primarily a result of the $548 thousand, or 50%, decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of the $83.6 million, or 17% increase in average interest-bearing deposits was offset by a 49-basis point decrease in the cost of interest-bearing deposits. A 59-basis point reduction of the cost of interest-bearing checking accounts and a 103-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 81-basis point decrease in the yield on earning assets, which was partially offset by a $158.3 million, or 22%, increase in average earning assets. The decrease in the yield on earning assets resulted from a 19-basis point decrease in the yield on securities, a 48-basis point decrease in the yield on loans, and a 206-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 2% to 12% of average earning assets.

Noninterest income increased slightly to $2.2 million compared to the same period of 2019. ATM and check card fees were $83 thousand higher, primarily from an annual incentive payment received during the third quarter from the Banks card services provider. The incentive payment is typically received in the fourth quarter. Wealth management fees increased $96 thousand, or 20%, from a larger amount of assets under management. Fees for other customer services were $146 thousand, or 82% higher from an increase in brokered mortgage loan activity. These increases were partially offset by a $311 thousand, or 41%, decrease in service charges on deposits. The Bank first experienced a significant decrease in service charges on deposits in the second quarter of 2020 from lower overdraft fee income, which continued to underperform in the third quarter compared to historical levels. Bank management believes the decrease in overdraft fee income was a result of the significant increase in deposit balances and a decrease in consumer spending.

Noninterest expense decreased $51 thousand, or 1%, to $6.1 million, compared to the same period one year ago. The decrease was primarily attributable to a $58 thousand, or 2%, decrease in salaries and employee benefits, an $80 thousand, or 56%, decrease in marketing expense, a $38 thousand decrease in amortization expense, and a $131 thousand, or 17%, decrease in other operating expense. The decrease in salaries and employee benefits resulted from a decrease in the number of employees as certain vacated employee positions were not replaced. Marketing expense decreased from reduced spending on marketing campaigns. Other operating expense decreased primarily from a decrease in debit card fraud losses and loan collection expense. The decrease in loan collection expense resulted from the recovery of collection costs during the quarter that were incurred in a prior period. These decreases were partially offset by increases in occupancy, equipment, supplies, legal and professional fees, ATM and check card expense, FDIC assessment, and bank franchise tax.

PERFORMANCE ANALYSIS OF THE NINE-MONTH PERIOD

Net interest income increased $1.1 million, or 5%, to $22.0 million for the nine-month period ending September 30, 2020, compared to the same period of 2019. The increase resulted from a $911 thousand, or 25%, decrease in total interest expense, and a $165 thousand, or 1%, increase in total interest and dividend income. The net interest margin decreased 33 basis points to 3.58%. The decrease in the net interest margin was offset by growth in average earning assets of $105.3 million, or 15%, and resulted in an increase in net interest income.

The decrease in total interest expense resulted primarily from an $883 thousand decrease in interest expense on deposits, which was attributable to reduced interest rates paid on deposits. The impact of the $58.1 million or 12%, increase in average interest-bearing deposits was offset by a 30-basis point decrease in the cost of interest-bearing deposits. A 49-basis point reduction of the cost of interest-bearing checking accounts and a 65-basis point reduction of the cost of money market accounts made the largest contributions to the decrease in interest expense.

The increase in total interest and dividend income resulted from a $105.3 million, or 15%, increase in average earning assets, which was partially offset by a 56-basis point decrease in the yield on earning assets. The decrease in the yield on earning assets resulted from a 22-basis point decrease in the yield on securities, a 36-basis point decrease in the yield on loans, and a 189-basis point decrease in the yield on interest-bearing deposits in banks. The loan yield was negatively impacted by PPP loans earning a 1.00% interest rate. Additionally, the mix of earning assets had an unfavorable impact on the yield on average earning assets as lower yielding interest-bearing deposits in banks increased from 3% to 8% of average earning assets.

Noninterest income decreased $138 thousand, or 2%, to $6.1 million, compared to the same period of 2019, primarily from a $698 thousand, or 32%, decrease in service charges on deposits. The Bank first experienced a significant decrease in service charges on deposits in the second quarter of 2020 from lower overdraft fee income, which continued to underperform in the third quarter compared to historical levels. Bank management believes the decrease in overdraft fee income was a result of the significant increase in deposit balances and a decrease in consumer spending. This decrease was partially offset by a $62 thousand, or 4%, increase in ATM and check card fees, a $238 thousand, or 17%, increase in wealth management fees, and a $262 thousand, or 52%, increase in fees for other customer services. ATM and check card fees were higher from an annual incentive payment received during the third quarter from the Banks card service provider. The incentive payment is typically received in the fourth quarter. Wealth management fees increased from higher amounts of assets under management. Fees for other customer services were higher from an increase in brokered mortgage loan activity.

Noninterest expense decreased $622 thousand, or 3%, to $17.9 million, compared to the same period one year ago. The decrease was attributable to a $265 thousand, or 3%, decrease in salaries and employee benefits, a $280 thousand, or 54%, decrease in marketing expense, a $114 thousand decrease in amortization expense, and a $326 thousand, or 15%, decrease in other operating expense. The decrease in salaries and employee benefits resulted primarily from the deferral of $535 thousand of salary costs to originate PPP loans during the second and third quarters of 2020. Marketing expense decreased from a combination of reduced spending on marketing campaigns during 2020 and elevated expenses during 2019 from the timing of marketing initiatives in the prior year. Other operating expense decreased primarily from lower debit card fraud losses, education and training expenses, travel costs, loan servicing fees, registration and licensing costs, and dues and subscriptions. The decreases in the noninterest expense categories were partially offset by increases in supplies, legal and professional fees, ATM and check card expense, FDIC assessment, bank franchise tax, and data processing expense.

ASSET QUALITY/LOAN LOSS PROVISION

Provision for loan losses totaled $1.5 million for the third quarter of 2020, which resulted in a total allowance for loan losses of $7.8 million, or 1.20% of total loans. Excluding PPP loans, the allowance for loan losses totaled 1.34% of total loans at September 30, 2020. This compared to no provision for loan losses for the same period of 2019 and an allowance for loan losses of $4.9 million, or 0.86% of total loans at September 30, 2019.

The higher provision for loan losses was primarily attributable to an increase in the specific reserve component of the allowance for loan losses, which was partially offset by a decrease in the general reserve component. The increase in the specific reserve component of the allowance for loan losses resulted from a reserve placed on a newly identified impaired loan and an increase in a reserve on an existing impaired loan. The general reserve component decreased primarily from adjustments to qualitative factors as loans participating in the Banks loan payment deferral program decreased significantly and economic conditions continued to improve in the third quarter. Net charge-offs of loans also contributed to the provision for loan losses, which totaled $19 thousand for the third quarter of 2020, compared to $83 thousand for the same period of 2019.

Loans that were 30 to 89 days past due and accruing totaled $885 thousand, or 0.14% of total loans at September 30, 2020 compared to $902 thousand, or 0.16% of total loans one year ago. Accruing substandard loans totaled $3.8 million at September 30, 2020 and 2019. Nonperforming assets consisted only of non-accrual loans, which totaled $7.0 million, or 0.74% of total assets at September 30, 2020, compared to $1.6 million, or 0.20% 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 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 September June March December September 30, 30, 31, 31, 30, 2020 2020 2020 2019 2019 Income StatementInterest income Interest and $ 7,568 $ 7,416 $ 7,203 $ 7,333 $ 7,429 fees on loansInterest ondeposits in 25 16 118 163 97 banksInterest on securitiesTaxable 575 636 670 627 645 interestTax-exempt 152 151 151 156 157 interestDividends 23 26 26 27 26 Total interest $ 8,343 $ 8,245 $ 8,168 $ 8,306 $ 8,354 incomeInterest expenseInterest on $ 541 $ 676 $ 962 $ 1,042 $ 1,089 depositsInterest onfederal funds ? ? ? ? 1 purchasedInterest onsubordinated 160 91 90 91 90 debtInterest onjunior 68 67 90 98 103 subordinateddebtTotal interest $ 769 $ 834 $ 1,142 $ 1,231 $ 1,283 expenseNet interest $ 7,574 $ 7,411 $ 7,026 $ 7,075 $ 7,071 incomeProvision for 1,500 800 900 250 ? loan lossesNet interestincome after $ 6,074 $ 6,611 $ 6,126 $ 6,825 $ 7,071 provision forloan lossesNoninterest incomeService chargeson deposit $ 446 $ 348 $ 681 $ 753 $ 757 accountsATM and check 669 550 519 654 586 card feesWealth 573 512 525 496 477 management feesFees for othercustomer 323 237 207 181 177 servicesIncome frombank owned life 131 99 115 123 131 insuranceNet gains(losses) on 38 ? ? 1 ? securitiesNet gains on 3 26 31 89 34 sale of loansOther operating 18 1 21 44 29 incomeTotalnoninterest $ 2,201 $ 1,773 $ 2,099 $ 2,341 $ 2,191 incomeNoninterest expenseSalaries andemployee $ 3,498 $ 3,022 $ 3,589 $ 3,193 $ 3,556 benefitsOccupancy 433 409 402 415 398 Equipment 439 418 410 406 410 Marketing 63 74 106 128 143 Supplies 112 103 89 88 86 Legal andprofessional 262 301 279 311 231 feesATM and check 259 223 245 231 225 card expenseFDIC assessment 52 60 30 (53 ) (6 )Bank franchise 162 161 153 136 136 taxData processing 191 188 184 179 174 expenseAmortization 33 42 52 61 71 expenseOther realestate owned ? ? ? 1 ? expense(income), netNet losses(gains) ondisposal of ? ? (9 ) 14 ? premises andequipmentOther operating 631 612 614 694 762 expenseTotalnoninterest $ 6,135 $ 5,613 $ 6,144 $ 5,804 $ 6,186 expenseIncome before $ 2,140 $ 2,771 $ 2,081 $ 3,362 $ 3,076 income taxesIncome tax 386 528 376 646 583 expenseNet income $ 1,754 $ 2,243 $ 1,705 $ 2,716 $ 2,493

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

(unaudited) For the Quarter Ended September June 30, March 31, December September 30, 31, 30, 2020 2020 2020 2019 2019 Common Shareand Per Common Share DataNet income, $ 0.36 $ 0.46 $ 0.34 $ 0.55 $ 0.50 basicWeightedaverage shares, 4,854,144 4,849,719 4,950,887 4,968,574 4,966,641 basicNet income, $ 0.36 $ 0.46 $ 0.34 $ 0.55 $ 0.50 dilutedWeightedaverage shares, 4,854,649 4,849,719 4,955,970 4,972,535 4,969,126 dilutedSharesoutstanding at 4,858,217 4,852,187 4,849,692 4,969,716 4,968,277 period endTangible bookvalue at period $ 16.92 $ 16.63 $ 16.17 $ 15.50 $ 15.11 endCash dividends $ 0.11 $ 0.11 $ 0.11 $ 0.09 $ 0.09 Key Performance RatiosReturn on 0.74 % 1.00 % 0.85 % 1.36 % 1.27 %average assetsReturn on 8.52 % 11.30 % 8.72 % 14.10 % 13.31 %average equityNet interest 3.41 % 3.59 % 3.77 % 3.79 % 3.87 %marginEfficiency 62.35 % 60.34 % 66.50 % 60.50 % 65.65 %ratio (1) Average BalancesAverage assets $ 944,390 $ 899,301 $ 806,609 $ 795,391 $ 780,376 Average earning 889,127 836,741 755,173 745,721 730,865 assetsAverageshareholders? 81,894 79,845 78,659 76,424 74,291 equity Asset Quality Loan $ 115 $ 176 $ 328 $ 281 $ 156 charge-offsLoan recoveries 96 88 78 53 73 Net charge-offs 19 88 250 228 83 Non-accrual 6,974 1,480 1,522 1,459 1,566 loansOther realestate owned, ? ? ? ? ? netNonperforming 6,974 1,480 1,522 1,459 1,566 assetsLoans 30 to 89days past due, 885 1,094 2,901 2,372 902 accruingLoans over 90days past due, 6 1 86 97 113 accruingTroubled debtrestructurings, ? 4,313 ? ? ? accruingSpecial mention 510 2,034 6,058 6,069 1,458 loansSubstandard 3,804 8,616 4,368 3,410 3,758 loans, accruing Capital Ratios (2)Total capital $ 89,155 $ 88,109 $ 86,849 $ 85,439 $ 83,591 Tier 1 capital 81,883 81,813 81,265 80,505 78,679 Common equity 81,883 81,813 81,265 80,505 78,679 tier 1 capitalTotal capitalto 15.34 % 15.20 % 14.98 % 14.84 % 14.57 %risk-weightedassetsTier 1 capitalto 14.09 % 14.11 % 14.02 % 13.99 % 13.71 %risk-weightedassetsCommon equitytier 1 capitalto 14.09 % 14.11 % 14.02 % 13.99 % 13.71 %risk-weightedassetsLeverage ratio 8.67 % 9.08 % 10.08 % 10.13 % 10.09 %

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

(unaudited) For the Quarter Ended September June 30, March 31, December September 30, 31, 30, 2020 2020 2020 2019 2019 Balance Sheet Cash and due from $ 13,349 $ 17,717 $ 30,551 $ 9,675 $ 11,885 banksInterest-bearing 108,857 90,562 17,539 36,110 18,488 deposits in banksSecuritiesavailable for sale, 117,132 123,193 128,660 120,983 114,568 at fair valueSecurities held tomaturity, at 15,101 16,211 17,086 17,627 18,222 amortized costRestricted 1,848 1,848 1,848 1,806 1,806 securities, at costLoans held for sale ? 170 621 167 1,098 Loans, net ofallowance for loan 640,591 645,220 576,283 569,412 566,341 lossesPremises and 19,548 19,792 19,619 19,747 19,946 equipment, netAccrued interest 3,156 3,863 2,124 2,065 2,053 receivableBank owned life 17,792 17,661 17,562 17,447 17,324 insuranceCore deposit 43 76 118 170 231 intangibles, netOther assets 5,316 5,777 4,401 4,839 5,231 Total assets $ 942,733 $ 942,090 $ 816,412 $ 800,048 $ 777,193 Noninterest-bearing $ 256,733 $ 253,974 $ 197,662 $ 189,623 $ 189,797 demand depositsSavings andinterest-bearing 480,017 470,764 407,555 399,255 376,047 demand depositsTime deposits 101,645 114,277 115,410 117,564 119,777 Total deposits $ 838,395 $ 839,015 $ 720,627 $ 706,442 $ 685,621 Subordinated debt 9,987 9,982 4,987 4,983 4,978 Junior subordinated 9,279 9,279 9,279 9,279 9,279 debtAccrued interestpayable and other 2,816 3,026 3,001 2,125 1,999 liabilitiesTotal liabilities $ 860,477 $ 861,302 $ 737,894 $ 722,829 $ 701,877 Preferred stock $ ? $ ? $ ? $ ? $ ? Common stock 6,073 6,065 6,062 6,212 6,210 Surplus 6,081 5,967 5,899 7,700 7,648 Retained earnings 66,670 65,451 63,741 62,583 60,314 Accumulated othercomprehensive 3,432 3,305 2,816 724 1,144 income (loss), netTotal shareholders? $ 82,256 $ 80,788 $ 78,518 $ 77,219 $ 75,316 equityTotal liabilitiesand shareholders? $ 942,733 $ 942,090 $ 816,412 $ 800,048 $ 777,193 equity Loan Data Mortgage loans on real estate:Construction and $ 27,472 $ 31,981 $ 40,279 $ 43,164 $ 45,193 land developmentSecured by farmland 533 872 888 900 916 Secured by 1-4 234,198 234,188 230,980 229,438 226,828 family residentialOther real estate 249,786 247,623 240,486 235,655 232,151 loansLoans to farmers(except those 1,120 711 1,221 1,423 1,461 secured by realestate)Commercial andindustrial loans(except those 124,157 123,995 54,287 48,730 49,096 secured by realestate)Consumer 7,378 8,401 9,505 10,400 11,040 installment loansDeposit overdrafts 194 170 238 374 263 All other loans 3,530 3,575 3,983 4,262 4,305 Total loans $ 648,368 $ 651,516 $ 581,867 $ 574,346 $ 571,253 Allowance for loan (7,777 ) (6,296 ) (5,584 ) (4,934 ) (4,912 )lossesLoans, net $ 640,591 $ 645,220 $ 576,283 $ 569,412 $ 566,341

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

(unaudited) For the Quarter Ended September June March December September 30, 30, 31, 31, 30, 2020 2020 2020 2019 2019 ReconciliationofTax-Equivalent Net InterestIncomeGAAP measures: Interest income $ 7,568 $ 7,416 $ 7,203 $ 7,333 $ 7,429 ? loansInterest income? investments 775 829 965 973 925 and otherInterest expense (541 ) (676 ) (962 ) (1,042 ) (1,089 )? depositsInterest expense? federal funds ? ? ? ? (1 )purchasedInterest expense? subordinated (160 ) (91 ) (90 ) (91 ) (90 )debtInterest expense? junior (68 ) (67 ) (90 ) (98 ) (103 )subordinateddebtTotal net $ 7,574 $ 7,411 $ 7,026 $ 7,075 $ 7,071 interest incomeNon-GAAP measures:Tax benefitrealized onnon-taxable $ 8 $ 8 $ 10 $ 10 $ 9 interest income? loansTax benefitrealized onnon-taxable 41 40 40 41 43 interest income? municipalsecuritiesTotal taxbenefit realized $ 49 $ 48 $ 50 $ 51 $ 52 on non-taxableinterest incomeTotaltax-equivalent $ 7,623 $ 7,459 $ 7,076 $ 7,126 $ 7,123 net interestincome

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

(unaudited) For the Nine Months Ended September September 30, 30, 2020 2019 Income Statement Interest income Interest and fees on loans $ 22,187 $ 21,625 Interest on deposits in banks 159 340 Interest on securities Taxable interest 1,881 2,078 Tax-exempt interest 454 472 Dividends 75 76 Total interest income $ 24,756 $ 24,591 Interest expense Interest on deposits $ 2,179 $ 3,062 Interest on federal funds purchased ? 1 Interest on subordinated debt 341 269 Interest on junior subordinated debt 225 322 Interest on other borrowings ? 2 Total interest expense $ 2,745 $ 3,656 Net interest income $ 22,011 $ 20,935 Provision for loan losses 3,200 200 Net interest income after provision for loan $ 18,811 $ 20,735 lossesNoninterest income Service charges on deposit accounts $ 1,475 $ 2,173 ATM and check card fees 1,738 1,676 Wealth management fees 1,610 1,372 Fees for other customer services 767 505 Income from bank owned life insurance 345 333 Net gains (losses) on securities 38 ? Net gains on sale of loans 60 81 Other operating income 40 71 Total noninterest income $ 6,073 $ 6,211 Noninterest expense Salaries and employee benefits $ 10,109 $ 10,374 Occupancy 1,244 1,237 Equipment 1,267 1,239 Marketing 243 523 Supplies 304 250 Legal and professional fees 842 775 ATM and check card expense 727 666 FDIC assessment 142 98 Bank franchise tax 476 402 Data processing expense 563 526 Amortization expense 127 241 Net losses (gains) on disposal of premises and (9 ) ? equipmentOther operating expense 1,857 2,183 Total noninterest expense $ 17,892 $ 18,514 Income before income taxes $ 6,992 $ 8,432 Income tax expense 1,290 1,592 Net income $ 5,702 $ 6,840

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

(unaudited) For the Nine Months Ended September September 30, 30, 2020 2019 Common Share and Per Common Share Data Net income, basic $ 1.17 $ 1.38 Weighted average shares, basic 4,884,805 4,963,571 Net income, diluted $ 1.17 $ 1.38 Weighted average shares, diluted 4,886,668 4,966,384 Shares outstanding at period end 4,858,217 4,968,277 Tangible book value at period end $ 16.92 $ 15.11 Cash dividends $ 0.33 $ 0.27 Key Performance Ratios Return on average assets 0.86 % 1.19 %Return on average equity 9.49 % 12.85 %Net interest margin 3.58 % 3.91 %Efficiency ratio (1) 63.04 % 66.93 % Average Balances Average assets $ 883,741 $ 770,777 Average earning assets 827,240 721,899 Average shareholders? equity 80,228 71,148 Asset Quality Loan charge-offs $ 619 $ 603 Loan recoveries 262 306 Net charge-offs 357 297 Reconciliation of Tax-Equivalent Net Interest IncomeGAAP measures: Interest income ? loans $ 22,187 $ 21,625 Interest income ? investments and other 2,569 2,966 Interest expense ? deposits (2,179 ) (3,062 )Interest expense ? federal funds purchased ? (1 )Interest expense ? subordinated debt (341 ) (269 )Interest expense ? junior subordinated debt (225 ) (322 )Interest expense ? other borrowings ? (2 )Total net interest income $ 22,011 $ 20,935 Non-GAAP measures: Tax benefit realized on non-taxable interest $ 26 $ 30 income ? loansTax benefit realized on non-taxable interest 121 126 income ? municipal securitiesTotal tax benefit realized on non-taxable $ 147 $ 156 interest incomeTotal tax-equivalent net interest income $ 22,158 $ 21,091

(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.