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 $3.7 million, or $0.60 per basic and diluted share, for the first quarter of 2022. This compares to net income of $2.4 million, or $0.50 per basic and diluted share, for the first quarter of 2021, which included merger expenses of $405 thousand, or $320 thousand, net of tax. Merger expenses had a $0.07 per share impact to basic and diluted earnings per share in the first quarter of 2021.

FIRST QUARTER HIGHLIGHTS

Key highlights of the first quarter of 2022 are as follows. Comparisons are to the corresponding period in the prior year unless otherwise stated:

• Return on average assets increased to 1.06%, up from 1.00%
• Return on average equity increased to 13.40%, up from 11.53%
• Total assets increased by $389.5 million, or 38%
• Noninterest-bearing deposits increased $125.5 million, or 43%
• Loans increased $198.2 million, or 31%
• Loans, excluding PPP loans, increased $21.3 million, or 11% annualized, since December 31, 2021
• Net interest income increased $3.0 million, or 40%
• Wealth management revenue increased $160 thousand, or 25%
• Service charges on deposits increased $167 thousand, or 38%

“We are pleased with loan growth and profitability in the first quarter,” said Scott Harvard, president and chief executive officer of First National. “The Company is seeing benefits from its strategic expansion initiatives last year, including loan growth and noninterest income growth. The Bank’s wealth management division also contributed to higher profitability for the quarter with revenue that increased 25% over the same period one year ago. Loan demand continues to be steady in spite of rising rates, and our small business customers appear to have weathered the pandemic well and are now more focused on inflation and wage pressures.”

NET INTEREST INCOME

Net interest income increased $3.0 million, or 40%, to $10.5 million for the first quarter of 2022, compared to the same period of 2021. The increase resulted from a $2.9 million, or 36% increase in total interest and dividend income and a $107 thousand, or 18%, decrease in total interest expense. Net interest income was favorably impacted by a $415.1 million, or 44%, increase in average earning assets, which was partially offset by an 8-basis point decrease in the net interest margin to 3.19% when comparing the periods.

Accretion of PPP income, net of costs, and accretion of discounts on purchased loans, net of premiums, were included in interest and fees on loans. Accretion of PPP income totaled $323 thousand in the first quarter of 2022, compared to $599 thousand for the same period of 2021. Accretion of discounts on purchased loans totaled $367 thousand in the first quarter of 2022. There were no purchased loans in the first quarter of 2021, and as a result, there was no accretion of discounts on purchased loans during the period.

PROVISION FOR LOAN LOSSES

There was no provision for loan losses for the first quarter of 2022. During the quarter, an increase in the general reserve component of the allowance for losses was offset by net recoveries of loans previously charged off and a decrease in the specific reserve component of the allowance for loan losses. Net recoveries totaled $118 thousand for the quarter. There were no specific reserves on impaired loans at March 31, 2022, compared to $55 thousand of specific reserves at December 31, 2021. The allowance for loan losses totaled $5.8 million, or 0.70% of total loans at March 31, 2022, compared to 0.69% of total loans at December 31, 2021. There was no provision for loan losses for the same period of 2021.

ASSET QUALITY

Loans 30 to 89 days past due and accruing totaled $2.1 million, or 0.25% of total loans at March 31, 2022, compared to $906 thousand, or 0.14% of total loans one year ago. Accruing substandard loans decreased to $336 thousand at March 31, 2022, an improvement from $1.3 million one year ago. Nonperforming assets decreased to $3.9 million, or 0.27% of total assets at March 31, 2022, compared to $6.8 million, or 0.66% of total assets at March 31, 2021. Nonperforming assets were comprised of $2.1 million of nonaccrual loans and $1.8 million of other real estate owned. There were $1.5 million of commercial rental properties included in other real estate owned, which were acquired through the merger with The Bank of Fincastle (“Fincastle”) in 2021.

During the fourth quarter of 2020 and during the first half of 2021, the Bank modified terms of certain loans for customers negatively impacted by the pandemic. The modifications lowered borrower’s loan payments with interest only payments for periods ranging between 6 and 24 months. Modified loan balances decreased from $11.5 million at December 31, 2021, to $8.9 million at March 31, 2022. All modified loans were to businesses in the lodging sector, were included in the Bank’s commercial real estate loan portfolio and were performing under their modified terms at March 31, 2022.

NONINTEREST INCOME

Noninterest income increased $568 thousand, or 27%, to $2.7 million for the three-month period ended March 31, 2022, compared to the same period of 2021. Wealth management fees increased $160 thousand, or 25%, and was attributable to an increase in assets under management from growth in account values and from an increase in the number of clients served by the wealth management division. Service charges on deposits increased $167 thousand, or 38%, ATM and check card fees increased $149 thousand, or 25%, income from bank-owned life insurance increased $31 thousand, or 27%, and fees for other customer services increased $51 thousand, or 28%, comparing the same periods. The increases were primarily attributable to the acquisition of Fincastle.

NONINTEREST EXPENSE

Noninterest expense increased $2.0 million, or 30%, to $8.6 million for the three-month period ended March 31, 2022, compared to the same period one year ago. The increase was primarily attributable to a $1.6 million, or 44% increase in salaries and employee benefits, a $125 thousand, or 28%, increase in occupancy expense, a $128 thousand, or 30%, increase in equipment expense, and a $227 thousand, or 38%, increase in other operating expense. These increases were partially offset by a $404 thousand decrease in legal and professional fees. The increases were primarily attributable to the increase in the number of employees, branch offices and customers that resulted from the acquisition of Fincastle and the acquisition of the loan portfolio, branch assets and addition of the employees from SmartBank. Merger expenses totaled $20 thousand and $405 thousand for the three-month periods ending March 31, 2022, and 2021, respectively. The decrease in legal and professional fees was primarily attributable to merger related costs in the first quarter of 2021.

BALANCE SHEET

Total assets of First National increased $389.5 million, or 38%, to $1.4 billion at March 31, 2022, compared to $1.0 billion at March 31, 2021. Interest-bearing deposits in banks decreased $34.5 million, or 21%, while total securities increased $193.6 million, or 111%, and loans increased $198.2 million, or 31%. Loans, excluding Paycheck Protection Program (“PPP”) loans, increased $262.0 million, or 46%. PPP loans decreased by $63.8 million over the last twelve months and totaled $2.5 million at March 31, 2022. 

Total liabilities increased $368.9 million, or 39%, to $1.3 billion at March 31, 2022, compared to $942.2 million one year ago. The increase in total liabilities was primarily attributable to significant growth in deposits. Total deposits increased $376.8 million, or 41%, to $1.3 billion. Noninterest-bearing demand deposits increased $125.5 million, or 43%, savings and interest-bearing demand deposits increased $208.0 million, or 40%, and time deposits increased $43.3 million, or 44%. Subordinated debt decreased to $5.0 million at March 31, 2022, compared to $10.0 million one year ago, from the redemption of subordinated debt with an interest rate of 6.75%.

Shareholders’ equity increased $20.6 million, or 24%, to $106.6 million at March 31, 2022, compared to one year ago, from an $8.7 million increase in retained earnings and a $27.8 million combined increase in common stock and surplus. The increase in common stock and surplus was primarily attributable to the Company’s acquisition of Fincastle on July 1, 2021. These increases were partially offset by $15.9 million decrease in accumulated other comprehensive income, which resulted from a change in market interest rates that impacted securities available for sale reported at fair value. The Bank was considered well-capitalized at March 31, 2022.

The acquisition of Fincastle had a significant impact on balance sheet growth. On July 1, 2021, the acquisition date, Fincastle had total assets of $267.9 million, interest-bearing deposits in banks of $43.5 million, total securities of $12.0 million, loans, net of the allowance for loan losses, of $191.5 million, and total deposits of $236.3 million.

The acquisition of the SmartBank loan portfolio impacted the composition of the balance sheet. On September 30, 2021, the acquisition date, SmartBank’s Richmond-area branch loan portfolio totaled $82.6 million. The Bank funded the acquisition of the loan portfolio with cash, which decreased interest-bearing deposits in banks during the third quarter.

ACQUISITION OF THE BANK OF FINCASTLE

On July 1, 2021, the Company completed the acquisition of The Bank of Fincastle for an aggregate purchase price of $33.8 million of cash and stock (the “Merger”). Fincastle was merged with and into First Bank. The former Fincastle branches operated as The Bank of Fincastle, a division of First Bank, until their systems were converted on October 16, 2021. The Company incurred merger expenses of $20 thousand and $405 thousand for the three-month periods ending March 31, 2022, and 2021, respectively. The Company does not expect to incur additional merger expenses in future periods.

ACQUISITION OF THE SMARTBANK LOAN PORTFOLIO

On September 30, 2021, the Bank acquired $82.6 million of loans and certain branch assets from SmartBank related to their Richmond area branch, located in Glen Allen, Virginia. Additionally, an experienced team of bankers based out of the SmartBank location transitioned to become employees of First Bank in the fourth quarter of 2021. First Bank did not assume any deposit liabilities from SmartBank in connection with the transaction and SmartBank closed their branch operation on December 31, 2021. The Bank continued to operate its loan production office from the former branch location.

SMALL BUSINESS ADMINISTRATION’S PPP

The Bank participated as a lender in the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program to support local small businesses and non-profit organizations by providing forgivable loans. The Bank accretes loan fees received from the SBA, net of loan origination costs, into income evenly over the life of the loans through interest and fees on loans. PPP loans totaled $2.5 million at March 31, 2022, with $52 thousand scheduled to mature in the second and third quarters of 2022, and $2.4 million scheduled to mature in the first and second quarters of 2026.

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, a 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 Roanoke Valley, 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.

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, 2021, and other filings with the Securities and Exchange Commission.

CONTACTS

Scott C. Harvard		M. Shane Bell
President and CEO		Executive Vice President and CFO
(540) 465-9121		(540) 465-9121
sharvard@fbvirginia.com		sbell@fbvirginia.com

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

		(unaudited)
		For the Quarter Ended
		March 31,				December 31,				September 30,				June 30,				March 31,
		2022				2021				2021				2021				2021
Income Statement
Interest income
Interest and fees on loans		$	9,496			$	9,365			$	9,215			$	7,074			$	7,143
Interest on deposits in banks			70				64				79				37				33
Interest on federal funds sold			—				2				8				—				—
Interest on securities
Taxable interest			1,132				920				766				697				717
Tax-exempt interest			305				299				242				215				180
Dividends			21				23				21				22				22
Total interest income		$	11,024			$	10,673			$	10,331			$	8,045			$	8,095
Interest expense
Interest on deposits		$	340			$	355			$	369			$	328			$	363
Interest on subordinated debt			69				155				156				154				154
Interest on junior subordinated debt			67				68				68				68				66
Total interest expense		$	476			$	578			$	593			$	550			$	583
Net interest income		$	10,548			$	10,095			$	9,738			$	7,495			$	7,512
Provision for (recovery of) loan losses			—				350				—				(1,000	)			—
Net interest income after provision for (recovery of) loan losses		$	10,548			$	9,745			$	9,738			$	8,495			$	7,512
Noninterest income
Service charges on deposit accounts		$	609			$	625			$	547			$	447			$	442
ATM and check card fees			750				894				753				682				601
Wealth management fees			803				716				696				657				643
Fees for other customer services			233				176				279				150				182
Brokered mortgage fees			94				123				155				157				104
Income from bank owned life insurance			144				152				161				100				113
Net gains on securities available for sale			—				—				—				—				37
Net gains on sale of loans held for sale			—				—				—				18				7
Net gains on disposal of premises and equipment			—				15				—				—				—
Other operating income			78				260				57				224				14
Total noninterest income		$	2,711			$	2,961			$	2,648			$	2,435			$	2,143
Noninterest expense
Salaries and employee benefits		$	5,124			$	5,099			$	5,446			$	3,693			$	3,555
Occupancy			572				510				500				399				447
Equipment			559				527				519				433				431
Marketing			151				179				243				138				106
Supplies			136				168				176				77				88
Legal and professional fees			333				731				586				483				737
ATM and check card expense			303				317				329				268				231
FDIC assessment			152				112				87				78				69
Bank franchise tax			216				172				153				172				168
Data processing expense			236				1,271				465				216				204
Amortization expense			5				4				5				5				14
Other real estate owned expense, net			28				12				14				—				—
Net losses on disposal of premises and equipment			2				—				—				—				—
Other operating expense			827				924				903				668				600
Total noninterest expense		$	8,644			$	10,026			$	9,426			$	6,630			$	6,650
Income before income taxes		$	4,615			$	2,680			$	2,960			$	4,300			$	3,005
Income tax expense			886				497				562				958				569
Net income		$	3,729			$	2,183			$	2,398			$	3,342			$	2,436

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

		(unaudited)
		For the Quarter Ended
		March 31,				December 31,				September 30,				June 30,				March 31,
		2022				2021				2021				2021				2021
Common Share and Per Common Share Data
Earnings per common share, basic		$	0.60			$	0.35			$	0.39			$	0.69			$	0.50
Weighted average shares, basic			6,238,973				6,226,838				6,220,456				4,868,901				4,863,823
Earnings per common share, diluted		$	0.60			$	0.35			$	0.38			$	0.69			$	0.50
Weighted average shares, diluted			6,245,704				6,235,907				6,229,524				4,873,286				4,872,097
Shares outstanding at period end			6,249,784				6,228,176				6,226,418				4,870,459				4,868,462
Tangible book value at period end (4)		$	16.54			$	18.28			$	18.11			$	18.21			$	17.65
Cash dividends		$	0.14			$	0.12			$	0.12			$	0.12			$	0.12
Key Performance Ratios
Return on average assets			1.06	%			0.63	%			0.71	%			1.31	%			1.00	%
Return on average equity			13.40	%			7.44	%			8.64	%			15.33	%			11.53	%
Net interest margin			3.19	%			3.13	%			3.06	%			3.10	%			3.27	%
Efficiency ratio (1)			64.36	%			64.69	%			64.86	%			63.65	%			64.53	%
Average Balances
Average assets		$	1,430,524			$	1,366,855			$	1,337,247			$	1,026,583			$	988,324
Average earning assets			1,352,311				1,289,977				1,272,969				976,842				937,199
Average shareholders’ equity			112,822				116,511				110,153				87,442				85,708
Asset Quality
Loan charge-offs		$	106			$	185			$	111			$	1,085			$	66
Loan recoveries			224				111				80				64				67
Net charge-offs (recoveries)			(118	)			74				31				1,021				(1	)
Non-accrual loans			2,130				2,304				2,158				2,102				6,814
Other real estate owned, net			1,767				1,848				1,848				—				—
Nonperforming assets (3)			3,897				4,152				4,006				2,102				6,814
Loans 30 to 89 days past due, accruing			2,105				3,235				2,707				550				906
Loans over 90 days past due, accruing			52				—				7				5				—
Troubled debt restructurings, accruing			—				—				—				—				—
Special mention loans			—				—				—				—				—
Substandard loans, accruing			311				315				319				322				1,343
Capital Ratios (2)
Total capital		$	128,567			$	125,934			$	128,197			$	95,856			$	94,044
Tier 1 capital			122,739				120,224				122,763				90,391				86,717
Common equity tier 1 capital			122,739				120,224				122,763				90,391				86,717
Total capital to risk-weighted assets			14.44	%			14.76	%			14.42	%			16.25	%			16.05	%
Tier 1 capital to risk-weighted assets			13.79	%			14.09	%			13.81	%			15.32	%			14.80	%
Common equity tier 1 capital to risk-weighted assets			13.79	%			14.09	%			13.81	%			15.32	%			14.80	%
Leverage ratio			8.61	%			8.82	%			9.22	%			8.78	%			8.78	%

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

		(unaudited)
		For the Quarter Ended
		March 31,				December 31,				September 30,				June 30,				March 31,
		2022				2021				2021				2021				2021
Balance Sheet
Cash and due from banks		$	19,989			$	18,725			$	19,182			$	13,913			$	11,940
Interest-bearing deposits in banks			129,801				157,281				95,459				114,334				164,322
Federal funds sold			—				—				80,589				—				—
Securities available for sale, at fair value			284,893				289,495				266,600				222,236				159,742
Securities held to maturity, at amortized cost			81,640				33,441				10,046				10,898				13,424
Restricted securities, at cost			1,908				1,813				1,813				1,631				1,631
Loans, net of allowance for loan losses			830,595				819,408				816,977				611,883				630,716
Other real estate owned, net			1,767				1,848				1,848				—				—
Premises and equipment, net			22,278				22,403				22,401				18,876				19,087
Accrued interest receivable			4,056				3,903				3,823				2,662				2,609
Bank owned life insurance			24,438				24,294				24,141				18,128				18,029
Goodwill			3,030				3,030				4,011				—				—
Core deposit intangibles, net			150				154				159				—				5
Other assets			13,117				13,641				8,740				10,032				6,625
Total assets		$	1,417,662			$	1,389,436			$	1,355,789			$	1,024,593			$	1,028,130
Noninterest-bearing demand deposits		$	417,776			$	413,188			$	411,527			$	290,571			$	292,280
Savings and interest-bearing demand deposits			734,051				689,998				652,624				528,002				526,012
Time deposits			141,065				145,566				148,419				95,732				97,765
Total deposits		$	1,292,892			$	1,248,752			$	1,212,570			$	914,305			$	916,057
Subordinated debt			4,994				9,993				9,993				9,992				9,992
Junior subordinated debt			9,279				9,279				9,279				9,279				9,279
Accrued interest payable and other liabilities			3,934				4,373				7,041				2,335				6,876
Total liabilities		$	1,311,099			$	1,272,397			$	1,238,883			$	935,911			$	942,204
Preferred stock		$	—			$	—			$	—			$	—			$	—
Common stock			7,812				7,785				7,783				6,088				6,086
Surplus			32,298				31,966				31,889				6,295				6,214
Retained earnings			79,845				76,990				75,554				73,901				71,144
Accumulated other comprehensive (loss) income, net			(13,392	)			298				1,680				2,398				2,482
Total shareholders’ equity		$	106,563			$	117,039			$	116,906			$	88,682			$	85,926
Total liabilities and shareholders’ equity		$	1,417,662			$	1,389,436			$	1,355,789			$	1,024,593			$	1,028,130
Loan Data
Mortgage real estate loans:
Construction and land development		$	49,308			$	55,721			$	45,120			$	25,035			$	25,720
Secured by farmland			3,555				3,708				3,748				495				507
Secured by 1-4 family residential			290,408				291,990				294,216				235,158				236,870
Other real estate loans			380,635				361,213				358,895				244,960				248,357
Loans to farmers (except those secured by real estate)			937				985				857				232				436
Commercial and industrial loans (except those secured by real estate)			102,745				98,820				104,807				102,734				117,109
Consumer installment loans			4,602				4,963				6,577				5,179				5,684
Deposit overdrafts			205				175				172				174				112
All other loans			4,028				7,543				8,019				3,381				3,407
Total loans		$	836,423			$	825,118			$	822,411			$	617,348			$	638,202
Allowance for loan losses			(5,828	)			(5,710	)			(5,434	)			(5,465	)			(7,486	)
Loans, net		$	830,595			$	819,408			$	816,977			$	611,883			$	630,716

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

		(unaudited)
		For the Quarter Ended
		March 31,				December 31,				September 30,				June 30,				March 31,
		2022				2021				2021				2021				2021
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans		$	9,496			$	9,365			$	9,215			$	7,074			$	7,143
Interest income – investments and other			1,528				1,308				1,116				971				952
Interest expense – deposits			(340	)			(355	)			(369	)			(328	)			(363	)
Interest expense – subordinated debt			(69	)			(155	)			(156	)			(154	)			(154	)
Interest expense – junior subordinated debt			(67	)			(68	)			(68	)			(68	)			(66	)
Total net interest income		$	10,548			$	10,095			$	9,738			$	7,495			$	7,512
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans		$	5			$	8			$	8			$	8			$	8
Tax benefit realized on non-taxable interest income – municipal securities			81				80				64				57				48
Total tax benefit realized on non-taxable interest income		$	86			$	88			$	72			$	65			$	56
Total tax-equivalent net interest income		$	10,634			$	10,183			$	9,810			$	7,560			$	7,568

(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.

(3) Nonperforming assets are comprised of nonaccrual loans and other real estate owned, net of selling costs.

(4) Tangible book value is calculated by subtracting goodwill and other intangibles from total shareholders’ equity.