STRASBURG, Va., July 29, 2020 (GLOBE NEWSWIRE) -- First National Corporation (NASDAQ: FXNC), the bank holding company of First 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 Bank’s 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 Bank’s mobile and internet banking platforms, and with in-person meetings by appointment. On July 1^st, 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 public’s adoption of social distancing. The Company’s 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 Administration’s (“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 Bank’s 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 Bank’s 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 Bank’s loan quality will likely depend on the duration of the pandemic and the extent that the Bank’s 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 Company’s 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 Company’s 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 Company’s stock repurchase plan.

The Company’s 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 Bank’s 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 Bank’s 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 Bank’s loan payment deferral program totaled $182.6 million, or 28% of the Bank’s 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.

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.