8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

___________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 23, 2019

___________

FIRST NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation) 0-23976 (Commission File Number) 54-1232965 (IRS Employer Identification No.)

112 West King Street Strasburg, Virginia (Address of principal executive offices)   22657 (Zip Code)

Registrant’s telephone number, including area code: (540) 465-9121

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.25 per share	FXNC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.

      Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Item 2.02 Results of Operations and Financial Condition.

On October 23, 2019, the First National Corporation (the “Company”) issued a press release reporting its financial results for the period ended September 30, 2019.  A copy of the press release is being furnished as an exhibit to this report and is incorporated by reference into this Item 2.02.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits. The following exhibit is being furnished pursuant to Item 2.02 above.

Exhibit No.	Description
99.1	Press Release dated October 23, 2019

2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	FIRST NATIONAL CORPORATION
	(Registrant)
Date:  October 25, 2019	By:	/s/ M. Shane Bell
		M. Shane Bell
		Executive Vice President and Chief Financial Officer

3

EX-99.1

Exhibit 99.1

First National Corporation Announces Third Quarter Earnings

STRASBURG, Va., October 23, 2019 --- First National Corporation (the “Company” or “First National”) (NASDAQ:FXNC) reported net income of $2.5 million, or $0.50 per diluted share, for the third quarter of 2019, which resulted in a return on average assets of 1.27% and a return on average equity of 13.31%.  This compared to $2.7 million or $0.54 per diluted share, and a return on average assets of 1.41% and a return on average equity of 16.89% for the third quarter of 2018.

Highlights for the third quarter of 2019:

• Return on average equity of 13.31%

• Return on average assets of 1.27%

• Wealth management revenue increased 13%

• Net interest margin of 3.87%

• Nonperforming assets decreased to 0.20% of assets

“While our company delivered another quarter of excellent financial performance for our shareholders, the challenges of lower interest rates with a flat or inverted yield curve continue to put pressure on the net interest margin,” said Scott Harvard, president and chief executive officer of First National.  Harvard added, “We are pleased with loan growth of five percent year-to-date, while underlying asset quality remains very good based on all metrics. Management has seen no trends that would indicate forward deterioration in the underlying businesses in our portfolio.”

BALANCE SHEET

Total assets of First National increased $30.7 million, or 4%, to $777.2 million at September 30, 2019, compared to $746.5 million at September 30, 2018. The earning asset composition changed favorably as loans, net of the allowance for loan losses, increased $31.3 million, or 6%, while securities and interest-bearing deposits in banks decreased $5.6 million, or 4%.

Total deposits increased $18.5 million, or 3%, to $685.6 million at September 30, 2019, compared to $667.1 million at September 30, 2018. There was a slight change in the deposit composition as noninterest-bearing deposits was unchanged at 28% of total deposits, while savings and interest-bearing demand deposits increased from 54% to 55% of total deposits and time deposits decreased from 18% to 17% of total deposits.

Shareholders’ equity increased $11.7 million to $75.3 million at September 30, 2019, compared to $63.7 million one year ago, primarily from a $7.6 million increase in retained earnings and a $3.9 million increase in accumulated other comprehensive income. Tangible common equity totaled $75.1 million at the end of the third quarter, an increase of 19% compared to $63.1 million at September 30, 2018. The Company’s wholly owned subsidiary, First Bank (the “Bank”), was considered well capitalized at September 30, 2019.

ANALYSIS OF THE THREE-MONTH PERIOD

Net interest income was unchanged at $7.1 million for the quarter ended September 30, 2019, compared to the third quarter of 2018. Average earning asset balances increased 4%, while the net interest margin decreased 15 basis points to 3.87%, compared to 4.02% for the same period in 2018. The decrease in the net interest margin resulted from an 18 basis point increase in interest expense as a percent of average earning assets, which was partially offset by a 3 basis point increase in the yield on average earning assets.

The higher yield on average earning assets was attributable to the change in the earning asset composition, as loans increased from 76% to 79% of average earning assets, while interest-bearing deposits in banks and securities decreased from 24% to 21% of average earning assets. The increase in interest expense was primarily attributable to higher interest rates paid on deposits, as the cost of total interest-bearing deposits increased 29 basis points.

Noninterest income was unchanged at $2.2 million, compared to the same period of 2018. Wealth management fees increased $54 thousand, or 13%, ATM and check card fees increased $46 thousand, or 8%, fees for other customer services increased $34 thousand, or 24%, and income from bank owned life insurance increased $24 thousand, or 22%. These increases were partially offset by a $61 thousand, or 7%, decrease in service charges on deposits and a $79 thousand decrease in other operating income. Other operating income decreased primarily as a result of revenue earned during the prior year from a settlement and release agreement related to brokerage services, which is no longer being earned in the current year.

Noninterest expense increased $236 thousand, or 4%, to $6.2 million, compared to the same period one year ago. The increase was primarily attributable to a $185 thousand, or 6%, increase in salaries and employee benefits, an $86 thousand, or 16%, increase in other operating expense, a $20 thousand, or 16%, increase in marketing expense, and an $18 thousand, or 15%, increase in bank franchise tax expense. The increase in other operating expense was attributable to an increase in fraud losses on ATM and debit card transactions. These increases were partially offset by an $84 thousand decrease in FDIC assessments.

ANALYSIS OF THE NINE-MONTH PERIOD

Net interest income increased $474 thousand, or 2%, to $20.9 million for the nine months ended September 30, 2019, compared to $20.5 million for the same period of 2018. The increase resulted from a higher net interest margin and higher average earning asset balances. Average earning asset balances increased 2%, and the net interest margin increased 2 basis points to 3.91%. The increase in the net interest margin resulted from a 21 basis point increase in the yield on average earning assets, which was partially offset by a 19 basis point increase in interest expense as a percent of average earning assets. 

The higher yield on average earning assets was attributable to a change in the earning asset composition, a 13 basis point increase in the yield on loans, and a 53 basis point increase in the yield on interest-bearing deposits in banks. The change in the earning asset composition favorably impacted the yield on average earning assets as loans increased from 74% to 78% of average earning assets, while interest-bearing deposits in banks and securities decreased from 26% to 22% of average earning assets. The increase in interest expense was primarily attributable to higher interest rates paid on deposits, as the cost of total interest-bearing deposits increased by 29 basis points.

Noninterest income decreased to $6.2 million, compared to $6.9 million for the same period of 2018. The decrease was primarily attributable to a $410 thousand decrease in income from bank-owned life insurance, a $337 thousand decrease in other operating income, and a $191 thousand, or 8%, decrease in service charges on deposits. These decreases were partially offset by a $133 thousand, or 11%, increase in wealth management fees, a $62 thousand, or 4%, increase in ATM and check card fees, and a $58 thousand, or 13%, increase in fees for other customer services. The decrease in income from bank-owned life insurance resulted from a death benefit recorded in the first quarter of 2018. The decrease in other operating income was impacted by the termination of the Company’s pension plan and subsequent distribution of plan assets in the prior year, which resulted in a one-time increase in other operating income of $126 thousand during the first quarter of 2018, as well as revenue earned during the prior year from a settlement and release agreement related to brokerage services.

Noninterest expense increased $834 thousand, or 5%, to $18.5 million, compared to $17.7 million for the same period one year ago. The increase was primarily attributable to a $393 thousand, or 4%, increase in salaries and employee benefits, a $208 thousand increase in other operating expense, a $132 thousand, or 21%, increase in legal and professional fees, a $130 thousand, or 33%, increase in marketing expense, a $63 thousand, or 5%, increase in occupancy expense, and a $51 thousand, or 15%, increase in bank franchise tax. The increase in other operating expense was attributable to fraud losses on ATM and debit card transactions, costs of listing the Company’s common stock on the Nasdaq Capital Market stock exchange, and higher education and training expenses. The increase in legal and professional fees resulted primarily from legal costs related to an evaluation of strategic initiatives, an increase in investment advisory costs of the wealth management department, and consulting expenses related to bank compliance testing and implementation of new accounting standards. The increase in investment advisory costs correlated with the increase in wealth management revenue, when comparing the same periods.  The increase in marketing expense was attributable to strategic initiatives. These increases were partially offset by a $128 thousand decrease in FDIC assessments.  

ASSET QUALITY/LOAN LOSS PROVISION

There was no provision for loan losses recorded during the third quarters of 2019 and 2018. Net charge-offs totaled $83 thousand for the third quarter of 2019 compared to $238 thousand for the same period of 2018. Nonperforming assets totaled $1.6 million, or 0.20% of total assets at September 30, 2019, compared to $2.7 million, or 0.37% of total assets, one year ago. The allowance for loan losses totaled $4.9 million, or 0.86% of total loans, and $4.8 million, or 0.89% of total loans, at September 30, 2019 and 2018, respectively.

The provision for loan losses totaled $200 thousand for the nine-month period ended September 30, 2019, compared to $100 thousand for the same period in 2018. Net charge-offs totaled $297 thousand for the nine months ended September 30, 2019 compared to $625 thousand for the same period of 2018.

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. For details on 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, 2018, 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 and central regions of Virginia. In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management. First Bank also owns First Bank Financial Services, Inc., which invests in entities that provide investment services and title insurance.

CONTACTS

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

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Quarter Ended
	September 30,			June 30,		March 31,		December 31,			September 30,
	2019			2019		2019		2018			2018
Income Statement
Interest income
Interest and fees on loans	$	7,429		$	7,200	$	6,996	$	7,106		$	6,917
Interest on deposits in banks		97			133		110		105			88
Interest on securities
Taxable interest		645			696		737		771			797
Tax-exempt interest		157			159		156		153			156
Dividends		26			26		24		24			23
Total interest income	$	8,354		$	8,214	$	8,023	$	8,159		$	7,981
Interest expense
Interest on deposits	$	1,089		$	1,051	$	922	$	798		$	702
Interest on federal funds purchased		1			—		—		—			—
Interest on subordinated debt		90			90		89		91			91
Interest on junior subordinated debt		103			108		111		105			105
Interest on other borrowings		—			—		2		—			—
Total interest expense	$	1,283		$	1,249	$	1,124	$	994		$	898
Net interest income	$	7,071		$	6,965	$	6,899	$	7,165		$	7,083
Provision for loan losses		—			200		—		500			—
Net interest income after provision for loan losses	$	7,071		$	6,765	$	6,899	$	6,665		$	7,083
Noninterest income
Service charges on deposit accounts	$	757		$	715	$	701	$	814		$	818
ATM and check card fees		586			573		517		642			540
Wealth management fees		477			458		437		443			423
Fees for other customer services		177			153		175		154			143
Income from bank owned life insurance		131			99		103		97			107
Net gains (losses) on securities		—			—		—		(1	)		—
Net gains on sale of loans		34			25		22		23			39
Other operating income		29			12		30		107			108
Total noninterest income	$	2,191		$	2,035	$	1,985	$	2,279		$	2,178
Noninterest expense
Salaries and employee benefits	$	3,556		$	3,375	$	3,443	$	3,306		$	3,371
Occupancy		398			401		438		424			387
Equipment		410			409		420		410			396
Marketing		143			239		141		155			123
Supplies		86			91		73		91			75
Legal and professional fees		231			303		241		343			229
ATM and check card expense		225			225		216		178			217
FDIC assessment		(6	)		35		69		68			78
Bank franchise tax		136			136		130		117			118
Telecommunications expense		82			79		83		79			83
Data processing expense		174			179		173		173			168
Postage expense		43			44		48		51			42
Amortization expense		71			80		90		99			108
Other real estate owned expense (income), net		—			—		—		—			2
Net loss on disposal of premises and equipment		—			—		—		—			2
Other operating expense		637			634		533		587			551
Total noninterest expense	$	6,186		$	6,230	$	6,098	$	6,081		$	5,950
Income before income taxes	$	3,076		$	2,570	$	2,786	$	2,863		$	3,311
Income tax expense		583			484		525		542			635
Net income	$	2,493		$	2,086	$	2,261	$	2,321		$	2,676

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Quarter Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2019			2019			2019			2018			2018
Common Share and Per Common Share Data
Net income, basic	$	0.50		$	0.42		$	0.46		$	0.47		$	0.54
Weighted average shares, basic		4,966,641			4,963,737			4,960,264			4,957,055			4,955,162
Net income, diluted	$	0.50		$	0.42		$	0.46		$	0.47		$	0.54
Weighted average shares, diluted		4,969,126			4,965,822			4,964,134			4,960,597			4,958,162
Shares outstanding at period end		4,968,277			4,964,824			4,963,487			4,957,694			4,956,925
Tangible book value at period end	$	15.11		$	14.60		$	13.97		$	13.35		$	12.72
Cash dividends	$	0.09		$	0.09		$	0.09		$	0.05		$	0.05
Key Performance Ratios
Return on average assets		1.27	%		1.08	%		1.21	%		1.22	%		1.41	%
Return on average equity		13.31	%		11.76	%		13.47	%		14.15	%		16.89	%
Net interest margin		3.87	%		3.88	%		3.97	%		4.05	%		4.02	%
Efficiency ratio (1)		65.65	%		67.94	%		67.23	%		62.99	%		62.68	%
Average Balances
Average assets	$	780,376		$	773,574		$	757,910		$	753,112		$	750,619
Average earning assets		730,865			724,909			709,690			706,323			703,894
Average shareholders’ equity		74,291			71,124			68,089			65,077			62,882
Asset Quality
Loan charge-offs	$	156		$	219		$	228		$	374		$	295
Loan recoveries		73			68			165			82			57
Net charge-offs		83			151			63			292			238
Non-accrual loans		1,566			1,775			1,915			3,172			2,738
Other real estate owned, net		—			—			—			—			—
Nonperforming assets		1,566			1,775			1,915			3,172			2,738
Loans 30 to 89 days past due, accruing		902			792			1,002			1,446			2,707
Loans over 90 days past due, accruing		113			19			133			235			261
Troubled debt restructurings, accruing		—			—			259			264			269
Special mention loans		1,458			2,610			1,910			2,078			2,718
Substandard loans, accruing		3,758			2,825			3,132			3,522			1,216
Capital Ratios (2)
Total capital	$	83,591		$	82,078		$	80,780		$	74,697		$	72,807
Tier 1 capital		78,679			77,083			75,834			69,688			68,006
Common equity tier 1 capital		78,679			77,083			75,834			69,688			68,006
Total capital to risk-weighted assets		14.57	%		14.24	%		14.49	%		13.62	%		13.25	%
Tier 1 capital to risk-weighted assets		13.71	%		13.37	%		13.60	%		12.71	%		12.38	%
Common equity tier 1 capital to risk-weighted assets		13.71	%		13.37	%		13.60	%		12.71	%		12.38	%
Leverage ratio		10.09	%		9.96	%		10.01	%		9.26	%		9.07	%

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Quarter Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2019			2019			2019			2018			2018
Balance Sheet
Cash and due from banks	$	11,885		$	12,354		$	10,862		$	13,378		$	11,370
Interest-bearing deposits in banks		18,488			10,716			31,833			15,240			10,068
Securities available for sale, at fair value		114,568			119,510			121,202			99,857			102,748
Securities held to maturity, at amortized cost		18,222			18,828			19,489			43,408			44,239
Restricted securities, at cost		1,806			1,701			1,701			1,688			1,590
Loans held for sale		1,098			675			200			419			516
Loans, net of allowance for loan losses		566,341			569,959			545,529			537,847			535,020
Premises and equipment, net		19,946			20,182			20,282			20,066			19,557
Accrued interest receivable		2,053			2,163			2,143			2,113			2,138
Bank owned life insurance		17,324			17,193			17,094			13,991			13,894
Core deposit intangibles, net		231			302			382			472			571
Other assets		5,231			4,801			4,361			4,490			4,743
Total assets	$	777,193		$	778,384		$	775,078		$	752,969		$	746,454
Noninterest-bearing demand deposits	$	189,797		$	186,553		$	189,261		$	181,964		$	186,293
Savings and interest-bearing demand deposits		376,047			385,399			377,673			369,383			360,988
Time deposits		119,777			117,863			117,290			119,219			119,823
Total deposits	$	685,621		$	689,815		$	684,224		$	670,566		$	667,104
Other borrowings		—			—			5,000			—			—
Subordinated debt		4,978			4,974			4,969			4,965			4,961
Junior subordinated debt		9,279			9,279			9,279			9,279			9,279
Accrued interest payable and other liabilities		1,999			1,507			1,878			1,485			1,459
Total liabilities	$	701,877		$	705,575		$	705,350		$	686,295		$	682,803
Preferred stock	$	—		$	—		$	—		$	—		$	—
Common stock		6,210			6,206			6,204			6,197			6,196
Surplus		7,648			7,566			7,515			7,471			7,438
Retained earnings		60,314			58,268			56,629			54,814			52,741
Accumulated other comprehensive income (loss), net		1,144			769			(620	)		(1,808	)		(2,724	)
Total shareholders’ equity	$	75,316		$	72,809		$	69,728		$	66,674		$	63,651
Total liabilities and shareholders’ equity	$	777,193		$	778,384		$	775,078		$	752,969		$	746,454
Loan Data
Mortgage loans on real estate:
Construction and land development	$	45,193		$	46,281		$	48,948		$	45,867		$	42,982
Secured by farmland		916			855			883			880			942
Secured by 1-4 family residential		226,828			225,820			217,527			215,945			211,938
Other real estate loans		232,151			236,515			220,513			218,673			223,961
Loans to farmers (except those secured by real estate)		1,461			1,006			806			1,035			937
Commercial and industrial loans (except those secured by real estate)		49,096			48,347			45,239			43,570			41,924
Consumer installment loans		11,040			11,572			11,890			12,061			12,301
Deposit overdrafts		263			208			204			275			249
All other loans		4,305			4,350			4,465			4,550			4,587
Total loans	$	571,253		$	574,954		$	550,475		$	542,856		$	539,821
Allowance for loan losses		(4,912	)		(4,995	)		(4,946	)		(5,009	)		(4,801	)
Loans, net	$	566,341		$	569,959		$	545,529		$	537,847		$	535,020

FIRST NATIONAL CORPORATION

Quarterly Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Quarter Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2019			2019			2019			2018			2018
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans	$	7,429		$	7,200		$	6,996		$	7,106		$	6,917
Interest income – investments and other		925			1,014			1,027			1,053			1,064
Interest expense – deposits		(1,089	)		(1,051	)		(922	)		(798	)		(702	)
Interest expense – federal funds purchased		(1	)		—			—			—			—
Interest expense – subordinated debt		(90	)		(90	)		(89	)		(91	)		(91	)
Interest expense – junior subordinated debt		(103	)		(108	)		(111	)		(105	)		(105	)
Interest expense – other borrowings		—			—			(2	)		—			—
Total net interest income	$	7,071		$	6,965		$	6,899		$	7,165		$	7,083
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans	$	9		$	10		$	11		$	11		$	12
Tax benefit realized on non-taxable interest income – municipal securities		43			42			41			42			41
Total tax benefit realized on non-taxable interest income	$	52		$	52		$	52		$	53		$	53
Total tax-equivalent net interest income	$	7,123		$	7,017		$	6,951		$	7,218		$	7,136

FIRST NATIONAL CORPORATION

Year-to-Date Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Nine Months Ended
	September 30,		September 30,
	2019		2018
Income Statement
Interest income
Interest and fees on loans	$	21,625	$	19,768
Interest on deposits in banks		340		434
Interest on securities
Taxable interest		2,078		2,253
Tax-exempt interest		472		457
Dividends		76		67
Total interest income	$	24,591	$	22,979
Interest expense
Interest on deposits	$	3,062	$	1,957
Interest on federal funds purchased		1		—
Interest on subordinated debt		269		269
Interest on junior subordinated debt		322		292
Interest on other borrowings		2		—
Total interest expense	$	3,656	$	2,518
Net interest income	$	20,935	$	20,461
Provision for loan losses		200		100
Net interest income after provision for loan losses	$	20,735	$	20,361
Noninterest income
Service charges on deposit accounts	$	2,173	$	2,364
ATM and check card fees		1,676		1,614
Wealth management fees		1,372		1,239
Fees for other customer services		505		447
Income from bank owned life insurance		333		743
Net gains on sale of loans		81		63
Other operating income		71		408
Total noninterest income	$	6,211	$	6,878
Noninterest expense
Salaries and employee benefits	$	10,374	$	9,981
Occupancy		1,237		1,174
Equipment		1,239		1,239
Marketing		523		393
Supplies		250		243
Legal and professional fees		775		643
ATM and check card expense		666		631
FDIC assessment		98		226
Bank franchise tax		402		351
Telecommunications expense		244		217
Data processing expense		526		500
Postage expense		135		145
Amortization expense		241		359
Other real estate owned expense (income), net		—		(20	)
Net loss on disposal of premises and equipment		—		2
Other operating expense		1,804		1,596
Total noninterest expense	$	18,514	$	17,680
Income before income taxes	$	8,432	$	9,559
Income tax expense		1,592		1,745
Net income	$	6,840	$	7,814

FIRST NATIONAL CORPORATION

Year-to-Date Performance Summary

(in thousands, except share and per share data)

	(unaudited)
	For the Nine Months Ended
	September 30,			September 30,
	2019			2018
Common Share and Per Common Share Data
Net income, basic	$	1.38		$	1.58
Weighted average shares, basic		4,963,571			4,952,351
Net income, diluted	$	1.38		$	1.58
Weighted average shares, diluted		4,966,384			4,954,955
Shares outstanding at period end		4,968,277			4,956,925
Tangible book value at period end	$	15.11		$	12.72
Cash dividends	$	0.27		$	0.15
Key Performance Ratios
Return on average assets		1.19	%		1.38	%
Return on average equity		12.85	%		17.17	%
Net interest margin		3.91	%		3.89	%
Efficiency ratio (1)		66.93	%		63.07	%
Average Balances
Average assets	$	770,777		$	754,856
Average earning assets		721,899			707,998
Average shareholders’ equity		71,148			60,848
Asset Quality
Loan charge-offs	$	603		$	795
Loan recoveries		306			170
Net charge-offs		297			625
Reconciliation of Tax-Equivalent Net Interest Income
GAAP measures:
Interest income – loans	$	21,625		$	19,768
Interest income – investments and other		2,966			3,211
Interest expense – deposits		(3,062	)		(1,957	)
Interest expense – federal funds purchased		(1	)		—
Interest expense – subordinated debt		(269	)		(269	)
Interest expense – junior subordinated debt		(322	)		(292	)
Interest expense – other borrowings		(2	)		—
Total net interest income	$	20,935		$	20,461
Non-GAAP measures:
Tax benefit realized on non-taxable interest income – loans	$	30		$	33
Tax benefit realized on non-taxable interest income – municipal securities		126			121
Total tax benefit realized on non-taxable interest income	$	156		$	154
Total tax-equivalent net interest income	$	21,091		$	20,615

⁽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.