For the quarterly period ended September 30, 2021 or Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 112 West King Street, Strasburg, Virginia 22657 (Address of principal executive offices) (Zip Code) (540) 465-9121 (Registrant's telephone number, including area code) ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Securities ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-38874 (Exact name of registrant as specified in its charter) Virginia 54-1232965 (State or other jurisdiction of incorporat ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-38874 (Exact name of registrant as specified in its charter) Virginia 54-1232965 (State or other jurisdiction of incorpora ...

Part I [Business](index=5&type=section&id=Item%201.%20Business) First National Corporation, a bank holding company, offers diverse financial services through First Bank, operating under extensive regulation - First National Corporation is a bank holding company whose primary operating subsidiary is **First Bank**, a commercial bank chartered under Virginia law. The company also has subsidiaries for investment services, real estate holdings, and issuing trust preferred securities[17](index=17&type=chunk) - On February 18, 2021, the Company agreed to acquire **The Bank of Fincastle**, with the transaction expected to close in the **third quarter of 2021**. The deal involves a mix of cash and stock consideration[19](index=19&type=chunk)[20](index=20&type=chunk) - The Bank offers a comprehensive suite of products including consumer and commercial loans, various deposit accounts, and wealth management services. Its customer base includes small and medium-sized businesses, individuals, and local governmental entities[22](index=22&type=chunk) - The company competes with a wide range of financial institutions and holds the **third-largest** deposit market share (**10.53%** as of June 30, 2020) in its operating area[25](index=25&type=chunk)[26](index=26&type=chunk) - As a bank holding company, the Company is subject to extensive supervision and regulation by the **Federal Reserve** and the **Virginia State Corporation Commission (SCC)**[31](index=31&type=chunk) First Bank Regulatory Capital Ratios (December 31, 2020) | Ratio | Value (%) | | :--- | :--- | | Total capital to risk-weighted assets | 15.82 | | Tier 1 capital to risk-weighted assets | 14.57 | | Common equity Tier 1 capital to risk-weighted assets | 14.57 | | Tier 1 capital to average assets | 8.80 | | Capital conservation buffer ratio | 7.82 | [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from the COVID-19 pandemic, economic conditions, competition, operational threats, and acquisition integration - The **COVID-19 pandemic** presents a material risk, potentially impacting credit losses, operational efficiency, vendor performance, and demand for products and services[70](index=70&type=chunk)[73](index=73&type=chunk) - The company's concentration in loans secured by **real estate** creates exposure to adverse changes in real estate markets, which could affect borrowers' ability to repay and the value of collateral[102](index=102&type=chunk)[103](index=103&type=chunk) - The pending acquisition of **Fincastle** carries risks, including potential difficulties in integration, failure to realize anticipated benefits, disruption to customer relationships, and the possibility that regulatory approvals may be delayed or impose unforeseen conditions[131](index=131&type=chunk)[132](index=132&type=chunk)[134](index=134&type=chunk) - Changes in **interest rates** could adversely affect net interest income, as income is highly dependent on the spread between interest earned on assets and interest paid on liabilities[89](index=89&type=chunk) - **Cybersecurity threats** are a significant risk. A security breach could compromise confidential information, lead to liability and financial loss, and damage the company's reputation[97](index=97&type=chunk)[98](index=98&type=chunk) - The company is subject to extensive regulation, and changes in laws, accounting standards (like **CECL**), or tax rates could adversely affect business operations, financial condition, and capital levels[112](index=112&type=chunk)[114](index=114&type=chunk)[116](index=116&type=chunk) [Unresolved Staff Comments](index=33&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved comments from the SEC staff - Not applicable[146](index=146&type=chunk) [Properties](index=33&type=section&id=Item%202.%20Properties) The company's headquarters is in Strasburg, Virginia, with 14 branches and other offices operating across its market areas - The Company's headquarters is located at **112 West King Street, Strasburg, Virginia**. The Bank operates **14 branches**, a loan production office, and a customer service center in its service regions[147](index=147&type=chunk) [Legal Proceedings](index=33&type=section&id=Item%203.%20Legal%20Proceedings) The company states that there are no material pending legal proceedings to which it or its property is subject - There are no material pending legal proceedings to which the Company is a party[148](index=148&type=chunk) [Mine Safety Disclosures](index=33&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reports that there are no mine safety disclosures applicable to its operations - None[149](index=149&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=34&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq, with dividend policy and past stock repurchase plans detailed, noting no new authorization - The Company's common stock trades on the **Nasdaq Capital Market** under the symbol '**FXNC**'[152](index=152&type=chunk) - The stock repurchase plan authorized in **2019** expired on **December 31, 2020**. The company repurchased **129,035 shares** for a total of **$2.1 million** under the **$5.0 million** plan. No new plan has been authorized due to pandemic-related economic uncertainty[154](index=154&type=chunk) - No common stock was repurchased during the three months ended **December 31, 2020**[155](index=155&type=chunk) [Selected Financial Data](index=35&type=section&id=Item%206.%20Selected%20Financial%20Data) This section presents selected financial data for the company over the last five years, including key figures from operations, ratios, and financial condition Selected Financial Data for the Year Ended December 31, 2020 (in thousands, except per share data) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | **Results of Operations** | | | | Net interest income | $29,468 | $28,010 | | Provision for loan losses | $3,000 | $450 | | Net income | $8,858 | $9,556 | | **Per Common Share Data** | | | | Net income, diluted | $1.82 | $1.92 | | Cash dividends | $0.44 | $0.36 | | Book value at period end | $17.47 | $15.54 | | **Financial Condition (End of Period)** | | | | Assets | $950,932 | $800,048 | | Loans, net | $622,429 | $569,412 | | Deposits | $842,461 | $706,442 | | Shareholders' equity | $84,916 | $77,219 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes 2020 financial results, highlighting COVID-19 impacts, decreased net income due to higher loan loss provisions, and the Fincastle acquisition - Net income for **2020** was **$8.9 million**, a decrease from **$9.6 million** in **2019**. The decline was primarily due to a **$2.6 million** increase in the provision for loan losses, reflecting economic uncertainties from the **COVID-19 pandemic**[175](index=175&type=chunk)[176](index=176&type=chunk) - The Bank actively participated in the **Paycheck Protection Program (PPP)**, originating **$76.6 million** in loans during **2020**[167](index=167&type=chunk) - In response to the pandemic, the Bank implemented a loan payment deferral program and modified terms for certain commercial real estate loans totaling **$14.3 million** to provide interest-only payments[170](index=170&type=chunk)[171](index=171&type=chunk) - Total assets grew by **$150.9 million** to **$950.9 million** at year-end **2020**, primarily driven by a **$136.0 million** increase in deposits and a **$53.0 million** increase in net loans[233](index=233&type=chunk)[234](index=234&type=chunk) - Non-performing assets increased to **$6.7 million** (**0.71%** of total assets) at the end of **2020**, up from **$1.5 million** (**0.18%** of total assets) at the end of **2019**[242](index=242&type=chunk) - The Bank's capital ratios remain strong and exceed all regulatory requirements to be considered '**well capitalized**', with a total risk-based capital ratio of **15.82%** at **December 31, 2020**[289](index=289&type=chunk)[290](index=290&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=63&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that this disclosure is not required - Not required[301](index=301&type=chunk) [Financial Statements and Supplementary Data](index=63&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements, including management's internal control report and the auditor's unqualified opinion - Management asserts that the company maintained effective internal controls over financial reporting as of **December 31, 2020**, based on the **COSO framework**[306](index=306&type=chunk) - The independent auditor, **Yount, Hyde & Barbour, P.C.**, issued an **unqualified opinion**, stating the financial statements are presented fairly in all material respects. The auditor identified the **Allowance for Loan Losses** as a **Critical Audit Matter**[311](index=311&type=chunk)[317](index=317&type=chunk) Consolidated Financial Highlights (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | **Assets** | | | | Total Assets | $950,932 | $800,048 | | Loans, net | $622,429 | $569,412 | | **Liabilities & Equity** | | | | Total Deposits | $842,461 | $706,442 | | Total Shareholders' Equity | $84,916 | $77,219 | | **Income Statement** | | | | Net Interest Income | $29,468 | $28,010 | | Provision for loan losses | $3,000 | $450 | | Net Income | $8,858 | $9,556 | - Note **25** discloses a significant subsequent event: the agreement on **February 18, 2021**, to acquire **The Bank of Fincastle** for approximately **$31.6 million** in cash and stock[521](index=521&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=123&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[527](index=527&type=chunk) [Controls and Procedures](index=123&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The **CEO** and **CFO** concluded that the Company's disclosure controls and procedures were effective as of **December 31, 2020**[528](index=528&type=chunk) - Management assessed the Company's internal control over financial reporting as effective as of **December 31, 2020**, using the **COSO framework**[530](index=530&type=chunk) - No changes in internal control over financial reporting occurred during the **fourth quarter of 2020** that materially affected, or are reasonably likely to materially affect, these controls[531](index=531&type=chunk) [Other Information](index=123&type=section&id=Item%209B.%20Other%20Information) The company reports no other information in this section - None[532](index=532&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=124&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Company's **Proxy Statement** for the **2021 Annual Meeting of Shareholders**[535](index=535&type=chunk) [Executive Compensation](index=124&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive and director compensation is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Company's **Proxy Statement** for the **2021 Annual Meeting of Shareholders**[536](index=536&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=124&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership of beneficial owners and management is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Company's **Proxy Statement** for the **2021 Annual Meeting of Shareholders**[537](index=537&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=124&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Company's **Proxy Statement** for the **2021 Annual Meeting of Shareholders**[538](index=538&type=chunk) [Principal Accounting Fees and Services](index=124&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the 2021 Proxy Statement - Information is incorporated by reference from the Company's **Proxy Statement** for the **2021 Annual Meeting of Shareholders**[539](index=539&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=125&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all documents filed as exhibits to the Form 10-K, including key corporate and legal agreements - Lists all exhibits filed with the **Form 10-K**, including financial statements, schedules, and various corporate and legal documents[542](index=542&type=chunk) - Key exhibits incorporated by reference include the merger agreement with **The Bank of Fincastle** (**Exhibit 2.1**) and the form of the **5.50% Subordinated Note due 2030** (**Exhibit 4.3**)[542](index=542&type=chunk) [Form 10-K Summary](index=126&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has not provided a summary in this section of the Form 10-K - None[544](index=544&type=chunk)

PART I – FINANCIAL INFORMATION Presents the unaudited consolidated financial information for First National Corporation and its subsidiary [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Presents unaudited consolidated financial statements for First National Corporation and First Bank, including balance sheets, income statements, and cash flow statements, with detailed notes [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Highlights key assets, liabilities, and equity figures, showing changes between September 30, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :----------------------------- | :----------- | :----------- | :----- | :--------- | | Total assets | $942,733 | $800,048 | $142,685 | 17.8% | | Cash and due from banks | $13,349 | $9,675 | $3,674 | 37.9% | | Interest-bearing deposits in banks | $108,857 | $36,110 | $72,747 | 201.4% | | Loans, net | $640,591 | $569,412 | $71,179 | 12.5% | | Total liabilities | $860,477 | $722,829 | $137,648 | 19.0% | | Total deposits | $838,395 | $706,442 | $131,953 | 18.7% | | Subordinated debt | $9,987 | $4,983 | $5,004 | 100.4% | | Total shareholders' equity | $82,256 | $77,219 | $5,037 | 6.5% | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) Details net interest income, provision for loan losses, noninterest income/expense, and net income for specified periods Consolidated Statements of Income (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | :--------- | | Net interest income | $7,574 | $7,071 | $503 | 7.1% | | Provision for loan losses | $1,500 | $0 | $1,500 | N/A | | Noninterest income | $2,201 | $2,191 | $10 | 0.5% | | Noninterest expense | $6,135 | $6,186 | ($51) | -0.8% | | Net income | $1,754 | $2,493 | ($739) | -29.6% | | Basic EPS | $0.36 | $0.50 | ($0.14)| -28.0% | | Diluted EPS | $0.36 | $0.50 | ($0.14)| -28.0% | | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | :--------- | | Net interest income | $22,011 | $20,935 | $1,076 | 5.1% | | Provision for loan losses | $3,200 | $200 | $3,000 | 1500.0% | | Noninterest income | $6,073 | $6,211 | ($138) | -2.2% | | Noninterest expense | $17,892 | $18,514 | ($622) | -3.4% | | Net income | $5,702 | $6,840 | ($1,138)| -16.6% | | Basic EPS | $1.17 | $1.38 | ($0.21)| -15.2% | | Diluted EPS | $1.17 | $1.38 | ($0.21)| -15.2% | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Presents net income and other comprehensive income components, leading to total comprehensive income for the periods Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | :--------- | | Net income | $1,754 | $2,493 | ($739) | -29.6% | | Total other comprehensive income | $127 | $375 | ($248) | -66.1% | | Total comprehensive income | $1,881 | $2,868 | ($987) | -34.4% | | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :----- | :--------- | | Net income | $5,702 | $6,840 | ($1,138)| -16.6% | | Total other comprehensive income | $2,708 | $2,952 | ($244) | -8.3% | | Total comprehensive income | $8,410 | $9,792 | ($1,382)| -14.1% | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash flows from operating, investing, and financing activities, showing changes in cash and equivalents Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | Change (%) | | :-------------------------------- | :----- | :----- | :----- | :--------- | | Net cash provided by operating activities | $9,078 | $6,894 | $2,184 | 31.7% | | Net cash used in investing activities | ($65,993)| ($18,931)| ($47,062)| 248.6% | | Net cash provided by financing activities | $133,336 | $13,792| $119,544| 866.8% | | Increase in cash and cash equivalents | $76,421| $1,755 | $74,666| 4254.5% | | Ending cash and cash equivalents | $122,206 | $30,373| $91,833| 302.4% | - Net cash used in investing activities significantly increased due to a **$74.4 million** net increase in loans (vs **$28.7 million** in 2019) and higher purchases of securities available for sale[19](index=19&type=chunk) - Net cash provided by financing activities saw a substantial increase, driven by a **$147.9 million** net increase in demand deposits and savings accounts (vs **$14.5 million** in 2019) and **$5.0 million** in proceeds from subordinated debt[19](index=19&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Outlines changes in shareholders' equity, including net income, comprehensive income, dividends, and stock repurchases Changes in Shareholders' Equity (Nine Months Ended Sep 30, 2020, in thousands) | Metric | Amount | | :-------------------------------- | :----- | | Balance, December 31, 2019 | $77,219| | Net income | $5,702 | | Other comprehensive income | $2,708 | | Cash dividends on common stock | ($1,615)| | Stock-based compensation | $254 | | Repurchase of common stock, stock repurchase plan | ($2,071)| | Balance, September 30, 2020 | $82,256| - Total shareholders' equity increased by **$5.0 million** to **$82.3 million** at September 30, 2020, primarily driven by net income and a **$2.7 million** increase in accumulated other comprehensive income, partially offset by **$1.6 million** in cash dividends and **$2.1 million** in common stock repurchases[22](index=22&type=chunk)[231](index=231&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Provides detailed explanations and disclosures supporting the consolidated financial statements, covering various accounting policies and financial instruments [Note 1. General](index=9&type=section&id=Note%201.%20General) Discusses the impact of the COVID-19 pandemic on the Company's operations, financial performance, and liquidity measures - The COVID-19 pandemic has adversely impacted a broad range of industries, potentially impairing customer financial obligations and creating business continuity issues for the Company[24](index=24&type=chunk)[26](index=26&type=chunk) - Net interest income and noninterest income could decrease, while noninterest expense could increase, due to COVID-19 impacts such as payment deferrals, suspended fees, and worsening asset quality[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) - The Company suspended stock repurchases and issued **$5.0 million** in subordinated debt in June 2020 to strengthen liquidity and capital amidst economic uncertainty[33](index=33&type=chunk) - Loans participating in the payment deferral program totaled **$22.6 million** (**3%** of loan balances) at September 30, 2020, a significant reduction from **$182.6 million** (**28%**) at June 30, 2020[36](index=36&type=chunk) - The Bank originated **$76.6 million** of Paycheck Protection Program (PPP) loans, with **$73.7 million** outstanding at September 30, 2020, and expects most to be forgiven by the SBA[37](index=37&type=chunk) - The SEC's amendments to 'accelerated filer' definitions mean the Company expects to no longer be considered an accelerated filer, reducing audit requirements (no external auditor attestation over ICFR)[51](index=51&type=chunk) [Note 2. Securities](index=18&type=section&id=Note%202.%20Securities) Details the Company's securities portfolio, including available-for-sale and held-to-maturity categories, along with unrealized gains and losses Securities Portfolio (Fair Value, in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Securities available for sale | $117,132 | $120,983 | ($3,851)| -3.2% | | Securities held to maturity | $15,638 | $17,646 | ($2,008)| -11.4% | | Restricted securities | $1,848 | $1,806 | $42 | 2.3% | | Total securities | $134,618 | $140,435 | ($5,817)| -4.1% | Unrealized Gains and Losses (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Gross Unrealized Gains (AFS) | $4,223 | $1,254 | $2,969 | 236.8% | | Gross Unrealized Losses (AFS) | ($14) | ($339) | $325 | -95.9% | | Gross Unrealized Gains (HTM) | $537 | $99 | $438 | 442.4% | | Gross Unrealized Losses (HTM) | $0 | ($80) | $80 | -100.0% | - **100%** of the investment portfolio is considered investment grade. The weighted-average re-pricing term decreased from **3.7 years** at December 31, 2019, to **3.1 years** at September 30, 2020[59](index=59&type=chunk) [Note 3. Loans](index=21&type=section&id=Note%203.%20Loans) Provides a breakdown of the loan portfolio by type, aging of past due loans, and credit risk profile categories Loan Composition (in thousands) | Loan Type | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Total loans | $648,368 | $574,346 | $74,022| 12.9% | | Construction and land development | $27,472 | $43,164 | ($15,692)| -36.3% | | Secured by 1-4 family residential | $234,198 | $229,438 | $4,760 | 2.1% | | Other real estate loans | $250,319 | $236,555 | $13,764| 5.8% | | Commercial and industrial loans | $125,277 | $50,153 | $75,124| 149.8% | | Consumer and other loans | $11,102 | $15,036 | ($3,934)| -26.2% | | Allowance for loan losses | ($7,777) | ($4,934) | ($2,843)| 57.6% | | Loans, net | $640,591 | $569,412 | $71,179| 12.5% | Aging of Past Due Loans (in thousands) | Past Due Status | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | 30-59 Days Past Due | $371 | $2,013 | ($1,642)| -81.6% | | 60-89 Days Past Due | $643 | $571 | $72 | 12.6% | | > 90 Days Past Due | $357 | $561 | ($204) | -36.4% | | Total Past Due | $1,371 | $3,145 | ($1,774)| -56.4% | Credit Risk Profile (in thousands) | Risk Category | Sep 30, 2020 | Dec 31, 2019 | Change | Change (%) | | :-------------------------------- | :----------- | :----------- | :----- | :--------- | | Pass | $637,080 | $563,408 | $73,672| 13.1% | | Special Mention | $510 | $6,069 | ($5,559)| -91.6% | | Substandard | $10,778 | $4,869 | $5,909 | 121.4% | | Doubtful | $0 | $0 | $0 | N/A | [Note 4. Allowance for Loan Losses](index=24&type=section&id=Note%204.%20Allowance%20for%20Loan%20Losses) Outlines the activity in the allowance for loan losses, including charge-offs, recoveries, and provisions, and details impaired loans Allowance for Loan Losses Activity (Nine Months Ended Sep 30, in thousands) | Metric | 2020 | 2019 | Change | Change (%) | | :-------------------------------- | :----- | :----- | :----- | :--------- | | Beginning Balance | $4,934 | $5,009 | ($75) | -1.5% | | Charge-offs | ($619) | ($603) | ($16) | 2.7% | | Recoveries | $262 | $306 | ($44) | -14.4% | | Provision for loan losses | $3,200 | $200 | $3,000 | 1500.0% | | Ending Balance | $7,777 | $4,912 | $2,865 | 58.3% | Impaired Loans and Related Allowance (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | Sep 30, 2019 | | :-------------------------------- | :----------- | :----------- | :----------- | | Total Recorded Investment | $6,974 | $1,459 | $1,566 | | Related Allowance | $2,289 | $33 | $74 | - Troubled Debt Restructurings (TDRs) increased significantly to **$6.0 million** at September 30, 2020, from **$360 thousand** at December 31, 2019, with all TDRs at September 30, 2020, considered non-performing[76](index=76&type=chunk) - Loans participating in the COVID-19 payment deferral program, totaling **$22.6 million**, were not considered TDRs due to relief provisions of the CARES Act[78](index=78&type=chunk) [Note 5. Other Real Estate Owned (OREO)](index=28&type=section&id=Note%205.%20Other%20Real%20Estate%20Owned%20(OREO)) States that there was no activity or balances related to Other Real Estate Owned for the reported periods - The Bank had no OREO activity or balances for the nine months ended September 30, 2020, or the year ended December 31, 2019[80](index=80&type=chunk) - No expenses applicable to OREO were incurred for the nine months ended September 30, 2020, and 2019[81](index=81&type=chunk) [Note 6. Other Borrowings](index=28&type=section&id=Note%206.%20Other%20Borrowings) Details the Company's unused lines of credit with non-affiliated banks and the Federal Home Loan Bank of Atlanta - The Company had an unused **$5.0 million** unsecured line of credit at September 30, 2020[82](index=82&type=chunk) - The Bank had **$226.3 million** in unused lines of credit with non-affiliated banks at September 30, 2020, primarily from the Federal Home Loan Bank of Atlanta (FHLB), with no outstanding FHLB borrowings[83](index=83&type=chunk) [Note 7. Capital Requirements](index=29&type=section&id=Note%207.%20Capital%20Requirements) Presents the Bank's regulatory capital ratios, confirming its 'well capitalized' status and compliance with requirements Bank Regulatory Capital Ratios (as of Sep 30, 2020) | Ratio | Actual | Minimum | Well Capitalized | | :-------------------------------- | :----- | :------ | :--------------- | | Total Capital (to Risk-Weighted Assets) | 15.34% | 8.00% | 10.00% | | Tier 1 Capital (to Risk-Weighted Assets) | 14.09% | 6.00% | 8.00% | | Common Equity Tier 1 Capital (to Risk-Weighted Assets) | 14.09% | 4.50% | 6.50% | | Tier 1 Capital (to Average Assets) | 8.67% | 4.00% | 5.00% | - The Bank was categorized as **'well capitalized'** by the Federal Reserve Bank as of September 30, 2020, and met all capital adequacy requirements[88](index=88&type=chunk)[89](index=89&type=chunk) - The Bank's capital conservation buffer was **7.34%** at September 30, 2020, exceeding the **2.50%** requirement[89](index=89&type=chunk) [Note 8. Subordinated Debt](index=30&type=section&id=Note%208.%20Subordinated%20Debt) Describes the Company's subordinated term notes, including interest rates, maturity dates, and call provisions - The Company has a **$5.0 million** subordinated term note due October 1, 2025, bearing a fixed interest rate of **6.75%** per annum, callable from January 1, 2021[90](index=90&type=chunk) - A new **$5.0 million** subordinated term note was issued on June 29, 2020, due July 1, 2030, with an initial fixed rate of **5.50%** per annum, resetting quarterly to three-month SOFR plus **510 basis points** from July 1, 2025, and callable from July 1, 2025[91](index=91&type=chunk) - Both notes are unsecured, subordinated obligations, ranking junior to senior indebtedness but senior to junior subordinated debt, preferred stock, and common stock[92](index=92&type=chunk) [Note 9. Junior Subordinated Debt](index=30&type=section&id=Note%209.%20Junior%20Subordinated%20Debt) Details the Company's junior subordinated debt, including LIBOR-indexed floating rates and mandatory redemption dates - The Company has **$5.2 million** in junior subordinated debt (Trust II) with a LIBOR-indexed floating rate (**2.85%** at Sep 30, 2020), mandatory redemption June 17, 2034[93](index=93&type=chunk) - Another **$4.1 million** in junior subordinated debt (Trust III) has a LIBOR-indexed floating rate (**1.90%** at Sep 30, 2020), mandatory redemption October 1, 2036[94](index=94&type=chunk) [Note 10. Benefit Plans](index=30&type=section&id=Note%2010.%20Benefit%20Plans) Reports expenses incurred for the Company's 401(k) plan and supplemental executive retirement plans for the periods - The Company's 401(k) plan incurred an expense of **$643 thousand** for the nine months ended September 30, 2020, up from **$631 thousand** in 2019[95](index=95&type=chunk) - Expense for supplemental executive retirement plans totaled **$198 thousand** for the nine months ended September 30, 2020, compared to **$155 thousand** in 2019[97](index=97&type=chunk) [Note 11. Earnings per Common Share](index=32&type=section&id=Note%2011.%20Earnings%20per%20Common%20Share) Provides basic and diluted earnings per common share calculations and related net income figures Earnings per Common Share (EPS) | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net income (in thousands) | $1,754 | $2,493 | $5,702 | $6,840 | | Basic EPS | $0.36 | $0.50 | $1.17 | $1.38 | | Diluted EPS | $0.36 | $0.50 | $1.17 | $1.38 | - Restricted stock units for **9,632 shares** were antidilutive for the three months ended September 30, 2020, and thus not included in diluted EPS calculation[100](index=100&type=chunk) [Note 12. Fair Value Measurements](index=32&type=section&id=Note%2012.%20Fair%20Value%20Measurements) Explains the three-level hierarchy for fair value measurements and presents recurring and nonrecurring fair value balances - The Company categorizes fair value measurements into a three-level hierarchy: Level 1 (quoted active market prices), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[104](index=104&type=chunk) Recurring Fair Value Measurements (Sep 30, 2020, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :-------- | :------ | :------ | :------ | | Securities available for sale | $117,132 | $0 | $117,132 | $0 | | Derivatives - cash flow hedges | $134 | $0 | $134 | $0 | Nonrecurring Fair Value Measurements (Sep 30, 2020, in thousands) | Description | Balance | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :-------- | :------ | :------ | :------ | | Impaired loans, net | $3,572 | $0 | $0 | $3,572 | - For Level 3 impaired loans, **$2.2 million** were valued by property appraisals (**10.00%** selling cost) and **$1.4 million** by present value of cash flows (**6.50%** discount rate) at September 30, 2020[115](index=115&type=chunk) [Note 13. Stock Compensation Plans](index=38&type=section&id=Note%2013.%20Stock%20Compensation%20Plans) Details the Company's stock incentive plan, compensation expense for stock awards, and restricted stock unit grants - The Company's 2014 Stock Incentive Plan makes available up to **240,000 shares** for various stock-based awards[120](index=120&type=chunk) - Compensation expense for stock awards totaled **$50 thousand** for the nine months ended September 30, 2020 (vs **$67 thousand** in 2019)[122](index=122&type=chunk) - **14,457 restricted stock units (RSUs)** were granted in Q1 2020, with **9,632** subject to a two-year vesting schedule. Unrecognized pre-tax compensation expense for RSUs was **$213 thousand** at September 30, 2020[124](index=124&type=chunk)[125](index=125&type=chunk) [Note 14. Accumulated Other Comprehensive Income (Loss)](index=40&type=section&id=Note%2014.%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Presents the balance and changes in accumulated other comprehensive income (loss), including unrealized gains and reclassification adjustments Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | Sep 30, 2020 | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | :----------- | | Balance | $3,432 | $1,144 | ($1,808) | Changes in AOCI (Nine Months Ended Sep 30, 2020, in thousands) | Component | Amount | | :-------------------------------- | :----- | | Unrealized holding gains on securities (net of tax) | $2,632 | | Reclassification adjustment (net of tax) | ($30) | | Change in fair value of cash flow hedges (net of tax) | $106 | | Total change during period | $2,708 | Reclassifications from AOCI to Earnings (Nine Months Ended Sep 30, 2020, in thousands) | Item | Amount | | :-------------------------------- | :----- | | Net securities gains reclassified into earnings | ($38) | | Related income tax expense | $8 |\ | Total reclassifications (net of tax) | ($30) | [Note 15. Revenue Recognition](index=42&type=section&id=Note%2015.%20Revenue%20Recognition) Breaks down noninterest income by revenue stream and explains the Company's revenue recognition policies for various services Noninterest Income by Revenue Stream (in thousands) | Revenue Stream | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Service charges on deposit accounts | $446 | $757 | $1,475 | $2,173 | | ATM and check card fees | $669 | $586 | $1,738 | $1,676 | | Wealth management fees | $573 | $477 | $1,610 | $1,372 | | Fees for other customer services | $323 | $177 | $767 | $505 | | Total in-scope of Topic 606 | $2,011 | $1,997 | $5,590 | $5,726 | | Total noninterest income | $2,201 | $2,191 | $6,073 | $6,211 | - Revenue recognition policies vary by service: monthly service fees are recognized over time, while overdraft/ATM fees are recognized at a point in time. Interchange and wealth management fees are generally recognized over time or upon completion[131](index=131&type=chunk)[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) [Note 16. Derivative Financial Instruments](index=44&type=section&id=Note%2016.%20Derivative%20Financial%20Instruments) Describes the Company's interest rate swap agreements designated as cash flow hedges to manage interest rate risk - On April 21, 2020, the Company entered into two interest rate swap agreements with a total notional amount of **$9.0 million** to convert variable-rate junior subordinated debt to fixed-rate debt[137](index=137&type=chunk)[141](index=141&type=chunk) - These swaps are designated as cash flow hedges to manage interest rate risk, with changes in fair value reported as a component of other comprehensive income[138](index=138&type=chunk) - The cash flow hedges had a fair value of **$134 thousand** (asset) at September 30, 2020[141](index=141&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=45&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's perspective on financial condition and results, covering performance analysis, accounting policies, lending, and COVID-19 impacts [Cautionary Statement Regarding Forward-Looking Statements](index=45&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Statements) Warns that the report contains forward-looking statements subject to risks, including the COVID-19 pandemic and economic conditions - The report contains forward-looking statements subject to significant risks and uncertainties, including the effects of the COVID-19 pandemic, general economic conditions, competition, and regulatory changes[142](index=142&type=chunk)[144](index=144&type=chunk) [Executive Overview](index=45&type=section&id=Executive%20Overview) Provides an overview of First National Corporation's business, primary revenue sources, and key financial impacts of the COVID-19 pandemic - First National Corporation is the bank holding company for First Bank, offering loan, deposit, and wealth management products and services to small/medium businesses, individuals, estates, and local government entities across Virginia[143](index=143&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk) - Net interest income is the primary revenue source (**70-80%** of total revenue), supplemented by noninterest income from service charges, wealth management, and ATM/check card fees. Salaries and employee benefits are the largest noninterest expense[148](index=148&type=chunk)[149](index=149&type=chunk) - The Bank originated **$76.6 million** in PPP loans and implemented a loan payment deferral program, which saw participation decrease from **$182.6 million** (**28%** of loans) at June 30, 2020, to **$22.6 million** (**3%** of loans) at September 30, 2020[151](index=151&type=chunk)[152](index=152&type=chunk) - Net income decreased by **$739 thousand** (**-29.6%**) for the three months and **$1.1 million** (**-16.7%**) for the nine months ended September 30, 2020, primarily due to a significant increase in the provision for loan losses[155](index=155&type=chunk)[156](index=156&type=chunk)[160](index=160&type=chunk)[161](index=161&type=chunk) [Non-GAAP Financial Measures](index=48&type=section&id=Non-GAAP%20Financial%20Measures) Presents key non-GAAP financial measures, including efficiency ratio and net interest margin, with reconciliation to GAAP figures Efficiency Ratio | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Efficiency ratio | 62.35% | 65.65% | 63.04% | 66.93% | Net Interest Margin | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Net interest margin | 3.41% | 3.87% | 3.58% | 3.91% | Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income (in thousands) | Metric | Sep 30, 2020 (3 months) | Sep 30, 2019 (3 months) | Sep 30, 2020 (9 months) | Sep 30, 2019 (9 months) | | :-------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Total net interest income (GAAP) | $7,574 | $7,071 | $22,011 | $20,935 | | Total tax-equivalent net interest income (Non-GAAP) | $7,623 | $7,123 | $22,158 | $21,091 | [Critical Accounting Policies](index=49&type=section&id=Critical%20Accounting%20Policies) Focuses on the allowance for loan losses as a critical accounting policy, detailing its estimation methodology and risk grading - The allowance for loan losses (ALL) is a critical accounting policy, inherently subjective and based on management's periodic review of loan collectability, historical experience, portfolio characteristics, and economic conditions[173](index=173&type=chunk)[174](index=174&type=chunk) - The ALL consists of a specific component for impaired loans (based on discounted cash flows, collateral value, or market price) and a general component for non-impaired loans (based on historical loss experience adjusted for qualitative factors)[177](index=177&type=chunk)[178](index=178&type=chunk) - The Company uses a risk grading matrix (pass, special mention, substandard, doubtful, loss) for loans, with regular reviews by Credit Administration and internal/external loan review processes[68](index=68&type=chunk)[174](index=174&type=chunk) [Lending Policies](index=50&type=section&id=Lending%20Policies) Describes the Bank's loan approval processes, portfolio segmentation, and underwriting considerations for various loan types - Loan approval limits are tiered by officer position, with oversight from the Management Loan Committee and Board Loan Committee, which also approves the Bank's Loan Policy and reviews risk management reports[179](index=179&type=chunk)[181](index=181&type=chunk) - The loan portfolio is segmented into Real Estate (Construction and Land Development, 1-4 Family Residential, Other Real Estate), Commercial and Industrial, and Consumer and Other loans, each with distinct risk characteristics and underwriting considerations[180](index=180&type=chunk)[233](index=233&type=chunk)[234](index=234&type=chunk)[235](index=235&type=chunk)[236](index=236&type=chunk)[237](index=237&type=chunk) - Construction and land development loans carry risks related to project completion and cost overruns, mitigated by limiting loan amounts, analyzing creditworthiness, and monitoring construction progress[185](index=185&type=chunk) - Commercial and industrial loans generally have higher risk due to reliance on business cash flow and less reliable collateral appraisals, while consumer loans are susceptible to individual financial instability and rapid collateral depreciation[189](index=189&type=chunk)[190](index=190&type=chunk) [Results of Operations](index=52&type=section&id=Results%20of%20Operations) Analyzes changes in net interest income, provision for loan losses, noninterest income, and noninterest expense for the reported periods - Net interest income increased by **$503 thousand** (**+7%**) for the three months and **$1.1 million** (**+5%**) for the nine months ended September 30, 2020, primarily due to a decrease in interest expense on deposits[194](index=194&type=chunk)[198](index=198&type=chunk) - The net interest margin decreased by **46 basis points** to **3.41%** for the three months and **33 basis points** to **3.58%** for the nine months, impacted by lower earning asset yields (PPP loans, increased lower-yielding deposits)[194](index=194&type=chunk)[197](index=197&type=chunk)[198](index=198&type=chunk)[200](index=200&type=chunk) - Provision for loan losses increased significantly to **$1.5 million** for the three months (from **$0**) and **$3.2 million** for the nine months (from **$200 thousand**), driven by increases in both general and specific reserve components due to pandemic impacts[211](index=211&type=chunk)[215](index=215&type=chunk) - Noninterest income saw a slight increase of **$10 thousand** (**+0.5%**) for the three months but a decrease of **$138 thousand** (**-2%**) for the nine months, primarily due to lower service charges on deposit accounts (overdraft fees) offset by higher ATM/check card and wealth management fees[218](index=218&type=chunk)[219](index=219&type=chunk) - Noninterest expense decreased by **$51 thousand** (**-1%**) for the three months and **$622 thousand** (**-3%**) for the nine months, mainly from lower salaries and employee benefits (including PPP loan cost deferrals), marketing, and other operating expenses[222](index=222&type=chunk)[223](index=223&type=chunk)[224](index=224&type=chunk) [Financial Condition](index=57&type=section&id=Financial%20Condition) Examines changes in total assets, liabilities, and shareholders' equity, along with non-performing assets, allowance for loan losses, liquidity, and capital - Total assets increased by **$142.7 million** to **$942.7 million** at September 30, 2020, primarily due to a **$71.2 million** increase in net loans (including **$73.7 million** in PPP loans) and a **$72.7 million** increase in interest-bearing deposits in banks[228](index=228&type=chunk) - Total liabilities increased by **$137.6 million** to **$860.5 million**, driven by a **$132.0 million** increase in total deposits (noninterest-bearing demand deposits up **$67.1 million**, savings/interest-bearing demand deposits up **$80.8 million**) and a **$5.0 million** increase in subordinated debt[229](index=229&type=chunk)[230](index=230&type=chunk) - Total shareholders' equity increased by **$5.0 million** to **$82.3 million**, supported by net income and a **$2.7 million** increase in accumulated other comprehensive income, partially offset by stock repurchases[231](index=231&type=chunk) - Non-performing assets totaled **$7.0 million** (**0.74%** of total assets) at September 30, 2020, up from **$1.5 million** (**0.18%**) at December 31, 2019, consisting solely of non-accrual loans[247](index=247&type=chunk)[248](index=248&type=chunk) - The allowance for loan losses increased to **$7.8 million** (**1.20%** of total loans) at September 30, 2020, from **$4.9 million** (**0.86%**) at December 31, 2019. Excluding PPP loans, the ALL was **1.34%** of total loans[251](index=251&type=chunk) - The Bank maintains sufficient liquidity, with **$169.8 million** in liquid assets and **$226.3 million** in non-deposit funding sources available at September 30, 2020[261](index=261&type=chunk)[262](index=262&type=chunk) - The Bank continues to meet all regulatory capital adequacy requirements and was **'well capitalized'** at September 30, 2020, with a capital conservation buffer of **7.34%**. The stock repurchase plan remained suspended due to pandemic uncertainty[268](index=268&type=chunk)[269](index=269&type=chunk)[275](index=275&type=chunk) [Contractual Obligations](index=63&type=section&id=Contractual%20Obligations) States that there have been no material changes to the Company's contractual obligations since the prior annual report - There have been no material changes to the Company's contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019[276](index=276&type=chunk) [Off-Balance Sheet Arrangements](index=63&type=section&id=Off-Balance%20Sheet%20Arrangements) Details off-balance sheet commitments, including credit extensions, standby letters of credit, and derivative financial instruments Off-Balance Sheet Commitments (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Commitments to extend credit | $112,200 | $92,500 | | Standby letters of credit | $10,600 | $11,000 | | Locked-rate mortgage loan commitments | $15,200 | N/A | - The Company uses interest rate swaps with a total notional amount of **$9.0 million** as cash flow hedges to convert variable-rate junior subordinated debt to fixed rates, with a fair value of **$134 thousand** (asset) at September 30, 2020[282](index=282&type=chunk)[283](index=283&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=64&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) States that quantitative and qualitative disclosures regarding market risk are not required for the Company - The Company is not required to provide quantitative and qualitative disclosures about market risk[285](index=285&type=chunk) [Item 4. Controls and Procedures](index=64&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were effective as of September 30, 2020[286](index=286&type=chunk) - No material changes in internal control over financial reporting were identified during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[287](index=287&type=chunk) PART II – OTHER INFORMATION Contains additional disclosures, including legal proceedings, risk factors, and equity sales information [Item 1. Legal Proceedings](index=64&type=section&id=Item%201.%20Legal%20Proceedings) No material pending legal proceedings against the Company, beyond routine litigation incidental to its business - No material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business[289](index=289&type=chunk) [Item 1A. Risk Factors](index=64&type=section&id=Item%201A.%20Risk%20Factors) Highlights significant, uncertain risks from the COVID-19 pandemic and related measures to the Company's business and financial condition - The ongoing COVID-19 pandemic and measures to prevent its spread may adversely affect the Company's business, financial condition, and operations; the extent of such impacts are highly uncertain and difficult to predict[291](index=291&type=chunk) - Potential adverse effects include credit losses from borrower financial stress, operational failures, decreased demand for products/services, and heightened levels of cyber and payment fraud[292](index=292&type=chunk)[296](index=296&type=chunk) - The rapidly changing nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on the Company's loan portfolio, increasing the risk that assumptions for the allowance for loan losses are incorrect[293](index=293&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=65&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Board authorized a stock repurchase plan for up to **$5 million** of common stock, with no repurchases made in Q3 2020 - The Board of Directors authorized a stock repurchase plan for up to **$5.0 million** of outstanding common stock through December 31, 2020[294](index=294&type=chunk) - No purchases of common stock were made during the three months ended September 30, 2020, pursuant to the stock repurchase plan[295](index=295&type=chunk) [Item 3. Defaults Upon Senior Securities](index=65&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported for the period - No defaults upon senior securities[296](index=296&type=chunk) [Item 4. Mine Safety Disclosures](index=65&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) No mine safety disclosures were reported - No mine safety disclosures[296](index=296&type=chunk) [Item 5. Other Information](index=65&type=section&id=Item%205.%20Other%20Information) No other information was reported in this section - No other information[296](index=296&type=chunk) [Item 6. Exhibits](index=65&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL formatted financial statements - Includes Certifications of Chief Executive Officer and Chief Financial Officer (Sections 302 and 1350)[297](index=297&type=chunk) - Includes XBRL formatted Consolidated Balance Sheets, Statements of Income, Comprehensive Income, Cash Flows, Shareholders' Equity, and Notes to Consolidated Financial Statements[300](index=300&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-23976 (Exact name of registrant as specified in its charter) Virginia 54-1232965 (State or other jurisdiction of incorporat ...

PART I – FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents unaudited consolidated financial statements and notes, detailing accounting policies and the initial impacts of the COVID-19 pandemic Consolidated Balance Sheet Summary (Unaudited) | (in thousands) | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$816,412** | **$800,048** | | Loans, net | $576,283 | $569,412 | | Securities available for sale | $128,660 | $120,983 | | **Total Liabilities** | **$737,894** | **$722,829** | | Total deposits | $720,627 | $706,442 | | **Total Shareholders' Equity** | **$78,518** | **$77,219** | Consolidated Statement of Income Summary (Unaudited) | (in thousands, except per share data) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net interest income | $7,026 | $6,899 | | Provision for loan losses | $900 | $— | | Noninterest income | $2,099 | $1,985 | | Noninterest expense | $6,144 | $6,098 | | **Net income** | **$1,705** | **$2,261** | | **Diluted EPS** | **$0.34** | **$0.46** | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20%28unaudited%29) These notes detail interim financial statements, significant risks, lending operations, asset quality, capital, liquidity, and financial instruments, emphasizing COVID-19 impacts - In response to the COVID-19 pandemic, the company is participating in the Paycheck Protection Program (PPP), having approved 575 loans totaling **$74.9 million** as of April 30, 2020[34](index=34&type=chunk) - The company implemented a payment deferral program for customers affected by the pandemic, executing 464 deferrals on loan balances of **$171.0 million** as of April 30, 2020. These are not considered troubled debt restructurings under interagency guidance[33](index=33&type=chunk) Allowance for Loan Losses Activity - Q1 2020 | (in thousands) | Amount | | :--- | :--- | | Beginning Balance, Dec 31, 2019 | $4,934 | | Charge-offs | ($328) | | Recoveries | $78 | | Provision for loan losses | $900 | | **Ending Balance, Mar 31, 2020** | **$5,584** | - On April 21, 2020, the company entered into two interest rate swap agreements with notional amounts of **$5.0 million** and **$4.0 million** to convert floating-rate junior subordinated debt to fixed-rate debt, designated as cash flow hedges[127](index=127&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q1 2020 financial results, emphasizing COVID-19's impact, including a significant loan loss provision, operational adjustments, and stable financial condition - Net income for Q1 2020 was **$1.7 million**, a decrease of **$556 thousand** from Q1 2019, primarily driven by a **$900 thousand provision for loan losses** related to the COVID-19 pandemic[147](index=147&type=chunk)[148](index=148&type=chunk) - The company suspended its stock repurchase program in March 2020 due to economic uncertainty. In Q1 2020, it repurchased **129,035 shares for $2.1 million**[140](index=140&type=chunk)[235](index=235&type=chunk) - The efficiency ratio improved to **66.50%** for Q1 2020 from **67.23%** in Q1 2019[153](index=153&type=chunk) Loan Portfolio Sectors with Expected Pressure from COVID-19 | Industry | Loan Balance (Mar 31, 2020) | Percent of Total Loans | | :--- | :--- | :--- | | Hospitality | $45,014 thousand | 7.74% | | Retail / shopping | $26,598 thousand | 4.57% | | Health care | $23,180 thousand | 3.98% | | **Total** | **$94,792 thousand** | **16.29%** | [Results of Operations](index=50&type=section&id=Results%20of%20Operations) Net interest income increased, but a significant loan loss provision was recorded due to the pandemic, while noninterest income and expenses saw modest changes - Net interest income rose to **$7.0 million** in Q1 2020 from **$6.9 million** in Q1 2019, as a 6% increase in average earning assets offset a **20 basis point decline** in the net interest margin to **3.77%**[176](index=176&type=chunk) - A provision for loan losses of **$900 thousand** was recorded in Q1 2020, with approximately **$700 thousand** attributed to adjustments in qualitative factors due to the pandemic's economic impact[184](index=184&type=chunk)[186](index=186&type=chunk) - Noninterest income increased by **$114 thousand (6%)** year-over-year, primarily due to an **$88 thousand (20%) increase** in wealth management fees from higher assets under management[187](index=187&type=chunk) [Financial Condition](index=54&type=section&id=Financial%20Condition) Total assets and net loans grew, while asset quality remained stable, though future risks in COVID-19 impacted sectors were identified - Total assets increased by **$16.4 million (2%)** to **$816.4 million** at March 31, 2020, compared to December 31, 2019[194](index=194&type=chunk) - Net loans grew by **$6.9 million (1%)** during Q1 2020, led by increases in commercial and industrial loans[197](index=197&type=chunk) - Non-performing assets were stable at **$1.5 million**, or **0.19% of total assets**, at March 31, 2020[211](index=211&type=chunk) - The allowance for loan losses increased to **0.96% of total loans** at March 31, 2020, up from **0.86%** at December 31, 2019[214](index=214&type=chunk) [Liquidity and Capital Resources](index=58&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital, exceeding regulatory requirements, but suspended its stock repurchase program due to pandemic uncertainty - The Bank had access to **$237.9 million** in non-deposit sources of funds at March 31, 2020, including **$146.7 million** from the FHLB[226](index=226&type=chunk) First Bank's Regulatory Capital Ratios (March 31, 2020) | Ratio | Value | | :--- | :--- | | Total capital to risk-weighted assets | 14.98% | | Tier 1 capital to risk-weighted assets | 14.02% | | Common equity Tier 1 capital to risk-weighted assets | 14.02% | | Tier 1 capital to average assets | 10.08% | | Capital conservation buffer ratio | 6.98% | - The Bank met all requirements to be categorized as **"well capitalized"** under prompt corrective action regulations as of March 31, 2020[232](index=232&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=61&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This disclosure is not required for the company for this reporting period - The company states that this disclosure is not required[245](index=245&type=chunk) [Controls and Procedures](index=61&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2020[246](index=246&type=chunk) - No changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, such controls were identified during the last fiscal quarter[247](index=247&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=63&type=section&id=Item%201.%20Legal%20Proceedings) The company is not a party to any material pending legal proceedings beyond routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business[250](index=250&type=chunk) [Risk Factors](index=63&type=page&id=Item%201A.Risk%20Factors) A new risk factor addresses the highly uncertain and potentially adverse effects of the COVID-19 pandemic on business, financial condition, and operations - A new risk factor has been added to address the ongoing COVID-19 pandemic, noting that its effects on the business, financial condition, and operations are **highly uncertain and difficult to predict**[252](index=252&type=chunk) - Specific pandemic-related risks include potential credit losses from borrower financial stress, operational disruptions, decreased demand for products and services, and **heightened cybersecurity and fraud threats**[253](index=253&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=64&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company details Q1 2020 stock repurchase activity, including the suspension of its $5 million plan due to pandemic uncertainty Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Shares Purchased | Average Price Paid Per Share | Total Shares Purchased as Part of Plan | Approx. Dollar Value Remaining in Plan | | :--- | :--- | :--- | :--- | :--- | | Jan 2020 | — | $— | — | $5,000 thousand | | Feb 2020 | 2,323 | $20.92 | 100 | $4,998 thousand | | Mar 2020 | 128,935 | $16.05 | 128,935 | $2,929 thousand | | **Total Q1** | **131,258** | **$16.14** | **129,035** | **$2,929 thousand** | [Defaults Upon Senior Securities](index=64&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) None reported - None[256](index=256&type=chunk) [Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) None reported - None[256](index=256&type=chunk) [Other Information](index=64&type=section&id=Item%205.%20Other%20Information) None reported - None[256](index=256&type=chunk) [Exhibits](index=65&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL financial statements - The filing includes CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 1350, as well as XBRL interactive data files[257](index=257&type=chunk)[258](index=258&type=chunk)

Financial Performance - Net income for the year ended December 31, 2019, decreased by $579 thousand to $9.6 million, or $1.92 per diluted share, compared to $10.1 million, or $2.04 per diluted share, for 2018[148] - Noninterest income decreased by $605 thousand, or 7%, primarily due to lower service charges on deposit accounts and income from bank-owned life insurance[149] - Net interest income increased by $384 thousand, or 1%, driven by higher average earning asset balances, despite a decrease in net interest margin by 5 basis points to 3.88%[150] - The efficiency ratio for 2019 was 65.28%, compared to 63.05% in 2018, indicating a decline in operational efficiency[153] - The return on average assets was 1.23% and return on average equity was 13.19% for 2019, down from 1.34% and 16.36% in 2018, respectively[148] - The interest rate spread was 3.60% for 2019, compared to 3.74% in 2018, indicating a decrease in profitability from interest-earning assets[1] - Noninterest income totaled $8,552 million in 2019, up from $9,157 million in 2018, reflecting a decrease of 6.6%[255] Loan and Asset Quality - The provision for loan losses was recorded at $450 thousand for 2019, down from $600 thousand in 2018, reflecting improved asset quality[151] - The allowance for loan losses is evaluated quarterly, considering factors such as trends in delinquencies, charge-offs, and current economic conditions[162] - The provision for loan losses was $450 million in 2019, down from $600 million in 2018, indicating a reduction of 25%[255] - The allowance for loan losses totaled $4.9 million at December 31, 2019, representing 0.86% of total loans[212] - Non-performing assets totaled $1.5 million at December 31, 2019, representing 0.18% of total assets[209] - The company experienced a decrease in net charge-offs, totaling $525 thousand in 2019, down from $917 thousand in 2018[1][2] - The ratio of net charge-offs to average loans outstanding was 0.09% in 2019, down from 0.17% in 2018[217] Asset and Liability Management - Total assets increased to $776.933 million at December 31, 2019, up from $754.457 million in 2018, representing a growth of 3.1%[1] - Total loans increased to $564.042 million in 2019, up from $530.165 million in 2018, marking a growth of 6.4%[1] - Total liabilities increased by $36.5 million to $722.8 million at December 31, 2019, compared to $686.3 million at December 31, 2018[201] - Total shareholders' equity increased by $10.5 million to $77.2 million at December 31, 2019, compared to $66.7 million at December 31, 2018[202] - As of December 31, 2019, total deposits increased to $706.4 million, up by $35.9 million from $670.6 million at the end of 2018[230] Interest Income and Expenses - Tax-equivalent net interest income for 2019 was $28,217 thousand, compared to $27,833 thousand in 2018[155] - The company achieved a net interest margin of 3.88% for 2019, slightly down from 3.93% in 2018, suggesting a tightening in the margin between interest income and interest expense[1] - The cost of funds was 0.70% for 2019, up from 0.51% in 2018, indicating an increase in the expense of funding sources[1] - Noninterest expenses rose by $557 thousand, or 2%, primarily due to higher salaries and employee benefits, marketing expenses, and legal fees[149] Capital Adequacy - The Bank's regulatory capital ratios met all adequacy requirements, including a common equity Tier 1 capital ratio of 7.0% as of December 31, 2019[246] - Common equity Tier 1 capital increased to $80,505 million in 2019 from $69,688 million in 2018, representing a growth of 11.6%[248] - Total risk-based capital rose to $85,439 million in 2019, up from $74,697 million in 2018, reflecting a 14.4% increase[248] - The Common equity Tier 1 capital ratio improved to 13.99% in 2019, compared to 12.71% in 2018, indicating a 10% increase[248] - The Tier 1 leverage ratio increased to 10.13% in 2019 from 9.26% in 2018, marking a 9.4% improvement[248] Risk Management - The Bank's loan policy includes approval limits for individual loan officers based on their position and experience, with oversight from the Board Loan Committee[166] - The Bank's commercial real estate loan underwriting criteria require examination of debt service coverage ratios and the borrower's creditworthiness[173] - The Company conducts independent reviews of loans within the portfolio annually to analyze loan risk ratings and validate specific reserves on impaired loans[168] - Construction and land development loans entail significant risks, including potential cost overruns and failure to complete construction[170] - The Bank's consumer lending includes unsecured loans and lines of credit, which may entail greater risk than residential mortgage loans[175]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-23976 (Exact name of registrant as specified in its charter) Virginia 54-1232965 (State or other jurisdiction of incor ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 112 West King Street, Strasburg, Virginia 22657 (Address of principal executive offices) (Zip Code) For the transition period from to (I.R.S. Employer Identification No.) Commission F ...