First National Corporation 2021 Form 10-K Summary
Business Context and Reporting Period
First National Corporation is a Virginia bank holding company whose principal subsidiary, First Bank, provides commercial and consumer lending, deposit, mortgage, and wealth management services across Virginia’s Shenandoah Valley, Roanoke Valley, central Virginia, and Richmond markets. The filing covers the fiscal year ended December 31, 2021, with comparative information for 2020. The company operated 20 branches, a loan production office, and a customer service center at year-end.
Major 2021 strategic actions included the July 1 acquisition of The Bank of Fincastle for $33.8 million in cash and stock and the September 30 acquisition of $82.0 million of loans and certain fixed assets from SmartBank for $83.7 million in cash.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total assets | $1.389 billion | $950.9 million | +$438.5 million |
| Net interest income | $34.8 million | $29.5 million | +18% |
| Noninterest income | $10.2 million | $8.2 million | +$1.9 million |
| Net income | $10.4 million | $8.9 million | +$1.5 million |
| Diluted earnings per share | $1.86 | $1.82 | +$0.04 |
| Net interest margin | 3.13% | 3.50% | -37 basis points |
| Return on average assets | 0.88% | 0.98% | Down |
| Return on average equity | 10.30% | 10.92% | Down |
| Efficiency ratio | 64.44% | 62.52% | Higher |
| Operating cash flow | $7.9 million | $15.1 million | Down |
| Cash and cash equivalents | $176.0 million | $127.3 million | +$48.7 million |
Net interest income benefited from a $274.0 million increase in average earning assets, lower deposit funding costs, $1.3 million of additional PPP fee accretion, and $408 thousand of acquired-loan discount accretion. These benefits were partly offset by lower earning-asset yields and a shift toward lower-yielding securities and bank deposits.
The company recorded a $650 thousand recovery of loan losses in 2021 versus a $3.0 million provision in 2020. Net charge-offs increased to $1.1 million from $449 thousand. Noninterest expense rose 38% to $32.7 million, including $3.5 million of merger-related expenses. Salaries and employee benefits represented 54% of noninterest expense.
At December 31, 2021, loans net of the allowance were $819.4 million, securities were $324.7 million, deposits were $1.249 billion, and shareholders’ equity was $117.0 million. The allowance for loan losses was $5.7 million, or 0.69% of total loans, compared with $7.5 million, or 1.19%, in 2020.
Material Changes Versus the Prior Comparable Period
- Total assets increased 46%, principally due to the Fincastle acquisition, the SmartBank loan portfolio acquisition, loan growth, and a $168.4 million increase in securities.
- Total loans increased $197.0 million to $825.1 million before the allowance. Commercial real estate loans increased $118.0 million and residential real estate loans increased $56.2 million.
- Total deposits increased $406.3 million, including $236.3 million assumed from Fincastle. Noninterest-bearing demand deposits increased $150.0 million and interest-bearing deposits increased $211.0 million; time deposits declined $45.4 million.
- Shareholders’ equity increased $32.1 million, primarily from the issuance of 1,348,065 shares to Fincastle shareholders and retained earnings. The company paid $0.48 per common share in dividends versus $0.44 in 2020.
- Nonperforming assets declined to $4.2 million, or 0.30% of total assets, from $6.7 million, or 0.71%. However, year-end 2021 included $1.8 million of other real estate owned, compared with none in 2020.
- Accumulated other comprehensive income declined to $298 thousand from $3.4 million, primarily due to unrealized losses on available-for-sale securities as interest rates and market values changed.
- No common stock repurchases occurred during the fourth quarter of 2021, and no new repurchase plan had been authorized at year-end.
Debt, Liquidity, Capital, and Contingencies
The company reported $9.993 million of subordinated debt and $9.279 million of junior subordinated debt at year-end. The $5.0 million subordinated note issued in 2015 was prepaid on January 1, 2022. The company remained current on interest payments and had no borrowings outstanding under its available FHLB and other borrowing lines.
Available liquidity included $268.1 million of cash, bank deposits, securities, and loans maturing within one year, plus $240.4 million of available non-deposit funding, including $155.7 million from the Federal Home Loan Bank, $51.0 million of correspondent-bank federal funds lines, and $33.7 million through the Federal Reserve Discount Window. Estimated uninsured deposits were $246.0 million.
First Bank remained well capitalized. Its year-end regulatory ratios were 14.09% common equity Tier 1, 14.09% Tier 1, 14.76% total capital, and 8.82% Tier 1 leverage. The capital conservation buffer was 6.76%.
Off-balance-sheet credit commitments totaled $161.4 million, standby letters of credit totaled $18.9 million, and locked-rate mortgage commitments totaled $4.6 million. The company also maintained $9.0 million of interest-rate swaps designated as cash-flow hedges.
Outlook, Management Commentary, Risks, and Unusual Items
- Management expected Fincastle cost savings to be realized as integration was completed during 2022 and estimated approximately $20 thousand of additional Fincastle merger costs in the first and second quarters of 2022. No additional SmartBank acquisition costs were anticipated.
- PPP fee accretion was expected to decline significantly after 2021; $367 thousand of deferred PPP income remained unrecognized at year-end.
- The company stated that all pandemic-related payment deferrals had ended by year-end. Commercial real estate loans totaling $11.5 million remained modified to permit interest-only payments, with management reporting that the loans were performing or had resumed regular payments.
- COVID-19 remained a risk to borrower credit quality, loan demand, noninterest income, operating expenses, liquidity, and capital. Management cautioned that government support and loan accommodations may have delayed recognition of credit deterioration.
- Key ongoing risks include concentration in commercial and other real estate lending, interest-rate and net interest margin pressure, deposit outflows, competition, cybersecurity and third-party technology risks, acquisition integration, regulatory changes, litigation, and the transition away from LIBOR.
- The company is preparing for adoption of the current expected credit loss standard, which is expected to apply beginning January 1, 2023 for this smaller reporting company. The ultimate impact on reserves, capital, and earnings was not yet clear.
- Management assessed disclosure controls and internal control over financial reporting as effective at December 31, 2021, with no material weaknesses identified. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Most Important Facts for Investors to Verify
- Whether the Fincastle and SmartBank acquisitions produce the expected revenue synergies, cost savings, customer retention, and credit performance.
- Whether the lower allowance ratio of 0.69% adequately reflects risks in the expanded commercial real estate and acquired-loan portfolios.
- Future net interest margin performance as interest rates, deposit pricing, loan yields, and securities balances change.
- Trends in nonperforming assets, modified commercial real estate loans, charge-offs, and provision expense after pandemic relief programs ended.
- Actual liquidity and deposit stability, including the proportion and behavior of uninsured deposits.
- The quantified effect of CECL adoption, LIBOR transition, and any resulting changes to capital or earnings.
- The company’s ability to maintain dividends while servicing subordinated and junior subordinated debt and complying with regulatory capital requirements.