First National Corporation (NASDAQ: FXNC) — 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, deposits, 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, 2022, with comparisons to 2021. First Bank operated 20 branches, a loan production office, and two retirement-community customer service centers at year-end.
The 2022 results reflect the first full year of operations following the July 2021 acquisition of The Bank of Fincastle and the September 2021 acquisition of SmartBank’s Richmond-area loan portfolio and related assets.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $16.8 million | $10.4 million |
| Diluted earnings per share | $2.68 | $1.86 |
| Net interest income | $45.6 million | $34.8 million |
| Noninterest income | $12.6 million | $10.2 million |
| Noninterest expense | $35.6 million | $32.7 million |
| Provision for loan losses | $1.9 million | $(0.7) million recovery |
| Net interest margin | 3.44% | 3.13% |
| Return on average assets | 1.19% | 0.88% |
| Return on average equity | 15.87% | 10.30% |
| Efficiency ratio | 61.75% | 64.44% |
| Total assets | $1.369 billion | $1.389 billion |
| Total loans | $920.5 million | $825.1 million |
| Total deposits | $1.241 billion | $1.249 billion |
| Shareholders’ equity | $108.4 million | $117.0 million |
Net interest income represented the primary earnings driver. Total interest income rose 33% to $49.4 million, while interest expense increased 66% to $3.8 million as market rates increased. Average earning assets grew 19%, and the Federal funds rate increased from 0.25% to 4.50% during 2022.
Cash flow from operating activities was $26.8 million, compared with $7.9 million in 2021. Investing activities used $120.1 million, primarily reflecting $94.4 million of net loan growth and securities purchases. Financing activities used $15.7 million, including repayment of $5.0 million of subordinated debt and $3.3 million of dividends. Cash and cash equivalents declined to $66.9 million from $176.0 million.
Liquidity resources included $157.9 million of cash, bank deposits, securities, and loans maturing within one year, plus $287.3 million of available non-deposit funding capacity, including $188.8 million from the Federal Home Loan Bank, $51.0 million of correspondent-bank lines, and $47.5 million through the Federal Reserve Discount Window. Estimated uninsured deposits were $256.5 million.
At December 31, 2022, the Bank reported a 13.82% common equity Tier 1 ratio, 13.82% Tier 1 risk-based capital ratio, 14.60% total capital ratio, and 9.36% Tier 1 leverage ratio. Management stated that the Bank was well capitalized and met applicable capital requirements.
Material changes versus the prior comparable period
- Net income increased $6.4 million, or 62%, driven mainly by higher net interest income and noninterest income.
- Net interest income increased $10.7 million, or 31%, supported by loan growth, higher earning-asset yields, and a 31-basis-point expansion in net interest margin.
- Loans increased $95.4 million, or approximately 12%, with growth concentrated in residential real estate, other real estate, and commercial and industrial loans.
- Deposits decreased modestly by $7.4 million, although noninterest-bearing demand deposits increased $14.2 million.
- The allowance for loan losses increased to $7.4 million, or 0.81% of total loans, from $5.7 million, or 0.69%. Net charge-offs declined to $114 thousand from $1.1 million.
- Nonperforming assets declined to $2.9 million, or 0.21% of assets, from $4.2 million, or 0.30%. Nonaccrual loans increased slightly to $2.7 million from $2.3 million, while other real estate owned declined to $184 thousand from $1.8 million.
- Noninterest income benefited from a $2.9 million gain on the sale of an investment interest, but was reduced by a $2.0 million net loss on sales of available-for-sale securities and lower mortgage fees.
- Shareholders’ equity declined $8.6 million, primarily because of a $22.8 million reduction in accumulated other comprehensive income from unrealized securities losses caused by rising interest rates.
- The Company transferred securities with a $74.4 million fair value from available-for-sale to held-to-maturity, including $7.8 million of unrealized losses, to reduce the effect of rising rates on reported equity.
- The Company repaid $5.0 million of subordinated debt on January 1, 2022 and authorized a $5.0 million common-stock repurchase plan in the fourth quarter; no shares were repurchased under that plan by year-end.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management stated that liquidity was sufficient for depositor requirements and customer borrowing needs and that the Bank remained well capitalized. The Company continued quarterly common-stock dividends, but future dividends remain subject to earnings, liquidity, capital, regulatory, and contractual restrictions.
Management identified rising interest rates, inflation, possible recession, deposit competition, and pressure on net interest margin as important operating considerations. Higher rates supported asset yields but increased deposit costs and produced significant unrealized securities losses. Mortgage banking revenue declined materially as higher rates reduced mortgage demand.
Credit risks include the Company’s concentration in commercial real estate and other real-estate-secured loans, exposure to small and mid-sized businesses, construction and development lending, and the possibility that the allowance for loan losses will prove insufficient. The allowance calculation relies on subjective assumptions regarding economic conditions, collateral values, credit quality, and historical losses.
Other disclosed risks include deposit outflows and dependence on secondary funding sources, securities-market losses, cybersecurity and third-party technology risks, competition from banks and financial technology companies, regulatory and compliance costs, litigation, climate and severe-weather effects, LIBOR transition, and potential impairment of goodwill or other acquired intangibles.
The Company adopted the current expected credit loss standard, or CECL, on January 1, 2023 and recorded a $1.6 million after-tax reduction to retained earnings. The filing states that the Company expects to modify LIBOR-linked instruments before June 30, 2023 and does not expect the transition to have a material effect, although the ultimate impact remains subject to execution and market conditions.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that internal control over financial reporting was effective and identified no material weakness. No material pending legal proceedings were disclosed.
Most important facts an investor should verify
- Whether net interest margin remains resilient as deposit costs rise and excess liquidity declines.
- The level, mix, and maturity of uninsured deposits and the Company’s ability to retain them under stressed market conditions.
- Commercial real estate, construction, and other real-estate exposure, including concentrations by borrower, geography, property type, and loan-to-value metrics.
- Changes in nonaccrual loans, criticized or classified loans, modified loans, charge-offs, and the adequacy of the allowance under CECL.
- The effect of unrealized securities losses and any future securities sales on equity, regulatory capital, and liquidity.
- Actual availability and collateral requirements for the $287.3 million of disclosed secondary funding capacity.
- The sustainability of the $2.9 million investment-sale gain and the effect of lower mortgage banking activity on recurring noninterest income.
- The terms and cash-flow restrictions associated with subordinated and junior subordinated debt, including the potential effect on common dividends.
- Progress and costs associated with the CECL implementation and the transition from LIBOR to replacement rates.