First National Corporation 2023 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, wealth management and related services across Virginia markets including the Shenandoah, Roanoke and Richmond regions. The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022. The company operated 20 branches, one loan production office and two retirement-community customer service centers.
Financial Performance and Condition
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net income | $9.6 million | $16.8 million | Down $7.2 million |
| Diluted earnings per share | $1.53 | $2.68 | Down $1.15 |
| Net interest income | $43.4 million | $45.6 million | Down 5% |
| Provision for credit losses | $6.2 million | $1.9 million | Up $4.3 million |
| Noninterest income | $11.8 million | $12.6 million | Down 7% |
| Noninterest expense | $37.2 million | $35.6 million | Up 5% |
| Net interest margin | 3.41% | 3.44% | Down 3 basis points |
| Return on average assets | 0.71% | 1.19% | Decreased |
| Return on average equity | 8.59% | 15.87% | Decreased |
| Efficiency ratio | 67.69% | 61.75% | Increased |
- Total assets increased to $1.419 billion from $1.369 billion. Loans increased to $969.4 million from $920.5 million, while net loans were $957.5 million after the allowance for credit losses.
- Total deposits were $1.234 billion, down modestly from $1.241 billion. The deposit mix shifted toward higher-cost time deposits, which increased deposit funding costs materially.
- Shareholders’ equity increased to $116.3 million from $108.4 million. Book value per share increased to $18.06 from $16.79.
- Cash and cash equivalents ended at $87.2 million, compared with $66.9 million at December 31, 2022.
- Operating activities provided $16.4 million of cash, investing activities used $34.3 million, and financing activities provided $38.2 million. The increase in financing cash flow primarily reflected $50.0 million borrowed through the Federal Reserve Bank Term Funding Program.
- Total available liquidity, including cash, eligible securities and credit lines, was $512.7 million at year-end. Available credit lines totaled $351.4 million, and there were no borrowings on those lines at year-end.
- Other borrowings included $50.0 million of Federal Reserve borrowing at a fixed 4.85% rate, maturing December 26, 2024. The company also had $5.0 million of subordinated debt and $9.3 million of junior subordinated debt.
- The Bank remained well capitalized. Year-end ratios were 12.82% common equity Tier 1, 12.82% Tier 1 risk-based capital, 14.05% total risk-based capital and 9.31% Tier 1 leverage.
Material Changes Versus the Prior Comparable Period
- Profitability deteriorated primarily because deposit costs rose sharply, credit-loss provisions increased and operating expenses grew. Interest income increased $8.3 million, but interest expense increased $10.5 million.
- Average loan balances increased 7% and loan yields increased 48 basis points, but the cost of interest-bearing deposits increased 126 basis points. Average earning assets declined 4%.
- The allowance for credit losses on loans increased to $12.0 million, or 1.24% of loans, from $7.4 million, or 0.81%. Net charge-offs increased to $3.6 million from $114 thousand.
- Nonperforming assets increased to $6.8 million, or 0.48% of total assets, from $2.9 million. Nonaccrual loans were $6.8 million, including $6.2 million of commercial and industrial loans; $524 thousand of loans were more than 90 days past due and still accruing.
- Noninterest income was affected by the absence of a $2.9 million gain on the sale of an investment recognized in 2022. Mortgage-related fees declined 51% because higher interest rates reduced mortgage demand, while service charges, card fees and wealth management fees increased modestly.
- The company adopted the CECL credit-loss standard on January 1, 2023. The adoption increased loan reserves by $2.2 million, established other reserves and reduced retained earnings by approximately $2.0 million after tax.
- The company recorded $3.8 million of other comprehensive income in 2023, reversing part of the $22.8 million loss recorded in 2022, primarily because of improved values in the securities portfolio.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings, revenue or margin guidance. Management describes the interest-rate environment, deposit competition, credit quality and economic conditions as key drivers of future performance.
- Management expects credit-loss provisions to fluctuate because of economic uncertainty, loan growth, portfolio risk characteristics and changes in forecasts. The allowance calculation is a critical accounting estimate and was identified as a critical audit matter.
- The loan portfolio is concentrated in real estate, including commercial real estate, construction and development loans. Declines in property values, occupancy, borrower cash flow or local economic activity could increase defaults, provisions and charge-offs.
- The company has exposure to loans purchased through a third-party lending program for health care professionals. In the fourth quarter, it charged off $2.5 million related to loans and unamortized premiums from that program. At year-end, $2.4 million of those loans were nonaccrual.
- The securities portfolio had approximately $31.5 million of gross unrealized losses at year-end, primarily attributable to higher interest rates. Management concluded that the losses were not credit-related and did not record an allowance for available-for-sale securities.
- Estimated uninsured deposits totaled $368.2 million, including $286.2 million excluding municipal deposits. Deposit outflows or increased reliance on wholesale funding could pressure liquidity and net interest margin.
- The company maintained $207.0 million of commitments to extend credit, standby letters of credit and rate-lock commitments. These commitments create potential future funding and credit exposure.
- Cybersecurity, third-party service providers, regulatory compliance, interest-rate changes, competition, litigation, climate-related effects and broader economic deterioration remain identified risks. Management reported no material cybersecurity impact and no material pending legal proceedings.
- On March 25, 2024, after year-end, the company agreed to acquire Touchstone Bankshares, Inc. for approximately $47.0 million in stock. The transaction is subject to shareholder and regulatory approvals and is expected to involve approximately 2.7 million new shares. Touchstone reported year-end 2023 assets of $658.7 million, gross loans of $508.8 million and deposits of $542.2 million.
- The company repurchased 37,532 shares in 2023 at a weighted average price of $15.14. The filing states that no shares were repurchased during the fourth quarter.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2023, with no material weaknesses identified. The auditor issued an unqualified opinion on the financial statements.
Most Important Facts for Investors to Verify
- Assess whether the increase in nonaccrual commercial and industrial loans and the third-party lending program charge-offs represent isolated issues or an emerging credit trend.
- Monitor deposit retention, the shift from noninterest-bearing deposits to time deposits, funding costs and the effect on net interest margin.
- Evaluate the liquidity implications and maturity risk of the $50.0 million Federal Reserve borrowing due in December 2024 and the level of uninsured deposits.
- Review the fair value sensitivity of the securities portfolio, including approximately $31.5 million of gross unrealized losses and the effect of changing interest rates on tangible equity.
- Examine the assumptions supporting the $12.0 million allowance for credit losses, including commercial real estate concentrations and CECL forecasts.
- Confirm the terms, regulatory approvals, expected dilution, purchase accounting and integration risks associated with the proposed Touchstone acquisition.
- Reconcile reported liquidity measures with immediately available collateral, borrowing capacity and any restrictions on transferring funds from First Bank to the parent company.