First National (FXNC) - 2020 Q4 - Annual Report

Part I Business 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] - 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][20] - 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] - 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][26] - 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] 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 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][73] - 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][103] - 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][132][134] - 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] - 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][98] - 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][114][116] Unresolved Staff Comments The company reports that it has no unresolved comments from the SEC staff - Not applicable[146] Properties 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] Legal Proceedings 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] Mine Safety Disclosures The company reports that there are no mine safety disclosures applicable to its operations - None[149] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - 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] - No common stock was repurchased during the three months ended December 31, 2020[155] Selected Financial Data 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 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][176] - The Bank actively participated in the Paycheck Protection Program (PPP), originating $76.6 million in loans during 2020[167] - 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][171] - 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][234] - 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] - 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][290] Quantitative and Qualitative Disclosures About Market Risk The company states that this disclosure is not required - Not required[301] Financial Statements and Supplementary Data 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] - 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][317] 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] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[527] Controls and Procedures 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] - Management assessed the Company's internal control over financial reporting as effective as of December 31, 2020, using the COSO framework[530] - 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] Other Information The company reports no other information in this section - None[532] Part III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Certain Relationships and Related Transactions, and Director Independence 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] Principal Accounting Fees and Services 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] Part IV Exhibits, Financial Statement Schedules 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] - 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] Form 10-K Summary The company has not provided a summary in this section of the Form 10-K - None[544]