First National (FXNC) - 2023 Q4 - Annual Report

Part I Business First National Corporation, a Virginia-based bank holding company, operates through First Bank, providing diverse financial services across Virginia - First National Corporation is a bank holding company whose primary operating subsidiary is First Bank, a commercial bank chartered under Virginia law[18] - The Bank offers a full suite of loan (consumer, mortgage, commercial), deposit (checking, savings, treasury management), and wealth management products and services[21] - The Bank's primary market includes attractive areas along the I-81, I-66, and I-64 corridors in Virginia, serving diverse industries through 20 branch offices and digital platforms[21] - As of June 30, 2023, the Bank ranked third in its market area with an 11.13% share of total deposits[23] - At December 31, 2023, the company employed 224 full-time equivalent employees[25] Capital Ratio (First Bank) | Capital Ratio (First Bank) | December 31, 2023 | | :--- | :--- | | Total capital to risk-weighted assets | 14.05% | | Tier 1 capital to risk-weighted assets | 12.82% | | Common equity Tier 1 capital to risk-weighted assets | 12.82% | | Tier 1 capital to average assets | 9.31% | | Capital conservation buffer ratio | 6.05% | Risk Factors The company faces key risks including economic downturns, interest rate fluctuations, intense competition, cybersecurity threats, reliance on third-party vendors, and extensive regulatory changes - The company's business is directly affected by general economic conditions, with a deterioration potentially leading to increased loan delinquencies, problem assets, and reduced demand for services[66] - A significant concentration in loans secured by real estate, especially commercial real estate, exposes the company to risks from downturns in the real estate market[70][72] - Profitability is substantially dependent on the net interest margin, which is vulnerable to fluctuations in interest rates. Rising rates in 2022 and 2023 increased unrealized losses in the investment portfolio[87][88] - The company relies on third-party vendors for key components of its business infrastructure, such as data processing and online banking, creating inherent operational risks[100] - Cybersecurity breaches pose a significant threat, potentially compromising confidential information and exposing the company to liability and reputational damage[97] - The company is subject to extensive state and federal regulation, and changes in laws or their interpretation could adversely affect business operations and increase costs[117][124] - The company relies on dividends from its subsidiary, First Bank, for substantially all of its revenue, and these dividends are subject to regulatory restrictions[133] Unresolved Staff Comments The company reports that there are no unresolved staff comments - Not applicable[141] Cybersecurity The company's cybersecurity risk management is overseen by the Chief Risk Officer and the Audit Committee, following the NIST Framework with layered defenses and regular assessments - The cybersecurity program is managed by the Chief Risk Officer, who reports to the CEO and periodically to the Board's Audit Committee[143] - The information security program is structured around the National Institute of Standards and Technology (NIST) Cybersecurity Framework[144] - The company employs a layered defensive strategy, including preventative and detective tools, employee training, and regular assessments of infrastructure and systems[145] - The Audit Committee of the Board of Directors is responsible for overseeing the information security and technology governance programs, receiving quarterly reports from the Chief Risk Officer[149] Properties The company's headquarters is in Strasburg, Virginia, with First Bank operating 20 branches and other facilities, all in good condition - The Company's headquarters is at 112 West King Street, Strasburg, Virginia[151] - As of December 31, 2023, the Bank operated 20 branches, a loan production office, and two customer service centers[151] Legal Proceedings The company reports 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 or to which its property is subject[152] Mine Safety Disclosures This item is not applicable to the company - None[152] 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 under 'FXNC', with 802 shareholders of record, and repurchased 37,532 shares in 2023 - The company's common stock is traded on the Nasdaq Capital Market under the symbol "FXNC"[155] - As of March 19, 2024, there were 802 shareholders of record and approximately 1,143 beneficial owners[155] - The company repurchased 37,532 shares of common stock at a weighted average price of $15.14 during 2023 under a repurchase plan that expired at year-end[157] Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined in 2023 due to increased credit loss provisions, lower net interest income, and higher expenses, while assets grew and capital remained strong despite asset quality deterioration Financial Performance Summary | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $9.6 million | $16.8 million | | Diluted EPS | $1.53 | $2.68 | | Return on Average Assets | 0.71% | 1.19% | | Return on Average Equity | 8.59% | 15.87% | | Net Interest Margin | 3.41% | 3.44% | - The $7.2 million decrease in net income was driven by a $4.3 million increase in provision for credit losses, a $2.2 million decrease in net interest income, and a $1.6 million increase in noninterest expense[167] - The provision for credit losses increased to $6.2 million in 2023 from $1.9 million in 2022, with net charge-offs rising to $3.6 million, including $2.5 million related to a purchased third-party loan portfolio[169][225][259] - Total assets increased by $49.9 million to $1.42 billion, while total deposits decreased slightly by $7.6 million to $1.23 billion[233][234] - Non-performing assets increased to $6.8 million (0.48% of total assets) at year-end 2023, up from $2.9 million (0.21% of total assets) in 2022[246] Results of Operations Net interest income decreased by 5% in 2023 due to higher interest expense, while credit loss provisions surged, noninterest income fell, and noninterest expenses rose - Net interest income decreased by $2.2 million (5%) as the increase in cost of funds (interest expense up $10.5 million) exceeded the increase in yield on earning assets (interest income up $8.3 million)[216] - The provision for credit losses increased by $4.3 million to $6.2 million, comprised of a $6.0 million provision for loans, a $260 thousand provision for unfunded commitments, and a small recovery for securities[224] - Noninterest income decreased by $866 thousand (7%), primarily because 2022 results included a $2.9 million gain on the sale of an investment, partially offset by a $2.0 million loss on securities sales in that same year[228] - Noninterest expense increased by $1.6 million (5%), with notable increases in salaries and benefits (+$330 thousand), legal and professional fees (+$233 thousand), and ATM/check card expense (+$208 thousand)[230] Financial Condition Total assets grew to $1.42 billion driven by loan growth, but asset quality weakened, leading to increased credit loss allowances, while deposits shifted and capital remained strong - Total loans increased by $48.9 million to $969.4 million, with growth in other real estate (+$28.8 million) and residential real estate (+$12.9 million) loans[241] - Non-performing assets rose to $6.8 million, or 0.70% of total loans, compared to $2.7 million, or 0.29%, in the prior year, largely attributed to purchased commercial and industrial loans[246][259] - The allowance for credit losses on loans increased to $12.0 million (1.24% of total loans) from $7.4 million (0.81% of total loans) at year-end 2022[250] - The securities portfolio decreased by $14.8 million to $303.2 million and held gross unrealized losses of $31.5 million at year-end[260] - Total deposits decreased by $7.6 million, with noninterest-bearing demand deposits falling by $48.1 million while time deposits grew by $55.5 million[234][269] - The Bank remained well-capitalized, with a Total risk-based capital ratio of 14.05% and a Tier 1 leverage ratio of 9.31% at December 31, 2023[292][298] Financial Statements and Supplementary Data The audited financial statements for 2023 and 2022 reflect the CECL adoption, with total assets of $1.42 billion and net income of $9.6 million, and note a subsequent acquisition agreement - The company adopted the new credit loss accounting standard, ASU 2016-13 (CECL), on January 1, 2023, resulting in a $2.2 million increase to the allowance for credit losses on loans and a net decrease to retained earnings of $2.0 million[310][374] Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,419,295 | $1,369,383 | | Loans, net | $957,456 | $913,077 | | Total Deposits | $1,233,726 | $1,241,332 | | Total Liabilities | $1,303,024 | $1,261,023 | | Total Shareholders' Equity | $116,271 | $108,360 | Consolidated Income Statement Summary (in thousands) | Account | Year Ended Dec 31, 2023 (in thousands) | Year Ended Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $43,413 | $45,575 | | Provision for Credit Losses | $6,150 | $1,850 | | Net Income | $9,624 | $16,797 | - Subsequent Event: On March 25, 2024, the Company entered into an agreement to acquire Touchstone Bankshares, Inc. for approximately $47.0 million in stock; Touchstone had total assets of $658.7 million as of December 31, 2023[535][536] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[542] - There were no changes in the Company's internal control over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, internal controls[543] Part III Directors, Executive Compensation, and Corporate Governance Information on directors, executive compensation, corporate governance, and related matters is incorporated by reference from the 2024 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders[548][549][550][551][552] Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications - This section contains a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[556]