First National Corporation Reports Record Earnings

STRASBURG, Va., Jan. 26, 2023 (GLOBE NEWSWIRE) -- First National Corporation (the “Company” or “First National”) (NASDAQ: FXNC), the bank holding company of First Bank (the “Bank”), reported unaudited consolidated net income of $4.8 million and diluted earnings per common share of $0.76 for the fourth quarter ended December 31, 2022. This compares to net income of $4.5 million and diluted earnings per common share of $0.71 for the third quarter of 2022.

For the year ended December 31, 2022, unaudited consolidated net income totaled $16.8 million and diluted earnings per common share totaled $2.68. This compares to net income of $10.4 million and diluted earnings per common share of $1.86 for the year ending December 31, 2021.

FOURTH QUARTER HIGHLIGHTS

Key highlights of the fourth quarter ended December 31, 2022, are as follows. Comparisons are to the linked quarterly period ended September 30, 2022, unless otherwise stated:

• Return on average assets was 1.37%
• Return on average equity was 18.38%
• Net interest margin improved to 3.70% from 3.58%
• Efficiency ratio improved to 59.56% from 61.10%
• Loans increased $14.0 million, or 6% annualized
• Nonperforming assets totaled 0.21% of total assets

“First National Corporation continued to deliver excellent financial results in the fourth quarter with 6% annualized loan growth, strong credit metrics, and an improved net interest margin and efficiency ratio,” said Scott C. Harvard, president and chief executive officer of First National. “The record results for the year reflect solid execution of recent strategic expansion initiatives and we expect those initiatives to continue to build long term value for our shareholders. The Company will remain vigilant in its credit underwriting and portfolio management going into a year of economic uncertainties. We believe the record earnings for 2022 validate our strategy of organic growth built on people and relationships, combined with strategic acquisitions.” 

NET INTEREST INCOME

For the fourth quarter of 2022, net interest income totaled $12.0 million, an increase of $283 thousand from $11.7 million for the third quarter of 2022 and was positively impacted by a higher interest rate environment and a continued change in the Company’s earning asset composition. The increase in net interest income was primarily a result of higher interest income and fees on loans and interest on deposits in banks, which were partially offset by an increase in interest expense on deposits. As a result, the net interest margin expanded by 12 basis points to 3.70%. The yield on earning assets increased 33-basis points, which exceeded the 21-basis point increase in the cost of funds. A change in the composition of average earning assets contributed to the increase in net interest income as average loans increased from 68% to 71% of average earning assets, while average interest-bearing deposits in banks decreased from 6% to 4% of average earning assets.

Net accretion of discounts on purchased loans was included in interest income and fees on loans and totaled $117 thousand in the fourth quarter of 2022 compared to $295 thousand in the third quarter of 2022. There was no accretion of Paycheck Protection Program (“PPP”) loan income, net of costs, for the fourth and third quarters of 2022.

ASSET QUALITY

Overview

Nonperforming assets (“NPAs”) as a percentage of total assets totaled 0.21% at December 31, 2022, compared to 0.15% at September 30, 2022, and 0.30% at December 31, 2021. Accruing past due loans as a percentage of total loans totaled 0.17% at December 31, 2022, which was a 10 basis point decrease compared to September 30, 2022 and was 22 basis points lower than at December 31, 2021. Net charge-offs totaled $95 thousand for the fourth quarter of 2022. The allowance for loan losses totaled $7.4 million, or 0.81% of total loans at December 31, 2022, which was an increase from $6.3 million, or 0.69% of total loans at September 30, 2022, and $5.7 million, or 0.69%, of total loans at December 31, 2021.

Nonperforming Assets

NPAs totaled $2.9 million at December 31, 2022, $2.1 million at September 30, 2022, and $4.2 million at December 31, 2021, which represented 0.21%, 0.15% and 0.30% of total assets, respectively. The following table shows a summary of NPA balances at the periods (dollars in thousands):

Past Due Loans

Past due loans still accruing interest totaled $1.5 million, or 0.17%, of total loans at December 31, 2022, compared to $2.4 million, or 0.27%, of total loans at September 30, 2022, and $3.2 million, or 0.39%, of total loans at December 31, 2021. Of the total past due loans still accruing interest, there were no loans past due 90 days or more at December 31, 2022, $306 thousand, or 0.03%, of total loans were past due 90 days or more at September 30, 2022, and there were no loans past due 90 days or more at December 31, 2021.

Net Charge-offs

Net charge-offs totaled $95 thousand for the quarter ended December 31, 2022, compared to $111 thousand for the quarter ended September 30, 2022, and $74 thousand for the fourth quarter of 2021.

Provision for Loan Losses

For the quarter ended December 31, 2022, the Company recorded a provision for loan losses of $1.3 million, compared to $200 thousand for the third quarter of 2022, and $350 thousand for the fourth quarter of 2021. The provision for loan losses for the fourth quarter of 2022 resulted from an $888 thousand specific reserve on impaired loans from one customer relationship, as well as the impact of loan growth on the general reserve component of the allowance for loan losses, changes in qualitative factors that increased the general reserve, and net charge-offs. The changes in qualitative factors were attributable to an increase in classified loans in the commercial and industrial, and the construction and land development loan categories.

Allowance for Loan Losses

At December 31, 2022, the allowance for loan losses totaled $7.4 million, which was a $1.1 million increase from $6.3 million as of September 30, 2022. The increase in the allowance for loan losses resulted from specific reserves on impaired loans from one customer relationship, the impact of loan growth, and changes in qualitative factors that impacted the general reserve component of the allowance for loan losses.

The allowance for loan losses as a percentage of total loans increased to 0.81% at December 31, 2022, compared to 0.69% at September 30, 2022, and 0.69% at December 31, 2021. The net discount on purchased loans totaled $2.5 million at December 31, 2022, compared to $2.7 million at September 30, 2022, and $3.7 million at December 31, 2021. The net discount on purchased loans is not included in the allowance for loan losses.

NONINTEREST INCOME

Noninterest income totaled $4.1 million for the fourth quarter of 2022, which was a $1.1 million increase compared to the third quarter of 2022, primarily from a $3.3 million increase in other operating income. The increase in other operating income resulted from a $2.9 million gain on sale of an interest in a broker-dealer of investments by First Bank Financial Services, Inc. and $556 thousand that was recovered from the full curtailment of a purchased loan. First Bank Financial Services, Inc. is a wholly owned subsidiary of the Bank.

The increases to other operating income were partially offset by a $2.0 million net loss on the sale of securities available for sale, which resulted from the sale of lower yielding securities, as well as a $77 thousand decrease in ATM and check card fee income, a $51 thousand decrease in brokered mortgage fee income, and a $46 thousand decrease in service charges on deposits. The decrease in ATM and check card fee income was attributable to an annual payment received and recorded in the third quarter of 2022.

NONINTEREST EXPENSE

Noninterest expense decreased $103 thousand, or 1%, to $9.0 million in the fourth quarter of 2022, compared to the third quarter of 2022, primarily from a $187 thousand decrease in other operating expense and a $203 thousand decrease in other real estate owned (income) expense, net. Other operating expense decreased primarily from higher expenses in the third quarter from director fees related to annual equity compensation as well as an increase in losses related to customer account fraud during the third quarter. The decrease in other real estate owned (income) expense, net, resulted from a gain on the sale of other real estate owned during the fourth quarter. 

The decreases in other operating expense and other real estate owned (income) expense, net, were partially offset by increases in several expense categories, including a $151 thousand increase in salaries and employee benefits, a $56 thousand increase in ATM and check card expense, and a $46 thousand increase in data processing expense. 

BALANCE SHEET

At December 31, 2022, assets totaled $1.4 billion, which was a decrease of $14.2 million, or 1%, from September 30, 2022, and a decrease of $20.1 million, or 1%, from December 31, 2021. Total assets decreased from the prior quarter primarily due to a $6.8 million decrease in interest-bearing deposits in banks, a $15.2 million decrease in total securities, and a $2.2 million decrease in other assets. The decreases were partially offset by a $12.9 million increase in loans, net of the allowance for loan losses.

Loans totaled $920.5 million at December 31, 2022, an increase of $14.0 million or 6% (annualized) from $906.5 million at September 30, 2022. Average loans totaled $914.8 million for the fourth quarter of 2022, an increase of $24.1 million or 11% (annualized) from the prior quarter. At December 31, 2022, loans increased $95.4 million, or 12%, from the prior year as of December 31, 2021, and quarterly average loans increased $95.4 million, or 12%, from the same period in the prior year.

At December 31, 2022, deposits totaled $1.2 billion, which was a $24.7 million, or 2%, decrease from September 30, 2022. Noninterest-bearing demand deposits decreased $11.0 million and savings and interest-bearing demand deposits decreased $16.8 million, while time deposits increased $3.1 million. Average deposits totaled $1.3 billion for the fourth quarter of 2022, a decrease of $7.8 million compared to the third quarter of 2022.

Total deposits decreased $7.4 million, or 1%, compared to the prior year as of December 31, 2021. Noninterest-bearing demand deposits increased $14.2 million, while savings and interest-bearing demand deposits decreased $12.9 million and time deposits decreased $8.7 million. Average deposits increased $38.3 million, or 3%, comparing the fourth quarter of 2022 to the fourth quarter of 2021.

The Company’s common equity to total assets capital ratio and the tangible common equity to tangible assets capital ratio increased during the fourth quarter compared to the prior quarter, but were lower than the prior year, primarily due to the unrealized losses on the available-for-sale securities portfolio recorded in other comprehensive (loss) income due to market interest rate increases during 2022.

During the fourth quarter of 2022, the Company declared and paid cash dividends of $0.14 per common share, consistent with the third quarter of 2022, and represented an increase of $0.02 per common share compared to cash dividends of $0.12 per share for the fourth quarter of 2021. The Bank was considered well-capitalized at December 31, 2022.

The following table provides capital ratios at the quarters ended:

TRANSFER OF SECURITIES FROM AVAILABLE FOR SALE TO HELD TO MATURITY

On September 1, 2022, the Bank transferred 24 securities designated as available for sale with a combined book value of $82.2 million, market value of $74.4 million, and unrealized loss of $7.8 million, to securities designated held to maturity. The unrealized loss is being amortized monthly over the life of the securities with an increase to the carrying value of securities and a decrease to the related accumulated other comprehensive loss, which is included in the shareholders’ equity section of the Company’s balance sheet. The amortization of the unrealized loss on the transferred securities totaled $436 thousand, or $345 thousand, net of tax, for the fourth quarter of 2022, and $157 thousand, or $124 thousand, net of tax, for the third quarter of 2022. The securities selected for transfer had larger potential decreases in their fair market values in higher interest rate environments than most other securities in the available-for-sale portfolio. Securities transferred included U.S. Treasury, agency, municipal and commercial mortgage-backed securities. The securities were transferred to mitigate the potential unfavorable impact that higher market interest rates may have on the carrying value of the securities and on the related accumulated other comprehensive loss. Securities designated as held to maturity are carried on the balance sheet at amortized cost, while securities designated as available for sale are carried at fair market value.

ACQUISITION OF THE BANK OF FINCASTLE

On July 1, 2021, the Company completed the acquisition of The Bank of Fincastle (“Fincastle”) for an aggregate purchase price of $33.8 million of cash and stock (the “Merger”). Fincastle was merged with and into First Bank. The former Fincastle branches operated as The Bank of Fincastle, a division of First Bank, until their systems were converted on October 16, 2021. There were no merger expenses in the fourth or third quarters of 2022. Merger expenses totaled $1.3 million in the fourth quarter of 2021.

ABOUT FIRST NATIONAL CORPORATION

First National Corporation (NASDAQ: FXNC) is the parent company and bank holding company of First Bank, a community bank that first opened for business in 1907 in Strasburg, Virginia. The Bank offers loan and deposit products and services through its website, www.fbvirginia.com, its mobile banking platform, a network of ATMs located throughout its market area, a loan production office, a customer service center in a retirement community, and 20 bank branch office locations located throughout the Shenandoah Valley, the central regions of Virginia, the Roanoke Valley, and in the city of Richmond. In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management. First Bank also owns First Bank Financial Services, Inc., which owns an interest in an entity that provides title insurance services.

FORWARD-LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to the Company’s future operations and are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including the rapidly changing uncertainties related to the COVID-19 pandemic and its potential adverse effect on the economy, our employees and customers, and our financial performance. For details on other factors that could affect expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and other filings with the Securities and Exchange Commission.

CONTACTS

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(1) The efficiency ratio is computed by dividing noninterest expense excluding other real estate owned income/expense, amortization of intangibles, gains and losses on disposal of premises and equipment, and merger related expenses by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding gains and losses on sales of securities and gains and losses on other assets.  The efficiency ratio is a non-GAAP financial measure that management believes provides investors with important information regarding operational efficiency.  Such information is not prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be construed as such. Management believes; however, such financial information is meaningful to the reader in understanding operational performance but cautions that such information not be viewed as a substitute for GAAP.

(2) Capital ratios are for First Bank.

(3) Nonperforming assets are comprised of nonaccrual loans and other real estate owned, net of selling costs.

(4) Tangible book value is calculated by subtracting goodwill and other intangibles from total shareholders' equity.

(5) Capital ratios presented are for First National Corporation.

(6)  The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing consolidated total common shareholders’ equity by consolidated total assets, after reducing both amounts by goodwill and other intangible assets. The TCE ratio is not required by GAAP or by bank regulations, but is a metric used by management to evaluate the adequacy of the Company’s capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP.

(7) Tax-equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21%. See the tables above for tax-equivalent net interest income and reconciliations of net interest income to tax-equivalent net interest income.