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):

 December 31,
2022
September 30,
2022
December 31,
2021
Nonaccrual loans$2,673$    566$2,304
Other real estate owned, net 185 1,578 1,848
Total nonperforming assets$2,858$2,144$4,152

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:

 December 31,
2022
September 30,
2022
December 31,
2021
Total capital ratio (2)14.60%14.18%14.76%
Tier 1 capital ratio (2)13.82%13.52%14.09%
Common equity Tier 1 capital ratio (2)13.82%13.52%14.09%
Leverage ratio (2)9.57%9.27%8.82%
Common equity to total assets (5)7.91%7.16%8.42%
Tangible common equity to tangible assets (5) (6)7.70%6.95%8.21%

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

Scott C. Harvard M. Shane Bell
President and CEO Executive Vice President and CFO
(540) 465-9121 (540) 465-9121
sharvard@fbvirginia.com sbell@fbvirginia.com
   

 FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Quarter Ended 
  December
31,
  September
30,
  June 30,  March 31,  December
31,
 
  2022  2022  2022  2022  2021 
Income Statement                    
Interest income                    
Interest and fees on loans $11,502  $10,759  $9,963  $9,496  $9,365 
Interest on deposits in banks  522   380   251   70   64 
Interest on federal funds sold              2 
Interest on securities                    
Taxable interest  1,381   1,323   1,295   1,132   920 
Tax-exempt interest  308   307   309   305   299 
Dividends  27   23   21   21   23 
Total interest income $13,740  $12,792  $11,839  $11,024  $10,673 
Interest expense                    
Interest on deposits $1,593  $927  $413  $340  $355 
Interest on subordinated debt  69   70   69   69   155 
Interest on junior subordinated debt  68   68   67   67   68 
Total interest expense $1,730  $1,065  $549  $476  $578 
Net interest income $12,010  $11,727  $11,290  $10,548  $10,095 
Provision for loan losses  1,250   200   400      350 
Net interest income after provision for loan losses $10,760  $11,527  $10,890  $10,548  $9,745 
Noninterest income                    
Service charges on deposit accounts $662  $708  $698  $609  $625 
ATM and check card fees  838   915   797   750   894 
Wealth management fees  706   739   760   803   716 
Fees for other customer services  238   180   188   233   176 
Brokered mortgage fees  21   72   58   94   123 
Income from bank owned life insurance  155   166   131   144   152 
Net (losses) on securities available for sale  (2,004)            
Other operating income  3,516   247   148   78   275 
Total noninterest income $4,132  $3,027  $2,780  $2,711  $2,961 
Noninterest expense                    
Salaries and employee benefits $5,325  $5,174  $5,086  $5,124  $5,099 
Occupancy  562   539   545   572   510 
Equipment  575   546   620   559   527 
Marketing  228   211   223   151   179 
Supplies  144   117   131   136   168 
Legal and professional fees  339   361   381   333   731 
ATM and check card expense  388   332   347   303   317 
FDIC assessment  70   109   132   152   112 
Bank franchise tax  238   238   238   216   172 
Data processing expense  289   243   221   236   1271 
Amortization expense  4   5   5   5   4 
Other real estate owned (income) expense, net  (189)  14   41   28   12 
Other operating expense  1,007   1,194   948   829   924 
Total noninterest expense $8,980  $9,083  $8,918  $8,644  $10,026 
Income before income taxes $5,912  $5,471  $4,752  $4,615  $2,680 
Income tax expense  1,132   1,017   917   886   497 
Net income $4,780  $4,454  $3,835  $3,729  $2,183 

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Quarter Ended 
  December
31,
  September
30,
  June 30,  March 31,  December
31,
 
  2022  2022  2022  2022  2021 
Common Share and Per Common Share Data                    
Earnings per common share, basic $0.76  $0.71  $0.61  $0.60  $0.35 
Weighted average shares, basic  6,262,821   6,257,040   6,250,329   6,238,973   6,226,838 
Earnings per common share, diluted $0.76  $0.71  $0.61  $0.60  $0.35 
Weighted average shares, diluted  6,272,409   6,264,107   6,257,479   6,245,704   6,235,907 
Shares outstanding at period end  6,264,912   6,262,381   6,252,147   6,249,784   6,228,176 
Tangible book value at period end (4) $16.79  $15.31  $15.54  $16.54  $18.28 
Cash dividends $0.14  $0.14  $0.14  $0.14  $0.12 
                     
Key Performance Ratios                    
Return on average assets  1.37%  1.27%  1.08%  1.06%  0.63%
Return on average equity  18.38%  17.27%  15.04%  13.40%  7.44%
Net interest margin  3.70%  3.58%  3.42%  3.19%  3.13%
Efficiency ratio (1)  59.56%  61.10%  62.69%  64.36%  64.69%
                     
Average Balances                    
Average assets $1,386,841  $1,393,308  $1,419,878  $1,430,524  $1,366,855 
Average earning assets  1,297,223   1,309,794   1,334,976   1,352,311   1,289,977 
Average shareholders’ equity  103,132   102,341   102,269   112,822   116,511 
                     
Asset Quality                    
Loan charge-offs $135  $181  $107  $106  $185 
Loan recoveries  40   70   81   224   111 
Net charge-offs (recoveries)  95   111   26   (118)  74 
Non-accrual loans  2,673   566   442   2,130   2,304 
Other real estate owned, net  185   1,578   1,665   1,767   1,848 
Nonperforming assets (3)  2,858   2,144   2,107   3,897   4,152 
Loans 30 to 89 days past due, accruing  1,532   2,117   1,572   2,105   3,235 
Loans over 90 days past due, accruing     306   91   52    
Troubled debt restructurings, accruing               
Special mention loans  1,959   3,183          
Substandard loans, accruing  301   304   308   311   315 
                     
Capital Ratios (2)                    
Total capital $139,549  $134,882  $131,624  $128,567  $125,934 
Tier 1 capital  132,103   128,590   125,422   122,739   120,224 
Common equity tier 1 capital  132,103   128,590   125,422   122,739   120,224 
Total capital to risk-weighted assets  14.60%  14.18%  14.23%  14.44%  14.76%
Tier 1 capital to risk-weighted assets  13.82%  13.52%  13.56%  13.79%  14.09%
Common equity tier 1 capital to risk-weighted assets  13.82%  13.52%  13.56%  13.79%  14.09%
Leverage ratio  9.57%  9.27%  8.87%  8.61%  8.82%

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Quarter Ended 
  December
31,
  September
30,
  June 30,  March 31,  December
31,
 
  2022  2022  2022  2022  2021 
Balance Sheet                    
Cash and due from banks $20,784  $22,809  $19,886  $19,989  $18,725 
Interest-bearing deposits in banks  46,130   52,976   104,529   129,801   157,281 
Securities available for sale, at fair value  162,907   176,403   264,750   284,893   289,495 
Securities held to maturity, at amortized cost  153,158   154,894   77,151   81,640   33,441 
Restricted securities, at cost  1,908   1,908   1,908   1,908   1,813 
Loans, net of allowance for loan losses  913,076   900,222   873,887   830,595   819,408 
Other real estate owned, net  185   1,578   1,665   1,767   1,848 
Premises and equipment, net  21,876   21,693   22,118   22,278   22,403 
Accrued interest receivable  4,543   4,247   4,154   4,056   3,903 
Bank owned life insurance  24,531   24,375   24,569   24,438   24,294 
Goodwill  3,030   3,030   3,030   3,030   3,030 
Core deposit intangibles, net  136   140   145   150   154 
Other assets  17,119   19,320   16,898   13,117   13,641 
Total assets $1,369,383  $1,383,595  $1,414,690  $1,417,662  $1,389,436 
                     
Noninterest-bearing demand deposits $427,344  $438,306  $431,292  $417,776  $413,188 
Savings and interest-bearing demand deposits  677,139   693,970   731,125   734,051   689,998 
Time deposits  136,849   133,770   133,733   141,065   145,566 
Total deposits $1,241,332  $1,266,046  $1,296,150  $1,292,892  $1,248,752 
Subordinated debt, net  4,995   4,995   4,994   4,994   9,993 
Junior subordinated debt  9,279   9,279   9,279   9,279   9,279 
Accrued interest payable and other liabilities  5,417   4,198   3,952   3,934   4,373 
Total liabilities $1,261,023  $1,284,518  $1,314,375  $1,311,099  $1,272,397 
                     
Preferred stock $  $  $  $  $ 
Common stock  7,831   7,828   7,815   7,812   7,785 
Surplus  32,716   32,620   32,398   32,298   31,966 
Retained earnings  90,284   86,382   82,804   79,845   76,990 
Accumulated other comprehensive (loss) income, net  (22,471)  (27,753)  (22,702)  (13,392)  298 
Total shareholders’ equity $108,360  $99,077  $100,315  $106,563  $117,039 
Total liabilities and shareholders’ equity $1,369,383  $1,383,595  $1,414,690  $1,417,662  $1,389,436 
                     
Loan Data                    
Mortgage real estate loans:                    
Construction and land development $51,840  $51,352  $49,118  $49,308  $55,721 
Secured by farmland  3,343   3,432   3,169   3,555   3708 
Secured by 1-4 family residential  331,421   317,414   312,082   290,408   291,990 
Other real estate loans  415,112   414,072   397,868   380,635   361,213 
Loans to farmers (except those secured by real estate)  900   745   769   937   985 
Commercial and industrial loans (except those secured by real estate)  110,325   111,400   108,780   102,745   98,820 
Consumer installment loans  4,128   4,192   4,230   4,602   4,963 
Deposit overdrafts  197   163   292   205   175 
All other loans  3,256   3,744   3,781   4,028   7,543 
Total loans $920,522  $906,514  $880,089  $836,423  $825,118 
Allowance for loan losses  (7,446)  (6,292)  (6,202)  (5,828)  (5,710)
Loans, net $913,076  $900,222  $873,887  $830,595  $819,408 

FIRST NATIONAL CORPORATION
Quarterly Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Quarter Ended 
  December
31,
  September
30,
  June 30,  March 31,  December
31,
 
  2022  2022  2022  2022  2021 
Reconciliation of Tax-Equivalent Net Interest Income (7)                    
GAAP measures:                    
Interest income – loans $11,502  $10,759  $9,963  $9,496  $9,365 
Interest income – investments and other  2,238   2,033   1,876   1,528   1,308 
Interest expense – deposits  (1,593)  (927)  (413)  (340)  (355)
Interest expense – subordinated debt  (69)  (70)  (69)  (69)  (155)
Interest expense – junior subordinated debt  (68)  (68)  (67)  (67)  (68)
Total net interest income $12,010  $11,727  $11,290  $10,548  $10,095 
Non-GAAP measures:                    
Tax benefit realized on non-taxable interest income – loans $  $  $  $8  $8 
Tax benefit realized on non-taxable interest income – municipal securities  82   82   82   81   80 
Total tax benefit realized on non-taxable interest income $82  $82  $82  $89  $88 
Total tax-equivalent net interest income $12,092  $11,809  $11,372  $10,637  $10,183 

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Year Ended 
  December 31,  December 31, 
  2022  2021 
Income Statement        
Interest income        
Interest and fees on loans $41,720  $32,797 
Interest on deposits in banks  1,223   213 
Interest on federal funds sold     10 
Interest on securities        
Taxable interest  5,131   3,100 
Tax-exempt interest  1,229   936 
Dividends  92   88 
Total interest income $49,395  $37,144 
Interest expense        
Interest on deposits $3,273  $1,415 
Interest on subordinated debt  277   619 
Interest on junior subordinated debt  270   270 
Total interest expense $3,820  $2,304 
Net interest income $45,575  $34,840 
Provision for (recovery of) loan losses  1,850   (650)
Net interest income after provision for (recovery of) loan losses $43,725  $35,490 
Noninterest income        
Service charges on deposit accounts $2,677  $2,061 
ATM and check card fees  3,300   2,930 
Wealth management fees  3,008   2,712 
Fees for other customer services  839   787 
Brokered mortgage fees  245   539 
Income from bank owned life insurance  596   526 
Net (losses) gains on securities available for sale  (2,004)  37 
Net gains on sale of loans     25 
Other operating income  3,989   570 
Total noninterest income $12,650  $10,187 
Noninterest expense        
Salaries and employee benefits $20,709  $17,792 
Occupancy  2,218   1,856 
Equipment  2,300   1,910 
Marketing  813   666 
Supplies  528   509 
Legal and professional fees  1,414   2,537 
ATM and check card expense  1,370   1,145 
FDIC assessment  463   346 
Bank franchise tax  930   665 
Data processing expense  989   2,156 
Amortization expense  19   28 
Other real estate owned (income) expense, net  (106)  26 
Other operating expense  3,978   3,096 
Total noninterest expense $35,625  $32,732 
Income before income taxes $20,750  $12,945 
Income tax expense  3,952   2,586 
Net income $16,798  $10,359 

FIRST NATIONAL CORPORATION
Year-to-Date Performance Summary
(in thousands, except share and per share data)

  (unaudited) 
  For the Year Ended 
  December 31,  December 31, 
  2022  2021 
Common Share and Per Common Share Data        
Earnings per common share, basic $2.69  $1.87 
Weighted average shares, basic  6,252,369   5,550,589 
Earnings per common share, diluted $2.68  $1.86 
Weighted average shares, diluted  6,259,357   5,559,082 
Shares outstanding at period end  6,264,912   6,228,176 
Tangible book value at period end $16.79  $18.28 
Cash dividends $0.56  $0.48 
         
Key Performance Ratios        
Return on average assets  1.19%  0.88%
Return on average equity  15.87%  10.30%
Net interest margin  3.71%  3.13%
Efficiency ratio (1)  61.75%  64.44%
         
Average Balances        
Average assets $1,408,710  $1,182,436 
Average earning assets  1,237,635   1,120,647 
Average shareholders’ equity  105,869   100,596 
         
Asset Quality        
Loan charge-offs $529  $1,447 
Loan recoveries  415   322 
Net charge-offs  114   1,125 
         
Reconciliation of Tax-Equivalent Net Interest Income (7)        
GAAP measures:        
Interest income – loans $41,720  $32,797 
Interest income – investments and other  7,675   4,347 
Interest expense – deposits  (3,273)  (1,415)
Interest expense – subordinated debt  (277)  (619)
Interest expense – junior subordinated debt  (270)  (270)
Total net interest income $45,575  $34,840 
Non-GAAP measures:        
Tax benefit realized on non-taxable interest income – loans $8  $32 
Tax benefit realized on non-taxable interest income – municipal securities  327   249 
Total tax benefit realized on non-taxable interest income $335  $281 
Total tax-equivalent net interest income $45,910  $35,121 

(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.