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What changed in FIRST NATIONAL CORP /VA/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FIRST NATIONAL CORP /VA/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+214 added−230 removedSource: 10-K (2024-03-29) vs 10-K (2023-03-30)

Top changes in FIRST NATIONAL CORP /VA/'s 2023 10-K

214 paragraphs added · 230 removed · 140 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

13 edited+1 added−4 removed103 unchanged
Biggest changeThe Bank met the requirements to qualify as "well capitalized" as of December 31, 2022 and December 31, 2021. In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel 4”).
Biggest changeThe Bank met the requirements to qualify as "well capitalized" as of December 31, 2023 and December 31, 2022.
At December 31, 2022, the Company had not been made aware of any instances of non-compliance with the guidance. 10 Table of Contents CARES Act. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020.
At December 31, 2023, the Company had not been made aware of any instances of non-compliance with the guidance. 10 Table of Contents CARES Act. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020.
Among other things, the CARES Act included the Small Business Administration (SBA) Paycheck Protection Program. The CARES Act created the SBA’s Paycheck Protection Program. Under the Paycheck Protection Program, funds were authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.
Among other things, the CARES Act created the Small Business Administration (SBA) Paycheck Protection Program. Under the Paycheck Protection Program, funds were authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. The Bank met the definition of “well capitalized” as of December 31, 2022. Community Reinvestment Act . The Bank is subject to the requirements of the CRA.
These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions. The Bank met the definition of “well capitalized” as of December 31, 2023. Community Reinvestment Act . The Bank is subject to the requirements of the CRA.
Management believes, as of December 31, 2022 and December 31, 2021, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.
Management believes, as of December 31, 2023 and December 31, 2022, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer.
If implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.
The rule is intended to, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.
The increase is being instituted to account for extraordinary growth in insured deposits during the first and second quarters of 2020, which caused a substantial decrease in the “reserve ratio” of the DIF to total industry deposits.
The increase was instituted to account for extraordinary growth in insured deposits during the first and second quarters of 2020, which caused a substantial decrease in the “reserve ratio” of the DIF to total industry deposits.
No material part of the business of the Company is dependent upon a single or a few customers, and the loss of any single customer would not have a materially adverse effect upon the business of the Company. Employees At December 31, 2022, the Bank employed a total of 215 f ull-time equivalent employees.
No material part of the business of the Company is dependent upon a single or a few customers, and the loss of any single customer would not have a materially adverse effect upon the business of the Company. Employees At December 31, 2023, the Bank employed a total of 224 f ull-time equivalent employees.
On October 18, 2022, the FDIC adopted a final rule to increase base deposit insurance assessment rate schedules uniformly by 2 basis points beginning in the first quarterly assessment period of 2023.
On October 18, 2022, the FDIC adopted a final rule that increased base deposit insurance assessment rate schedules uniformly by 2 basis points beginning in the first quarterly assessment period of 2023.
The following table shows the Bank’s regulatory capital ratios at December 31, 2022: First Bank Total capital to risk-weighted assets 14.60 % Tier 1 capital to risk-weighted assets 13.82 % Common equity Tier 1 capital to risk-weighted assets 13.82 % Tier 1 capital to average assets 9.36 % Capital conservation buffer ratio(1) 6.60 % (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Bank’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital.
The following table shows the Bank’s regulatory capital ratios at December 31, 2023: First Bank 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(1) 6.05 % (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Bank’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital.
The Company’s primary operating subsidiary, First Bank, generally has a strong deposit share of the markets it serves. According to Federal Deposit Insurance Corporation (FDIC) deposit data as of June 30, 2022 , the Bank was ranked second overall in its market area with 12.39% of its total deposit market.
The Company’s primary operating subsidiary, First Bank, generally has a strong deposit share of the markets it serves. According to Federal Deposit Insurance Corporation (FDIC) deposit data as of June 30, 2023 , the Bank was ranked third overall in its market area with 11.13% of its total deposit market.
In 2021, the most recent notific ation from the Federal Reserve, the Bank received a "satisfactory" CRA rating. In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework.
In 2021, the most recent notific ation from the Federal Reserve, the Bank received a "satisfactory" CRA rating. In October 2023, federal bank regulatory agencies jointly issued a final rule intended to strengthen and modernize the CRA regulatory framework. Most of the final rule’s new requirements are applicable beginning January 1, 2026.
The Bank purchased the fixed assets for an amount equal to SmartBank’s book value. Additional information about these acquisitions is presented in Note 25. Access to Filings The Company’s internet address is www.fbvirginia.com .
Access to Filings The Company’s internet address is www.fbvirginia.com .
Removed
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. On September 30, 2021, the Bank acquired $82.0 million of loans and certain fixed assets from SmartBank related to its Richmond area branch.
Added
The remaining new requirements, including data reporting requirements, are applicable on January 1, 2027.
Removed
Among other things, these standards revised the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provided a new standardized approach for operational risk capital.
Removed
Under the proposed framework, these standards are to become effective on January 1, 2023, with an aggregate output floor phasing-in through January 1, 2028. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company.
Removed
The impact of Basel 4 on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

27 edited+7 added−12 removed197 unchanged
Biggest changeHowever, these costs, limitations and restrictions may produce significant, material effects on our business, financial condition and results of operations. Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The policies of the Federal Reserve affect us significantly.
Biggest changeOur earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The policies of the Federal Reserve affect us significantly. The Federal Reserve regulates the supply of money and credit in the United States.
The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations.
The Company’s banking regulators generally give commercial real estate lending greater scrutiny and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies, and portfolio stress testing, as well as possibly higher levels of allowances for credit losses and capital levels as a result of commercial real estate lending growth and exposures, which could have a material adverse effect on the Company’s results of operations.
During 2022, revenues from mortgage banking decreased significantly, primarily due to lower mortgage volumes as market interest rates increased and the demand for mortgages declined. Loan production levels may continue to suffer if there is a sustained slowdown in the housing markets in which the Company conducts business or tightening credit conditions.
During 2022 and 2023, revenues from mortgage banking decreased significantly, primarily due to lower mortgage volumes as market interest rates increased and the demand for mortgages declined. Loan production levels may continue to suffer if there is a sustained slowdown in the housing markets in which the Company conducts business or tightening credit conditions.
Although the domestic and global economies have largely recovered from the COVID-19 pandemic, certain consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. For example, the COVID-19 pandemic could have long-lasting impacts certain industries due to changes in consumer behavior and business practices, including remote work and business travel.
Although the domestic and global economies have largely recovered from the COVID-19 pandemic, certain consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. For example, the COVID-19 pandemic could have long-lasting impacts on certain industries due to changes in consumer behavior and business practices, including remote work and business travel.
In addition, changes in interest rates may negatively affect both the returns on and market value of our investment securities. As we experienced due to rising interest rates in 2022, interest rate changes can reduce unrealized gains or increase unrealized losses in our portfolio and thereby negatively impact our accumulated other comprehensive income and equity levels.
In addition, changes in interest rates may negatively affect both the returns on and market value of our investment securities. As we experienced due to rising interest rates in 2022 and 2023, interest rate changes can reduce unrealized gains or increase unrealized losses in our portfolio and thereby negatively impact our accumulated other comprehensive income and equity levels.
The loss of these revenue streams and the loss of deposits as a lower cost source of funds could have a material adverse effect on our financial condition and results of operations. 15 Table of Contents Strong competition in our primary market area may limit asset growth and profitability.
The loss of these revenue streams and the loss of deposits as a lower cost source of funds could have a material adverse effect on our financial condition and results of operations. 15 Table of Contents Competition in our primary market area may limit asset growth and profitability.
Security breaches and other disruptions could compromise our information and expose us to liability or result in the loss of money, which could damage our reputation and our business. We rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks.
Security breaches and other disruptions could compromise our information and expose us to liability or result in the loss of money, which could damage our reputation and our business. We rely on the secure processing, storage, and transmission of confidential and other information in our and our vendors' computer systems and networks.
Any such required additional provisions for loan losses or charge-offs could have a material adverse effect on the Company’s financial condition and results of operations. The Company ’ s concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets.
Any such required additional provisions for credit losses or charge-offs could have a material adverse effect on the Company’s financial condition and results of operations. The Company ’ s concentration in loans secured by real estate may adversely affect earnings due to changes in the real estate markets.
For more information regarding recent accounting pronouncements and their effects on the Company, including CECL, see “Recent Accounting Pronouncements” in Note 1 of the consolidated financial included in Item 8 of this Form 10-K. 20 Table of Contents Changes in tax rates applicable to the Company may cause impairment of deferred tax assets.
For more information regarding recent accounting pronouncements and their effects on the Company, see “Recent Accounting Pronouncements” in Note 1 of the consolidated financial included in Item 8 of this Form 10-K. 20 Table of Contents Changes in tax rates applicable to the Company may cause impairment of deferred tax assets.
If one or more such events occur, this potentially could jeopardize our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our or our customers’ operations or result in the loss of money.
If one or more such events occur, this potentially could jeopardize our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks or those of our vendors, or otherwise cause interruptions or malfunctions in our or our customers’ operations or result in the loss of money.
The significant uncertainties surrounding the ability of the Company’s borrowers to execute their business models successfully through changing economic environments, competitive challenges, and other factors complicate the Company’s estimates of the risk of loss and amount of loss on any loan.
The significant uncertainties surrounding the ability of the Company’s borrowers to execute their business models successfully through changing economic environments, competitive challenges, and other factors complicate the Company’s estimates of the risk of loss and amount of loss on any loan or security.
An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition.
An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for credit losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition.
Because of the degree of uncertainty and susceptibility of these factors to change, the actual losses may vary from current estimates. The Company expects fluctuations in the loan loss provisions due to the uncertain economic conditions.
Because of the degree of uncertainty and susceptibility of these factors to change, the actual losses may vary from current estimates. The Company expects fluctuations in the credit loss provisions due to the uncertain economic conditions.
However, the allowance for loan losses may not be sufficient to cover actual loan losses and future provisions for loan losses could materially and adversely affect the Company’s operating results. Accounting measurements related to impairment and the allowance for loan losses require significant estimates that are subject to uncertainty and changes relating to new information and changing circumstances.
However, the ACL may not be sufficient to cover actual losses and future provisions for credit losses could materially and adversely affect the Company’s operating results. Accounting measurements related to impairment and the allowance for credit losses require significant estimates that are subject to uncertainty and changes relating to new information and changing circumstances.
While we have policies and procedures designed to prevent or limit the effect of a possible security breach, our computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses, or other malicious code, and other events that could have a security impact.
While we have policies and procedures designed to prevent or limit the effect of a possible security breach, our computer systems, software, and networks, including those of our vendors, may be vulnerable to unauthorized access, computer viruses, or other malicious code, and other events that could have a security impact.
The Company’s banking regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to increase its allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease the allowance for loan losses by recognizing loan charge-offs, net of recoveries.
The Company’s banking regulators, as an integral part of their examination process, periodically review the ACL and may require the Company to increase its allowance for credit losses by recognizing additional provisions for credit losses charged to expense, or to decrease the allowance for credit losses on loans by recognizing loan charge-offs, net of recoveries.
Although the Company emphasizes local lending practices, the Company purchases certain loans through a third-party lending program. These portfolios include commercial loans and carry risks associated with the borrower, changes in the economic environment, and the vendor themselves.
Although the Company emphasizes local lending practices, the Company has purchased certain loans through third-party lending programs. These portfolios include commercial loans and carry risks associated with the borrower, changes in the economic environment, and the vendor themselves.
Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower's products and services.
Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower's products and services.
The Company believes that it maintains an allowance for loan losses at a level adequate to absorb probable losses inherent in the loan portfolio as of the corresponding balance sheet date and in compliance with applicable accounting and regulatory guidance.
The Company believes that it maintains an ACL at a level adequate to absorb expected losses inherent in the loan and securities portfolios as of the corresponding balance sheet date and in compliance with applicable accounting and regulatory guidance.
The Company ’ s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio. Like all financial institutions, the Company maintains an allowance for loan losses to provide for loans that its borrowers may not repay in their entirety.
The Company ’ s allowance for credit losses on loans may prove to be insufficient to absorb losses in its loan and securities portfolios. Like all financial institutions, the Company maintains an allowance for credit losses (ACL) to provide for loans and securities that may not repay in their entirety.
These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders and could potentially adversely affect the market price of the Company’s common stock. 22 Table of Contents Item 1B. Unresolved Staff Comments Not applicable.
These provisions also could discourage or make more difficult a merger, tender offer, or proxy contest, even though such transactions may be favorable to the interests of shareholders and could potentially adversely affect the market price of the Company’s common stock.
The Federal Reserve regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing.
Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine to a significant extent our cost of funds for lending and investing. Changes in those policies are beyond our control and are difficult to predict.
Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations.
Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. There is no assurance that any such losses would not materially and adversely affect the Company’s results of operations. In addition, financial challenges at other banking institutions could lead to depositor concerns that spread within the banking industry.
Changes in tax rates and laws could impair the Company’s deferred tax assets and result in an expense associated with the change in deferred tax assets and liabilities. The Company is transitioning from the use of the LIBOR index in the future.
Changes in tax rates and laws could impair the Company’s deferred tax assets and result in an expense associated with the change in deferred tax assets and liabilities.
Such changes could also impact the capital levels of the Company and the Bank or require the Company to incur additional personnel or technology costs. For example, effective January 1, 2023, the Company adopted Accounting Standards Codification 326, Financial Instruments - Credit Losses, commonly referred to as CECL.
Such changes could also impact the capital levels of the Company and the Bank or require the Company to incur additional personnel or technology costs.
While these policies are designed to manage the risks associated with these loans, there can be no assurance that such measures will be effective in avoiding undue credit losses. The Company ’ s focus on lending to small to mid-sized community-based businesses may increase its credit risk.
While these policies are designed to manage the risks associated with these loans, there can be no assurance that such measures will be effective in avoiding undue credit losses. Prepayments of loans and securities could materially impact earnings through a reduction in interest income and fees on loans and interest income on securities.
The operational functions of business counterparties over which the Company may have limited, or no control may experience disruptions that could adversely impact the Company.
While public confidence in the banking system has stabilized, deposit outflows caused by reputational concerns or events affecting the banking industry generally could adversely affect the Company’s liquidity, financial condition, and results of operations. The operational functions of business counterparties over which the Company may have limited, or no control may experience disruptions that could adversely impact the Company.
Removed
CECL is generally viewed throughout the industry as the most significant change in accounting standards to affect financial institutions in decades, as it fundamentally changes the accounting for and estimation of the allowance for loan losses.
Added
The Company assumes earnings risk from the potential prepayment of loans and securities purchased at premiums. The Company’s loan portfolio includes commercial and industrial loans purchased at premiums through third-party lending programs as well as loans acquired through business combinations, which resulted in purchase premiums. Additionally, the Company purchases securities at premiums from time-to-time for its investment portfolio.
Removed
The current incurred loss approach was replaced by a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. As a result, the Company has incurred additional expenses to support both the adoption and the subsequent accounting and financial reporting requirements of CECL.
Added
Premiums on performing loans are amortized over the life of the loans and premiums on securities are amortized to the earlier of their call dates or maturity dates.
Removed
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR.
Added
Prepayments of the loans and securities would accelerate amortization expense of unamortized premiums and could result in a material decrease in earnings during future periods from a reduction of interest income and fees on loans or interest income on securities. The Company ’ s focus on lending to small to mid-sized community-based businesses may increase its credit risk.
Removed
In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one-week and two-month LIBOR offered rates will cease after December 31, 2021, but the publication of the remaining LIBOR offered rates will continue until June 30, 2023.
Added
In March 2023, Silicon Valley Bank and Signature Bank experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there was substantial market disruption and concern that diminished depositor confidence could spread across the banking industry, leading to deposit outflows that could destabilize other institutions.
Removed
Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks and that they will examine bank practices accordingly.
Added
However, these costs, limitations and restrictions may produce significant, material effects on our business, financial condition and results of operations. The CFPB has recently pursued a more aggressive enforcement policy with respect to a range of regulatory compliance matters, specifically including fair lending, loan servicing, financial institution sales and marketing practices, and financial institution consumer fee and account management practices.
Removed
Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
Added
For example, in 2023, the CFPB brought enforcement actions against a number of financial institutions for overdraft practices that the CFPB alleged to be unlawful and ordered each of these institutions to pay a substantial civil money penalty in addition to customer restitution.
Removed
Regulators, industry groups, and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., SOFR, as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.
Added
Despite our ongoing compliance efforts, we may become subject to regulatory enforcement actions with respect to our programs and practices. The costs and limitations related to this additional regulatory scrutiny with respect to consumer product offerings and services may adversely affect the Company’s profitability.
Removed
The Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on SOFR for contracts governed by U.S. law that have no or ineffective fallbacks.
Removed
Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities will not be adversely affected.
Removed
For example, SOFR is a relatively new reference rate, has a very limited history, and differs fundamentally from U.S. Dollar LIBOR. SOFR is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions, whereas U.S. Dollar LIBOR is an unsecured rate that represents interbank funding over different maturities.
Removed
As a result, there can be no assurance that SOFR will perform in the same way as U.S. Dollar LIBOR would have done at any time, and there is no guarantee that it is a comparable substitute for U.S. Dollar LIBOR.
Removed
The implementation of a substitute index or indices for the calculation of interest rates under the Company’s loan agreements with borrowers, subordinated notes that it has issued, or other financial arrangements may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on the Company’s results of operations.

Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed3 unchanged
Biggest changeAt December 31, 2022, the Ban k operated 20 branches throughout the Shenandoah Valley, central regions of Virginia, and the Richmond and Roanoke market areas. The Bank also operates a loan production office and two customer service centers in retirement communities. The Company’s operations center is in Strasburg, Virginia.
Biggest changeAt December 31, 2023, the Ban k operated 20 branches throughout the Shenandoah Valley, central regions of Virginia, and the Richmond and Roanoke market areas. The Bank also operates a loan production office and two customer service centers in retirement communities. The Company’s operations center is in Strasburg, Virginia.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

3 edited+1 added−0 removed1 unchanged
Biggest changeThe Company's Board of Directors authorized the purchase plan through December 31, 2023, unless the entire amount authorized to be repurchased had been acquired before that date. As of December 31, 2022, the Company had not repurchased common stock under the purchase plan. 24 Table of Contents
Biggest changeThe Company's Board of Directors authorized the purchase plan through December 31, 2023, unless the entire amount authorized to be repurchased had been acquired before that date. The Company repurchased 37,532 shares of common stock under the purchase plan at a weighted average price of $15.14 during 2023.
Issuer Purchases of Equity Securities During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company may repurchase up to $5.0 million of its outstanding common stock. Repurchases under the plan could be made through privately negotiated transactions or in the open market in accordance with SEC rules.
Issuer Purchases of Equity Securities During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could have repurchased up to $5.0 million of its outstanding common stock. Repurchases under the plan were made during 2023 through open market transactions in accordance with SEC rules.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Holders Shares of the common stock of the Company are traded on the Nasdaq Capital Market stock exchange under the symbol “FX NC.” As of March 17, 2023 the Company had 808 shareholders of record and approximately 1,022 beneficial owners of shares of common stock.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Holders Shares of the common stock of the Company are traded on the Nasdaq Capital Market stock exchange under the symbo l “FXNC.” As of March 19, 2024 the Company had 802 shareholders of record and approximately 1,143 beneficial owners of shares of common stock.
Added
There were no repurchases of common stock during the fourth quarter of 2023. 24 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAverage Balances, Income and Expense, Yields and Rates (Taxable Equivalent Basis) Years Ending December 31, 2022 2021 Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate Assets Interest-bearing deposits in other banks $ 107,530 $ 1,223 1.14 % $ 164,118 $ 213 0.13 % Securities: Taxable 284,380 5,131 1.80 % 173,363 3,100 1.79 % Tax-exempt (1) 65,836 1,555 2.36 % 47,570 1,184 2.49 % Restricted 1,887 92 4.87 % 1,926 88 4.56 % Total securities 352,103 6,778 1.93 % 222,859 4,372 1.96 % Loans: (2) Taxable 872,440 41,700 4.78 % 709,347 32,677 4.61 % Tax-exempt (1) 548 25 4.49 % 3,389 152 4.49 % Total loans 872,988 41,725 4.78 % 712,736 32,829 4.61 % Federal funds sold 1 — 2.25 % 20,934 10 0.05 % Total earning assets 1,332,622 49,726 3.73 % 1,120,647 37,424 3.34 % Less: allowance for loan losses (6,013 ) (6,316 ) Total nonearning assets 82,101 68,105 Total assets $ 1,408,710 $ 1,182,436 Liabilities and Shareholders’ Equity Interest-bearing deposits: Checking $ 295,530 $ 1,394 0.47 % $ 254,077 $ 424 0.17 % Money market accounts 218,783 930 0.43 % 168,932 187 0.11 % Savings accounts 205,532 173 0.08 % 164,768 107 0.07 % Certificates of deposit: Less than $100 74,616 345 0.46 % 69,904 310 0.44 % Greater than $100 62,036 428 0.69 % 52,304 385 0.74 % Brokered deposits 556 3 0.57 % 650 2 0.34 % Total interest-bearing deposits 857,053 3,273 0.38 % 710,635 1,415 0.20 % Federal funds purchased 1 — 2.27 % 1 — 0.47 % Subordinated debt 5,379 277 5.15 % 9,992 619 6.20 % Junior subordinated debt 9,279 270 2.91 % 9,279 270 2.91 % Other borrowings — — — % 0 — 0.00 % Total interest-bearing liabilities 871,712 3,820 0.44 % 729,907 2,304 0.32 % Noninterest-bearing liabilities Demand deposits 426,823 348,829 Other liabilities 4,306 3,104 Total liabilities 1,302,841 1,081,840 Shareholders’ equity 105,869 100,596 Total liabilities and shareholders’ equity $ 1,408,710 $ 1,182,436 Net interest income $ 45,906 $ 35,120 Interest rate spread 3.29 % 3.02 % Cost of funds 0.29 % 0.21 % Interest expense as a percent of average earning assets 0.29 % 0.21 % Net interest margin 3.44 % 3.13 % (1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%.
Biggest changeAverage Balances, Income and Expense, Yields and Rates (Taxable Equivalent Basis) Years Ending December 31, 2023 2022 Average Balance Interest Income/Expense Yield/Rate Average Balance Interest Income/Expense Yield/Rate Assets Interest-bearing deposits in other banks $ 36,050 $ 1,809 5.02 % $ 107,530 $ 1,223 1.14 % Securities: Taxable 252,470 5,286 2.09 % 284,380 5,131 1.80 % Tax-exempt (1) 53,524 1,545 2.89 % 65,836 1,555 2.36 % Restricted 1,923 111 5.79 % 1,887 92 4.87 % Total securities 307,917 6,942 2.25 % 352,103 6,778 1.93 % Loans: (2) Taxable 937,013 49,293 5.26 % 872,440 41,700 4.78 % Tax-exempt (1) — — 0.00 % 548 25 4.49 % Total loans 937,013 49,293 5.26 % 872,988 41,725 4.78 % Federal funds sold — — 0.00 % 1 — 2.25 % Total earning assets 1,280,980 58,044 4.53 % 1,332,622 49,726 3.73 % Less: allowance for credit losses on loans (8,994 ) (6,013 ) Total nonearning assets 91,353 82,101 Total assets $ 1,363,339 $ 1,408,710 Liabilities and Shareholders’ Equity Interest-bearing deposits: Checking $ 269,551 $ 4,538 1.68 % $ 295,530 $ 1,394 0.47 % Money market accounts 219,655 4,882 2.22 % 218,783 930 0.43 % Savings accounts 173,075 211 0.12 % 205,532 173 0.08 % Certificates of deposit: Less than $100 84,387 1,641 1.94 % 74,616 345 0.46 % Greater than $100 82,184 2,275 2.77 % 62,036 428 0.69 % Brokered deposits 3,061 113 3.70 % 556 3 0.57 % Total interest-bearing deposits 831,913 13,660 1.64 % 857,053 3,273 0.38 % Federal funds purchased 15 1 5.90 % 1 — 2.27 % Subordinated debt 4,997 277 5.54 % 5,379 277 5.15 % Junior subordinated debt 9,279 271 2.92 % 9,279 270 2.91 % Other borrowings 1,973 97 4.90 % — — 0.00 % Total interest-bearing liabilities 848,177 14,306 1.69 % 871,712 3,820 0.44 % Noninterest-bearing liabilities Demand deposits 397,932 426,823 Other liabilities 5,147 4,306 Total liabilities 1,251,256 1,302,841 Shareholders’ equity 112,083 105,869 Total liabilities and shareholders’ equity $ 1,363,339 $ 1,408,710 Net interest income $ 43,738 $ 45,906 Interest rate spread 2.84 % 3.29 % Cost of funds 1.15 % 0.29 % Interest expense as a percent of average earning assets 1.12 % 0.29 % Net interest margin 3.41 % 3.44 % (1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 21%.
As a provider of community-oriented financial services, the Bank does not attempt to further geographically diversify its loan portfolio by undertaking significant lending activity outside it s market areas. The Bank actively participated as a lender in the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) to support local small businesses and non-profit organizations by providing forgivable loans.
As a provider of community-oriented financial services, the Bank does not attempt to further geographically diversify its loan portfolio by undertaking significant lending activity outside its market areas. The Bank actively participated as a lender in the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP) to support local small businesses and non-profit organizations by providing forgivable loans.
Junior Subordinated Debt See Note 10 to the Consolidated Financial Statements included in this Form 10-K, for discussion of junior subordinated debt. 43 Table of Contents Off-Balance Sheet Arrangements The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers.
Junior Subordinated Debt See Note 10 to the Consolidated Financial Statements included in this Form 10-K, for discussion of junior subordinated debt. 41 Table of Contents Off-Balance Sheet Arrangements The Company, through the Bank, is a party to credit related financial instruments with risk not reflected in the consolidated financial statements in the normal course of business to meet the financing needs of its customers.
The Bank met the requirements to qualify as "well capitalized" as of December 31, 2022 and 2021. On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth Act.
The Bank met the requirements to qualify as "well capitalized" as of December 31, 2023 and 2022 . On September 17, 2019 the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth Act.
The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the year ended December 31, 2022 and 2021. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income and income from bank owned life insurance.
The Company’s income tax expense differed from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the year ended December 31, 2023 and 2022. The difference was a result of net permanent tax deductions, primarily comprised of tax-exempt interest income and income from bank owned life insurance.
For further information on securities, see Note 2 to the Consolidated Financial Statements included in this Form 10-K. Securities Portfolio Maturity Distribution/Yield Analysis At December 31, 2022 Less than One Year One to Five Years Five to Ten Years Greater than Ten Years and Equity Securities Total U.S.
For further information on securities, see Note 2 to the Consolidated Financial Statements included in this Form 10-K. Securities Portfolio Maturity Distribution/Yield Analysis At December 31, 2023 Less than One Year One to Five Years Five to Ten Years Greater than Ten Years and Equity Securities Total U.S.
Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the financial condition and results of operations of the Company for the years ended December 31, 2022 and 2021 should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included in Item 8 of this Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operation The following discussion and analysis of the financial condition and results of operations of the Company for the years ended December 31, 2023 and 2022 should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included in Item 8 of this Form 10-K.
Investment securities are comprised of U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of December 31, 2022 , neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios.
Investment securities are comprised of U.S. agency and mortgage-backed securities, obligations of state and political subdivisions, corporate debt securities, and restricted securities. As of December 31, 2023 , neither the Company nor the Bank held any derivative financial instruments in their respective investment security portfolios.
Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements included in this Form 10-K, for discussion of recent accounting pronouncements. 45 Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required.
Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements included in this Form 10-K, for discussion of recent accounting pronouncements. 43 Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required.
Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for loan losses.
Changing economic conditions caused by inflation, recession, unemployment, or other factors beyond the Company’s control have a direct correlation with asset quality, net charge-offs, and ultimately the required provision for credit losses.
The tax rate utilized in calculating the tax benefit for both 2022 and 2021 is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands).
The tax rate utilized in calculating the tax benefit for both 2023 and 2022 is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below (in thousands).
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, certain appraisals are analyzed by management or by an outsourced appraisal review specialist throughout the year in order to ensure standards of quality are met.
As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, certa in appraisals are analyzed by management or by an outsourced appraisal review specialist throughout the year in order to ensure standards of quality are met.
There can be no assurance, however, that an additional provision for loan losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers.
Th ere can be no assurance, however, that an additional provision for credit losses will not be required in the future, including as a result of changes in the qualitative factors underlying management’s estimates and judgments, changes in accounting standards, adverse developments in the economy, on a national basis or in the Company’s market area, loan growth, or changes in the circumstances of particular borrowers.
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. 41 Table of Contents The following table shows the maturities of debt and restricted securities at amortized cost and market value at December 31, 2022 and approximate weighted average yields of such securities (dollars in thousands).
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. 39 Table of Contents The following table shows the maturities of debt and restricted securities at amortized cost and market value at December 31, 2023 and approximate weighted average yields of such securities (dollars in thousands).
The Company evaluated goodwill as of June 30, 2022 and determined there was no impairment. 30 Table of Contents Lending Policies General In an effort to manage risk, the Bank’s loan policy gives loan amount approval limits to individual loan officers based on their position within the Bank and level of experience.
The Company evaluated goodwill as of June 30, 2023 and determined there was no impairment. Lending Policies General In an effort to manage risk, the Bank’s loan policy gives loan amount approval limits to individual loan officers based on their position within the Bank and level of experience.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015 and is no longer obligated to report consolidated regulatory capital.
The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued in February 2015 and is not obligated to report consolidated regulatory capital.
The purpose of the issuance was primarily to further strengthen holding company liquidity and to remain a source of strength for the Bank in the event of a severe economic downturn. The Company was able to use the proceeds of the issuance for general corporate purposes.
The purpose of the issuance was primarily to further strengthen holding company liquidity and to remain a source of strength for the Bank in the event of a severe economic downturn. The Company used the proceeds of the issuance for general corporate purposes.
Management believes, as of December 31, 2022 and December 31, 2021, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer. 44 Table of Contents The following table summarizes the Bank’s regulatory capital and related ratios at December 31, 2022, and 2021(dollars in thousands).
Management believes, as of December 31, 2023 and December 31, 2022, that the Bank met all capital adequacy requirements to which it is subject, including the capital conservation buffer. 42 Table of Contents The following table summarizes the Bank’s regulatory capital and related ratios at December 31, 2023, and 2022 (dollars in thousands).
Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management determines that the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Allowance for Credit Losses on Loans The allowance for credit losses on loans (ACLL) is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when management determines that the loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $350 thousand and $12.4 million at December 31, 2022 and 2021, respectively; with $350 thousand scheduled to mature in the first and second quarters of 2026.
Loan fees received from the SBA are accreted by the Bank into income evenly over the life of the loans, net of loan origination costs, through interest and fees on loans. PPP loans totaled $128 thousand and $350 thousand at December 31, 2023 and 2022, respectively; with $128 thousand scheduled to mature in the first and second quarters of 2026.
At December 31, 2022, the cash flow hedges had a fair value of $2,679 thousand, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings.
At December 31, 2023, the cash flow hedges had a fair value of $2.5 million, which is recorded in other assets. The net gain/loss on the cash flow hedges is recognized as a component of other comprehensive income and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings.
Loans The Bank is an active lender with a loan portfolio that inc ludes commercial and residential real estate loans, commercial loans, consumer loans, construction and land development loans, and home equity loans. The Bank’s lending activity is concentrated on individuals, small and medium-sized businesses, and local governmental entities primarily in its market areas.
Loans The Bank is an active lender with a loan portfolio that includes commercial and residential real estate loans, commercial loans, consumer loans, construction and land development loans, and home equity loans. The Bank’s lending activity is concentrated on individuals, and small and medium-sized businesses primarily in its market areas.
As of December 31, 2022, the Company did not own securities of any issuer for which the aggregate book value of the securities of such issuer exceeded ten percent of shareholders’ equity. 42 Table of Contents Deposits At December 31, 2022 , deposits totaled $1.2 billion, decreasing slightly by $7.4 million, from $1.2 billion at December 31, 2021 .
As of December 31, 2023, the Company did not own securities of any issuer for which the aggregate book value of the securities of such issuer exceeded ten percent of shareholders’ equity. 40 Table of Contents Deposits At December 31, 2023 , deposits totaled $1.2 billion, decreasing slightly by $7.6 million, from $1.2 billion at December 31, 2022 .
For further discussion regarding the allowance for loan losses, see “Critical Accounting Policies” above. The following table shows a detail of loans charged-off, recovered, and the changes in the allowance for loan losses (dollars in thousands).
For further discussion regarding the ACLL, see “Critical Accounting Policies” above. The following table shows a detail of loans charged-off, recovered, and the changes in the ACLL (dollars in thousands).
OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank had $184 thousand and $1.8 million in assets classified as OREO at December 31, 2022 and 2021, respectively.
OREO is recorded at the lower of cost or fair value, less estimated selling costs, and is marketed by the Bank through brokerage channels. The Bank had $0 and $184 thousand in assets classified as OREO at December 31, 2023 and 2022, respectively.
At December 31, 2022, t he Bank had $998 thousand in locked-rate commitments to originate mortgage loans. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Bank does not expect any counterparty to fail to meet its obligations.
At December 31, 2023, t he Bank had $1.2 million in locked-rate commitments to originate mortgage loans. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Bank does not expect any counterparty to fail to meet its obligations.
Consumer loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. These loans are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances. Other loans included in this category include loans to states and political subdivisions.
Consumer loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles. These loans are also likely to be immediately and adversely affected by job loss, divorce, illness, personal bankruptcy, or other changes in circumstances.
During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could repurchase up to $5.0 million of its outstanding common stock through December 31, 2023. The Company did not repurchase any shares during the year ended December 31, 2022.
During the fourth quarter of 2022, the Board of Directors of the Company authorized a stock repurchase plan pursuant to which the Company could repurchase up to $5.0 million of its outstanding common stock through December 31, 2023.
Furthermore, any collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much reliability as real estate. Also included in this category are loans originated under the SBA's PPP.
Furthermore, any collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much reliability as real estate. Also included in this category are loans originated under the SBA's PPP and loans purchased through a third-party lending programs.
At December 31, 2022 and 2021, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands): 2022 2021 Commitments to extend credit and unfunded commitments under lines of credit $ 158,297 $ 161,428 Stand-by letters of credit 17,950 18,904 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
At December 31, 2023 and 2022, the following financial instruments were outstanding whose contract amounts represent credit risk (in thousands): 2023 2022 Commitments to extend credit and unfunded commitments under lines of credit $ 194,242 $ 158,297 Stand-by letters of credit 11,615 17,950 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
There was a slight change in the deposit mix when comparing the periods. At December 31, 2022 , noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits composed 34%, 55%, and 11% of total deposits, respectively, compared to 33%, 55%, and 12% at December 31, 2021 .
There was a change in the deposit mix when comparing the periods. At December 31, 2023 , noninterest-bearing demand deposits, savings and interest-bearing demand deposits, and time deposits composed 31%, 54%, and 15% of total deposits, respectively, compared to 34%, 55%, and 11% at December 31, 2022 .
A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in this Form 10-K. 36 Table of Contents Financial Condition General Total assets decreased $20.1 million during the year and totaled $1.4 billion at December 31, 2022.
A more detailed discussion of the Company’s tax calculation is contained in Note 11 to the Consolidated Financial Statements included in this Form 10-K. 35 Table of Contents Financial Condition General Total assets increased $49.9 million during the year and totaled $1.4 billion at December 31, 2023 .
The provision for loan losses is based upon management’s current estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The allowance for loan losses totaled $7.4 million at December 31, 2022 and $5.7 million at December 31, 2021 , representing 0.81% and 0.69% of total loans, respective ly.
The provision for credit losses is based upon management’s current estimate of the amount required to maintain an adequate ACLL reflective of the risks in the loan portfolio. The allowance for credit losses on loans totaled $12.0 million at December 31, 2023 and $7.4 million at December 31, 2022 , representing 1.24% and 0.81% of total loans, respective ly.
The subordinated debt issued consisted of a 5.50% fixed-to-floating rate subordinated note due 2030 issued to an institutional investor and was structured to qualify as Tier 2 capital under bank regulatory guidelines.
The subordinated debt issued consisted of a 5.50% fixed-to-floating rate subordinated note due 2030 issued to an institutional investor and was structured to qualify as Tier 2 capital under bank regulatory guidelines. First Bank remained well-capitalized at December 31, 2023.
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.
There was no allowance for credit losses on held to maturity securities at December 31, 2022. 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.
To mitigate the risks associated with this type of lending, the Bank generally limits loan amounts relative to the appraised value and/or cost of the collateral, analyzes the cost of the project and the creditworthiness of its borrowers, and monitors construction progress.
Thus, there is risk associated with failure to complete construction and potential cost overruns. To mitigate the risks associated with this type of lending, the Bank generally limits loan amounts relative to the appraised value and/or cost of the collateral, analyzes the cost of the project and the creditworthiness of its borrowers, and monitors construction progress.
Non-performing assets totaled $2.9 million and $4.2 million at December 31, 2022 and 2021 , representing approximately 0.21% and 0.30% of total assets, respectively. Non-performing assets consisted of $184 thousand of OREO and $2.7 million of non-accrual loans at December 31, 2022.
Non-performing assets totaled $6.8 million and $2.9 million at December 31, 2023 and 2022 , representing approximately 0.48% and 0.21% of total assets, respectively. Non-performing assets consisted of $6.8 million of non-accrual loans at December 31, 2023. Non-performing assets consisted of $184 thousand of OREO and $2.7 million of non-accrual loans and at December 31, 2022.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The CARES Act temporarily lowered the tier 1 leverage ratio requirement to 8% until December 31, 2020.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities.
As of December 31, 2022 the estimated amount of total uninsured deposits was $256.5 million. Maturities of the estimated amount of uninsured time deposits at December 31, 2022 are presented in the table below.
As of December 31, 2023 the estimated amount of total uninsured deposits was $368.2 million. Maturities of the estimated amount of uninsured time deposits at December 31, 2023 are presented in the table below.
Overview of Financial Performance and Condition Net income increased by $6.4 million to $16.8 million, or $2.68 per diluted share, for the year ended December 31, 2022 , compared to $10.4 million, or $1.86 per diluted share, for the same period in 2021 .
Overview of Financial Performance and Condition Net income decreased by $7.2 million to $9.6 million, or $1.53 per diluted share, for the year ended December 31, 2023 , compared to $16.8 million, or $2.68 per diluted share, for the same period in 2022 .
Gross unrealized gains in the available for sale portfolio totaled $99 thousand and $2.0 million at December 31, 2022 and 2021 , respectively. Gross unrealized losses in the available for sale portfolio totaled $24.0 million and $2.6 million at December 31, 2022 and 2021 , respectively.
Gross unrealized gains in the available for sale portfolio totaled $61 thousand and $99 thousand at December 31, 2023 and 2022 , respectively. Gross unrealized losses in the available for sale portfolio totaled $20.7 million and $24.0 million at December 31, 2023 and 2022 , respectively.
Non-performing Assets At December 31, 2022 2021 Non-accrual loans $ 2,673 $ 2,304 Other real estate owned 184 1,848 Total non-performing assets $ 2,857 $ 4,152 Loans past due 90 days accruing interest — — Total non-performing assets and past due loans $ 2,857 $ 4,152 Troubled debt restructurings $ 101 $ 1,638 Non-performing assets to period end loans 0.31 % 0.50 % The following table summarizes the Company's credit ratios on a consolidated basis as of December 31, 2022 and 2021.
Non-performing Assets At December 31, 2023 2022 Non-accrual loans $ 6,763 $ 2,673 Other real estate owned — 184 Total non-performing assets $ 6,763 $ 2,857 Loans past due 90 days accruing interest 524 — Total non-performing assets and past due loans $ 7,287 $ 2,857 Troubled debt restructurings $ — $ 101 Non-performing assets to period end loans 0.75 % 0.31 % The following table summarizes the Company's credit ratios on a consolidated basis as of December 31, 2023 and 2022 .
Allocation of Allowance for Loan Losses At December 31, 2022 2021 Allocation of Allowance for Loan Losses: Real estate loans: Construction and land development $ 546 $ 345 Secured by 1-4 family 1,108 1,077 Other real estate loans 3,609 3,230 Commercial and industrial 1,874 718 Consumer and other loans 309 340 Total allowance for loan losses $ 7,446 $ 5,710 Ratios of loans to total period-end loans: Real estate loans: Construction and land development 5.6 % 6.8 % Secured by 1-4 family 36.0 % 35.4 % Other real estate loans 45.5 % 44.2 % Commercial and industrial 12.1 % 12.1 % Consumer and other loans 0.8 % 1.5 % 100.0 % 100.0 % 40 Table of Contents The following table provides information on the Bank’s non-performing assets at the dates indicated (dollars in thousands).
Allocation of Allowance for Credit Losses At December 31, 2023 2022 Allocation of Allowance for Credit Losses: Real estate loans: Construction and land development $ 312 $ 546 Secured by 1-4 family 3,159 1,108 Other real estate loans 4,698 3,609 Commercial and industrial 3,706 1,874 Consumer and other loans 99 309 Total allowance for credit losses $ 11,974 $ 7,446 Ratios of loans to total period-end loans: Real estate loans: Construction and land development 5.4 % 5.6 % Secured by 1-4 family 35.5 % 36.0 % Other real estate loans 46.1 % 45.5 % Commercial and industrial 11.7 % 12.1 % Consumer and other loans 1.2 % 0.8 % 100.0 % 100.0 % 38 Table of Contents The following table provides information on the Bank’s non-performing assets at the dates indicated (dollars in thousands).
Return on average assets was 1.19% and return on average equity was 15.87% for the year ended December 31, 2022 , compared to 0.88% and 10.30%, respectively, for the year ended December 31, 2021 .
Return on average assets was 0.71% and return on average equity was 8.59% for the year ended December 31, 2023 , compared to 1.19% and 15.87%, respectively, for the year ended December 31, 2022 .
Non-GAAP Financial Measures This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding OREO expense, amortization of intangibles, merger expenses, and gains/(losses) on disposal of premises and equipment, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding securities gains.
For a more detailed discussion of the Company's annual performance, see "Net Interest Income,” “Provision for Credit Losses,” "Noninterest Income," "Noninterest Expense" and "Income Taxes" below. 27 Table of Contents Non-GAAP Financial Measures This report refers to the efficiency ratio, which is computed by dividing noninterest expense, excluding OREO expense, amortization of intangibles, and merger expenses, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding (gains)/losses on disposal of premises and equipment, and securities gains.
Noninterest income and expense primarily consists of income from service charges on deposit accounts, ATM and check card income, wealth management income, income from other customer services, income from bank owned life insurance, general and administrative expenses, and amortization expense.
The provision for credit losses, noninterest income, noninterest expense and income tax expense are the other components that determine net income. Noninterest income and expense primarily consists of income from service charges on deposit accounts, ATM and check card income, wealth management income, income from other customer services, income from bank owned life insurance, and general and administrative expenses.
Analysis of Capital At December 31, 2022 2021 Common equity Tier 1 capital $ 132,103 $ 120,224 Tier 1 capital 132,103 120,224 Tier 2 capital 7,446 5,710 Total risk-based capital 139,549 125,934 Risk-weighted assets 955,779 852,959 Capital ratios: Common equity Tier 1 capital ratio 13.82 % 14.09 % Tier 1 capital ratio 13.82 % 14.09 % Total capital ratio 14.60 % 14.76 % Leverage ratio (Tier 1 capital to average assets) 9.36 % 8.82 % Capital conservation buffer ratio(1) 6.60 % 6.76 % (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital.
Analysis of Capital At December 31, 2023 2022 Common equity Tier 1 capital $ 129,840 $ 132,103 Tier 1 capital 129,840 132,103 Tier 2 capital 12,493 7,446 Total risk-based capital 142,333 139,549 Risk-weighted assets 1,012,843 955,779 Capital ratios: Common equity Tier 1 capital ratio 12.82 % 13.82 % Tier 1 capital ratio 12.82 % 13.82 % Total capital ratio 14.05 % 14.60 % Leverage ratio (Tier 1 capital to average assets) 9.31 % 9.36 % Capital conservation buffer ratio(1) 6.05 % 6.60 % (1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio for Common equity Tier 1, Tier 1, and Total risk based capital.
Noninterest income is derived primarily from service charges on deposits, fee income from wealth management services, ATM and check card fees, and brokered mortgage fees. Primary expense categories are salaries and employee benefits, which compri sed 58% of noninterest expenses during 2022 , followed by occupancy and equipment expense, which comprised 13% of noninterest ex penses.
Noninterest income is derived primarily from service charges on deposits, fee income from wealth management services, and ATM and check card fees. Primary expense categories are salaries and employee benefits, whic h compri sed 57% of noninterest expenses d uring 2023 , followed by occupancy and equipment expense, whi ch comprised 12% of noninterest ex penses.
The Company manages these risks through policies that require minimum credit scores and other underwriting requirements, robust analysis of actual performance versus expected performance, as well as ensuring compliance with the Company's vendor management program. 32 Table of Contents Results of Operations General Net interest income represents the primary source of earnings for the Company.
The Company manages these risks through policies that require minimum credit scores and other underwriting requirements, robust analysis of actual performance versus expected performance, as well as ensuring compliance with the Company's vendor management program.
Investments in an unrealized loss position were considered temporarily impaired at December 31, 2022 and 2021 . The change in the unrealized gains and losses of investment securities from December 31, 2021 to December 31, 2022 was related to changes in market interest rates and was not related to credit concerns of the issuers.
The change in the unrealized gains and losses of investment securities from December 31, 2022 to December 31, 2023 was related to changes in market interest rates and was not related to credit concerns of the issuers.
Modified loans totaled $9.1 million at December 31, 2022, which were all in the Bank’s commercial real estate loan portfolio. All modified loans were either performing under their modified terms or resumed regular loan payments as of December 31, 2022. The allowance for loan l osses represents management’s analysis of the existing loan portfolio and related credit risks.
Modified loans totaled $9.1 million at December 31, 2022, which were all in the Bank’s commercial real estate loan portfolio. All of these loans resumed regular payments during 2023. The ACLL represents management’s analysis of the existing loan portfolio and related credit risks.
Efficiency Ratio 2022 2021 Noninterest expense $ 35,597 $ 32,732 Subtract: other real estate owned income (expense), net 106 (26 ) Subtract: amortization of intangibles (19 ) (28 ) Subtract: merger related expenses (69 ) (3,514 ) $ 35,615 $ 29,164 Tax-equivalent net interest income $ 45,906 $ 35,120 Noninterest income 12,621 10,172 Loss (gain) on disposal of premises and equipment 29 (37 ) Gain on sale of other investment (2,885 ) — Securities losses (gains), net 2,004 — $ 57,675 $ 45,255 Efficiency ratio 61.75 % 64.44 % 28 Table of Contents This report also refers to net interest margin, which is calculated by dividing tax equivalent net interest income by total average earning assets.
Efficiency Ratio 2023 2022 Noninterest expense $ 37,242 $ 35,597 Subtract: other real estate (gain) loss and expense, net 199 106 Subtract: amortization of intangibles (18 ) (19 ) Subtract: merger related expenses — (69 ) $ 37,423 $ 35,615 Tax-equivalent net interest income $ 43,738 $ 45,906 Noninterest income 11,784 12,621 (Gain) loss on disposal of premises and equipment (47 ) 29 Gain on sale of other investment (186 ) (2,885 ) Securities losses (gains), net — 2,004 $ 55,289 $ 57,675 Efficiency ratio 67.69 % 61.75 % This report also refers to net interest margin, which is calculated by dividing tax equivalent net interest income by total average earning assets.
There were no gross unrealized gains in the held to maturity portfolio at December 31, 2022 . Gross unrealized gains in the held to maturity portfolio totaled $242 thousand at December 31, 2022 Gross unrealized losses in the held to maturity portfolio totaled $11.4 million and $66 thousand at December 31, 2022 and 2021 , respectively.
Gross unrealized gains in the held to maturity portfolio totaled $107 thousand and $0 at December 31, 2023 and 2022 , respectively. Gross unrealized losses in the held to maturity portfolio totaled $10.8 million and $11.4 thousand at December 31, 2023 and 2022 , respectively.
As of and for the years ended December 31, 2022 2021 Results of Operations Interest and dividend income $ 49,395 $ 37,144 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 loan losses 43,725 35,490 Noninterest income 12,621 10,172 Noninterest expense 35,597 32,717 Income before income taxes 20,749 12,945 Income tax expense 3,952 2,586 Net income $ 16,797 $ 10,359 Key Performance Ratios Return on average assets 1.19 % 0.88 % Return on average equity 15.87 % 10.30 % Net interest margin (1) 3.44 % 3.13 % Efficiency ratio (1) 61.75 % 64.44 % Dividend payout 20.85 % 25.69 % Equity to assets 7.91 % 8.42 % Per Common Share Data Net income, basic $ 2.69 $ 1.87 Net income, diluted 2.68 1.86 Cash dividends 0.56 0.48 Book value at period end 16.79 18.28 Financial Condition Assets $ 1,369,383 $ 1,389,437 Loans, net 913,077 819,408 Securities 317,973 324,749 Deposits 1,241,332 1,248,752 Shareholders’ equity 108,360 117,039 Average shares outstanding, diluted 6,259 5,559 Capital Ratios (2) Leverage 9.36 % 8.82 % Risk-based capital ratios: Common equity Tier 1 capital 13.82 % 14.09 % Tier 1 capital 13.82 % 14.09 % Total capital 14.60 % 14.76 % (1) Thi s performance ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational performance.
As of and for the years ended December 31, 2023 2022 Results of Operations Interest and dividend income $ 57,719 $ 49,395 Interest expense 14,306 3,820 Net interest income 43,413 45,575 Provision for credit losses 6,150 1,850 Net interest income after provision for credit losses 37,263 43,725 Noninterest income 11,784 12,621 Noninterest expense 37,242 35,597 Income before income taxes 11,805 20,749 Income tax expense 2,181 3,952 Net income $ 9,624 $ 16,797 Key Performance Ratios Return on average assets 0.71 % 1.19 % Return on average equity 8.59 % 15.87 % Net interest margin (1) 3.41 % 3.44 % Efficiency ratio (1) 67.69 % 61.75 % Dividend payout 39.05 % 20.85 % Equity to assets 7.97 % 7.91 % Per Common Share Data Net income, basic $ 1.54 $ 2.69 Net income, diluted 1.53 2.68 Cash dividends 0.60 0.56 Book value at period end 18.06 16.79 Financial Condition Assets $ 1,419,295 $ 1,369,383 Loans, net 957,456 913,077 Securities 303,179 317,973 Deposits 1,233,726 1,241,332 Shareholders’ equity 116,271 108,360 Average shares outstanding, diluted 6,279 6,259 Capital Ratios (2) Leverage 9.31 % 9.36 % Risk-based capital ratios: Common equity Tier 1 capital 12.82 % 13.82 % Tier 1 capital 12.82 % 13.82 % Total capital 14.05 % 14.60 % (1) Thi s performance ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational performance.
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income 2022 2021 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 $ 5 $ 32 Tax benefit realized on non-taxable interest income - municipal securities 326 248 Total tax benefit realized on non-taxable interest income $ 331 $ 280 Total tax-equivalent net interest income $ 45,906 $ 35,120 Critical Accounting Policies General The Company’s consolidated financial statements and related notes are prepared in accordance with GAAP.
Reconciliation of Net Interest Income to Tax-Equivalent Net Interest Income 2023 2022 GAAP measures: Interest income - loans $ 49,293 $ 41,720 Interest income - investments and other 8,426 7,675 Interest expense - deposits (13,660 ) (3,273 ) Interest expense – subordinated debt (277 ) (277 ) Interest expense – junior subordinated debt (271 ) (270 ) Interest expense - other borrowings (98 ) — Total net interest income $ 43,413 $ 45,575 Non-GAAP measures: Tax benefit realized on non-taxable interest income - loans $ — $ 5 Tax benefit realized on non-taxable interest income - municipal securities 325 326 Total tax benefit realized on non-taxable interest income $ 325 $ 331 Total tax-equivalent net interest income $ 43,738 $ 45,906 28 Table of Contents Critical Accounting Policies General The Company’s consolidated financial statements and related notes are prepared in accordance with GAAP.
Another risk involved in construction and land development lending is the fact that loan funds are advanced upon the security of the land or property under construction, which value is estimated based on the completion of construction. Thus, there is risk associated with failure to complete construction and potential cost overruns.
Construction and land development loans sometimes involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction and land development lending is the fact that loan funds are advanced upon the security of the land or property under construction, which value is estimated based on the completion of construction.
The provision for loan losses is also a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, economic conditions, and loan growth.
The provi sion for credit losses is also a primary expense of the Bank. The provision is determined by factors that include net charge-offs, asset quality, loan growth, evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience.
The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements. 38 Table of Contents There were no loans greater th an 90 days past due and still accruing at December 31, 2022 and 2021, respectively.
Other potential problem loans totaled $287 thousand and $2.3 million at December 31, 2023 and December 31, 2022 , respectively. The amount of other potential problem loans in future periods may be dependent on economic conditions and other factors influencing a customers’ ability to meet their debt requirements.
Several noninterest expense categories increased compared to the prior year, including salaries and employee benefits, occupancy, equipment, bank franchise tax and other operating expenses. The increases were partially offset by decreases in data processing and legal and professional fees. The following is selected financial data for the Company for the years ended December 31, 2022 and 2021.
The increase was attributable to increases in several categories, including salaries and employee benefits, marketing, legal and professional fees, ATM and check card expense, FDIC assessment, bank franchise tax, and other operating expenses. The following is selected financial data for the Company for the years ended December 31, 2023 and 2022.
The Company has various committees that review and ensure that the allowance for loans losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio. 29 Table of Contents The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible.
The Company has various committees that review and ensure that the allowance for credit losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.
For further discussion regarding the allowance for loan losses, see “Provision for Loan Losses” above. A recovery of loan losses of $66 thousand was recorded in the consumer and other loan class during the year ended December 31, 2022 .
For further discussion regarding the ACLL, see “Provision for Credit Losses” above. A recovery of credit losses of $593 thousand was recorded in the other real estate class during the year ended December 31, 2023 . The recovery of credit losses resulted primarily from a decrease in the general reserve.
The allowance for loan losses as a percentage of total loans increased to 0.81% at December 31, 2022 compared to 0.69% at December 31, 2021 pri marily as a result of an $833 thousand increase in the specific reserve component of the allowance for loan losses.
The allowance for credit losses on loans as a percentage of total loans increased to 1.24% at December 31, 2023 compared to 0.81% at December 31, 2022 as a result of a $2.9 million increase in the general reserve and a $1.8 million increase in the specific reserve component of the ACLL.
Average Deposits and Rates Paid Year Ended December 31, 2022 2021 Amount Rate Amount Rate Noninterest-bearing deposits $ 426,823 — % $ 348,829 — % Interest-bearing deposits: Interest checking $ 295,530 0.47 % $ 254,077 0.17 % Money market 218,783 0.43 % 168,932 0.11 % Savings 205,532 0.08 % 164,768 0.07 % Time deposits: Less than $100 74,616 0.46 % 69,904 0.44 % Greater than $100 62,036 0.69 % 52,304 0.74 % Brokered deposits 556 0.57 % 650 0.34 % Total interest-bearing deposits $ 857,053 0.38 % $ 710,635 0.20 % Total deposits $ 1,283,876 $ 1,059,464 The table above includes brokered deposits greater than $100 thousand.
Average Deposits and Rates Paid Year Ended December 31, 2023 2022 Amount Rate Amount Rate Noninterest-bearing deposits $ 397,932 — % $ 426,823 — % Interest-bearing deposits: Interest checking $ 269,551 1.68 % $ 295,530 0.47 % Money market 219,655 2.22 % 218,783 0.43 % Savings 173,075 0.12 % 205,532 0.08 % Time deposits: Less than $100 84,387 1.94 % 74,616 0.46 % Greater than $100 82,184 2.77 % 62,036 0.69 % Brokered deposits 3,061 3.70 % 556 0.57 % Total interest-bearing deposits $ 831,913 1.64 % $ 857,053 0.38 % Total deposits $ 1,229,845 $ 1,283,876 The table above includes brokered deposits greater than $100 thousand.
For further information about the Company’s loans and the allowance for loan losses, see Notes 1, 3, and 4 to the Consolidated Financial Statements included in this Form 10-K.
For further information about the Company’s loans and the ACLL, see Notes 1, 3, and 4 to the Consolidated Financial Statements included in this Form 10-K. The ACLL is evaluated on a quarterly basis by management and is based on a discounted cash flow model to estimate its current expected credit losses.
The decrease was primarily attributable to a $111.2 million decrease in interest-bearing deposits in banks, which was partially offset by offset by a $93.7 million increase in net loans. Securities available for sale decreased $126.6 million and was mostly offset by securities held to maturity that increased $119.7 million during the year ended December 31, 2022.
The increase was primarily attributable to a $44.4 million increase in loans, net of allowance and a $23.8 million increase in interest-bearing deposits in banks, which was partially offset by a $10.1 million decrease in securities available for sale, and a $4.9 million decrease in securities held to maturity.
These favorable variances were partially offset by a $2.5 million increase in provision for loan losses, a $2.9 million, or 9%, increase in noninterest expense and a $1.4 million increase in income tax expense. 26 Table of Contents Net interest income increased $10.7 million, or 31%, for the year ended December 31, 2022, compared to the same period of 2021 from a $12.3 million increase in total interest income, which was partially offset by a $1.5 million increase in total interest expense.
These unfavorable variances were partially offset by a $1.8 million, decrease in income tax expense. 26 Table of Contents Net interest income decreased $2.2 million, or 5%, from a $10.5 million increase in total interest expense, which was partially offset by an $8.3 million increase in total interest income.
The allowance for loan losses totaled $7.4 million, or 0.81% of total loans, at December 31, 2022, compared to $5.7 million, or 0.69% of total loans, at December 31, 2021. The specific reserve increased $833 thousand, and the general reserve increased $903 thousand compared to the prior year. Net charge-offs totaled $114 thousand in 2022 and $1.1 million in 2021.
The allowance for credit losses on loans totaled $12.0 million, or 1.24% of total loans, at December 31, 2023, compared to $7.4 million, or 0.81% of total loans, at December 31, 2022. The allowance for credit losses on loans individually evaluated increased $1.8 million compared to the prior year.
Non-performing assets could increase due to the deterioration of other loans identified by management as potential problem loans.
At December 31, 2023 , 92.1% of non-performing assets were commercial and industrial loans, 7.3% were residential real estate loans, 0.6% construction loans. Non-performing assets could increase due to the deterioration of other loans identified by management as potential problem loans.
Subordinated Debt See Note 9 to the Consolidated Financial Statements included in this Form 10-K, for discussion of subordinated debt.
Excluding municipal deposits, the estimated amount of uninsured customer deposits totaled $286.2 million on December 31, 2023 , and $185.3 million on December 31, 2022. Subordinated Debt See Note 9 to the Consolidated Financial Statements included in this Form 10-K, for discussion of subordinated debt.
As of December 31, 2022 , none of these TDRs were performing under the restructured terms and all were considered non-performing assets. 39 Table of Contents Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio.
The related allowance for credit losses required for these loans totaled $2.7 million and $888 thousand at December 31, 2023 and December 31, 2022 , respectively. 37 Table of Contents Management believes, based upon its review and analysis, that the Bank has sufficient reserves to cover losses inherent within the loan portfolio.
Although the Bank did not opt into the CBLR framework at December 31, 2021, it may opt into the CBLR framework in a future quarterly period. For further discussion regarding the CARES Act, see "Supervision and Regulation" included in Item 1 of this Form 10-K.
Although the Bank did not opt into the CBLR framework at December 31, 2023, it may opt into the CBLR framework in a future quarterly period.
Interest on deposits in banks increased from a 101-basis point increase in yield and was partially offset by a $56.6 million decrease in the average balance of deposits in banks.
The higher interest expense on deposits resulted from a 126-basis point increase in the cost of interest-bearing deposits, which was partially offset by the impact of a 3% decrease in average interest-bearing deposits.
At December 31, 2022 , commitments to extend credit, stand-by letters of credit, and rate lock commitments totaled $177.2 million. Construction and Land Development Lending The Bank makes local construction loans, including residential and land acquisition and development loans. These loans are secured by the property under construction and the underlying land for which the loan was obtained.
Construction and Land Development Lending The Bank makes local construction loans, including residential and land acquisition and development loans. These loans are secured by the property under construction and the underlying land for which the loan was obtained. The majority of these loans mature in one year. Construction lending entails significant additional risks, compared with residential mortgage lending.
Net Interest Income Net interest income increased $10.7 million, or 31%, for the year ended December 31, 2022, compared to the same period of 2021 from a $12.3 million increase in total interest income, which was partially offset by a $1.5 million increase in total interest expense.
Net Interest Income Net interest income decreased $2.2 million, or 5%, to $43.4 million for 2023 compared to the prior year. Total interest expense increased by $10.5 million and was partially offset by total interest income, which increased by $8.3 million.
The tax-equivalent adjustment was $331 thousand for 2022, and $280 thousand for 2021 (2) Loans placed on a non-accrual status are reflected in the balances. 34 Table of Contents Volume and Rate Years Ending December 31, 2022 Volume Effect Rate Effect Change in Income/Expense Interest-bearing deposits in other banks $ (96 ) $ 1,106 $ 1,010 Loans, taxable 7,777 1,247 9,024 Loans, tax-exempt (127 ) (1 ) (128 ) Securities, taxable 1,202 829 2,031 Securities, tax-exempt 292 79 371 Securities, restricted (2 ) 6 4 Federal funds sold — (10 ) (10 ) Total earning assets $ 9,046 $ 3,256 $ 12,302 Checking $ 82 $ 888 $ 970 Money market accounts 68 675 743 Savings accounts 42 24 66 Certificates of deposits: Less than $100 21 14 35 Greater than $100 67 (24 ) 43 Brokered deposits — 1 1 Federal funds purchased — — — Subordinated debt (250 ) (92 ) (342 ) Junior subordinated debt — — — Other borrowings — — — Total interest-bearing liabilities $ 30 $ 1,486 $ 1,516 Change in net interest income $ 9,016 $ 1,770 $ 10,786 Provision for Loan Losses Provision for loan losses totaled $1.9 million for the year ended December 31, 2022, and resulted in an allowance for loan losses that totaled $7.4 million, or 0.81% of total loans.
The tax-equivalent adjustment was $325 thousand for 2023, and $331 thousand for 2022 (2) Loans placed on a non-accrual status are reflected in the balances. 34 Table of Contents Volume and Rate Years Ending December 31, 2023 Volume Effect Rate Effect Change in Income/Expense Interest-bearing deposits in other banks $ (142 ) $ 729 $ 587 Loans, taxable 3,221 4,371 7,592 Loans, tax-exempt (25 ) — (25 ) Securities, taxable 58 97 155 Securities, tax-exempt (15 ) 4 (11 ) Securities, restricted 2 18 20 Federal funds sold — — — Total earning assets $ 3,099 $ 5,219 $ 8,318 Checking $ (111 ) $ 3,255 $ 3,144 Money market accounts 4 3,948 3,952 Savings accounts (17 ) 55 38 Certificates of deposits: Less than $100 50 1,245 1,295 Greater than $100 180 1,668 1,848 Brokered deposits 49 61 110 Federal funds purchased 1 — 1 Subordinated debt — — — Junior subordinated debt — 1 1 Other borrowings — — 97 Total interest-bearing liabilities $ 156 $ 10,233 $ 10,486 Change in net interest income $ 2,943 $ (5,014 ) $ (2,168 ) Provision for Credit Losses Provision for credit losses totaled $6.2 million in 2023, compared to a provision for credit losses of $1.9 million for the prior year.
The Company also obtains an independent review of loans within the portfolio on an annual basis to analyze loan risk ratings and validate specific reserves on impaired loans. In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are disclosed but not reflected in its financial statements, including commitments to extend credit.
In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are disclosed but not reflected in its financial statements, including commitments to extend credit. At December 31, 2023 , commitments to extend credit, stand-by letters of credit, and rate lock commitments totaled $207.0 million.
Noninterest income increased $2.4 million, primarily from a gain of $2.9 million recognized from the sale of an interest in a company owned by First Bank Financial Services, Inc.
The gain on sale of other investment resulted from a gain on sale of an interest in a broker-dealer of investment securities by First Bank Financial Services, Inc.
For more detailed information regarding the provision for loan losses, see Note 4 to the Consolidated Financial Statements included in this Form 10-K. Impaired loans totaled $2.7 million and $2.3 million at December 31, 2022 and 2021 , respectively.
This recovery was offset by provision for credit losses totaling $6.5 million in the construction and land development, 1-4 family residential, commercial and industrial, and consumer loan classes. For more detailed information regarding the provision for credit losses on loans, see Note 4 to the Consolidated Financial Statements included in this Form 10-K.
Allowance for loan losses Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total For the year ended December 31, 2021: Balance at beginning of year $ 306 $ 1,022 $ 4,956 $ 784 $ 417 $ 7,485 Charge-offs — (15 ) (992 ) (6 ) (434 ) (1,447 ) Recoveries 6 65 3 7 241 322 Provision for (recovery of) loan losses 33 5 (737 ) (67 ) 116 (650 ) Balance at end of year $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 Average loans $ 32,233 $ 265,900 $ 296,381 $ 107,964 $ 10,258 $ 712,736 Ratio of net (recoveries) charge-offs to average loans -0.02 % -0.02 % 0.33 % 0.00 % 1.88 % 0.16 % For the year ended December 31, 2022: Balance at beginning of year 345 1,077 3,230 718 340 5,710 Charge-offs — — — (398 ) (131 ) (529 ) Recoveries — 10 15 277 113 415 Provision for (recovery of) loan losses 4 192 350 1,370 (66 ) 1,850 Balance at end of year $ 349 $ 1,279 $ 3,595 $ 1,967 $ 256 $ 7,446 Average loans $ 49,671 $ 308,276 $ 399,395 $ 107,561 $ 8,085 $ 872,988 Ratio of net (recoveries) charge-offs to average loans 0.00 % 0.00 % 0.00 % 0.11 % 0.22 % 0.01 % The following table shows the balance of the Bank’s allowance for loan losses allocated to each major category of loans and the ratio of related outstanding loan balances to total loans (dollars in thousands).
Allowance for credit losses Construction and Land Development Secured by 1-4 Family Residential Other Real Estate Commercial and Industrial Consumer and Other Loans Total For the year ended December 31, 2022: Balance at beginning of year $ 345 $ 1,077 $ 3,230 $ 718 $ 340 $ 5,710 Charge-offs — (6 ) — (32 ) (491 ) (529 ) Recoveries 10 19 15 145 226 415 Provision for (recovery of) credit losses 191 18 364 1,043 234 1,850 Balance at end of year $ 546 $ 1,108 $ 3,609 $ 1,874 $ 309 $ 7,446 Average loans $ 49,671 $ 308,276 $ 399,395 $ 107,561 $ 8,085 $ 872,988 Ratio of net (recoveries) charge-offs to average loans -0.02 % 0.00 % 0.00 % -0.11 % 3.28 % 0.01 % For the year ended December 31, 2023: Balance at beginning of year $ 546 $ 1,108 $ 3,609 $ 1,874 $ 309 $ 7,446 Adjustment to allowance for adoption of ASU 2016-13 (313 ) 1,409 1,702 (387 ) (225 ) 2,186 Charge-offs — (59 ) (34 ) (3,452 ) (448 ) (3,993 ) Recoveries — 47 14 145 212 418 Provision for (recovery of) credit losses 79 654 (593 ) 5,526 251 5,917 Balance at end of year $ 312 $ 3,159 $ 4,698 $ 3,706 $ 99 $ 11,974 Average loans $ 49,950 $ 337,278 $ 427,094 $ 112,822 $ 9,868 $ 937,012 Ratio of net (recoveries) charge-offs to average loans 0.00 % 0.00 % 0.00 % 2.93 % 2.39 % 0.38 % The following table shows the balance of the Bank’s ACLL allocated to each major category of loans and the ratio of related outstanding loan balances to total loans (dollars in thousands).
The $6.4 million increase in net income for the year ended December 31, 2022 resulted primarily from a $10.7 million, or 31%, increase in net interest income, and a $2.5 million, or 24%, increase in noninterest income, compared to the same period of 2021 .
The $7.2 million decrease in net income resulted from a $4.3 million, increase in provision for credit losses, a $2.2 million, or 5%, decrease in net interest income, a $866 thousand, or 7%, decrease in noninterest income, and a $1.6 million, or 5%, increase in noninterest expense.

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