First National Corporation (FXNC) is a bank holding company and the parent of First Bank, a community bank that has been serving the Shenandoah Valley, Roanoke Valley, and central Virginia regions since 1907. Over its 117-year history, First National has navigated economic cycles, industry consolidation, and technological disruption, emerging as a trusted financial institution known for its personalized service and community-centric approach.

Business Overview and History

First National Corporation was founded in 1907 as the First National Bank of Strasburg, Virginia. Initially serving the Shenandoah Valley region, the bank expanded its footprint over the decades, opening new branches and acquiring smaller community banks. In 2010, the company reorganized as a bank holding company, with First Bank as its wholly-owned subsidiary.

Throughout its history, First National Corporation has faced various challenges, including the financial crisis of the late 2000s, which put pressure on asset quality and profitability. However, the company successfully maintained its capital levels and continued serving customers during this difficult period. In the 2010s, First National Corporation invested heavily in digital banking capabilities, enhancing its mobile banking platform and online banking services to meet evolving customer needs. The company also focused on diversifying its revenue streams by growing its wealth management business and expanding commercial lending activities.

Despite these challenges and changes, First National Corporation has remained committed to its community banking model and focus on personalized service. The company has cultivated longstanding relationships with small and medium-sized businesses, individuals, estates, local governmental entities, and non-profit organizations throughout its market area. This customer-centric approach, coupled with prudent risk management and a strong capital position, has allowed First National Corporation to navigate various economic cycles and emerge as a respected community bank in its region.

In 2024, First National took a significant step in its growth strategy by acquiring Touchstone Bankshares, Inc. and its subsidiary, Touchstone Bank. The $660.8 million acquisition expanded First National's presence in the greater Richmond, Virginia market, as well as into northern North Carolina. Following the merger, the combined company had approximately $2.1 billion in assets, $1.5 billion in loans, and $1.8 billion in deposits, operating through 33 branch offices and 3 loan production offices across Virginia and North Carolina.

Financial Performance and Ratios

Financials

For the fiscal year ended December 31, 2023, First National reported annual revenue of $53.6 million, net income of $9.6 million, annual operating cash flow of $16.4 million, and annual free cash flow of $14.5 million. For the fiscal year ended December 31, 2024, First National reported annual net income of $7.0 million, annual revenue of $53.6 million, annual operating cash flow of $16.4 million, and annual free cash flow of $14.5 million. These figures represent a 10% decrease in net income, a 6% increase in revenue, a 3% decrease in operating cash flow, and an 18% decrease in free cash flow compared to the prior year.

Liquidity

The company's financial ratios demonstrate its solid financial position. As of September 30, 2024, First National had a debt-to-equity ratio of 0.51, a current ratio of 0.44, and a quick ratio of 0.44, indicating a well-capitalized and liquid balance sheet. The company's return on assets (ROA) and return on equity (ROE) for the nine-month period ended September 30, 2024, were 0.73% and 8.84%, respectively. First National reported cash and cash equivalents of $126.5 million and had access to a $50 million line of credit as of September 30, 2024.

Quarterly Performance

In the third quarter of 2024, First National reported revenue of $13.3 million and net income of $2.2 million, or $0.36 per diluted share, compared to $3.1 million, or $0.50 per diluted share, in the same period of the prior year. The decrease in net income was primarily due to a $1.6 million increase in the provision for credit losses and a $675,000 increase in noninterest expense, partially offset by a $1.1 million increase in net interest income and a $150,000 increase in noninterest income. The company's revenue increased by 6% in Q3 2024 compared to Q3 2023, driven by higher interest income on loans and deposits.

The company's net interest margin for the third quarter of 2024 was 3.43%, up from 3.35% in the same period of 2023, driven by an 8% increase in average earning assets and an 8-basis point increase in yield. However, the net interest margin for the nine-month period ended September 30, 2024, decreased by 8 basis points to 3.36% compared to the same period in 2023, as the increase in the cost of funds outpaced the increase in earning asset yields.

Business Segments

First National Corporation offers a range of banking products and services across several key segments:

Loans: As of September 30, 2024, the loan portfolio totaled $994.7 million, with real estate loans accounting for approximately 80% of the total. The loan portfolio consists of real estate loans (construction and land development, 1-4 family residential, and other real estate loans), commercial and industrial loans, and consumer and other loans. The Bank's loan growth was 3% annualized during the first nine months of 2024, driven primarily by increases in real estate and commercial/industrial loans. Loan quality remained relatively stable, with nonaccrual loans totaling $5.9 million, or 0.60% of total loans, as of September 30, 2024.

Deposits: First National's deposit base totaled $1.25 billion as of September 30, 2024. The deposit portfolio is composed of noninterest-bearing demand deposits (31% of total), savings and interest-bearing demand deposits (53%), and time deposits (16%). Deposit growth was 2% annualized during the first nine months of 2024, with increases across all deposit categories.

Wealth Management: First National offers wealth management services, including estate planning, investment management, and trust services. Wealth management fees were $2.7 million for the first nine months of 2024, an increase of 16% compared to the same period in 2023, driven by growth in assets under management and higher market values.

Other Noninterest Income: The company generates additional noninterest income from service charges on deposit accounts, ATM and check card fees, brokered mortgage fees, and other customer service fees. Total noninterest income, excluding wealth management fees, was $7.2 million for the first nine months of 2024, a 9% increase compared to the prior-year period.

Geographic Markets

First National Corporation primarily operates in the Shenandoah Valley, Roanoke Valley, central regions of Virginia, and the city of Richmond. The company has a diverse customer base across industries including medical and professional services, manufacturing, retail, warehousing, government, hospitality, and higher education. The recent acquisition of Touchstone Bankshares has expanded the company's presence into northern North Carolina as well.

Outlook and Guidance

In its most recent quarterly report, First National provided the following outlook for the remainder of 2024 and 2025:

• The company expects to incur additional pre-tax merger-related expenses of approximately $11.5 million during the fourth quarter of 2024 and first quarter of 2025 related to the Touchstone acquisition.
• Management anticipates continued loan growth, with a focus on commercial and industrial, and residential mortgage lending.
• The company is closely monitoring economic conditions, including the potential impact of inflation and rising interest rates, and their effect on asset quality and the allowance for credit losses.

Risks and Challenges

While First National has a strong track record of navigating industry challenges, the company faces several risks and uncertainties, including:

• Integration risks associated with the Touchstone acquisition, including the ability to retain key personnel and customers, and achieve expected cost savings and revenue synergies.
• Potential pressure on net interest margin due to rising funding costs and the competitive lending environment.
• Exposure to credit risk, particularly in the commercial real estate and commercial and industrial loan portfolios, in the event of an economic downturn.
• Heightened competition from larger regional banks and financial technology (fintech) companies.
• Ongoing regulatory changes and compliance requirements in the banking industry.

Conclusion

First National Corporation has demonstrated its resilience and adaptability over more than a century of operation. The company's recent acquisition of Touchstone Bankshares has bolstered its presence in attractive Virginia and North Carolina markets, while its focus on personalized customer service and community involvement has helped it maintain a loyal customer base. As First National navigates the evolving banking landscape, its strong financial position, experienced management team, and commitment to its communities position it well for continued growth and success. The company's diversified revenue streams from lending, deposit-taking, and wealth management operations provide a solid foundation for future performance, even as it faces challenges such as integration risks from recent acquisitions and potential economic headwinds.