Introduction and History
First National Corporation (NASDAQ:FXNC) is a well-established community bank that has successfully weathered multiple economic cycles and demonstrated a commitment to delivering shareholder value. With a rich history dating back to 1907, the company has evolved into a diversified financial services provider, offering a comprehensive suite of lending, deposit, and wealth management products to its customers across Virginia and North Carolina.
The company’s origins trace back to 1907 when it first opened its doors in Strasburg, Virginia. Over the decades, First National has strategically expanded its footprint through organic growth and selective acquisitions, establishing a strong presence in the Shenandoah Valley, Roanoke Valley, central Virginia, and the greater Richmond market area. The 2024 acquisition of Touchstone Bankshares, Inc. further bolstered the company’s market share and geographic diversification, adding 13 branch locations in Virginia and North Carolina.
Growth Journey and Milestones
First National’s growth journey includes several significant milestones. In 1990, the company acquired Bank of Fincastle, expanding its reach into the Roanoke Valley and diversifying its customer base. This acquisition, while beneficial for geographic expansion, presented challenges in the early 2000s as the Bank of Fincastle subsidiary faced asset quality issues following the dot-com bubble burst. First National successfully navigated this period through aggressive management of troubled loans and a strategic refocus of the Bank of Fincastle operations.
Another pivotal moment in First National’s history came in 2014 with the acquisition of Shenandoah Valley National Bank. This transaction significantly enhanced the company’s market position in the Shenandoah Valley region and was executed smoothly, allowing First National to capture substantial cost savings and revenue synergies. Throughout its growth, First National has maintained a steadfast commitment to its community banking model, emphasizing personal relationships, local decision-making, and a diverse range of financial products and services.
Financial Performance
As of September 30, 2024, First National Corporation reported total assets of $1.45 billion, an increase of 2% on an annualized basis from the prior year-end. The company’s loan portfolio totaled $994.72 million, up 3% annualized, with a diverse mix of real estate loans, commercial and industrial loans, and consumer loans. Deposits reached $1.25 billion, a 2% annualized increase, demonstrating the bank’s ability to attract and retain a loyal customer base.
First National’s financial performance has been impressive, with the company reporting net income of $7.90 million for the nine months ended September 30, 2024. This translated to diluted earnings per share of $1.26, down from $1.67 in the same period of the prior year. The decrease in net income was primarily attributable to a $2.90 million increase in the provision for credit losses and a $2.80 million rise in noninterest expenses, which included $790,000 in merger-related costs associated with the Touchstone acquisition.
For the most recent fiscal year (2023), First National reported revenue of $53.57 million, net income of $9.62 million, operating cash flow of $16.39 million, and free cash flow of $14.52 million. In the most recent quarter (Q3 2024), the company’s revenue was $20.637 million, representing a 5.0% increase compared to the same quarter last year. Net income for Q3 2024 was $2.248 million, a 27.9% decrease from the prior year’s quarter. The increase in revenue was driven by higher net interest income, while the decrease in net income was due to a $1.6 million increase in the provision for credit losses and a $675,000 increase in noninterest expense.
Balance Sheet and Capital Position
Despite the near-term financial impact of the Touchstone integration, First National has maintained a healthy balance sheet and strong capital position. As of September 30, 2024, the bank’s total risk-based capital ratio stood at 14.26%, well above the regulatory minimum of 8% and the 10.50% requirement to be considered “well capitalized.” The company’s tangible common equity ratio was a robust 8.62%, providing ample cushion to withstand potential economic headwinds.
The company’s debt-to-equity ratio was 0.51 as of September 30, 2024, indicating a conservative leverage profile. First National had $126.52 million in cash and cash equivalents and an available $50 million line of credit as of the most recent quarter. The company’s current ratio and quick ratio both stood at 1.00 at the end of Q3 2024, suggesting adequate liquidity to meet short-term obligations.
Liquidity
Liquidity has also remained a strength, with the bank reporting $499.10 million in available liquidity sources as of September 30, 2024, including interest-bearing deposits, unpledged securities, and borrowing capacity. This liquidity position enables First National to fund loan growth, meet deposit demands, and pursue strategic initiatives.
Shareholder Value and Dividends
First National’s commitment to shareholder value is evidenced by its consistent dividend payments and recent increases. In November 2024, the company raised its quarterly cash dividend by 3% to $0.155 per share, marking the tenth consecutive year of dividend hikes. The current dividend yield of 2.6% provides an attractive return for income-oriented investors.
Loan Products and Services
First National Corporation, through its subsidiary First Bank, offers a variety of loan products and services to its customers. As of September 30, 2024, the loan portfolio was primarily comprised of loans secured by one-to-four family residential real estate (35%), commercial real estate (45%), and commercial and industrial loans (12%).
The bank offers traditional mortgage loans, home equity loans, and home equity lines of credit secured by one-to-four family residential properties. Commercial real estate loans include those secured by owner-occupied properties and non-owner occupied investment properties. The commercial and industrial loan portfolio caters to small and medium-sized businesses, while consumer loans include automobile loans, personal loans, and demand deposit overdrafts.
As of September 30, 2024, loans acquired through business combinations included unamortized discounts, net of unamortized premiums, totaling $1.7 million, and loans purchased from a third-party totaled $20.8 million, which included unamortized premiums of $6.5 million.
The allowance for credit losses totaled $12.7 million as of September 30, 2024, an increase of $730 thousand from December 31, 2023. The provision for credit losses totaled $3.1 million for the nine months ended September 30, 2024, compared to $200 thousand for the same period in the prior year, reflecting an increase in specific reserves on loans and the general reserve component due to an increase in projected losses from a higher projected unemployment rate.
Deposit Products and Services
First Bank offers a variety of deposit products and services, including checking accounts, savings accounts, money market accounts, and time deposits. As of September 30, 2024, total deposits amounted to $1.25 billion, an increase of $20 million, or 2% on an annualized basis, from December 31, 2023.
The deposit portfolio was comprised of 31% noninterest-bearing demand deposits, 53% savings and interest-bearing demand deposits, and 16% time deposits as of September 30, 2024, relatively consistent with the composition at December 31, 2023. The bank’s focus on core deposits has led to a stable funding base, with noninterest-bearing demand deposits representing a significant portion of total deposits.
Wealth Management Services
In addition to loan and deposit products, First Bank offers wealth management services, including estate planning, investment management of assets, trustee services, and individual retirement accounts. Wealth management fees increased by $378 thousand, or 16%, for the nine months ended September 30, 2024, compared to the same period in the prior year, due to an increase in assets under management and higher market values.
Future Outlook and Strategy
Looking ahead, First National remains focused on organic growth, strategic acquisitions, and operational efficiency. The successful integration of Touchstone is a top priority, as the company aims to realize the anticipated revenue and cost synergies from the merger. Additionally, the bank continues to invest in technology and digital capabilities to enhance the customer experience and drive long-term competitiveness.
The acquisition of Touchstone Bankshares, Inc., completed on October 1, 2024, expanded the company’s presence in the greater Richmond market area, southern Virginia, and northern North Carolina. As of September 30, 2024, Touchstone reported total assets of $660.8 million, gross loans of $492.4 million, and total deposits of $559.1 million. The company estimates it will incur an additional $11.5 million in merger-related expenses during the fourth quarter of 2024 and the first quarter of 2025.
Risks and Challenges
Risks to First National’s business model include rising interest rates, increased competition from both traditional and non-traditional financial institutions, potential credit quality deterioration, and the ongoing integration challenges associated with the Touchstone acquisition. The company’s ability to navigate these headwinds while executing its growth strategy will be crucial to its future performance.
Conclusion
In conclusion, First National Corporation is a well-positioned community bank with a rich history, a diversified business model, and a track record of delivering shareholder value. The company’s recent acquisition and steady financial performance, coupled with its strong capital and liquidity profiles, position it well to continue capitalizing on growth opportunities in its core markets. As First National navigates the evolving financial landscape, investors will likely keep a close eye on the company’s ability to integrate Touchstone seamlessly and maintain its focus on organic expansion and operational excellence. With its comprehensive suite of loan products, deposit services, and wealth management offerings, First National is well-equipped to serve its customers across its expanded market areas in Virginia and North Carolina, setting the stage for continued growth and profitability in the years to come.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.