8-K: First National Corporation Reports Net Loss in Q4 2024, Cites Merger Costs

First National Corporation reported a net loss for Q4 2024, primarily due to merger-related expenses from the Touchstone Bankshares acquisition, but highlights a net interest margin increase and solid operating metrics when adjusting for these costs.

Summary

• First National Corporation reported an unaudited consolidated net loss of $933 thousand for the fourth quarter of 2024, with a loss per common share of $0.10.
• Adjusted operating earnings for the quarter were $6.0 million, with adjusted earnings per common share of $0.66.
• For the year ended December 31, 2024, the company reported earnings of $7.0 million, or $1.00 per share, and adjusted operating earnings of $14.6 million, or $2.10 per share.
• The acquisition of Touchstone Bankshares was completed on October 1, 2024, adding $664.3 million in total assets and $614.6 million in total liabilities.
• The company recorded a preliminary bargain purchase gain of $2.9 million related to the acquisition.
• Net interest income for the fourth quarter was $18.4 million, up from $11.7 million in the previous quarter.
• The net interest margin increased by 40 basis points to 3.83%.
• Noninterest income increased to $6.4 million, primarily due to the bargain purchase gain.
• Noninterest expense increased to $21.9 million, driven by $7.3 million in merger-related expenses.
• Nonperforming assets (NPAs) as a percentage of total assets decreased to 0.35%.
• The allowance for credit losses on loans totaled $16.4 million, or 1.12% of total loans.
• Total assets reached $2.0 billion, an increase of $559.6 million from the previous quarter.
• Total deposits were $1.80 billion, an increase of $550.5 million from the prior quarter.

Sentiment

Score: 5

Explanation: The sentiment is neutral. While the company reports a net loss, it emphasizes the positive aspects of the Touchstone acquisition and anticipates future benefits from the integration. The negative impact of merger-related expenses is acknowledged, but the overall tone suggests optimism about the company's future performance.

Positives

• The acquisition of Touchstone Bankshares significantly increased the company's asset base and deposit base.
• The net interest margin improved by 40 basis points to 3.83%.
• Noninterest bearing deposits represent a substantial portion (29%) of total deposits.
• The company recorded a bargain purchase gain of $2.9 million from the Touchstone acquisition.
• Earning asset yields increased, and the cost of funds decreased.
• Nonperforming assets as a percentage of total assets decreased to 0.35%.

Negatives

• The company reported a net loss of $933 thousand for the fourth quarter of 2024.
• Merger-related expenses significantly impacted the company's profitability, totaling $7.3 million for the quarter.
• Noninterest expense increased substantially due to the Touchstone acquisition and associated costs.
• Net charge-offs totaled $1.3 million in the fourth quarter of 2024.
• Total net unrealized losses on available for sale (AFS) securities were $22.1 million at December 31, 2024.

Risks

• The company faces risks related to the integration of Touchstone's operations, including potential delays and higher-than-expected costs.
• The company's forward-looking statements are subject to various risks and uncertainties, including economic conditions and competitive factors.
• The company's financial performance could be affected by changes in interest rates and credit quality.
• The company's capital ratios decreased due to the Touchstone acquisition.

Future Outlook

The company anticipates completing system conversions in several weeks, which will allow them to operate as one bank across their footprint and expects the fourth quarter financial operating performance is indicative of the benefits of the acquisition and look forward to fully completing the integration of our two companies.

Management Comments

• Scott Harvard, President and Chief Executive Officer of First National, stated that the fourth quarter results reflected solid operating metrics adjusting for merger costs and is the first quarter to include the combined financial results of First National and Touchstone.
• Scott Harvard is proud of all the work from the company's teammates to get to this point.

Industry Context

The acquisition of Touchstone Bankshares reflects a trend of consolidation in the banking industry, where smaller banks merge to achieve economies of scale and expand their market presence.

Comparison to Industry Standards

• Comparing First National's efficiency ratio of 63.97% to industry peers such as Truist Financial Corporation (efficiency ratio around 57%) and Bank of America (efficiency ratio around 65%) suggests that First National is performing within a reasonable range, although there is room for improvement.
• The net interest margin of 3.83% is comparable to regional banks like United Bankshares, Inc. which has a net interest margin of 3.65%.
• The tangible book value per share of $16.55 is lower than some larger banks but is within the range of other community banks.

Stakeholder Impact

• Shareholders may be concerned about the net loss in Q4 2024, but reassured by the long-term benefits of the Touchstone acquisition.
• Employees are likely impacted by the merger and integration process.
• Customers will experience changes as the two banks integrate their systems and services.

Next Steps

• The company will complete system conversions in several weeks to operate as one bank across its footprint.
• The company will finalize the fair value measurements of the acquired company's net assets within 12 months of the acquisition date.

Key Dates

Keywords

acquisition, Touchstone Bankshares, net interest margin, merger, financial results, earnings, First National Corporation, FXNC, bank