First National Corporation Reports Fourth Quarter and Annual 2024 Financial Results

In connection with the acquisition, the Company recorded an allowance for credit losses on acquired loans that experienced a more than insignificant amount of credit deterioration since origination (“PCD” loans) of $385 thousand. In addition, the Company recorded a provision for credit losses of $3.8 million on non-PCD loans and $100 thousand provision on unfunded commitments for the fourth quarter of 2024.

The Company incurred pre-tax merger costs of approximately $7.3 million during the fourth quarter of 2024 related to the Touchstone acquisition.

NET INTEREST INCOME

For the fourth quarter of 2024, net interest income was $18.4 million, an increase of $6.6 million from $11.7 million in the third quarter of 2024. The increases in net interest income was primarily the result of a $545.3 million increase in average interest earning assets, partially offset by a $415.0 million increase in average interest bearing liabilities, in each case primarily related to the acquisition of Touchstone. For the fourth quarter of 2024, the Company’s net interest margin increased 40 basis points to 3.83% primarily due to the impacts associated with the Touchstone acquisition. Earning asset yields for the fourth quarter of 2024 increased 22 basis points to 5.30% compared to the third quarter of 2024, and the cost of funds decreased by 21 basis points to 1.51%, due to changes in deposit mix following the acquisition of Touchstone and federal funds rate cuts in late 2024.

The Company’s net interest margin (FTE)⁽¹⁾ for the fourth quarter of 2024 includes the impact of acquisition accounting fair value adjustments. Net accretion income related to acquisition accounting was $408 thousand, or a nine basis point incremental increase to the net interest margin for the fourth quarter ended December 31, 2024, and none for the comparative prior quarter and same quarter in 2023, respectively, due to the Touchstone acquisition.

NONINTEREST INCOME

Noninterest income increased $3.4 million to $6.4 million for the fourth quarter of 2024 from $3.2 million in the prior quarter, primarily driven by $2.9 million of pre-tax bargain purchase gain and other increases in noninterest income associated with the full quarter impact of the Touchstone acquisition that closed on October 1, 2024.

NONINTEREST EXPENSE

Noninterest expense increased $11.5 million to $21.9 million for the fourth quarter of 2024 from $10.5 million in the prior quarter, primarily driven by a $7.3 million increase in pre-tax merger-related expenses, as well as other increases in noninterest expense due to the full quarter impact of the Touchstone acquisition. The full quarter impact of Touchstone and related merger expenses drove the majority of the $4.5 million increase in salaries and benefits, the $3.9 million increase in data processing, and the $351 thousand increase in occupancy expenses compared to the prior quarter. In addition, legal and professional services increased $618 thousand, primarily due to fees associated with the merger.

Adjusted operating noninterest expense, which excludes merger-related costs ($219 thousand in the third quarter and $7.3 million in the fourth quarter) and amortization of intangible assets ($4 thousand in the third quarter and $448 thousand in the fourth quarter), increased $3.9 million to $14.2 million for the fourth quarter of 2024 from $10.2 million in the prior quarter, primarily due to the impact of the Touchstone acquisition.

ASSET QUALITY

Overview

Loans past due greater than 30 days and still accruing interest as a percentage of total loans amounted to 0.24% on December 31, 2024, compared to 0.24% on September 30, 2024, and 0.31% on December 31, 2023. Of the total past due loans still accruing interest, $365 thousand were past due 90 days or more on December 31, 2024, compared to $0 on September 30, 2024, and $524 thousand on December 31, 2023. Management classifies non-performing assets (“NPAs”) as non-accrual loans and OREO. Nonperforming assets (“NPAs”) as a percentage of total assets decreased to 0.35% on December 31, 2024, compared to 0.41% on September 30, 2024, and 0.48% one year ago on December 31, 2023. The decrease in the NPA ratio was primarily due to the effects of the Touchstone acquisition, which added LHFI of $479.3 million acquired in the transaction. Net charge-offs totaled $1.3 million in the fourth quarter of 2024, compared to net charge-offs of $1.6 million in the third quarter of 2024, and net charge-offs of $2.7 million in the fourth quarter of 2023. The net charge-offs for the fourth quarter of 2024 included $883 thousand of commercial and industrial loans, with $774 thousand of that specific to our pool of loans originated to health care professionals through a third-party lender. The allowance for credit losses on loans totaled $16.4 million, or 1.12% of total loans on December 31, 2024, compared to $12.7 million, or 1.28% of total loans on September 30, 2024, and $12.0 million, or 1.24% of total loans on December 31, 2023.

Nonperforming Assets

NPAs increased to $7.1 million on December 31, 2024, compared to $6.0 million on September 30, 2024, and $6.8 million on December 31, 2023, which represented 0.35%, 0.41%, and 0.48% of total assets, respectively. The increase in NPAs during the fourth quarter of 2024 resulted from the acquisition of Touchstone’s portfolio, including $1 million of additional non-accrual loans.

Past Due Loans

Loans past due 30-89 days and still accruing interest increased to $3.1 million, or 0.21% of total loans on December 31, 2024, compared to $2.4 million, or 0.24% of total loans on September 30, 2024, and $2.5 million, or 0.26%, of total loans on December 31, 2023. Loans past due over 90 days or more and still accruing interest on December 31, 2024, increased to $365 thousand, compared to $0 on September 30, 2024, and $524 thousand on December 31, 2023.

Allowance for Credit Losses on Loans

For the fourth quarter of 2024, the Company recorded a provision for credit losses of $4.8 million, compared to a provision for credit losses of $1.7 million in the prior quarter, and a provision for credit losses of $6.0 million in the fourth quarter of 2023. Included in the provision for credit losses for the fourth quarter of 2024 was a $3.8 million initial provision expense on non-PCD loans and $100 thousand on unfunded commitments, each acquired from Touchstone. As compared to the prior quarter, the decrease in provision for credit losses, outside of the initial provision expense recorded on non-PCD loans and unfunded commitments acquired from Touchstone, primarily reflects the impact of lower net charge-offs in the fourth quarter of 2024 and lower outstanding legacy loan balances. As compared to the same period in the prior year, the decrease in provision for credit losses, outside of the initial provision expense recorded on non-PCD loans and unfunded commitments acquired from Touchstone, is primarily due to higher reserves booked during the fourth quarter of 2023 due to qualitative factor adjustments related to the commercial and industrial loan pool, as well as specific reserves from identified individually evaluated loans.

BALANCE SHEET

At December 31, 2024, the Company’s consolidated balance sheet includes the impact of the Touchstone acquisition, which closed October 1, 2024, as discussed above. ASC 805, Business Combinations, allows for a measurement period of 12 months beyond the acquisition date to finalize the fair value measurements of the acquired Company’s net assets as additional information not existing as of the acquisition date becomes available. Any future measurement period adjustments will be recorded through an adjustment to the bargain purchase gain upon identification. Below is a summary of the related impact of the acquisition on the Company’s consolidated balance sheet as of the acquisition date.

• The fair value of assets acquired totaled $664.3 million and included total loans of $479.3 million with an initial loan discount of $13.5 million.

• The fair value of the liabilities assumed totaled $614.6 million and included total deposits of $555.4 million with an initial deposit mark related to time deposits of $1.1 million.

• Core deposit intangibles and other intangibles acquired totaled $15.6 million.

• No goodwill was recorded in the transaction, and the preliminary bargain purchase gain (included in other income) totaled $2.9 million.

At December 31, 2024, total assets were $2.0 billion, an increase of $559.6 million or 38.6% from September 30, 2024 and $591.0 million or approximately 41.6% from December 31, 2023. The increases in total assets from the prior quarter and prior year were primarily driven by growth in loans held for investment (LHFI) (net of deferred fees and costs) and the securities portfolio, primarily due to the Touchstone acquisition.

At December 31, 2024, LHFI net of allowance totaled $1.5 billion, an increase of $468.6 million from $982.0 million at September 30, 2024, and an increase of $493.1 million or 51.5% from December 31, 2023. LHFI increased from the prior quarter and prior year primarily due to the Touchstone acquisition, as well as organic loan growth compared to prior year.

At December 31, 2024, total investments were $277.3 million, an increase of $7.8 million from September 30, 2024, and a decrease of $25.9 million or 8.5% from December 31, 2023. Available for sale (AFS) securities totaled $163.8 million at December 31, 2024 and $146.0 million at September 30, 2024 and $152.9 million at December 31, 2023. The increases compared to the prior quarter and prior year were primarily due to the acquisition of Touchstone. Total net unrealized losses on the AFS securities portfolio were $22.1 million at December 31, 2024, compared to $17.2 million at September 30, 2024, and $20.6 million at December 31, 2023. Held to maturity securities are carried at cost and totaled $109.7 million at December 31, 2024, $121.4 million at September 30, 2024, and $148.2 million at December 31, 2023.

At December 31, 2024, total deposits were $1.80 billion, an increase of $550.5 million from the prior quarter, and an increase of $570.1 million or 46.2% from December 31, 2023. The increases in deposit balances from the prior quarter and prior year are primarily due to increases in interest bearing customer deposits and demand deposits, primarily related to the addition of the Touchstone acquired deposits.

Other borrowings decreased $50.0 million during the fourth quarter as the Bank repaid borrowed funds from the Federal Reserve Bank through their Bank Term Funding Program.

Shareholders’ equity totaled $166.5 million on December 31, 2024, which was an increase of $41.4 million from September 30, 2024. The increase in total shareholders’ equity was primarily attributable to the issuance of 2.67 million shares associated with the Touchstone acquisition. The Company declared and paid cash dividends of $0.155 per common share during the fourth quarter of 2024, up from $0.15 paid during the first three quarterly periods of 2024.

The following table provides capital ratios at the periods ended:

NON-GAAP FINANCIAL MEASURES

In addition to financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company uses certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends, and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this document include adjusted operating net income, adjusted basic and diluted earnings (loss) per share, adjusted return on average assets, adjusted return on average equity, pre-provision pre-tax earnings, adjusted pre-provision pre-tax earnings, fully taxable equivalent interest income, the net interest margin, the efficiency ratio, tangible book value per share, and tangible common equity to tangible assets.

The Company believes certain non-GAAP financial measures enhance the understanding of its business and performance. Non-GAAP financial measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure is included at the end of this release.

ABOUT FIRST NATIONAL CORPORATION

First National Corporation (NASDAQ: FXNC) is the parent company and bank holding company of First Bank, a community bank that first opened for business in 1907 in Strasburg, Virginia. The Bank offers loan and deposit products and services through its website, www.fbvirginia.com, its mobile banking platform, a network of ATMs located throughout its market area, a loan production office, a customer service center in a retirement community, and thirty-three bank branch office locations located throughout the Shenandoah Valley, the south-central regions of Virginia, the Roanoke Valley, the Richmond MSA, and in northern North Carolina. In addition to providing traditional banking services, the Bank operates a wealth management division under the name First Bank Wealth Management. First Bank also owns First Bank Financial Services, Inc., which owns an interest in an entity that provides title insurance services.

FORWARD-LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to the Company’s plans, objectives, expectations and intentions and other statements that are not historical facts, and other statements identified by words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” and “projects,” as well as similar expression. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. For details on factors that could affect expectations, future events, or results, see the risk factors and other cautionary language included in First National’s Annual Report on Form 10-K for the year ended December 31, 2023, and most recent Quarterly Reports on Form 10-Q and other filings with the Securities and Exchange Commission (the “SEC”).

Additional risks and uncertainties may include, but are not limited to: (1) the risk that the cost savings and any revenue synergies from the Touchstone merger may not be realized or take longer than anticipated to be realized, including due to the state of the economy or other competitive factors in the areas in which the parties operate, (2) disruption from the merger of customer, supplier, employee or other business partner relationships, including diversion of management’s attention from ongoing business operations and opportunities due to the merger, (3) the possibility that the costs, fees, expenses and charges related to the merger may be greater than anticipated, (4) reputational risk and the reaction of each of the parties’ customers, suppliers, employees or other business partners to the merger, (5) the risks relating to the integration of Touchstone’s operations into the operations of First National, including the risk that such integration will be materially delayed or will be more costly or difficult than expected, (6) the risk of expansion into new geographic or product markets, (7) the dilution caused by First National’s issuance of additional shares of its common stock in the merger, and (8) general competitive, economic, political and market conditions. All subsequent written and oral forward-looking statements concerning First National or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above. First National does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

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