FXNC First National Corporation

PRINCE GEORGE, Va., July 31, 2024 /PRNewswire/ -- Touchstone Bankshares, Inc. (the "Company") (OTC Pink: TSBA), and its wholly owned subsidiary, Touchstone Bank (the "Bank"), reported unaudited results for the three and six months ended June 30, 2024.

The Company reported net income available to common shareholders of $451 thousand for the three months ended June 30, 2024. Basic and diluted earnings per common share for the three months ended June 30, 2024, was $0.14, while return on average assets (annualized), return on average common equity (annualized) and the efficiency ratio was 0.27%, 4.08%, and 87%, respectively. By comparison, the Company reported net income available to common shareholders for the three months ended June 30, 2023 of $285 thousand, and basic and diluted earnings per common share was $0.09. Return on average assets (annualized), return on average common equity (annualized), and the efficiency ratio was 0.18%, 2.61%, and 93%, respectively, for the three months ended June 30, 2023.

The Company's results of operations for the three months ended June 30, 2024 were negatively impacted by incurring $186 thousand in provision for credit losses and $202 thousand in merger related expenses in connection with its pending merger with First National Corporation ("First National") (NASDAQ: FXNC). Excluding the impact of the merger related expenses, for the three months ended June 30, 2024, the Company would have reported adjusted net income available to common shareholders of $611 thousand, adjusted basic and diluted earnings per common share of $0.19, and an adjusted return on average assets (annualized), an adjusted return on average common equity (annualized) and an adjusted efficiency ratio of 0.37%, 5.52%, and 83%, respectively. 

For the six months ended June 30, 2024, the Company reported net income available to common shareholders of $778 thousand. Basic and diluted earnings per common share for the six months ended June 30, 2024, was $0.24, while return on average assets (annualized), return on average common equity (annualized) and the efficiency ratio was 0.24%, 3.50%, and 90%, respectively. By comparison, the Company reported net income available to common shareholders for the six months ended June 30, 2023 of $89 thousand, and basic and diluted earnings per common share was $0.03. Return on average assets (annualized), return on average common equity (annualized), and the efficiency ratio was 0.03%, 0.42%, and 91%, respectively, for the six months ended June 30, 2023.

The Company's results of operations for the six months ended June 30, 2024 were negatively impacted by incurring $186 thousand in provision for credit losses and $745 thousand in merger related expenses in connection with its pending merger with First National. Excluding the impact of the merger related expenses, for the six months ended June 30, 2024, the Company would have reported adjusted net income available to common shareholders of $1.4 million, adjusted basic and diluted earnings per common share of $0.42 and $0.41, respectively, and an adjusted return on average assets (annualized), an adjusted return on average common equity (annualized) and an adjusted efficiency ratio of 0.42%, 6.14%, and 84%, respectively. 

As previously disclosed, on March 25, 2024, the Company and First National, the parent holding company for First Bank, entered into an Agreement and Plan of Merger (the "Agreement"), which provides that, subject to the terms and conditions set forth in the Agreement, the Company will merge with and into First National (the "Merger") with First National being the surviving corporation in the Merger. In addition, simultaneously with or immediately following the Merger of the Company with and into First National, the Bank will be merged with and into First Bank.

The Agreement and the transactions contemplated thereby are subject to the approval of the respective shareholders of the Company and First National, approval by the Bureau of Financial Institutions division of the State Corporation Commission of the Commonwealth of Virginia, and other customary closing conditions. The Company and First National anticipate closing the mergers in the fourth quarter of 2024.

James R. Black, the Company's President and CEO commented, "I am pleased with the team's ability to show continual improvement for the Company on a standalone basis while simultaneously working with First National on merger integration and transition processes. The team's resiliency and efforts continue to demonstrate the cultural strength that fits well with our future partner's culture and mission. Together the combined entity should create and offer many valuable aspects for all stakeholders. Again, I am thankful and proud of the hard work and dedication from the Company's team, they are doing an amazing job."

Earnings Analysis

Three Months Ended June 30, 2024, and 2023

As noted above, net income available to common shareholders for the three months ended June 30, 2024, was $451 thousand, or $0.14 per basic and diluted common share. This represents an increase of $166 thousand, or 58.2%, when compared with the net income available to common shareholders of $285 thousand, or $0.09 per basic and diluted common share for the same period in 2023.

Net interest income for the three months ended June 30, 2024, and 2023, was $5.2 million and $5.1 million, respectively, representing an increase of $44 thousand, or 0.9%. The net interest margin increased 3 basis points from 3.44% in the second quarter of 2023 to 3.47% for the same quarter in 2024 due primarily to the yields on interest-earning assets continuing to reprice higher, which was partially offset by repricing on interest-bearing liabilities driven by competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures that occurred during the first six months of 2023.  While the Company's overall cost of funds for the second quarter of 2024 increased as compared to prior periods, the yields on interest-earning assets continued to reprice higher and at a slightly faster pace. As a result, net interest income increased by $58 thousand, or 1.1%, and the net interest margin increased by 1 basis point when compared to the first quarter of 2024.

The Company recorded $186 thousand in provision for credit losses for the three months ended June 30, 2024, an increase of $86 thousand, or 86.0%, when compared to the same period in 2023. The increase in the provision for credit losses was primarily due to the Company recording a full impairment in the amount of $243 thousand on one C&I loan that was moved to nonaccrual status and downgraded to a risk grade 8 late in the second quarter of 2024 and a higher required reserve on unfunded credit commitments, which were partially offset by a decrease in total loans and recording net (recoveries) during the second quarter of 2024 as compared to recording net charge-offs for the same period in 2023.  As of June 30, 2024, the Company's credit quality metrics remained strong with minimal nonperforming assets and past due loans.

Noninterest income totaled $871 thousand for the three months ended June 30, 2024, a decrease of $85 thousand, or 8.9%, when compared to the same period in 2023. 

The following table is a comparison of the components of noninterest income for the three months ended June 30, 2024, and 2023:

Notable variances for the noninterest income table above are as follows:

• The decrease in secondary market origination fees was primarily due to the continued slowing of home refinancing and purchases, partially offset by prior year investments in personnel and related products and services.
• The decrease in bank-owned life insurance was primarily due to adjustments recorded during the second quarter of 2024 to adjust the recorded amount that can be realized under the life insurance contracts to their cash surrender values as reported by the insurance carriers.
• The increase in other operating income was primarily due to increases in income from other investments, partially offset by a decrease in merchant services fees.

Noninterest expense totaled $5.2 million for the three months ended June 30, 2024, a decrease of $417 thousand, or 7.4%, when compared to the same period in 2023. 

The following table is a comparison of the components of noninterest expense for the three months ended June 30, 2024, and 2023:

Notable variances for the noninterest expense table above are as follows:

• The decrease in salaries and employee benefits was primarily due to managements focused efforts to streamline operations and improve efficiencies after the core conversion was completed during the first quarter of 2023. These efforts lead to a reduction in the work force that was implemented during the third quarter of 2023, with full cost savings becoming accretive in the fourth quarter of 2023. In addition, this decrease was driven by employee attrition during the second quarter of 2024, and lower expenses related to bonus accruals, payroll taxes, benefit costs including 401(k) contributions, and deferred incentive compensation, which were partially offset by merit increases, wage inflation, and a lower impact from deferred loan origination costs.
• The increase in data processing was primarily due to additional services, as well as volume based and other one-time charges.
• The decrease in legal and professional fees was primarily due to lower expenses related to professional fees, which was partially offset by higher expenses related to legal, audit and compliance.
• The decrease in FDIC insurance assessments was primarily due to a decrease in the Bank's assessment base, which was partially offset by an increase to the initial base deposit insurance assessment rate schedules that began with the first quarterly assessment period of 2023.
• The increase in merger related expenses was primarily due to legal fees, as well as other costs associated with the pending merger with First National that were incurred during the second quarter of 2024, as compared to no merger related expenses being incurred during the same period of 2023.
• The decrease in other noninterest expenses was primarily due to lower expenses related to insurance, deposits, meals and entertainment, marketing and advertising, miscellaneous other operating, and core deposit intangible amortization, which were partially offset by higher expenses related to state franchise taxes.

Six Months Ended June 30, 2024, and 2023

As noted above, net income available to common shareholders for the six months ended June 30, 2024, was $778 thousand, or $0.24 per basic and diluted common share. This represents an increase of $689 thousand, or 774.2%, when compared with the net income available to common shareholders of $89 thousand, or $0.03 per basic and diluted common share for the same period in 2023.

Net interest income for the six months ended June 30, 2024, and 2023, was $10.2 million and $10.5 million, respectively, representing a decrease of $295 thousand, or 2.8%. The net interest margin decreased 15 basis points from 3.61% in the first six months of 2023 to 3.46% for the same period in 2024 due primarily to material repricing on interest-bearing liabilities driven by competitive pressures in the higher interest rate environment and the negative banking industry developments associated with multiple high-profile bank failures that occurred during the first six months of 2023 and the time needed for interest-earning assets to reprice higher. 

The Company recorded $186 thousand in provision for credit losses for the six months ended June 30, 2024, a decrease of $923 thousand, or 83.2%, when compared to the same period in 2023. The decrease in the provision for credit losses was primarily due to $1.0 million in provision for credit losses related to the Company's previous investment in Signature Bank of New York subordinated debt that was fully charged-off in the first quarter of 2023 and subsequently sold in the fourth quarter of 2023, a decrease in total loans, and recording net (recoveries) during the first six months of 2024 as compared to recording net charge-offs for the same period in 2023, which were partially offset by the Company recording a full impairment in the amount of $243 thousand on one C&I loan that was moved to nonaccrual status and downgraded to a risk grade 8 late in the second quarter of 2024 and a higher required reserve on unfunded credit commitments. 

Noninterest income totaled $1.7 million for the six months ended June 30, 2024, a decrease of $39 thousand, or 2.3%, when compared to the same period in 2023. 

The following table is a comparison of the components of noninterest income for the six months ended June 30, 2024, and 2023:

Notable variances for the noninterest income table above are as follows:

• The increase in service charges on deposit accounts was primarily due to an increase in ATM and debit card interchange fees, partially offset by small business and commercial accounts receiving higher earnings credit rates which offset previous fee opportunities.
• The decrease in secondary market origination fees was primarily due to the continued slowing of home refinancing and purchases, partially offset by prior year investments in personnel and related products and services.
• The decrease in bank-owned life insurance was primarily due to adjustments recorded during the first six months of 2024 to adjust the recorded amount that can be realized under the life insurance contracts to their cash surrender values as reported by the insurance carriers.
• The increase in other operating income was primarily due to increases in income from other investments, partially offset by a decrease in merchant services fees.

Noninterest expense totaled $10.7 million for the six months ended June 30, 2024, a decrease of $458 thousand, or 4.1%, when compared to the same period in 2023. 

The following table is a comparison of the components of noninterest expense for the six months ended June 30, 2024, and 2023:

Notable variances for the noninterest expense table above are as follows:

• The decrease in salaries and employee benefits was primarily due to managements focused efforts to streamline operations and improve efficiencies after the core conversion was completed during the first quarter of 2023. These efforts lead to a reduction in the work force that was implemented during the third quarter of 2023, with full cost savings becoming accretive in the fourth quarter of 2023. In addition, this decrease was driven by employee attrition during the second quarter of 2024, and lower expenses related to bonus accruals, payroll taxes, benefit costs including 401(k) contributions, and deferred incentive compensation, which were partially offset by merit increases, wage inflation, and a lower impact from deferred loan origination costs.
• The increase in data processing was primarily due to additional services, as well as volume based and other one-time charges.
• The decrease in legal and professional fees was primarily due to lower expenses related to professional fees, which was partially offset by higher expenses related to legal, audit and compliance.
• The increase in merger related expenses was primarily due to legal and investment banker fees, as well as other costs associated with the pending merger with First National that were incurred during the first six months of 2024, as compared to no merger related expenses being incurred during the same period of 2023.
• The decrease in other noninterest expenses was primarily due to lower expenses related to printing and supplies, network management services, marketing and advertising, loans, meals and entertainment, other losses, miscellaneous other operating, and core deposit intangible amortization, which were partially offset by higher expenses related to internet banking, shareholder relations, customer service, and state franchise taxes.

Balance Sheet

At June 30, 2024, total assets were $662.7 million, compared to $658.7 million at December 31, 2023, an  increase of $4.0 million, or 0.6%.

Cash and cash equivalents as of June 30, 2024, were $57.7 million, an increase of $15.4 million, or 36.4%, from December 31, 2023. Key drivers of this change were deposit growth outpacing loan growth and a decrease in investment securities available for sale, at fair value. Cash and cash equivalents represented 8.7% and 6.4% of total assets as of June 30, 2024, and December 31, 2023, respectively.

Investment securities available for sale, at fair value as of June 30, 2024, were $70.7 million, a decrease of $2.5 million, or 3.4%, from December 31, 2023. Key drivers of this change were scheduled payments of principal and an increase in unrealized losses on the investment securities available for sale portfolio because of increases in market interest rates.

Total loans as of June 30, 2024, were $500.6 million, a decrease of $8.2 million, or 1.6%, from December 31, 2023. The key driver of this change was higher than expected payoffs, which were partially offset by organic growth. The Company's loan to deposit ratio was 91.6% as of June 30, 2024, as compared to 93.8% as of December 31, 2023.

Total deposits as of June 30, 2024, were $546.7 million, an increase of $4.5 million, or 0.8%, from December 31, 2023. Key drivers of this change were organic growth due to our continued focus on total relationship banking, which was partially offset by deposit outflows due to competitive pressures in the higher interest rate environment. While the Company has continued to see the deposit mix shift into higher yielding products, particularly interest-bearing checking and money market accounts, the balance and level of noninterest-bearing deposits to total deposits has remained relatively stable. As of June 30, 2024, total noninterest-bearing deposits were $135.3 million, a decrease of $2.0 million, or 1.5%, from December 31, 2023. These deposits represented 24.7% and 25.3% of total deposits as of June 30, 2024, and December 31, 2023, respectively. As of June 30, 2024, and December 31, 2023, there were no brokered deposits outstanding.

Total Federal Home Loan Bank borrowings as of June 30, 2024, were $49.0 million, representing no change from December 31, 2023.

Total subordinated debt, net of issuance costs as of June 30, 2024, were $17.8 million, an increase of $55 thousand, or 0.3%, from December 31, 2023. The key driver of this change was the amortization of the issuance costs. In August 2020, the Company issued $8.0 million of subordinated debt with a 10-year maturity and an initial 6.00% coupon. In February 2021, the Company redeemed the $3.5 million of legacy subordinated  debt issued in February 2016, which notes carried a 7% coupon. In January 2022, the Company issued an additional $10.0 million of subordinated debt. These notes have a maturity date of January 30, 2032, and carry an initial coupon of 4%. 

Total shareholders' equity as of June 30, 2024, was $45.1 million, an increase of $282 thousand, or 0.6%, from December 31, 2023. Key drivers of this change were the net income attributable to the Company for the six months ended June 30, 2024, and stock-based compensation expense related to restricted stock awards, which were partially offset by an increase in accumulated other comprehensive (loss), net of tax. Total accumulated other comprehensive (loss), net of tax as of June 30, 2024, was $10.1 million, an increase of $547 thousand, or 5.7%, from December 31, 2023. The key driver of this change was increases in market interest rates over the comparable periods. The Bank's Community Bank Leverage Ratio   was 9.92% as of June 30, 2024, as compared to 9.68% as of December 31, 2023. The Bank continues to remain well capitalized as defined by regulatory guidelines.

Asset Quality

The allowance for credit losses as of June 30, 2024, was $5.1 million, or 1.02%, of total loans, as compared to $5.0 million as of December 31, 2023, or 0.98%, of total loans. Loans past due 30 days or more and still accruing interest were $287 thousand as of June 30, 2024, while nonaccrual loans, excluding purchased credit deteriorated loans, totaled $490 thousand. The Company believes the current level of the allowance for credit losses is adequate to cover expected losses as credit metrics remain stable.

Source: Touchstone Bankshares, Inc.

About Touchstone Bankshares, Inc.

Touchstone Bankshares, Inc. (the "Company") is the bank holding company for Touchstone Bank (the "Bank"). Most of the Company's business activities are conducted through the Bank. The Bank is a full-service  community bank headquartered in Prince George, Virginia. The Bank has ten branches serving Southern and Central Virginia and two branches and two loan centers serving Northern North Carolina. Visit www.touchstone.bank for more information.

Forward-Looking Statements

In addition to historical information, this press release may contain certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. For this purpose, any statement that is not a  statement of historical fact may be deemed to be a forward-looking statement. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not  limited to, the completion and benefits of the Merger with First National; the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Agreement between the Company and First National; the outcome of any legal proceedings that may be instituted against the Company or First National; the possibility that the proposed transaction will not close when expected or at all because required regulatory, shareholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated (and the risk that required regulatory approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the proposed transaction); the ability of the Company and First National to meet expectations regarding the timing, completion and accounting and tax treatments of the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of the common stock of either or both parties to the proposed transaction; the possibility that the anticipated benefits of the proposed transaction will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and First National do business; certain restrictions during the pendency of the proposed transaction that may impact the parties' ability to pursue certain business opportunities or strategic transactions; the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management's attention from ongoing business operations and opportunities; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the Merger within the expected timeframes or at all and to successfully integrate the Company's operations and those of First National, which may be more difficult, time-consuming or costly than expected; revenues following the proposed transaction may be lower than expected; the Company's and First National's success in executing their respective business plans and strategies and managing the risks involved in the foregoing; effects of the announcement, pendency or completion of the proposed transaction on the ability of the Company and First National to retain customers and retain and hire key personnel and maintain relationships with their suppliers, and on their operating results and businesses generally; changes in interest rates and general economic  conditions; the legislative/regulatory climate; monetary and fiscal policies of the U.S. Government; the quality or composition of the loan or investment securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; mergers, acquisitions and dispositions; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; and tax and accounting rules, principles, policies and guidelines.

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SOURCE Touchstone Bankshares, Inc.