425: First National Corporation to Acquire Touchstone Bankshares, Inc. in All-Stock Deal

First National Corporation and Touchstone Bankshares, Inc. have announced a definitive merger agreement for First National to acquire Touchstone in an all-stock transaction, creating a combined company with approximately $2.1 billion in assets.

Summary

• First National Corporation (First National) and Touchstone Bankshares, Inc. (Touchstone) have entered into a definitive merger agreement.
• First National will acquire Touchstone in an all-stock transaction.
• The combined company is expected to have approximately $2.1 billion in assets, $1.5 billion in loans, and $1.8 billion in deposits.
• The combined entity will operate thirty branch offices across Virginia and two in North Carolina.
• The resulting company is expected to be the ninth largest Virginia community bank as ranked by deposits.
• First National expects the transaction to be approximately 36% accretive to earnings per share with an estimated earn-back period for tangible book value dilution of approximately 3.0 years.
• Touchstone shareholders will receive 0.8122 shares of First National stock for each share of Touchstone stock.
• Based on First National's closing stock price of $17.55 as of March 22, 2024, this equates to an aggregate deal value of approximately $47.0 million, or $14.25 per share of Touchstone stock.
• The transaction is expected to close in the fourth quarter of 2024, subject to shareholder and regulatory approvals.
• First National and First Bank will appoint three Touchstone directors to join their respective Boards.
• James Black, President and Chief Executive Officer of Touchstone, will join First Bank as Executive Vice President and South Region President.

Sentiment

Score: 8

Explanation: The document presents a positive outlook on the merger, highlighting strategic and financial benefits, strong cultural alignment, and positive management comments. The expected EPS accretion and quick earn-back period contribute to the positive sentiment.

Positives

• The merger expands First National's presence in the Richmond metro area.
• Significant cost synergies are expected, estimated at $7.2 million or 35% of Touchstone's noninterest expense.
• The merger enhances the scale and profitability of the combined organization.
• Both banks have a strong, low-cost deposit base.
• The companies share a strong cultural alignment with a focus on community support.
• The transaction is expected to be approximately 36% accretive to earnings per share.
• The estimated earn-back period for tangible book value dilution is approximately 3.0 years.

Risks

• The risk that the cost savings and any revenue synergies from the proposed merger may not be realized or take longer than anticipated to be realized.
• Disruption from the proposed merger of customer, supplier, employee or other business partner relationships.
• The occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement.
• The failure to obtain the necessary approval by the shareholders of Touchstone and First National.
• The possibility that the costs, fees, expenses and charges related to the proposed merger may be greater than anticipated.
• The ability to obtain required governmental approvals of the proposed merger.
• Reputational risk and the reaction of each of the parties customers, suppliers, employees or other business partners to the proposed merger.
• The failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the proposed merger.
• The risks relating to the integration of Touchstones 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.
• The risk of potential litigation or regulatory action related to the proposed merger.
• The risk of expansion into new geographic or product markets.
• The dilution caused by the First Nationals issuance of additional shares of its common stock in the proposed merger.
• General competitive, economic, political and market conditions.

Future Outlook

The transaction is expected to close in the fourth quarter of 2024, subject to shareholder and regulatory approvals.

Management Comments

• Scott Harvard, President and Chief Executive Officer of First National Corporation, said, 'We are thrilled to have found a partner with an equally long history of serving and supporting local customers and businesses in their communities. Combining our companies will help ensure that we continue to be part of the fabric of the communities we serve, which we believe enables us to deliver superior service and financial performance. We are incredibly excited about this opportunity to expand our Richmond metro presence with the addition of seven branches in the market, and we look forward to welcoming the entire Touchstone team into the First Bank family.'
• James Black, President and Chief Executive Officer of Touchstone, stated, 'First National is a like-minded partner that shares our culture of supporting our communities by focusing on building meaningful relationships and personalized service to their customers. We are enthusiastic about the opportunity to partner with First National in a transaction that we believe offers significant opportunities to our clients, communities, employees, and shareholders. This partnership is an excellent opportunity to create value for both institutions.'

Industry Context

This announcement reflects a trend of consolidation within the community banking sector, as institutions seek to achieve greater scale, efficiency, and market presence in a competitive environment.

Comparison to Industry Standards

• The estimated cost savings of $7.2 million, representing 35% of Touchstone's noninterest expense, is a significant synergy target, which is in line with typical cost-cutting measures seen in similar bank mergers.
• The projected 36% EPS accretion is a substantial benefit for First National shareholders, exceeding the average accretion seen in many bank mergers.
• The estimated 3.0-year earn-back period for tangible book value dilution is a relatively quick recovery, suggesting a well-structured deal with strong potential for value creation.
• Comparable companies that have undertaken similar mergers include: United Bankshares Inc.'s acquisition of Community Bankers Trust Corporation, which aimed for similar cost synergies and market expansion; and Southern States Bancorp's merger with CBT Financial Corp., which focused on enhancing scale and profitability.

Management Changes

Stakeholder Impact

• Shareholders of Touchstone will receive 0.8122 shares of First National stock for each share of Touchstone stock.
• Customers of both banks can expect a continuation of community-focused service.
• Employees of Touchstone will be integrated into the First Bank team.
• Communities served by both banks will benefit from a stronger, more capable financial institution.

Next Steps

• Obtain approval from both companies' shareholders.
• Secure necessary regulatory approvals.
• Satisfy other customary closing conditions.
• Integrate Touchstone's operations into First National's operations.
• Appoint three Touchstone directors to First National and First Bank Boards.
• James Black to join First Bank as Executive Vice President and South Region President.

Key Dates