First National (FXNC) Q2 EPS Jumps 19%

First National (FXNC -0.41%), a Virginia-based community banking company, released its second quarter fiscal 2025 earnings on July 30, 2025. The company posted record adjusted earnings per share of $0.57 (non-GAAP), topping analyst estimates of $0.49. However, net interest income (GAAP) -- a key measure of bank revenue -- came in at $18.5 million, Net interest income meaningfully underperformed the $22.3 million analyst estimate. Despite the revenue shortfall, the period showed strong improvements in profitability, aided by gains in efficiency (efficiency ratio improved to 65.11%) and net interest margin (fully taxable equivalent net interest margin increased to 3.95%) following the completion of the Touchstone acquisition. The quarter demonstrated sharper cost controls but also saw rising nonperforming assets and muted loan growth, offering a mixed but forward-looking snapshot of the bank's operations.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q1 2025 earnings report.

Understanding First National's Business and Recent Focus Areas

First National operates as a community-focused bank, offering a full range of banking services including consumer, commercial, and real estate loans, as well as deposit products. It serves individuals, small businesses, and public entities across Virginia and North Carolina with a network that recently expanded following its acquisition of Touchstone Bankshares.

Its primary source of revenue stems from net interest income -- the difference between interest earned on loans and investments, and interest paid to depositors. While noninterest income, such as fees from ATM services, also contributes, the company remains sensitive to interest rate movements. Recent business strategy has emphasized disciplined cost control, capital adequacy, and growing through acquisitions, with the Touchstone integration now complete. For the bank, success is tied to effective risk management, maintaining strong customer relationships, and regulatory compliance.

Quarterly Performance: Key Drivers and Data in Context

The standout feature was the adjusted (non-GAAP) earnings per share. This surpassed expectations on a non-GAAP basis, helped by an improved net interest margin, which reached 3.95% (non-GAAP). This margin measures how well the company generates interest income relative to its interest-bearing assets. The margin climb came partly from accounting accretion benefits tied to the Touchstone merger but also reflected better yields on loans and careful deposit pricing.

Revenue (GAAP, measured here as net interest income and noninterest income) told a different story. Net interest income fell short of analyst estimates by $3.75 million. Noninterest income edged up 7.7% from the prior quarter, thanks to higher ATM and check card fees, along with stronger brokered mortgage fee income.

Efficiency ratio (non-GAAP) improved to 65.11%. The efficiency ratio (non-GAAP) -- which compares costs to revenues and is used throughout the banking industry to measure operating discipline -- dropped to 65.11%, a five-point improvement from Q2 2024. The improvement resulted from lower merger-related costs and a decrease in salaries and benefits, following the full systems integration with Touchstone. Overall noninterest expense (GAAP) fell to $15.2 million, down from $18.3 million in the prior period.

Loan and deposit growth, however, was muted despite headline year-over-year gains. The company's net loans held for investment stood at $1.43 billion, up 46.1% from the prior year, primarily due to the Touchstone acquisition as well as organic loan growth; organic growth in lending actually dipped by $7.6 million from the previous quarter, as more loans were paid off than originated. Deposits finished at $1.80 billion (GAAP), up 42.5% year over year but slightly down from the quarter before, also reflecting acquisition rather than organic expansion. Noninterest-bearing deposits, which help keep funding costs lower, remained a steady 30% of the total.

Asset quality was a key watchpoint. Nonperforming assets -- loans or properties where borrowers have stopped making payments -- rose to $6.8 million, or 0.33% of total assets, from $4.9 million in Q1 2025. While this is lower than the $8.5 million reported for Q2 2024, nonperforming assets and the ratio increased from the previous quarter. The allowance for credit losses -- a reserve set aside for potential loan losses -- increased to $15.2 million, amounting to 1.05% of loans, a rise from the prior quarter. Net charge-offs, which are loans formally written off as unrecoverable, fell to $448 thousand from $2.4 million in Q1 2025.

Capital strength remains a positive theme in the release. The company’s total capital ratio at the bank level was 12.89%, and the common equity Tier 1 ratio (a regulatory measure of core equity relative to assets) was 11.81%. Both ratios were above regulatory thresholds. Shareholders’ equity (GAAP) climbed to $173.5 million, and tangible book value per share (non-GAAP) is now $17.40, slightly down from last year's $18.59 for Q2 2024, reflecting merger-driven capital deployment.

There were no material regulatory or compliance issues flagged this period. The company continues to prioritize disciplined liquidity and funding management. With available liquidity sources of $633.7 million, it continues to manage risks tied to uninsured deposits and wider fluctuations in the deposit market.

In terms of returning value to shareholders, the board approved a quarterly cash dividend of $0.155 per share. This is flat compared to the prior quarter but up 3.3% from the $0.15 dividend paid in Q2 2024.

Looking Ahead: Guidance and Key Issues to Watch

Management did not provide explicit guidance for upcoming quarters or the remainder of fiscal 2025. Its public comments highlighted completed integration efforts, cost and efficiency gains, and a cautious approach to loan and deposit growth given current market dynamics. Without quantitative targets, it remains unclear how management expects net interest income and loan volumes to trend in the second half of the year.

For investors tracking First National, the coming quarters will likely focus on three areas: organic loan growth, sustainability of margin gains, and ongoing asset quality trends. Continued dividend payments offer some predictability on capital returns, but with organic growth muted and nonperforming assets on the rise, credit metrics and future revenue composition will be critical points to monitor. The quarterly dividend was raised 3.3% to $0.155 per share.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.