UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-23976 FIRST NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Virginia 54-1232965 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 112 West King Street, Strasburg, Virginia 22657 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (540) 465-9121 NONE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 Months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ --- Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date: Class: Common stock, $5.00 par value Outstanding as of November 3, 2000: 791,431 ================================================================================ FIRST NATIONAL CORPORATION INDEX Part I. Financial Information Item 1. Financial Statements Page No. Consolidated Statements of Income 3,4 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Consolidated Statements of Changes in Stockholders' Equity 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II. Other Information Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 Signature 14 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars) (Except Per Share Amounts) (Unaudited) Three Months Ended September 30, 2000 September 30, 1999 Interest Income Interest and Fees on Loans $3,589 $3,095 Interest on Federal Funds Sold 66 1 Interest on Deposits in Banks 30 0 Interest and Dividends on Securities Available for Sale Taxable 459 711 Non Taxable 209 114 ------ ------ Total Interest Income 4,353 3,921 Interest Expense Interest on Savings Deposits and Interest Bearing Demand Deposits 898 833 Interest on Time Deposits of $100,000 or more 270 174 Interest on All Other Time Deposits 767 605 Interest on Federal Funds Purchased 1 30 Interest on Long-term Debt 549 374 ------ ------ Total Interest Expense 2,485 2,016 ------ ------ Net Interest Income 1,868 1,905 ------ ------ Provision for Loan Losses 123 135 ------ ------ Net Interest Income After Provisions for Loan Losses 1,745 1,770 Other Operating Income Service Charges 231 170 Profits on Securities Available for Sale -- 14 Other Operating Income 138 124 ------ ------ Total Operating Income 369 308 Other Operating Expenses Salaries and Employee Benefits 732 685 Occupancy Expense 82 81 Equipment Expense 124 139 Other 422 441 ------ ------ Total Operating Expenses 1,360 1,346 Income Before Income taxes 754 732 Income Taxes 230 225 ------ ------ Net Income $ 524 $ 507 ====== ====== Per Share Data Earnings Per Common Share, basic $ 0.66 $ 0.64 ====== ====== Earnings Per Common Share, diluted $ 0.66 $ 0.64 ====== ====== Cash Dividends 0.290 0.260 ====== ====== The Accompanying Notes Are An Integral Part Of These Statements 3 FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (In Thousands of Dollars) (Except Per Share Amounts) (Unaudited) Nine Months Ended September 30, 2000 September 30, 1999 Interest Income Interest and Fees on Loans $10,271 $ 8,800 Interest on Federal Funds Sold 86 59 Interest on Deposits in Banks 38 14 Interest and Dividends on Securities Available for Sale Taxable 1,654 2,077 Non Taxable 373 310 ------- ------- Total Interest Income 12,422 11,260 Interest Expense Interest on Savings Deposits and Interest Bearing Demand Deposits 2,501 2,334 Interest on Time Deposits of $100,000 or more 686 501 Interest on All Other Time Deposits 1,939 1,905 Interest on Federal Funds Purchased 63 59 Interest on Long-term Debt 1,607 906 ------- ------- Total Interest Expense 6,796 5,705 ------- ------- Net Interest Income 5,626 5,555 ------- ------- Provision for Loan Losses 369 360 ------- ------- Net Interest Income After Provisions for Loan Losses 5,257 5,195 Other Operating Income Service Charges 604 475 Profits on Securities Available for Sale -- 14 Other Operating Income 420 335 ------- ------- Total Operating Income 1,024 824 Other Operating Expenses Salaries and Employee Benefits 2,214 1,982 Occupancy Expense 256 236 Equipment Expense 361 377 Other 1,339 1,295 ------- ------- Total Operating Expenses 4,170 3,890 Income Before Income taxes 2,111 2,129 Income Taxes 632 660 ------- ------- Net Income $ 1,479 $ 1,469 ======= ======= Per Share Data Earnings Per Common Share, basic $ 1.86 $ 1.86 ======= ======= Earnings Per Common Share, diluted $ 1.86 $ 1.86 ======= ======= Cash Dividends 0.870 0.780 ======= ======= The Accompanying Notes Are An Integral Part Of These Statements 4 FIRST NATIONAL CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars) (Unaudited) September 30, 2000 December 31, 1999 ASSETS Cash and due from banks $ 6,011 $ 4,108 Federal Funds Sold 3,045 -- Securities Available for Sale 44,374 45,129 Loans Net of Unearned Discount 163,785 150,760 Less: Allowance for Loan Losses 1,741 1,447 -------- -------- Net Loans 162,044 149,313 Bank Premises and Equipment 4,322 4,700 Interest Receivable 1,307 1,166 Other Real Estate 5 343 Other Assets 2,235 1,859 -------- -------- Total Assets $223,343 $206,618 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand Deposits Non-Interest Bearing $ 21,028 $ 18,656 Interest Bearing 17,981 17,995 Savings Deposits 59,237 61,943 Certificates of Deposit of $100,000 and over 16,688 12,993 All Other Time Deposits 55,084 41,835 -------- -------- Total Deposits $170,018 $153,422 Federal Funds Purchased - 1,547 Short-term debt 15,000 - Long-term debt 18,549 33,622 Accrued Expenses 1,367 851 -------- -------- Total Liabilities $204,934 $189,442 -------- -------- Stockholders' Equity Common Stock, Par Value $5 per Share; Authorized 2,000,000 Shares, 794,631 and 793,991 Shares Issued and Outstanding $ 3,973 $ 3,970 Surplus 1,543 1,531 Accumulated Other Comprehensive (Loss) (912) (1,342) Retained Earnings 13,805 13,017 -------- -------- Total Stockholders' Equity $ 18,409 $ 17,176 -------- -------- Total Liabilities and Stockholders' Equity $223,343 $206,618 ======== ======== The Accompanying Notes Are An Integral Part of These Statements 5 FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) (Unaudited) Nine Months Ended September 30, 2000 September 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,479 $ 1,469 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 298 330 Provision for loan losses 369 360 Change in assets and liabilities (Increase) in interest receivables (141) (52) (Increase) in other assets (323) (90) Increase in accrued expenses 516 253 -------- -------- Net Cash Provided by Operating Activities $ 2,198 $ 2,270 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from the sale of Other Real Estate Owned $ 343 $ 0 Proceeds from sale of securities-available for sale 0 4,115 Proceeds from maturities and principal payments on securities-available for sale 1,407 5,065 Purchases of securities-available for sale 0 (14,048) Proceeds from maturities and principal payments on securities-held to maturity 0 19 Purchases of bank premises and equipment (200) (398) Net (increase) in loans (13,100) (17,243) (Increase) Decrease in federal funds sold (3,045) 2,859 -------- -------- Net Cash (Used in) Investing Activities $(14,595) $(19,631) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts, and savings accounts (348) 6,938 Net increase in certificates of deposit 16,944 776 Net (decrease) in long-term borrowings (73) (3,064) Net increase in short-term borrowings 0 8,000 Net proceeds from issuance of common stock 15 107 Cash dividends paid (691) (616) Net increase (decrease) in federal funds purchased (1,547) 5,078 -------- -------- Net Cash Provided by Financing Activities $ 14,300 $ 17,219 -------- -------- Increase (Decrease) in Cash and Cash Equivalents $ 1,903 $ (142) CASH AND CASH EQUIVALENTS: Beginning 4,108 5,026 -------- -------- Ending $ 6,011 $ 4,884 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 6,666 $ 5,748 ======== ======== Income Taxes $ 686 $ 635 ======== ======== The Accompanying Notes Are An Integral Part of These Statements 6 FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands of Dollars) Nine Months Ended September 30, 2000 and 1999 (Unaudited) Accumulated Other Common Capital Comprehensive Retained Comprehensive Stock Surplus Income (Loss) Earnings Income Total Balances, December 31, 1998 $ 3,945 $ 1,417 $ 347 $11,892 $17,601 Comprehensive income: Net income 1,469 1,469 1,469 Other comprehensive income net of tax: Unrealized loss on securities available for sale (1,412) (1,412) Reclassification adjustment (9) (9) ------- Other comprehensive income, net of tax (1,421) (1,421) ------- Total comprehensive income 48 ======= Issuance of authorized common stock Dividend reinvestment plan 11 58 69 Exercise of incentive stock options 8 30 38 Cash dividends declared (616) (616) ------- ------- ------- ------- ------- Balances, September 30, 1999 $ 3,964 $ 1,505 $(1,074) $12,745 $17,140 ======= ======= ======= ======= ======= Balances, December 31, 1999 3,970 $ 1,531 $(1,342) $13,017 $17,176 Comprehensive income: Net Income 1,479 1,479 1,479 Other comprehensive income, net of tax: Unrealized gain on securities available for sale 430 430 Reclassification adjustment 0 0 ------- Total comprehensive income, net of tax 430 430 ------- Total comprehensive income 1,909 ======= Issuance of authorized common stock Exercised Options 3 12 15 Cash dividends declared (691) (691) ------- ------- ------- ------- ------- Balances, September 30, 2000 $ 3,973 $ 1,543 $ (912) $13,805 $18,409 ======= ======= ======= ======= ======= The Accompanying Notes Are An Integral Part of These Statements 7 FIRST NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Interim Financial Statements The accompanying consolidated financial statements of First National Corporation and its subsidiaries have not been audited by independent accountants, except for the balance sheet at December 31, 1999. In the opinion of the company's management, the financial statements reflect all adjustments necessary to present fairly the results of operations for the nine month periods ended September 30, 2000 and 1999, the company's financial position at September 30, 2000 and December 31, 1999, and the cash flows for the nine month periods ended September 30, 2000 and 1999. These adjustments are of a normal recurring nature. Note 2. Securities as of September 30, 2000 and December 31, 1999 are summarized below: (000 Omitted) September 30, 2000 December 31, 1999 ------------------ ----------------- Unrealized Unrealized Cost Market Gain (Loss) Cost Market Gain (Loss) ---- ------ ----------- ---- ------ ---------- Securities Available For Sale U.S. Treasury Securities $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 U.S. Agency Securities 36,581 35,324 ($1,257) 38,337 36,636 ($ 1701) Obligation of State and Political Subdivisions 6,827 6,658 ($169) 6,826 6,445 ($381) Corporate Securities 1 52 $51 1 49 $48 Other Securities 2,347 2,340 ($7) 1,999 1,999 $0 ------- ------- ------ ------- ------- ------ Total Securities Available for Sale $45,756 $44,374 ($1,382) $47,163 $45,129 ($2,034) 8 FIRST NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. The consolidated loan portfolio, stated at face amount, is composed of the following: (000 Omitted) September 30, 2000 December 31, 1999 Real estate loans: Construction and land development $ 8,104 10,205 Secured by farm land 1,844 1,489 Secured by 1-4 family residential 36,229 58,712 Other real estate loans 45,215 20,971 Loans to farmers (except those secured by real estate) 534 466 Commercial and industrial loans (except those secured by real estate) 35,661 26,441 Loans to individuals for personal expenditures 35,025 31,829 All other loans 1,179 670 -------------------------------- Total loans $ 163,791 150,783 Less unearned income reflected in loans 6 23 -------------------------------- Loans, net of unearned income $ 163,785 150,760 ================================ The Bank had loans in a Nonaccrual category of $34,125 on December 31, 1999 and $120,000 on September 30, 2000. Note 4. Allowance for Loan Losses Analysis of the Allowance for Loan Losses For the Nine Months Ended (000 Omitted) September 30, 2000 September 30, 1999 Balance at Beginning of Period $ 1,447 $ 1,226 Charge-Offs (121) (295) Recoveries 46 59 --------- ------------ Net Charge-Offs (75) (236) Provision for Loan Losses 369 360 --------- ------------ Balance at End of Period $ 1,741 $ 1,350 ========= ============ 9 FIRST NATIONAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Corporation will adopt this accounting standard as required by January 1, 2001. The Statement will require the Corporation to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Because the Corporation does not use derivatives, management does not anticipate that the adoption of the Statement will have any effect on the Corporation's earnings or financial position. 10 FIRST NATIONAL CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview - -------- Net income for the first three quarters of 2000, ended September 30, was $1.48 million compared to $1.47 million in the first three quarters of 1999. This represents an increase of less than 1% from the previous period and is attributable to an increase in net interest income during the first nine months of 2000. Interest and fees on loans increased $1.16 million during the period, while interest on deposits increased $1.09 million resulting in an increase in net interest income of $71 thousand. The provision to the allowance for loan losses increased from the previous period by $9 thousand. Total other operating expenses increased $280 thousand, principally in the salary and benefit area. Total non-interest income increased $200 thousand during the period, mostly, in the service charges area. Yields, Rates and Net Interest Margin - ------------------------------------- Interest rates on loans have increased moderately during 2000 and, in comparison with the first nine months of 1999, the yield on the loan portfolio has increased 13 basis points from 8.61% in 1999 to 8.74% in 2000. At the same time the cost of interest bearing deposits increased from 4.46% in the first three quarters of 1999 to 4.91% in the same period of 2000. While the yield on earning assets increased 35 basis points from 7.88% in 1999 to 8.23% in 2000, the cost of interest bearing liabilities increased 53 basis points from 4.63% in 1999 to 5.16% in 2000. This resulted in a decrease in the bank's interest rate spread from 3.25% in 1999 to 3.07% in 2000. Interest expense as a percentage of average earning assets increased from 3.93% in 1999 to 4.45% in 2000. The bank's net interest margin decreased from 3.94% in 1999 to 3.78% in 2000. Recent Developments - -------------------- First Bank was one of sixty-five banks seeking to collectively purchase a general insurance agency(s) through membership in the Virginia Bankers Insurance Center. The bank has purchased an interest in Banker's Title Shenandoah, a title insurance company. First Bank introduced "internet banking" with a bill-payer feature on September 1, 2000. Stock Repurchase - ---------------- On September 6, 2000, the Board of Directors approved the repurchase of up to 5% of the outstanding common shares of First National Corporation. This stock buyback is one of the steps that will increase shareholder value and serve as a prudent use of the company's capital. The repurchased shares will be held as unissued stock and will be available for general corporate purposes. 11 FIRST NATIONAL CORPORATION AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES Nine Months Ended September 30, ------------------------------- 2000 1999 Annual Annual Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate(3) Balance Expense Rate(3) ------- ------- ------ ------- ------- ------ ASSETS Balances at correspondent banks - interest bearing $ 341,451 $ 37,448 14.62% $ 212,211 $ 13,606 8.55% Securities: Taxable 37,555,831 1,780,636 6.32% 46,970,008 2,076,916 5.90% Tax-exempt (1) 6,823,394 372,759 7.28% 8,157,979 469,358 7.67% ------------ ----------- ----- ------------- ---------- ----- Total Securities 44,379,225 2,153,395 6.47% 55,127,987 2,546,274 6.16% Loans (net of earned income): (2) Taxable 156,661,616 10,219,804 8.70% 136,302,478 8,794,194 8.60% Tax-exempt (1) 459,095 78,267 22.73% 103,557 9,415 12.12% ------------ ----------- ----- ------------- ---------- ----- Total Loans 157,120,711 10,298,071 8.74% 136,406,035 8,803,609 8.61% Fed funds sold and repurchase agreements 1,810,168 86,285 6.36% 1,613,168 58,848 4.86% ------------ ----------- ----- ------------- ----------- ----- Total earning assets 203,651,555 12,575,199 8.23% 193,359,401 11,422,337 7.88% Less: allowance for Loan Losses (1,577,382) (1,254,933) Total nonearning assets 12,361,443 10,941,326 ------------ ------------- Total Assets $214,435,616 $ 203,045,794 ============ ============= LIABILITIES AND SHAREHOLDER EQUITY Interest bearing deposits: Checking $ 11,899,158 $ 111,874 1.25% $ 10,546,731 $ 114,549 1.45% Money market savings 5,983,399 138,792 3.09% 6,789,478 152,626 3.00% Regular savings 57,945,068 2,250,518 5.18% 63,519,961 2,066,684 4.34% Certificates of deposit: Less than $100,000 47,882,962 1,939,064 5.40% 48,356,781 1,902,573 5.25% $100,000 and more 15,574,754 685,583 5.87% 12,452,098 500,638 5.36% ------------ ----------- ----- ------------- ---------- ----- Total interest bearing deposits 139,285,341 5,125,831 4.91% 141,665,049 4,740,070 4.46% Fed funds purchased 1,295,084 62,648 6.45% 1,406,930 58,677 5.56% Long term borrowings 34,908,761 1,607,206 6.14% 21,337,971 906,455 5.66% ----------- ----------- ----- ------------- ---------- ----- Total interest bearing liabilities 175,489,186 6,795,685 5.16% 164,409,950 5,705,202 4.63% Noninterest bearing liabilities Demand deposits 19,787,414 19,638,677 Other liabilities 1,486,910 1,463,434 ------------ ------------- Total liabilities 196,763,510 185,512,061 Stockholders' equity 17,672,106 17,533,733 ------------ ------------- Total liabilities and stockholders' equity $214,435,616 $ 203,045,794 ============ ============= Net Interest income $ 5,779,514 $5,717,135 =========== ========== Interest rate spread 3.07% 3.25% Interest expense as a percent of average earning assets 4.45% 3.93% Net interest margin 3.78% 3.94% (1) Income and yields are reported on a taxable-equivalent basis assuming a federal tax rate of 34% in 1999 and 2000. (2) Loans placed on a nonaccrual status are reflected in the balances. (3) Annualized 12 First National Corporation Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II. OTHER INFORMATION Item 1. Legal Proceedings As of September 30, 2000 neither the Corporation nor the Bank was a party to any legal proceedings. Item 2. Not Applicable Item 3. Not Applicable Item 4. Not Applicable Item 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Financial Data Schedule Filed electronically as a separate document. (b) Reports on form 8-K None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First National Corporation (Registrant) Date November 13, 2000 /s/ Stephen C. Pettit ------------------------- ----------------------------------- Stephen C. Pettit, Comptroller (Principal Accounting Officer and Duly Authorized Officer) 14