UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
Securities registered pursuant to Section 12(B) of the Act:
Title of each class Name of each exchange on which registered:
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $5.00 par value per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[X]
As of February 28, 2001 there were 790,031 shares of common stock,
$5.00 par value, outstanding and the aggregate market value of common stock of
First National Corporation held by nonaffiliates was approximately $19,059,498.
DOCUMENTS INCORPORATED BY REFERENCE
2000 Annual Report to Shareholders - Parts I and II
Proxy Statement for the 2001 Annual Meeting of Shareholders - Part III
PART I
Item 1. Business
The Company
First National Corporation (the "Company") was organized on September
7, 1983 as a Virginia corporation for the purpose of acquiring all of the
outstanding common stock of the First National Bank of Strasburg (effective June
1, 1994, name changed to First Bank) (the "Bank") in connection with the
reorganization of the Bank into a one bank holding company structure. At the
effective date of the reorganization, the Bank merged into a newly-formed
national bank organized as a wholly-owned subsidiary of the Company, with each
outstanding share of common stock of the Bank being converted into one share of
common stock of the Company. The primary activity of the Company is the
ownership and operation of the Bank.
The Bank
The Bank is currently organized as a state chartered bank under the
laws of the Commonwealth of Virginia. It commenced operations on July 1, 1907 as
The Peoples National Bank of Strasburg. On January 10, 1928, the Bank changed
its name to the First National Bank of Strasburg and moved into its current
headquarters location in Strasburg.
On July 8, 1985, the Bank's first branch was opened in the town of
Front Royal, Virginia. The second branch was opened on July 26, 1985 in the City
of Winchester, Virginia. The Bank purchased a branch in Frederick County,
Virginia from First Union National Bank of Virginia on March 31, 1994. The Bank
opened this former First Union branch as a full service office on July 1, 1994.
A fourth branch was constructed in the town of Woodstock, Virginia and opened
for business on May 30, 1995. During 1998, two additional office locations were
opened. The Bank leased office space for a Loan Production Office in downtown
Winchester, Virginia, which opened on March 18, 1998. Additionally, a new
full-service branch facility was purchased on the north side of Winchester,
Virginia. This location was opened for business on December 19, 1998. The Bank
opened a sixth branch on June 28, 1999 with the lease of a former Regional Bank
branch office in Woodstock, Virginia.
On April 12, 1994, the Bank received approval from the Federal Reserve
Bank of Richmond (the "Federal Reserve") and the Virginia State Corporation
Commission's Bureau of Financial Institutions (the "SCC") to convert to a state
chartered bank with membership in the Federal Reserve System. The Bank was given
one year from approval to convert. On June 1, 1994, the Bank consummated such
conversion and changed its name to First Bank.
In April 1994, the Bank formed a subsidiary, First Bank Financial
Services, Inc. ("Financial Services"), for the purpose of investing in Bankers
Title of Fredericksburg, LLC, a title insurance company formed by a group of
community banks in Virginia. This company underwrites title insurance which is
sold through the banks which own the company.
Banking Services
As a full-service commercial bank, the Bank provides a wide range of
deposit, loan and other general banking services to individuals, businesses,
institutions and government entities. The Bank's deposit services for
individuals include checking, statement savings, NOW accounts, money market
accounts, IRA deposits, certificates of deposit, Christmas club accounts, direct
deposit programs, a club account, life-line checking accounts and investment
savings accounts. Loan services to individuals include personal and installment
loans (including automobile and property improvement loans), residential
mortgages, adjustable rate mortgages, bi-weekly mortgages, home equity loans,
and MasterCard and Visa credit cards. The Bank also offers consumers other
general banking services, such as safe deposit facilities, travelers checks and
collections, and acts as agent for the purchase and redemption of United States
Savings Bonds. In addition, the Bank offers corporate and business services,
including regular business checking, corporate savings, certificates of deposit,
commercial and small business loans, and on-line wire transfer services. The
Bank also offers Commercial mortgages. During 1999 the Bank began to offer
equipment leasing services and a wider array of mortgage products. In 2000 the
Bank introduced an on-line banking package including bill-payer to be fully
integrated with our enhanced website (www.firstbank-va.com).
2
Location and Service
The Bank serves the areas of Shenandoah, Frederick, Warren and Clarke
Counties and the City of Winchester in Virginia. The Bank solicits business from
individuals and small to medium-sized businesses, including retail shops and
professional service businesses, residing in this service area.
The Bank has offices at the following locations:
Main Office - 112 W. King St., Strasburg, VA 22657
Front Royal Office - 508 N. Commerce Ave., Front Royal, VA 22630
Winchester Office - 2210 Valley Ave., Winchester, VA 22601
Kernstown Office - 3143 Valley Pike, Winchester, VA 22602
Remote ATM site at Strasburg Square Shopping Center, Strasburg, Virginia
Woodstock South Office - 860 South Main Street, Woodstock, VA 22664
Remote ATM site at Judd's Inc., Strasburg, Virginia
N. Loudoun Street Office - 661 N. Loudoun Street, Winchester, Virginia
Winchester LPO - 9 W. Piccadilly Street, Winchester, Virginia 22601
Remote ATM site at Apple Mountain Chevron, Linden, Virginia
Woodstock North Office - 496 N. Main Street, Woodstock, Virginia
Remote ATM site at Handy-Mart, Winchester, Virginia
Remote ATM site at Handy-Mart, Woodstock, Virginia
Competition
The Bank is subject to intense competition from various financial
institutions and other companies or firms that offer financial services. In its
market area, the Company is and will be competing with several state-wide and
regional banking institutions. The Bank competes for deposits with other
commercial banks, savings and loan associations, credit unions and with issuers
of commercial paper and securities, such as money market and mutual funds. In
making loans, the Bank competes with other commercial banks, savings and loan
associations, consumer finance companies, credit unions, leasing companies and
other lenders.
Federal and state legislative changes since 1982 have significantly
increased competition among financial institutions, and current trends toward
further deregulation may be expected to increase such competition even further.
Many of the financial organizations in competition with the Company have greater
financial resources than the Company and are able to offer similar services at
varying costs with greater loan capacities. Of all the banks in our marketplace,
the Bank is one of a few that serves the area exclusively as an independent,
community bank. This enables it to identify and meet customer needs efficiently
and enhance its competitiveness in the marketplace. The Bank's history, dating
back to 1907, also allows it to compete from a position of strength and
stability.
Asset and Liability Management
Assets of the Bank consist primarily of loans and its investment
portfolio. Deposit accounts, including checking accounts and interest-bearing
accounts, time deposits and certificates of deposit, represent the majority of
the liabilities of the Bank. In an effort to maintain adequate levels of
liquidity and minimize fluctuations in the net interest margin (the difference
between interest income and interest expense), the rate sensitivity of the loan
and investment portfolios are similar to the rate sensitivity of the Bank's
liabilities.
The Bank invests the majority of its investment portfolio in highly
marketable short-term assets, such as federal funds and issues of the United
States government and its agencies. By pricing loans on a variable rate
structure, or by keeping the maturity of the investment and loan portfolios
relatively short- term, the Bank is able to maintain loan interest or to
reinvest securities proceeds at prevailing market rates, thereby helping to
maintain a generally consistent spread over the interest rates paid by the Bank
on the deposits which are used to fund the investment and loan portfolios.
3
Lending Activities
The Bank is an active lender with a loan portfolio that includes
commercial and residential mortgages, real estate construction loans, commercial
loans, and consumer loans. The Company's lending activity extends to individuals
and small and medium-sized businesses within its primary service area.
Consistent with its focus on providing community-based financial services, the
Bank does not attempt to diversify its loan portfolio geographically by making
significant amounts of loans to borrowers outside of its primary service area.
The principal economic risk associated with each of the categories of
loans in the portfolio is the credit worthiness of its borrowers. Within each
category, such risk is increased or decreased depending on prevailing economic
conditions. In an effort to manage this risk, it is the Bank's policy to give
loan amount approval limits to individual loan officers based on their level of
experience. The risk associated with the real estate mortgage loans and
installment loans to individuals varies based upon employment levels, consumer
confidence, fluctuations in value of residential real estate and other
conditions that affect the ability of consumers to repay indebtedness. The risk
associated with commercial, financial and agricultural loans varies based upon
the strength and activity of the local economies of the Bank's market area. The
risk associated with real estate construction loans varies based upon the supply
and demand for the type of real estate under construction. Most of the Bank's
real estate construction loans are for pre-sold or contract homes.
Residential Mortgage Lending. Residential mortgage loans are made in
amounts up to 80% (95% with Mortgage Guaranty Insurance) of the appraised value
of the security property. Residential mortgage loans are underwritten using
qualification guidelines. The Bank requires that the borrower obtain title, fire
and casualty coverage in an amount equal to the loan amount and in a form
acceptable to the Bank.
The Bank charges origination fees on its residential mortgage loans.
These fees vary among loan products and with market conditions. Generally such
fees amount to 1.0% to 2.125% of the loan principal amount. In addition, the
Bank charges fees to its borrowers to cover the cost of appraisals, credit
reports and certain expenses related to the documentation and closing of loans.
Real Estate Construction Loans. The Bank does originate construction
loans on income-producing properties such as apartments, shopping centers,
hotels and office buildings. These loans are carefully underwritten with
emphasis placed on the project income, as well as, the borrowers and guarantors
ability to repay from outside sources. The Bank also makes construction loans
for residential purposes. These loans are primarily used for construction of
owner-occupied pre-sold residential homes and are considered an attractive type
of lending due to their short-term maturities and high yields. The Bank does not
participate in any "speculative lending" which relies on market demand after
construction.
Construction lending entails significant additional risk as compared
with commercial and residential mortgage lending. Construction loans typically
involve larger loan balances concentrated with single borrowers or groups of
related borrowers. Construction loans involve additional risks attributable to
the fact that loan funds are advanced upon the security of the home under
construction, which is of uncertain value prior to the completion of
construction. Thus, it is more difficult to evaluate accurately the total loan
funds required to complete a project and related loan-to-value ratios. To
minimize risks associated with construction lending, the Bank limits loan
amounts to 80% of appraised value on pre-sold homes in addition to its usual
credit analysis of its borrowers. The Bank also obtains a first lien on the
security property as security for its construction loans.
Commercial Real Estate Lending. The Bank provides permanent mortgage
financing for a variety of commercial projects. These loans are written with
maturities generally within one and five years and are made predominantly on an
adjustable rate basis. The Bank attempts to concentrate its commercial real
estate lending efforts into owner-occupied projects. However, from time to time,
in the normal course of business, the Bank will provide a limited amount of
financing for income producing, non-owner occupied projects which meet all of
the guidelines established by loan policy.
Commercial Loans. As a full-service community bank, the Bank makes
loans to qualified small businesses in its service area. Commercial business
loans generally have a higher degree of risk than commercial and residential
mortgage but have commensurately higher yields. To manage these risks, the Bank
secures appropriate collateral and carefully monitors the financial condition of
4
its business borrowers. Commercial business loans typically are made on the
basis of the borrower's ability to make repayment from the cash flow of its
business and are either unsecured or secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability of
funds for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the collateral for
secured commercial business loans may depreciate over time and cannot be
appraised with as much precision as real estate.
Consumer Loans. The Bank currently offers most types of consumer
demand, time and installment loans including automobile loans and home equity
lines of credit. The risk associated with installment loans to individuals
varies based upon employment levels, consumer confidence, and other conditions
that affect the ability of consumers to repay indebtedness.
Employees
At December 31, 2000, a total of 86 persons were employed by the
Company and the Bank in both full and part time positions. None are represented
by any collective bargaining unit. The Company considers relations with its
employees to be good.
Supervision and Regulation
General. As a bank holding company registered under the Bank Holding
Company Act of 1956 (the "BHCA"), the Company is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System and is
required to file with the Federal Reserve such reports and other information as
the Federal Reserve may require. The Bank was supervised and regularly examined
by the Office of the Comptroller of the Currency, but upon its conversion to a
state chartered bank on June 1, 1994, became subject to the oversight of the
Federal Reserve and the Bureau of Financial Institutions of the SCC. The various
laws and regulations administered by the regulatory agencies affect corporate
practices, such as dividend payments, incurring debt, acquisition of financial
institutions and other companies, and types of business conducted.
Bank Holding Company Regulation. Under Federal Reserve policy, a bank
holding company is expected to act as a source of financial strength to each of
its subsidiary banks and to commit resources to support such banks in
circumstances where it might not do so absent such policy. The BHCA requires a
bank holding company to obtain Federal Reserve approval before it acquires,
directly or indirectly, ownership or control of any voting shares of a bank or
bank holding company if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls a majority of such
voting shares). Federal Reserve approval also must be obtained before a bank
holding company acquires all or substantially all of the assets of another bank
or bank holding company or merges or consolidates with another bank holding
company. In addition to the approval of the Federal Reserve, before any bank
acquisition can be completed, prior approval thereof must be obtained from each
other banking agency which has supervisory jurisdiction over the bank to be
acquired.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, from acquiring or retaining direct or indirect ownership or control
of more than 5% of the voting shares of any company which is not a bank, or from
engaging in any activities other than those of banking or of managing or
controlling banks or furnishing services to or performing services for its
subsidiaries. The principal exceptions to these prohibitions permit a bank
holding company to engage in, or acquire an interest in a company that engages
in activities which, after due notice and opportunity for hearing, the Federal
Reserve by regulation or order has determined are so closely related to banking
or of managing or controlling banks as to be a proper incident thereto.
The subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, or investments in the stock
or other securities thereof, and on the taking of such stocks or securities as
collateral for loans. The Federal Reserve possesses cease and desist powers over
bank holding companies if their actions represent unsafe or unsound practices or
violations of law.
A bank holding company may not, without providing prior notice to the
Federal Reserve, purchase or redeem its own stock if after the transaction the
company is no longer classified as "well-capitalized."
5
The Company is also subject to certain provisions of Virginia law that
affect the ability of a bank holding company to acquire another financial
institution based in Virginia. Under certain amendments to the Virginia
Financial Institutions Holding Company Act that became effective July 1, 1983,
no corporation, partnership or other business entity may acquire, or make any
public offer to acquire, more than 5% of the stock of any Virginia financial
institution or any Virginia financial institution holding company, unless it
shall first file an application with the Virginia State Corporation Commission
(the "SCC"). The SCC is directed by the statute to solicit the views of the
affected financial institution, or financial institution holding company, with
respect to such stock acquisition, and is empowered to conduct an investigation
during the 60 days following receipt of such an application. If the SCC takes no
action within the prescribed period, or if during the prescribed period it
issues notice of its intent not to disapprove an application, the acquisition
may be completed. The SCC may disapprove an application subject to such
conditions as it may deem advisable.
The Bank. As stated earlier in this item under "The Bank," the Bank
received approval from the Federal Reserve and the SCC and converted to a state
chartered bank, organized under the laws of the Commonwealth of Virginia, with
membership in the Federal Reserve System. The Bank is now supervised and
regularly examined by the Federal Reserve and the SCC and is subject to the laws
and regulations administered by those regulatory authorities.
Limits on Dividends and Other Payments. The Company is a legal entity
separate and distinct from the Bank. Most of the Company's revenues result from
dividends paid to the Company by the Bank. The right of the Company, and
consequently the right of creditors and shareholders of the Company, to
participate in any distribution of the assets or earnings of the Bank through
the payment of such dividends or otherwise is necessarily subject to the prior
claims of creditors of the Bank, except to the extent that claims of the Company
in its capacity as a creditor may be recognized.
The amount of dividends payable by the Bank to the Company depends upon
the Bank's earnings and capital position, and is limited by federal and state
law, regulations and policies.
As a state member bank subject to the regulations of the Federal
Reserve Board, the Bank has to obtain the approval of the Federal Reserve Board
for any dividend if the total of all dividends declared in any calendar year
would exceed the total of its net profits, as defined by the Federal Reserve
Board, for that year, combined with its retained net profits for the preceding
two years. In addition, the Bank may not pay a dividend in an amount greater
than its undivided profits then on hand after deducting its losses and bad
debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, the Bank is not permitted
to add the balance in its allowance for loan losses account to its undivided
profits then on hand; however, it may net the sum of its bad debts as so defined
in excess of that account. At December 31, 2000, the Bank had $3.8 million of
retained earnings legally available for the payment of dividends.
In addition, the Federal Reserve is authorized to determine under
certain circumstances relating to the financial condition of a national bank, a
state member bank or a bank holding company that the payment of dividends would
be an unsafe or unsound practice and to prohibit payment thereof. The payment of
dividends that deplete a bank's capital base could be deemed to constitute such
an unsafe or unsound practice. The Federal Reserve has indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
Borrowings by the Company. There are various legal restrictions on the
extent to which the Company can Borrow or otherwise obtain credit from the Bank.
In general, these restrictions require that any such extensions of credit must
be secured by designated amounts of specified collateral and are limited, as to
the Company, to 10 percent of the Bank's capital stock and surplus, and as to
the Company and any nonbanking subsidiaries in the aggregate, to 20 percent of
the Bank's capital stock and surplus. Federal law also requires that
transactions between the Bank and the Company or any nonbanking subsidiaries,
including extensions of credit, sales of securities or assets and the provision
of services, be conducted on terms at least as favorable to the Bank as those
that apply or would apply to comparable transactions with unaffiliated parties.
6
Capital Requirements
Year Ended
December 31,
2000
Required Capital Ratios:
Leverage Ratio 4.00%
Tier 1 risk-based capital ratio 4.00
Total risk-based capital ratio 8.00
The Company Capital Ratios:
Leverage Ratio 8.7%
Tier 1 risk-based capital ratio 11.3
Total risk-based capital ratio 12.3
In January 1989, the Federal Reserve Board published risk-based capital
guidelines in final form which are applicable to bank holding companies. The
Federal Reserve Board guidelines redefine the components of capital, categorize
assets into different risk classes and include certain off-balance sheet items
in the calculation of risk-weighted assets. These guidelines became effective on
March 15, 1989. The minimum ratio of qualified total capital to risk-weighted
assets (including certain off balance sheet items, such as standby letters of
credit) is 8.00%. At least half of the total capital must be comprised of common
equity, retained earnings and a limited amount of permanent preferred stock,
less goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist
of a limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of loan and lease losses reserves. The
Company's Tier 1 and total Capital ratios as of December 31, 2000 were 11.3% and
12.3%, respectively.
In addition, the Federal Reserve Board has established minimum Leverage
ratio (Tier 1 capital to quarterly average assets less goodwill) guidelines for
bank holding companies. These guidelines provide for a minimum ratio of 3.00%
for bank holding companies that meet certain specific criteria, including that
they have the highest regulatory rating. All other bank holding companies will
be required to maintain a Leverage ratio of 3.00% plus an additional cushion of
at least 100 to 200 basis points. The Company's Leverage ratio as of December
31, 2000 was 8.7%. The guidelines also provide that a banking organization
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Under Federal Reserve Board policy, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that, in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks. This support may be required during periods of financial stress or
adversity or in circumstances where the financial flexibility and
capital-raising capacity of the bank holding company would be called upon to
obtain additional resources for assisting its subsidiary banks. The failure of a
bank holding company to serve as a source of strength to its subsidiary banks
would generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice, a violation of Federal Reserve regulations, or both.
FIRREA. In August 1989, Congress enacted the Financial Institutions
Reform, Recovery, and Enforcement Act ("FIRREA"). Among other things, FIRREA
abolished the Federal Savings and Loan Insurance Corporation and established two
new insurance funds under the jurisdiction of the FDIC -- the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF"). The
FDIC will set assessments for deposit insurance annually. The act requires that
the FDIC reach an insurance fund reserve ratio for the BIF of $1.25 for every
$100 of insured deposits within fifteen years. Assessment for the BIF and SAIF
will be set independently.
7
FIRREA also imposes, with certain exceptions, a "cross-guarantee" on
the part of commonly controlled depository institutions. Under this provision,
if one depository institution subsidiary of a multi- unit holding company fails
or requires FDIC assistance, the FDIC may assess a commonly controlled
depository institution for the estimated losses suffered by the FDIC. While the
FDIC's claim is junior to the claims of non-affiliated depositors, holders of
secured liabilities, general creditors, and subordinated creditors, it is
superior to the claims of shareholders.
In addition, FIRREA grants numerous new or enhanced enforcement powers
over financial institutions and individuals associated with them. Its criminal
and civil liability provisions apply equally to banks and savings and loan
associations and provide for stiffer civil fines and criminal penalties for any
depository institution or any institution affiliated party who engages in or
tolerates bank fraud or other wrongdoing.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") was signed into law on December 19, 1991. Section 131 of FDICIA
requires the federal banking agencies to develop a mechanism to take prompt and
corrective action ("PCA") to resolve the problems of insured depository
institutions ("IDI's"). Capital levels and supervisory concern determine a
bank's PCA capital category.
Section 302 requires the FDIC to establish a risk-based assessment
system. The system is designed as a matrix where each IDI will pay an assessment
rate based on the combination of its capital and supervisory condition.
Section 305 of FDICIA requires incorporating interest rate risk ("IRR")
into the risk-based standard and a measurement system that would identify
institutions with high levels of IRR and ensure that they have sufficient
capital to cover their exposure. The measurement system will quantify IRR
exposure through weighting and risk factors.
Depository institutions are required to establish non-capital standards
for bank safety and soundness. These standards fall into three broad categories:
operations and management standards for internal controls, loan documentation,
and credit underwriting; asset quality, earnings and stock valuation standards;
and executive compensation standards. The failure of a depository institution to
meet these standards will trigger regulatory actions. Section 112 establishes
guidelines for annual independent audit, annual report filings with regulatory
agencies, independent audit reports and procedures, and independent audit
committees.
Section 301 addresses brokered deposits with no restrictions on "well
capitalized" institutions and restrictions based upon the capital threshold of
remaining institutions. Truth in Savings ("TISA") or Regulation DD is intended
to assist consumers in comparing deposit accounts principally through
disclosures of fees, annual percentage yields, interest rates and other terms
associated with interest-bearing deposit accounts. Compliance was mandatory on
June 21, 1993. Section 304 requires a uniform standard for real estate lending
establishing loan-to value ("LTV") ratio guidelines for real estate secured
loans.
FDICIA contains a provision for IDI's to provide supplemental
disclosure of the estimated fair value of assets and liabilities in reports
required to be filed with federal banking agency.
FDICIA establishes various limitations on loans to bank insiders and
prescribes standards that effectively limit the risks posed by an insured bank's
exposure to other insured depository institutions ("Interbank Liabilities").
FDICIA also requires advance notice of a branch closure, the establishment of
incentives to provide life-line accounts to low-income customers and addresses
the frequency and scope of supervisory examinations. Clearly, the ultimate
impact of FDICIA will be profound.
Government Policies and Legislation. The policies of regulatory
authorities, including the Federal Reserve Board and the FDIC, have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. An important function of the Federal
Reserve is to regulate aggregate bank credit and money through such means as
open market dealings in securities, establishment of the discount rate on member
banks, borrowings, and changes in reserve requirements against member deposits.
Policies at these agencies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance, and fiscal policies of the United States government.
8
Congress has periodically considered and adopted legislation which has
resulted in, and could result in further, deregulation of both banks and
financial institutions. Such legislation could modify or eliminate geographic
restrictions on banks and bank holding companies and could modify or eliminate
current prohibitions against the Company engaging in one or more non-banking
activities. Such legislative changes also could place the Company in more direct
competition with other financial institutions. No assurance can be given as to
whether any additional legislation will be adopted and as to effect of such
legislation on the business of the Company.
Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the
"Act") was signed into law on November 12, 1999. The Act covers a broad range of
issues, including a repeal of most of the restrictions on affiliations among
depository institutions, securities firms and insurance companies. Most of the
Act's provisions require the federal bank regulatory agencies and other
regulatory bodies to adopt regulations to implement the Act, and for that reason
an assessment of the full impact on the Company of the Act must await completion
of that regulatory process.
The Act repeals sections 20 and 32 of the Glass-Stegall Act, thus
permitting unrestricted affiliations between banks and securities firms. The Act
also permits bank holding companies to elect to become financial holding
companies. A financial holding company may engage in or acquire companies that
engage in a broad range of financial services, including securities activities
such as underwriting, dealing, brokerage, investment and merchant banking and
insurance underwriting, sales and brokerage activities. In order to become a
financial holding company, the bank holding company and all of its affiliated
depository institutions must be well-capitalized, well-managed, and have at
least a satisfactory Community Reinvestment Act rating.
The Act provides that the states continue to have the authority to
regulate insurance activities, but prohibits the states in most instances from
preventing or significantly interfering with the ability of a bank, directly or
through an affiliate, to engage insurance sales, solicitations or cross-
marketing activities. Although the states generally must regulate bank insurance
activities in a nondiscriminatory manner, the states may continue to adopt and
enforce rules that specifically regulate bank insurance activities in certain
areas identified in the Act. The Act directs the federal bank regulatory
agencies to adopt insurance consumer protection regulations that apply to sales
practices, solicitations, advertising and disclosures.
The Act adopts a system of functional regulation under which the Federal
Reserve Board is confirmed as the umbrella regulator for financial holding
companies, but financial holding company affiliates are to be principally
regulated by functional regulators such as the FDIC for state nonmember bank
affiliates, the Securities and Exchange Commission for securities affiliates and
state insurance regulators for insurance affiliates. The Act repeals the broad
exemption of banks from the definitions of "broker" and "dealer" for purposes of
the Securities Exchange Act of 1934, as amended, but identifies a set of
specific activities, including traditional bank trust and fiduciary activities,
in which a bank may engage without being deemed a "broker", and a set of
activities in which a bank may engage without being deemed a "dealer". The Act
also makes conforming changes in the definitions of "broker" and "dealer" for
purposes of the Investment Company Act of 1940, as amended, and the Investment
Advisers Act of 1940, as amended.
The Act contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, at the
inception of the customer relationship and annually thereafter, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The Act provides that, except for
certain limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The Act also provides that the states may adopt customer privacy
protections that are more strict than those contained in the Act. The Act also
makes a criminal offense, except in limited circumstances, obtaining or
attempting to obtain customer information of a financial nature by fraudulent or
deceptive means.
Item 2. Properties
The principal executive offices of the Company are located at 112 West
King Street, Strasburg, Virginia, which is owned free of encumbrances. In
addition to operating a full service banking facility at this Strasburg
location, the Company operates six additional branches and a loan production
office. The Company owns four of these facilities without encumbrances and
leases three of the facilities. The leases on these facilities including renewal
options, expire in 2002. See Note 14 to the Consolidated Financial Statements of
the Company's 2000 Annual Report to Shareholders for additional information
concerning these lease commitments.
Item 3. Legal Proceedings
In the ordinary course of its operations, the Company is party to
various legal proceedings. Based on information presently available, and after
consultation with legal counsel, management believes that the ultimate outcome
in such proceedings in the aggregate, will not have a material adverse effect on
the business or the financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote in the fourth
quarter of 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Shares of the common stock of the Company are traded on the
over-the-counter (OTC) market and quoted in the OTC Bulletin Board under the
symbol "FXNC." However, similar to the trading of the Bank's common stock prior
to its reorganization, trading of the Company's common stock is generally the
result of private negotiation. Increasingly, a broker or dealer may be involved.
The Company has a limited record of trades involving its common stock
in the sense of "bid" and "asked" prices or in highs and lows. The effort to
accurately disclose trading prices is made more difficult due to the fact that
price per share information is not required to be disclosed to the Company when
shares of its stock have been sold by holders and purchased by others. The
following table summarizes the high and low sales prices of shares of the
Company's common stock on the basis of trades known to the Company. The Company
may not be aware of the per share price of all trades made.
9
Market Price and Dividends
Sales Price ($) Dividends ($) (1)
--------------- -----------------
High Low
---- ---
1999:
1st quarter................. 30.50 29.00 .26
2nd quarter................. 30.00 27.00 .26
3rd quarter................. 31.00 26.50 .26
4th quarter................. 28.88 26.00 .37
2000:
1st quarter................. 27.00 22.50 .29
2nd quarter................. 23.00 22.00 .29
3rd quarter................. 22.00 21.25 .29
4th quarter................. 22.87 21.75 .33
.........
(1) The Company increased its dividend to $1.20 per share in 2000, which
represented a payout ratio of 44.56%. The dividend per share and payout
ratios in 1999 were $1.15 and 44.72%, respectively.
The Company had 718 shareholders of record as of February 28, 2001.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference to
"Table 1 - Selected Consolidated Financial Data" in Item 7., "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company is the holding company for the Bank, and the Bank owns
First Bank Financial Services Inc. ("Financial Services"). The following
discussion and analysis of the financial condition and results of operations of
the Corporation for the years ended December 31, 2000, 1999 and 1998 should be
read in conjunction with the consolidated financial statements and related
notes.
Overview
Earnings and assets continued to grow in 2000. Net income for 2000 was
$2,136,787 compared to $2,034,288 in 1999 and $1,904,682 in 1998. Net income per
share increased $0.12 per share, both basic and diluted in 2000 from 1999 ($2.69
per share basic and diluted in 2000 versus $2.57 per share basic and diluted in
1999). The increase in earnings resulted primarily from a continuing increase in
the Bank's interest income which was greater than the increase in interest
expense. Return on average assets was .98% in 2000, 1.00% in 1999 and 1.05% in
1998. Return on average equity was 11.90% in 2000, 11.63% in 1999, and 11.31% in
1998.
Assets grew 11.0% in 2000. In 1999 management elected to slow the rate
to 8.1%. Growth occurred in the loan portfolio where loans, net of unearned
income and allowance for loan losses, increased $15.8 million to $165.1 million.
The securities portfolio declined slightly to $44.8 million in 2000 from $45.1
million in 1999.
Results of Operations
Net interest income represents the primary source of earnings for the
Corporation. Net interest income equals the amount by which interest income on
earning assets, predominately loans and securities, exceeds interest expense on
interest bearing liabilities, predominately deposits, short-term and long-term
10
borrowings. The provision for loan losses and the amount of noninterest income
and expense also have an effect on net income. Noninterest income and expense
consists of income from service charges on deposit accounts, fees charged for
various services, gains and losses from the sale of assets, both fixed assets
and securities, and various administrative, operating and income tax expenses.
Changes in the volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income. Net interest margin is
calculated by dividing tax equivalent net interest income by average earning
assets and reflects the Company's net yield on its earning assets.
General. Net income has increased in each of the last three years. The
increase in income in 2000 was caused by growth in earning assets and by the
funding of higher yielding assets, in part, from lower priced deposits. In 1999
and 1998 net interest income increased as the Corporation continued to
experience favorable asset growth.
Net Interest Income. Net interest income was $7.62 million for the year
ended December 31, 2000, up $85 thousand or 1.13% over the $7.53 million
reported for the same period in 1999. This increase in net interest income
resulted from an increase in interest-earning assets. In 1999, net interest
income increased 9.46% or $651 thousand from $6.88 million in 1998.
Interest income as a percent of average earning assets increased to
8.29% in 2000 from 7.94% in 1999 following a decline in 1999 from 8.27% in 1998.
Interest expense as a percent of average earning assets declined from 4.12% in
1998 to 3.95% in l999 and increased to 4.52% in 2000. Net interest margin and
interest rate spread decreased in 2000 when compared to 1999. Net interest
margin was 3.77% in 2000, 3.98% in l999, and 4.15% in l998. Interest rate spread
was 3.03% in 2000, 3.30% in 1999, and 3.36% in l998. The decline in yields on
earning assets reflect a lower interest rate environment and management's
attempt to grow the assets of the Bank while the cost of funding the growth
increased.
Provision for Loan Losses. The provision for 2000 decreased to $369,000
from $495,000 in 1999. The decrease was due to management's analysis of the
existing loan portfolio and related credit risks.
Non-Interest Income. Non-interest income increased $282,330 or 25.22%
for 2000 over 1999 compared to a decrease of $129,943 or 10.40% for 1999 over
1998. The increase in non-interest income is attributed in part to service
charges, which increased $159,919 in 2000 and to an increase of $158,287 in fees
for other customer services. There were no sales of securities available for
sale in 2000. In 1999, profits on securities available for sale declined
$196,942 from 1998.
Non-Interest Expense. In 2000, non-interest expenses increased $340,066
or 6.45% over 1999. In 1999, non-interest expenses increased $164,623 or 3.22%
over 1998. The increase in 2000 was primarily the result of the increase in
employee salaries and benefits.
Income Taxes. The corporation has adopted FASB Statement No. 109,
"Accounting for Income Taxes". A more detailed discussion of the Corporation's
tax calculation is contained in Note 9 to the consolidated financial statements.
Net interest income is affected by changes in both average interest
rates and average volumes of interest earning assets and interest bearing
liabilities. Table 3 sets forth the amounts of the total change in interest
income that can be attributed to changes in the volume of interest earning
assets and interest bearing liabilities and the amount of the change that can be
attributed to changes in interest rates. The amount of change not solely due to
rate or volume changes was allocated between the change due to rate and the
change due to volume based on the relative size of the rate and volume changes.
11
Table 1 - Selected Consolidated Financial Data
Years Ended December 31,
(in thousands except ratios and per share amounts)
2000 1999 1998 1997 1996
Income Statement Data:
Interest Income $ 16,951 $ 15,217 $ 13,993 $ 11,932 $ 10,833
Interest Expense 9,332 7,683 7,110 5,738 5,097
Net Interest Income 7,619 7,534 6,883 6,194 5,736
Provision For Loan Losses 369 495 330 220 120
Net Interest Income After
Provision For Loan Losses 7,250 7,039 6,553 5,974 5,616
Noninterest Income 1,402 1,118 1,052 908 628
Securities Gains (Losses) 0 1 198 11 20
Noninterest Expense 5,611 5,271 5,106 4,646 4,279
Income Before Income Taxes 3,041 2,887 2,697 2,247 1,985
Income Taxes 905 853 792 636 531
Net Income $ 2,137 $ 2,034 $ 1,905 $ 1,611 $ 1,454
Per Share Data:
Net Income, Basic $ 2.69 $ 2.57 $ 2.43 $ 2.08 $ 1.88
Net Income, Diluted 2.69 2.57 2.42 2.08 1.88
Cash Dividends 1.20 1.15 1.00 0.82 0.70
Book Value At Period End 24.47 21.63 22.31 20.81 19.16
Balance Sheet Data:
Assets $229,329 $206,618 $191,136 $164,589 $141,329
Loans, Net Of Unearned Income 165,145 149,313 128,371 112,493 98,421
Securities 44,831 45,129 48,263 41,699 33,742
Deposits 175,194 153,422 155,008 139,762 123,984
Stockholders' Equity 19,329 17,176 17,601 16,182 14,837
Average Shares Outstanding, Diluted 794 792 787 776 773
Performance Ratios:
Return On Average Assets 0.98% 1.00% 1.05% 1.07% 1.06%
Return On Average Equity 11.90% 11.63% 11.31% 10.41% 10.36%
Dividend Payout 44.56% 44.72% 41.21% 39.71% 37.19%
Capital And Liquidity Ratios:
Leverage 8.67% 8.91% 9.02% 9.99% 10.43%
Risk-Based Capital Ratios:
Tier 1 Capital 11.28% 12.74% 13.78% 14.20% 15.58%
Total Capital 12.25% 13.73% 14.76% 15.19% 16.60%
12
Table 2 - Average Balances, Income and Expense, Yields and Rates
Twelve Months Ended December 31,
2000 1999 1998
Annual Annual Annual
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
ASSETS
Balances at correspondent banks
- interest bearing $ 508,853 $ 59,191 11.63% $ 240,004 $ 31,007 12.92% $ 211,408 28,121 13.30%
Securities:
Taxable 37,411,972 2,365,251 6.32% 45,356,202 2,707,561 5.97% 40,911,545 2,489,752 6.09%
Tax-exempt (1) 6,824,295 496,970 7.28% 7,840,363 604,758 7.71% 6,689,586 540,955 8.09%
------------ ----------- ------------ ----------- ------------ -----------
Total Securities 44,236,267 2,862,221 6.47% 53,196,565 3,312,319 6.23% 47,601,131 3,030,707 6.37%
Loans (net of earned income): (2)
Taxable 158,582,976 13,956,636 8.80% 139,526,204 12,010,303 8.61% 122,961,198 11,108,481 9.03%
Tax-exempt (1) 582,072 66,310 11.39% 99,387 12,080 12.15% 150,922 16,288 10.79%
------------ ----------- ------------ ----------- ------------ -----------
Total Loans 159,165,048 14,022,946 8.81% 139,625,591 12,022,383 8.61% 123,112,120 11,124,769 10.79%
Federal funds sold and repurchase 9.04%
agreements 2,717,194 175,993 6.48% 1,254,732 60,874 4.85% 1,620,395 85,556 5.28%
------------ ----------- ------------ ----------- ------------ -----------
Total earning assets 206,627,362 17,120,351 8.29% 194,316,892 15,426,583 7.94% 172,545,054 14,269,153 5.28%
Less: allowance for Loan Losses (1,618,154) (1,289,781) (1,163,943) 8.27%
Total nonearning assets 12,393,531 11,285,982 9,844,364
------------ ------------ ------------
Total Assets $217,402,739 $204,313,093 $181,225,475
LIABILITIES AND SHAREHOLDER EQUITY
Interest bearing deposits:
Checking $ 12,083,034 $158,442 1.31% $ 10,873,173 $ 147,343 1.36% $ 9,582,208 $ 194,980
Money market savings 5,983,995 188,153 3.14% 6,667,684 199,488 2.99% 6,467,845 210,531 2.03%
Regular savings 58,761,111 3,107,260 5.29% 63,119,179 2,776,451 4.40% 54,901,337 2,191,114 3.26%
Certificates of deposit: 3.99%
Less than $100,000 49,448,164 2,729,657 5.52% 47,187,911 2,462,154 5.22% 45,677,800 2,916,964
$100,000 and more 15,889,137 947,505 5.96% 12,833,365 688,260 5.36% 12,399,700 688,453 6.39%
------------ ----------- ------------ ----------- ------------ -----------
Total interest bearing deposits 142,165,441 7,131,017 5.02% 140,681,312 6,273,696 4.46% 129,028,890 6,202,042 5.55%
Fed funds purchased 969,544 62,648 6.46% 1,862,879 104,447 5.61% 457,638 29,462 4.81%
FHLB borrowings 34,564,638 2,138,546 6.19% 22,961,368 1,304,924 5.68% 15,374,312 878,732 6.44%
------------ ----------- ------------ ----------- ------------ -----------
Total interest bearing liabilities 177,699,623 9,332,211 5.25% 165,505,559 7,683,067 4.64% 144,860,840 7,110,236 5.72%
Noninterest bearing liabilities 4.91%
Demand deposits 20,236,880 19,888,343 17,925,343
Other liabilities 1,510,331 1,432,181 1,596,292
------------ ------------ ------------
Total liabilities 199,446,834 186,826,083 164,382,475
Stockholders' equity 17,955,905 17,487,010 16,843,000
------------ ------------ ------------
Total liabilities and
stockholders' equity $217,402,739 $204,313,093 $181,225,475
Net Interest income $ 7,788,140 $ 7,743,516 $ 7,158,917
Interest rate spread 3.03% 3.30% 3.36%
Interest expense as a percent
of average earning assets 4.52% 3.95% 4.12%
Net interest margin 3.77% 3.98% 4.15%
.........
(1) Income and yields are reported on a taxable-equivalent basis assuming
a federal tax rate of 34% in 2000 and 1999.
(2) Loans placed on a nonaccrual status are reflected in the balances.
13
Table 3 - Volume and Rate Analysis
2000 1999
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
Earning Assets:
Due From Banks $ 30,942 $ (2,758) $ 28,184 $ 3,659 $ (773) $ 2,886
Taxable Securities (514,533) 172,223 (342,310) 266,066 (48,257) 217,809
Tax-Exempt Securities (75,357) (32,431) (107,788) 87,768 (23,965) 63,803
Taxable Loans 1,675,607 270,726 1,946,333 1,377,360 (475,538) 901,822
Tax-Exempt Loans 54,938 (708) 54,230 (6,670) 2,462 (4,208)
Federal Funds Sold and
Repurchase Agreements 89,354 25,765 115,119 (18,137) (6,545) (24,682)
---------- --------- ---------- ----------- --------- ----------
Total Earning Assets $1,260,951 $ 432,817 $1,693,768 $1,710,046 $(522,616) $1,157,430
---------- --------- ---------- ---------- --------- ----------
Interest Bearing Liabilities:
Interest Checking $ 16,576 $ (5,477) $ 11,099 $ 32,858 $ (80,495) $ (47,637)
Savings Deposits-
Regular (171,441) 502,250 330,809 311,109 (181,109) 130,000
Money Market (22,193) 10,858 (11,335) 6,571 (17,614) (11,043)
CD's and Other Time Deposits
$100,000 and More 176,343 82,902 259,245 7,085 (7,278) (193)
Less Than $100,000 121,601 145,902 267,503 (19,345) 19,872 527
---------- --------- ---------- ---------- --------- ----------
Total Interest-
Bearing Deposits $ 120,886 $ 736,435 857,321 $ 338,278 $(266,624) 71,654
Fed Funds Purchased (61,106) 19,307 (41,799) 78,270 (3,285) 74,985
FHLB Borrowings 707,851 125,771 833,622 432,318 (6,126) 426,192
---------- --------- ---------- ---------- --------- ----------
Total Interest-
Bearing Liabilities $ 767,631 $ 881,513 $1,649,144 $ 848,866 $(276,035) $572,831
---------- --------- ---------- ---------- --------- ----------
Change in
Net Interest Income $ 493,320 $(448,696) $ 44,624 $ 861,180 $(276,581) $ 584,599
========== ========== ========== ========== ========= ==========
14
Financial Condition
General. Management continued to increase the size of the loan
portfolio in 2000. Loans, net of unearned discounts and allowance for loan
losses, increased $15.8 million or 10.6% from $149.3 million in 1999 to $165.1
million in 2000. This growth in loans was reflected in an 11.0% increase in
assets during the year. Assets began the year at $206.6 million and grew $22.7
million to $229.3 million by year-end.
Loans. The Bank is an active lender with a loan portfolio which
includes commercial and residential mortgages, commercial loans, consumer loans,
both installment and credit card, real estate construction loans and home equity
loans. The Bank's lending activity is concentrated on individuals and small to
medium sized businesses in its primary trade area of the Virginia counties of
Shenandoah, Warren, Frederick and the City of Winchester. As a provider of
community oriented financial services, the Bank does not attempt to
geographically diversify its loan portfolio by undertaking significant lending
activity outside its primary trade area.
Commercial and industrial loans increased $9.5 million in 2000 while
real estate mortgage loans secured by 1-4 family properties decreased $21.1
million. Other real estate loans increased $25.2 million and consumer loans
increased $2.2 million.
The Bank's loan portfolio is summarized in table 4 for the periods
indicated.
Table 4 - Loan Portfolio
Loans at December 31, by year are summarized as follows:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(thousands)
Commercial, Financial, and Agricultural $ 36,500 $ 26,907 $ 26,217 $ 20,223 $ 14,318
Real Estate Construction 8,836 10,205 5,415 3,583 2,127
Real Estate-Mortgage:
Residential (1-4 Family) 37,588 58,712 47,965 45,133 43,615
Non-Farm, Non-Residential 46,124 20,971 21,381 17,126 16,959
Secured by Farmland 1,791 1,489 851 947 993
Consumer 34,024 31,829 27,376 26,574 21,397
All Other Loans 1,190 670 513 461 1,075
-------- -------- -------- -------- --------
Total Loans $166,853 $150,783 $129,718 $114,047 $100,484
Less Unearned Income 5 23 121 441 1,089
Less Allowance for Loan Losses 1,703 1,447 1,226 1,112 974
-------- -------- -------- -------- --------
Loans-Net of Unearned Income $165,145 $149,313 $128,371 $112,494 $ 99,395
======== ======== ======== ======== ========
As shown in Table 4 above the total amount of commercial, financial and
agricultural loans increased $9.6 million in 2000. Residential real estate
mortgage loans decreased $21.1 million in 2000 after increasing $10.7 million in
1999. Non-farm, non residential mortgage loans increased in 2000 by $25.2
million and decreased in 1999 by $0.4 million. The growth in the consumer loan
area continued in 2000 with an increase of $2.2 million compared to an increase
of $4.5 million in 1999.
There was no category of loans that exceeded 10% of outstanding loans
at December 31, 2000 which were not disclosed in Table 4.
15
Table 5 - Remaining Maturities of Selected Loans
At December 31, 2000
Commercial
Financial, and Real Estate
Agricultural Construction
------------ ------------
(Dollars in Thousands)
Within 1 Year: $ 14,151 $ 8,836
-------- -------
Variable Rate:
1 to 5 Years $ 3,203 $ - -
After 5 Years 939 - -
-------- -------
Total $ 4,142 $ - -
-------- -------
Fixed Rate:
1 to 5 Years $ 14,536 $ - -
After 5 Years 3,671 - -
-------- -------
Total $ 18,207 $ - -
-------- -------
Total Maturities $ 36,500 $ 8,836
======== =======
Asset Quality. The Allowance for Loan Losses ("ALL") balance at
December 31, 2000 was $1,702,856, representing 1.02% of total loans and 275% of
non-performing assets. At December 31, 1999, these amounts were 0.96% and 384%.
Total losses charged against the ALL in 2000 were $165,135 compared to
$338,897 in 1999, and $233,306 in 1998. Recoveries, consisting of the recovery
of principal on loans previously charged against the allowance, totaled $51,980
in 2000, $64,712 in 1999, and $17,184 in 1998.
Management believes, based upon its review and analysis, that the Bank
has sufficient reserves to cover any projected losses within the total loan
portfolio.
16
Allowance for Loan Losses. Changes in the allowance for loan and lease
losses are detailed in Table 6.
Table 6 - Allowance For Loan Losses
(in thousands of dollars)
At December 31,
2000 1999 1998 1997 1996
Balance, Beginning of Period $1,447 $1,226 $1,112 $974 $901
Loans Charged-Off
Commercial, Financial and Agricultural 10 193 65 5 8
Real Estate-Construction 0 0 0 0 0
Real Estate-Mortgage
Residential (1-4 Family) 30 0 11
Non-Farm, Non Residential 0 0 0 0 0
Secured by Farmland 0 0 0 0 0
Consumer 146 146 138 92 44
All Other Loans 9 0 0 0 0
- - - - -
Total Loans Charged Off 165 339 233 97 63
--- --- --- -- --
Recoveries
Commercial, Financial and Agricultural 4 30 0 2 1
Real Estate-Construction 0 0 0 0 0
Real Estate-Mortgage
Residential (1-4 Family) 0 0 0 1 11
Non-Farm, Non-Residential 0 0 0 0 0
Secured by Farmland 0 0 0 0 0
Consumer 48 35 17 12 40
All Other Loans 0 0 0 0 0
- - - - -
Total Recoveries 52 65 17 15 16
-- -- -- -- --
Net Charge-Offs 113 274 216 82 47
Provision For Loan Losses 369 495 330 220 120
--- --- --- --- ---
Balance, End of Period $1,703 $1,447 $1,226 $1,112 $974
============================================================
Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the period 0.07% 0.20% 0.18% 0.08% 0.05%
For each period presented, the provision for loan losses charged to
operating expense was based on management's judgement after taking into
consideration all factors connected with the collectability of the existing
portfolio. Management considers economic conditions, changes in the nature and
value of the portfolio, industry standards and other relevant factors when
evaluating the loan portfolio. Specific factors considered by management when
determining the amount to be provided included internally generated loan quality
reports which analyze each problem loan to estimate amounts of probable loss and
previous loss experience with various loan categories.
17
Table 7 shows the balance and percentage of the Bank's allowance for
loan losses allocated to each major category of loans.
Table 7 - Allocation of Allowance For Loan Losses
2000 1999 1998 1997
---- ---- ---- ----
Percent of Percent of Percent of Percent of
Loans in Loans in Each Loans in Loans in
Each Each Each
Category to Category to Category to Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(Dollars in
Thousands)
Commercial, Financial
And Agricultural $ 447 21.88% $ 251 17.84% $ 405 20.21% $ 401 17.73%
Real 0 5.30% 0 6.77% 0 4.17% 0 3.14%
Estate-Construction
Real Estate-Mortgage 791 51.24% 738 53.83% 504 54.12% 390 55.43%
Consumer 449 20.39% 447 21.11% 298 21.10% 309 23.30%
All Other 16 1.19% 11 0.45% 19 0.40% 12 0.40%
Unallocated 0 0 0 0 0 0 0 0
$1,703 100.00% $1,447 100.00% $1,226 100.00% $1,112 100.00%
1996
----
Percent of
Loans in
Each
Category to
Allowance Total Loans
--------- -----------
Commercial, Financial $417 14.25%
And Agricultural 5 2.12%
Real
Estate-Construction 177 61.27%
Real Estate-Mortgage 302 21.29%
Consumer 33 1.07%
All Other 40 0
Unallocated
$974 100.00%
Non-Performing Assets. Management classifies as non-performing both
those loans on which payment has been delinquent 90 days or more and for which
there is a risk of loss to either principal or interest, and Other Real Estate
Owned. Other Real Estate Owned represents real property taken by the Bank either
through foreclosure or through a deed in lieu thereof from the borrower. Other
Real Estate Owned is booked at the lower of cost or market less estimated
selling costs, and is actively marketed by the Bank through brokerage channels.
Impairment of loans having recorded investments of $181,559 at December
31, 2000 and $303,479 at December 31, 1999 has been recognized in conformity
with FASB Statement No. 114. The average recorded investment in impaired loans
during 2000 and 1999 was $242,519 and $234,024. The total allowance for loan
losses related to these loans was $39,610 and $45,522. There was no interest
income on impaired loans recognized for cash payments received in 2000 or 1999.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $207,989 and $34,125 at December 31, 2000 and 1999 respectively. If
interest on these loans had been accrued, such income would have approximated
$2,679 and $374 for 2000 and 1999.
When a loan is placed on non-accrual status there are several negative
implications as a result. First, all interest accrued but unpaid at the time of
the classification is deducted from the interest income totals for the Bank.
Second, accruals of interest are discontinued until it becomes certain that both
principal and interest can be repaid. Third, there may be actual losses which
necessitate additional provisions for credit losses charged against earnings.
18
Table 8 - Non-Performing Assets
At December 31,
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Nonaccrual Loans $208 $ 34 $207
Restructured Loans -- -- --
Foreclosed Property 0 343 343
-------------------------------------
-------------------------------------
Total Nonperforming Assets $208 $377 $550
=====================================
Loans Past Due 90 Days Accruing Interest $282 $126 $213
Allowance for Loan Losses to Period End Loans 1.02% 0.96% 0.95%
Nonperforming Assets to Period End Loans 0.13% 0.25% 0.42%
and Foreclosed Properties
Net Charge-Offs (Recoveries) to Average Loans 0.07% 0.20% 0.18%
Securities. Securities at December 31, 2000 were $44.8 million, a
decrease of $298 thousand or 0.66% from the $45.1 million at the end of 1999.
As of December 31, 2000, neither the Corporation nor the Bank held any
derivative financial instruments in their respective investment security
portfolios.
Table 9 summarizes the carrying value of the Company's securities
portfolio on the dates indicated.
Table 9 - Securities Portfolio
Years Ended December 31
(Dollars in Thousands)
2000 1999 1998
---- ---- ----
Book Value:
Securities Held to Maturity
U.S. Government Securities $ - $ - $ 19
Securities Available for Sale
U.S. Government Securities $35,502 $36,635 $36,583
States and Political Subdivisions 6,822 6,445 6,884
Other Securities 2,507 2,049 4,776
------------------------------------------
Total Securities $44,831 $45,129 $48,262
==========================================
19
Investment Portfolio Maturity Distribution/Yield Analysis
Year Ended December 31, 2000
Over Ten Years
One Year or One to Five Five to Ten And Equity
Less Years Years Securities Total
Available for Sale Securities
U.S. Government Securities
Amortized Cost 0 24,164 11,661 152 35,978
Market Value 0 23,847 11,499 156 35,502
Weighted Ave. Yield 0.00% 5.68% 6.67% 8.17%
State and Political Subdivisions
Amortized Cost 0 0 1,172 5,655 6,827
Market Value 0 0 1,199 5,623 6,822
Weighted Ave. Yield (1) 0.00% 0.00% 7.42% 6.79%
Other Securities
Amortized Cost 0 0 0 2,460 2,460
Market Value 0 0 0 2,507 2,507
Weighted Ave. Yield 0.00% 0.00% 0.00% 5.61%
Total Portfolio
Amortized Cost 0 24,164 12,833 8,267 45,265
Market Value 0 23,847 12,698 8,285 44,830
Weighted Ave. Yield (1) 0.00% 5.68% 6.66% 6.46%
- -------------------
(1) Yields on tax exempt securities have been computed on a tax-equivalent
basis.
This schedule has been prepared using the contractual maturities for
all securities with the exception of mortgaged-backed securities (MBS's) and
collateralized mortgage obligations (CMO's). Both MBS and CMO securities were
recorded using dealer median prepayment speed assumptions, which is an industry
standard.
Deposits. The Bank has made an effort in recent years to increase core
deposits and control costs of funds. Deposits provide funding for the Bank's
investments in loans and securities, and the interest paid for deposits must be
managed carefully to control the level of interest expense.
Deposits at December 31, 2000 were $175.2 million, an increase of $21.8
million or 14.2% from $153.4 million at December 31, 1999. Savings and interest
bearing demand deposits grew $1.2 million or 1.48% while non-interest-bearing
demand deposits increased $3.4 million or 18.24% and time deposits increased
$17.2 million or 31.35%.
20
The following tables are a summary of average deposits and average
rates paid.
Table 10 - Average Deposits and Rates Paid
Year Ended December 31,
2000 1999 1998
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
Noninterest Bearing Deposits $20,237 -- $19,888 -- $17,925 --
-------------- ------------ -------------
Interest Bearing Deposits
Interest Checking $12,083 1.31% $10,873 1.36% $9,582 2.03%
Money-Market 5,984 3.14% 6,668 2.99% 6,468 3.26%
Regular Savings 58,761 5.29% 63,119 4.40% 54,901 3.99%
Time Deposits
Less than $100,000 49,448 5.52% 47,188 5.22% 45,678 6.39%
$100,000 and more 15,889 5.96% 12,833 5.36% 12,400 5.55%
-------------- ------------ -------------
Total Interest Bearing $142,165 5.02% $140,681 4.46% $129,029 4.81%
-------------- ------------ -------------
Total $162,402 $160,569 $146,954
============== ============ =============
Maturities of CD's of $100,000 and More
Within Three to Six to Over
Three Six Twelve One
Months Months Months Year Total
At December 31, 2000 $3,754 $2,005 $3,067 $9,102 $17,928
Liquidity. Liquidity represents an institutions ability to meet present
and future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investments in securities, and loans maturing within one year. As a result
of the Bank's management of liquid assets and the ability to generate liquidity
through liability funding, management believes that the Bank maintains overall
liquidity sufficient to satisfy its depositors' requirements and to meet its
customers' credit needs.
At December 31, 2000, cash, interest bearing and non-interest bearing
deposits with banks, federal funds sold, securities, and loans maturing within
one year were $55.6 million. As of December 31, 2000, approximately 26.33% or
$43.9 million of the loan portfolio would mature or reprice within a one year
period.
As of December 31, 2000, non-deposit sources of funds totaled $33.5
million totally comprised of seven Federal Home Loan Bank advances. Three
advances, which totaled $3.5 million are fixed-rate advances that were used to
fund longer-term fixed-rate financing requests. These advances are all
amortizing advances that require monthly principal repayment. The first PRC
advance was in the amount of $1.5 million at 6.25% and matures on December 12,
2005; the second was $1.3 million at 6.23% and matures on April 1, 2013 and the
third was $1.0 million at 5.98% and matures February 1, 2019. Additionally,
$10.0 million was borrowed in 1998 at 5.515% as a Convertible borrowing, which
maintains a fixed rate feature through March 17, 2003 when the FHLB may choose
to exercise an option to convert the advance to a libor based borrowing. The
final maturity of the advance is March 17, 2008. This advance was used to fund
an investment growth strategy. Furthermore, the Company maintains two advances
21
for general funding, inclusive of two additional Convertible advances. The first
is a $10.0 million advance at 6.57% due on March 22, 2005, convertible on March
22, 2002. The second is a $5.0 million advance at 6.49% due on July 25, 2005,
convertible on March 25, 2002. Lastly, a short-term Adjustable Rate Credit
Advance (ARC) in the amount of $5.0 million was used to fund some short-term
needs. It matures on March 22, 2001.
Capital Resources. The adequacy of the Corporation's capital is
reviewed by management on an ongoing basis with reference to the size,
composition, and quality of the Corporation's asset and liability levels and
consistent with regulatory requirements and industry standards. Management seeks
to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and absorb potential losses.
The Board of Governors of the Federal Reserve System has adopted
capital guidelines to supplement the existing definitions of capital for
regulatory purposes and to establish minimum capital standards. Specifically,
the guidelines categorize assets and off-balance sheet items into four risks
weighted categories. The minimum ratio of qualifying total capital to
risk-weighted assets is 8.0%, of which at least 4.0% must be tier 1 capital,
composed of common equity, retained earnings and a limited amount of perpetual
preferred stock, less certain goodwill items. The Corporation had a ratio of
risk-weighted assets to total capital of 12.3% at December 31, 2000 and a ratio
of risk-weighted assets to Tier 1 capital of 11.3%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
Table 11- Analysis of Capital
Year End December 31,
2000 1999 1998
(Dollars in Thousands)
Tier 1 Capital
Common Stock $ 3,950 $ 3,970 $ 3,945
Surplus 1,465 1,531 1,417
Retained Earnings 14,201 13,017 11,892
------------------------------------
Total Tier 1 Capital $ 19,616 $ 18,518 $ 17,254
Tier 2 Capital:
Allowance for Loan Losses (1) 1,703 1,447 1,226
------------------------------------
Total Risk Based Capital $ 21,319 $ 19,965 $ 18,480
====================================
Risk-Weighted Assets $173,967 $145,269 $125,213
Capital Ratios:
Tier 1 Risk-Based Capital Ratio 11.30% 12.70% 13.80%
Total Risk-Based Capital Ratio 12.30% 13.70% 14.80%
Tier 1 Capital to Average Total Assets 8.70% 8.90% 9.00%
- ---------------
(1) Limited to 1.25% of risk weighted assets.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement 133, "Accounting for Derivative Instruments and
Hedging Activities, " which, as amended, requires adoption in years beginning
after June 15, 2000. The statement requires the corporation to recognize all
derivatives on the balance sheet at fair value. This statement was adopted as of
January 1, 2001 and had no effect on the corporation's earnings or financial
position.
22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is a small business issuer, as defined in Rule 405 under
the Securities Act of 1933, as amended, and Rule 12b-2 under the Securities
Exchange Act of 1934, as amended, and, accordingly, has not provided the
information required by this Item.
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2), information required by this Item
is incorporated by reference from pages 6 to 30 of the Company's Annual Report
to Shareholders for the fiscal year ended December 31, 2000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3), the information required by this
Item is incorporated herein by reference from pages 4 through 8 of the Company's
proxy statement dated March 2, 2001, for the Company's Annual Meeting of
Shareholders to be held April 3, 2001.
Item 11. Executive Compensation
Pursuant to General Instruction G(3), the information required by this
Item is incorporated herein by reference from pages 8 and 9 of the Company's
proxy statement dated March 2, 2001 for the Company's Annual Meeting of
Shareholders to be held April 3, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3), the information required by this
Item is incorporated herein by reference from pages 6 and 7 of the Company's
proxy statement dated March 2, 2001, for the Company's Annual Meeting of
Shareholders to be held April 3, 2001.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3), the information required by this
Item is incorporated herein by reference from page 9 of the Company's proxy
statement dated March 2, 2001, for the Company's Annual Meeting of Shareholders
to be held April 3, 2001.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents required in Part II, Item 8, are incorporated
by reference to pages 6 through 30 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 2000:
1. Financial Statements Page
----
Report of Independent Certified Public Accountants 6
First National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 2000 and 1999 7
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 8 and 9
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998 10 and 11
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2000, 1999 and 1998 12
Notes to Financial Statements 13 - 30
2. Financial Statement schedules
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
3. Exhibits
The following documents are attached hereto or incorporated herein by
reference as Exhibits:
3.1 Articles of Incorporation, including amendments thereto (incorporated
herein by reference to Exhibit 2 to the Company's Form 10 filed with
the SEC on May 2, 1994).
3.2 Bylaws (incorporated herein by reference to Exhibit 3 to the
Company's Form 10 filed with the SEC on May 2, 1994). 4.1 Specimen of
Common Stock Certificate (incorporated herein by reference to
Exhibit 1 to the Company's Form 10 filed with SEC on May 2, 1994).
13.1 Annual Report to Shareholders for the year ended December 31, 2000.
21.1 Subsidiaries of the Company.
23.1 Consent of Yount, Hyde & Barbour, P.C.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
2000.
(c) Exhibits
The response to this portion of Item 14 is set forth in Item 14(a)(3)
above.
(d) Financial Statement Schedules
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given
in the financial statements or notes thereto.
With the exception of the information herein expressly incorporated by
reference, the 2000 Annual Report to Shareholders and the Proxy Statement for
the 2001 Annual Meeting of Shareholders are not to be deemed filed as part of
this Annual Report on Form 10-K.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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
By: /S/ Harry S. Smith
----------------------------
Harry S. Smith
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Harry S. Smith President and March 30, 2001
- -----------------------------------
Harry S. Smith Chief Executive Officer
(Principal Executive Officer)
Director March 30, 2001
/s/ Stephen C. Pettit Controller and Chief
- -----------------------------------
Stephen C. Pettit Financial Officer (Principal
Financial and Accounting Officer)
/s/ Noel M. Borden Chairman of the Board March 30, 2001
- -----------------------------------
Noel M. Borden Director
/s/ Douglas C. Arthur Vice Chairman of the Board March 30, 2001
- -----------------------------------
Douglas C. Arthur Director
/s/ Dr. Byron A. Brill Director March 30, 2001
- -----------------------------------
Dr. Byron A. Brill
/s/ Elizabeth H. Cottrell March 30, 2001
- ----------------------------------- Director
Elizabeth H. Cottrell
/s/ Dr. James A. Davis Director March 30, 2001
- -----------------------------------
Dr. James A. Davis
/s/ Christopher E. French March 30, 2001
- ----------------------------------- Director
Christopher E. French
/s/ Charles E. Maddox, Jr. Director March 30, 2001
- -----------------------------------
Charles E. Maddox, Jr.
/s/ W. Allen Nicholls
- ----------------------------------- Director March 30, 2001
W. Allen Nicholls
/s/ Henry L. Shirkey
- ----------------------------------- Director March 30, 2001
Henry L. Shirkey
/s/ Alson H. Smith, Jr. Director March 30, 2001
- -----------------------------------
Alson H. Smith, Jr.
EXHIBIT INDEX
Number Document
3.1 Articles of Incorporation, including amendments thereto
(incorporated herein by reference to Exhibit 2 to the
Company's Form 10 filed with the SEC on May 2, 1994).
3.2 Bylaws (incorporated herein by reference to Exhibit 3 to the
Company's Form 10 filed with the SEC on May 2, 1994).
4.1 Specimen of Common Stock Certificate (incorporated herein by
reference to Exhibit 1 to the Company's Form 10 filed
with SEC on May 2, 1994).
13.1 Annual Report to Shareholders for the year ended
December 31, 2000.
21.1 Subsidiaries of the Company.
23.1 Consent of Yount, Hyde & Barbour, P.C.