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, 1998
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 26, 1999, there were 788,925 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 $ 22,981,385.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Shareholders - Parts I and II
Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III
<PAGE>
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.
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 to their customers.
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.
<PAGE>
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 Office - 860 South Main Street, Woodstock, VA 22664
Remote ATM site at Shenandoah Memorial Hospital, Woodstock, Virginia
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
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.
<PAGE>
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's adjustable rate mortgages ("ARMs") generally are subject to
limitations of 2% per year on interest rate increases and decreases. In
addition, ARMs currently originated by the Bank provide for a lifetime cap of 6%
or less from the borrower's initial interest rate. All changes in the interest
rate must be based on the movement of an index agreed to by the Bank and the
borrower.
There are risks resulting from increased costs to a borrower as a result
of the periodic repricing mechanisms of these loans. Despite the benefits of
ARMs to an institution's Asset Liability management, they pose additional risks,
primarily because as interest rates rise the underlying payments by the
borrowers rise, increasing the potential for default. At the same time, the
marketability of the underlying property may be affected adversely by higher
interest rates.
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. In general, the Bank does not originate
construction loans on income-producing properties such as apartments, shopping
centers, hotels and office buildings. However, the Bank does make 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 higher 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.
<PAGE>
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 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, 1998, a total of 87 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.
<PAGE>
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."
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, 1998, the Bank had $3.5 million of retained earnings
legally available for the payment of dividends.
<PAGE>
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.
Capital Requirements
Year Ended
December 31,
1998
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 9.0%
Tier 1 risk-based capital ratio 13.8
Total risk-based capital ratio 14.8
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, 1998 were 13.8% and
14.8%, 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, 1998 was 9.0%. 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.
<PAGE>
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.
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.
<PAGE>
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.
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.
Item 2. Properties
The principal executive offices of First National Corporation 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 five additional branches and a loan
production office. The Company owns four of these facilities without
encumbrances and leases two of the facilities. The leases, which include renewal
options, expire in 2000 and 2001. See Note 14 to the Consolidated Financial
Statements of the Company's 1998 Annual Report to Shareholders for additional
information concerning this lease commitment.
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.
<PAGE>
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 1998.
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.
Market Price and Dividends
Sales Price ($) Dividends ($)(1)
--------------- ----------------
High Low
---- ---
1997:
1st quarter............... 22.75 21.08 .175
2nd quarter............... 23.00 21.37 .175
3rd quarter............... 24.54 21.87 .175
4th quarter............... 29.75 23.62 .295
1998:
1st quarter............... 34.00 27.50 .215
2nd quarter............... 40.00 35.09 .215
3rd quarter............... 37.25 31.00 .215
4th quarter............... 33.00 30.63 .355
_________________
(1) The Company increased its dividend to $1.00 per share in 1998, which
represented a payout ratio of 41.21%. The dividend per share and payout
ratios in 1997 were $0.82 and 39.71%, respectively.
The Company had 686 shareholders of record as of February 26, 1999.
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
First National Corporation (the "Company") is the holding company for
First Bank (the "Bank") and First Bank Financial Services Inc. ("Financial
Services"). The following discussion and analysis of the financial condition and
results of operations of the Company for the years ended December 31, 1998, 1997
and 1996 should be read in conjunction with the consolidated financial
statements and related notes.
<PAGE>
Overview
Earnings and assets grew in 1998. Net income for 1998 was $1,904,682
compared to $1,611,322 in 1997 and $1,454,266 in 1996. Net income per share
increased $0.35 in 1998 from 1997 ($2.43 per share basic and $2.42 per share
diluted in 1998 versus $2.08 per share basic and diluted in 1997). 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 1.05% in 1998, 1.07% in 1997 and 1.06% in 1996. Return on
average equity was 11.31% in 1998, 10.41% in 1997 and 10.36% in 1996.
Assets grew 16.13% in 1998, in line with the increase of 16.46% in 1997.
Growth occurred in both the loan portfolio where loans, net of unearned income
and allowance for loan losses, increased $15.9 million to $128.4 million and in
the securities portfolio which increased $6.6 million to $48.3 million. Funding
for this loan growth was provided by an increase in deposits of $15.2 million
and an increase in long term debt of $11.2 million.
Results of Operations
Net interest income represents the primary source of earnings for the
Company. 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
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 net interest income in 1996 was caused by growth in earning assets
and by the funding of higher yielding assets, in part, from lower yielding
assets. In 1997 and 1998 net interest income increased as the Bank continued to
experience favorable asset growth.
Net Interest Income. Net interest income, after provision for loan losses,
was $6.64 million for the year ended December 31, 1998, up $0.62 million or
10.37% over the $6.02 million reported for the same period in 1997. This
increase in net interest income, after provision for loan losses, resulted from
an increase in interest-earning assets. In 1997 net interest income, after
provision for loan losses increased 7.11% or $0.40 million from $5.62 million in
1996.
Interest income as a percent of average earning assets declined to 8.27%
in 1998 from 8.53% in 1997 following an increase in 1997 from 8.50% in 1996.
Interest expense as a percent of average earning assets increased from
3.92% in 1996 to 4.02% in 1997 and 4.12% in 1998. Net interest margin and
interest rate spread decreased in 1998 when compared to 1997 and in 1997 when
compared to 1996. Net interest margin was 4.15% in 1998, 4.51% in 1997 and 4.58%
in 1996. Interest rate spread was 3.36% in 1998, 3.68% in 1997 and 3.78% in
1996. 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 1998 was increased to
$330,000 from $220,000 for 1997 and $120,000 for 1996. The increases were the
result of management's analysis of the loan portfolio and associated risks.
<PAGE>
Non-Interest Income. Non-interest income increased $0.28 million or 32.42%
for 1998 over 1997 compared to and increase of $0.23 million or 35.59% for 1997
over 1996.
Non-Interest Expense. In 1998, non-interest expenses increased $0.46
million or 9.89% over 1997. The percentage increase for 1998 was in line with
the 8.58% increase for 1997 or $0.37 million over 1996 considering the growth in
assets of the Bank of 16.13% in 1998.
Income Taxes. The company has adopted FASB Statement No. 109,
"Accounting for Income Taxes." A more detailed discussion of the Company'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.
Year 2000 Issues
In 1997, First Bank, a subsidiary of First National Corporation, initiated
a review and assessment of all hardware and software to confirm that it would
function properly in the Year 2000. A Year 2000 project team was formed
utilizing representatives from all areas of the Bank. Based on this assessment,
the Bank's mainframe hardware and banking software were upgraded and tested.
According to the test results, and accompanied by a letter of certification from
the Bank's software provider, our core processing system has been termed Year
2000 compliant. For certain other systems, the Bank has determined that it will
have to replace or modify certain pieces of hardware and/or software so that the
systems will properly function in the year 2000. Systems for which the Bank
relies on third party vendors, these vendors have been contacted and have
indicated that the hardware and/or software will be Year 2000 compliant.
The Bank has also contacted all significant loan and deposit customers to
determine the extent to which the Bank is vulnerable to those third parties'
failure to remedy their own Year 2000 issue. The Bank believes that exposure
from customers who may not be Year 2000 compliant is minimal.
The Bank plans to complete the majority of the Year 2000 project by June
30, 1999. To date, the Bank has expensed $82,280 related to the assessment and
replacement of issues related to the Year 2000. An additional $127,919 has been
contracted for projects to be completed by June 30, 1999. Remaining
expenditures, if any, are not expected to have a material effect on the Bank's
consolidated financial statements.
The Bank continues to assess its risk from other environmental factors
over which it has little direct control, such as electrical power supply, and
voice and data transmission. Based on its current assessments and remediation
plans, which are based in part on certain representations of third-party
servicers, the Bank does not expect that it will experience a significant
disruption of its operations as a result of the change to the new millennium.
Although the Bank has no reason to conclude that a failure will occur, the most
reasonably likely worst case Year 2000 scenario would entail a disruption or
failure of the Bank's power suppliers' or voice and data transmission suppliers'
capability to provide data transmission services to the Main Office, where the
main computer and switchboard are located, or one of our Branch locations. If
such a failure were to occur, the Bank would implement a contingency plan. While
it is impossible to quantify the impact of such a scenario, the most reasonably
likely worst-case scenario would entail diminishment of service levels, some
customer inconvenience, and additional, as yet understood, cost associated with
the implementation of the contingency plan.
For the systems and facilities that it has determined to be most critical,
the Bank expects to complete development of business contingency plans by March,
1999. These plans are then expected to be adopted by the Board of Directors of
First Bank and testing finalized by June 30, 1999. These plans will conform to
recently issued guidelines from the FFIEC on business contingency planning for
Year 2000 readiness. Contingency plans will include, among other actions, manual
workarounds and identification of resource requirements and alternative
solutions for resuming critical business processes in the event of a year 2000
related failure. While the Bank will have contingency plans in place to address
a temporary disruption in these services, there can be no assurance that any
disruption or failure will be only temporary, that the Bank's contingency plans
will function as anticipated, or that the results of operations, financial
condition, or liquidity of the Bank will not be adversely affected in the event
of a prolonged disruption or failure.
<PAGE>
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that require additional
work by the Bank and, if issued, the new regulatory requirements will not
increase the cost or delay the completion of the Bank's Year 2000 project. The
costs of the project and the date on which the Bank's plans to complete the Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Year 2000 issues, and similar uncertainties.
<PAGE>
Table 1 - Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
(in thousands, except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $14,080 $11,974 $10,833 $9,943 $8,441
Interest expense 7,110 5,738 5,097 4,733 3,605
Net interest income 6,970 6,236 5,736 5,210 4,836
Provision for loan losses 330 220 120 0 0
Net interest income after
provision for loan losses 6,640 6,016 5,616 5,210 4,836
Noninterest income 965 867 628 811 526
Securities gains (losses 198 11 20 (8) 73
Noninterest expense 5,106 4,646 4,279 4,217 4,053
Income before income taxes 2,697 2,247 1,985 1,796 1,382
Income taxes 792 636 531 481 341
Net income $1,905 $1,611 $1,454 $1,315 $1,041
Per Share Data:
Net income, basic $2.43 $2.08 $1.88 $1.70 $1.35
Net income, diluted 2.42 2.08 1.88 1.70 1.35
Cash dividends 1.00 .82 0.70 0.60 0.52
Book value at period end 22.31 20.81 19.16 18.02 15.74
Balance Sheet Data:
Assets $191,136 $164,589 $141,329 $132,321 $122,008
Loans, net of unearned income 128,371 112,494 98,421 85,986 76,829
Securities 48,263 41,699 33,742 36,619 38,441
Deposits 155,008 139,762 123,984 115,906 106,129
Stockholders' equity 17,601 16,182 14,837 13,908 12,135
Average shares outstanding 784 776 773 771 771
Performance Ratios:
Return on average assets 1.05% 1.07% 1.06% 1.03% 0.91%
Return on average equity 11.31% 10.41% 10.36% 10.28% 8.66%
Dividend payout 41.21% 39.71% 37.19% 35.19% 38.50%
Capital and Liquidity Ratios
Leverage 9.02% 9.99% 10.43% 10.70% 11.19%
Risk-based capital ratios:
Tier 1 capital 13.78% 14.20% 15.58% 16.46% 17.89%
Total capital 14.76% 15.19% 16.60% 17.53% 19.27%
</TABLE>
<PAGE>
Table 2 - Average Balances, Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Balances at correspondent banks
- interest bearing $211,408 $28,121 13.30% $188,336 $27,828 14.78%
Securities:
Taxable 40,911,545 2,489,752 6.09% 29,820,396 1,890,375 6.34%
Tax-exempt (1) 6,689,586 540,955 8.09% 6,364,538 540,538 8.49%
---------- --------- ---------- ---------
Total Securities 47,601,131 3,030,707 6.37% 36,184,934 2,430,913 6.72%
Loans (net of earned income): (2)
Taxable 122,961,198 11,108,481 9.03% 104,602,121 9,608,529 9.19%
Tax-exempt (1) 150,922 16,288 10.79% 233,177 27,171 11.65%
----------- ---------- ----------- ---------
Total Loans 123,112,120 11,124,769 9.04% 104,835,298 9,635,700 9.19%
Federal funds sold and repurchase
agreements 1,620,395 85,556 5.28% 1,359,677 72,338 5.32%
----------- ---------- ----------- ---------
Total earning assets 172,545,054 14,269,153 8.27% 142,568,245 12,166,779 8.53%
---------- ----------
Less: allowance for Loan Losses (1,163,943) (1,037,732)
Total nonearning assets 9,844,364 9,356,074
---------- ----------
Total Assets $181,225,475 $150,886,587
============ ============
LIABILITIES AND SHAREHOLDER EQUITY
Interest bearing deposits:
Checking $9,582,208 $194,980 2.03% $9,319,003 $207,523 2.23%
Money market savings 6,467,845 210,531 3.26% 7,467,943 252,551 3.38%
Regular savings 54,901,337 2,646,451 4.82% 43,739,949 2,171,628 4.96%
Certificates of deposit:
Less than $100,000 45,677,800 2,461,627 5.39% 43,408,723 2,304,884 5.31%
$100,000 and more 12,399,700 688,453 5.55% 12,334,619 677,710 5.49%
----------- --------- ---------- ---------
Total interest bearing deposits 129,028,890 6,202,042 4.81% 116,270,237 5,614,296 4.83%
Fed funds purchased 457,638 29,462 6.44% 276,025 19,612 7.11%
FHLB borrowings 15,374,312 878,732 5.72% 1,685,539 104,182 6.18%
----------- --------- ----------- ---------
Total interest bearing liabilities 144,860,840 7,110,236 4.91% 118,231,801 5,738,090 4.85%
--------- ---------
Noninterest bearing liabilities
Demand deposits 17,925,343 16,260,497
Other liabilities 1,596,292 916,236
---------- ----------
Total liabilities 164,382,475 135,408,534
Stockholders' equity 16,843,000 15,478,053
----------- -----------
Total liabilities and
stockholders' equity $181,225,475 $150,886,587
============ ============
Net Interest income $7,158,917 $6,428,689
========== ==========
Interest rate spread 3.36% 3.68%
Interest expense as a percent of average
earning assets 4.12% 4.02%
Net interest margin 4.15% 4.51%
</TABLE>
(1) Income and yields are reported on a taxable-equivalent basis assuming a
federal tax rate of 34% in 1998 and 1997.
(2) Loans placed on a nonaccrual status are reflected in the balances.
<PAGE>
Table 3 - Volume and Rate Analysis
<TABLE>
<CAPTION>
1998 1997
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Due From Banks $1,605 $(1,312) $293 $ 2,017 $ 1,185 $ 3,202
Taxable Securities 670,459 (71,082) 599,377 212,206 37,674 249,880
Tax-Exempt Securities 5,381 (4,964) 417 (23,186) (16,859) (40,045)
Taxable Loans 1,665,126 (165,174) 1,499,952 948,490 18,761 967,251
Tax-Exempt Loans (9,000) (1,883) (10,883) (49,114) 7,521 (41,593)
Federal Funds Sold and
Repurchase Agreements 13,757 (539) 13,218 (25,794) (184) (25,978)
--------- ------- --------- ------- ------ -------
Total Earning Assets $2,347,328 (244,954) $2,102,374 $ 1,064,619 $ 48,09 $ 1,112,717
---------- -------- ---------- ----------- ------- -----------
Interest Bearing Liabilities:
Interest Checking $5,766 $(18,309) $(12,543) $ (14,719) $ 4,241 $ (10,478)
Savings Deposits-
Regular 83,413 (63,927) (42,020) 549,469 106,975 656,444
Money Market (33,215) (8,805) 19,486 (2,445) 0 (2,445)
CD's and Other Time Deposits
$100,000 and More 3,498 7,245 612,080 63,858 4,549 68,407
Less Than $100,000 125,145 486,935 10,743 (89,086) (4,481) (93,567)
------- ------- ------- ------- ------- -------
Total Interest-
Bearing Deposits $184,607 $403,139 587,746 $ 507,077 $ 111,284 $ 618,361
Fed Funds Purchased 11,497 (1,647) 9,850 16,409 404 16,813
FHLB Borrowings 781,715 (7,165) 774,550 11,160 (5,219) 5,941
------- -------- ------- --------- -------- --------
Total Interest-
Bearing Liabilities $977,819 $394,327 $1,372,146 $ 534,646 $ 106,469 $ 641,115
-------- -------- ---------- --------- --------- ---------
Change in
Net Interest Income $1,369,509 $(639,281) $730,228 $ 529,973 $ (58,371) $ 471,602
========== ========= ========== ========= ========= =========
</TABLE>
<PAGE>
Financial Condition
General. Management's plan to aggressively increase the size of the loan
portfolio continued in 1998. Loans, net of unearned discounts and allowance for
loan losses, increased $15.9 million or 14.11% from $112.5 million in 1997 to
$128.4 million in 1998. This growth in loans was reflected in a 16.13% increase
in assets during the year. Assets began the year at $164.6 million and grew
$26.5 million to $191.1 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.
The Bank's loan portfolio is summarized in table 4 for the periods
indicated.
Table 4 - Loan Portfolio
Loans at December 31, 1998 and 1997 are summarized as follows
1998 1997
(thousands)
Commercial, Financial, and Agricultural $26,217 $20,223
Real Estate Construction 5,415 3,583
Real Estate-Mortgage:
Residential (1-4 Family) 47,965 45,133
Non-Farm. Non-Residential 21,381 17,126
Secured by Farmland 851 947
Consumer 27,376 26,574
All Other Loans 513 461
-------- --------
Total Loans $129,718 $114,047
Less Unearned Income 121 441
Less Allowance for Loan Losses 1,226 1,112
-------- --------
Loans-Net of Unearned Income $128,371 $112,494
======== ========
As shown in Table 4 above the total amount of commercial, financial and
agricultural loans increased $6.0 million in 1998. Residential real estate
mortgage loans increased $2.8 million in 1998 after increasing $1.5 million in
1997. Non-farm, non residential mortgage loans also increased in 1998 by $4.3
million and in 1997 by $0.2 million. The growth in the consumer loan area
continued in 1998 with an increase of $0.8 million which was less than the
increase of $5.2 million in 1997.
There were no category of loans that exceeded 10% of outstanding loans at
December 31, 1998 which were not disclosed in Table 4.
<PAGE>
Table 5 - Remaining Maturities of Selected Loans
At December 31, 1998
Commercial
Financial, and Real Estate
Agricultural Construction
(Dollars in Thousands)
Within 1 Year: $ 8,080 $5,415
Variable Rate:
1 to 5 Years $ 1,238 $ - -
After 5 Years 88 - -
Total $ 1,326 $ - -
Fixed Rate:
1 to 5 Years $ 14,745 $ - -
After 5 Years 2,066 - -
Total $ 16,811 $ - -
Total Maturities $ 26,217 $ 5,415
Asset Quality. The Allowance for Loan Losses ("ALL") balance at December
31, 1998 was $1,226,196, representing 0.95% of total loans and 223% of
non-performing assets. At December 31, 1997, these amounts were 0.98 and 114%.
These amounts were 0.98% and 115% at December 31, 1996.
Total losses charged against the ALL in 1998 were $233,306 compared to
$97,008 in 1997, and $62,825 in 1996. Recoveries, consisting of the recovery of
principal on loans previously charged against the allowance, totaled $17,184 in
1998, $14,914 in 1997, and $ 16,425 in 1996.
Management believes, based upon its review and analysis, that the Bank has
sufficient reserves to cover any projected losses within the total loan
portfolio.
<PAGE>
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,
1998 1997
---- ----
Balance, Beginning of Period $1,112 $ 974
Loans Charged-Off
Commercial, Financial and Agricultural 65 5
Real Estate-Construction -- --
Real Estate-Mortgage
Residential (1-4 Family) 30 --
Non-Farm, Non Residential -- --
Secured by Farmland -- --
Consumer 138 92
All Other Loans -- --
------ -----
Total Loans Charged Off 233 97
------ -----
Recoveries
Commercial, Financial and Agricultural -- 2
Real Estate-Construction -- --
Real Estate-Mortgage
Residential (1-4 Family) -- 1
Non-Farm, Non-Residential -- --
Secured by Farmland -- --
Consumer 17 12
All Other Loans -- --
------ -----
Total Recoveries 17 15
------ -----
Net Charge-Offs 216 82
Provision For Loan Losses 330 220
------ -----
Balance, End of Period $1,226 $1,112
====== ======
Ratio of net charge-offs (recoveries)
during the period to average loans outstanding
during the period 0.18% 0.08%
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.
<PAGE>
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
<TABLE>
<CAPTION>
1998 1997
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ------------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial, Financial
And Agricultural $405 20.21% $401 17.73%
Real Estate-Construction -- 4.17% -- 3.14%
Real Estate-Mortgage 504 54.12% 390 55.43%
Consumer 298 21.10% 309 23.30%
All Other 19 0.40% 12 0.40%
Unallocated -- -- -- --
------- ------ ------- ------
$ 1,226 100.00% $ 1,112 100.00%
======= ====== ======= ======
</TABLE>
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 $164,569 at December
31, 1998 has been recognized in conformity with FASB Statement No. 114. The
average recorded investment in impaired loans during 1998 was $195,574. The
total allowance for loan losses related to these loans was $78,228 on December
31, 1998. There was no interest income on impaired loans recognized for cash
payments received in 1998. There were no impaired loans in 1997.
Non-accrual loans excluded from impaired loan disclosure under FASB 114
totaled $42,385 and $23,642 at December 31, 1998 and 1997, respectively. If
interest on these loans had been accrued, such income would have approximated
$1,326 and $3,490 for 1998 and 1997. The Bank has allocated a portion of the
Allowance for Loan Losses to cover anticipated losses from these loans and is
included in Table 7 above.
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.
<PAGE>
Table 8 - Non-Performing Assets
At December 31,
1998 1997
---- ----
(Dollars in Thousands)
Nonaccrual Loans $207 $ 23
Restructured Loans -- 37
Foreclosed Property 343 919
---- ----
Total Nonperforming Assets $550 $979
==== ====
Loans Past Due 90 Days Accruing Interest $213 $717
Allowance for Loan Losses to Period End Loans 0.95% 0.98%
Nonperforming Assets to Period End Loans 0.42% 0.85%
and Foreclosed Properties
Net Charge-Offs (Recoveries) to Average Loans 0.18% 0.08%
Securities. The Company adopted FASB No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" effective beginning January 1, 1994.
The Company reclassified its securities portfolio into those securities that
would be held to maturity and those that were available for sale. The securities
that were classified as available for sale were recorded at fair value in
accordance with FASB No. 115 and the Company recognized the effect of unrealized
gains/losses net of tax effects in stockholders' equity.
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)
1998 1997
---- ----
Book Value:
Securities Held to Maturity
U.S. Government Securities $ 19 $1,662
States and Political Subdivisions 0 0
---- ------
Total Securities Held to Maturity $ 19 $1,662
==== ======
Securities Available for Sale
U.S. Government Securities $40,140 $32,162
States and Political Subdivisions 6,884 6,785
Other Securities 1,219 1,090
------ -------
Total Securities Available for Sale $48,243 $40,037
======= =======
Total Securities $48,262 $41,699
======= =======
<PAGE>
Investment Portfolio Maturity Distribution/Yield Analysis
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Over Ten Years
One Year or One to Five Five to Ten And Equity
Less Years Years Securities Total
<S> <C> <C> <C> <C> <C>
Held to Maturity Securities
U.S. Government Securities
Amortized Cost 0 0 19 0 19
Market Value 0 0 19 0 19
Weighted Ave. Yield 0.00% 0.00% 6.99% 0.00%
Available for Sale Securities
U.S. Government Securities
Amortized Cost 3,081 20,148 14,810 1,928 39,967
Market Value 3,110 20,279 14,817 1,934 40,140
Weighted Ave. Yield 6.36% 5.96% 6.38% 6.64%
State and Political Subdivisions
Amortized Cost 625 280 1,831 3,823 6,559
Market Value 631 303 1,960 3,990 6,884
Weighted Ave. Yield (1) 9.43% 8.70% 7.84% 7.68%
Other Securities
Amortized Cost 0 0 0 1,192 1,192
Market Value 0 0 0 1,219 1,219
Weighted Ave. Yield 0.00% 0.00% 0.00% 5.40%
Total Portfolio
Amortized Cost 3706 20428 16660 6943 47,736
Market Value 3741 20582 16796 7143 48,262
Weighted Ave. Yield (1) 6.88% 6.00% 6.54% 7.00%
</TABLE>
(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.
As of December 31, 1998, neither the Company nor the Bank held any
derivative financial instruments in their respective investment security
portfolios.
Deposits. The Bank has made an effort in recent years to increase core
deposits and reduce costs of funds. Deposits provide funding for the Company'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, 1998 were $155.0 million, an increase of $15.2
million or 10.91% from $139.8 million at December 31, 1997. All deposit types
increased in 1998. Noninterest bearing demand deposits grew $2.6 million or
15.24% while savings and interest bearing demand deposits grew $6.7 million or
9.81%. Time deposits grew $6.0 million or 10.93%.
<PAGE>
The following tables are a summary of average deposits and average rates
paid.
Table 10 - Average Deposits and Rates Paid
December 31,
1998 1997
(Dollars in Thousands)
Amount Rate Amount Rate
Noninterest Bearing Deposits $17,925 -- $16,260 --
------- -------
Interest Bearing Deposits
Interest Checking $9,582 2.03% $9,319 2.23%
Money-Market 6,468 3.26% 7,468 3.38%
Regular Savings 54,901 4.82% 43,740 4.96%
Time Deposits
Less than $100,000 45,678 5.39% 43,408 5.31%
$100,000 and more 12,400 5.55% 12,335 5.49%
------ ------
Total Interest Bearing $129,029 4.81% $116,271 4.83%
-------- --------
Total $146,954 $132,531
======== ========
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, 1998 $1,694 $1,853 $3,473 $4,243 $11,263
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 Treasury 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, 1998, cash, interest bearing and non-interest bearing
deposits with banks, federal funds sold, investments in Treasury securities, and
loans maturing within one year were $86.6 million. As of December 31, 1998,
approximately 32.46% or $42.1 million of the loan portfolio would mature or
reprice within a one year period.
Non-deposit sources of funds in use at December 31, 1998 consisted of four
Federal Home Loan Bank advances. Two of the advances are fixed rate, amortizing
advances which were specifically used to fund loan growth. One of these advances
was in the amount of $1.5 million and maintains an interest rate of 6.25% and a
maturity date of December 12, 2005. The other advance was in the amount of $1.3
million and maintains an interest rate of 6.23% and a maturity date of April 1,
2013. The remaining two advances are convertible advances which maintain a fixed
rate for an agreed contract term. Thereafter, and until the maturity date, the
Federal Home Loan Bank may convert the advances to a floating rate advance. If
the Federal Home Loan Bank chooses to exercise its option to convert the rate,
the Bank may prepay the advances with no penalty. One of these advances was used
to fund a $10.0 million growth strategy in the investment portfolio. The other
convertible advance funded additional loan growth. The $10.0 million convertible
advance used for growth strategy maintains a current rate of 5.515% and a
maturity of March 17, 2008. The second convertible advance was in the amount of
$5.0 million and maintains a current rate of 5.58% and a maturity date of
December 16, 2002.
<PAGE>
Capital Resources. The adequacy of the Company's capital is reviewed by
management on an ongoing basis with reference to the size, composition, and
quality of the Company'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
quidelines 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 risk 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 Company had a ratio of risk-weighted
assets to total capital of 14.76% at December 31, 1998 and a ratio of
risk-weighted assets to Tier 1 capital of 13.78%. Both of these exceed the
capital requirements adopted by the federal regulatory agencies.
Table 11- Analysis of Capital
Year End December 31,
1998 1997
(Dollars in Thousands)
Tier 1 Capital
Common Stock $3,945 $3,888
Surplus 1,417 1,187
Retained Earnings 11,892 10,772
------- -------
Total Tier 1 Capital $17,254 $15,847
Tier 2 Capital:
Allowance for Loan Losses (1) 1,226 1,112
------- -------
Total Risk Based Capital $18,480 $16,959
======= =======
Risk-Weighted Assets $125,213 $111,572
Capital Ratios:
Tier 1 Risk-Based Capital Ratio 13.8% 14.2%
Total Risk-Based Capital Ratio 14.8% 15.2%
Tier 1 Capital to Average Total Assets 9.0% 10.0%
- --------------
(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 is required to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company has not determined whether to
adopt the new statement early. The Statement will require the Company 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 be either 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 Company does not use derivative's, management does not
anticipate that the adoption of the new Statement will have any effect on the
Company's earnings or financial position.
<PAGE>
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 23 of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1998.
Item 9. Change 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 called for this Item
is incorporated herein by reference from pages 2, 3 and 5 of the Company's proxy
statement dated March 3, 1999, for the Company's Annual Meeting of Shareholders
held April 6, 1999.
Item 11. Executive Compensation
Pursuant to General Instruction G(3), the information called for this Item
is incorporated herein by reference from pages 6 and 7 of the Company's proxy
statement dated March 3, 1999 for the Company's Annual Meeting of Shareholders
held April 6, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3), the information called for this Item
is incorporated herein by reference from pages 3 and 4 of the Company's proxy
statement dated March 3, 1999, for the Company's Annual Meeting of Shareholders
held April 6, 1999.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3), the information called for this Item
is incorporated herein by reference from page 7 of the Company's proxy statement
dated March 3, 1999, for the Company's Annual Meeting of Shareholders held April
6, 1999.
<PAGE>
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 23 of the Company's Annual Report to Shareholders
for the fiscal year ended December 31, 1998:
1. Financial Statements Page
Report of Independent Certified Public Accountants 6
First National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1998 and 1997 7
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 8
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 9 and 10
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1998, 1997 and 1996 11
Notes to Financial Statements 12 - 23
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, 1998.
21.1 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 1 to the Company's Form 10 filed with SEC on May 2, 1994).
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended December 31,
1998.
With the exception of the information herein expressly incorporated by
reference, the 1998 Annual Report to Shareholders and the Proxy Statement for
the 1999 Annual Meeting of Shareholders are not to be deemed filed as part of
this Annual Report on Form 10-K.
<PAGE>
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
Strasburg, Virginia
by /S/ Harry S. Smith
-----------------------
Harry S. Smith
President and Chief
Executive Officer
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 3/29/99
---------------- President and
Harry S. Smith Chief Executive Officer
(Principal Executive Officer)
/S/ Stephen Pettit 3/29/99
--------------- Comptroller and Chief
Stephen Pettit Accounting Officer
(Principal Financial and
Accounting Officer)
/S/ Noel M. Borden 3/29/99
--------------- Chairman of the Board
Noel M. Borden Director
/S/ Douglas C. Arthur 3/29/99
------------------ Vice Chairman of the Board
Douglas C. Arthur Director
-------------------- Director
Dr. Byron A. Brill
/S/ Elizabeth H. Cottrell 3/29/99
--------------------- Director
Elizabeth H. Cottrell
--------------------- Director
Dr. James A. Davis
/S/ Christopher E. French 3/29/99
---------------------- Director
Christopher E. French
--------------------- Director
Charles E. Maddox, Jr.
----------------- Director
W. Allen Nicholls
/S/ Henry L. Shirkey 3/29/99
----------------- Director
Henry L. Shirkey
/S/ Alson H. Smith, Jr. 3/29/99
--------------------- Director
Alson H. Smith, Jr.
<PAGE>
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 the
SEC on May 2, 1994).
13.1 Annual Report to Shareholders for the year ended December 31,
1998.
21.1 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 1 to the Company's Form 10 filed with the SEC on
May 2, 1994).
27 Financial Data Schedule (filed electronically only).
FIRST NATIONAL CORPORATION
Strasburg, Virginia
FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3 and 4
Consolidated statements of cash flows 5 and 6
Consolidated statements of changes in
stockholders' equity 7 and 8
Notes to consolidated financial statements 9-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
First National Corporation
Strasburg, Virginia
We have audited the accompanying consolidated balance sheets of First
National Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
National Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 15, 1999
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------------ --------------
Cash and due from banks $ 5 025 590 $ 3 623 386
Federal funds sold 2 859 000 - -
Securities (fair value: 1998, $48,262,497;
1997, $41,699,077) 48 262 527 41 698 525
Loans, net 128 371 407 112 493 701
Bank premises and equipment 4 317 646 3 933 602
Interest receivable 1 150 951 1 148 462
Other real estate 343 181 919 239
Other assets 805 382 771 836
----------- -----------
Total assets $191 135 684 $164 588 751
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 19 555 288 $ 16 969 015
Savings and interest-bearing demand deposits 74 990 558 68 289 401
Time deposits 60 461 938 54 503 436
----------- ------------
Total deposits $155 007 784 $139 761 852
Federal funds purchased - - 1 417 000
Long-term debt 17 709 827 6 461 236
Accrued expenses 817 065 766 388
Commitments and contingent liabilities - - - -
----------- ------------
Total liabilities $173 534 676 $148 406 476
----------- ------------
Stockholders' Equity
Common stock, par value $5 per share; authorized
2,000,000 shares; issued and outstanding
788,903 and 775,547 shares $ 3 944 515 $ 3 887 735
Surplus 1 417 280 1 187 023
Retained earnings 11 892 298 10 772 543
Accumulated other comprehensive income 346 915 334 974
------------ ------------
Total stockholders' equity $ 17 601 008 $ 16 182 275
------------ ------------
Total liabilities and stockholders'
equity $191 135 684 $164 588 751
============ ============
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ----------
Interest Income:
Interest and fees on loans $11 119 247 $ 9 626 462 $8 686 663
Interest on federal funds sold 85 556 72 338 98 316
Interest on deposits in banks 28 121 27 828 24 626
Interest on investment securities,
taxable 31 061 142 761 237 132
Interest and dividends on securities
available for sale:
Taxable 2 385 641 1 669 348 1 336 188
Nontaxable 357 030 356 755 383 185
Dividends 73 050 78 267 67 175
----------- ----------- ----------
Total interest income $14 079 706 $11 973 759 $10 833 285
----------- ----------- ----------
Interest Expense:
Interest on deposits $ 6 202 042 $ 5 614 295 $4 995 935
Interest on federal funds purchased 29 462 19 612 2 799
Interest on long-term debt 878 732 104 182 98 241
----------- ----------- ----------
Total interest expense $ 7 110 236 $ 5 738 089 $5 096 975
----------- ----------- ----------
Net interest income $ 6 969 470 $ 6 235 670 $5 736 310
Provision for loan losses 330 000 220 000 120 000
----------- ----------- ----------
Net interest income after
provision for loan losses $ 6 639 470 $ 6 015 670 $5 616 310
----------- ----------- ----------
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Other Operating Income:
Service charges $ 620 479 $ 568 276 $ 471 680
Fees for other customer services 156 336 118 097 87 545
Profits on securities available for sale 198 325 11 149 19 549
Gain (loss) on sale of assets and
other real estate 9 216 2 268 (23 059)
Other 178 900 178 678 92 185
----------- ----------- ---------
Total other operating income $ 1 163 256 $ 878 468 $ 647 900
----------- ----------- ---------
Other Operating Expenses:
Salaries and employee benefits $ 2 608 261 $ 2 365 875 $2 230 677
Occupancy expense 273 930 245 429 215 270
Equipment expense 514 828 528 289 527 615
Advertising 218 121 271 294 202 839
Supplies and stationery 118 227 124 874 123 600
Telephone 160 235 138 256 107 143
Other 1 212 558 972 464 872 204
----------- ----------- ----------
Total other operating expenses $ 5 106 160 $ 4 646 481 $4 279 348
----------- ----------- -----------
Income before income taxes $ 2 696 566 $ 2 247 657 $1 984 862
Provision for income taxes 791 884 636 335 530 596
----------- ----------- ----------
Net income $ 1 904 682 $ 1 611 322 $1 454 266
=========== =========== ==========
Earnings Per Common Share, basic $ 2.43 $ 2.08 $ 1.88
=========== =========== ==========
Earnings Per Common Share, diluted $ 2.42 $ 2.08 $ 1.88
=========== =========== ==========
Cash Dividends Per Share $ 1.00 $ .82 $ .70
=========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $1 904 682 $1 611 322 $1 454 266
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 428 114 419 751 443 274
Provision for loan losses 330 000 220 000 120 000
(Gain) loss on sale of assets and other
real estate (9 216) (2 268) 23 059
(Profits) on securities available for
sale (198 325) (11 149) (19 549)
Accretion of security discounts (53 129) (49 763) (30 764)
Amortization of security premiums 188 545 107 910 99 723
Deferred tax expense (benefit) (69 254) (70 181) 9 726
Changes in assets and liabilities:
(Increase) in interest receivable (2 489) (257 112) (51 077)
(Increase) decrease in other assets 12 500 (217 728) 143 932
(Increase) in other real estate (39 225) (115 431) - -
Increase (decrease) in accrued
expenses 67 733 159 315 (18 225)
----------- ----------- -----------
Net cash provided by
operating activities $2 559 936 $1 794 666 $2 174 365
----------- ----------- ----------
Cash Flows from Investing Activities
Proceeds from sale of securities
available for sale $11 529 144 $9 105 427 $2 319 615
Proceeds from maturities, calls,
and principal payments of
investment securities 1 640 428 1 364 430 3 041 039
Proceeds from maturities, calls,
and principal payments of securities
available for sale 17 842 596 5 892 658 6 399 218
Purchase of securities available for
sale (37 495 168) (23 906 086) (8 993 267)
(Increase) in federal funds sold (2 859 000) - - - -
Proceeds on sale of equipment 23 725 13 030 - -
Purchases of bank premises and equipment (834 415) (1 044 089) (673 897)
Net (increase) in loans (16 322 706) (14 292 570) (12 822 646)
Proceeds on sale of other real estate 738 031 - - 244 416
------------ ------------ ------------
Net cash (used in)
investing activities $(25 737 365) $(22 867 200) $(10 485 522)
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase in demand deposits,
NOW accounts, and savings accounts $ 9 287 430 $17 138 568 $ 9 200 571
Net increase (decrease) in certificates of
deposit 5 958 502 (1 465 131) (1 122 247)
Proceeds from long-term debt 11 300 000 5 000 000 - -
Principal payments on long-term debt (51 409) (20 188) (18 576)
Net proceeds from issuance of common
stock 287 037 70 090 55 717
Cash dividends paid (784 927) (639 870) (540 872)
Increase (decrease) in federal funds
purchased (1 417 000) 1 102 000 (67 000)
---------- ---------- ----------
Net cash provided by
financing activities $24 579 633 $21 185 469 $ 7 507 593
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents $ 1 402 204 $ 112 935 $ (803 564)
Cash and Cash Equivalents
Beginning 3 623 386 3 510 451 4 314 015
----------- ----------- -----------
Ending $ 5 025 590 $ 3 623 386 $ 3 510 451
=========== =========== ===========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 7 073 034 $ 5 714 898 $ 5 091 883
=========== =========== ===========
Income taxes $ 906 157 $ 652 286 $ 540 281
=========== =========== ===========
Supplemental Disclosures of Noncash
Investing and Financing Activities
Other real estate acquired in
settlement of loans $ 115 000 $ - - $ 267 475
=========== =========== ============
Unrealized gain (loss) on securities
available for sale $ 18 093 $ 459 908 $ (60 474)
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
FIRST NATIONAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Capital Retained
Stock Surplus Earnings
----------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 3 858 490 $1 090 461 $8 887 697
Comprehensive income:
Net income - 1996 - - - - 1 454 266
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $13,915) - - - - - -
Reclassification adjustment (net of tax, $6,647) - - - - - -
Other comprehensive income (net of tax, $20,562) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1996 - - - - (540 872)
Issuance of 2,078 shares of common stock, dividend
reinvestment plan 13 540 42 177 - -
---------- --------- ----------
Balance, December 31, 1996 $3 872 030 $1 132 638 $9 801 091
Comprehensive income:
Net income - 1997 - - - - 1 611 322
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $160,159) - - - - - -
Reclassification adjustment (net of tax, $3,791) - - - - - -
Other comprehensive income (net of tax, $156,369) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1997 - - - - (639 870)
Issuance of 3,141 shares of common stock, dividend
reinvestment plan 15 705 54 385 - -
---------- ---------- -----------
Balance, December 31, 1997 $3 887 735 $1 187 023 $10 772 543
Comprehensive income:
Net income - 1998 - - - - 1 904 682
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $73,583) - - - - - -
Reclassification adjustment (net of tax, $67,431) - - - - - -
Other comprehensive income (net of tax, $6,152) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1998 - - - - (784 927)
Issuance of 8,542 shares of common stock, employee
stock options 42 710 158 680 - -
Issuance of 2,814 shares of common stock, dividend
reinvestment plan 14 070 71 577 - -
----------- ---------- -----------
Balance, December 31, 1998 $ 3 944 515 $1 417 280 $11 892 298
=========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income Income Total
------------- ------------- -------
<S> <C> <C> <C>
Balance, December 31, 1995 $ 71 347 $13 907 995
Comprehensive income:
Net income - 1996 - - $ 1 454 266 1 454 266
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $13,915
Reclassification adjustment (net of tax, $6,647) - - (27 010) - -
Other comprehensive income (net of tax, $20,562) - - (12 902) - -
-------------
Total comprehensive income (39 912) $ (39 912) (39 912)
-------------
Cash dividends - 1996 - - $ 1 414 354 - -
=============
Issuance of 2,078 shares of common stock, dividend - - (540 872)
reinvestment plan
- - 55 717
------------ -----------
Balance, December 31, 1996 $ 31 435 $14 837 194
Comprehensive income:
Net income - 1997 - - $ 1 611 322 1 611 322
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $160,159)
Reclassification adjustment (net of tax, $3,791) - - 310 897 - -
Other comprehensive income (net of tax, $156,369) - - (7 358) - -
-------------
Total comprehensive income 303 539 $ 303 539 303 539
-------------
Cash dividends - 1997 - - $ 1 914 861 - -
=============
Issuance of 3,141 shares of common stock, dividend - - (639 870)
reinvestment plan
- - 70 090
------------ -----------
Balance, December 31, 1997 $ 334 974 $16 182 275
Comprehensive income:
Net Income - 1998 - - $ 1 904 682 1 904 682
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $73,583)
Reclassification adjustment (net of tax, $67,431) - - 142 835 - -
Other comprehensive income (net of tax, $6,152) - - (130 894) - -
-------------
Total comprehensive income 11 941 $ 11 941 11 941
-------------
Cash dividends - 1998 - - $ 1 916 623 - -
=============
Issuance of 8,542 shares of common stock, employee - - (784 927)
stock options
Issuance of 2,814 shares of common stock, dividend - - 201 390
reinvestment plan
- - 85 647
------------ -----------
Balance, December 31, 1998 $ 346 915 $17 601 008
============ ===========
</TABLE>
<PAGE>
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
First National Corporation and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to
customers in the Shenandoah Valley Region of Virginia. The loan
portfolio is well diversified and generally is collateralized by
assets of the customers. The loans are expected to be repaid from cash
flow or proceeds from the sale of selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to accepted practices
within the banking industry.
Principles of Consolidation
The consolidated financial statements of First National Corporation
and its wholly-owned subsidiaries, First Bank (the Bank) and First
Bank Financial Corporation (the Financial Corporation), include the
accounts of all three companies. All material intercompany balances
and transactions have been
eliminated in consolidation.
Securities
Investments are classified in three categories and are accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
<PAGE>
Notes to Consolidated Financial Statements
c. Trading Securities
Trading securities, which are generally held for the short term
in anticipation of market gains, are carried at fair value.
Realized and unrealized gains and losses on trading account
assets are included in interest income on trading account
securities. The Corporation held no assets classified as trading
securities at December 31, 1998 and 1997.
Derivatives
The Corporation has no securities defined as derivatives by FASB
No. 119, "Disclosures for Derivative Financial Instruments".
Loans
Loans are shown on the balance sheets net of unearned discounts and
the allowance for loan losses. Interest is computed by methods which
result in level rates of return on principal. Loans are charged off
when in the opinion of management they are deemed to be
uncollectible after taking into consideration such factors as the
current financial condition of the customer and the underlying
collateral and guarantees.
The Corporation adopted FASB No. 114, "Accounting by Creditors for
Impairment of a Loan". This statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures". Statement 114, as amended, requires
that the impairment of loans that have been separately identified
for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for
those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is
probable, the measure of impairment of those loans is to be based on
the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and
the allowance for credit losses and interest income recognized on
loans.
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loans are
not subject to impairment under FASB 114. A loan is considered
impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and the
current economic conditions. A performing loan may be considered
impaired, if the factors above indicate a need for impairment. A
loan on nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than
5% of the required principal and interest payment generally does not
indicate an impairment situation, if in management's judgment the
loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired
loan under FASB 114. Charge-offs for impaired loans occur when the
loan, or a portion of the loan is determined to be uncollectible, as
is the case for all loans.
<PAGE>
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on the collateral values or the present value of estimated
cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net
of recoveries. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. For financial reporting, depreciation is computed
using the straight-line method over the estimated useful lives of
the assets, which range from five to forty years. Gains and losses
on routine dispositions are reflected in current operations.
Other Real Estate
Real estate acquired by foreclosure is carried at the lower of cost
or fair market value less estimated costs of disposal.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences,
operating loss carryforwards, and tax credit carryforwards. Deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
<PAGE>
Pension Plan
In 1998, the Corporation adopted FASB No 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
pronouncement does not change the measurement or recognition of
amounts recognized in the Corporation's financial statements
applicable to its defined benefit plan. Statement No. 132 revises
the existing disclosure requirements by standardizing the disclosure
requirements for pensions requiring certain additional information
on changes in the benefit obligations and fair values of plan
assets, and eliminating certain disclosures.
Earnings Per Share
In 1997, the Corporation adopted FASB No. 128, "Earnings Per Share."
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the
Statement 128 requirements.
Nonrefundable Loan Fees and Costs
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as
an adjustment of the related loan's yield.
Cash and Cash Equivalents
The Corporation has defined cash equivalents as those amounts
included in the balance sheet caption "Cash and Due from Banks".
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Advertising Costs
The Corporation follows the policy of charging the production costs
of advertising to expense as incurred. Total advertising expense
incurred for 1998, 1997 and 1996 was $218,121, $271,294 and
$202,839, respectively.
<PAGE>
Comprehensive Income
As of January 1, 1998, the Corporation adopted FASB No. 130,
"Reporting Comprehensive Income". Statement 130 establishes new
rules for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact on
the Corporation's net income or stockholders' equity. The Statement
requires other comprehensive income to include adjustments for
unrealized gains and losses on available for sale securities, which
prior to adoption were reported separately in stockholders' equity.
The financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Emerging Accounting Standards
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, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Corporation
has not determined whether to adopt the new statement early. 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 new Statement will have any
effect on the Corporation's earnings or financial position.
Note 2. Securities
Amortized costs and fair values of securities being held to maturity
as of December 31, 1998 and 1997, are as follows:
1998
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
Mortgage-backed
securities $ 19 486 $ - - $ (30) $ 19 456
========== =========== ========= =========
<PAGE>
1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
Mortgage-backed
securities $1 661 684 $ 3 012 $ (2460) $1 662 236
========== ======= ======= ==========
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be
called or repaid without any penalties, therefore these securities are
not included in a maturity analysis.
Amortized costs and fair values of securities available for sale as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $36 397 397 $ 270 233 $ (84 329) $ 36 583 301
Obligations of states and
political subdivisions 6 558 718 326 143 (1 218) 6 883 643
Corporate securities 4 010 27 350 - - 31 360
Mortgage-backed
Securities 3 569 371 2 075 (14 625) 3 556 821
Other 1 187 916 - - - - 1 187 916
----------- ---------- ---------- ------------
$47 717 412 $ 625 801 $ (100 172) $ 48 243 041
=========== ========== ========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $31 961 244 $ 225 632 $ (25 039) $ 32 161 837
Obligations of states and
political subdivisions 6 478 299 306 944 - - 6 785 243
Corporate securities 4 010 - - - - 4 010
Other 1 085 751 - - - - 1 085 751
----------- ---------- ---------- ------------
$39 529 304 $ 532 576 $ (25 039) $ 40 036 841
=========== ========== ========== ============
</TABLE>
The amortized cost and fair value of securities available for sale as
of December 31, 1998, by contractual maturity, are shown below.
Maturities may differ from contractual maturities in corporate and
mortgage-backed securities because the securities and mortgages
underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary.
Amortized Fair
Cost Value
--------- -----
Due in one year or less $ 6 018 481 $ 6 055 707
Due after one year through
five years 17 950 041 18 163 240
Due after five years through
ten years 17 078 557 17 333 403
Due after ten years 1 909 036 1 914 594
Corporate securities 4 010 31 360
Mortgage-backed securities 3 569 371 3 556 821
Other 1 187 916 1 187 916
----------- -----------
$47 717 412 $48 243 041
=========== ===========
There were no sales of securities being held to maturity during 1998,
1997 and 1996.
Proceeds from sales of securities available for sale during 1998,
1997, and 1996 were $11,529,144, $9,105,427, and $2,319,615,
respectively. Gross gains of $199,657, $41,973, and $19,549 and gross
losses of $1,332, $30,824, and $-0- were realized on those sales.
Securities having a book value of $7,786,481 and $9,403,358 at
December 31, 1998 and 1997, were pledged to secure public deposits and
for other purposes required by law.
<PAGE>
Note 3. Loans
Loans at December 31, 1998 and 1997, are summarized as follows:
1998 1997
------ ------
(Thousands)
Real estate loans:
Construction and land development $ 5 415 $ 3 583
Secured by farm land 851 947
Secured by 1-4 family
residential 47 965 45 133
Other real estate loans 21 381 17 126
Loans to farmers (except those
secured by real estate) 585 647
Commercial and industrial loans
(except those secured by real
estate) 25 632 19 576
Loans to individuals for
personal expenditures 27 376 26 574
All other loans 513 461
-------- --------
Total loans $129 718 $114 047
Less: Unearned income 121 441
Allowance for loan losses 1 226 1 112
-------- --------
Loans, net $128 371 $112 494
======== ========
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $1 112 318 $ 974 412 $ 900 812
Provision charged to operating
expense 330 000 220 000 120 000
Loan recoveries 17 184 14 914 16 425
Loan charge-offs (233 306) (97 008) (62 825)
---------- ----------- -----------
Balance at end of year $1 226 196 $ 1 112 318 $ 974 412
========== =========== ===========
</TABLE>
Impairment of loans having recorded investments of $164,569 at
December 31, 1998 has been recognized in conformity with FASB
Statement No. 114. The average recorded investment in impaired loans
during 1998 was $195,574. The total allowance for loan losses related
to these loans was $78,228. There was no interest income on impaired
loan recognized for cash payments received in 1998. There were no
impaired loans in 1997.
<PAGE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $42,385 and $23,642 at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income
would have approximated $1,326 and $3,490 for 1998 and 1997.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows at December 31,
1998 and 1997:
1998 1997
Land $ 669 425 $ 468 785
Buildings and leasehold improvements 3 745 278 3 392 827
Furniture and equipment 4 075 850 3 827 693
----------- ------------
$ 8 490 553 $ 7 689 305
Less accumulated depreciation 4 172 907 3 755 703
----------- ------------
$ 4 317 646 $ 3 933 602
=========== ============
Depreciation expense included in operating expenses for 1998, 1997 and
1996 was $428,114, $419,751, and $443,274, respectively.
Note 6. Deposits
The aggregate amount of short-term jumbo certificates of deposit, each
with a minimum denomination of $100,000, was $11,262,920 and
$12,243,178 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
1999 $39 612 473
2000 8 642 312
2001 6 600 016
2002 2 285 419
2003 3 321 718
-----------
$60 461 938
===========
Note 7. Short-Term Borrowings
The Corporation had unused lines of credit totaling $24,873,000
available with non-affiliated banks at December 31, 1998.
<PAGE>
Note 8. Long-Term Debt
At December 31, 1998, the Corporation had borrowings from the Federal
Home Loan Bank system totaling $17,709,827 which mature through April
1, 2013. The interest rate on these notes payable ranges from 5.515%
to 6.25%. The Corporation has pledged real estate loans and Federal
Home Loan Bank stock as collateral on these borrowings. Principal
payments on these notes are due as follows:
1999 $ 71 287
2000 77 550
2001 84 363
2002 5 091 774
2003 99 837
Later years 12 285 016
-----------
$17 709 827
===========
Note 9. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:
1998 1997
---------- ---------
Deferred tax assets:
Allowance for loan losses $ 330 738 $ 292 020
Pension payable 103 294 103 545
Interest on nonaccrual loans 8 766 1 187
---------- ---------
$ 442 798 $ 396 752
---------- ---------
Deferred tax liabilities:
Depreciation $ 69 500 $ 53 822
Bond accretion 5 862 6 107
Loan origination costs 28 537 67 178
Securities available for sale 178 714 172 562
---------- ---------
$ 282 613 $ 299 669
---------- ---------
$ 160 185 $ 97 083
========== =========
<PAGE>
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Current tax expense $861 138 $706 516 $ 520 870
Deferred tax expense (benefit) (69 254) (70 181) 9 726
-------- -------- ---------
$791 884 $636 335 $ 530 596
======== ======== =========
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1998, 1997 and 1996, due to
the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense $ 916 832 $ 764 203 $ 674 853
(Decrease) in income taxes
resulting from:
Tax-exempt interest income (106 451) (110 540) (128 063)
Other (18 497) (17 328) (16 194)
---------- ---------- ---------
$791 884 $636 335 $530 596
========== ========== =========
</TABLE>
Low income housing credits totalled $32,179 for the years ended
December 31, 1998, 1997 and 1996 respectively.
Note 10. Fund Restrictions and Reserve Balance
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of December
31, 1998, the aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totalled $3,518,821.
The Bank must maintain a reserve against its deposits in accordance
with Regulation D of the Federal Reserve Act. For the final weekly
reporting period in the years ended December 31, 1998 and 1997, the
aggregate amounts of daily average required balances were
approximately $702,000 and $612,000, respectively.
Note 11. Benefit Plans
The Bank has a noncontributory, defined benefit pension plan for all
full-time employees over 21 years of age with one year of service.
Benefits are generally based upon years of service and average
compensation for the five highest-paid consecutive years of service.
The Bank funds pension costs in accordance with the funding provisions
of the Employee Retirement Income Security Act.
Information about the plan follows:
<PAGE>
1998 1997
Change in Benefit Obligation
Benefit obligation, beginning
of year $1 822 867 $ 1 400 560
Service cost 156 069 145 319
Interest cost 136 715 105 042
Actuarial loss 36 572 184 053
Benefits paid (593 076) (12 107)
---------- -----------
Benefit obligation, end of year $1 559 147 $ 1 822 867
========== ===========
Changes in Plan Assets
Fair value of plan assets,
beginning of year $1 689 889 $ 1 270 505
Actual return on plan assets 26 745 281 660
Employer contributions 139 074 149 831
Benefits paid (593 076) (12 107)
---------- -----------
Fair value of assets, end of year $1 262 632 $ 1 689 889
========== ===========
Funded status $ (296 515) $ (132 978)
Unrecognized net actuarial
(gain) loss 13 485 (148 432)
Unrecognized net obligation at
transition (67 507) (73 133)
Unrecognized prior service cost 45 771 49 041
---------- -----------
Accrued benefit cost included in
other liabilities $ (304 766) $ (305 502)
========== ===========
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Components of Net Periodic
Benefit Cost
Service cost $156 069 $145 319 $133 691
Interest cost 136 715 105 042 91 351
Expected return on plan assets (152 090) (114 345) (91 375)
Amortization of prior service
cost 3 270 3 270 - -
Amortization of net obligation
at transition (5 626) (5 626) (2 626)
Recognized net actuarial
(gain) - - (1 256) - -
-------- -------- --------
Net periodic benefit cost $138 338 $132 404 $131 041
======== ======== ========
Weighted-Average Assumptions as
of December 31
Discount rate 7.50% 7.50% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 6.00%
</TABLE>
<PAGE>
The Corporation provides a profit sharing thrift plan for all eligible
employees. Participating employees may elect to contribute up to 6% of
their salaries. The Corporation contributes an amount equal to
one-half of the employees' contributions. The Corporation's
contributions in 1998, 1997 and 1996 were $50,187, $54,399 and
$52,616, respectively.
On January 6, 1999 the Bank adopted a Director Split Dollar Life
Insurance Plan. This Plan provides life insurance coverage to
insurable directors of the Bank. The Bank owns the policies and is
entitled to all values and proceeds. The Plan provides retirement
benefits and the payment of benefits at the death of the insured
director. The amount of benefits will be determined by the performance
of the policies over the director's life.
Note 12. Commitments and Contingencies
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as guarantees,
commitments to extend credit, etc., which are not reflected in the
accompanying financial statements. The Corporation does not anticipate
losses as a result of these transactions.
The Corporation is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year
2000 Issue, and is developing a remediation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Corporation is heavily dependent
on computer processing in the conduct of its business activities.
Failure of these systems could have a significant impact on the
Corporation's operations.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at these banks at December 31, 1998, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by
approximately $152,000.
See Note 16 with respect to financial instruments with
off-balance-sheet risk.
Note 13. Transactions With Related Parties
During the year, employees, executive officers and directors (and
companies controlled by them) were customers of and had transactions
with the Corporation in the normal course of business. These
transactions were made on substantially the same terms as those
prevailing for other customers.
An analysis of loans (exclusive of loans to any such person which in
the aggregate did not exceed $60,000) made by the Corporation to
directors, executive officers, or principal stockholders or to any
associate of such persons is shown in the following table:
<PAGE>
Balance Balance
January 1, New Loan December 31,
1998 Loans Repayments 1998
---------- ----- ---------- ------------
$3 059 826 $ 886 681 $1 143 959 $2 802 548
========== ========= ========== ==========
Note 14. Winchester Branch Office
The branch office in Winchester has been leased for a five-year period
beginning June 1, 1986, with options to renew for three additional
five-year periods. The current annual rent is $20,039, with an
allowable increase based on the Consumer Price Index. The annual rent
for the third five-year period cannot exceed $21,175.
Note 15. Dividend Reinvestment Plan
The Company has in effect a Dividend Reinvestment Plan which provides
an automatic conversion of dividends into common stock for enrolled
shareholders. Stock is issued at 100% of fair market value on each
dividend record date.
Note 16. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1998 and 1997,
is as follows:
1998 1997
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 19 734 000 $ 9 442 000
Standby letters of credit $ 729 665 $ 348 700
<PAGE>
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds security
agreements on accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at
December 31, 1998, varies from 0 percent to 100 percent; the average
amount collateralized is 55.4 percent.
Note 17. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair values are based
on quoted market prices or dealer quotes.
Loan Receivables
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The
fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities.
<PAGE>
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits
of similar remaining maturities.
Borrowings
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings under
repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analyses based
on the Corporation's current incremental borrowing rates for similar
types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 1998 and 1997, the carrying amounts and fair values
of loan commitments and stand-by letters of credit were deemed
immaterial.
The estimated fair values of the Corporation's financial instruments
are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 7 885 $ 7 885 $ 3 623 $ 3 623
Securities 48 263 48 263 41 699 41 699
Loans 128 371 132 930 112 494 114 091
-------- -------- -------- ---------
Total financial assets $184 519 $189 078 $157 816 $ 159 413
======== ======== ======== =========
Financial liabilities:
Deposits $155 008 $156 075 $139 762 $ 139 788
Federal funds purchased - - - - 1 417 1 417
Long-term debt 17 710 18 623 6 461 6 304
-------- -------- -------- ---------
Total financial liabilities $172 718 $174 698 $147 640 $ 147 509
======== ======== ======== =========
</TABLE>
<PAGE>
Note 18. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31,
1998, that the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
<PAGE>
The Corporation's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 18 480 14.8% >=$10 017 >=8.0% N/A
First Bank $ 18 269 14.6% >=$10 007 >=8.0% >=$12 509 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 17 254 13.8% >=$5 009 >=4.0% N/A
First Bank $ 17 043 13.6% >=$5 004 >=4.0% >=$ 7 505 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 17 254 9.0% >=$7 655 >=4.0% N/A
First Bank $ 17 043 8.9% >=$7 650 >=4.0% >=$ 9 562 >= 5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 16 959 15.2% >=$8 945 >=8.0% N/A
First Bank $ 16 700 15.0% >=$8 930 >=8.0% >=$11 162 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 15 847 14.2% >=$4 472 >=4.0% N/A
First Bank $ 15 588 14.0% >=$4 465 >=4.0% >=$ 6 697 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 15 847 10.0% >=$6 343 >=4.0% N/A
First Bank $ 15 588 9.8% >=$6 337 >=4.0% >=$ 7 922 >= 5.0%
</TABLE>
<PAGE>
Note 19. Incentive Stock Option Plan
The Corporation has an incentive stock option plan for all full-time
employees. Under the plan, the Corporation may grant options for up to
21,000 shares of the common stock. The exercise price of each option
is equal to the market price of the Corporation's stock on the date of
grant. The maximum term of the option is five years, and they vest
immediately upon grant.
The Corporation applies APB Opinion 25 in accounting for its incentive
stock option plan. Accordingly, no compensation cost has been
recognized for the plan in 1998, 1997 and 1996. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement
No. 123, net income and earnings per share would not have been
materially different from the amounts presented.
The status of the stock option plan during 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 15 780 $ 23.51 19 003 $ 23.55 23 179 $ 23.40
Granted - - - - - - - - - - - -
Exercised (8 542) 23.58 - - - - - - - -
Forfeited (683) 23.58 (3 223) 23.76 (4 176) 22.72
------ ------ ------
Outstanding and
exercisable at
December 31 6 555 23.43 15 780 23.51 19 003 23.55
====== ====== ======
</TABLE>
The status of the options outstanding at December 31, 1998 is as
follows:
Weighted
Weighted Number Average
Average Outstanding Remaining
Exercise and Contractual
Price Exercisable Life
-------- ----------- -----------
$ 24.00 2 820 .5 year
23.00 3 735 1.5 years
-----
23.43 6 555 1.0 year
=====
<PAGE>
Note 20. Earnings Per Share
The following table presents the amounts used in computing earnings
per share and the effect on the weighted average number of shares of
dilutive potential common stock. Potential dilutive common stock has
no effect on income available to common stockholders.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- ------------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 783 897 $ 2.43 775 508 $ 2.08 772 557 $ 1.88
========= ========= =======
Effect of dilutive
securities, stock
options 3 006 445 - -
-------- ------- -------
Diluted EPS 786 903 $ 2.42 775 953 $ 2.08 772 557 $ 1.88
======== ========== ======= ======== ======= =======
</TABLE>
Options on 19,003 shares of common stock were not included in
computing diluted earnings per share for the year ended December 31,
1996, because their effects were antidilutive.
<PAGE>
Notes to Consolidated Financial Statements
Note 21. Parent Corporation Only Financial Statements
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---------- -----------
Cash $ 39 041 $ 70 493
Investment in subsidiaries, at cost, plus
undistributed net income 17 389 973 15 923 036
Other assets 171 994 188 746
----------- -----------
Total assets $17 601 008 $16 182 275
=========== ===========
Liabilities and Stockholders' Equity
Liabilities, accounts payable $ - - $ - -
----------- -----------
Stockholders' Equity
Common stock $ 3 944 515 $ 3 887 735
Surplus 1 417 280 1 187 023
Retained earnings 11 892 298 10 772 543
Accumulated other comprehensive income 346 915 334 974
------------ -----------
Total stockholders' equity $ 17 601 008 $16 182 275
------------ -----------
Total liabilities and stockholders'
equity $ 17 601 008 $16 182 275
============ ===========
<PAGE>
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ------------
Income, dividends from subsidiary $ 464 000 $ 535 000 $ 465 000
----------- ----------- ------------
Expenses:
Registration fees $ 850 $ 850 $ 850
Stationery and supplies 11 290 10 363 11 686
Legal and professional fees 14 487 6 677 12 610
Other 42 215 32 358 19 447
----------- ----------- ------------
Total expenses $ 68 842 $ 50 248 $ 44 593
----------- ----------- ------------
Income before allocated tax
benefits and undistributed
income of subsidiary $ 395 158 $ 484 752 $ 420 407
Allocated income tax benefits 54 528 49 263 47 341
----------- ----------- ------------
Income before equity in
undistributed income
of subsidiary $ 449 686 $ 534 015 $ 467 748
Equity in undistributed income of
subsidiary 1 454 996 1 077 307 986 518
----------- ------------ ------------
Net income $ 1 904 682 $ 1 611 322 $ 1 454 266
=========== =========== ============
<PAGE>
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash Flows from Operating Activities
Net income $1 904 682 $1 611 322 $ 1 454 266
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of
subsidiary (1 454 996) (1 077 307) (986 518)
Decrease in other assets 16 752 17 062 11 877
(Decrease) in accounts payable - - - - (319)
--------- ---------- ------------
Net cash provided by operating
activities $ 466 438 $ 551 077 $ 479 306
--------- ---------- ------------
Cash Flows from Financing Activities
Net proceeds from issuance of common
stock $ 287 037 $ 70 090 $ 55 717
Cash dividends paid (784 927) (639 870) (540 872)
--------- ---------- ------------
Net cash (used in) financing
activities $ (497 890) $ (569 780) $ (485 155)
---------- ---------- ------------
(Decrease) in cash and
cash equivalents $ (31 452) $ (18 703) $ (5 849)
Cash and Cash Equivalents
Beginning 70 493 89 196 95 045
---------- ---------- ------------
Ended $ 39 041 $ 70 493 $ 89 196
========== ========== ============
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,820
<INT-BEARING-DEPOSITS> 206
<FED-FUNDS-SOLD> 2,859
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,243
<INVESTMENTS-CARRYING> 19
<INVESTMENTS-MARKET> 19
<LOANS> 128,371
<ALLOWANCE> 1,226
<TOTAL-ASSETS> 191,136
<DEPOSITS> 155,008
<SHORT-TERM> 0
<LIABILITIES-OTHER> 817
<LONG-TERM> 17,710
0
0
<COMMON> 3,945
<OTHER-SE> 13,656
<TOTAL-LIABILITIES-AND-EQUITY> 191,136
<INTEREST-LOAN> 11,119
<INTEREST-INVEST> 2,847
<INTEREST-OTHER> 114
<INTEREST-TOTAL> 14,080
<INTEREST-DEPOSIT> 6,202
<INTEREST-EXPENSE> 7,110
<INTEREST-INCOME-NET> 6,969
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 198
<EXPENSE-OTHER> 5,106
<INCOME-PRETAX> 2,697
<INCOME-PRE-EXTRAORDINARY> 2,697
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,905
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.42
<YIELD-ACTUAL> 4.15
<LOANS-NON> 207
<LOANS-PAST> 213
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,112
<CHARGE-OFFS> 233
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 1,226
<ALLOWANCE-DOMESTIC> 1,226
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
