UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-22747
Second National Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1542438
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
102 South Main Street, Culpeper, Virginia 22701
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 540-825-4800
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 1997:
Common Stock, $2.50 par value 1,497,440
- ----------------------------- ---------------
Class Number of Shares
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Page No.
ITEM 1 Consolidated Financial Statements:
Consolidated Statements of Condition 3
Consolidated Statements of Earnings 4-5
Consolidated Statements of Cash Flows 6
Notes to Financial Statements 7-9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-10
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings 11
ITEM 2 Change in Securities 11
ITEM 3 Defaults Upon Senior Securities 11
ITEM 4 Submission of Matters to a Vote of Security Holders 11
ITEM 5 Other information 11
ITEM 6 Exhibits and Reports on Form 8-K 11
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(unaudited)
<S> <C>
ASSETS
Cash and due from depository institutions
(non-interest bearing deposits) $ 6,816 $ 5,012
Securities held to maturity (market value,
1997 - $16,262; 1996 - $14,913) 15,723 14,545
Securities held for sale (market value,
1997 - $63,293; 1996 - $67,848) 63,293 67,848
Federal funds sold and securities
purchased under agreements to resell 695 4,368
Loans receivable - net 122,735 107,987
Bank premises and equipment 4,775 4,874
Other assets 2,634 2,840
Total Assets $ 216,671 $ 207,474
LIABILITIES
Deposits
Non-interest bearing $ 22,668 $ 20,753
Interest bearing 159,104 154,284
Total Deposits 181,772 175,037
Repurchase agreements 1,481 1,200
Master Notes 2,578 2,870
Short-term borrowing 1,373 579
Other liabilities 1,217 1,213
Total Liabilities 188,421 180,899
STOCKHOLDERS' EQUITY Preferred stock, no par value:
(Authorized 1,000,000 shares,
no shares outstanding) - -
Common stock par value $2.50 per share:
(Authorized 3,000,000 shares; issued and outstanding
1,497,440 shares 1997;1,506,419 shares 1996) 3,744 3,737
Capital surplus 1,234 1,171
Market valuation AFS securities 43 (162)
Retained earnings 23,229 21,829
Total Stockholders' Equity 28,250 26,575
Total Liabilities and Stockholders'
Equity $ 216,671 $ 207,474
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(000 OMITTED)
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
(unaudited) (unaudited)
INTEREST INCOME
Loans receivable $ 2,684 $ 2,321
Securities and other investments 1,249 1,325
Total Interest Income 3,933 3,646
INTEREST EXPENSE
Interest on deposits 1,686 1,615
Interest on notes payable - 32
Interest on short-term borrowings 70 47
Total Interest Expense 1,756 1,694
NET INTEREST INCOME 2,177 1,952
Less: Provision for loan losses 38 -
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,139 1,952
NONINTEREST INCOME
Commissions and fees from fiduciary activities 87 92
Service charges on deposit accounts 197 172
Investment sales 20 -
Loan fees 63 40
Other operating income 63 43
Total Noninterest Income 430 347
NONINTEREST EXPENSES
Salaries and employee benefits 790 715
Occupancy and equipment 205 194
Data processing services 61 53
Marketing 30 22
Capital stock taxes 47 41
Other operating expenses 309 229
Total Noninterest Expense 1,442 1,254
Income before income tax expense 1,127 1,045
Income tax expense 323 299
Net Income $ 804 $ 746
Net income per share $ 0.53 $ 0.50
Dividends per share $ 0.22 $ 0.19
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(000 OMITTED)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
(unaudited) (unaudited)
INTEREST INCOME
Loans receivable $ 7,717 $ 6,800
Securities and other investments 3,719 3,861
Total Interest Income 11,436 10,661
INTEREST EXPENSE
Interest on deposits 4,929 4,739
Interest on notes payable - 102
Interest on short-term borrowings 174 125
Total Interest Expense 5,103 4,966
NET INTEREST INCOME 6,333 5,695
Less: Provision for loan losses 76 -
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,257 5,695
NONINTEREST INCOME
Commissions and fees from fiduciary activities 259 278
Service charges on deposit accounts 558 471
Investment sales 46 -
Loan fees 150 118
Other operating income 96 88
Total Noninterest Income 1,109 955
NONINTEREST EXPENSES
Salaries and employee benefits 2,224 2,092
Occupancy and equipment 607 568
Data processing services 167 145
Marketing 86 55
Capital stock taxes 140 122
Other operating expenses 803 716
Total Noninterest Expense 4,027 3,698
Income before income tax expense 3,339 2,952
Income tax expense 954 829
Net Income $ 2,385 $ 2,123
Net income per share $ 1.59 $ 1.42
Dividends per share $ 0.66 $ 0.57
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 OMITTED)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
SEPTEMBER 30
1997 1996
----------- -----------
(Unaudited) (Unaudited)
<S> <C>
OPERATING ACTIVITIES
Net income $ 2,385 $ 2,123
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 76 -
Depreciation 371 399
Pension 24 (19)
Amortization (accretion) of premiums
and discounts on securities (54) 65
Loss on sale of securities 3 32
(Increase) decrease in other assets 207 (207)
Increase (decrease) in other liabilities 7 304
----------- ----------
Net cash provided by operating activities 3,019 2,697
----------- ----------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposits
in other banks - 1,753
Proceeds from maturity of securities held
to maturity 420 1,750
Proceeds from sales of securities available
for sale 5,506 9,709
Proceeds from maturity of securities available
for sale 17,622 21,400
Purchase of securities available for sale (18,239) (33,322)
Purchase of securities held to maturity (1,595) (780)
Purchase of premises and equipment (475) (342)
Net increase in loans (14,730) (12,166)
----------- ----------
Net cash provided by (used in) investing
activities (11,491) (11,998)
----------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings
deposits 4,208 5,835
Net increase in time deposits 2,524 4,023
Net decrease in long-term borrowings - (225)
Net increase (decrease) in repurchase agreements 281 100
Net increase (decrease) in short-term borrowings 794 943
Net decrease in master notes (292) (95)
Common stock repurchases (178) (293)
Common stock issued 250 76
Cash dividends paid on common stock (984) (856)
----------- ----------
Net cash provided by (used in) financing
activities 6,603 9,508
----------- ----------
Increase in cash and cash equivalents (1,869) 207
CASH AND CASH EQUIVALENTS
Beginning of the period 9,380 9,010
----------- ----------
End of the period $ 7,511 $ 9,217
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
1. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of
September 30, 1997 and December 31, 1996, and the results of operations and
cash flows for the nine months ended September 30, 1997 and 1996. The
statements should be read in conjunction with the Notes to Financial
Statements included in the Company's Annual Report for the year ended
December 31, 1996.
2. The results of operations for the nine month period ended September 30,
1997 and 1996 are not necessarily indicative of the results to be expected
for the full year.
3. The Corporation's securities portfolio is composed of the following (000's
omitted):
Amortized Fair
Cost Value
---------- ---------------
Securities being Held to Maturity:
September 30, 1997
----------------------
U. S. Government Agencies $ 2,000 $ 2,004
Obligations of States and Political Subdivisions 13,723 14,258
---------- ---------
$ 15,723 $ 16,262
========== =========
December 31, 1996
-----------------------
U. S. Government Agencies $ 1,996 $ 2,034
Obligations of States and Political Subdivisions 12,549 12,879
---------- ----------
$ 14,545 $ 14,913
========== ==========
Securities Available For Sale:
September 30, 1997
----------------------
U. S. Treasury Securities $ 19,436 $ 19,508
U. S. Agency Securities - Bonds 31,996 29,865
U.S. Agency Securities - Mortgage-backed 10,365 10,449
Corporate Bonds 2,981 2,982
Other Equity Securities 489 489
---------- ----------
$ 65,267 $ 63,293
========== ==========
December 31, 1996
-----------------------
U. S. Treasury Securities $ 18,421 $ 18,431
U. S. Government Securities 43,506 43,198
U.S. Agency Securities - Mortgage-backed 5,749 5,802
Other Equity Securities 417 417
---------- -----------
$ 68,093 $ 67,848
========== ===========
-7-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(000 Omitted)
4. The Corporation's loan portfolio is composed of the following:
Sept. 30 Dec. 31
1997 1996
----------- -----------
(Unaudited)
Real estate loans:
Construction $ 9,853 $ 6,274
Secured by farmland 619 627
Secured by 1-4 family residential 55,409 51,927
Other real estate loans 32,999 27,819
Loans to farmers (except secured by
real estate) 327 443
Commercial and industrial loans (except
those secured by real estate) 8,244 9,004
Loans to individuals for personal
expenditures 13,489 9,873
All other loans 3,214 3,353
---------- -----------
124,154 109,320
Less:
Deferred loan fees (85) (86)
Allowance for loan losses (1,334) (1,247)
---------- -----------
$ 122,735 $ 107,987
========== ==========
5. Activity in the allowance for loan losses is as follows:
Sept. 30 Dec. 31
1997 1996
----------- -----------
(Unaudited)
Balance at January 1 $ 1,247 $ 1,320
Recoveries added to the allowance 16 28
Loan losses charged to the allowance (5) (101)
Provision recorded to expense 76 -
--------- -----------
Balance at end of period $ 1,334 $ 1,247
========= ===========
6. Earnings and Dividends Paid Per Share:
The weighted average number of shares outstanding for the nine month periods
ended September 30 were 1,495,500 in 1997 and 1,493,200 in 1996.
-8-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition / Results of Operations
Second National Financial Corporation's consolidated net income amounted to $804
thousand or $.53 per share for the three month period ended September 30, 1997,
compared with $746 thousand or $.50 per share for the same period in 1996.
Consolidated net income for the nine month period ended September 30, 1997
amounted to $2.385 million or $1.59 per share, compared with $2.123 million or
$1.42 per share for the same period in 1996. Operating results for the three and
nine month periods where positively impacted by continuing loan growth and
improvement in the net interest margin. Net income for the three month period
ended September 30, 1997 represented a 7.78% increase over three month
comparable earnings and a 12.33% increase over nine month comparable earnings in
1996. Cumulative nine month earnings represented 1.52% return on average assets
and a 11.77% return on stockholder's equity versus 1.40% and 11.15% for 1996.
Net interest income, the Corporation's primary source of earnings, increased
$187 thousand from $1.952 million in 1996 to $2.139 million for the three months
ended September 30, 1997. For the nine month period ended September 30, 1997,
net interest income increased $562 thousand or 9.87% over the comparable period
in 1996. The increase reflects improvement in the net interest margin and
improved performance in the Company's investment portfolio. The net interest
margin improved to 4.55% for the nine months ended September 30, 1997, compared
to 4.17% for the same period in 1996.
The mix of average earning assets was positively impacted by growth in the loan
portfolio. Net loans amounted to $122.735 million, up $14.749 million from
$107.987 million at December 31, 1996. Total assets of the Corporation were
$216.671 million at September 30, 1997, an increase of 4.43% compared to assets
of $207.4 million at December 31, 1996. The loan growth was funded from deposit
growth and securities that matured during the period.
Noninterest income consists of earnings generated primarily from service charges
on deposit accounts, fiduciary income and other service charges, commissions and
fees. The Corporation's noninterest income increased $83 thousand or 23.9% from
$347 thousand in 1996 to $430 thousand for the three months ended September 30,
1997. Noninterest income increased $154 thousand or 16.13% from $955 thousand in
1996 to $1.109 million for the nine months ended September 30, 1997. The
increase was primarily attributed to increased service charges on deposit
accounts and commission income on investment sales.
Noninterest expenses increased $188 thousand or 14.99% from $1.254 million in
1996 to $1.442 million for the three months ended September 30, 1997.
Noninterest expense increased $329 thousand or 8.89% from $3.698 million in 1996
to $4.027 million for the nine months ended September 30, 1997. The increase was
primarily attributed to increased personnel and operating costs associated with
the opening of two new branches.
-9-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Capital Adequacy
Stockholders' equity as of September 30, 1997 of $28.250 million increased
$1.675 million or approximately 6.30% from $26.575 million at December 31, 1996.
The Corporation's Tier I risk- based capital-to-asset ratio was 19.51% at
September 30, 1997, compared to 23.89% at December 31, 1996. Federal Reserve and
FDIC guidelines require 8% of total capital to risk weighted assets.
Asset Quality
The Corporation continued to experience high loan quality during the three
months ended September 30, 1997, as evidenced by net recoveries of $3 thousand
for the three month period ending September 30, 1997, compared to net
charge-offs of $101 thousand for all of 1996. The allowance for loan losses as a
percentage of net loans amounted to 1.08% at September 30, 1997 compared to
1.14% at December 31, 1996. Nonperforming assets at September 30, 1997 amounted
to $489,514 or .39% of loans.
The adequacy of the allowance for loan losses is reviewed quarterly by
management based on an evaluation of the collectibility of the loan portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. The Bank began to record additional provision
for loan loss in 1997 to maintain its ratio of allowances to outstanding loans
receivable given the growth in the loan portfolio. Provision for loan losses
amounted to $38 thousand and $76 thousand for the three months and nine months
ended September 30, 1997, compared to no provisions recorded in 1996.
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient amounts
of cash when needed and at reasonable cost to accommodate withdrawals, payments
of debt, and increased loan demand. These events may occur daily or other
short-term intervals in the normal operation of the business. Experience helps
management predict time cycles in the amount of cash required. In assessing
liquidity, management gives consideration to relevant factors including
stability of deposits, quality of assets, economy of market served,
concentrations of business and industry, competition, and the Corporation's
overall financial condition. The Corporation's primary source of liquidity are
cash, due from banks, fed funds sold and securities in our available for sale
portfolio. In addition, the Bank has substantial lines of credit from its
correspondent banks and access to the Federal Reserve discount window to support
liquidity. The Corporation has no brokered deposits. Certificates of deposit in
denominations of $100 thousand or more represent 7.9% of total deposits
primarily from established core depositors. In the judgment of management, the
Company maintains the ability to generate sufficient amounts of cash to cover
normal requirements and any additional needs which may arise.
-10-
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the
Registrant or any of its subsidiaries, directors, or officers
is a party or by which they, or any of them, are threatened.
Any legal proceeding presently pending or threatened against
Second National Financial Corporation and its subsidiary are
either not material in respect to the amount in controversy or
fully covered by insurance.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Second National Financial Corporation's stock commenced
trading on the NASDAQ Small Cap Market July 14, 1997 under the
symbol SEFC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits are not applicable
(b) No Form 8-K filed on behalf of the Corporation.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SECOND NATIONAL FINANCIAL CORPORATION
/s/ O.R. Barham, Jr.
---------------------------
O.R. Barham, Jr., President
Chief Executive Officer
November 10, 1997
/s/ Jeffrey W. Farrar
---------------------
Jeffrey W. Farrar, CPA
Vice President - Principal Financial Officer
November 10, 1997
-12-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,816
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 695
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,293
<INVESTMENTS-CARRYING> 15,723
<INVESTMENTS-MARKET> 16,262
<LOANS> 124,069
<ALLOWANCE> 1,334
<TOTAL-ASSETS> 216,671
<DEPOSITS> 181,772
<SHORT-TERM> 1,373
<LIABILITIES-OTHER> 1,217
<LONG-TERM> 0
0
0
<COMMON> 3,744
<OTHER-SE> 24,506
<TOTAL-LIABILITIES-AND-EQUITY> 216,671
<INTEREST-LOAN> 7,717
<INTEREST-INVEST> 3,719
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,436
<INTEREST-DEPOSIT> 4,929
<INTEREST-EXPENSE> 174
<INTEREST-INCOME-NET> 6,333
<LOAN-LOSSES> 76
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 4,024
<INCOME-PRETAX> 3,339
<INCOME-PRE-EXTRAORDINARY> 2,385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,385
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 0
<YIELD-ACTUAL> 203,835
<LOANS-NON> 490
<LOANS-PAST> 58
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,224
<ALLOWANCE-OPEN> 1,292
<CHARGE-OFFS> 0
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,334
<ALLOWANCE-DOMESTIC> 91
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,243
</TABLE>
