UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 33-34100
--------
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 S. Main Street
Culpeper, Virginia 22701
------------------------------- -------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (540) 825-4800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $2.50 Par
----------------------------------------------------------------------
(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 registrant's knowledge, in 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]
<PAGE>
As of the close of business on February 14, 1997, 1,485,959 shares of
Registrant's Common Stock, par value $2.50 per share, were outstanding and the
aggregate market value of common stock of Second National Financial Corporation
held by non-affiliates was approximately $29,719,180.
The following documents have been incorporated by reference herein in the Parts
listed below:
Part II: The Company's 1996 Annual Report to Stockholders for fiscal
year ended December 31, 1996.
Part III: The Company's 1997 Annual Meeting Proxy Statement.
PART I
ITEM 1. BUSINESS
GENERAL
Second National Financial Corporation ("SNFC" or "The Company") is a
bank holding company incorporated under the laws of the Commonwealth of Virginia
in July, 1990. SNFC owns all of the stock of its subsidiary, Second Bank & Trust
("the Bank") which was chartered in 1900 and acquired by SNFC in July, 1990,
pursuant to the formation of a holding company. The Company's only direct
subsidiary is the Bank, the Company has no material assets or liabilities,
except for master notes with certain Bank customers and stock in the Bank. On
June 20, 1994, the Bank changed its corporate charter from a national charter to
a state charter. Second National Bank became Second Bank & Trust. The primary
reason for the change was to allow the Bank to run its business under the
guidance of State and Federal Reserve regulators headquartered in Virginia. On
August 4, 1994, Second Service Company, a subsidiary of Second Bank & Trust, was
formed. Second Service Company owns 12% of Bankers Title of Fredericksburg, a
title insurance company, in which the Bank shares in the revenues of the title
company.
The Bank is headquartered in Culpeper, Virginia, and conducts a general
banking business in Culpeper County, Virginia, and adjoining areas through
offices in the counties of Culpeper, Madison, and Orange in the state of
Virginia. The Bank's primary business is the granting of residential real estate
loans, commercial real etate loans, and, to a lesser extent, commercial business
and consumer loans, and the solicitation of deposits, which, along with loan
repayments, are the principal source of funds for the making of such loans. The
Bank considers itself to be a community-oriented institution servicing the
banking needs of Culpeper County and the adjoining areas.
2
<PAGE>
BANKING SERVICES
The Bank offers a wide range of banking services available to both
individuals and to businesses located in Culpeper County and the adjoining
areas. Among such services are those traditionally offered by banks including
deposit accounts, such as business and personal checking, savings accounts
(including the interest-bearing negotiable orders of withdrawal accounts (NOW
Accounts)), time certificates of deposit, money market accounts, travelers
checks, issuance of drafts, note collection, credit card services, safe deposit
rental, some limited international services, wire services, fiduciary services,
ACH origination transfers, and drive-up windows. The Bank has four automatic
teller machines at all of our branches linked to the MOST (R) CIRRUS (R) system
allowing customers to access over 285,000 terminals nationwide. A free-standing
ATM was added during 1996 at Culpeper Memorial Hospital. We are an equal
opportunity housing lender.
The Company offers full Trust services at the Main Office location.
Trust services include estates, wills, agency accounts, and financial planning.
The Bank established a mortgage department in 1994. The mortgage
department originates new mortgage loans. Some loans are held in the
Bank's portfolio, and some loans are sold to third party investors. The Bank
retains the servicing of sold loans. During the fourth quarter of 1996,
the Bank entered into a joint venture with Virginia Heartland Bank of
Fredericksburg to establish a mortgage company in the Fredericksburg area
subject to regulatory approval.
COMPETITION
The banking business generally in Virginia, and in the Bank's market
area specifically, is highly competititve with respect to both loans and
deposits. The Bank considers its market area for full-service banking to be
Culpeper County and the adjacent areas. According to statistics published by the
Federal Deposit Insurance Corporation, the Bank had 41% of the deposits in the
Culpeper County market. These figures reflect the Bank's continuing ability to
compete with larger state-wide institutions with greater resources. The Bank
attributes its ability to maintain this competitive edge to management's
familiarity with the Culpeper County market area and its involvement in that
community. The Bank's success comes from its ability to satisfy its customers'
needs on a timely basis with an experienced staff.
EMPLOYEES
At December 31, 1996, SNFC and the Bank had 69 employees.
3
<PAGE>
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
SNFC is registered as a bank holding company under the Federal Bank
Holding Company Act of 1956, as amended, and is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As a bank holding company, SNFC is required to furnish to the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and to furnish such additional information as the Federal Reserve
Board may require pursuant to the Bank Holding Company Act. The Federal Reserve
Board also may conduct examinations of SNFC.
DEPOSITS
The Bank offers several types of deposit accounts, including
non-interest bearing checking accounts, non-profit and economy checking, NOW
accounts, money market deposit accounts, savings accounts, IRA accounts and time
deposits. The Bank advertises primarily in the newspaper, but also uses radio,
television, and direct mail. The Bank as a policy does not accept brokered
out-of-state deposits. The percentage of the average balance of non-interest
bearing accounts to total average deposits was 10.92% in 1996 and 10.08% in
1995. See "Deposits" under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 12 in the Annual Report
for further discussion.
LENDING ACTIVITIES
The Bank's lending activities are its principal source of income. The
Bank engages in a wide range of lending activities including commercial,
financial and agricultural loans, installment loans and construction and
residential real estate loans.
Total loans as of December 31, 1996, were $109.3 million increasing
15.5% from $94.6 million in 1995. The increase in loans was due principally to
aggressive marketing, expanding our commercial lending market, and the growth in
our mortgage department. The Bank provides funds for business expansion,
equipment, receivables, inventory, working capital and other financing needs in
various aspects of commercial and agricultural operations. The Bank directs its
commercial lending principally towards businesses whose needs for funds do not
exceed the Bank's lending limit which was approximately $4.3 million at December
31, 1996. The Bank has relationships with other banks to assist customers whose
borrowing requirements exceed the Bank's lending limitations. In its lending
activities, the Bank utilizes lines of credit and commercial term loans in its
portfolio. At December 31, 1996, off balance sheet unused loan commitments
amounted to $12.8 million.
4
<PAGE>
These commitments may be secured or unsecured.
Real estate mortgage loans and other real estate loans outstanding at
December 31, 1996, totaled approximately $86.6 million. The Bank's residential
real estate loans consist of fixed rate loans that have contractual maturities
of one, three, or five years with balloon payments, and are secured by first
liens on real estate. The Bank also has adjustable rate mortgages. The Bank
historically has limited its real estate lending to its market area and has
applied conservative loan standards which have, management believes, insured the
quality of the loan portfolio. The Bank also makes real estate construction
loans generally for residential and commercial construction purposes and for
local construction projects with acceptable take out commitments. Real estate
construction loans currently offered by the Bank generally have six month to
nine month terms. At December 31, 1996, construction loans outstanding total
$6.3 million.
The Bank offers various types of installment loans including
automobile, home improvement, equipment and personal loans. Loans to individuals
for personal expenditures totaled $9.9 million at December 31, 1996.
Approximately $28.7 million of the Bank's commercial loan portfolio
consists of loans bearing interest at floating rates which are tied to the prime
rate of interest.
LOAN PORTFOLIO
The following table sets forth the amounts of specified categories of
loans at the dates indicated.
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C>
Residential real estate
One to four family $ 51,927 $ 45,087 $40,593 $41,760 $41,327
Five or more dwelling units 3,083 4,831 4,821 4,888 8,149
Nonresidential real estate 24,736 20,107 16,805 11,085 12,151
Construction and land development 6,274 3,834 1,342 1,475 2,548
Agricultural 1,070 2,983 3,999 5,007 4,585
Commercial 9,004 7,455 6,262 4,964 5,576
Consumer and other 13,225 10,317 7,597 8,428 12,148
-------- --------- ------- ------- -------
$109,319 $ 94,614 $81,419 $77,807 $86,484
======== ======== ======= ======= =======
</TABLE>
5
<PAGE>
The following table sets forth maturities at December 31, 1996 for certain loan
types:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
1 YEAR 1-5 OVER
OR LESS YEARS 5 YEARS TOTAL
------- ----- ------- -----
(IN THOUSANDS)
<S> <C>
FIXED
- -----
Commercial, financial, and agricultural $ 3,569 $20,434 $ 1,337 $25,340
Real estate, construction 458 4,438 132 5,028
VARIABLE
- --------
Commercial, financial, and agricultural 15,095 210 - 15,305
Real estate, construction 1,079 167 - 1,246
-----------------------------------------------------------------
$20,201 $25,249 $ 1,469 $46,919
=================================================================
</TABLE>
ASSET QUALITY
The Company maintains a loan classification and review system to
identify loans with higher risk of noncollectibility. Loans identified on the
Bank's watch list as having potential for loss of principal as of December, 1996
amounted to $5.2 million or 4.76% of outstanding loans. Approximately
$338 thousand of such outstanding loans were reserved against because of
concerns regarding the borrower's ability to comply with contractual loan
repayment terms. The Bank was adequately collateralized on the remaining watch
list loans. The Company anticipates net loan losses in 1997 will be at or below
the range of our peer group.
See "Asset Quality" under the reading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 10 and 11 in
the Annual Report incorporated herein.
6
<PAGE>
SECURITIES
The Bank's security investments provide liquidity for regulatory and
other purposes. As of December 31, 1996, the Bank's investments consisted of
state and municipal obligations (15.2% of the total), and U.S. treasury and
government agency obligations (84.3%). As of December 31, 1996, the investment
portfolio represented 39.7% of the Company's total assets.
States (including political subdivisions) of which holdings aggregate
more than ten percent of stockholders' equity (amounts in thousands):
Issuer Year Book Value Market Value
------ ---- ---------- ------------
Virginia 1996 $11,356 $11,677
See "Securities" under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 11 in the
Annual Report incorporated by reference herein for further discussion.
ASSET/LIABILITY MANAGEMENT
An important element of earnings performance and the maintenance of
sufficient liquidity is proper management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities in a specific time interval. This gap can be
managed by repricing assets or liabilities, which can be effected by replacing
an asset or liability at maturity or by adjusting the interest rate during the
life of the asset or liability. Matching the amounts of assets and liabilities
maturing in the same time interval helps to hedge interest risk and to minimize
the impact on net interest income in periods of rising or falling interest
rates.
The Company determines the overall magnitude of interest
sensitivity risk and then formulates policies governing asset generation and
pricing, funding sources and pricing, and off-balance-sheet commitments. These
decisions are based on management's expectations regarding future interest rate
movements, the state of the national and regional economy, and other financial
and business risk factors. The Company uses computer simulations to measure the
effect of various interest rate scenarios on net interest income. This modeling
reflects interest rate changes and the related impact on net income over
specified time horizons.
At December 31, 1996, the Company had $63 thousand more liabilities
than assets subject to repricing within one year and was, therefore, in a
liability sensitive position. This compares to the Company's position at
December 31, 1995, when
7
<PAGE>
it had $36.5 million more in assets than liabilities subject to repricing within
one year. A liability-sensitive institution's net interest margin and net
interest income generally will be impacted favorably by declining interest
rates, while that of an asset-sensitive institution generally will be impacted
favorably by increasing interest rates. The Company was able to improve its net
interest margin to 4.24% in 1996 from 3.86% during 1995. See "Asset/Liability
Management" under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 9 in the Annual Report incorporated
by reference herein for further discussion.
REGULATORY MATTERS
The Company is subject to variuos 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 Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications 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 Company 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, 1996, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company 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.
8
<PAGE>
The Company's actual capital amounts and ratios are also presented
in the table. No deduction was made from capital for interest rate risk.
<TABLE>
<CAPTION>
To Be
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $27,985 24.91% >=$8,987 >=8.0% N/A
Second Bank & Trust $28,090 25.01% >=$8,987 >=8.0% >=$11,233 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $26,737 23.80% >=$4,493 >=4.0% N/A
Second Bank & Trust $26,842 23.89% >=$4,493 >=4.0% >=$ 6,740 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $26,737 12.93% >=$8,272 >=4.0% N/A
Second Bank & Trust $26,842 12.98% >=$8,272 >=4.0% >=$10,340 >= 5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets):
Consolidated $26,464 26.92% >=$7,863 >=8.0% N/A
Second Bank & Trust $26,418 26.88% >=$7,863 >=8.0% >=$ 9,829 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $25,235 25.67% >=$3,932 >=4.0% N/A
Second Bank & Trust $25,189 25.63% >=$3,932 >=4.0% >=$ 5,898 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consoliated $25,235 12.86% >=$7,851 >=4.0% N/A
Second Bank & Trust $25,189 12.83% >=$7,851 >=4.0% >=$ 9,814 >= 5.0%
</TABLE>
9
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
See "New Acccounting Pronouncement" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 13 in the Annual Report incorporated by reference herein for discussion.
ITEM 2. PROPERTIES
The Company owns the property and building at its Main Office
location in Culpeper, Virginia. In May, 1993, the Bank completed a major
renovation to the existing 16,519 square foot building and added 21,931 square
feet of office space at a cost of $2.5 million. It also owns the office and
property at its Madison Branch in Madison, Virginia. The branch office at the
Southgate location in Culpeper, Virginia is under a five year lease which can be
renewed six times expiring in January, 2001. The branch office at our Dominion
Square building is owned by Second Bank & Trust. The property on which this
branch is located is leased for 20 years expiring in September, 2005. The
Company established a branch office at Locust Grove in Orange County during
1995. A temporary facility on land purchased for $245,000 is open for business
with the permanent facility of approximately 2,900 square feet of office space
scheduled to be completed in 1997 at a total cost including land of $750,000.
ITEM 3. LEGAL PROCEEDINGS
Management currently is unaware of any material legal proceedings
to which SNFC or the Bank is a party or of which any of their properties is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders of SNFC through a
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
At the present time, there is no established public trading market
for SNFC Common Stock, nor are there any regularly reported quotations for such
shares. The most recent trade of Common Stock of which the Company is aware was
at $20.00 per share on February 15, 1997.
10
<PAGE>
As of February 14, 1997, the number of shareholders of record of
SNFC's Common Stock was approximately 1,220, and the number of outstanding
shares of Common Stock was 1,485,959.
High and low stock prices and dividends for the last two fiscal
years were:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter Ended High Low Declared High Low Declared
- ------------- ---- --- -------- ---- --- --------
<S> <C>
March 31 $20.00 $18.50 $ .19 $19.00 $19.00 $ .17
June 30 20.00 19.00 .19 19.00 19.00 .17
September 30 20.00 20.00 .19 19.00 17.75 .17
December 31 21.00 19.50 .22 19.00 18.00 .19
------ ------
$ .79 $ .70
</TABLE>
Each share of Common Stock is entitled to participate equally in
dividends, which are payable when and as declared by the Board of Directors out
of funds legally available for that purpose. Under Virginia law, a Virginia
corporation generally may declare and pay a dividend or make other distributions
to its shareholders, subject to any restrictions in its articles of
incorporation, if the corporation is solvent and if the payment will not render
the corporation insolvent.
Although SNFC has no established policy regarding dividends, the
Bank's subsidiary, Second Bank & Trust, has paid a dividend every year since
1900. The Company's dividend payout ratio was 41.5% in 1996 and 44.2% in 1995.
The future dividend policy of the Company is subject to the discretion of the
Board of Directors and will depend upon a number of factors, including future
earnings, financial condition, cash needs and general business conditions.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference herein from the Company's 1996 Annual
Report to Shareholders "Financial Highlights" on page 4.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See pages 5 through 13 of the Annual Report incorporated by
reference herein.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto on pages 14
through 29 of the Company's 1996 Annual Report to Shareholders are incorporated
by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference herein from pages 4 through 7 of the
Company's 1997 Proxy Statement related to the Annual Meeting of Shareholders
"Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference herein from pages 7 through 10 of the
Company's 1997 Proxy Statement. "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference herein from page 5 through 6 of the
Company's 1997 Proxy Statement regarding beneficial ownership of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference herein from pages 9 and 10 of the
Company's 1997 Proxy Statement, "Transactions with Directors and Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
A. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company for
the year ended December 31, 1996, including
12
<PAGE>
the related notes and the report of the independent auditors, are
incorporated herein by reference to pages 14 through 30 of the 1996
Annual Report to Shareholders for fiscal year ended December 31,
1996.
1. Auditor's Report (page 30).
2. Consolidated Balance Sheets - December 31, 1996 and 1995
(page 14).
3. Consolidated Statements of Income - Years Ended December
31, 1996, 1995, and 1994 (page 15).
4. Consolidated Statements of Changes in Shareholders' Equity
- Years Ended December 31, 1996, 1995, and 1994 (page 16).
5. Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995, and 1994 (page 17).
6. Notes to Consolidated Financial Statements (pages 18-29).
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.
13
<PAGE>
EXHIBITS
(a) (3) The following exhibits either are filed as part of this
Report or are incorporated herein by reference:
Exhibit No. 3. Articles of Incorporation and Bylaws.
------------------------------------
(i) Articles of Incorporation (incorporated herein by
reference to Exhibit 3(i) Appendix II to the Registrant's
Registration Statement No. 33-34100 filed on March 28,
1990.
(ii) Bylaws (incorporated herein by reference to Exhibit 3(ii)
to the Registrant's Registration Statement No. 33-34100
filed on March 28, 1990.
Exhibit No. 10 Material Contracts.
------------------
(i) Lease for Dominion Square branch of the Bank (incorporated
herein by reference to Exhibit 10 (i) to the Registrant's
Form 10-K for the fiscal year ended December 31, 1990).
Exhibit No. 13 Second National Financial Corporation
-------------------------------------
1996 Annual Report to Shareholders.
----------------------------------
Exhibit No. 21 Subsidiaries of the Registrant.
------------------------------
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant)
By: /s/ O. R. Barham, Jr. 3/27/97
------------------------------------------- ----------------
O. R. Barham, Jr. Date
President and Chief Executive Officer
Director
/s/ Jeffrey W. Farrar 3/27/97
-------------------------------------------- ----------------
Jeffrey W. Farrar, CPA Date
Secretary/Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
DATE SIGNATURE AND TITLE
- ---- -------------------
<S> <C>
3/27/97 /s/ Lewis P. Armstrong
- ---------------------------- ____________________________________________________
Lewis P. Armstrong, Director
3/27/97 /s/ O. R. Barham, Jr.
- ---------------------------- ____________________________________________________
O. R. Barham, Jr., President & CEO & Director
3/27/97 /s/ Robert Y. Button, Jr.
- ---------------------------- ____________________________________________________
Robert Y. Button, Jr., Director
3/27/97 /s/Gregory L. Fisher
- ---------------------------- ____________________________________________________
Gregory L. Fisher, Director
3/27/97 /s/ Marshall D. Gayheart, Jr.
- ---------------------------- ____________________________________________________
Marshall D. Gayheart, Jr., Director
3/27/97 /s/ Taylor E. Gore
- ---------------------------- ____________________________________________________
Taylor E. Gore, Chairman & Director
3/27/97 /s/ Charles K. Gyory
- ---------------------------- ____________________________________________________
Charles K. Gyory, Director
3/27/97 /s/ W. Robert Jebson, Jr.
- ---------------------------- ____________________________________________________
W. Robert Jebson, Jr., Director
3/27/97 /s/ Harlean Smoot
- ---------------------------- ____________________________________________________
Harlean Smoot, Director
3/27/97 /s/ Allen Y. Stokes
- ---------------------------- ____________________________________________________
Allen Y. Stokes, Director
</TABLE>
15
Second National Financial Corporation
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended December 31,
(Dollars in thousands except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C>
Statement of Income Data:
Total Interest Income
and Fees on Loans $ 14,500 $ 13,215 $ 12,378 $ 12,464 $ 14,605
Total Interest Expense 6,670 6,436 5,676 6,214 7,219
Net Interest Income 7,830 6,779 6,702 6,250 7,386
Provision for Loan Losses -- -- -- -- 300
Net Income 2,859 2,382 2,249 2,155 2,887
Selected Ratios:
Return on Average Assets 1.41% 1.23% 1.16% 1.15% 1.56%
Return on Average Equity 11.20% 10.17% 10.02% 9.76% 14.11%
Net Interest Margin 4.24% 3.86% 3.84% 3.83% 4.21%
Per Share Data:
Net Income $ 1.91 $ 1.59 $ 1.50 $ 1.43 $ 1.92
Cash Dividends Declared .79 .70 .68 .66 .62
Book Value 17.78 16.78 14.75 15.09 14.32
Market Price Per Share 20.00 19.00 19.00 19.25 17.50
Balance Sheet Data:
Assets $207,474 $195,919 $193,554 $191,099 $186,868
Deposits 175,037 164,118 161,128 164,068 161,652
Loans 109,319 94,614 81,553 74,984 82,784
Stockholders' Equity 26,575 25,217 22,154 22,670 21,507
</TABLE>
[GRAPH]
Return on Assets Return on Equity
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
1.56% 1.15% 1.16% 1.23% 1.41% 14.11% 9.76% 10.02% 10.17% 11.20%
4
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
Overview
In 1996, Second National experienced growth in its balance sheet and
improvement in many aspects of it's operating performance. Earnings for the year
ended December 31, 1996 were $2.86 million or $1.91 a share, an increase of
approximately 20.2% compared to $2.38 million or $1.59 per share for 1995. Net
income represents a 1.41% return on average assets and a 11.20% return on
stockholder's equity versus 1.23% and 10.17% in 1995.
While its primary markets of Culpeper, Madison and Orange counties were
less impacted, the fairly robust national economy characterized by low inflation
and unemployment contributed to strong loan and asset growth in 1996. Net loans
receivable at December 31, 1996 amounted to $108.0 million, an increase of $14.8
million or 15.9% over 1995. Total assets at December 31, 1996 amounted to $207.5
million, an increase of $11.6 million or 5.9% over 1995. Growth in assets was
funded by an increase in deposits of $10.9 million or 6.7% over 1995.
This growth in loans resulted in growth in earning assets as well as
improvement in the earning asset mix. In addition, an upward movement in the
short term U.S. Treasury yield curve coupled with some diversification and
extension strategy in the investment portfolio resulted in an improvement in
average yield on our securities portfolio to 6.20% in 1996 from 5.79% in 1995
and 5.71% in 1994. These factors contributed greatly to an improvement in net
interest income of $1.1 million or 15.5% for the year ended December 31, 1996
over the comparable period in 1995.
Loan quality continues to be excellent, with the level of nonperforming
loans decreasing to $582 thousand or .3% of assets at December 31, 1996, from
$1.17 million or .6% of assets at December 31, 1995. The total allowance for
loan losses amounted to 195% of nonperforming loans at December 31, 1996.
[GRAPH]
Assets
1992 $187
1993 $191
1994 $194
1995 $196
1996 $207
Net Interest Income
The most significant component of the Corporation's profitability is net
interest income. Net interest is affected by both (1) changes in the interest
rate spread (the difference between the weighted average yield on interest
earning assets and the weighted average cost of interest-bearing liabilities)
and (2) changes in volume (average balances of interest-earning assets and
interest bearing liabilities).
As previously mentioned, the Corporation improved its net interest income
in 1996 as compared to 1995 and in 1995 as compared to 1994 by improving its
earning asset volume and net interest spread, primarily through strong loan
growth and investment portfolio performance. Net interest income, the
Corporation's primary source of earnings, increased $1.1 million from $6.779
million in 1995 to $7.830 million in 1996. Net loans receivable as a percentage
of deposits increased to 61.7% in 1996, compared with 56.8% in 1995 and 49.7% in
1994. Average earning assets increased to $192.5 million from $184.0 million in
1995 and from $182.8 million in 1994. The net interest margin improved to 4.24%
in 1996 from 3.86% in 1995 and from 3.84% in 1994.
The following table sets forth the average balances of interest-earning
assets, interest bearing liabilities, the net interest margin and the interest
rate spread at the end of and for the years indicated.
5
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Average Balance Sheets, Net Interest Income and Rates
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Year ended December 31
1996 1995
Interest Interest
Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Rates Balance Expense Rates
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Loans (net of unearned) $102,747 $ 9,344 9.09% $ 89,251 $8,089 9.06%
Investment securities
Taxable 71,153 4,160 5.85 73,805 3,985 5.40
Tax exempt 12,033 1,000 8.31 11,611 962 8.29
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments 83,186 5,160 6.20 85,416 4,947 5.79
Interest - bearing deposits
in other banks 1,277 55 4.31 4,938 245 4.96
Federal funds sold 5,272 282 5.35 4,406 260 5.90
- ---------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 192,482 14,841 7.71Tax Eql 184,011 13,541 7.36Tax Eql
Reserve for loan losses (1,309) (1,340)
Cash and due from banks 4,778 4,027
Bank premises and equipment 4,724 4,571
Other assets 2,603 2,727
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 203,278 $193,996
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Time and savings deposits
Int-bearing transaction accts $ 27,237 $ 610 2.24% $ 25,735 $ 612 2.38%
Money market deposit accts 19,495 733 3.76 19,389 721 3.72
Passbook savings accts 28,508 787 2.76 31,349 905 2.89
Certificates of deposit
greater than $100,000 13,843 775 5.60 10,601 814 7.68
Other certificates of deposit 63,403 3,475 5.48 60,094 3,023 5.03
- ---------------------------------------------------------------------------------------------------------------------------
Total Time and Savings
Deposits 152,486 6,380 4.18 147,168 6,075 4.13
Federal funds purchased and
securities under agreement
to repurchase 1,199 61 5.09 1,368 78 5.70
Note payable 1,289 122 9.46 1,836 169 9.20
Other borrowings 547 24 4.39 520 25 4.81
Master note 2,412 85 3.52 2,136 89 4.17
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 157,933 6,672 4.22 153,028 6,436 4.21
Demand deposits 18,693 16,503
Other liabilities 1,117 1,050
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 177,743 170,581
Stockholders' equity 25,535 23,415
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' equity $ 203,278 $193,996
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income/yield $ 8,169 $7,105
- ---------------------------------------------------------------------------------------------------------------------------
Average interest rate spread 3.49% 3.15%
Interest expense as percent of
average earning assets 3.47% 3.50%
Net interest margin 4.24% 3.86%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Average Balance Sheets, Net Interest Income and Rates
- -------------------------------------------------------------------------------
Year ended December 31
1994
Interest
Average Income/ Average
(Dollars in thousands) Balance Expense Rates
- -------------------------------------------------------------------------------
Assets
Loans(net of unearned) $ 78,179 $ 6,854 8.77%
Investment securities
Taxable 81,022 4,321 5.33
Tax exempt 11,385 951 8.35
- -------------------------------------------------------------------------------
Total Investments 92,407 5,272 5.71
Interest-bearing deposits
in other banks 10,026 492 4.91
Federal funds sold 2,191 84 3.83
- -------------------------------------------------------------------------------
Total Earning Assets 182,803 12,702 6.95Tax Eql
Reserve for loan losses (1,390)
Cash and due from banks 4,905
Bank premises and equipment 4,853
Other assets 2,611
- -------------------------------------------------------------------------------
Total Assets $193,782
- -------------------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Time and savings deposits
Int-bearing transaction accts $ 26,364 $ 629 2.39%
Money market deposit accts 22,675 684 3.02
Passbook savings accts 38,305 1,134 2.96
Certificates of deposit
greater than $100,000 11,385 427 3.75
Other certificates of deposit 51,818 2,538 4.90
- -------------------------------------------------------------------------------
Total Time and Savings
Deposits 150,547 5,412 3.59
Federal funds purchased and
securities under agreement
to repurchase 1,827 86 4.71
Note payable 2,136 160 7.49
Other borrowings 533 18 3.38
Master note -- -- --
- -------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 155,043 5,676 3.66
Demand deposits 15,336
Other liabilities 969
- -------------------------------------------------------------------------------
Total Liabilities 171,348
Stockholders' equity 22,434
- -------------------------------------------------------------------------------
Total Liabilities and
Stockholders' equity $193,782
- -------------------------------------------------------------------------------
Net interest income/yield $ 7,026
- -------------------------------------------------------------------------------
Average interest rate spread 3.29%
Interest expense as percent of
average earning assets 3.10%
Net interest margin 3.84%
- -------------------------------------------------------------------------------
7
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the years indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided regarding changes attributable to (1) changes in volume
of balances outstanding (changes in volume multiplied by prior period interest
rate) (2) changes in the interest earned or paid on the balances (changes in
rate multiplied by prior period volume) and (3) a combination of changes in
volume and rate allocated pro rata.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31
1996 vs 1995 1995 vs 1994
Increase (Decrease) Increase (Decrease)
Due to changes in: Due to changes in:
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Earning Assets:
Loans $ 1,228 $ 27 $ 1,255 $ 1,001 $ 234 $1,235
Securities:
Taxable (133) 308 175 (385) 49 (336)
Tax-exempt 36 2 38 17 (6) 11
- ---------------------------------------------------------------------------------------------------------------------------
Total securities (97) 310 213 (368) 43 (325)
Interest-bearing deposits
in other banks (161) (29) (190) (252) 5 (247)
Federal funds sold 42 (20) 22 115 61 176
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 1,012 $ 288 $ 1,300 $ 496 $ 343 $ 839
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Time and savings deposits:
Interest-bearing deposits $ -- $ (2) $ (2) $ (14) $ (3) $ (17)
Money market deposits 4 8 12 (62) 99 37
Savings deposits (67) (39) (106) (201) (24) (225)
Certificates of deposit:
$100,000 or more (341) 302 (39) (27) 414 387
Less than $100,000 172 280 452 414 69 483
- ---------------------------------------------------------------------------------------------------------------------------
Total time and savings deposits (232) 549 317 110 555 665
Federal funds purchased & under
agreements to repurchase (9) (8) (17) (49) 41 (8)
Notes payable (52) 5 (47) (14) 23 9
Other short term borrowings -- -- -- -- 7 7
Master note 19 (23) (4) 89 -- 89
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ (274) $ 523 $ 249 $ 136 $ 626 $ 762
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,286 $ (235) $ 1,051 $ 360 $(283) $ 77
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The combined effect of changes in both volume and rate which cannot be
separately identified has been allocated proportionately to the change due to
volume and the change due to rate.
8
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
Asset/Liability Management
Paramount to the earnings performance of the Corporation is the effective
management of interest rate risk, commonly referred to as asset/liability
management. Asset and liability strategies impact the interest sensitivity gap,
which measures the difference between interest-earning assets and
interest-bearing liabilities repricing within a specific time interval.
The Corporation is subject to interest rate risk to the degree that its
interest-earning assets mature or reprice at a different time interval from that
of its interest-bearing liabilities. While having assets that mature or reprice
more frequently than liabilities ("positive interest rate gap") may be
beneficial in times of rising interest rates, such a structure may have a
negative earnings impact during periods of declining rates.
The Corporation manages its interest rate risk by management of its
interest sensitivity gap, and by using simulations to measure the impact on
earnings of a significant rise or fall in interest rates. The following table
presents the Corporation's interest sensitivity as of December 31, 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996
1 Year 1 - 5 Over 5
(Dollars in thousands) or Less(1) Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Earning Assets:
Loans $ 43,405 $ 60,837 $ 6,290 $ 110,532
Investment Securities 254 5,070 9,051 14,375
Securities available for sale 20,168 39,078 8,185 67,431
Federal funds sold 4,368 -- -- 4,368
Other short-term investments -- 1 2 3
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 68,195 $ 104,986 $ 23,528 $ 196,709
Interest-Bearing Liabilities:
Interest checking $ 6,769 $ 2,308 $ -- $ 27,077
Regular savings 6,726 20,177 -- 26,903
Money market savings 9,731 9,730 -- 19,461
Certificates of deposit:
$100,000 and over 8,512 6,048 -- 14,560
Under $100,000 31,871 34,416 -- 66,287
Short-term borrowings 4,649 -- -- 4,649
Long-term borrowings -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 68,258 $ 90,679 $ -- $ 158,937
- ---------------------------------------------------------------------------------------------------------------------------
Period gap $ (63) $ 14,307 $ 23,528
Cumulative gap $ (63) $ 14,244 $ 37,772 $ 37,772
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of cumulative gap to
Total earning assets -0.03% 7.24% 19.20%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts have been adjusted to reflect expected price movement in relation to
one year treasury bill.
At December 31, 1996, the Company had $63,000 more liabilities than assets
repricing within one year and was therefore in a slightly liability sensitive
position. At December 31, 1995, the Corporation was asset sensitive in the
amount of $23.5 million.
Noninterest Income
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 for 1996 totaled
$1.14 million, an increase of 6.5% from $1.07 million in 1995. Noninterest
income in 1995 increased 17.1% from $914 thousand in 1994. The increases were
primarily attributable to increases in fiduciary income from expanding trust
operations along with increases in service charges on deposit accounts.
9
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
Noninterest Expense
Noninterest expenses for 1996 were $5.08 million, compared to $4.57 million
in 1995 and $4.57 million in 1994, respectively. The increase in 1996 compared
to 1995 of 11% was attributable to several factors including compensation and
benefits, occupancy and supplies associated with the opening of a new branch, as
well as increased expenditures for professional services and other personnel
related costs.
Noninterest expenses were approximately unchanged in 1995 compared to 1994.
Increases in employee salaries and benefits of $160,000 and supplies and
equipment expenses of $61,000 were offset by a reduction in FDIC premiums of
$184,000. The Corporation expects its FDIC insurance premium to approximate
$40,000 in 1997.
Asset Quality
The Corporation continued to experience high loan quality during 1996, as
evidenced by net charge-offs of $72,000, compared to net charge-offs of $45,000
in 1995 and $33,000 in 1994. The allowance for loan losses as a percentage of
net loans amounted to 1.16% at December 31, 1996 compared to 1.42% at December
31, 1995. This decrease was primarily attributable to a 15.6% increase in gross
loans in 1996.
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. While the Bank has not found it necessary to
provide additional provisions for loan loss in 1996, 1995 and 1994, there can be
no assurance that its loan loss experience and loan portfolio growth will allow
this to occur in 1997.
The following table provides an analysis of the allowance for loan losses
for the past five years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Allowance for loan losses,
January 1 $ 1,320 $ 1,365 $ 1,398 $ 1,509 $ 1,354
Loans charged off:
Commercial 25 68 48 47 14
Real estate -- -- 35 81 172
Installment 76 10 6 24 220
- ---------------------------------------------------------------------------------------------------------------------------
Total loans charged off 101 78 89 152 406
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 8 12 2 7 19
Real estate -- -- 10 5 184
Installment 20 21 44 29 58
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 28 33 56 41 261
- ---------------------------------------------------------------------------------------------------------------------------
Net charge offs 73 45 33 111 145
Provision for loan losses -- -- -- -- 300
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses,
December 31 $ 1,247 $ 1,320 $ 1,365 $ 1,398 $ 1,509
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan
losses to total loans
outstanding at end of year 1.14% 1.40% 1.67% 1.86% 1.82%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net charge offs
(recoveries) to average loans
outstanding during year 0.07% 0.05% 0.04% 0.14% 0.17%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------
The following table reflects the composition of nonperforming assets for
the past five years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 31
(Dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Non-accrual loans $ 582 $ 1,177 $ 1,235 $ 3,100 $ 2,961
Other property owned -- -- 60 239 146
- -----------------------------------------------------------------------------------------------------------------
Total non-performing assets 643 1,177 1,295 3,339 3,107
- -----------------------------------------------------------------------------------------------------------------
Loans past due 90 days
accruing interest 561 457 257 1,213 1,195
- -----------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
non-accrual loans 214.26% 112.15% 110.53% 45.11% 50.96%
Non-performing assets to year-end
loans and other properties 0.59% 1.24% 1.59% 4.45% 3.75%
Net charge offs (recoveries) to
average loans 0.07% 0.05% 0.04% 0.14% 0.17%
</TABLE>
Securities
Investment securities and securities available for sale totaled $82.39
million and comprised 39.7% of total assets at December 31, 1996, as compared
with $84.04 million and 42.9% of assets at December 31, 1995. The lower levels
in 1996 were attributable to strong loan demand, providing the Corporation with
a higher yielding asset.
The Corporation benefited from improved yield on its securities portfolio
in 1996, with the portfolio yield at December 31, 1996 improving to 6.35%
compared to 5.90% in 1995. The Corporation attempts to maintain diversity in its
portfolio, maintain durations that are consistent with its asset/liability
management objectives and hold a significant allocation of securities in states
and political subdivisions that provide tax benefits.
The following table includes information with respect to the Corporation's
securities portfolio.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996 (1)
1 Year 1 - 5 5 - 10 Over 10
(Dollars in thousands) or Less Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
U. S. Agency Securities:
Amortized cost $ 12,823 $ 30,275 $ 5,602 $2,551 $51,251
Fair value $ 12,827 $ 30,021 $ 5,612 $2,574 $51,034
Weighted average yield 5.39% 6.24% 7.01% 6.77% 6.14%
U. S. Treasury Securities:
Amortized cost $ 2,503 $ 15,918 -- -- $18,421
Fair value $ 2,502 $ 15,929 -- -- $18,431
Weighted average yield 5.56% 5.91% -- -- 5.87%
Municipal Bonds:
Amortized cost $ 425 $ 3,073 $ 5,986 $3,065 $12,549
Fair value $ 427 $ 3,190 $ 6,155 $3,107 $12,879
Weighted average yield 9.35% 8.45% 7.74% 7.61% 7.90%
Total Securities:
Amortized cost $ 15,751 $ 49,266 $11,588 $5,616 $82,221
Fair value $ 15,756 $ 49,140 $11,767 $5,681 $82,344
Weighted average yield 5.53% 6.39% 7.53% 7.39% 6.35%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
11
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Deposits
The Corporation encountered strong deposit growth in 1996. Deposits at
December 31, 1996 amounted to $175.0 million, an increase of $10.9 million or
6.7% over 1995. Funds provided by the increase in deposits allowed the
Corporation to fund its loan growth without additional higher cost borrowings.
This growth also allowed the Corporation to better leverage its capital base in
1996. Noninterest bearing deposits increased by $2.7 million or 15% over 1995,
which helped offset the higher cost associated with an increase of $7.46 million
in certificates of deposit. The overall cost of deposit funds increased to 4.18%
compared to 4.13% in 1995.
The following table illustrates average outstanding deposits and rates
paid.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Noninterest-bearing
demand accounts $ 18,693 $ 16,503 $ 15,336
Interest-bearing accounts:
Interest checking 27,237 2.24% 25,735 2.38% 26,364 2.39%
Money market 19,495 3.76 19,389 3.72 22,675 3.02
Regular savings 28,508 2.76 31,349 2.89 38,305 2.96
Time deposits:
Less than $100,000 63,403 5.48 60,094 5.03 51,818 4.90
$100,000 and over 13,843 5.60 10,601 7.68 11,385 3.75
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing 152,486 4.18% 147,168 4.13% 150,547 3.59%
- ----------------------------------------------------------------------------------------------------------------
Total deposits $171,179 $163,671 $165,883
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following table illustrates maturities on deposits greater than
$100,000.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Percent
Within 3 - 6 6 - 12 Over 12 of Total
(Dollars in thousands) 3 Months Months Months Months Total Deposits
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
At December 31, 1996 $ 2,126 $ 2,035 $ 5,297 $ 5,102 $ 14,560 8.32%
At December 31, 1995 $ 2,023 $ 1,466 $ 3,849 $ 6,517 $ 13,855 8.44%
At December 31, 1994 $ 2,534 $ 2,251 $ 2,962 $ 4,240 $ 11,987 7.44%
</TABLE>
General
Capital Adequacy
Management seeks to maintain a capital structure that will maintain a level
of capital that ensures the Corporation will meet regulatory requirements for a
"well-capitalized" institution and absorb potential losses. In achieving this
goal, management recognizes the need to obtain proper leveraging of its capital
base to maximize stockholder value.
Stockholders' equity as of December 31, 1996 of $26.58 million increased
$1.36 million or approximately 5.4% from $25.22 million in 1995. The
Corporation had a ratio of risk-weighted assets to total capital of 24.91% and
26.92% at December 31, 1996 and 1995, and a ratio of risk-weighted assets to
Tier I capital of 23.80% and 25.67% at December 31, 1996 and 1995, respectively.
Second National Financial Corporation far exceeds regulatory capital
requirements.
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 at
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
12
<PAGE>
Second National Financial Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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 sources 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 as conditions dictate.
The Corporation has no brokered deposits. Certificates of deposit in
denominations of $100 thousand or more represent 8.3% 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, within realistic limitations.
New Accounting Pronouncements
SFAS No. 122, "Accounting for Mortgage Servicing Rights", was issued in
May, 1995. SFAS 122 was effective for the fiscal year beginning after December
31, 1995. This statement requires that the cost of mortgage loans originated or
purchased, with a definitive plan to sell the loans and retain the servicing
rights, be allocated between the loans and servicing rights based on their
estimated values at the purchase or origination date. Upon the sales of the
loans, additional income may be recognized resulting from a lower adjusted cost
basis on the mortgage loan sold. The servicing rights asset is amortized over
the life of the servicing revenue stream, and thus has the effect of reducing
loan servicing income in future periods. The impact of this pronouncement is not
material to the Corporation's financial statements.
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," was issued in June, 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASBStatement No. 125," defers for one year the effective date (a)
of paragraph 15 of Statement 125 and (b) for repurchase agreement, dollar-roll,
securities lending, or similar transactions, of paragraph 9-12 and 237(b) of
Statement 125.
The effects of these Statements on the Corporation's consolidated financial
statements are not expected to be material.
13
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31,
1996 1995
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Notes 2 and 16) $ 5,012,015 $ 4,728,355
Interest-bearing deposits in other banks -- 2,254,764
Securities (market value: 1996, $82,760,841; 1995, $84,617,248)
(Notes 3 and 13) 82,393,160 84,039,519
Federal funds sold 4,368,178 4,281,353
Loans, net (Notes 4, 5 and 6) 107,986,477 93,195,636
Bank premises and equipment, net (Note 7) 4,874,324 4,727,814
Interest receivable 1,788,074 1,759,914
Other assets (Notes 11 and 12) 1,051,498 929,559
- --------------------------------------------------------------------------------------------------------------
Total assets $207,473,726 $195,916,914
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 20,752,831 $ 18,037,714
Interest bearing 154,284,132 146,080,456
- --------------------------------------------------------------------------------------------------------------
Total deposits (Note 8) 175,036,963 164,118,170
Federal funds purchased and securities sold under agreement to
repurchase 1,200,000 1,200,000
Short-term borrowings (Note 9) 3,448,854 2,717,954
Note payable (Note 10) -- 1,675,000
Interest payable 705,273 622,530
Other liabilities 507,377 366,171
Commitments and contingent liabilities (Notes 13 and 16) -- --
- --------------------------------------------------------------------------------------------------------------
Total liabilities 180,898,467 170,699,825
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, par value $2.50 per share; 3,000,000 shares authorized;
1996, 1,494,855 shares issued and outstanding; 1995, 1,502,862 shares
issued and outstanding 3,737,137 3,757,156
Capital surplus 1,170,814 1,323,456
Retained earnings (Note 14) 21,828,996 20,154,878
Unrealized gain (loss) on securities available for sale, net (161,688) (18,401)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 26,575,259 25,217,089
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $207,473,726 $195,916,914
===============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
=============================================================================================================
For the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 9,343,964 $ 8,089,163 $ 6,854,051
Interest on investment securities:
Taxable 195,062 197,875 16,242
Nontaxable 659,983 635,088 627,413
Interest and dividends on securities available for sale:
Taxable 3,941,135 3,774,116 4,295,532
Dividends 23,988 13,372 8,997
Interest income on federal funds sold 281,987 259,813 83,884
Interest on deposits in banks 54,523 245,423 491,994
- -------------------------------------------------------------------------------------------------------------
Total interest income 14,500,642 13,214,850 12,378,113
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 6,379,257 6,074,971 5,411,740
Interest on federal funds purchased and securities
sold under agreement to repurchase 60,781 77,500 86,380
Interest on short-term borrowings 108,393 114,340 18,739
Interest on note payable (Note 10) 121,858 169,100 159,517
- -------------------------------------------------------------------------------------------------------------
Total interest expense 6,670,289 6,435,911 5,676,376
- -------------------------------------------------------------------------------------------------------------
Net interest income 7,830,353 6,778,939 6,701,737
Provision for loan losses (Note 5) -- -- --
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,830,353 6,778,939 6,701,737
- -------------------------------------------------------------------------------------------------------------
OTHER INCOME
Fiduciary income 371,065 351,536 281,400
Service charges on deposit accounts 679,377 575,370 519,044
Other operating income 121,918 143,625 114,428
Gains (losses) on securities available for sale (32,375) 199 (741)
- -------------------------------------------------------------------------------------------------------------
Total other income 1,139,985 1,070,730 914,131
- -------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits (Note 11) 2,869,368 2,561,058 2,401,509
Net occupancy expense of premises 290,284 268,173 282,618
Regulatory assessment 1,500 189,315 373,109
Supplies and equipment expenses 713,483 671,722 611,134
Capital stock tax 162,813 128,005 218,446
Other operating expenses 1,039,061 754,999 687,395
- -------------------------------------------------------------------------------------------------------------
Total other expenses 5,076,509 4,573,272 4,574,211
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 3,893,829 3,276,397 3,041,657
Income tax expense (Note 12) 1,034,502 894,157 792,952
- -------------------------------------------------------------------------------------------------------------
Net income $ 2,859,327 $ 2,382,240 $ 2,248,705
- -------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 1.91 $ 1.59 $ 1.50
=============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Common Capital Retained Available for
Stock Surplus Earnings Sale, Net Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $3,755,880 $1,317,292 $17,597,179 $ -- $22,670,351
Net income - 1994 -- -- 2,248,705 -- 2,248,705
Cash dividends - 1994
($.68 per share) -- -- (1,021,599) -- (1,021,599)
Change in unrealized gain (loss) on
securities available for sale,
net of deferred income taxes
of $898,288 -- -- -- (1,743,736) (1,743,736)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 3,755,880 1,317,292 18,824,285 (1,743,736) 22,153,721
Net income - 1995 -- -- 2,382,240 -- 2,382,240
Cash dividends - 1995
($.70 per share) -- -- (1,051,647) -- (1,051,647)
Issuance of common stock - dividend
reinvestment plan 13,776 86,164 -- -- 99,940
Acquisition of common stock (12 500) (80 000) -- -- (92,500)
Change in unrealized gain (loss) on
securities available for sale,
net of deferred income taxes
of $888,809 -- -- -- 1,725,335 1,725,335
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,757,156 1,323,456 20,154,878 (18,401) 25,217,089
Net Income - 1996 -- -- 2,859,327 -- 2,859,327
CASH DIVIDENDS - 1996
($.79 PER SHARE) -- -- (1,185,209) -- (1,185,209)
ISSUANCE OF COMMON STOCK - DIVIDEND
REINVESTMENT PLAN 38,601 251,432 -- -- 290,033
ACQUISITION OF COMMON STOCK (58,620 (404,074) -- -- (462,694)
CHANGE IN UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE FOR SALE,
NET OF DEFERRED INCOME TAXES
OF $73,815 -- -- -- (143,287) (143,287)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $3,737,137 $1,170,814 $21,828,996 $ (161,688) $26,575,259
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=======================================================================================================================
For the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,859,327 $ 2,382,240 $ 2,248,705
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 463,952 438,794 437,286
Deferred tax expense (benefit) 66,939 96,482 (3,544)
Pension income (24,762) (5,666) (37,530)
(Gain) loss on other real estate owned 4,015 (13,088) --
(Gain) on sale of equipment -- (4,190) (2,475)
(Gain) loss on securities available for sale 32,375 (199) 741
Amortization of security premiums and accretion of discounts,
net (78,453) (32,949) (17,539)
Amortization of organization expenses -- 4,303 9,500
Changes in assets and liabilities:
(Increase) decrease in interest receivable (28,160) 85,726 (177,955)
(Increase) decrease in other assets (78,102) (194,551) 58,068
Increase (decrease) in interest payable 82,743 121,777 (31,650)
Increase (decrease) in other liabilities 127,892 (35,146) 113,687
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,427,766 2,843,533 2,597,294
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other banks 2,254,764 4,255,653 8,529,628
Proceeds from sale of securities available for sale 5,966,508 1,748,069 14,322,145
Proceeds from maturities and principal payments of investment
securities 500,000 507,000 575,000
Proceeds from maturities and principal payments of securities
available for sale 34,071,985 32,673,717 23,341,665
Purchase of investment securities (1,036,309) -- (5,365,510)
Purchase of securities available for sale (38,026,849) (24,536,133) (44,014,888)
Proceeds from sale of equipment -- 6,516 3,701
Purchase of premises and equipment (610,462) (578,453) (127,857)
Proceeds from sale of other real estate -- 72,938 328,269
Net (increase) in loans (14,793,741) (13,090,319) (6,751,397)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (11,674,104) 1,058,988 (9,159,244)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, money market and savings
deposits 3,348,645 (7,235,323) (1,906,718)
Net increase (decrease) in certificates of deposit 7,570,148 10,225,739 (1,033,857)
Net increase (decrease) in federal funds purchased and securities
sold under agreement to repurchase -- (5,750,000) 6,950,000
Net increase (decrease) in short-term borrowings 730,900 2,272,960 (718,443)
Principal payments on note payable (1,675,000) (300,000) (300,000)
Issuance of common stock - dividend reinvestment plan 290,033 99,940 --
Acquisition of common stock (462,694) (92,500) --
Cash dividends paid (1,185,209) (1,051,647) (1,021,599)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,616,823 (1,830,831) 1,969,383
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 370,485 2,071,690 (4,592,567)
CASH AND CASH EQUIVALENTS
Beginning 9,009,708 6,938,018 11,530,585
- -----------------------------------------------------------------------------------------------------------------------
Ending $ 9,380,193 $ 9,009,708 $ 6,938,018
=======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 6,587,546 $ 6,314,134 $ 5,708,026
=======================================================================================================================
Income taxes $ 1,013,000 $ 938,142 $ 782,492
=======================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ 112,353 $ -- $ 149,316
=======================================================================================================================
Unrealized gain (loss) on securities available for sale $ (217,102) $ 2,614,144 $ (2,642,024)
=======================================================================================================================
Other real estate disposed of through loan proceeds $ 108,338 $ -- $ --
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Second National Financial Corporation and Subsidiaries (the Corporation)
grant commercial, financial, agricultural, residential and consumer loans to
customers in 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 practice within the
banking industry. The following is a description of the more significant of
those policies and practices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Second National Financial
Corporation and its wholly-owned subsidiaries, Second Bank and Trust and Second
Service Company, include the accounts of all three companies. All material
intercompany balances and transactions have been eliminated.
SECURITIES
Securities are classified in three categories and 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.
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 had no
trading securities at December 31, 1996 and 1995.
LOANS
Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Interest accrual is
discontinued when, in the opinion of management, the likelihood of collection is
doubtful. 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.
On January 1, 1995, 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.
18
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 judgement, 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, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on 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 allowances 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
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Premises and equipment are depreciated over their estimated useful
lives; leasehold improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement, whichever is
less. Depreciation and amortization are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.
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 the
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 the changes in tax laws and rates on
the date of enactment.
PENSION PLAN
The Corporation has a noncontributory, defined benefit pension plan covering
employees meeting certain age and service requirements. The Corporation computes
the net periodic pension cost of the plan in accordance with FASB No. 87,
"Employers' Accounting for Pensions."
EARNINGS AND DIVIDENDS PAID PER SHARE
Earnings and dividends paid per share of common stock are based on the
weighted average number of shares outstanding during each year.
NONREFUNDABLE LOAN FEES AND COSTS
Loan origination and commitment fees are being deferred and amortized as an
adjustment of the related loan's yield.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
ORGANIZATIONAL COSTS
The Second National Financial Corporation was organized under the laws of
the Commonwealth of Virginia as a bank holding company on July 2, 1990. Certain
expenses incurred prior to this date were deferred and were amortized using the
straight-line method over a 60-month period.
19
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRUST DIVISION
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.
OTHER REAL ESTATE
Real estate acquired through foreclosure is carried at the lower of cost or
fair market value less estimated selling costs.
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.
NOTE 2. CASH AND DUE FROM BANKS
The Corporation is required to maintain reserve balances with the Federal
Reserve Bank. For the final weekly reporting period in the years ended December
31, 1996 and 1995, the aggregate amounts of daily average required balances were
approximately $1,310,000 and $1,439,000, respectively.
NOTE 3. SECURITIES
The amortized cost and fair value of securities being held to maturity as of
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
=============================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
U.S. GOVERNMENT AGENCIES $ 1,996,100 $ 37,960 $ -- $ 2,034,060
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS 12,548,870 364,927 (35,206) 12,878,591
- -------------------------------------------------------------------------------------------------------------
$14,544,970 $402,887 $(35,206) $14,912,651
=============================================================================================================
1995
U.S. Government agencies $ 2,491,707 $102,663 $ -- $ 2,594,370
Obligations of states and political
subdivisions 11,506,969 494,183 (19,117) 11,982,035
- -------------------------------------------------------------------------------------------------------------
$13,998,676 $596,846 $(19,117) $14,576,405
=============================================================================================================
</TABLE>
The amortized cost and market value of securities being held to maturity as
of December 31, 1996, by contractual maturity are shown below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair
Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 424,383 $ 427,009
Due after one year through five years 5,069,457 5,223,578
Due after five years through ten years 5,986,083 6,154,995
Due after ten years 3,065,047 3,107,069
- ----------------------------------------------------------------------------------------------------------------
$14,544,970 $14,912,651
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for sale as of
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
U.S. TREASURY SECURITIES $18,420,696 $ 36,757 $ (26,288) $18,431,165
U.S. GOVERNMENT AGENCIES 49,255,247 88,562 (344,014) 48,999,795
OTHER 417,230 -- -- 417,230
- -----------------------------------------------------------------------------------------------------------
$68,093,173 $125,319 $(370,302) $67,848,190
===========================================================================================================
1995
U.S. Treasury securities $28,461,310 $ 57,127 $ (62,112) $28,456,325
U.S. Government agencies 41,282,137 134,781 (157,676) 41,259,242
Other 325,276 -- -- 325,276
- -----------------------------------------------------------------------------------------------------------
$70,068,723 $191,908 $(219,788) $70,040,843
===========================================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1996, by contractual maturity are shown below.
<TABLE>
<CAPTION>
=================================================================================================================
Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $15,325,250 $15,329,359
Due after one year through five years 44,197,182 43,916,601
Due after five years through ten years 5,602,052 5,611,172
Due after ten years 2,551,459 2,573,828
Other 417,230 417,230
- -----------------------------------------------------------------------------------------------------------------
$68,093,173 $67,848,190
=================================================================================================================
</TABLE>
There were no sales of securities being held to maturity during 1996, 1995
and 1994.
Proceeds from sales of securities available for sale during 1996, 1995 and
1994 were $5,966,508, $1,748,069 and $14,322,145. Gross realized gains of $-0-,
$1,058 and $26,137 and gross realized losses of $32,375, $859 and $26,878 were
recognized on those sales.
Securities with amortized cost of $16,224,083 and $18,222,024 at December
31, 1996 and 1995, respectively, were pledged to secure public deposits and for
other purposes. In addition, interest-bearing deposits in other banks with an
amortized cost of $1,000,000 at December 31, 1995, were pledged for the above
purposes.
NOTE 4. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
================================================================================================================
December 31,
(thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
Construction and land development $ 6,274 $ 3,834
Secured by farm land 627 2,227
Secured by 1-4 family residential 51,927 45,087
Other real estate loans 27,819 24,938
Loans to farmers (except secured by real estate) 443 756
Commercial and industrial loans (except those secured by real estate) 9,004 7,455
Loans to individuals for personal expenditures 9,872 6,875
All other loans 3,353 3,442
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total loans 109,319 94,614
Less: Allowance for loan losses 1,247 1,320
Unearned loan fees 86 98
- ----------------------------------------------------------------------------------------------------------------
Loans, net $107,986 $93,196
================================================================================================================
</TABLE>
21
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
================================================================================================================
December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,319,887 $1,364,670 $1,397,764
Recoveries 28,221 32,876 55,771
Provision for loan losses -- -- --
Charge-offs (100,566) (77,659) (88,865)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $1,247,542 $1,319,887 $1,364,670
================================================================================================================
</TABLE>
Information about impaired loans as of and for the years ended December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
================================================================================================================
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans for which an allowance has been provided $ 69,054 $1,010,046
Impaired loans for which no allowance has been provided 225,391 45,000
- ----------------------------------------------------------------------------------------------------------------
Total impaired loans $294,445 $1,055,046
================================================================================================================
Allowance provided for impaired loans, included in the
allowance for loan losses $ 63,070 $ 418,029
================================================================================================================
Average balance in impaired loans $341,871 $1,071,350
================================================================================================================
Interest income recognized $ 8,634 $ 969
================================================================================================================
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $287,429 and $121,964 at December 31, 1996 and 1995. If interest on
these loans had been accrued, such income would have approximated $21,486 and
$21,070, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
The Securities and Exchange Commission requires disclosure of loans which
exceed $60,000 to Executive Officers and Directors of the Corporation or to
their associates. Such loans were made on substantially the same terms as those
prevailing for comparable transactions with similar risk. At December 31, 1996
and 1995, these loans totaled $3,244,100 and $3,546,227 respectively. During
1996, total principal additions were $558,275 and total principal payments were
$860,402.
NOTE 7. BANK PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
===============================================================================================================
December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank premises $3,413,082 $3,396,720
Leasehold improvements 59,009 59,009
Furniture and equipment 3,059,093 2,659,055
Construction in progress 631,080 442,468
- ---------------------------------------------------------------------------------------------------------------
7,162,264 6,557,252
Less accumulated depreciation and amortization 2,287,940 1,829,438
- ---------------------------------------------------------------------------------------------------------------
$4,874,324 $4,727,814
===============================================================================================================
</TABLE>
22
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense amounted to $463,952, $438,794 and
$437,286 for 1996, 1995 and 1994, respectively.
The Corporation is constructing a new branch. The total contract cost for
construction is $430,600. The total cost to complete the branch is approximately
$117,000.
NOTE 8. DEPOSITS
The Corporation held certificates of deposits in denominations of $100,000
or more totaling approximately $14,290,613 and $13,585,953 at December 31, 1996
and 1995, respectively.
NOTE 9. SHORT-TERM BORROWINGS
Short-term borrowings consist of Master Promissory Notes with Corporate
customers. These notes bear a variable interest rate and are payable on demand.
NOTE 10. NOTE PAYABLE
A note payable in the amount of $3,000,000 was issued in connection with the
main office renovation project during 1991. The note terms called for interest
payments monthly at an adjustable rate. Principal was to be paid in the amount
of $25,000 monthly over a ten-year repayment period. Certain securities of the
Corporation were pledged as collateral on this obligation. The note was paid in
full in 1996.
NOTE 11. EMPLOYEE BENEFIT PLANS
The Corporation maintains a profit sharing plan for all eligible employees.
Amounts charged to operations were $175,000, $124,000 and $90,000 in 1996, 1995
and 1994, respectively.
Eligible employees of the Corporation also participate in an Employee Stock
Ownership Plan (ESOP) and 401-K Plan. Contributions to these plans are
determined by the Board of Directors in accordance with Internal Revenue Service
Regulations. Such contributions are limited to a percentage of the annual
compensation of all employees covered by the plans. The Corporation's cash
contribution to the ESOP was $54,965, $46,145 and $51,889 in 1996, 1995 and
1994, respectively. The Corporation's cash contribution to the 401-K Plan was
$45,869, $42,855 and $36,111 in 1996, 1995 and 1994, respectively.
The Corporation has a noncontributory, defined benefit pension plan covering
substantially all employees. The benefits are based on years of service and
level of compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the future.
The following table sets forth the Plan's funded status and amounts
recognized in the Corporation's balance sheets:
<TABLE>
<CAPTION>
==================================================================================================================
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Vested benefit obligation $ 2,024,337 $ 1,395,214
==================================================================================================================
Accumulated benefit obligation $ 2,048,190 $ 1,417,507
==================================================================================================================
Projected benefit obligation $(2,429,721) $(1,694,969)
Plan assets, at fair value 2,821,152 2,576,895
- ------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 391,431 881,926
Unrecognized transition obligation (301,019) (344,022)
Unrecognized prior service cost 614,587 67,816
Unrecognized net (gain) loss (142,077) (67,560)
- ------------------------------------------------------------------------------------------------------------------
Net pension asset $ 562,922 $ 538,160
==================================================================================================================
</TABLE>
Net periodic pension income includes the following components:
<TABLE>
<CAPTION>
==================================================================================================================
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 71,878 $ 64,904 $ 50,462
Interest cost on projected benefit obligation 116,064 106,109 97,797
Actual return on plan assets (339,546) (554,975) (20,337)
Net amortization and deferral 126,842 378,296 (165,452)
- ------------------------------------------------------------------------------------------------------------------
Net periodic pension (income) $ (24,762) $ (5,666) $ (37,530)
==================================================================================================================
</TABLE>
23
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for the year ended December 31, 1996 was 7.0% and
5.0%, respectively. The expected long-term rate of return on plan assets for
1996 was 7.0%.
NOTE 12. INCOME TAXES
Net deferred tax assets (liabilities) consist of the following components as
of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $ 263,568 $ 290,052
Unearned loan fees 28,661 33,566
Nonaccrual loan interest 4,056 43,440
Keyman Life Insurance 21,622 15,018
Securities available for sale 83,294 9,479
Other 1,750 2,319
- ------------------------------------------------------------------------------------------------------------------
402,951 393,874
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accrued pension asset 191,393 182,974
Premises and equipment 198,845 208,004
Other 9,672 6,731
- ------------------------------------------------------------------------------------------------------------------
399,910 397,709
- ------------------------------------------------------------------------------------------------------------------
$ 3,041 $ (3,835)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1996, 1995 and 1994, consists of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense $ 967,563 $ 797,675 $ 796,496
Deferred tax expense (benefit) 66,939 96,482 (3,544)
- ------------------------------------------------------------------------------------------------------------------
$ 1,034,502 $ 894,157 $ 792,952
- ------------------------------------------------------------------------------------------------------------------
</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, 1996, 1995 and 1994, due to the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,323,902 $ 1,113,975 $ 1,034,163
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (240,051) (231,963) (253,865)
Other, net (49,349) 12,145 12,654
- ------------------------------------------------------------------------------------------------------------------
$ 1,034,502 $ 894,157 $ 792,952
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding various commitments
and contingent liabilities which are not reflected in the accompanying financial
statements. Management does not anticipate any material losses as a result of
these transactions.
During 1993, the Corporation entered into an agreement to purchase .25 units
of the Housing Equity Fund of Virginia II, L.P., a limited partnership. Under
this agreement, the total purchase price will be $250,000. As of December 31,
1996, $219,255 of this obligation was funded. This amount, net of accumulated
amortization of $18,800, is included under securities on the balance sheet as of
December 31, 1996. The remainder of the subscription price will be payable at
the call of the General Partner, Housing Capital Corporation of Virginia.
24
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
See Note 16 with respect to financial instruments with off-balance-sheet
risk.
NOTE 14. RESTRICTIONS ON TRANSFERS TO PARENT
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, 1996 the aggregate amount of
unrestricted funds which could be transferred from the banking subsidiary to the
Parent Corporation without prior regulatory approval totalled $4,189,263 or
15.8% of the consolidated net assets.
NOTE 15. DIVIDEND REINVESTMENT PLAN
The Corporation has in effect a Dividend Reinvestment Plan which provides an
automatic conversion of dividends into common stock for enrolled stockholders.
It is based on 95% of the stock's 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. 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, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $12,759,715 $10,756,764
Standby letters of credit $ 795,890 $ 1,537,971
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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 property, inventory and bank deposits as collateral
supporting those commitments for which collateral is deemed necessary. The
extent of collateral held for those commitments at December 31, 1996, varies
from 0 percent to 100 percent; the average amount collateralized is 78 percent.
The securities portfolio includes U.S. Treasury and U.S. Government agency
securities which may, on occasion, be loaned to securities dealers designated as
"Primary Government Dealers" by the Federal Reserve System. Such loans of
securities are secured by U.S. Treasury securities, U.S. Government agency
securities, or cash with a market value exceeding 102% of the market value of
securities lent. The loaned securities continue to be reported in the financial
statements, and the loan transaction is not reflected therein. In the event
loans are secured by cash, the pledged cash is reported as an asset in the
Corporation's balance sheet and an offsetting liability is reported as
short-term borrowings. All such loans are callable in one business day. Such
transactions may involve credit and interest rate risk. At December 31, 1996,
securities loaned totaled $2,150,000.
25
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit with correspondent institutions at December 31, 1996, exceeded
the insurance limits of the Federal Deposit Insurance Corporation by $2,404,038.
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 and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered.
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.
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, 1996 and 1995, the carrying amounts and fair values of loan
commitments, stand-by letters of credit, and securities loaned were immaterial.
The carrying amount is a reasonable estimate of the fair value of securities
loaned.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995
CARRYING FAIR Carrying Fair
(dollars in thousands) AMOUNT VALUE Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 9,380 $ 9,380 $ 11,264 $ 11,264
Securities 82,393 82,761 84,040 84,617
Loans 109,234 109,127 94,516 95,148
Less: allowance for loan losses (1,248) -- (1,320) --
- -----------------------------------------------------------------------------------------------------------------
Total financial assets $199,759 $201,268 $188,500 $191,029
- -----------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $175,037 $175,288 $164,118 $166,497
Other borrowings 4,649 4,649 5,593 5,517
- -----------------------------------------------------------------------------------------------------------------
Total financial liabilities $179,686 $179,937 $169,711 $172,014
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements.
26
<PAGE>
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, 1996, that the Corporation meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, 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.
The Corporation's actual capital amounts and ratios are also presented in
the table. No deduction was made from capital for interest rate risk.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets):
Consolidated $27,985 24.91% >$8,987 >8.0% N/A
- -
Second Bank & Trust $28,090 25.01% >$8,987 >8.0% >$11,233 >10.0%
- - - -
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated $26,737 23.80% >$4,493 >4.0% N/A
- -
Second Bank & Trust $26,842 23.89% >$4,493 >4.0% >$6,740 >6.0%
- - - -
Tier 1 Capital (to
Average Assets):
Consolidated $26,737 12.93% >$8,272 >4.0% N/A
- -
Second Bank & Trust $26,842 12.98% >$8,272 >4.0% >$10,340 >5.0%
- - - -
As of December 31, 1995:
Total Capital (to Risk Weighted
Assets):
Consolidated $26,464 26.92% >$7,863 >8.0% N/A
- -
Second Bank & Trust $26,418 26.88% >$7,863 >8.0% >$9,829 >10.0%
Tier 1 Capital (to Risk Weighted - - - -
Assets):
Consolidated $25,235 25.67% >$3,932 >4.0% N/A
- -
Second Bank & Trust $25,189 25.63% >$3,932 >4.0% >$5,898 >6.0%
Tier 1 Capital (to - - - -
Average Assets):
Consolidated $25,235 12.86% >$7,851 >4.0% N/A
- -
Second Bank & Trust $25,189 12.83% >$7,851 >4.0% >$9,814 >5.0%
- - - -
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
SECOND NATIONAL FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investment in subsidiary $26,680,450 $25,170,357
Income taxes receivable 36,238 32,377
Due from subsidiary 2,728,571 2,525,355
- ---------------------------------------------------------------------------------------------------------------
Total assets $29,445,259 $27,728,089
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, short-term borrowings $ 2,870,000 $ 2,511,000
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,737,137 3,757,156
Capital surplus 1,170,814 1,323,456
Retained earnings 21,828,996 20,154,878
Unrealized (loss) on securities available for sale, net (161,688) (18,401)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 26,575,259 25,217,089
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $29,445,259 $27,728,089
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiary $1,185,209 $1,051,646 $1,021,599
Interest from subsidiary 127,083 126,358 --
- ---------------------------------------------------------------------------------------------------------------
1,312,292 1,178,004 1,021,599
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
Interest 84,846 89,127 --
Amortization of organizational expenses -- 4,303 9,500
Miscellaneous 57,737 34,795 3,671
- ---------------------------------------------------------------------------------------------------------------
142,583 128,225 13,171
- ---------------------------------------------------------------------------------------------------------------
Net income before income tax benefit and undistributed
equity in subsidiary 1,169,709 1,049,779 1,008,428
Income tax benefit 36,238 32,377 4,478
- ---------------------------------------------------------------------------------------------------------------
Net income before undistributed equity in subsidiary 1,205,947 1,082,156 1,012,906
Undistributed equity in subsidiary 1,653,380 1,300,084 1,235,799
- ---------------------------------------------------------------------------------------------------------------
Net income $2,859,327 $2,382,240 $2,248,705
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SECOND NATIONAL FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,859,327 $ 2,382,240 $ 2,248,705
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization -- 4,303 9,500
Undistributed earnings of subsidiary (1,653,380) (1,300,084) (1,235,799)
(Increase) in income taxes receivable (3,861) (27,899) (807)
(Increase) in due from subsidiary (203,216) (2,525,353) --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 998,870 (1,466,793) 1,021,599
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,185,209) (1,051,647) (1,021,599)
Net increase in short-term borrowings 359,000 2,511,000 --
Issuance of common stock -- dividend reinvestment plan 290,033 99,940 --
Acquisition of common stock (462,694) (92,500) --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (998,870) 1,466,793 (1,021,599)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents -- -- --
CASH AND CASH EQUIVALENTS
Beginning -- -- --
- ---------------------------------------------------------------------------------------------------------------
Ending $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Unrealized gain (loss) on securities available for sale $ (217,102) $ 2,614,144 $(2,642,024)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[YOUNT, HYDE & BARBOUR, P.C. LOGO]
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
and Consultants
To the Stockholders and Directors
Second National Financial Corporation
Culpeper, Virginia
We have audited the accompanying consolidated balance sheets of Second National
Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994. 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 Second National
Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 30, 1997
<PAGE>
Second National Financial Corporation
Officers and Directors
Culpeper Offices
Officers
Second National Financial Corporation
Taylor E. Gore Chairman of the Board
O. R. Barham, Jr. President and Chief Executive
Officer
George L. Pulliam Vice President
Jeffrey W. Farrar, CPA Vice President and Chief
Financial Officer
Officers
Second Bank & Trust
Taylor E. Gore Chairman of the Board
O. R. Barham, Jr. President & Chief Executive
Officer
Jeffrey W. Farrar, CPA Vice President & Chief
Financial Officer
David W. Meadows Vice President
J. Quintin Mullins Vice President and Trust Officer
George L. Pulliam Vice President
Jerry L. Raines Vice President
George J. Sutorka Vice President
Gregory C. Godsey Assistant Vice President
John E. Meyer Assistant Vice President
Timothy B. Morris Investment Representative
Peggy P. Mocarski Assistant Vice President
G. William Morton, IV Assistant Vice President
C. Shane Nicholls Assistant Vice President
Donna H. Rosson Assistant Vice President
Sallie E. Slaughter Assistant Vice President
Delores N. Snead Assistant Vice President
W. Scott Thompson Assistant Trust Officer
Debra L. Dodson Assistant Cashier
Steve A. Grayson Assistant Cashier
Julia E. McMann Assistant Cashier
Denise L. Whetzel Assistant Cashier
Nancy E. Wilkerson Assistant Cashier
Directors
Second National Financial Corporation
Second Bank & Trust
Lewis P. Armstrong Taylor E. Gore
O. R. Barham, Jr. Charles K. Gyory
Robert Y. Button, Jr. W. Robert Jebson, Jr.
Gregory L. Fisher Harlean Smoot
Marshall D. Gayheart, Jr. Allen Y. Stokes
George P. Beard, Jr., Chairman Emeritus
Edwin G. Adair, Jr., Director Emeritus
J. Carlton Clore, Director Emeritus
H. M. Thomas, Jr., Director Emeritus
A. Gordon Willis, Jr., Director Emeritus
Madison Office
Officers
C. M. Ponton Assistant Vice President &
Manager
Connie M. Aylor Branch Officer
Advisors
James W. Aylor Harry M. Gibbs
Lucian W. Clore James C. Graves
Donald R. Eddins Thomas J. Weaver
Locust Grove Office
Officers
Richard T. Harrington Assistant Vice President &
Manager
Patricia A. Banks Branch Officer
Exhibit 21
Subsidiaries of the Registrant.
-------------------------------
Second Service Company, Subsidiary of Second Bank & Trust
Second Bank & Trust, Subsidiary of Second National Financial Corporation
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,012
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,368
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,848
<INVESTMENTS-CARRYING> 14,545
<INVESTMENTS-MARKET> 14,913
<LOANS> 109,319
<ALLOWANCE> 1,247
<TOTAL-ASSETS> 207,474
<DEPOSITS> 175,037
<SHORT-TERM> 4,649
<LIABILITIES-OTHER> 1,213
<LONG-TERM> 0
0
0
<COMMON> 3,737
<OTHER-SE> 22,838
<TOTAL-LIABILITIES-AND-EQUITY> 204,474
<INTEREST-LOAN> 9,344
<INTEREST-INVEST> 4,820
<INTEREST-OTHER> 337
<INTEREST-TOTAL> 14,501
<INTEREST-DEPOSIT> 6,379
<INTEREST-EXPENSE> 6,670
<INTEREST-INCOME-NET> 7,831
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (32)
<EXPENSE-OTHER> 5,077
<INCOME-PRETAX> 3,894
<INCOME-PRE-EXTRAORDINARY> 2,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,859
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 0
<YIELD-ACTUAL> 203,278
<LOANS-NON> 582
<LOANS-PAST> 561
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,200
<ALLOWANCE-OPEN> 1,320
<CHARGE-OFFS> 101
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,247
<ALLOWANCE-DOMESTIC> 316
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 932
</TABLE>
