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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______________ to ______________
Commission file number 000-22747
SECOND NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1542438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 S. Main Street, Culpeper, Virginia 22701
(Address of principal executive offices) (Zip Code)
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,
par value $2.50
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]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 1998 was $48,698,930.
The number of shares outstanding of the registrant's common stock as of
March 15, 1998 was 1,502,744.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV. Portions of the definitive Proxy Statement
dated March 13, 1998 to be delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held April 23, 1998 are incorporated by
reference into Part III.
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<PAGE>
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 Bank is the Company's only
direct subsidiary. The Company's primary asset is its stock investment in the
Bank, with cash and short-term investments accounting for the remainder of
assets. Liabilities consist of master notes with certain Bank customers and
miscellaneous accruals. On August 4, 1994, Second Service Company, a subsidiary
of the Bank, 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. In addition, the Bank owns a 50% interest in VHB
Mortgage LLC, a mortgage company serving the greater Fredericksburg, Virginia
area.
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, Orange, and Rockingham in the
state of Virginia. The Bank's primary business is the granting of residential
real estate loans, commercial real estate loans, and, to a lesser extent,
commercial business and consumer loans, funded through solicitation of deposits.
Significant business lines include trust services, investment services, and a
mortgage division. The Bank considers itself to be a community-oriented
institution servicing the banking needs of its four county market and
surrounding areas.
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 automatic teller
machines at four branch locations and seven free-standing ATMs located
strategically through the market area linked to the HONOR (R)
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CIRRUS (R) system allowing customers to access over 285,000 terminals
nationwide.
Competition
The banking business in Virginia, and in the Bank's market area
specifically, is highly competitive with respect to both loans and deposits. The
Bank considers its primary market area for full-service banking to be Culpeper,
Madison, Orange, and Rockingham counties. According to statistics published by
the Federal Deposit Insurance Corporation, the Bank had 42% of the deposits in
the Culpeper County market at June 30, 1997. 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 market area and its involvement in those
communities. The Bank's success comes from its ability to satisfy its customers'
needs on a timely basis with an experienced staff.
During 1997, two of the Bank's more significant competitors, Central
Fidelity National Bank and Jefferson National Bank, announced plans to be
acquired by Wachovia Bank, NA, headquartered in Winston-Salem, North Carolina.
The combination will give Wachovia a slightly greater market share than that of
the Bank in the Culpeper County market. The Bank considers this change in
competitive pressures as an opportunity to strengthen its community bank focus,
and believes that it can compete effectively.
Employees
At December 31, 1997, SNFC and the Bank had 74 full-time employees. The
Company's success is highly dependent on its ability to attract and retain
qualified employees. To date, the Company believes it has been successful in its
efforts to recruit qualified employees, but there can be no assurance that it
will continue to be as successful in the future. None of the Company's employees
are subject to collective bargaining agreements. The Company believes relations
with its employees are excellent.
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") and State Corporation Commission ("SCC"). 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
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additional information as the Federal Reserve Board may require pursuant to the
Bank Holding Company Act. The Federal Reserve Board and SCC also may conduct
examinations of SNFC.
Deposits
The Bank offers various 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 12.75% in 1997 and 10.92% in
1996. See "Deposits" under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 14 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, 1997, were $130.8 million increasing
19.7% from $109.3 million in 1996. The increase in loans was due principally to
aggressive marketing, expanding our commercial lending market, and the growth in
our new Harrisonburg, Virginia location. 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
$3.9 million at December 31, 1997. 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, 1997, off balance sheet
unused loan commitments amounted to $17.5 million. These commitments may be
secured or unsecured.
Real estate mortgage loans and other real estate loans outstanding at
December 31, 1997, totaled approximately $92.1 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
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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, 1997, construction
loans outstanding total $10.9 million.
The Bank offers various types of installment loans including
automobile, home improvement, equipment and personal loans. Loans to individuals
for personal expenditures totaled $17.7 million at December 31, 1997.
The following table sets forth maturities at December 31, 1997 for certain loan
types:
December 31, 1997
----------------------------------------
1 Year 1-5 Over
Or Less Years 5 Years Total
------- ----- ------- -----
(In Thousands)
Commercial, financial,
and agricultural $ 33,142 $78,748 $ 5,740 $117,630
Real estate, construction,
installment 9,282 3,845 45 13,172
---------------------------------------------
$42,424 $82,593 $ 5,785 $130,802
=============================================
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, 1997
amounted to $6.9 million or 5.30% of outstanding loans. Approximately $88
thousand of such outstanding loans were specifically 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 1998 will be at or below
the range of our peer group.
See "Asset Quality" under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 12 and 13 in
the 1997 Annual Report to Stockholders incorporated by reference herein for
further discussion.
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Securities
The Bank's security investments provide liquidity for regulatory and
other purposes. As of December 31, 1997, the Bank's investments consisted of
state and municipal obligations (19.7% of the total), U.S. treasury and
government agency obligations (75.3%), corporate bonds (4.5%), and miscellaneous
investments (.5%). As of December 31, 1997, the investment portfolio represented
35.1% of the Corporation'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 1997 $13,175 $13,543
See "Securities" under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 13 in the
1997 Annual Report to Stockholders incorporated by reference herein for further
discussion.
Interest Rate Sensitivity
See "Interest Rate Sensitivity" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 10 and 11 in the 1997 Annual Report to Stockholders incorporated by
reference herein for further discussion.
Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
- -- actions by regulators that, if undertaken, could have a direct material
effect on the 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 of total and
Tier 1 capital (as defined in the regulations) to
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risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1997, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, 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. There are no conditions or events since
that notification that management believes have changed the institution's
category. See Note 17 to the consolidated financial statements on page 31 of the
1997 Annual Report to Stockholders incorporated by reference herein for further
discussion.
New Accounting Pronouncements
See "New Accounting Pronouncements" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 15 of the Annual Report to Stockholders 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 and its Locust Grove Branch
in Orange, 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 the
Bank. The property on which this branch is located is leased for 20 years
expiring in September, 2005. The Company rented space to establish a new branch
in Harrisonburg, Virginia in August, 1997. The temporary facility is being
leased for an initial term of eighteen months with quarterly renewals up to
twelve months.
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.
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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
The information under the heading "Stockholder Information" on page
35 of the 1997 Annual Report to Stockholders is incorporated by reference
herein.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Financial Highlights" on page 4
of the Company's 1997 Annual Report to Stockholders is incorporated by reference
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 7 through 15
of the Annual Report to Stockholders is incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As the holding company for a commercial bank, the Company's primary
component of market risk is interest rate volatility. Fluctuations in interest
rates will ultimately impact both the level of income and expense recorded on a
large portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which
possess a short term to maturity. Since the majority of the Company's
interest-earning assets and all of the Company's interest-bearing liabilities
are held by the Bank, virtually all of the Company's interest rate risk exposure
lies at the Bank level. Therefore, all significant interest rate risk management
procedures are performed by management of the Bank. Based upon the nature of the
Bank's operations, the Bank is not subject to foreign currency exchange or
commodity price risk. See "Interest Rate Sensitivity" under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 10 and 11 of the 1997 Annual Reoprt to Stockholders
incorporated by reference herein for further discussion.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company,
including the related notes and the report of the independent auditors, are
incorporated herein by reference to pages 16 through 34 of the 1997 Annual
Report to Stockholders and is filed herewith as Exhibit 13.
1. Auditor's Report. (page 34)
2. Consolidated Balance Sheets - December 31, 1997 and 1996. (page 16)
3. Consolidated Statements of Income - Years Ended December 31, 1997,
1996, and 1995. (page 17)
4. Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1997, 1996, and 1995. (page 18)
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5. Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995. (pages 19-20)
6. Notes to Consolidated Financial Statements. (pages 21-33)
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
Information with respect to Directors is incorporated by reference
herein from pages 3 through 6 of the Company's 1998 Proxy Statement related to
the Annual Meeting of Stockholders "Election of Directors." The executive
officers of the Company as of February 28, 1998 are as follows:
Name Age Current Position
O. R. Barham, Jr. 47 President and Chief Executive Officer of
the Bank; President and Chief Executive
Officer of the Company
Jeffrey W. Farrar 37 Vice President and Chief Financial Officer
of the Bank; Secretary and Chief Financial
Officer of the Company
George L. Pulliam 49 Vice President of the Bank and the Company
J. Quintin Mullins 39 Vice President of the Bank
Jerry L. Raines 44 Vice President of the Bank
George J. Sutorka 56 Vice President of the Bank
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference herein from pages 6 through 10 of the
Company's 1998 Proxy Statement. "Executive Compensation."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference herein from page 5 through 6 of the
Company's 1998 Proxy Statement regarding beneficial ownership of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference herein from page 9 of the Company's 1998
Proxy Statement, "Transactions with Directors and Officers."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF
FORM 8-K
Financial Statements and Schedules
The financial statements as set forth under Item 8 of this report
on Form 10-K are incorporated herein by reference.
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1997.
Exhibits
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. 13 Second National Financial Corporation
1997 Annual Report to Stockholders.
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Exhibit No. 21 Subsidiaries of the Registrant.
Second Service Company, Subsidiary of Second Bank
& Trust
Second Bank & Trust, Subsidiary of Second National
Financial Corporation
Exhibit No. 27 Financial Data Schedule
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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. 3/20/98
---------------------------------------------------- -------------
O. R. Barham, Jr. Date
President and Chief Executive Officer
Director
/s/ Jeffrey W. Farrar 3/20/98
---------------------------------------------------- -------------
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.
DATE SIGNATURE AND TITLE
3/20/98 /s/ Lewis P. Armstrong
----------------------------------
Lewis P. Armstrong, Director
3/20/98 /s/ O. R. Barham, Jr.
----------------------------------
O. R. Barham, Jr., President & CEO & Director
3/20/98 /s/ Robert Y. Button, Jr.
----------------------------------
Robert Y. Button, Jr., Director
3/20/98 /s/ Gregory L. Fisher
----------------------------------
Gregory L. Fisher, Director
3/20/98 /s/ Marshall D. Gayheart, Jr.
----------------------------------
Marshall D. Gayheart, Jr., Director
3/20/98 /s/ Taylor E. Gore
----------------------------------
Taylor E. Gore, Chairman & Director
3/20/98 /s/ Charles K. Gyory
----------------------------------
Charles K. Gyory, Director
3/20/98 /s/ W. Robert Jebson, Jr.
----------------------------------
W. Robert Jebson, Jr., Director
3/20/98 /s/ Harlean Smoot
----------------------------------
Harlean Smoot, Director
12
OUR MOST PROFITABLE ASSET - OUR PEOPLE
<TABLE>
<S><C>
Joan S. Anderson Erica G. Gates Charles A. Martorana Sarah W. Newman
Sherrie K. Arey Gregory C. Godsey Julia E. McMann C. Shane Nicholls
Connie M. Aylor Steve A. Grayson David W. Meadows Cathy L. Poe
Gina M. Aylor Elaine G. Griffith Rebecca L. Merritt C. M. Ponton
Patricia A. Banks Richard T. Harrington John E. Meyer Wanda E. Powers
O. R. Barham, Jr. Melissa J. Hitt Florine S. Miller George L. Pulliam
Victoria E. Beales Ann E. C. Homan Beverly A. Minor Jerry L. Raines
Jennifer R. Berry TABLE OF CONTENTS Kimberley J. Ramey
Jennifer L. Bivens Letter to Stockholders 2 Mandy S. Rankin
Sonya E. Bradley Selected Financial Data 4 Donna H. Rosson
Tina S. Bright Migrating to Electronic Banking 5 Betsy L. Sanftner
Angela D. Brown Directors and Officers 6 Jaime E. Sheads
Judy J. Brown Management's Discussion and Analysis 7 Sallie E. Slaughter
Pamela S. Buckley Consolidated Financial Statements 16 Michelle C. Smith
Susan A. Burnett Notes to Consolidated Financial Statements 21 George J. Sutorka
Anna M. Bushong Independent Auditors Report 34 Linda-Jean Tallman
Helen B. Clanagan Stockholder Information 35 Catherine C. Tharp
Susan C. Coli W. Scott Thompson, III
Jessica W. Collier Frances T. Horner Fannie W. Miranda Corinthians Tomes
Christine S. Cooper Karen C. Ingram Sarah Jane Mitchell Marlene M. Vance
Janet L. Coppage Martha L. Jenkins Peggy P. Mocarski Lisa M. Ward
Phyllis S. Crane Rebecca P. Jenkins Lawanda M. Moore Barbara L. Weber
Joan E. Davis Sheila A. Jones Timothy B. Morris Joye M. Weese
James R. Dennis Kathryn J. Leake G. William Morton, IV Denise L.Whetzel
Debra L. Dodson Susan L. Lowe J. Quintin Mullins Nancy E. Wilkerson
Jeffrey W. Farrar Jennifer M. Wilkins
Dina J. Fields Tammy L. Woodward
Nina S. Frye Jean C. Yancey
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 1 1997 ANNUAL REPORT
<PAGE>
DEAR STOCKHOLDER:
Second National Financial Corporation
completed its ninety-seventh year of business with some very impressive
financial results. Overall, your Company set an earnings record of $3.245
million or $2.17 per share, representing a 13.48% increase over $2.859 million
or $1.91 per share. Earnings for the year represented an 11.87% return on
average equity and a 1.52% return on average assets, compared to 11.20% and
1.41% for the comparable period in 1996. These outstanding results were made
possible from nothing less than the hard work and team effort of our employees.
In particular, the improvement in earnings was largely driven by our loan
growth of 19.7%. This loan growth translated into a loan-to-deposit ratio of
70.86% which pushed our net interest margin to 4.61% for the year, compared to
4.24% for the same comparable period of 1996. While the net interest margin
showed a significant increase over the prior fiscal year, what was even more
noteworthy was the growth in non-interest income. Non-interest income rose to
$1.402 million, an improvement of $262 thousand or 22.9% over 1996. This
non-interest income grew as a result of our improvement in service charges on
deposits, fees from trust and brokerage services, and fees from our mortgage
operations. Non-interest
RETURN ON AVERAGE EQUITY
[BAR GRAPH APPEARS HERE--SEE PERCENTAGES BELOW]
1993............. 9.76%
1994.............10.02
1995.............10.17
1996.............11.20
1997.............11.87
NET INCOME
(in thousands)
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1993.............$2,155
1994............. 2,249
1995............. 2,382
1996............. 2,859
1997............. 3,245
income will be an area we will continue to emphasize due to its ability to help
minimize our exposure to fluctuations in interest rates. Non-interest expenses
for the twelve month period increased $481 thousand or 9.5% with salaries,
marketing, and occupancy costs associated with two new offices accounting for
most of the increase. Despite our continued efforts to grow your Company's
franchise, we still were able to hold our efficiency ratio to a very favorable
52.40%, a reduction from the 54.50% posted for year-end 1996. These achievements
provide evidence of our continued emphasis on balancing profitability with
growth.
Outside of the excellent financial results posted for the year, I am
equally proud of the nonquantitative achievements of your Company. We have long
believed and continue to believe that our future success will come from our
ability to balance personalized service with the use of new technology. We
believe we continue to succeed at effectively incorporating these two critical
areas. In just the past year, we successfully completed several noteworthy
efforts aimed at improving your Company's performance and customer service.
During 1997, we began the issuance of debit cards; installed three new ATMs with
a local convenience/ fast food franchise and have other sites under development;
our jointly-owned mortgage
SECOND NATIONAL FINANCIAL CORPORATION 2 1997 ANNUAL REPORT
<PAGE>
company, VHB Mortgage, opened its doors in downtown Fredericksburg; we extended
our bank's lobby hours; hired a full-time Human Resources Director; added an
experienced Trust Officer; recruited an Investment Specialist for our new
Investment Services area; opened our sixth branch office in Harrisonburg;
purchased a new customer profitability/software program for improving our
marketing efforts; purchased a new computer system enterprise server, which will
triple our current customer capacity; and last but not least, listed our stock
on the Nasdaq Small Cap market. This last achievement I count among the most
significant for not only you the stockholder, but for the Company itself. By
going to a public market, we greatly improved the liquidity of our stock and the
public exposure of our Company. The result of our listing has been a significant
increase in market value of your Company. Point in fact, stockholder value
increased by over $19.5 million during 1997, and your Company now has a
capitalization level of roughly $50 million.
As we look to 1998 and beyond, the landscape continues to change, as more
and more Virginia banks disappear from the scene. Your Company, your board, and
its management stand as committed as ever to see that Second National Financial
Corporation
ASSETS
(in millions)
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1993............$191
1994............ 194
1995............ 196
1996............ 208
1997............ 222
EARNINGS PER SHARE
[BAR GRAPH APPEARS HERE--SEE DOLLAR AMOUNTS BELOW]
1993............$1.43
1994............ 1.50
1995............ 1.59
1996............ 1.91
1997............ 2.17
continues to grow and to prosper in what we see as opportunistic
times. No doubt, this coming year will be our most challenging yet. We will
continue to see consolidation, increased competition, and shrinking margins. In
this environment, we believe our tried and true advantages of personal customer
relationships built around local autonomy and decision making will continue to
serve us well in 1998 and into the next millennium.
Very truly yours,
/s/ O. R. Barham, Jr.
_________________________
O. R. Barham, Jr. (Ed)
President & Chief Executive Officer
SECOND NATIONAL FINANCIAL CORPORATION 3 1997 ANNUAL REPORT
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in Thousands except per share data) 1997 1996 1995 1994 1993
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<S><C>
STATEMENT OF OPERATIONS
DATA:
Total Interest Income
and Fees on Loans $ 15,733 $ 14,500 $ 13,215 $ 12,378 $ 12,464
Total Interest Expense 6,884 6,670 6,436 5,676 6,214
Net Interest Income 8,849 7,830 6,779 6,702 6,250
Provision for Loan Losses 125 -- -- -- --
Net Income 3,245 2,859 2,382 2,249 2,155
PERFORMANCE RATIOS:
Return on Average
Assets 1.52% 1.41% 1.23% 1.16% 1.15%
Return on Average
Equity 11.87% 11.20% 10.17% 10.02% 9.76%
Net Interest Margin 4.61% 4.24% 3.86% 3.84% 3.83%
Efficiency Ratio 52.40% 54.50% 55.90% 57.62% 57.84%
Equity to Assets Ratio 13.01% 12.81% 12.87% 11.45% 11.86%
PER SHARE DATA:
Net Income $ 2.17 $ 1.91 $ 1.59 $ 1.50 $ 1.43
Cash Dividends .90 .79 .70 .68 .66
Book Value 19.26 17.78 16.78 14.75 15.09
Market Price Per Share 33.00 20.00 19.00 19.00 19.25
Cash Dividend Payout Ratio 41.41% 41.45% 44.15% 45.43% 46.01%
BALANCE SHEET DATA:
Assets $222,070 $207,474 $195,919 $193,554 $191,099
Deposits 184,605 175,037 164,118 161,128 164,068
Loans 130,802 109,319 94,614 81,553 74,984
Stockholders' Equity 28,895 26,575 25,217 22,154 22,670
ASSET QUALITY RATIOS:
Total allowance for loan losses
to total loans outstanding 1.04% 1.14% 1.40% 1.67% 1.86%
Non-performing assets to year-end
loans and other property owned .39% .59% 1.24% 1.59% 4.45%
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 4 1997 ANNUAL REPORT
<PAGE>
MIGRATING TOWARD ELECTRONIC BANKING
As technology rapidly changes the world in which we live, customers expect
more personalized service, a faster delivery system and easier access to their
finances day or night, seven days a week. We are committed to meeting those
expectations.
While our customers expect excellent personal face-to-face service, they
now also require us to communicate with them electronically as well. Our
Phonebanc 24 touch tone banking system provides 24-hour, seven-day-a-week access
to account information, and is used by our customers over 800 times a week. Our
home page on the internet allows customers to review product information,
communicate with bank personnel or even apply for a personal loan. The Second
Bank & Trust VISA Check Card allows our customers to us their "plastic" rather
than write a check, with funds deducted from their checking account, not a
credit card charge. We continue to explore the feasibility of home banking and
internet banking, and see delivery of both of these capabilities in the not to
distant future.
-----------------------------------------------------------------------
2ND BANK & TRUST
[INTERNET HOME PAGE APPEARS HERE]
----------------------------------------------------------------------
Second Bank and Trust Debit Card!!! Click here for more information!!!
----------------------------------------------------------------------
[EQUAL HOUSING Site and contents (C) Copyright 2nd Bank & Trust. Member FDIC
LENDER LOGO] Produced by Halifax Interactive Technology Group
----------------------------------------------------------------------
www.secondbank.com
PLANNING FOR THE YEAR 2000
Much has been written about the Year 2000 technology dilemma and its impact
on community banks. Second has established a corporate-wide Year 2000 Project
Team with the goal of ensuring that all systems across the enterprise are
identified, analyzed for Year 2000 compliance, corrected if necessary, tested
and changes put into service by the end of 1998. Our hardware and software
systems testing is well underway, and we have committed significant resources to
ensure that systems are Year 2000 compliant well before the year is upon us. Our
plan is to have all changes completed in time to allow for testing and
compliance certification. This will enable the Corporation to transition
smoothly to the next century. We will soon have both a Year 2000 hotline and web
site updates to ensure our customers remain confident in their relationships and
accounts with Second.
SECOND NATIONAL FINANCIAL CORPORATION 5 1997 ANNUAL REPORT
<PAGE>
SECOND NATIONAL FINANCIAL CORPORATION
OFFICERS
<TABLE>
<S><C>
Taylor E. Gore, Chairman of the Board George L. Pulliam, Vice President
O. R. Barham, Jr., President & Chief Executive Officer Jeffrey W. Farrar, Secretary & Chief Financial Officer
DIRECTORS
Lewis P. Armstrong Harlean Smoot
O. R. Barham, Jr. George P. Beard, Jr., Chairman Emeritus
Robert Y. Button, Jr. Edwin G. Adair, Jr., Director Emeritus
Gregory L. Fisher J. Carlton Clore, Director Emeritus
Marshall D. Gayheart, Jr. Allen Y. Stokes, Director Emeritus
Taylor E. Gore H. M. Thomas, Jr., Director Emeritus
Charles K. Gyory A. Gordon Willis, Jr., Director Emeritus
W. Robert Jebson, Jr.
MADISON ADVISORY BOARD
James W. Aylor Harry M. Gibbs
Lucian W. Clore James C. Graves
Donald R. Eddins Thomas J. Weaver
SECOND BANK & TRUST
OFFICERS
Taylor E. Gore Chairman of the Board
O. R. Barham, Jr. President & Chief Executive Officer
Jeffrey W. Farrar Vice President & Chief Financial Officer
J. Quintin Mullins Vice President & Trust Officer
George L. Pulliam Vice President
Jerry L. Raines Vice President
George J. Sutorka Vice President
Jennifer L. Bivens Vice President, Human Resources
Ann E. C. Homan Vice President
Charles A. Martorana Vice President
David W. Meadows Vice President
Gregory C. Godsey Assistant Vice President
Richard T. Harrington Assistant Vice President
John E. Meyer Assistant Vice President
Peggy P. Mocarski Assistant Vice President
Timothy B. Morris Investment Representative
G. William Morton, IV Assistant Vice President
C. Shane Nicholls Assistant Vice President
C. M. Ponton Assistant Vice President
Donna H. Rosson Assistant Vice President
Betsy L. Sanftner Assistant Vice President & Trust Officer
Sallie E. Slaughter Assistant Vice President
W. Scott Thompson, III Assistant Trust Officer
Connie M. Aylor Branch Officer
Patricia A. Banks Branch Officer
Steve A. Grayson Assistant Cashier
Julia E. McMann Assistant Cashier
Denise L. Whetzel Assistant Cashier
Nancy E. Wilkerson Assistant Cashier
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 6 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For Second National Financial Corporation, 1997 was another successful year
characterized by strong core financial performance, balance sheet growth and an
attractive return for our stockholders. Earnings for the year ended December 31,
1997 were $3.245 million or $2.17 a share, an increase of approximately 13.5%
compared to $2.859 million or $1.91 per share for 1996. Net income represented a
1.52% return on average assets and a 11.87% return on stockholder's equity
versus 1.41% and 11.20% in 1996.
While maintaining its core retail base in Culpeper and Madison counties,
the Corporation was successful in expanding its franchise into Orange County and
the City of Harrisonburg. The Locust Grove and Harrisonburg branches were major
contributors to strong loan and asset growth in 1997. Net loans receivable at
December 31, 1997 amounted to $129.3 million, an increase of $21.3 million or
19.7% over 1996. Total assets at December 31, 1997 amounted to $222.1 million,
an increase of $14.6 million or 7.0% over 1996. Growth in assets was partially
funded by an increase in deposits of $9.5 million or 5.5% over 1996.
This growth in loans resulted in growth in earning assets as well as
improvement in the earning asset mix. In addition, improvement in average yield
on our securities portfolio from 6.20% in 1996 to 6.58% in 1997 contributed to
higher yields on earning assets and improvement in the net interest margin.
These factors contributed greatly to an increase in net interest income of
$1.018 million or 13.0% for the year ended December 31, 1997 over the comparable
period in 1996.
Loan quality continues to be excellent, with nonperforming loans amounting
to $516 thousand or .2% of assets at December 31, 1997, compared to $582
thousand or .3% of assets at December 31, 1996 and $1.17 million or .6% of
assets at December 31, 1995. The total allowance for loan losses amounted to
2.64, 2.14 and 1.13 times the amount of nonperforming loans at December 31,
1997, 1996 and 1995, respectively.
NET INTEREST MARGIN
[BAR GRAPH APPEARS HERE--SEE RATES BELOW]
1993............ 3.83
1994............ 3.84
1995............ 3.86
1996............ 4.24
1997............ 4.61
RETURN ON ASSETS
[BAR GRAPH APPEARS HERE--SEE RATES BELOW]
1993............ 1.15
1994............ 1.16
1995............ 1.23
1996............ 1.41
1997............ 1.52
Net Interest Income and Net Interest Margin
The most significant component of the Corporation's profitability is net
interest income. Net interest income is defined as the difference between income
on earning assets and the cost of funds supporting those assets. Significant
categories of earning assets are loans and securities while deposits and short
term borrowings represent the significant liabilities.
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).
The net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Corporation's net yield on
its earning assets. The net interest margin improved to 4.61% in 1997, compared
to 4.24% in 1996 and 3.86% in 1995. The Corporation improved its net interest
margin in 1997 as compared to 1996 and in 1996 as compared to 1995 by improving
its earning asset volume and yield, primarily through strong loan growth and
investment portfolio performance. Net loans receivable as a percentage of
deposits increased to 70.1% in 1997, compared with 61.7% in 1996 and 56.8% in
1995. Average earning assets increased to $199.4 million from $192.5 million in
1996 and $184.0 million in 1995.
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.
SECOND NATIONAL FINANCIAL CORPORATION 7 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31 Year ended December
1997 1996
Average Interest Average Average Interest Average
Dollars in thousands Balance Income/Expense Rates Balance Income/Expense Rates
- -----------------------------------------------------------------------------------------------------------------------
<S><C>
Assets
Loans receivable, net $ 118,756 $ 10,803 9.10% $ 102,747 $ 9,344 9.09%
Investment securities
Taxable 64,763 4,101 6.33 71,153 4,160 5.85
Tax exempt 13,387 1,045 7.81 12,033 1,000 8.31
- -----------------------------------------------------------------------------------------------------------------------
Total Investments 78,150 5,146 6.58 83,186 5,160 6.20
Interest - bearing deposits in
other banks -- -- -- 1,277 55 4.31
Federal funds sold 2,526 139 5.50 5,272 282 5.35
- -----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 199,432 16,088 8.07 Tax Eql 192,482 14,841 7.71Tax Eql
Allowance for loan losses (1,297) (1,309)
Cash and due from banks 7,483 4,778
Bank premises and equipment 4,865 4,724
Other assets 2,514 2,603
- -----------------------------------------------------------------------------------------------------------------------
Total Assets 212,997 203,278
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time and savings deposits
Interest-bearing transaction 27,480 661 2.41 27,237 610 2.24
Money market deposit accounts 19,819 761 3.84 19,495 733 3.76
Passbook savings accounts 26,437 767 2.90 28,508 787 2.76
Certificates of deposit (>$100,000) 14,932 806 5.40 13,843 775 5.60
Other certificates of deposit 67,618 3,656 5.41 63,403 3,475 5.48
- -----------------------------------------------------------------------------------------------------------------------
Total Time and Savings Deposits 156,286 6,651 4.26 152,486 6,380 4.18
Federal funds purchased and securities
under agreement to repurchase 1,867 106 5.68 1,199 61 5.09
Note payable -- -- -- 1,289 122 9.46
Other borrowings 625 25 4.00 547 24 4.39
Master notes 2,764 102 3.69 2,412 85 3.52
- -----------------------------------------------------------------------------------------------------------------------
Total Interest - Bearing Liabilities 161,542 6,884 4.26 157,933 6,672 4.22
Demand deposits 22,828 18,693
Other liabilities 1,292 1,117
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 185,662 177,743
Stockholders' equity 27,335 25,535
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 212,997 $ 203,278
- -----------------------------------------------------------------------------------------------------------------------
Net interest income (tax equivalent) $ 9,204 $ 8,169
- -----------------------------------------------------------------------------------------------------------------------
Average interest rate spread 3.81% 3.49%
Interest expense as percentage of
average earning assets 3.45% 3.47%
Net interest margin 4.61% 4.24%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 8 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
1995
Average Interest Average
Dollars in thousands Balance Income/Expense Rates
- -------------------------------------------------------------------------------
<S><C>
Assets
Loans(net of unearned) $ 89,251 $ 8,089 9.06%
Investment securities
Taxable 73,805 3,985 5.40
Tax exempt 11,611 962 8.29
- -------------------------------------------------------------------------------
Total Investments 85,416 4,947 5.79
Interest - bearing deposits in
other banks 4,938 245 4.96
Federal funds sold 4,406 260 5.90
- -------------------------------------------------------------------------------
Total Earning Assets 184,011 13,541 7.36 Tax Eql
Allowance for loan losses (1,340)
Cash and due from banks 4,027
Bank premises and equipment 4,571
Other assets 2,727
- -------------------------------------------------------------------------------
Total Assets 193,996
- -------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Time and savings deposits
Interest-bearing transactions 25,735 612 2.38
Money market deposit accounts 19,389 721 3.72
Passbook savings accounts 31,349 905 2.89
Certificates of deposit (>$100,000) 10,601 814 7.68
Other certificates of deposits 60,094 3,023 5.03
- -------------------------------------------------------------------------------
Total Time and Savings Deposits 147,168 6,075 4.13
Federal funds purchased and securities
under agreement to repurchase 1,368 78 5.70
Note payable 1,836 169 9.20
Other borrowings 520 25 4.81
Master notes 2,136 89 4.17
- -------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 153,028 6,436 4.21
Demand deposits 16,503
Other liabilities 1,050
- -------------------------------------------------------------------------------
Total Liabilities 170,581
Stockholders' equity 23,415
- -------------------------------------------------------------------------------
Total Liabilities and
Stockholder' Equity $ 193,996
- -------------------------------------------------------------------------------
Net interest income (tax equivalent) $ 7,105
- -------------------------------------------------------------------------------
Average interest rate spread 3.15%
Interest expense as percentage of
average earning assets 3.50%
Net interest margin 3.86%
- -------------------------------------------------------------------------------
</TABLE>
1) Income and yields are computed on a tax-equivalent basis using statutory
federal income tax rates, exclusive of the interest expense. The tax equivalent
adjustment was $355,000, $339,000 and $326,000 in 1997, 1996 and 1995,
respectively.
SECOND NATIONAL FINANCIAL CORPORATION 9 1997 ANNUAL REPORT
<PAGE>
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
1997 vs 1996 1996 vs 1995
Increase (Decrease) Increase (Decrease)
Dollars in thousands Due to changes in: Due to changes in:
- --------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Earning Assets: (1)
Loans $ 1,456 $ 3 $ 1,459 $ 1,228 $ 27 $ 1,255
Securities:
Taxable (788) 729 (59) (133) 308 175
Tax-exempt 65 (35) 30 36 2 38
- --------------------------------------------------------------------------------------------------------------------
Total securities (723) 694 (29) (97) 310 213
Interest-bearing deposits
in other banks (55) -- (55) (161) (29) (190)
Federal funds sold (151) 8 (143) 42 (20) 22
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 527 705 1,232 1,012 288 1,300
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Time and savings deposits:
Interest-bearing deposits 5 46 51 -- (2) (2)
Money market deposits 12 16 28 4 8 12
Savings deposits (67) 47 (20) (67) (39) (106)
Certificates of deposit:
Certificates of $100,000 or more 57 (26) 31 (341) 302 (39)
Certificates of less than $100,000 227 (46) 181 172 280 452
- --------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 234 37 271 (232) 549 317
Federal funds purchased & under
agreements to repurchase 37 9 46 (9) (8) (17)
Notes payable (122) -- (122) (56) 5 (51)
Other short term borrowings 16 2 18 -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 165 $ 48 $ 213 $ (297) $ 546 $ 249
- --------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 362 $ 657 $ 1,019 $ 1,309 $ (258) $ 1,051
- --------------------------------------------------------------------------------------------------------------------
</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.
Interest Rate Sensitivity
Asset/Liability Management
Paramount to the earnings performance of the Corporation is the effective
management of interest rate sensitivity, commonly referred to as asset-liability
management.
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. The Corporation uses a number of tools to
manage its interest rate risk, including simulating net interest income under
various scenarios, monitoring the present value change in equity under the same
scenarios and monitoring the difference or gap between rate sensitive assets and
rate sensitive liabilities over various time periods. Management believes that
rate risk is best measured by simulation modeling.
SECOND NATIONAL FINANCIAL CORPORATION 10 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation monitors exposure to gradual change in rates of up to 200
basis points up or down over a rolling 12 month period. The Corporation's policy
limit for the maximum negative impact on net interest income, gap analysis and
change in equity from a gradual change in interest rates of 200 basis points
over 12 months is 15%. Management has maintained a risk position well within
this guideline levels during 1997.
The following table presents the Corporation's present value change in
equity under various rate scenarios as of December 31, 1997.
<TABLE>
<CAPTION>
Minus 200 Minus 100 Current Plus 100 Plus 200
Basis Basis Fair Basis Basis
Points Points Value Points Points
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Total Securities $ 79,025,742 $ 77,690,643 $ 76,170,028 $ 74,258,911 $ 72,313,582
- ------------------------------------------------------------------------------------------------------------------
Change 2,855,714 1,520,615 -- (1,911,117) (3,856,446)
- ------------------------------------------------------------------------------------------------------------------
Total Other Investments 951,993 951,993 951,993 951,993 951,993
Change -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total Loans 133,971,350 132,084,397 130,138,941 127,982,970 125,817,799
Change 3,832,409 1,945,456 -- (2,155,971) (4,321,142)
- ------------------------------------------------------------------------------------------------------------------
Other Assets 13,639,999 13,639,999 13,639,999 13,639,999 13,639,999
Change -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive
Assets 227,589,084 224,367,032 220,900,961 216,833,873 212,723,373
Change 6,688,123 3,466,071 -- (4,067,088) (8,177,588)
- ------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive Deposits 166,074,099 163,421,699 160,848,103 158,350,097 155,924,625
Change 5,225,995 2,573,596 -- (2,498,006) (4,923,478)
- ------------------------------------------------------------------------------------------------------------------
Total Non-Rate Sensitive 23,840,638 23,112,449 22,417,834 21,754,775 21,121,394
Change 1,422,804 694,615 -- (663,060) (1,296,440)
- ------------------------------------------------------------------------------------------------------------------
Total Rate Sensitive Liab. 189,914,737 186,534,148 183,265,937 180,104,871 177,046,019
Change 6,648,799 3,268,211 -- (3,161,066) (6,219,919)
- ------------------------------------------------------------------------------------------------------------------
Present Value Equity 37,674,347 37,832,883 37,635,023 36,729,002 35,677,354
Change $ 39,324 $ 197,860 $ -- $ (906,022) $ (1,957,669)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 16 to consolidated financial statements for methods and assumptions to
estimate fair value.
Noninterest Income
Noninterest income consists of earnings generated primarily from service
charges on deposit accounts, fiduciary income and other service charges,
commissions and fees. Most categories of noninterest income exhibited growth in
1997, with strong increases recorded in service charges on deposits and trust
and investment fees. The Corporation's noninterest income totaled $1.402 million
in 1997, an increase of 23.0% from $1.140 million in 1996. Noninterest income in
1996 increased 6.5% from $1.071 million in 1995.
The Corporation's trust service fee income totaled $408 thousand in 1997, a
23.0% increase from $371 thousand in 1996. Trust service fees in 1996 increased
5.6% from $352 thousand in 1995. Increased assets under management through
business development efforts and greater market values for trust assets
accounted for the gains in each period. For 1997, the investment services
division generated $77 thousand in gross commissions in its first full year of
operations on gross sales of approximately $3.1 million.
SECOND NATIONAL FINANCIAL CORPORATION 11 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
Noninterest expenses for 1997 were $5.56 million, compared to $5.08 million
in 1996 and $4.57 million in 1995, respectively. The increase in 1997 compared
to 1996 of 9.5% was attributable to several factors including a higher salary
base, marketing and supplies associated with the opening of two new branches, as
well as increased expenditures for professional services and technology related
costs. The increase in 1996 compared to 1995 was attributable to an increase in
branch costs, additional personnel and professional fees. Management estimates
the total cost for making the Corporation's computer systems Year 2000 compliant
to not be material to financial results in 1998.
Overall, the Corporation has improved efficiency as demonstrated by an
improvement in its efficiency ratio, which is a measure of the Corporation's
gross revenues consumed by noninterest expenses or overhead. The Corporation's
efficiency ratio was 52.40% in 1997, compared to 54.50% in 1996 and 55.90% in
1995.
Asset Quality
The Corporation continued to experience high loan quality during 1997.
Nonperforming loans amounted to $516 thousand or .2% of assets at December 31,
1997, compared to $582 thousand or .3% of assets at December 31, 1996. The
Company had net charge-offs of $12 thousand and recorded provision for loan
losses of $125 thousand for the year ended December 31, 1997, compared to net
charge-offs of $73 and no provisions recorded for the comparable period in 1996,
and no provision and net charge-offs of $45 thousand in 1995.The allowance for
loan losses at December 31, 1997 amounted to $1.361 million compared to $1.247
million at December 31, 1996. The allowance for loan losses represents 264% of
nonperforming assets at December 31, 1997. The allowance for loan losses as a
percentage of net loans amounted to 1.04% at December 31, 1997 compared to 1.14%
at December 31, 1996. This decrease was primarily attributable to a 19.7%
increase in gross loans in 1997.
The adequacy of the allowance for loan losses is reviewed quarterly by
management based on an evaluation of the collectibility of the loan portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions.
The following table provides an analysis of the allowance for loan losses
for the past five years.
<TABLE>
<CAPTION>
December 31
(In thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S><C>
Allowance for loan losses, January 1 $ 1,247 $ 1,320 $ 1,365 $ 1,398 $ 1,509
Loans charged off:
Commercial 0 25 68 48 47
Real estate -- -- -- 35 81
Installment 32 76 10 6 24
- -------------------------------------------------------------------------------------------------------------------
Total loans charged off 32 101 78 89 152
- -------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 10 8 12 2 7
Real estate -- -- -- 10 5
Installment 11 20 21 44 29
- -------------------------------------------------------------------------------------------------------------------
Total recoveries 21 28 33 56 41
- -------------------------------------------------------------------------------------------------------------------
Net charge offs 11 73 45 33 111
Provision for loan losses 125 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 1,361 $1,247 $ 1,320 $ 1,365 $ 1,398
- -------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses to
total loans outstanding at end of the year 1.04% 1.14% 1.40% 1.67% 1.86%
- -------------------------------------------------------------------------------------------------------------------
Ratio of net charge offs to average
loans outstanding during the year 0.010% 0.070% 0.050% 0.042% 0.139%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 12 1997 ANNUAL REPORT
<PAGE>
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) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Non-accrual loans $ 516 $ 532 $ 1,177 $ 1,235 $ 3,100
Other property owned -- -- -- $ 60 $ 239
- ------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 516 $ 532 $ 1,177 $ 1,295 $ 3,339
- ------------------------------------------------------------------------------------------------------------------
Loans past due 90 days
accruing interest $ 57 $ 561 $ 457 $ 257 $ 1,213
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to
non-accrual loans 263.76% 214.26% 112.15% 110.53% 45.10%
- ------------------------------------------------------------------------------------------------------------------
Non-performing assets to year-end
loans and other proper 0.39% 0.59% 1.24% 1.59% 4.45%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities
Investment securities and securities available for sale totaled $78.055
million and comprised 35.1% of total assets at December 31, 1997, as compared
with $82.393 million and 39.7% of assets at December 31, 1996. The lower levels
in 1997 were attributable to strong loan demand which exceeded deposit growth,
requiring the Corporation to fund such loans with lower yielding securities.
The Corporation benefited from improved yield on its securities portfolio
in 1997, with the portfolio yielding 6.58% in 1997 compared to 6.20% in 1996.
The Corporation attempts to maintain diversity in its portfolio, maintain
durations that are consistent with its asset/liability management 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 at December 31, 1997.
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
1 Year 1-5 5-10 Over 10
(In thousands) or Less Years Years Years Total
- -------------------------------------------------------------------------------------------------------------------
<S><C>
U. S. Agency Securities:
Amortized cost $ 4,493 $ 23,494 $ 2,000 $ 0 $ 29,987
Fair value $ 4,503 $ 23,418 $ 2,001 $ 0 $ 29,922
Weighted average yield 5.02% 6.18% 7.00% 0.00% 6.06%
Mortgage-backed Securities:
Amortized cost $ 208 $ 832 $ 5,171 $ 3,505 $ 9,716
Fair value $ 208 $ 833 $ 5,229 $ 3,583 $ 9,853
Weighted average yield 8.04% 6.21% 6.81% 6.76% 6.77%
U. S. Treasury Securities:
Amortized cost $ 8,994 $ 9,953 $ 0 $ 0 $ 18,947
Fair value $ 9,001 $ 10,024 $ 0 $ 0 $ 19,025
Weighted average yield 5.88% 6.09% 0.00% 0.00% 5.99%
Corporate Bonds:
Amortized cost $ 0 $ 3,502 $ 0 $ 0 $ 3,502
Fair value $ 0 $ 3,511 $ 0 $ 0 $ 3,511
Weighted average yield 0.00% 6.40% 0.00% 0.00% 6.40%
Municipal Bonds:
Amortized cost $ 200 $ 2,635 $ 10,422 $ 2,017 $ 15,274
Fair value $ 203 $ 2,688 $ 10,750 $ 2,133 $ 15,774
Weighted average yield 10.07% 7.11% 8.05% 8.94% 8.03%
Total Securities:
Amortized cost $ 13,895 $ 40,416 $ 17,593 $ 5,522 $ 77,426
Fair value $ 13,915 $ 40,474 $ 17,980 $ 5,716 $ 78,085
Weighted average yield 5.70% 6.40% 7.29% 7.07% 6.54%
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
SECOND NATIONAL FINANCIAL CORPORATION 13 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits
The Corporation encountered stable deposit growth in 1997. Deposits at
December 31, 1997 amounted to $184.6 million, an increase of $9.5 million or
5.47% over $175.1 million in 1996. Funds provided by the increase in deposits
allowed the Corporation to fund about half of its loan growth and limit the use
of higher cost borrowings. This growth also allowed the Corporation to better
leverage its capital base in 1997. Noninterest bearing deposits increased by
$3.7 million or 18.1% over 1996, which helped offset the higher cost associated
with an increase of $6.5 million in certificates of deposit. The overall cost of
deposit funds increased to 4.26% compared to 4.18% in 1996 and 4.13% in 1995.
The following table illustrates average outstanding deposits and rates
paid.
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S><C>
Non-interest-bearing
demand accounts $ 22,828 -- $ 18,693 -- $ 16,503 --
Interest -bearing accounts:
Interest checking 27,480 2.41% 27,237 2.24% 25,735 2.38%
Money market 19,819 3.84% 19,495 3.76% 19,389 3.72%
Regular savings 26,437 2.90% 28,508 2.76% 31,349 2.89%
Time deposits:
Less than $100,000 67,618 5.41% 63,403 5.48% 60,094 5.03%
$100,000 and over 14,932 5.40% 13,843 5.60% 10,601 7.68%
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing 156,286 4.26% 152,486 4.18% 147,168 4.13%
- ----------------------------------------------------------------------------------------------------------------
Total deposits $ 179,114 $ 171,179 $ 163,671
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of Time Deposits of $100,000 and Over
<TABLE>
<CAPTION>
Within 3-6 6-12 Over 12
(Dollars in thousands) 3 Months Months Months Months
- ----------------------------------------------------------------------------------------------------------------
<S><C>
At December 31, 1997 $ 2,820 $ 1,507 $ 6,638 $ 6,684
</TABLE>
GENERAL
Capital Adequacy
Management seeks to maintain a capital structure that will provide 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 shareholder value.
Stockholders' equity as of December 31, 1997 of $28.895 million increased
$2.320 million or approximately 8.7% from $26.575 million in 1996. The
Corporation had a ratio of risk-weighted assets to total capital of 22.59% and
24.91% at December 31, 1997 and 1996, and a ratio of risk-weighted assets to
Tier I capital of 21.57% and 23.80% at December 31, 1997 and 1996, respectively.
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient
amounts of cash when needed and at reasonable cost to accommodate withdrawals,
payments of debt, and increased loan demand. These events may occur daily or
other short-term intervals in the normal operation of the business. Experience
helps management predict time cycles in the amount of cash required. In
assessing liquidity, management gives consideration to
SECOND NATIONAL FINANCIAL CORPORATION 14 1997 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
relevant factors including stability of deposits, quality of assets, the economy
of markets 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 9.7% 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
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (FASB 125), which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishment of
liabilities. FASB 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by FASB 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB
Statement No. 125." Adoption of FASB 125 was not material; FASB 127 will be
adopted as required in 1998 and is not expected to be material.
In February 1997, Statement of Financing Accounting Standards No. 128,
"Earnings per Share" (FASB 128), was issued and establishes new standards for
computing and presenting earnings per share. FASB 128 is effective for the
Corporation's December 31, 1997 financial statements, including restatement of
interim periods; earlier application is not permitted. The Corporation had no
potentially dilutive common stock, and thus the effect of the new standard will
not be material.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FASB 130), was issued and establishes
standards for reporting and displaying comprehensive income and its components.
FASB 130 requires comprehensive income and its components, as recognized under
the accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The Corporation plans to adopt the
standard, as required, beginning in 1998; adoption is not expected to have a
material impact on the Corporation.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FASB 131), also issued in
June 1997, establishes new standards for reporting information about operating
segments in annual and interim financial statements. The standard also requires
descriptive information about the way the operating segments are determined, the
products and services provided by the segments and the nature of differences
between reportable segment measurements and those used for the consolidated
enterprise. This standard is effective for years beginning after December 15,
1997. Adoption in interim financial statements is not required until the year
after initial adoption; however, comparative prior period information is
required. The Corporation is evaluating the standard and plans adoption as
required in 1998; adoption is not expected to have a significant financial
impact on the Corporation.
SECOND NATIONAL FINANCIAL CORPORATION 15 1997 ANNUAL REPORT
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------
<S><C>
Assets
Cash and due from banks $ 6,545,669 $ 5,012,015
Securities (market value: 1997, $78,554,665;
1996, $82,760,841) 78,054,659 82,393,160
Federal funds sold 475,492 4,368,178
Loans, net 129,351,897 107,986,477
Bank premises and equipment, net 4,988,020 4,874,324
Interest receivable 1,730,376 1,788,074
Other assets 923,661 1,051,498
- ------------------------------------------------------------------------------------------------------
Total assets $ 222,069,774 $ 207,473,726
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 24,498,824 $ 20,752,831
Savings and interest-bearing demand deposits 72,832,574 73,510,816
Time deposits 87,273,436 80,773,316
- ------------------------------------------------------------------------------------------------------
Total deposits 184,604,834 175,036,963
Federal funds purchased and securities sold under
agreement to repurchase 3,301,037 1,200,000
Short-term borrowings 3,838,000 3,448,854
Interest payable 754,020 705,273
Other liabilities 677,253 507,377
Commitments and contingent liabilities -- --
- ------------------------------------------------------------------------------------------------------
Total liabilities 193,175,144 180,898,467
- ------------------------------------------------------------------------------------------------------
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; 1997, 1,500,529 shares issued and outstanding;
1996, 1,494,855 shares issued and outstanding 3,751,323 3,737,137
Capital surplus 1,308,457 1,170,814
Retained earnings 23,730,119 21,828,996
Unrealized gain (loss) on securities available for sale, net 104,731 (161,688)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,894,630 26,575,259
- ------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 222,069,774 $ 207,473,726
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
SECOND NATIONAL FINANCIAL CORPORATION 16 1997 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Interest Income
Interest and fees on loans $ 10,802,679 $ 9,343,964 $ 8,089,163
Interest and dividends on investment securities:
Taxable -- 195,062 197,875
Nontaxable 689,876 659,983 635,088
Interest and dividends on securities available for sale:
Taxable 4,071,621 3,941,135 3,774,116
Dividends 30,371 23,988 13,372
Interest income on federal funds sold 138,820 281,987 259,813
Interest on deposits in banks -- 54,523 245,423
- ---------------------------------------------------------------------------------------------------------------
Total interest income 15,733,367 14,500,642 13,214,850
- ---------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits 6,651,363 6,379,257 6,074,971
Interest on federal funds purchased
and securities sold under agreement to repurchase 106,317 60,781 77,500
Interest on short-term borrowings 126,737 108,393 114,340
Interest on note payable -- 121,858 169,100
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 6,884,417 6,670,289 6,435,911
- ---------------------------------------------------------------------------------------------------------------
Net interest income 8,848,950 7,830,353 6,778,939
Provision for loan losses 125,000 -- --
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,723,950 7,830,353 6,778,939
- ---------------------------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts 757,158 639,598 539,049
Fees for trust services 408,620 371,065 351,536
Investment services fee income 77,065 1,155 --
Other operating income 163,064 160,542 179,946
Gains (losses) on sales of securities available for sale (3,741) (32,375) 199
- ---------------------------------------------------------------------------------------------------------------
Total other income 1,402,166 1,139,985 1,070,730
- ---------------------------------------------------------------------------------------------------------------
Other Expenses
Compensation and employee benefits 3,044,587 2,869,368 2,561,058
Net occupancy expense 324,487 290,284 268,173
Supplies and equipment expenses 799,484 713,483 671,722
Capital stock tax 188,796 162,813 128,005
Professional services 180,445 171,304 78,403
Marketing 124,643 90,222 93,363
Other operating expenses 895,219 779,035 772,548
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 5,557,661 5,076,509 4,573,272
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 4,568,455 3,893,829 3,276,397
Income tax expense 1,323,737 1,034,502 894,157
- ---------------------------------------------------------------------------------------------------------------
Net income $ 3,244,718 $ 2,859,327 $ 2,382,240
- ---------------------------------------------------------------------------------------------------------------
Earnings per Share, basic and
assuming dilution $ 2.17 $ 1.91 $ 1.59
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
SECOND NATIONAL FINANCIAL CORPORATION 17 1997 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION> Unrealized
Gain (Loss)
on Securities
Common Capital Retained Available for
Stock Surplus Earnings Sale, Net Total
- -----------------------------------------------------------------------------------------------------------------
<S><C>
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 $(73,815) -- -- -- (143,287) (143,287)
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,737,137 1,170,814 21,828,996 (161,688) 26,575,259
Net income - 1997 -- -- 3,244,718 -- 3,244,718
Cash dividends - 1997
($.90 per share) -- -- (1,343,595) -- (1,343,595)
Issuance of common stock -
dividend reinvestment plan 36,425 293,313 -- -- 329,738
Acquisition of common stock (22,239) (155,670) -- -- (177,909)
Change in unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $137,247 -- -- -- 266,419 266,419
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 3,751,323 $ 1,308,457 $ 23,730,119 $ 104,731 $ 28,894,630
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
SECOND NATIONAL FINANCIAL CORPORATION 18 1997 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Cash Flows from Operating Activities
Net income $ 3,244,718 $ 2,859,327 $ 2,382,240
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 513,111 463,952 438,794
Provision for loan losses 125,000 -- --
Deferred tax expense (benefit) (80,893) 66,939 96,482
Pension (income) expense 33,291 (24,762) (5,666)
(Gain) loss on other real estate owned -- 4,015 (13,088)
(Gain) on sale of equipment (12,988) -- (4,190)
(Gain) loss on sale of securities available for sale 3,741 32,375 (199)
Amortization of security premiums and
accretion of discounts, net (39,746) (78,453) (32,949)
Amortization of organization expenses -- -- 4,303
Changes in assets and liabilities:
(Increase) decrease in interest receivable 57,698 (28,160) 85,726
(Increase) decrease in other assets 121,414 (78,102) (194,551)
Increase in interest payable 48,747 82,743 121,777
Increase (decrease) in other liabilities 86,654 127,892 (35,146)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,100,747 3,427,766 2,843,533
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Decrease in interest-bearing deposits in other banks -- 2,254,764 4,255,653
Proceeds from sale of securities available for sale 5,497,656 5,966,508 1,748,069
Proceeds from maturities and principal
payments of investment securities 2,425,000 500,000 507,000
Proceeds from maturities and principal
payments of securities available for sale 18,353,449 34,071,985 32,673,717
Purchase of investment securities (2,132,518) (1,036,309) --
Purchase of securities available for sale (19,365,415) (38,026,849) (24,536,133)
Proceeds from sale of fixed assets 16,903 -- 6,516
Purchase of premises and equipment (630,722) (610,462) (578,453)
Proceeds from sale of other real estate -- -- 72,938
Net (increase) in loans (21,490,420) (14,793,741) (13,090,319)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (17,326,067) (11,674,104) 1,058,988
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in demand, money
market and savings deposits 3,067,751 348,645 (7,235,323)
Net increase in certificates of deposit 6,500,120 7,570,148 10,225,739
Net increase (decrease) in federal
funds purchased and securities
sold under agreement to repurchase 2,101,037 -- (5,750,000)
Net increase in short-term borrowings 389,146 730,900 2,272,960
Principal payments on note payable -- (1,675,000) (300,000)
Issuance of common stock - dividend
reinvestment plan 329,738 290,033 99,940
Acquisition of common stock (177,909) (462,694) (92,500)
Cash dividends paid (1,343,595) (1,185,209) (1,051,647)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 10,866,288 $ 8,616,823 $ (1,830,831)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
SECOND NATIONAL FINANCIAL CORPORATION 19 1997 ANNUAL REPORT
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S><C>
Increase (decrease) in cash and cash equivalents $ (2,359,032) $ 370,485 $ 2,071,690
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents
Beginning 9,380,193 9,009,708 6,938,018
- --------------------------------------------------------------------------------------------------------------------
Ending $ 7,021,161 $ 9,380,193 $ 9,009,708
- --------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 6,835,670 $ 6,587,546 $ 6,314,134
- --------------------------------------------------------------------------------------------------------------------
Income taxes $ 1,140,000 $ 1,013,000 $ 938,142
- --------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Activities
Investing Activities
Other real estate acquired in settlement of loans $ -- $ 112,353 $ --
- --------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale $ 403,666 $ (217,102) $ 2,614,144
- --------------------------------------------------------------------------------------------------------------------
Other real estate disposed of through loan proceeds $ -- $ 108,338 $ --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
SECOND NATIONAL FINANCIAL CORPORATION 20 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
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.
Risks and Uncertainties
In its normal course of business, the Corporation encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk.
The Corporation is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more rapidly or on a different
basis than its interest-earning assets. Credit risk is the risk of default on
the Corporation's loan portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of collateral underlying loans receivable and the valuation
of real estate held by the Corporation.
The determination of the allowance for loan losses and the valuation of
real estate are based on estimates that are particularly susceptible to
significant changes in the economic environment and market conditions.
Management believes that, as of December 31, 1997, the allowance for loan losses
and the valuation of real estate are adequate based on information currently
available. A worsening or protracted economic decline or substantial increase in
interest rates, would increase the likelihood of losses due to credit and market
risks and could create the need for substantial increases to the allowance for
loan losses.
The Corporation is subject to the regulations of various regulatory
agencies which can change significantly from year to year. In addition, the
Corporation undergoes periodic examinations by regulatory agencies which may
subject it to further changes based on the regulators' judgments about
information available to them at the time of their examinations.
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
SECOND NATIONAL FINANCIAL CORPORATION 21 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996.
Loans
Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses. Interest is computed by methods which result in level
rates of return on principal. Loans are charged off when in the opinion of
management they are deemed to be uncollectible after taking into consideration
such factors as the current financial condition of the customer and the
underlying collateral and guarantees.
The Corporation adopted FASB No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement has been amended by FASB No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be measured based on
the present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying collateral) and
for which management has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain disclosures about investments
in impaired loans and the allowance for credit losses and interest income
recognized on loans.
The Corporation considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to
impairment under FASB 114. A loan is considered impaired when it is probable
that the Corporation will be unable to collect all principal and interest
amounts according to the contractual terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and the current economic
conditions. A performing loan may be considered impaired, if the factors above
indicate a need for impairment. A loan on nonaccrual status may not be impaired
if in the process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of less than
5% of the required principal and interest payment generally does not indicate an
impairment situation, if in management's judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify
as an impaired loan under FASB 114. Charge-offs for impaired loans occur when
the loan, or portion of the loan is determined to be uncollectible, as is the
case for all loans.
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
SECOND NATIONAL FINANCIAL CORPORATION 22 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
Weighted average shares were 1,493,477, 1,500,867 and 1,502,480 for the
years ended 1997, 1996, and 1995, respectively. The Corporation had no potential
common stock as of December 31, 1997, 1996, and 1995.
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.
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.
SECOND NATIONAL FINANCIAL CORPORATION 23 1997 ANNUAL REPORT
<PAGE>
NOTES TO 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.
Advertising
The Bank follows the policy of charging the costs of advertising to expense
as incurred.
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, 1997 and 1996, the aggregate amounts of daily average required balances were
approximately $1,530,000 and $1,310,000, respectively.
Note 3. Securities
The amortized cost and fair value of securities being held to maturity as
of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
<S><C>
1997
Obligations of states and
political subdivisions $ 14,264,504 $ 503,547 $ (3,541) $ 14,764,510
- --------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of securities being held to maturity as
of December 31, 1997, by contractual maturity are shown below.
Amortized Fair
Cost Value
- ---------------------------------------------------------------------------
Due in one year or less $ 199,628 $ 202,670
Due after one year through five years 4,421,750 4,589,373
Due after five years through ten years 8,386,918 8,654,781
Due after ten years 1,256,208 1,317,686
- ---------------------------------------------------------------------------
$ 14,264,504 $ 14,764,510
- ---------------------------------------------------------------------------
SECOND NATIONAL FINANCIAL CORPORATION 24 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for sale as of
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
<S><C>
1997
U.S. Treasury securities $ 18,946,358 $ 84,384 $ (5,572) $ 19,025,170
U.S. Government agencies 29,988,787 60,982 (127,225) 29,922,544
Corporate bonds 3,502,325 8,605 -- 3,510,930
Mortgage-backed securities 9,715,620 137,510 -- 9,853,130
State and political subdivisions 1,008,630 -- -- 1,008,630
Other 469,751 -- -- 469,751
- --------------------------------------------------------------------------------------------------------------
$ 63,631,471 $ 291,481 $ (132,797) $ 63,790,155
- --------------------------------------------------------------------------------------------------------------
1996
U.S. Treasury securities $ 18,420,696 $ 36,757 $ (26,288) $ 18,431,165
U.S. Government agencies 43,505,384 30,829 (338,299) 43,197,914
Mortgage-backed securities 5,749,863 57,733 (5,715) 5,801,881
Other 417,230 -- -- 417,230
- --------------------------------------------------------------------------------------------------------------
$ 68,093,173 $ 125,319 $ (370,302) $ 67,848,190
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1997, by contractual maturity are shown below.
Amortized Fair
Cost Value
- ---------------------------------------------------------------------------
Due in one year or less $ 13,696,188 $ 13,704,567
Due after one year through five years 37,781,439 37,793,304
Due after five years through ten years 3,418,453 3,340,593
Due after ten years 8,265,640 8,481,940
Other 469,751 469,751
- ---------------------------------------------------------------------------
$ 63,631,471 $ 63,790,155
- ---------------------------------------------------------------------------
There were no sales of securities being held to maturity during 1997, 1996
and 1995.
Proceeds from sales of securities available for sale during 1997, 1996 and
1995 were $5,497,656, $5,966,508 and $1,748,069. Gross realized gains of $-0-,
$-0- and $1,058 and gross realized losses of $3,741, $32,375 and $859 were
recognized on those sales.
Securities with amortized cost of $19,295,001 and $16,224,083 at December
31, 1997 and 1996, respectively, were pledged to secure public deposits and for
other purposes.
Note 4. Loans
Major classifications of loans are as follows:
December 31,
(thousands) 1997 1996
- -------------------------------------------------------------------------------
Real estate loans:
Construction and land development $ 10,878 $ 6,274
Farm land 611 627
1-4 family residential 53,953 51,927
Multifamily nonresidential and junior liens 37,513 27,819
Loans to farmers (except secured by real estate) 455 443
Commercial and industrial loans 9,660 9,004
Consumer and installment loans 14,528 9,872
All other loans 3,204 3,353
- -------------------------------------------------------------------------------
Total loans 130,802 109,319
Less: Allowance for loan losses 1,361 1,247
Unearned loan fees 89 86
- -------------------------------------------------------------------------------
Loans, net $ 129,352 $ 107,986
- -------------------------------------------------------------------------------
SECOND NATIONAL FINANCIAL CORPORATION 25 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
December 31,
(thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Balance at beginning of year $ 1,247 $ 1,320 $ 1,365
Recoveries 20 28 33
Provision for loan losses 125 -- --
Charge-offs (31) (101) (78)
- ----------------------------------------------------------------------------
Balance at end of year $ 1,361 $ 1,247 $ 1,320
- ----------------------------------------------------------------------------
Information about impaired loans as of and for the years ended December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S><C>
Impaired loans for which an allowance has been provided $ -- $ 69,054
Impaired loans for which no allowance has been provided 258,890 225,391
- -----------------------------------------------------------------------------------------
Total impaired loans $ 258,890 $ 294,445
- -----------------------------------------------------------------------------------------
Allowance provided for impaired loans, included in
the allowance for loan losses $ -- $ 63,070
- -----------------------------------------------------------------------------------------
Average balance in impaired loans $ 275,151 $ 341,871
- -----------------------------------------------------------------------------------------
Interest income recognized $ 20,517 $ 8,634
- -----------------------------------------------------------------------------------------
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $256,883 and $287,429 at December 31, 1997 and 1996. If interest on
these loans had been accrued, such income would have approximated $40,953 and
$21,486, 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, 1997
and 1996, these loans totaled $3,104,507 and $3,244,100, respectively. During
1997, total principal additions were $5,155,631 and total principal payments
were $5,295,224.
Note 7. Bank Premises and Equipment, Net
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------
<S><C>
Bank premises $ 4,254,049 $ 3,413,082
Leasehold improvements 59,009 59,009
Furniture and equipment 3,419,593 3,059,093
Construction in progress -- 631,080
- ----------------------------------------------------------------------------------------
7,732,651 7,162,264
Less accumulated depreciation and amortization 2,744,631 2,287,940
- ----------------------------------------------------------------------------------------
$ 4,988,020 $ 4,874,324
- ----------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense amounted to $513,111, $463,952 and
$438,794 for 1997, 1996 and 1995, respectively.
Note 8. Deposits
The aggregate amount of jumbo time deposits, each with a minimum of
$100,000, was approximately $17,648,870 and $14,290,613 at December 31, 1997 and
1996, respectively.
SECOND NATIONAL FINANCIAL CORPORATION 26 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998 $ 54,385,188
1999 15,856,568
2000 10,131,067
2001 2,708,201
2002 and thereafter 4,192,412
--------------------------------------------
$ 87,273,436
--------------------------------------------
Note 9. Other Borrowings
Short-term borrowings consists of Master Promissory Notes with Corporate
customers. These notes bear a variable interest rate and are payable on demand.
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and treasury tax and loan
deposits and generally are repaid within one to 120 days from the transaction
date.
Note 10. Employee Benefit Plans
The Corporation maintains a profit sharing plan for all eligible employees.
Amounts charged to operations were $205,000, $175,000 and $124,000 in 1997, 1996
and 1995, 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 $64,420, $54,965 and $46,145 in 1997, 1996 and
1995, respectively. The Corporation's cash contribution to the 401-K Plan was
$45,980, $45,869 and $42,855 in 1997, 1996 and 1995, 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:
1997 1996
- ------------------------------------------------------------------------------
[S][C]
Vested benefit obligation $ 2,356,142 $ 2,024,337
- ------------------------------------------------------------------------------
Accumulated benefit obligation $ 2,402,415 $ 2,048,190
- ------------------------------------------------------------------------------
Projected benefit obligation $ (2,494,895) $ (2,429,721)
Plan assets, at fair value 3,309,339 2,821,152
- ------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 814,444 391,431
Unrecognized transition obligation (258,016) (301,019)
Unrecognized prior service cost 566,855 614,587
Unrecognized net (gain) loss (593,652) (142,077)
- ------------------------------------------------------------------------------
Net pension asset $ 529,631 $ 562,922
- ------------------------------------------------------------------------------
Net periodic pension expense (income) includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S><C>
Service cost - benefits earned during the period $ 55,962 $ 71,878 $ 64,904
Interest cost on projected benefit obligation 162,952 116,064 106,109
Actual return on plan assets (190,352) (339,546) (554,975)
Net amortization and deferral 4,729 126,842 378,296
- ---------------------------------------------------------------------------------------------------------
Net periodic pension (income) $ 33,291 $ (24,762) $ (5,666)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 27 1997 ANNUAL REPORT
<PAGE>
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 years ended December 31, 1997 and 1996 was
7.00% and 5.00%, respectively. The expected long-term rate of return on plan
assets was 7.0% for both years.
Note 11. Income Taxes
Net deferred tax assets (liabilities) consist of the following components
as of December 31:
1997 1996
- -------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan losses $ 302,033 $ 263,568
Unearned loan fees 50,934 28,661
Nonaccrual loan interest 27,504 4,056
Keyman Life Insurance -- 21,622
Securities available for sale -- 83,294
Other 1,182 1,750
- -------------------------------------------------------------------------
381,653 402,951
- -------------------------------------------------------------------------
Deferred tax liabilities:
Accrued pension asset 180,037 191,393
Premises and equipment 191,727 198,845
Securities available for sale 53,953 --
Other 9,249 9,672
- -------------------------------------------------------------------------
434,966 399,910
- -------------------------------------------------------------------------
$ (53,313) $ 3,041
- -------------------------------------------------------------------------
The provision for income taxes charged to operations for the years ended
December 31, 1997, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S><C>
Current tax expense $ 1,404,630 $ 967,563 $ 797,675
Deferred tax expense (benefit) (80,893) 66,939 96,482
- ---------------------------------------------------------------------------------------------------
$ 1,323,737 $ 1,034,502 $ 894,157
- ---------------------------------------------------------------------------------------------------
</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, 1997, 1996 and 1995, due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S><C>
Computed "expected" tax expense $ 1,553,275 $ 1,323,902 $ 1,113,975
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (241,858) (240,051) (231,963)
Other, net 12,320 (49,349) 12,145
- -----------------------------------------------------------------------------------------------------
$ 1,323,737 $ 1,034,502 $ 894,157
- -----------------------------------------------------------------------------------------------------
</TABLE>
Note 12. 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, 1997, $229,776 of this obligation was funded. This amount, net of
accumulated amortization of $42,800, is included under securities on the balance
sheet as of December 31, 1997. The remainder of the subscription price will be
payable at the call of the General Partner, Housing Capital Corporation of
Virginia.
See Note 15 with respect to financial instruments with off-balance-sheet
risk.
SECOND NATIONAL FINANCIAL CORPORATION 28 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. 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. During 1997, the banking subsidiary transferred
$4,000,000 to the Parent Corporation as working capital. As of December 31, 1997
the aggregate amount of additional unrestricted funds which could be transferred
from the banking subsidiary to the Parent Corporation without prior regulatory
approval totalled $1,318,636 or 4.6% of the consolidated net assets.
Note 14. 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 the stock's fair market value on each dividend
record date, and allows for voluntary contributions to purchase stock.
Note 15. 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, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S><C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 17,098,000 $ 12,760,000
Standby letters of credit $ 462,000 $ 796,000
- --------------------------------------------------------------------------------------------------------
</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, 1997, varies
from 0 percent to 100 percent; the average amount collateralized is 74 percent.
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit with correspondent institutions at December 31, 1997, exceeded
the insurance limits of the Federal Deposit Insurance Corporation by $2,678,572.
SECOND NATIONAL FINANCIAL CORPORATION 29 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. 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 were 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 market rates
for deposits of similar remaining maturities.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings maturing within 90 days
approximate their fair values. Fair values of other short-term borrowings are
estimated using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
At December 31, 1997 and 1996, the carrying amounts and fair values of loan
commitments and stand-by letters of credit were immaterial.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
(thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------
<C><C>
Financial assets:
Cash and short-term investments $ 7,021 $ 7,021 $ 9,380 $ 9,380
Securities 78,055 78,555 82,393 82,761
Loans 130,713 129,385 109,234 109,127
Less: allowance for loan losses (1,361) -- (1,248) --
- ---------------------------------------------------------------------------------------------
Total financial assets $ 214,428 $ 214,961 $ 199,759 $ 201,268
- ---------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $ 184,605 $ 173,089 $ 175,037 $ 175,288
Other borrowings 7,139 7,139 4,649 4,649
- ---------------------------------------------------------------------------------------------
Total financial liabilities $ 191,744 $ 180,228 $ 179,686 $ 179,937
- ---------------------------------------------------------------------------------------------
SECOND NATIONAL FINANCIAL CORPORATION 30 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - possibly additional discretionary
- - actions by regulators that, if undertaken, could have a direct material effect
on the Corporation's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1997, that the Corporation meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, 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>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Amount in Thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------
<S><C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 30,151 22.59% >$ 10,679 >8.0% N/A
- -
Second Bank & Trust $ 26,694 20.07% >$ 10,641 >8.0% >$ 13,302 > 10.0%
Tier 1 Capital (to Risk - - - -
Weighted Assets):
Consolidated $ 28,790 21.57% >$ 5,340 >4.0% N/A
- -
Second Bank & Trust $ 25,333 19.04% >$ 5,321 >4.0% >$ 7,981 > 6.0%
Tier 1 Capital (to - - - -
Average Assets):
Consolidated $ 28,790 13.23% >$ 8,706 >4.0% N/A
- -
Second Bank & Trust $ 25,333 11.64% >$ 8,706 >4.0% >$ 10,883 > 5.0%
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%
- - - -
- ------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 31 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Parent Corporation Only Financial Statements
Second National Financial Corporation (Parent Corporation Only)
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S><C>
Assets
Cash and due from banks $ 1,520,833 $ --
Securities available for sale
(market value $2,008,630) 2,008,630 --
Investment in subsidiary 25,392,840 26,680,450
Income taxes receivable 45,535 36,238
Accrued interest receivable 21,035 --
Due from subsidiary 2,753,757 2,728,571
- --------------------------------------------------------------------------------------------------------
Total assets $ 31,742,630 $ 29,445,259
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Short-term borrowings $ 2,838,000 $ 2,870,000
Other liabilities 10,000 --
- --------------------------------------------------------------------------------------------------------
Total liabilities 2,848,000 2,870,000
- --------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock -- --
Common stock 3,751,323 3,737,137
Capital surplus 1,308,457 1,170,814
Retained earnings 23,730,119 21,828,996
Unrealized gain (loss) on securities available for sale, net 104,731 (161,688)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,894,630 26,575,259
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 31,742,630 $ 29,445,259
- --------------------------------------------------------------------------------------------------------
</TABLE>
Second National Financial Corporation (Parent Corporation Only)
Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Income
Dividends from subsidiary $ 4,853,656 $ 1,185,209 $ 1,051,646
Interest from subsidiary 150,281 127,083 126,358
- ---------------------------------------------------------------------------------------------------------------
5,003,937 1,312,292 1,178,004
- ---------------------------------------------------------------------------------------------------------------
Expenses
Interest 101,530 84,846 89,127
Amortization of organizational expenses -- -- 4,303
Miscellaneous 68,396 57,737 34,795
- ---------------------------------------------------------------------------------------------------------------
169,926 142,583 128,225
- ---------------------------------------------------------------------------------------------------------------
Net income before income tax benefit and
undistributed equity in subsidiary 4,834,011 1,169,709 1,049,779
Income tax benefit 45,535 36,238 32,377
- ---------------------------------------------------------------------------------------------------------------
Net income before undistributed
equity in subsidiary 4,879,546 1,205,947 1,082,156
Undistributed (distributed) equity in subsidiary (1,634,828) 1,653,380 1,300,084
- ---------------------------------------------------------------------------------------------------------------
Net income $ 3,244,718 $ 2,859,327 $ 2,382,240
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 32 1997 ANNUAL REPORT
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Second National Financial Corporation (Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Cash Flows from Operating Activities
Net income $ 3,244,718 $ 2,859,327 $ 2,382,240
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization -- -- 4,303
Distributed (undistributed) earnings of subsidiary 1,634,828 (1,653,380) (1,300,084)
(Increase) in income taxes receivable (7,297) (3,861) (27,899)
(Increase) in due from subsidiary (105,985) (203,216) (2,525,353)
(Increase) in interest receivable (21,035) -- --
Increase in other liabilities 10,000 -- --
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,753,229 998,870 (1,466,793)
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities,
purchase of securities available for sale (2,008,630) -- --
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid (1,343,595) (1,185,209) (1,051,647)
Net increase (decrease) in short-term borrowings (32,000) 359,000 2,511,000
Issuance of common stock - dividend
reinvestment plan 329,738 290,033 99,940
Acquisition of common stock (177,909) (462,694) (92,500)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,223,766) (998,870) 1,466,793
- ---------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,520,833 -- --
Cash and Cash Equivalents
Beginning -- -- --
- ---------------------------------------------------------------------------------------------------------------
Ending $ 1,520,833 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SECOND NATIONAL FINANCIAL CORPORATION 33 1997 ANNUAL REPORT
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[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, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1997, 1996
and 1995. 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, 1997 and
1996, and the results of its operations and its cash flows for the years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
_________________________________
Winchester, Virginia
January 28, 1998
SECOND NATIONAL FINANCIAL CORPORATION 34 1997 ANNUAL REPORT
<PAGE>
STOCKHOLDER INFORMATION
CORPORATE HEADQUARTERS
Second National Financial Corporation
P.O. Box 71
102 S. Main Street
Culpeper, Virginia 22701
(540) 825-4800
www.secondnatl.com
<TABLE>
<S> <C>
STOCK TRANSFER/
ANNUAL MEETING DIVIDEND PAYING AGENT INDEPENDENT AUDITORS
The Annual Meeting of Stockholders J. Quintin Mullins Yount, Hyde & Barbour, P.C.
will be held at 12:00 P.M. on Thursday, Vice President and Trust Officer 50 South Cameron St.
April 23, 1998 at the Holiday Inn in Second Bank & Trust Winchester, Virginia 22604
Culpeper, Virginia. All Stockholders P.O. Box 71
are cordially invited to attend. Culpeper, Virginia 22701 CORPORATE COUNSEL
(540) 825-4800 Mays & Valentine, L.L.C.
NASDAQ SYMBOL: SEFC Email: [email protected] 1111 East Main Street
Richmond, Virginia 23208-1122
LOCAL MARKET MAKERS: FORM 10K:
Scott & Stringfellow A copy of Second National Financial Corporation's
Davenport & Company LLC Form 10K will be furnished without charge to
Ferris, Baker & Watts stockholders upon written request to:
Wheat, First Securities Mr. Jeffrey W. Farrar
McKinnon & Co. Vice President and Chief Financial Officer
Second National Financial Corporation
P.O. Box 71
Culpeper, Virginia 22701
(540) 825-4800
Email: [email protected]
</TABLE>
STOCK AND DIVIDEND INFORMATION
A total of 1,500,900 shares were outstanding on December 31, 1997 held by
1220 stockholders of record. During the first six months of 1997, shares of
Holding Company Common Stock were not traded on any national or regional
exchange, and trading is generally as a result of private negotiation. On July
14, 1997 the Corporation's stock began trading on on the Nasdaq Small Cap
Market. The Nasdaq Stock Market is a highly regulated electronic securities
market whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution. The Nasdaq is
operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the
National Association of Securities Dealers, Inc. The Corporation's common stock
trades on the Nasdaq Small Cap Market under the trading symbol SEFC. Listed
below are the high and low prices for the common stock and dividends for the
last eight quarters ended December 31, 1997.
<TABLE>
<CAPTION>
1997 High Low Dividends 1996 High Low Dividends
- -------------------------------------------------------------------------------------------------------
<S><C>
1st Quarter 22.00 20.00 .22 1st Quarter 20.00 18.50 .19
2nd Quarter 23.00 22.00 .22 2nd Quarter 20.00 19.00 .19
3rd Quarter 30.00 25.50 .22 3rd Quarter 20.00 20.00 .19
4th Quarter 33.50 27.00 .24 4th Quarter 21.00 20.00 .22
</TABLE>
Dividend Reinvestment Plan
Second National Financial Corporation's Dividend Reinvestment Plan provides
each registered stockholder with an economical method of investing cash
dividends into additional shares of the Company's stock. Key advantages include
reinvestment of dividends without commissions and the ability to make voluntary
contributions to purchase additional shares without commissions. For a
prospectus on the Dividend Reinvestment Plan, contact Trust and Investment
Services at (540) 825-4800 (Ext 251).
SECOND NATIONAL FINANCIAL CORPORATION 35 1997 ANNUAL REPORT
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,546
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