PUBLIC DISCLOSURE. February 16, 2010 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION. First Bank. 112 West King Street. Strasburg, Virginia 22657

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1 PUBLIC DISCLOSURE February 16, 2010 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION First Bank West King Street Strasburg, Virginia Federal Reserve Bank of Richmond P. O. Box Richmond, Virginia NOTE: This document is an evaluation of this institution s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of the institution. This evaluation is not, nor should it be construed as, an assessment of the financial condition of this institution. The rating assigned to this institution does not represent an analysis, conclusion or opinion of the Federal financial supervisory agency concerning the safety and soundness of this financial institution.

2 TABLE OF CONTENTS Institution Rating Page Institution Institution s CRA Rating... 1 Summary of Major Factors Supporting Rating... 1 Description of Institution... 1 Scope of Examination... 2 Conclusions With Respect to Performance Tests... 3 Assessment Area Conclusions Shenandoah NonMSA Assessment Area Description of Institution s Operations... 6 Conclusions with Respect to Performance Tests... 7 Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA Assessment Area Description of Institution s Operations Conclusions with Respect to Performance Tests CRA Appendix: Glossary... 17

3 COMMUNITY REINVESTMENT ACT PERFORMANCE EVALUATION INSTITUTION'S CRA RATING: This institution is rated Satisfactory. The Lending Test is rated: Satisfactory The Community Development Test is rated: Satisfactory The major factors supporting this rating include: The bank s loan-to-deposit ratio is considered more than reasonable in relation to the demand for credit in the assessment areas. A substantial majority of the institution s Home Mortgage Disclosure Act (HMDA) and small business loans were originated to borrowers within the bank s assessment areas. The bank s lending to borrowers of different income levels and businesses of different sizes varies between reasonable and excellent by product and assessment area but is overall considered reasonable. The bank s geographic distribution performance also varies between reasonable and excellent by product and assessment area. Similar to the borrower distribution, the geographic distribution performance is overall considered reasonable. An adequate level of community development performance through participation in community development loans, qualified investments, and community development services was noted. The institution has not received any complaints regarding its CRA performance since the previous evaluation. DESCRIPTION OF INSTITUTION First Bank is headquartered in Strasburg, Virginia, and operates a total of 12 branch offices within the counties of Frederick, Shenandoah, and Warren, and the City of Winchester, Virginia. The bank is a wholly-owned subsidiary of First National Corporation, a single-bank holding company headquartered in Strasburg, Virginia. The bank received a satisfactory rating at its prior CRA evaluation dated January 14, As of December 31, 2009, the bank held assets totaling $552.1 million in assets, of which 79.2% were loans and 10.9% were securities. Various deposit and loan products are available through the institution including loans for residential mortgage, consumer, and business purposes. The composition of the loan portfolio as of December 31, 2009, is represented in the following chart: Composition of Loan Portfolio Loan Type 12/31/2009 $(000s) % Secured by 1-4 Family dwellings 118, Multifamily 21, Construction and Development 55, Commercial & Industrial/ NonFarm NonResidential Consumer Loans and Credit Cards 227,563 13, Agricultural Loans/ Farmland 4, All Other 2, Total 443,

4 The bank serves two contiguous assessment areas. The Shenandoah NonMetropolitan Statistical Area (NonMSA) assessment area is located in a rural portion of the northwest Virginia. The bank also serves contiguous portions of the Washington-Arlington-Alexandria, DC-VA-MD-WV Metropolitan Statistical Area (MSA) and the Winchester, VA-WV MSA. When combined, these two MSAs comprise the Washington-Baltimore-Northern Virginia, DC-MD-VA-WV Combined Statistical Area (CSA). Because the bank s branch presence within the Washington-Baltimore-Northern Virginia, DC-MD-VA- WV CSA does not extend throughout the entire CSA, the bank s assessment area is limited to portions of the CSA. Areas included in the bank s assessment areas are as follows: Assessment Area City/County State Census Tracts Included Shenandoah NonMSA Shenandoah County VA All Frederick County VA All Washington-Baltimore-Northern Virginia, DC- Warren County VA All MD-VA-WV CSA Winchester City VA All Since the previous evaluation (January 14, 2008), the bank acquired one bank branch in Woodstock, Virginia (Shenandoah NonMSA assessment area). The bank purchased the branch during November 2009 from another financial institution and the addition of this branch did not necessitate a change to the Shenandoah NonMSA assessment area. SCOPE OF EXAMINATION The institution was evaluated using the interagency examination procedures developed by the Federal Financial Institutions Examination Council (FFIEC). First Bank is required to report certain information regarding its home mortgage lending in accordance with HMDA. Accordingly, the bank s 2007 and 2008 HMDA loan originations were considered in the evaluation. The bank s 2009 HMDA data was not included because the data is not yet available. Additionally, based on the institution s recent historical loan volume, small business loans were identified as a primary credit product and were also considered in the evaluation. The analysis includes all small business loans originated by the bank during calendar year 2008 and the first nine months of Qualified community development loans and services are considered for activities since the previous evaluation. All qualified investments outstanding as of the date of this evaluation were also considered regardless of when made. The following table includes the distribution of branch offices, along with deposit and loan volume. The deposit volume includes all bank deposits and is current as of June 30, 2009, while loan volume includes all HMDA and small business loans considered in the evaluation. Assessment Area Loan Volume Deposit Volume Branches # % $(000s) % $(000s) % # % Shenandoah NonMSA % $48, % $266, % % Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA % $57, % $195, % % Totals % $105, % $461, % % Ratings for the lending and community development tests are assigned to the institution based on its performance within its assessment areas. Both assessment areas are relatively equal based on size, determined by loan activity, proportion of bank branches, and deposit market share. Therefore, both assessment areas were subject to full scope evaluations. 2

5 CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS When evaluating the bank s performance, consideration is generally given to its level of lending in conjunction with relevant demographic data from the 2000 census, aggregate HMDA data from calendar years 2007 and 2008, aggregate small business data from 2008, and Dun & Bradstreet (D&B) business demographic data from Analyses of lending during the review period are discussed in greater detail in subsequent sections of this evaluation. While HMDA data from calendar years 2007 and 2008 were fully analyzed and considered in the evaluation, only bank and aggregate data from 2008 are presented in the assessment area analysis tables. Similarly, small business analysis tables include bank and aggregate data from Aggregate small business data from 2009 could not be considered in the evaluation because the data is not yet available. In instances where the 2007 HMDA and 2009 small business distribution performances vary significantly from the performance noted during 2008, such variances and the corresponding impact on the overall performance are discussed. When evaluating the geographic and borrower distribution for a specific loan category within an assessment area, primary emphasis is placed on the number of loans originated or purchased. To arrive at an overall assessment area level conclusion regarding the distribution of lending, performance in each loan category is then weighted by dollar volume of such loans made in the assessment area. The institution s overall rating is based on the overall performance of each market area, and primary consideration is given to the dollar volume each market contributes to the overall activity considered in the evaluation. During 2008, the bank originated $34.1 million of small business and $21.3 million of residential mortgage (HMDA) loans within its two assessment areas. In the Shenandoah NonMSA assessment area, however, the bank originated a larger dollar volume HMDA loans ($13.7 million) than small business loans ($11.7 million). In the Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA assessment area, the bank originated a much larger volume of small business loans ($22.5 million) than HMDA loans ($7.6 million). Accordingly, HMDA lending performance is given slightly more weight in the Shenandoah NonMSA assessment area, while the small business lending performance is weighted more heavily in the Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA assessment area. Overall, the bank s lending test performance is rated Satisfactory. This rating considers the bank s loanto-deposit ratio, level of lending in its assessment areas, borrower distribution performances, and geographic distribution performances. Each of these components are discussed in the following sections. Loan-To-Deposit Ratio The bank s loan-to-deposit ratio is one measure of its lending relative to its capacity. The bank s loanto-deposit ratio as of December 31, 2009, equaled 94.3% and averaged 98.2% for the eight-quarter period ending December 31, In comparison, the average of quarterly loan-to-deposit ratios for all banks headquartered in nonmetropolitan areas of Virginia and of similar asset size to First Bank ranged from 83.6% to 89% for the seven-quarter period ending September 30, Since December 31, 2007, bank assets and deposits have increased by 2% and 4.2%, respectively, while loans outstanding have decreased by 2.1%. Given the bank s size, financial condition, and local credit needs, the bank s loanto-deposit ratio is considered more than reasonable. Lending in Assessment Area To evaluate the institution s lending distribution within its assessment areas, all HMDA loans that were originated/purchased during 2007 and 2008 (479 loans) and all small business loans (529) that were originated since January 1, 2008 through September 30, 2009 were reviewed. The lending distribution is represented in the following table for the combined assessment areas. 3

6 Loan Type As illustrated in the preceding chart, a substantial majority of the number and dollar amount of HMDA and small business loans were extended within the bank s assessment areas. Overall, the institution s level of lending within its assessment areas is considered highly responsive to community credit needs. Lending to Borrowers of Different Incomes and To Businesses of Different Sizes Within the bank s market areas, a high level of small business lending activity has been reported by specialized lenders, who often originate small business loans in the form of credit cards. These loans, however, tend to be much smaller in size than traditional small business bank loans, and a significant majority of such loans do not have revenue data reported. The presence of these lenders is reflected in a smaller market share for traditional lenders and tends to understate the percentage of loans to businesses with annual revenues of $1 million or less. Consequently, the presence of these lenders was considered as an aspect of performance context when evaluating the level and distribution of bank lending. Therefore, to better gauge performance, First Bank s lending is also compared to a peer group of traditional small business lenders for 2008 that excludes the credit card/specialty lenders. Within its assessment areas, the bank s borrower distribution performance varies from excellent to reasonable by product and assessment area. Most often the bank s borrower distribution performance is reasonable. Consequently, the bank s overall borrower distribution performance is considered reasonable. Additional discussion of the bank s performance by product and market area is provided in greater detail in subsequent sections of this evaluation. Geographic Distribution of Loans Comparison of Credit Extended Inside and Outside of Assessment Area(s) Inside # % $(000) % # % $(000) % Home Purchase , , Home Improvement , Multi-Family Housing , Refinancing , , Total HMDA related , , Small Business* , , TOTAL LOANS , , Similar to its borrower distribution performance, the bank s geographic distribution performance varies by product and assessment area. The Shenandoah NonMSA assessment area has no low- or moderateincome census tracts, and the Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA assessment area has no low-income census tracts. Nonetheless, both assessment areas include a mixture of middle- and upper-income census tracts and the Washington-Baltimore-Northern Virginia DC-MD- VA-WV CSA assessment area also contains nine moderate-income census tracts. The bank s overall geographic distribution performance is considered reasonable. Community Development Loans, Investments, and Services First Bank supports community development initiatives and organizations that benefit their local markets and larger regional areas by funding community development loans, making qualified investments, and providing financial expertise and other support to local organizations providing community development services. Discussions with individuals knowledgeable of the local market areas and reviews of the performance evaluations of other financial institutions having a local presence indicate that local community development opportunities are limited in the Shenandoah NonMSA and 4 Outside *The number and dollar amount of loans reflects a sample of such loans originated during the evaluation period and does not reflect loan data collected or reported by the institution.

7 Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA assessment areas. CRA performance context considers not only available opportunities but bank capacity as well. As evidenced by its recent loan-to-deposit ratio (94.3%), the bank has been an active lender. Given the current loan-to-deposit ratio, the bank s capacity for additional lending, including community development lending, is somewhat constrained. The bank faces no constraints, however, in providing community development services and making qualified investments. During the evaluation period, First Bank originated five community development loans totaling $3 million, and the bank and its employees provide financial expertise and other assistance to several organizations that provide community development services throughout the bank s market areas. Details of the community development loans and services are discussed in the assessment areas where the activities took place. Qualified investment activities that benefit multiple assessment areas are as follows: $993,858 invested in a bond issued by the Virginia Housing Development Authority (VHDA). The VHDA promotes affordable housing by financing single-family and multi-family mortgages for low-and moderate-income individuals throughout the Commonwealth of Virginia. $275,000 invested in a time deposit account issued by Community Capital Bank of Virginia (CCBV). CCBV is a certified community development financial institution (CDFI) that only originates qualified community development loans throughout the Commonwealth of Virginia. Overall, the bank s community development activities demonstrate an adequate responsiveness to the local communities needs when considering the institutional capacity and available opportunities within the assessment areas and is rated Satisfactory. FAIR LENDING OR OTHER ILLEGAL CREDIT PRACTICES REVIEW No evidence of discriminatory or other illegal credit practices inconsistent with helping to meet community credit needs was identified. Adequate policies, procedures, and training programs have been developed to support nondiscrimination in lending activities. 5

8 DESCRIPTION OF INSTITUTION S OPERATIONS IN THE SHENANDOAH NONMSA ASSESSMENT AREA The bank s assessment area is located in the northern portion of Virginia s Shenandoah Valley region. The local economy is based on a variety of manufacturing, retail, hospitality, and agricultural industries. According to 2000 census data, the assessment area has a population of 35,075 and a median housing value of $101,096. The owner-occupancy rate for the market equals 62.6%, which is slightly lower than the level in nonmetropolitan areas of Virginia (65.4%). Within the assessment area, 5.8% of families are below the poverty level, which is lower than the corresponding rate for nonmetropolitan areas of the commonwealth (10.7%). The 2008 and 2009 HUD estimated median family incomes for the nonmetropolitan areas of Virginia equaled $50,600 and $53,100, respectively. According to recent (June 30, 2009) data from the FDIC, First Bank ranked first out of nine institutions in local deposit market share by having 33.3% of the deposits within Shenandoah County. The following table includes pertinent demographic data for the assessment area. Assessment Area Demographics Shenandoah NonMSA Income Categories* Tract Distribution Families by Tract Families < Poverty as a % of Families by Tract Families by Family Income Low Moderate Middle Upper NA Total Low Moderate Middle Upper NA Total # % # % # % # % , , , , , , , , O wner O ccupied Units by Tract Households HHs by Tract HHs < Poverty by Tract HHs by HH Income # % # % # % # % , , , , , , , , , , , , Total Businesses by Tract Businesses by Tract and Revenue Size Less than or = $1 Million O ver $1 Million Revenue not Reported Low Moderate Middle Upper NA Total # % # % # % # % , , , , Percentage of Total Businesses: *NA-Tracts without household or family income as applicable

9 Major area employers include George s Incorporated (poultry processing plant), Omega Studios Incorporated (book binding), Shenandoah Telecommunications, Merillat Industries (cabinet manufactures), and CMC Howell Metal (tubing manufacturer). Current and recent periodic unemployment rates are included in the following table: Unemployment Rate Trend Geographic Area January July January July January Shenandoah County 4.2% 5.1% 8.2% 8.1% 9.6% Virginia 3.6% 4% 6.2% 6.9% 7.6% As indicated by the table, area unemployment rates have risen sharply since January Rising area unemployment rates may adversely affect a bank s ability to extend credit as unemployed applicants often have diminished repayment capacity. A local community development official was contacted during the evaluation to discuss local economic conditions and area credit needs. The contact indicated that local economic conditions have continued to deteriorate. Funding for construction projects has proven difficult to obtain and several projects are currently incomplete and do not have the funds to complete construction. Additionally, demand for nonresidential properties has diminished leaving some completed projects with vacant space. The contact also noted that some of the area s older housing stock is in need of repair but there is essentially no municipal funding available to subsidize the improvement of substandard housing. Despite the difficult economic conditions, the contact indicated that local financial institutions are adequately serving the needs of the local market. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS: During 2008, the bank originated $13.7 million in HMDA loans and $11.7 million in small business loans within the assessment area. Accordingly, the bank s HMDA lending performance is afforded slightly more weight than the small business performance when considering the bank s combined product performance. Lending to Borrowers of Different Incomes and to Businesses of Different Sizes Overall, the distribution of loans to borrowers of different income/revenue levels is considered excellent within this assessment area. In reaching this conclusion more weight was placed on the HMDA performance, which was excellent, than on the small business performance, which was reasonable, because of the larger dollar volume of HMDA lending within the assessment area. The performance conclusion also reflects the strength of the bank s HMDA distribution performance. 7

10 Income Categories Distribution of HMDA Loans by Income Level of Borrower Bank Shenandoah NonMSA (2008) # % $(000s) % $ # % $(000s) % $ (22) Home Purchase (494) Low , Moderate , (68) Refinance (770) Low , Moderate , , (41) Home Improvement (132) Low Moderate , (0) Multi-Family (0) Low Moderate HMDA Totals Low , Moderate , , Middle , , Upper , , Total , , , Unknown 11 1, ,276 ( ) represents the total number of bank loans for the specific Loan Purpose where income is known Percentage's (%) are calculated on all loans where incomes are known Aggregate When considering the bank and aggregate data from 2008, refinance loans were the most frequent product extended by both the bank and aggregate reporters. Loans secured by multi-family dwellings were not a factor in the analysis. The bank s level of lending to low- and moderate-income borrowers exceeds the aggregate reporter level for each loan product but for home improvement loans to moderateincome borrowers, which lags the aggregate lending level. Overall, 13.7% of the bank s HMDA loans were made to low-income borrowers. This level of lending substantially exceeds the percentage of the 2008 aggregate lending level to such borrowers (4.1%) and exceeds the proportion of low-income families within the assessment area (11.8%). The bank s lending to moderate-income borrowers (22.1%) also exceeds the aggregate lending level (15%) and the percentage of moderate-income families within the assessment area (15.8%). The bank s overall performance is considered excellent, and the bank s overall lending performance for HMDA loans for 2007 is substantially similar to the performance discussed for

11 by R evenue # % $(000s) % $ # % $(000s) % $ $1 Million or Less , , Over $1 Million , NA NA NA NA Unknown NA NA NA NA by Loan Size D&B data indicated that 91.6% of all local businesses have revenues that do not exceed $1 million per year. According to 2008 aggregate small business data, 29.7% of reported loans were to businesses with annual revenues of $1 million or less. The remaining portion of businesses either had revenues exceeding $1 million or revenues were unknown. Additionally, data from 2008 for a peer group of traditional bank reporters was also considered because the aggregate data includes a large volume of credit card and other specialized lender data. According to the peer group data, 71% of the selected peer group s reported small business loans were to businesses having revenues of $1 million or less. Revenues were either unknown or in excess of $1 million for the remaining portion of loans. During 2008, 66.1% of the bank s small business loans were to businesses with annual revenues of $1 million or less. During 2009, the bank originated 80 small business loans totaling $8.3 million in the assessment area. Of these small business loans, 64 (80%) totaling $6.3 million (76.1%) were to businesses with annual revenues of $1 million or less. Overall, the bank s level of lending to businesses with annual revenues of $1 million or less is considered reasonable. Geographic Distribution of Loans Distribution of Lending by Loan Amount and Size of Business Shenandoah NonMSA (2008) Bank $100,000 or less , , , $100,001-$250, , , $250,001-$1 Million , , Total , , , * No data is available for Aggregate loans with Revenues over $1 million and those with Unknown revenues Aggregate* As indicated in the demographic table, there are no low- or moderate-income census tracts within the assessment area; however, there are five middle-income and three upper-income census tracts within the assessment area. As explained in the following paragraphs, the bank s overall geographic distribution performance is considered reasonable for the Shenandoah NonMSA assessment area. During 2008, the bank extended 142 HMDA loans within the assessment area totaling $13.7 million. Of these loans, 90 (63.4%) totaling $8.5 million (61.9%) were to residents of the middle-income census tracts. The bank s performance reasonably compares to the proportion of owner-occupied housing units located in middle-income areas (66.1%) and the aggregate level of lending (65%). The bank s performance during 2007 was substantially similar to its performance during During 2008, the bank originated 124 small business loans totaling $11.7 million. Of these loans, 97 (78.2%) totaling $9.4 million (80.9%) were to businesses located in the middle-income census tracts. The bank s performance compares favorably to the percentage businesses located in middle-income census tracts (75.5%) and the aggregate level of lending (70.2%) in such areas. The bank s small business lending performance during 2009 was substantially similar to its performance during 2008, which is considered reasonable. 9

12 Community Development Loans, Investments, and Services First Bank supports community development initiatives and organizations that benefit the assessment area by funding community development loans, making qualified investments, and providing financial expertise and other support to local organizations providing community development services. Discussions with an individual knowledgeable of the local market area and reviews of the performance evaluations of other financial institutions having a local presence indicate that local community development opportunities are limited within the assessment area. Given its current loan-to-deposit ratio (94.3%), the bank s capacity for additional lending, including community development lending, is somewhat constrained. The bank faces no constraints, however, in providing community development services and making qualified investments. During the evaluation period, the bank originated three community development loans totaling $2.8 million within this assessment area. The loans aided in local job creation and the development of affordable housing and provided operating funds to a local non-profit organization that provides community development services. The bank and its employees provide financial expertise to the following organizations that provide community development services targeted to area low- and moderate-income residents, facilitate small business development, and focus on local job creation: Shenandoah Community Foundation (community services) Community Foundation of Northern Shenandoah Valley (community services) Habitat for Humanity of Shenandoah County (affordable housing) Mount Jackson Economic Development Authority (small business development and job creation) As previously described, the bank also holds the following qualified investments that benefit both of the bank s assessment areas: VHDA bond ($993,858) CCBV time deposit account ($275,000) Overall, the bank has demonstrated an adequate level of responsiveness to local community development needs through its investment and lending activities and support of area organizations that facilitate community development. 10

13 DESCRIPTION OF INSTITUTION S OPERATIONS IN THE WASHINGTON-BALTIMORE- NORTHERN VIRGINIA DC-MD-VA-WV CSA ASSESSMENT AREA The bank s assessment area is located northern Virginia. The local economy is based on a variety of manufacturing, academic, health care, and local and Federal government jobs. According to 2000 census data, the assessment area has a population of 114,378 and a median housing value of $112,281. The owner-occupancy rate for the assessment area equaled 66.3% which is higher than the owneroccupancy rate for the Washington-Arlington-Alexandria, DC-MD-VA MSA (58.8%) and the Winchester, VA-WV MSA (63.8%). The assessment area s poverty rate of 5.3% is analogous to the Washington-Arlington-Alexandria, DC-MD-VA MSA s rate (5.6%) and lower than the Winchester, VA-WV MSA s rate (6.6%). The 2008 and 2009 HUD estimated median family incomes for the Washington-Arlington-Alexandria, DC-MD-VA MSA equaled $97,200 and $100,800, respectively, while the median family incomes of the Winchester, VA-WV MSA only equaled $59,800 and $64,200, respectively, during 2008 and According to recent (June 30, 2009) data from the FDIC, First Bank ranked fifth out of 15 institutions in local deposit market share by having 8.2% of the assessment area s deposits. The following table includes pertinent demographic data for the assessment area. Assessment Area Demographics Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA Income Categories* Tract Distribution Families by Tract Families < Poverty as a % of Families by Tract Families by Family Income Low Moderate Middle Upper NA Total Low Moderate Middle Upper NA Total # % # % # % # % , , , , , , , , , , O wner O ccupied Units by Tract # % # % # % # % , , , , , , , , , , , , , , , , Total Businesses by Tract Households HHs by Tract HHs < Poverty by Tract HHs by HH Income Businesses by Tract and Revenue Size Less than or = $1 Million O ver $1 Million Revenue not Reported Low Moderate Middle Upper NA Total # % # % # % # % , , , , , , , , Percentage of Total Businesses: *NA-Tracts without household or family income as applicable

14 Major area employers include Rubbermaid Commercial Products LLC (manufacturing), Valley Health System, E.I DuPont De Nemours Company (automotive finishes), Walmart stores, Shenandoah University, and area municipal school systems. Current and recent periodic unemployment rates are included in the following table: Unemployment Rate Trend Geographic Area January July January July January Frederick County 3.6% 4% 7.4% 7.9% 8% Warren County 4.1% 4.2% 8.4% 7% 8% Winchester City 3.7% 4.4% 8.7% 8.1% 7.6% Winchester, VA-WV MSA 3.9% 4.1% 7.7% 8.1% 8.6% Washington-Arlington-Alexandria, DC-VA-MD-WV MSA 3.4% 4% 5.6% 6.2% 6.9% Virginia 3.6% 4% 6.2% 6.9% 7.6% As indicated by the table, area unemployment rates have risen sharply since January The high unemployment rates affect a bank s ability to extend credit as unemployed applicants often have diminished repayment capacity. A local community development official was contacted during the evaluation to discuss local economic conditions and area credit needs. The contact stated that economic conditions in the area are deteriorating because of rising unemployment rates and that joblessness was a primary reason that the foreclosure rate was increasing in the City of Winchester. The contact also suggested that while the City of Winchester would benefit from additional affordable housing, no new projects are planned. Additionally, the contact indicated that the current difficult economic conditions have revealed a need for adult financial literacy programs. The contact indicated that local financial institutions were adequately serving area credit needs. CONCLUSIONS WITH RESPECT TO PERFORMANCE TESTS: During 2008, the bank originated $22.5 million in small business loans and $7.6 million in residential mortgage (HMDA) loans within the assessment area. Accordingly, the bank s small business lending performance is weighted more heavily than the HMDA distribution performance for the following loan distributions. Lending to Borrowers of Different Incomes and to Businesses of Different Sizes The bank s borrower distribution performance is considered reasonable for both small business and HMDA lending within this assessment area. 12

15 Income Categories Distribution of HMDA Loans by Income Level of Borrower Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA (2008) Bank # % $(000s) % $ # % $(000s) % $ (10) Home Purchase (2,151) Low , Moderate , (21) Refinance (2,606) Low , Moderate , (22) Home Improvement (311) Low , Moderate , (0) Multi-Family (0) Low Moderate HMDA Totals Low , Moderate , , , Middle , , , Upper , , , Total , , ,009, Unknown 13 2, ,484 ( ) represents the total number of bank loans for the specific Loan Purpose where income is known Percentage's (%) are calculated on all loans where incomes are known Aggregate According to the 2008 data, home improvement and refinance loans were the bank s primary product types, while the aggregate reporters reflect large volumes of home purchase and refinance loans with comparatively few home improvement loans. The multi-family product was not a factor for either the bank or the aggregate reporters for this analysis. The bank s level of lending to low-income borrowers substantially exceeds the aggregate reporter level for home improvement loans and is higher than the aggregate reporter level for refinance loans. The bank extended no home purchase loans to low-income borrowers during 2008 and lags the aggregate reporter level for lending to moderate-income borrowers for both refinance and home improvement lending. When considering the combined performance of each loan type, 18.9% of the bank s HMDA loans were made to low-income borrowers, which is analogous to the percentage of low-income families within the assessment area (19.2%) and substantially exceeds the aggregate lending level to such borrowers (10.7%). The bank s performance when lending to moderate-income borrowers is not as strong as the low-income borrower performance. The bank s lending to moderate-income borrowers (20.8%) is consistent with the percentage of moderate-income area families (20.9%) but slightly lags the aggregate reporter level (23.2%). The bank s performance during 2008 is considered reasonable and their performance during 2007 was substantially similar. 13

16 by R evenue # % $(000s) % $ # % $(000s) % $ $1 Million or Less , , , Over $1 Million , NA NA NA NA Unknown NA NA NA NA by Loan Size D&B data indicated that 90% of all local businesses have revenues that do not exceed $1 million per year. According to 2008 aggregate small business data, 32.7% of reported loans were to businesses with annual revenues of $1 million or less. The remaining portion of businesses either had revenues exceeding $1 million or revenues were unknown. Additionally, data from 2008 for a peer group of traditional bank reporters was also considered because the aggregate data includes a large volume of credit card and other specialized lender data. According to the peer group data, 69.5% of the selected peer group s reported small business loans were to businesses having revenues of $1 million or less. Revenues were either unknown or in excess of $1 million for the remaining portion of loans. During 2008, 62% of the bank s small business loans were to businesses with annual revenues of $1 million or less. The bank s level of lending to businesses with annual revenues of $1 million or less is considered reasonable and their performance during 2009 was similar. Geographic Distribution of Loans Distribution of Lending by Loan Amount and Size of Business Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA (2008) Bank Aggregate* $100,000 or less , , , $100,001-$250, , , $250,001-$1 Million , , Total , , , * No data is available for Aggregate loans with Revenues over $1 million and those with Unknown revenues As previously indicated, there are no low-income census tracts within this assessment area. The assessment area does, however, include nine moderate-income, ten middle-income, and four upperincome census tracts. Within this assessment area, the bank s geographic distribution of small business loans is excellent, while the distribution of HMDA loans is reasonable. When considering the geographic distribution performance on a combined product basis, the bank s geographic distribution performance is considered excellent. As previously noted, the small business lending performance was given more weight within this assessment area because of the larger volume of such lending during

17 Income Categories Distribution of HMDA Loans by Income Level of Census Tract Assessment Area: Washington CSA (2008) Bank # % $(000s) % $ # % $(000s) % $ (18) Home Purchase (2,475) Low NA NA NA NA NA NA NA NA Moderate , , (25) Refinance (3,080) Low NA NA NA NA NA NA NA NA Moderate , , (23) Home Improvement (375) Low NA NA NA NA NA NA NA NA Moderate , (0) Multi-Family (12) Low NA NA NA NA NA NA NA NA Moderate , HMDA Totals Low NA NA NA NA NA NA NA NA Moderate , , , Middle , , , Upper , NA* Total , , ,187, *NA-Tracts without household or family income as applicable; or a small county ( ) represents the total number of bank loans for the specific Loan Purpose Loans where the geographic location is unknown are excluded from this table. Aggregate The bank s level of reported home purchase and refinance loans in moderate-income census tracts is consistent with the proportion of owner-occupied housing units located in such areas (34.4%), while the bank s home improvement lending exceeds the proportion of owner-occupied housing units located in moderate-income census tracts. Given the limited volume fo multi-family loans reflected in the aggregate data, the absence of such lending by First Bank was not overly detrimental to the bank s overall performance. On a combined product basis, the bank s lending in moderate-income census tracts (36.4%) slightly exceeds the aggregate reporter level (34.8%). The bank s performance during 2008 is considered to be within a reasonable range of performance. During 2007, both the bank and aggregate lenders reported a higher proportion of loan in moderateincome census tracts. The bank reported 36 (40.9%) HMDA loans totaling $4.2 million (34.8%) in moderate-income census tracts, while the aggregate lenders reported 3,617 (35.6%) loans totaling $687.4 million (34%) in such areas. The bank s performance during 2007 is also considered to be within a reasonable range of performance. 15

18 Income Categories Distribution of Small Business Loans by Income Level of Census Tract First Bank s level of small business lending in moderate-income areas (40.4%) exceeds the percentage of businesses located in moderate-income census tracts (36.1%) and the aggregate lending level (33.6%) in such tracts. The bank s performance in 2009 is substantially similar to its performance in The bank s performance is considered excellent. Community Development Loans, Investments, and Services First Bank supports community development initiatives and organizations that benefit the assessment area by funding community development loans, making qualified investments, and providing financial expertise and other support to local organizations providing community development services. Discussions with an individual knowledgeable of the local market area and reviews of the performance evaluations of other financial institutions having a local presence indicate that local community development opportunities are limited within the assessment area. Given its current loan-to-deposit ratio (94.3%), the bank s capacity for additional lending, including community development lending, is somewhat constrained. The bank faces no constraints, however, in providing community development services and making qualified investments. During the evaluation period, the bank originated two community development loans totaling $200,000 within this assessment area that provided for affordable housing. Additionally, the bank and its employees provide financial expertise to the following organizations that provide community development services targeted to area low- and moderate-income residents, facilitate small business development, and focus on local job creation: Winchester Community Development Authority (community services) Economic Development Authority of Front Royal and Warren Counties (small business development and job creation) Habitat for Humanity (affordable housing) Blue Ridge Job Readiness Academy (job skills training for low-income residents) As previously described, the bank also holds the following qualified investments that benefit both of the bank s assessment areas: VHDA bond ($993,858) Washington-Baltimore-Northern Virginia DC-MD-VA-WV CSA (2008) Bank Aggregate # % $(000s) % $ # % $(000s) % $ Low NA NA NA NA NA NA NA NA Moderate , , , Middle , , , Upper , , NA* Total , , , *NA-Tracts without household or family income as applicable; or a small county CCBV time deposit account ($275,000) Overall, the bank has demonstrated an adequate level of responsiveness to local community development needs through its investment and lending activities and support of area organizations that facilitate community development. 16

19 CRA APPENDIX GLOSSARY Aggregate lending: The number of loans originated and purchased by all reporting lenders in specified income categories as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Census tract: A small subdivision of metropolitan and other densely populated counties. Census tract boundaries do not cross county lines; however, they may cross the boundaries of metropolitan statistical areas. Census tracts usually have between 2,500 and 8,000 persons, and their physical size varies widely depending upon population density. Census tracts are designed to be homogeneous with respect to population characteristics, economic status, and living conditions to allow for statistical comparisons. Community development: All Agencies have adopted the following language. Affordable housing (including multifamily rental housing) for low- or moderate-income individuals; community services targeted to low- or moderate-income individuals; activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration s Development Company or Small Business Investment Company programs (13 CFR ) or have gross annual revenues of $1 million or less; or, activities that revitalize or stabilize low- or moderate-income geographies. Effective September 1, 2005, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have adopted the following additional language as part of the revitalize or stabilize definition of community development. Activities that revitalize or stabilize- (i) (ii) (iii) Low-or moderate-income geographies; Designated disaster areas; or Distressed or underserved nonmetropolitan middle-income geographies designated by the Board, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, based ona. Rates of poverty, unemployment, and population loss; or b. Population size, density, and dispersion. Activities that revitalize and stabilize geographies designated based on population size, density, and dispersion if they help to meet essential community needs, including needs of low- and moderateincome individuals. Consumer loan(s): A loan(s) to one or more individuals for household, family, or other personal expenditures. A consumer loan does not include a home mortgage, small business, or small farm loan. This definition includes the following categories: motor vehicle loans, credit card loans, home equity loans, other secured consumer loans, and other unsecured consumer loans. Family: Includes a householder and one or more other persons living in the same household who are related to the householder by birth, marriage, or adoption. The number of family households always equals the number of families; however, a family household may also include non-relatives living with the family. Families are classified by type as either a married-couple family or other family, which is further classified into male householder (a family with a male householder and no wife present) or female householder (a family with a female householder and no husband present). Full-scope review: Performance under the Lending and Community Development Tests is analyzed considering performance context, quantitative factors (for example, geographic distribution, borrower distribution, and total number and dollar amount of investments), and qualitative factors (for example, innovativeness, complexity, and responsiveness). 17

20 Geography: A census tract delineated by the United States Bureau of the Census in the most recent decennial census. Home Mortgage Disclosure Act (HMDA): The statute that requires certain mortgage lenders that do business or have banking offices in a metropolitan statistical area to file annual summary reports of their mortgage lending activity. The reports include such data as the race, gender, and the income of applications, the amount of loan requested, and the disposition of the application (for example, approved, denied, and withdrawn). Home mortgage loans: Includes home purchase and home improvement loans as defined in the HMDA regulation. This definition also includes multifamily (five or more families) dwelling loans, loans for the purchase of manufactured homes and refinancings of home improvement and home purchase loans. Household: Includes all persons occupying a housing unit. Persons not living in households are classified as living in group quarters. In 100 percent tabulations, the count of households always equals the count of occupied housing units. Limited-scope review: Performance under the Lending and Community Development Tests is analyzed using only quantitative factors (for example, geographic distribution, borrower distribution, total number and dollar amount of investments, and branch distribution). Low-income: Individual income that is less than 50 percent of the area median income, or a median family income that is less than 50 percent, in the case of a geography. Market share: The number of loans originated and purchased by the institution as a percentage of the aggregate number of loans originated and purchased by all reporting lenders in the metropolitan area/assessment area. Metropolitan area (MA): A metropolitan statistical area (MSA) or a metropolitan division (MD) as defined by the Office of Management and Budget. A MSA is a core area containing at least one urbanized area of 50,000 or more inhabitants, together with adjacent communities having a high degree of economic and social integration with that core. A MD is a division of a MSA based on specific criteria including commuting patterns. Only a MSA that has a population of at least 2.5 million may be divided into MDs. Middle-income: Individual income that is at least 80 percent and less than 120 percent of the area median income, or a median family income that is at least 80 percent and less than 120 percent, in the case of a geography. Moderate-income: Individual income that is at least 50 percent and less than 80 percent of the area median income, or a median family income that is at least 50 percent and less than 80 percent, in the case of a geography. Multifamily: Refers to a residential structure that contains five or more units. Other products: Includes any unreported optional category of loans for which the institution collects and maintains data for consideration during a CRA examination. Examples of such activity include consumer loans and other loan data an institution may provide concerning its lending performance. Owner-occupied units: Includes units occupied by the owner or co-owner, even if the unit has not been fully paid for or is mortgaged. Qualified investment: A qualified investment is defined as any lawful investment, deposit, membership share, or grant that has as its primary purpose community development. 18