FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
September 30, 1997
<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1997 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
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) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of September 30, 1997
(Common Stock, $2.50 par value) 5,188,097
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Consolidated Balance Sheet -
September 30, 1997 and December 31, 1996
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1997 and 1996
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports of Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
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PART I - FINANCIAL INFORMATION
Item l. Financial Statements
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
9-30-97 12-31-96
ASSETS (In Thousands) (In Thousands)
Cash and due from banks $29,160 $28,824
Federal funds sold 1,975 0
Investment securities - Note 2
Securities held-to-maturity
Total (fair value of $53,508 in 1997
and $65,504 in 1996) 53,011 65,197
Securities available-for-sale, at fair
value 120,401 95,684
Total investment securities 173,412 160,881
Loans - Note 3 345,637 296,865
Less: Unearned income (3,655) (3,246)
Allowance for loan losses-Note 4 (5,426) (4,705)
Loans, net 336,556 288,914
Premises and equipment 10,559 10,848
Intangible assets 2,583 2,962
Other real estate - Note 6 15 63
Other assets 5,473 5,140
TOTAL ASSETS $559,733 $497,632
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 9-30-97 12-31-96
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest-bearing $69,731 $67,232
Interest-bearing - Note 7 383,077 346,921
TOTAL DEPOSITS 452,808 414,153
Federal funds purchased & securities
sold under agreement to repurchase 50,948 32,547
Other liabilities 3,080 2,586
TOTAL LIABILITIES 506,836 449,286
Commitments & Contingent liabilities - Note 8
Shareholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
5,188,097 shares in 1997 and 5,100,048
shares in 1996 - Note 9 12,970 12,750
Additional paid-in capital 23,257 22,856
Retained earnings 16,255 12,790
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes 415 (50)
TOTAL SHAREHOLDERS' EQUITY 52,897 48,346
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $559,733 $497,632
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended
09-30-97 09-30-96 09-30-97 09-30-96
(In Thousands) (In Thousands)
Interest income:
Interest & fees on loans $7,929 $6,352 $22,252 $18,417
Interest & dividends on investment sec.:
Taxable income 2,238 1,726 6,488 4,993
Non-taxable income 396 409 1,184 1,263
Dividends on stock 6 6 34 19
Interest on federal funds sold 76 116 468 444
Total interest income 10,645 8,609 30,426 25,136
Interest expense:
Interest on deposits 3,972 3,170 11,317 9,254
Interest on federal funds purchased &
securities sold under agreement to
repurchase 548 314 1,526 1,006
Total interest expense 4,520 3,484 12,843 10,260
Net interest income 6,125 5,125 17,583 14,876
Provisions for loan losses - Note 4 275 269 873 789
Net interest income after provision
for loan losses 5,850 4,856 16,710 14,087
Noninterest income:
Service charges on deposit accounts 1,056 956 3,106 2,954
Other service charges commissions, fees 518 304 1,441 895
Investment securities, gains (losses) 0 (9) 2 (7)
Other operating income 15 9 37 25
Total noninterest income 1,589 1,260 4,586 3,867
Noninterest expense:
Salaries & employee benefits 2,708 2,335 7,685 6,547
Occupancy expense of bank premises-net 329 225 954 743
Furniture & equipment expense - net 375 344 1,109 954
Amortization expense-Intangible assets 171 163 482 476
Other expense 1,380 1,052 3,882 3,227
Total noninterest expense 4,963 4,119 14,112 11,947
Income before income taxes 2,476 1,997 7,184 6,007
Applicable income taxes 770 611 2,231 1,825
Net Income $1,706 $1,386 $4,953 $4,182
Net income per common share - Note 10 $0.33 $0.29 $0.96 $0.87
Cash dividends per common share $0.10 $0.95 $0.29 $0.275
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
9 Months Ended 9 Months Ended
09-30-97 09-30-96
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 4,953 $ 4,182
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,341 1,156
Provision for loan losses 873 789
Provision for deferred taxes 0 0
Increase (decrease) in reserve for
income taxes-current 75 (457)
(Gain) loss on sale of premises
and equipment 0 (0)
(Increase) decrease in interest
receivables (697) 7
Increase (decrease) in accumulated
premium amortization and discount
accretion - net 8 43
Increase (decrease) in interest
payable 277 121
(Increase) decrease in miscellaneous
assets (23) (171)
(Increase) decrease in prepaid
assets (146) 226
Increase (decrease) in other
liabilities 332 454
Total adjustments 2,040 2,168
Net cash provided by operating
activities $ 6,993 $ 6,350
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Consolidated Statement of Cash Flows - Continued.......
9 Months Ended 9 Months Ended
09-30-97 09-30-96
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $17,716 $47,533
Purchase of investment securities
held-to-maturity (5,533) (7,283)
Proceeds from maturities of investment
securities available-for-sale 19,965 12,308
Purchase of investment securities
available-for-sale (43,935) (54,678)
Net (increase) decrease in customer
loans (48,809) (26,874)
Additions to premises and equipment (569) (2,699)
Recoveries from loans previously charged
off 294 316
(Increase) decrease in funds sold (1,975) 0
Proceeds from issuance of debt 0 2,000
Repayment of debt 0 (2,000)
Net cash used in investing
activities (62,846) (31,377)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 38,654 30,905
Purchase of treasury stock 0 (125)
Sale of common stock 622 4,902
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase 18,401 (4,894)
Dividends paid (1,488) (1,239)
Net cash provided by financing
activities 56,189 29,549
Net increase (decrease) in cash and
cash equivalents 336 4,522
Cash and cash equivalents at beginning
of year 28,824 24,144
Cash and cash equivalents at end of
reporting period $ 29,160 $ 28,666
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FIRST NATIONAL CORPORATION
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1996. All dollar amounts are stated in
thousands, except per share data.
Note 2 - Investment Securities:
The following is the amortized cost and fair value of investment
securities held-to-maturity at September 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
09-30-97 12-31-96
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 7,432 35 0 7,467 13,794 50 (2) 13,842
Obligations of
U S government
agencies & corps 12,478 50 (26) 12,502 16,825 70 (167) 16,728
Obligations of state
and political
subdivisions 33,101 469 (31) 33,539 34,578 432 (76) 34,934
Total 53,011 554 (57) 53,508 65,197 552 (245) 65,504
</TABLE>
<PAGE>
Note 2 - Continued...
The following is the amortized cost and fair value of securities
available-for-sale at September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
09-30-97 12-31-96
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 31,368 169 (1) 31,536 24,094 27 (62) 24,059
Obligations of
U S government
agencies & corps 87,752 544 (41) 88,255 71,061 224 (270) 71,015
Other securities 610 0 0 610 610 0 0 610
Total 119,730 713 (42) 120,401 95,765 251 (332) 95,684
</TABLE>
Investment securities with an aggregate amortized cost of $100,028
on September 30, 1997 and $65,885 on December 31, 1996, were
pledged to secure public deposits and for other purposes as
required and permitted by law.
Note 3 - Loans:
The following is a summary of loans at: 9-30-97 12-31-96
Commercial, financial & agricultural 63,568 46,392
Real estate - construction 11,547 9,625
Real estate - mortgage 199,316 178,544
Consumer, net of unearned 67,551 59,058
Total loans 341,982 293,619
As of September 30, 1997, and December 31, 1996, the aggregate
dollar amount of loans to related parties; principally, directors
and executive officers, their immediate families and their business
interests, was $8,969 and $7,945 respectively. The following is an
analysis of the activity with respect to loans to related parties
for the nine months ended September 30, 1997:
Balance, beginning of period 8,970
Add:
New loans: 14,518
Deduct:
Payments (10,871)
Other changes (3,647)
Balance, end of period 8,970
<PAGE>
Note 4 - Allowance for Loan Losses:
Amount
09-30-97 12-31-96
Balance, beginning of period (year) 4,705 3,703
Add:
Recoveries 294 374
Provisions for loan losses charged
to income 873 1,319
Total 5,872 5,396
Deduct:
Loans charged off 446 691
Balance, end of period (year) 5,426 4,705
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, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on 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.
For impairment recognized in accordance with Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", the entire change in present value of
expected cash flows is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be
reported.
Note 5 - Adoption of Statement of Financial Accounting Standards No. 114
and No. 118:
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", and Statement of Financial Accounting
Standards No. 118 (SFAS 118), "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". These
statements require creditors to account for impaired loans, except
for those loans that are accounted for at fair value or at the
lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
<PAGE>
Note 5 - Continued...
The Company determines when loans become impaired through its
normal loan administration and review functions. Those loans
identified as substandard or doubtful as a result of the loan
review process are potentially impaired loans. A loan is impaired
when, based on current information and events, it is probable that
a creditor will be unable to collect all principal and interest
amounts due according to the contractual terms of the loan
agreement. A loan is not impaired during a period of delay in
payment if the Company expects to collect all amounts due,
including interest accrued at the contractual interest rate, for
the period of delay.
In accordance with these standards, the Company does not apply SFAS
114 and SFAS 118 to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. These groups
include the Company's credit card, residential mortgage, overdraft
protection, home equity lines, accounts receivable financing, and
consumer installment loans.
The Company's adoption of these accounting standards did not have
a material effect on the financial condition and results of
operations of the Company.
In accordance with SFAS 114, historical information has not been
restated to reflect the application of this standard.
Note 6 - Other Real Estate:
Real estate acquired in satisfaction of a loan is reported in other
assets. Properties acquired by foreclosure or deed in lieu of
foreclosure are transferred to Other Real Estate Owned ("OREO") and
recorded at the lower of the outstanding loan balance at the time
of acquisition or the estimated market value. Market value is
determined on the basis of the properties being disposed of in the
normal course of business and not on a liquidation or distress
basis. Loan losses arising from the acquisition of such properties
are charged against the allowance for loan losses. Gains or losses
arising from the sale of OREO are reflected in current operations.
Note 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $44,694 and
$38,616 at September 30, 1997 and December 31, 1996 respectively.
<PAGE>
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various
commitments and incurs certain contingent liabilities, which are
not reflected in the accompanying financial statements. The
commitments and contingent liabilities include guarantees,
commitments to extend credit and standby letters of credit. At
September 30, 1997, commitments to extend credit and standby
letters of credit aggregated $67,481. The Company does not
anticipate any material losses as a result of these transactions.
Note 9 - Common Stock
As of December 31, 1996, the common stock outstanding was
2,550,024. The board of directors of the Company approved a 2 for
1 stock split payable May 30, 1997. During the first and second
quarters, the Company granted options to purchase an aggregate of
88,049 shares under the incentive stock option plan. As of
September 30, 1997, the common stock outstanding was 5,188,097
shares.
Note 10 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number
of shares of common stock outstanding, giving retroactive effect to
stock dividends and stock splits. The number of weighted-average
shares outstanding at September 30, 1997 was 5,132,457 and
4,869,698 at December 31, 1996.
Dividends per share are calculated using the current equivalent
number of common shares outstanding at the time of the dividend
based on the Company's shares outstanding.
<PAGE>
FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in
this report. For further information refer to the Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in
the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
First National Corporation opened its second bank, the National Bank of
York County, on July 11, 1996 in Rock Hill, South Carolina to join its
existing bank, First National Bank, Orangeburg, South Carolina. A second
office of National Bank of York County was opened in Fort Mill, South
Carolina on September 18, 1996.
For the third quarter of 1997, First National Corporation ("The
Corporation") had consolidated net income of $1,706,000, an increase of 23.1
percent over the $1,386,000 earned in the third quarter of 1996. Earnings
per share amounted to $0.33 for the three months ended September 30, 1997, a
13.8 percent increase over the $0.29 per share earned in the third quarter of
1996. Net income for the first nine months of 1997 was $4,953,000 an
increase of 18.4 percent over the $4,182,000 earned for the same period in
1996. Earnings per share amounted to $0.96 for the nine months ended
September 30, 1997, a 10.3 percent increase over the 0.87 per share earned in
the first nine months of 1996.
NET INTEREST INCOME
For the third quarter of 1997, net interest income was $6,125,000
compared to $5,125,000 for the same period in 1996. This is an increase of
$1,000,000 or 19.5 percent. Net interest income for the first nine months of
1997 was $17,583,000 compared to $14,876,000 for the same period in 1996.
This represents an increase of $2,707,000 or 18.2 percent. This increase
resulted from a 24.6 percent increase in loan outstandings, net of unearned
income as well as an 13.5 percent increase in investment security
outstandings, when compared to the first nine months of 1996.
The yield on a major portion of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first nine months of 1996, the year to date taxable equivalent yield on
earning assets was 7.93 percent. During the same period of 1997, the yield
increased to 8.01 percent, or an increase of 8 basis points. The cost of the
liabilities used to support these earning assets increased 17 basis points
from 3.89 percent in 1996 to 4.06 percent in 1997. Interest rates paid on
interest-bearing liabilities increased more rapidly than yields on earning
assets due to the Company's negative asset/liability position.
<PAGE>
Management's Discussion Continued...
For the first nine months net interest margins decreased from 4.66
percent in 1996 to 4.60 percent in 1997. The impact of interest-free funds
for the same period increased from .62 percent to .64 percent or an increase
of 2 basis points.
The largest category of earning assets is loans. At the end of the
third quarter 1997, loans outstanding, less unearned income, were
$341,982,000 compared to $293,619,000 at December 31, 1996. This represents
an increase of $48,363,000 or 16.5 percent. For the third quarter ended
September 30, 1997, interest and fees on loans were $7,929,000 compared to
$6,352,000 for the comparable period in 1996, an increase of $1,577,000 or
24.8 percent. For the nine months ended September 30, 1997, interest and
fees on loans were $22,252,000 compared with $18,417,000 for the same period
in 1996. This represents an increase of $3,835,000 or 20.8 percent.
The major volume increase in the loan portfolio was in commercial and
agricultural loans. For the first nine month period ended September 30,
1997, commercial loans increased $17,176,000 or 37.0 percent when compared to
December 31, 1996. This increase in the loan portfolio was brought about due
to a renewed confidence in overall economic trends as well as the opening of
the National Bank of York County and the Bluffton Branch of First National
Bank. The Company has no foreign loans nor loans for highly leveraged
transactions.
For the nine months ended September 30, 1997, loans averaged
$296,535,000 and yielded 8.99 percent on a taxable equivalent basis compared
to $261,448,000 with a taxable equivalent yield of 9.11 percent or a decrease
of 12 basis points for the year ended December 31, 1996.
Investment securities are the second largest category of earning assets.
Investment securities are utilized by the Company as a vehicle for the
employment of excess funds, to provide liquidity, to fund loan demand or
deposit liquidation, and to pledge as collateral for certain deposit and
purchased funds.
At September 30, 1997, investment securities were $173,412,000 compared
to $160,881,000 at December 31, 1996. This is an increase of $12,531,000 or
7.8 percent. This increase is the result of management's decision to utilize
excess funds in the investment function in an attempt to increase yields and
profitability.
For the third quarter ended September 30, 1997, investment income was
$2,640,000 compared with $2,141,000 for the comparable period in 1996, a net
increase of $499,000 or 23.3 percent. For the nine month period ended
September 30, 1997, investment income was $7,706,000 compared with $6,275,000
for the same period in 1996, a net increase of $1,431,000 or 22.8 percent.
Management attributes this increase in income to higher yields on investment
securities.
<PAGE>
Management's Discussion Continued...
At the end of the third quarter 1997, securities averaged $157,188,000
and yielded 6.29 percent on a taxable equivalent basis, compared to
$149,453,000 with a yield of 6.10 percent for the year ended December 31,
1996, resulting in a 19 basis point increase in yield.
As of September 30, 1997, The Company had unrealized gains in the U. S.
Treasury and agency portfolio denoted as held-to-maturity, of $85,000 and in
the municipal portfolio $469,000. Also at September 30, 1997, the Company
had an unrealized loss of $26,000 in the U. S. Treasury and agency portfolio
and a $31,000 unrealized loss in the municipal portfolio.
At year end 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" for the investment portfolio, and showed a net unrealized gain at
September 30, 1997 of approximately $671,000 on the $120,401,000 of
securities denoted as available-for-sale.
For the first nine months ended September 30, 1997, the Company had a
$2,000 realized gain due to called municipal bonds.
Although securities classified as available-for-sale may be sold from
time to tome to meet liquidity or other needs, it is not the normal activity
of the Company to trade the investment portfolio. Management has the intent
and the ability to hold securities on a long-term basis or until maturity.
During the first nine months of 1997, interest-bearing liabilities
averaged $391,570,000 and carried an average rate of 4.06 percent. This
compares to an average level of $353,810,000 with a rate of 3.90 percent at
December 31, 1996 or an increase of 16 basis points. Approximately half of
these interest-bearing liabilities have fixed rates. They are expected to be
renewed at prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended September
30, 1997 was $275,000 compared to $269,000 for the same period in 1996 which
represents a 2.2 percent increase. For the nine month period ended September
30, 1997, the provision for loan loss was $873,000 compared to $789,000 for
the same period in 1996 which represents a 10.6 percent increase. The
increase in the provision for loan losses was due to continued strong loan
growth. The allowance for loan losses was 5,426,000 or 1.59 percent of
outstanding loans at September 31, 1997 compared to 1.60 percent of
outstanding loans at year-end 1996.
<PAGE>
Management's Discussion Continued...
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicates the estimated loan losses.
Management feels that the allowance for loan losses is adequately funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure. For the period ended September 30, 1997, other real
estate owned was $15,000 compared to $63,000 at December 31, 1996. This
decrease resulted from the sale of several real estate properties.
Management anticipates that the level of charge-offs for 1997 will be
near or below the levels of 1996. The loan loss allowance is considered
adequate by management. However, changes in economic conditions in the
Company's market area could affect these levels.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 1997 was $1,589,000 compared
to $1,260,000 for the same period in 1996, representing an increase of
$329,000 or 26.1 percent. For the first nine months of 1997 noninterest
income was $4,586,000 compared to $3,867,000 for the same period in 1996,
representing an increase of $719,000 or 18.6 percent. During the first nine
months of 1997, other service charges, commissions, and fees increased
$546,000 or 61.0 percent compared to the same period in 1996. This increase
can be primarily attributed to the increase in debit card fees as well as ATM
fees charged on non-bank customer transactions.
Noninterest expense for the third quarter of 1997 was $4,963,000
compared to $4,119,000 for the same period in 1996, representing an increase
of $844,000 or 20.5 percent. For the nine months ended September 30, 1997,
noninterest expense was $14,112,000 compared to $11,947,000, an increase of
$2,165,000 or 18.1 percent. Salaries and employee benefits for the third
quarter ended September 30, 1997 increased $373,000 or 16.0 percent compared
to the same period in 1996. For the first nine months of 1997 salaries and
employee benefits increased $1,138,000 or 17.4 percent compared to the same
period in 1996. Occupancy expense along with furniture and equipment expense
increased 135,000 or 23.7 percent for the third quarter of 1997 compared to
the same period in 1996. For the nine months ended September 30, 1997
occupancy expense along with furniture and equipment expense increased
$366,000 or 21.6 percent compared to the same period in 1996. These
increases can be largely attributed to the opening of the National Bank of
York County and the Bluffton branch of First National Bank during the third
quarter of 1996. Other expenses increased $328,000 or 31.2 percent for the
third quarter of 1997 compared to the same period in 1996. For the nine
months ended June 30, 1997, other expenses increased $655,000 or 20.3 percent
compared to the same period in 1996. This increase in other expenses is
distributed among the following expense categories: advertising, insurance,
office and printing supplies, postage, telephone and line charges, and other
expenses.
<PAGE>
Management's Discussion Continued...
NET INCOME
Net income was up 23.1 percent for the third quarter of 1997 when
compared to the same period in 1996. For the nine months ended September 30,
1997, net income was up 18.4 percent compared to the same period in 1996.
The $2,707,000 or 18.2 percent increase in net interest income and the
$719,000 or 18.6 percent increase in noninterest income for the nine months
ended September 30, 1997 as compared to the same period in 1996 were the
primary factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the third quarter,
1997, stockholder's equity was $52,897,000 compared to $48,346,000 at
December 31, 1996.
The corporation and subsidiaries are subject to certain risk-based
capital guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of both
balance sheet and off balance sheet items will be adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to the Office of the Comptroller of
the Currency guidelines, as of December 31, 1995, Tier 1 capital must be at
least 4 percent of risk-weighted assets, while total capital must be 8
percent of risk-weighted assets. The Tier 1 capital ration at September 30,
1997 was 14.6 percent compared to 15.8 percent at December 31, 1996. The
total capital ratio was 15.9 percent at September 30, 1997 compared to 17.1
percent at December 31, 1996.
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage capital ratio in evaluating capital
strength and adequacy. The minimum leverage ratio required for banks is
between 3 and 5 percent, depending on the institution's composite rating as
determined by its regulators. At September 30, 1997, First National
Corporation's leverage ratio was 9.1 percent compared to 9.5 percent at
December 31, 1996. First National Corporation's ratio exceeds the minimum
standards by substantial margins.
Liquidity is the ability of The Company to meet its cash flow
requirements which arise primarily from withdrawal of deposits, extension of
credit and payment of operating expenses. Asset liquidity is maintained by
the maturity structure of loans, investment securities and other short-term
investments. Management has policies and procedures governing the length of
time to maturity on loans and investments. Normally changes in the earning
asset mix are of a longer term nature and are not utilized for day-to-day
Corporation liquidity needs.
<PAGE>
Management's Discussion Continued...
The Company's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from The Company's use
of federal funds purchased and securities sold under agreement to repurchase.
Additional liquidity can be secured from lines of credit extended to the
Company from its correspondent banks. Management feels that its liquidity
position is adequate.
OTHER
Many existing computer programs use only two digits to identify a year
in the data field. These Programs were designed and developed without
considering the impact of the upcoming century. If uncorrected, many
computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.
Certain of the Bank's systems may be affected by this so-called
millennium bug. The Bank is investigating the extent to which its systems
are affected and communicating with all of its computer vendors concerning
timely and completed remedies for those systems that require modification.
The Bank is also communicating with all third parties on which it relies to
assess their progress in evaluating their systems and implementing any
corrective measures. The Bank has been taking and will continue to pursue
all reasonably necessary steps to protect its operations and assets.
Based upon discussions with its computer vendors and other third
parties, the Bank does not expect that the cost of addressing the year 2000
issue, will be a material event or uncertainty that would cause its reported
financial information not to be materially indicative of future operating
results or future financial conditions.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries, First
National Bank and National Bank of York County, is a party to nor
is any of their property the subject of any material or other
pending legal proceedings, other than ordinary routine proceedings
incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
Not Applicable
Item 6. Exhibits and Reports of Form 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: November 12, 1997 C. John Hipp, III
-----------------------------------
President & Chief Executive Officer
Date: November 10, 1997 W. Louis Griffith
-----------------------------------
Principle Accounting Officer and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule Attached
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at September 30, 1997 (Unaudited)
and the Consolidated Statement of Income (Unaudited) for the nine months ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 29,160
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,401
<INVESTMENTS-CARRYING> 53,011
<INVESTMENTS-MARKET> 53,508
<LOANS> 341,982
<ALLOWANCE> 5,426
<TOTAL-ASSETS> 559,733
<DEPOSITS> 452,808
<SHORT-TERM> 50,948
<LIABILITIES-OTHER> 3,080
<LONG-TERM> 0
0
0
<COMMON> 12,970
<OTHER-SE> 39,927
<TOTAL-LIABILITIES-AND-EQUITY> 559,733
<INTEREST-LOAN> 22,252
<INTEREST-INVEST> 7,706
<INTEREST-OTHER> 468
<INTEREST-TOTAL> 30,426
<INTEREST-DEPOSIT> 11,317
<INTEREST-EXPENSE> 12,843
<INTEREST-INCOME-NET> 17,583
<LOAN-LOSSES> 873
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 14,112
<INCOME-PRETAX> 7,184
<INCOME-PRE-EXTRAORDINARY> 4,953
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,953
<EPS-PRIMARY> .96
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.01
<LOANS-NON> 1,100
<LOANS-PAST> 604
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,164
<ALLOWANCE-OPEN> 4,705
<CHARGE-OFFS> 446
<RECOVERIES> 294
<ALLOWANCE-CLOSE> 5,426
<ALLOWANCE-DOMESTIC> 5,426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
