FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
September 30, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1998 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, that the
registrant was required to file such report) 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, 1998
Common Stock, $2.50 par value 5,293,097
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1998 and December 31, 1997
Consolidated Statements of Changes
In Shareholders' Equity -
Nine Months Ended
September 30, 1998 and 1997
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1998 and 1997
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 - 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)
ASSETS 9-30-98 12-31-97
(In Thousands) (In Thousands)
Cash and due from banks $31,431 $30,802
Federal funds sold 0 0
Investment securities - Note 2
Securities held-to-maturity (fair value
of $44,012 in 1998 and $51,026 in 1997) 43,049 50,403
Securities available-for-sale, at fair
value 168,160 115,658
Total investment securities 211,209 166,061
Loans - Note 3 387,373 359,167
Less: Unearned income 3,273 3,654
Allowance for loan losses-Note 4 5,905 5,518
Loans, net 378,195 349,995
Premises and equipment 9,858 9,946
Intangible assets 2,162 2,732
Other real estate - Note 6 142 61
Other assets 7,307 5,974
TOTAL ASSETS $640,304 $565,571
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 9-30-98 12-31-97
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest bearing $77,048 $70,052
Interest-bearing - Note 7 437,302 384,323
TOTAL DEPOSITS 514,350 454,375
Federal funds purchased & securities
sold under agreement to repurchase 54,273 54,312
Other liabilities 10,089 2,984
TOTAL LIABILITIES 578,712 511,671
Commitments & Contingent liabilities - Note 8
Stockholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
5,293,097 shares in 1998 and 5,188,097
shares in 1997 - Note 9 13,233 12,970
Additional paid-in capital 25,669 23,257
Retained earnings 21,242 17,197
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes 1,448 476
TOTAL SHAREHOLDERS' EQUITY 61,592 53,900
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $640,304 $565,571
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income(Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,100,048 $ 12,750 $ 22,856 $ 12,790 $ (50) $ 48,346
Comprehensive income:
Net income - - - 4,953 - 4,953
Other comprehensive income
(loss) net of tax - - - - 465 465
Comprehensive income - - - - - 5,418
Common stock issued 88,049 220 401 - - 621
Cash dividends - - - (1,488) - (1,488)
Balance, September 30, 1997 5,188,097 12,970 23,257 16,255 415 52,897
Balance, December 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900
Comprehensive income:
Net income - - - 5,874 - 5,874
Other comprehensive income
(loss) net of tax - - - - 972 972
Comprehensive income - - - - - 6,846
Common stock issued 105,000 263 2,412 - - 2,675
Cash dividends - - - (1,829) - (1,829)
Balance, September 30, 1998 5,293,097 $ 13,233 $ 25,669 $ 21,242 $ 1,448 $ 61,592
</TABLE>
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended
09-30-98 09-30-97 09-30-98 09-30-97
(In Thousands) (In Thousands)
Interest income:
Interest and fees on loans $8,755 $7,929 $25,244 $22,252
Interest & dividends on investment sec.:
Taxable income 2,514 2,238 7,105 6,488
Non-taxable income 406 396 1,251 1,184
Dividends on stock 30 6 50 34
Interest on federal funds sold 159 76 553 468
Total Interest income 11,864 10,645 34,203 30,426
Interest expense:
Interest on deposits 4,515 3,972 12,860 11,317
Interest on federal funds purchased &
securities sold under agreement to
repurchase 621 548 1,865 1,526
Other interest expense 0 0 19 0
Total interest expense 5,136 4,520 14,744 12,843
Net Interest Income 6,728 6,125 19,459 17,583
Provisions for loan losses - Note 4 216 275 604 873
Net interest income after provisions
for loan losses 6,512 5,850 18,855 16,710
Noninterest income:
Service charges on deposit accounts 1,310 1,056 3,614 3,106
Other service charges commissions, fees 758 518 2,097 1,441
Gains (losses) on investment securities 6 0 44 2
Other operating income 22 15 57 37
Total noninterest income 2,096 1,589 5,812 4,586
Noninterest expense:
Salaries & employee benefits 3,136 2,708 9,007 7,685
Occupancy expense of bank premises -
net 291 329 788 954
Furniture & equipment expense - net 424 375 1,189 1,109
Amortization expense-Intangible assets 212 171 572 482
Other expense 1,592 1,380 4,524 3,882
Total noninterest expense 5,655 4,963 16,080 14,112
Income before income taxes 2,953 2,476 8,587 7,184
Applicable income taxes 945 770 2,713 2,231
Net Income $2,008 $1,706 $5,874 $4,953
Net income per common share - Basic $0.38 $0.33 $1.12 $0.96
Net income per common share - Diluted $0.38 $0.33 $1.11 $0.95
Cash dividends per common share $0.13 $0.10 $0.35 $0.29
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended 9 Months Ended
09-30-98 09-30-97
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 5,874 $ 4,953
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,419 1,341
Provision for loan losses 604 873
Increase (decrease) in reserve
for income taxes-current 20 75
(Gain)loss on sale of premises
and equipment 2 0
(Increase) decrease in interest
receivables (475) (697)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net 138 8
Increase (decrease) in interest
payable 447 277
(Increase) decrease in miscellaneous
assets (418) (23)
(Increase) decrease in prepaid
assets (192) (146)
Increase (decrease) in other
liabilities 195 332
Total adjustments 1,740 2,040
Net cash provided by operating
activities $ 7,614 $ 6,993
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Consolidated Statement of Cash Flows - Continued.......
9 Months Ended 9 Months Ended
09-30-98 09-30-97
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $15,934 $17,716
Purchase of investment securities
held-to-maturity (8,349) (5,533)
Proceeds from maturities of investment
securities available-for-sale 54,168 19,965
Purchase of investment securities
available-for-sale (101,258) (43,935)
Net (increase) decrease in customer
loans (29,212) (48,809)
Additions to premises and equipment 758 (569)
Proceeds from sale of premises and
equipment 2 0
Recoveries from loans previously charged
off 191 294
(Increase) decrease in funds sold 0 (1,975)
Net cash used in investing
activities (67,766) (62,846)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 59,975 38,654
Sale of common stock 2,674 622
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (38) 18,401
Proceeds from issuance of other
borrowings 2,500 0
Repayment of other borrowings (2,500) 0
Dividends paid (1,830) (1,488)
Net cash provided by financing
activities 60,781 56,189
Net increase (decrease) in cash and
cash equivalents 629 336
Cash and cash equivalents at beginning
of year 30,802 28,824
Cash and cash equivalents at end of
reporting period $ 31,431 $ 29,160
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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, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. 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, 1997. 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, 1998 and December 31, 1997:
09-30-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
U S Treasury
securities 3,218 34 0 3,252 3,231 28 0 3,259
Obligations of
U S government
agencies & corps 5,417 73 (2) 5,488 12,321 39 (18) 12,342
Obligations of state
and political
subdivisions 34,414 858 0 35,272 34,851 581 (7) 35,425
Total 43,049 965 (2) 44,012 50,403 648 (25) 51,026
<PAGE>
NOTE 2 - Continued...
The following is the amortized cost and fair value of securities
available-for-sale at September 30, 1998 and December 31, 1997:
09-30-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
U S Treasury
securities 46,852 1,025 0 47,877 30,320 240 0 30,560
Obligations of
U S government
agencies & corps 116,356 1,315 (41) 117,630 83,990 538 (23) 84,505
Other securities 2,653 0 0 2,653 593 0 0 593
Total 165,861 2,340 (41) 168,160 114,903 778 (23) 115,658
Investment securities with an aggregate amortized cost of $106,961
on September 30, 1998, and $88,276 on December 31, 1997, 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: 9-30-98 12-31-97
Commercial, financial & agricultural 70,804 67,519
Real Estate - construction 11,804 12,429
Real estate - mortgage 226,775 207,630
Consumer 74,717 67,935
Total loans 384,100 355,513
As of September 30, 1998 and December 31, 1997 the aggregate dollar
amount of loans to related parties; principally, directors and
executive officers, their immediate families and their business
interests, was $5,946 and $8,025 respectively. The following is an
analysis of the activity with respect to loans to related parties
for the nine months ended September 30, 1998:
Balance, beginning of period 8,025
Add:
New loans 5,817
Deduct:
Payments 7,819
Other changes (77)
Balance, end of period 5,946
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NOTE 4 - Allowance for Loan Losses:
Amount
09-30-98 12-31-97
Balance, beginning of period (year) 5,518 4,705
Add:
Recoveries 191 323
Provisions for loan losses charged
to income 604 1,251
Total 6,313 6,279
Deduct:
Loans charged off 408 761
Balance, end of period (year) 5,905 5,518
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 to 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 losses. Gains or losses
arising from the sale of OREO are reflected in current operations.
<PAGE>
NOTE 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $64,541 and
$40,794 at September 30, 1998 and December 31, 1997 respectively.
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, 1998, commitments to extend credit and standby
letters of credit aggregated $97,775. The Company does not
anticipate any material losses as a result of these transactions.
Note 9 - Common Stock:
As of December 31, 1997, the common stock outstanding was
5,188,097. The board of directors of the Company approved a 2 for
1 stock split payable May 30, 1997. As a result of a stock
offering, the Company sold and issued 105,000 shares of First
National Corporation stock during the second quarter of 1998. The
proceeds from this offering are to be used to purchase all the
common stock of the newly formed Florence County National Bank.
As of September 30, 1998, the common stock outstanding was
5,293,097 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.
In 1997, the Financial Accounting Standards Board "FASB" issued
SFAS No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share ("EPS") by replacing
the presentation of primary EPS with a presentation of basic EPS.
In addition, SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denominator of the diluted EPS
calculation.
<PAGE>
Note 10 - Continued...
In accordance with SFAS 128, the calculation of basic net income per
share and diluted net income per share is presented below:
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Net income per share - basic: 09/30/98 09/30/97 09/30/98 09/30/97
<S> <C> <C> <C> <C>
Net income $2,008 $1,706 $5,874 $4,953
Income available
to common shareholders $2,008 $1,706 $5,874 $4,953
Average common shares
outstanding-basic 5,234,822 5,132,748 5,234,822 5,132,748
Net income per share-basic $ .38 $ .33 $ 1.12 $ .96
Net income per share-diluted:
Income available to common
shareholders $2,008 $1,706 $5,874 $4,953
Average common shares
outstanding-basic 5,234,822 5,132,748 5,234,822 5,132,748
Incremental shares from
assumed conversion of stock
options 62,695 57,896 62,695 57,896
Average common shares
outstanding-diluted 5,297,517 5,190,644 5,297,517 5,190,644
Net income per share-
diluted $ .38 $ .33 $ 1.11 $ .95
</TABLE>
Dividends per share are calculated using the current equivalent of number of
common shares outstanding at the time of the dividend based on the Company's
shares outstanding.
<PAGE>
Note 11 - Comprehensive Income:
The following is the related tax effects allocated to other comprehensive
income at September 30, 1998:
Before Tax Tax (Expense) Net of
(In thousands of dollars) Amount Benefit Tax Amount
Unrealized gain (loss) on
securities available-for-sale $2,298 $(850) $1,448
The following is the other comprehensive income balance at September 30,
1998:
Beginning Current Period Ending
Balance Change Balance
Accumulated other comprehensive
income-Unrealized gain (loss)
on securities available-for-
sale $ 476 $ 972 $1,448
<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,
1997.
The National Bank of York County commenced business operations as a
national bank in Rock Hill, South Carolina, on July 11, 1996. The National
Bank of York County is also a full service commercial bank and its deposits
are insured to applicable limits by the Federal Deposit Insurance
Corporation (FDIC). Upon completion of its organization, 100% of the common
stock of the National Bank of York County was acquired by First National
Corporation, and the bank operates as a wholly owned subsidiary of the
Corporation with its own Board of Directors and operating policies.
The Florence County National Bank commenced business operations as a
national bank in Florence, South Carolina, on April 1, 1998. Florence
County National Bank is also a full service commercial bank and its deposits
are insured to applicable limits by the Federal Deposit Insurance
Corporation (FDIC). Upon completion of its organization, 100% of the common
stock of the Florence County National Bank was acquired by First National
Corporation, and the bank operates as a wholly owned subsidiary of the
Corporation with its own Board of Directors and operating policies.
The Corporation is sponsoring the organization of a nonbank subsidiary.
The organizers have filed an application with the Board of Governors of the
Federal Reserve System to establish NewSouth Financial Service Corporation,
Orangeburg, South Carolina and would acquire certain fixed assets of
Superior Mortgage Corporation of Florence, South Carolina. NewSouth
Financial Service Corporation would engage denovo in lending activities and
credit-related insurance sales. First National Corporation would own 80
percent of the common stock of NewSouth and the manager of NewSouth would
own the remaining 20 percent. Having received Federal Reserve approval on
September 22, 1998, operations will commence on or about November 1, 1998.
For the third quarter of 1998, First National Corporation ("the
Corporation") had consolidated net income of $2,008,000, an increase of 17.7
percent over the $1,706,000 earned in the third quarter of 1997. Earnings
per share amounted to $0.38 for the three months ended September 30, 1998,
a 15.2 percent increase over the $0.33 per share earned in the third
quarter of 1997. Net income for the first nine months of 1998 was
$5,874,000, an increase of 18.6 percent over the $4,953,000 earned for the
same period in 1997. Earnings per share amounted to $1.12 for the nine
months ended September 30, 1998, a 16.7 percent increase over the $0.96 per
share earned in the first nine months of 1997.
<PAGE>
Management's Discussion Continued...
NET INTEREST INCOME
For the third quarter of 1998, net interest income was $6,728,000
compared to $6,125,000 for the same period in 1997. This is an increase of
$603,000 or 9.8 percent. Net interest income for the first nine months of
1998 was $19,459,000 compared to $17,583,000 for the same period in 1997.
This represents an increase of $1,876,000 or 10.7 percent. This increase
resulted from a 12.3 percent increase in loan outstandings, net of unearned
income as well as a 21.8 percent increase in investment security
outstandings, when compared to the first nine months of 1997.
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 1997, the year to date taxable equivalent yield on
earning assets was 7.99 percent. During the same period of 1998, the yield
decreased to 7.81 percent, or a decrease of 18 basis points. The cost of
the liabilities used to support these earning assets increased 4 basis
points from 4.12 percent in 1997 to 4.16 percent in 1998. Interest rates
paid on interest-bearing liabilities increased more rapidly than yields on
earning assets due to the Company's negative asset/liability position.
For the first nine months net interest margins decreased from 4.52
percent in 1997 to 4.34 percent in 1998. The impact of interest-free funds
for the same period increased from .65 percent to .69 percent or an increase
of 4 basis points.
The largest category of earning assets is loans. At the end of the
third quarter 1998, loans outstanding, less unearned income, were
$384,100,000 compared to $355,513,000 at December 31, 1997. This represents
an increase of $28,587,000 or 8.0 percent. For the third quarter ended
September 30, 1998, interest and fees on loans were $8,755,000 compared to
$7,929,000 for the comparable period in 1997, an increase of $826,000 or
10.4 percent. For the nine months ended September 30, 1998, interest and
fees on loans were $25,244,000 compared with $22,252,000 for the same period
in 1997. This represents an increase of $2,992,000 or 13.4 percent.
For the nine months ended September 30, 1998, loans averaged
$364,673,000 and yielded 8.76 percent on a taxable equivalent basis compared
to $323,420,000 with a taxable equivalent yield of 8.93 percent or a
decrease of 17 basis points for the year ended December 31, 1997.
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.
<PAGE>
Management's Discussion Continued...
At September 30, 1998, investment securities were $211,209,000 compared
to $166,061,000 at December 31, 1997. This is an increase of $45,148,000 or
27.2 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, 1998, investment income was
$2,950,000 compared with $2,640,000 for the comparable period in 1997, a net
increase of $310,000 or 11.7 percent. For the nine month period ended
September 30, 1998, investment income was $8,406,000 compared with
$7,706,000 for the same period in 1997, a net increase of $700,000 or 9.1
percent. Management attributes this increase in income to higher yields on
investment securities.
At the end of the third quarter 1998, securities averaged $190,525,000
and yielded 6.17 percent on a taxable equivalent basis, compared to
$167,895,000 with a yield of 6.36 percent for the year ended December 31,
1997, resulting in a 19 basis point decrease in yield.
As of September 30, 1998, the Company had unrealized gains in the U.S.
Treasury and agency portfolio denoted as held-to-maturity, of $107,000 and
in the municipal portfolio $858,000. Also at September 30, 1998, the
Company had an unrealized loss of $2,000 in the U. S. Treasury and agency
portfolio and no 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 Debit and Equity
Securities" for the investment portfolio, and showed a net unrealized gain
at September 30, 1998 of approximately $2,299,000 on the $168,160,000 of
securities denoted as available-for-sale.
For the first nine months ended September 30, 1998, the Company had a
$44,000 realized gain due to called agency bonds.
Although securities classified as available-for-sale may be sold from
time to time 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 1998, interest-bearing liabilities
averaged $475,679,000 and carried an average rate of 4.16 percent. This
compares to an average level of $420,190,000 with a rate of 4.14 percent at
December 31, 1997 or an increase of 2 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.
<PAGE>
Management's Discussion Continued...
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended
September 30, 1998 was $216,000 compared to $275,000 for the same period in
1997 which represents a 21.5 percent decrease. For the nine month period
ended September 30, 1998, the provision for loan loss was $604,000 compared
to $873,000 for the same period in 1997 which represents a 30.8 percent
decrease. The decrease in the provision for loan losses was due to a
weakening loan demand. The allowance for loan losses was $5,905,000 or 1.54
percent of outstanding loans at September 30, 1998 compared to 1.55 percent
of outstanding loans at year-end 1997.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicated 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, 1998, other real
estate owned was $142,000 compared to $61,000 at December 31, 1997. This
increase resulted from the foreclosure of real estate properties.
Management anticipates that the level of charge-offs for 1998 will be
near the levels of 1997. 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 1998 was $2,096,000 compared
to $1,589,000 for the same period in 1997, representing an increase of
$507,000 or 31.9 percent. For the first nine months of 1998 noninterest
income was $5,812,000 compared to $4,586,000 for the same period in 1997,
representing an increase of $1,226,000 or 26.7 percent. During the first
nine months of 1998, other service charges, commissions, and fees increased
$656,000 or 45.5 percent compared to the same period in 1997. This increase
can be primarily attributed to the increase in secondary market origination
fees and debit card fees as well as fees collected on mutual fund sales.
<PAGE>
Management's Discussion continued...
Noninterest expense for the third quarter of 1998 was $5,655,000
compared to $4,963,000 for the same period in 1997, representing an increase
of $692,000 or 13.9 percent. For the nine months ended September 30, 1998,
noninterest expense was $16,080,000 compared to $14,112,000, an increase of
$1,968,000 or 13.9 percent. Salaries and employee benefits for the third
quarter ended September 30, 1998 increased $428,000 or 15.8 percent compared
to the same period in 1997. For the first nine months of 1998 salaries and
employee benefits increased $1,322,000 or 17.2 percent compared to the same
period in 1997. These increases can be largely attributed to the opening of
the Florence County National Bank on April 1, 1998. Occupancy and furniture
and equipment expense increased $11,000 or 1.6 percent for the third quarter
of 1998 compared to the same period in 1997. For the nine months ended
September 30, 1998 occupancy and furniture and equipment expense decreased
$86,000 or 4.2 percent compared to the same period in 1997. These decreases
can be largely attributed to a decrease in both building and furniture and
equipment depreciation expense, reductions in maintenance and repairs on
buildings as well as a decrease in equipment service contract costs. Other
expenses increased $212,000 or 15.4 percent for the third quarter of 1998
compared to the same period in 1997. For the nine months ended September
30, 1998, other expenses increased $642,000 or 16.5 percent compared to the
same period in 1997. 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.
NET INCOME
Net income was up 17.7 percent for the third quarter of 1998 when
compared to the same period in 1997. For the nine months ended September
30, 1998, net income was up 18.6 percent compared to the same period in
1997. The $2,145,000 or 12.8 percent increase in net interest income and
the $1,226,000 or 26.7 percent increase in noninterest income for the nine
months ended September 30, 1998 as compared to the same period in 1997 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,
1998, stockholder's equity was $61,592,000 compared to $53,900,000 at
December 31, 1997.
<PAGE>
Management's Discussion Continued...
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 ratio
at September 30, 1998 was 14.9 percent compared to 13.5 percent at December
31, 1997. The total capital ratio was 16.1 percent at September 30, 1998
compared to 14.7 percent at December 31, 1997.
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 percent and 5 percent, depending on the institution's composite
rating as determined by its regulators. At September 30, 1998, First
National Corporation's leverage ratio was 9.4 percent, compared to 9.5
percent at December 31, 1997. 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.
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.
<PAGE>
Management's Discussion Continued...
YEAR 2000
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company, its significant
customers, or suppliers fail to make necessary modifications and conversions
on a timely basis, the year 2000 issue could have a material adverse effect
on Company operations. However, the impact cannot be quantified at this
time. The Company believes that its competitors face a similar risk.
In August 1997, the Company established a corporate-wide project team to
identify non-compliant software and complete the corrections required by the
year 2000 issue. The Company intends to fix or replace non-compliant
internal software with code or software that is year 2000 compliant. While
a plan is in place, minor work remains to be done. The Company's current
target is to resolve compliance issues in important business information
systems by December 31, 1998. Remediation and testing activities are
underway on the Company's core business applications. The Company is also
focusing on major customers and suppliers to assess their compliance.
Nevertheless, there can be no absolute assurance that there will not be a
material adverse effect on the Company if third party governmental or
business entities do not convert or replace their systems in a timely manner
and in a way that is compatible with the Company's systems.
Costs related to the year 2000 issue are funded through operating cash
flows. Through fiscal 1998, the Company expended approximately $575,000 in
remediation efforts, including the cost of new software and modifying the
applicable code of existing software. The Company estimates remaining costs
to be negligible. The Company presently believes that the total cost of
achieving year 2000 compliant systems is not expected to be material to
First National Corporation's financial condition, liquidity, or results of
operations.
Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to,
the availability and cost of trained personnel; the ability to locate and
correct all relevant computer code and systems; and remediation success of
the Company's customers and suppliers.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries, First National
Bank, National Bank of York County, and Florence County National Bank
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 and 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 13, 1998 C. JOHN HIPP, III
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: November 13, 1998 W. LOUIS GRIFFITH
PRINCIPAL 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, 1998 (Unaudited)
and the Consolidated Statement of Income (Unaudited) for the nine months ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,431
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 168,160
<INVESTMENTS-CARRYING> 43,049
<INVESTMENTS-MARKET> 44,012
<LOANS> 384,100
<ALLOWANCE> 5,905
<TOTAL-ASSETS> 640,304
<DEPOSITS> 514,350
<SHORT-TERM> 54,273
<LIABILITIES-OTHER> 10,089
<LONG-TERM> 0
0
0
<COMMON> 13,233
<OTHER-SE> 48,359
<TOTAL-LIABILITIES-AND-EQUITY> 640,304
<INTEREST-LOAN> 25,244
<INTEREST-INVEST> 8,406
<INTEREST-OTHER> 553
<INTEREST-TOTAL> 34,203
<INTEREST-DEPOSIT> 12,860
<INTEREST-EXPENSE> 14,744
<INTEREST-INCOME-NET> 19,459
<LOAN-LOSSES> 604
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,080
<INCOME-PRETAX> 8,587
<INCOME-PRE-EXTRAORDINARY> 5,874
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,874
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 7.81
<LOANS-NON> 1,029
<LOANS-PAST> 586
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,171
<ALLOWANCE-OPEN> 5,518
<CHARGE-OFFS> 408
<RECOVERIES> 191
<ALLOWANCE-CLOSE> 5,905
<ALLOWANCE-DOMESTIC> 5,905
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
