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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 001-12669
FIRST NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0799315
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
950 JOHN C. CALHOUN DRIVE, S.E.
ORANGEBURG, SOUTH CAROLINA 29115
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 534-2175
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK - $2.50 PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at March 13, 1998 was $115,573,850 based on the closing sale
price of $25.00 per share on that date. For purposes of the foregoing
calculation only, all directors and executive officers of the registrant have
been deemed affiliates. The number of shares of common stock outstanding as of
March 13, 1998 was 5,188,097.
Documents Incorporated by Reference
Portions of the Registrant's 1997 Annual Report to Shareholders are incorporated
by reference into Part II, and portions of the Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 28, 1998 are incorporated
by reference into Part III.
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Form 10-K Cross-Reference Index
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Page
PART I
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Item 1. Business...............................................................................................1
Item 2. Properties.............................................................................................9
Item 3. Legal Proceedings......................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders...................................................10
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters(1)..........................10
Item 6. Selected Financial Data(1)............................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations(1)..............10
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.............................................11
Item 8. Financial Statements and Supplementary Data(1)........................................................11
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.................11
PART III
Item 10. Directors and Executive Officers of the Registrant(2).................................................11
Item 11. Executive Compensation(2).............................................................................11
Item 12. Security Ownership of Certain Beneficial Owners and Management(2).....................................11
Item 13. Certain Relationships and Related Transactions(2).....................................................12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................12
</TABLE>
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(1) Incorporated by reference to the Registrant's 1997 Annual Report to
Shareholders.
(2) Incorporated by reference to the Registrant's Proxy Statement for its 1998
Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
GENERAL
First National Corporation (the "Company") is a bank holding company
incorporated under the laws of South Carolina in 1985. The Company owns 100% of
First National Bank, a national bank which opened for business in 1934, and 100%
of National Bank of York County, a national bank which opened for business in
1996. The Company also is in the process of organizing Florence County National
Bank, which will be a wholly owned subsidiary of the Company and plans to open
for business on April 1, 1998. The Company engages in no significant operations
other than the ownership of its subsidiaries.
Some of the major services which the Company provides through its
banking subsidiaries include checking, NOW accounts, savings and other time
deposits of various types, alternative investment products such as annuities and
mutual funds, loans for businesses, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, and use of ATM facilities. The Company
has no material concentration of deposits from any single customer or group of
customers, and no significant portion of its loans is concentrated within a
single industry or group of related industries. There are no material seasonal
factors that would have a material adverse effect on the Company. The Company
does not have foreign loans.
TERRITORY SERVED AND COMPETITION
First National Bank conducts its business from twenty locations in
thirteen South Carolina towns. National Bank of York County conducts its
business from two locations in two South Carolina towns. In their markets, First
National Bank and National Bank of York County (the "Banks") encounter strong
competition from several major banks that dominate the commercial banking
industry in their service areas and in South Carolina generally. Several
competitors have substantially greater resources and higher lending limits than
the Banks and they offer certain services for their customers that the Banks do
not offer. In addition to commercial banks, savings institutions and credit
unions, the Banks compete for deposits and loans with other financial
intermediaries and investment alternatives, including but not limited to
mortgage companies, captive finance companies, money market mutual funds,
brokerage firms, governmental and corporation bonds and other securities.
Various of these nonbank competitors are not subject to the same regulatory
restrictions as the Company and many have substantially greater resources than
the Company.
The primary market area to be served by Florence County National Bank
will be the County of Florence, South Carolina and the immediately adjacent
areas. In such market, the Company believes that Florence County National Bank
will face competition as intense as the competition encountered by the Banks in
their respective markets as described above.
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As a bank holding company, the Company is a legal entity separate and
distinct from its bank subsidiaries. The Company coordinates the financial
resources of the consolidated enterprise and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends, fees for services performed and interest on advances and
loans.
EMPLOYEES
The Company does not have any salaried employees. As of December 31,
1997, the Banks had 281 full-time equivalent employees. The Company considers
its relationship with its employees to be excellent. The employee benefit
programs the Company provides include group life, health and dental insurance,
paid vacation, sick leave, educational opportunities, stock option plans for
officers and key employees, a defined benefit pension plan, and a 401K plan for
employees.
EXECUTIVE OFFICERS OF THE COMPANY
C. John Hipp, III (Age 46). Mr. Hipp has served as President of the
Company and First National Bank since April 1994. From 1991 to 1994, Mr. Hipp
served as President of Rock Hill National Bank and Rock Hill National
Corporation.
Robert R. Horger (Age 47). Mr. Horger was named Chairman of the Company
and First National Bank in January 1998 and served as Vice Chairman of the
Company and First National Bank from April 1994 to January 1998. Mr. Horger
became a director of the Company in April 1991. Mr. Horger is an attorney with
Horger, Barnwell and Reid.
L.D. Westbury (Age 65). Mr. Westbury has served as Vice Chairman of the
Company and First National Bank since January 1998 and served as Chairman of the
Company and First National Bank from April 1994 to January 1998. Mr. Westbury
served as President of the Company and First National Bank from November 1986 to
March 1994, as Executive Vice President of First National Bank from May 1986
until November 1986, and as Senior Vice President of First National Bank from
April 1975 until May 1986.
W. Louis Griffith (Age 46). Mr. Griffith has served as Chief Financial
Officer of the Company since October 1995, and as Senior Vice President and
Chief Financial Officer of First National Bank since December 1994. He served as
Vice President and Chief Financial Officer of First National Bank from August
until December 1994, and as Vice President of First National Bank from March
1986 until August 1994.
James C. Hunter, Jr. (Age 55). Mr. Hunter has served as Secretary and
Treasurer of the Company since May 1986 and as Executive Vice President of First
National Bank since April 1993. He served as Senior Vice President of First
National Bank from May 1987 until April 1993 and Vice President of First
National Bank from March 1976 until May 1987.
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Dane H. Murray (Age 48). Mr. Murray has served as Executive Vice
President of First National Bank since August 1997. Mr. Murray served as Senior
Vice President of First National Bank from May 1987 until August 1997.
Phil M. Smith (Age 45). Mr. Smith has served as Executive Vice
President of First National Bank since February 1997. Mr. Smith served as Senior
Vice President of First National Bank from April 1988 until February 1997.
SUPERVISION AND REGULATION
GENERAL
The Company is a registered "bank holding company" with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and is
subject to the supervision of, and to regular inspection by, the Federal Reserve
Board. Each of the Banks is, and Florence County National Bank will be,
organized as a national banking association and subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
(the "OCC"). In addition, the Company and each of the Banks is, and Florence
County National Bank will be, subject to regulation (and in certain cases
examination) by the Federal Deposit Insurance Corporation (the "FDIC"), other
federal regulatory agencies and the South Carolina State Board of Financial
Institutions (the "State Board"). The following discussion summarizes certain
aspects of banking and other laws and regulations that affect the Company and
its subsidiaries.
Under the Bank Holding Company Act (the "BHC Act"), the Company's
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries, or any other activity which the Federal Reserve Board determines
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The BHC Act requires prior Federal Reserve Board
approval for, among other things, the acquisition by a bank holding company of
direct or indirect ownership or control of more than 5% of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. The BHC Act also
prohibits a bank holding company from acquiring direct or indirect control of
more than 5% of the outstanding voting stock of any company engaged in a
non-banking business unless such business is determined by the Federal Reserve
Board to be so closely related to banking as to be a proper incident thereto.
Further, under South Carolina law, it is unlawful without the prior approval of
the State Board for any South Carolina bank holding company (i) to acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank or any other bank holding company, (ii) to acquire all or substantially
all of the assets of a bank or any other bank holding company, or (iii) to merge
or consolidate with any other bank holding company.
INTERSTATE BANKING
In July 1994, South Carolina enacted legislation which effectively
provided that, after June 30, 1996, out-of-state bank holding
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companies may acquire other banks or bank holding companies in South Carolina,
subject to certain conditions. Further, pursuant to the Riegel-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and
Branching Act"), a bank holding company became able to acquire banks in states
other than its home state, beginning in September 1995, without regard to the
permissibility of such acquisition under state law, subject to certain
exceptions. The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches, unless a state,
prior to the July 1, 1997 effective date, determined to "opt out" of coverage
under this provision. In addition, the Interstate Banking and Branching
Efficiency Act authorized a bank to open new branches in a state in which it
does not already have banking operations if such state enacted a law permitting
such "de novo" branching. Effective July 1, 1996, South Carolina law was amended
to permit interstate branching but not de novo branching by an out-of-state
bank. The Company believes that the foregoing legislation has increased takeover
activity of South Carolina financial institutions by out-of-state financial
institutions.
OBLIGATIONS OF HOLDING COMPANY TO ITS SUBSIDIARY BANKS
Under the policy of the Federal Reserve Board, a bank holding company
is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it otherwise might not desire or be able to do. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC's claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
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Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and if any
such assessment is not paid by any shareholder after three months notice, to
sell the stock of such shareholder to make good the deficiency.
CAPITAL ADEQUACY
The various federal bank regulators, including the Federal Reserve
Board and the OCC, have adopted risk-based capital requirements for assessing
bank holding company and bank capital adequacy. These standards define what
qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks. Capital is
classified into two tiers. For bank holding companies, Tier 1 or "core" capital
consists primarily of common and qualifying preferred shareholders' equity, less
certain intangibles and other adjustments ("Tier 1 Capital"). Tier 2 capital
consists primarily of the allowance for possible loan losses (subject to certain
limitations) and certain subordinated and other qualifying debt ("Tier 2
Capital"). A minimum ratio of total capital to risk-weighted assets of 8.00% is
required and Tier 1 capital must be at least 50% of total capital. The Federal
Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to
adjusted average total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital
to total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and will be used in conjunction with the
risk-based ratio in determining the overall capital adequacy of banking
organizations.
The Federal Reserve Board and the OCC have emphasized that the
foregoing standards are supervisory minimums and that an institution would be
permitted to maintain such levels of capital only if it had a composite rating
of "1" under the regulatory rating systems for bank holding companies and banks.
All other bank holding companies are required to maintain a leverage ratio of 3%
plus at least 1% to 2% of additional capital. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve Board has not advised the Company of any
specific minimum leverage ratio applicable to it. As of December 31, 1997, the
Company, First National Bank and National Bank of York County had leverage
ratios of 9.16%, 8.39% and 9.66%, respectively, and total risk adjusted capital
ratios of 14.72%, 14.26% and 17.55%, respectively.
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FDICIA, among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal relatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA also imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan (see
"--Obligations of Holding Company to its Subsidiary Banks," above). In addition,
FDICIA requires the various regulatory agencies to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratios of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of a least 8% and a leverage
ratio of a least 4%, or 3% in some cases. Under these guidelines, each of the
Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentration of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position), and (iii) risks from non-tradition activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with the amended guidelines, the
Company and the Banks with significant trading activity (as defined in the
amendment) must incorporate a measure for market risk in their respective
regulatory capital calculations effective for reporting periods after January 1,
1998. The revised guidelines are not expected to have a material impact on the
Company or the Banks' regulatory capital ratios or their well capitalized
status.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its
subsidiaries, and the Company's funds for cash distributions to its shareholders
are derived primarily from dividends received from the Banks. Each of the Banks
is subject to various general regulatory policies and
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requirements relating to the payment of dividends. Any restriction on the
ability of the Banks to pay dividends will indirectly restrict the ability of
the Company to pay dividends.
The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year will exceed the total of its
retained net profits for that year combined with its retained net profits for
the two preceding years, less any required transfers to surplus. In addition,
national banks can only pay dividends to the extent that retained net profits
(including the portion transferred to surplus) exceed bad debts. Further, if in
the opinion of the OCC a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the OCC may
require, after notice and a hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve Board, the OCC and the FDIC have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
In addition to the foregoing, the ability of the Company and the Banks
to pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors.
CERTAIN TRANSACTIONS BY THE COMPANY AND ITS AFFILIATES
Various legal limitations place restrictions on the ability of the
Banks to lend or otherwise supply funds to the Company. The Federal Reserve Act
limits a bank's "covered transactions," which include extensions of credit, with
any affiliate to 10% of such bank's capital and surplus. All covered
transactions with all affiliates cannot in the aggregate exceed 20% of a bank's
capital and surplus. All covered and exempt transactions between a bank and its
affiliates must be on terms and conditions consistent with safe and sound
banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Also, the Federal
Reserve Act requires that all of a bank's extensions of credit to an affiliate
be appropriately secured by acceptable collateral, generally United States
government or agency securities. In addition, the Federal Reserve Act limits
covered and other transactions among affiliates to terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to a bank holding company, a bank or a subsidiary of either as
prevailing at the time for transactions with unaffiliated companies.
INSURANCE OF DEPOSITS
As FDIC-insured institutions, First National Bank and National Bank of
York County are, and Florence County National Bank will be, subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions is as specified in a schedule required to
be issued by the FDIC that specifies, at semi-annual intervals, target reserve
ratios designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
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estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department of
the Treasury. The FDIC has implemented a risk-based assessment schedule that
provides for assessments ranging from 0.00% to 0.27% of an institution's average
assessment base. The actual assessment to be paid by each FDIC-insured
institution is based on the institution's assessment risk classification, which
is determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized", as such terms have been defined
in applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns
(see "--Capital Adequacy" above). As a result of the current provisions of
federal law, the assessment rates on deposits could increase over present
levels. Based on the current financial condition and capital levels of the
Banks, the Company does not expect that the current FDIC risk-based assessment
schedule will have a material adverse effect on the Banks' earnings in 1998.
OTHER LAWS AND REGULATIONS
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Community
Reinvestment Act requiring financial institutions to meet their obligations to
provide for the total credit needs of the communities they serve (which includes
the investment of assets in loans to low- and moderate-income borrowers), the
Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks also are subject to the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and Regulation E issued
by the Federal Reserve Board to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
From time to time, bills are pending before the United States Congress
and in the South Carolina state legislature which in certain cases contain
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the
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statutory separation of commercial and investment banking, and to further expand
the powers of banks, bank holding companies and competitors of banks. It cannot
be predicted whether or in what form any of these proposals will be adopted or
the extent to which the business of the Company and its subsidiaries may be
affected thereby.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitute the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve Board. The Federal Reserve Board regulates the supply of
money through various means, including open-market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve Board, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company cannot be
predicted.
ITEM 2. PROPERTIES
First National Bank's main office and the Company's executive offices
are located at 950 John C. Calhoun Drive, S.E., Orangeburg, South Carolina.
These quarters are owned by First National Bank and afford approximately 48,000
square feet of space for operating and administrative purposes. First National
Bank owns twenty-six other properties and leases four properties, substantially
all of which are used for branch locations or housing other operational units of
First National Bank.
National Bank of York County owns the property located at 1127 Ebenezer
Road, Rock Hill, South Carolina. National Bank of York County also leases one
property, which is used as a branch. Florence County National Bank will own
property located at 1600 W. Palmetto Street, Florence, South Carolina 29501.
Although the properties leased and owned are generally considered
adequate, there is a continuing program of modernization, expansion, and as
needs materialize, the occasional replacement of facilities.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the fourth
quarter of the Company's fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Certain information required by this item is incorporated herein by
reference to the information under the caption "Price Range of Common Stock and
Dividends" on page 26 of the Company's 1997 Annual Report to Shareholders. As of
March 31, 1998, the Company had issued and outstanding 5,188,097 shares of
Common Stock which were held of record by approximately 1,950 persons.
Dividends are paid by the Company from its assets which are provided
primarily by dividends paid to the Company by First National Bank. Certain
restrictions exist regarding the ability of the Company's subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances.
The approval of the OCC is required to pay dividends in excess of the Banks'
respective net profits for the current year plus retained net profits (net
profits less dividends paid) for the preceding two years, less any required
transfers to surplus. As of December 31, 1997, $9,466,000 of First National
Bank's retained earnings and none of National Bank of York County's retained
earnings were available for distribution to First National Corporation as
dividends without prior regulatory approval. For the twelve months ended
December 31, 1997, First National Bank paid dividends to the Company of
approximately $2,059,000.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Consolidated Financial
Highlights" on page 3 of the Company's 1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 6 through 28 of the Company's 1997 Annual Report to Shareholders.
10
<PAGE> 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the information in Table 10 on page 21 of the Company's 1997 Annual
Report to Shareholders and under the caption "Interest Sensitivity" immediately
following such table on pages 22 and 23 of the Company's 1997 Annual Report to
Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the audited consolidated financial statements of the Company set
forth on pages 29 through 61 of the Company's 1997 Annual Report to Shareholders
and to the information under the caption "Quarterly Results of Operations" on
page 27 of the Company's 1997 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by
reference to the information under the caption "Election of Directors" on pages
4 and 5 of the definitive proxy statement of the Company to be filed in
connection with the Company's 1998 Annual Meeting of the Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the information under the captions "Executive Compensation,"
"Information Pertaining to Stock Option Plans," "Aggregated Option Exercises
During 1997 and Year End 1997 Option Values," "Compensation Committee Interlocks
and Insider Participation," "Other Benefit Programs -- Defined Benefit Pension
Plan" and "Election of Directors -- Meetings of the Board of Directors and
Committees" on pages 5 through 10, 12 and 13 of the definitive proxy statement
of the Company to be filed in connection with the Company's 1998 Annual Meeting
of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the information under the caption "Principal Shareholders" on pages
2 and 3 of the definitive proxy
11
<PAGE> 14
statement of the Company to be filed in connection with the Company's 1998
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the information under the caption "Certain Relationships and
Related Transactions" on page 15 of the definitive proxy statement of the
Company to be filed in connection with
the Company's 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Filed:
First National Corporation and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed: None
3. Exhibits
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation of the
Registrant, as amended (incorporated by
reference to exhibits filed with the
Registrant's Form 10-Q for the quarter
ended June 30, 1996).
3.2 Bylaws of the Registrant, as amended
(incorporated by reference to exhibits
filed with the Registrant's Form 10-K
for the year ended December 31, 1995).
10.1* First National Corporation Incentive
Stock Option Plan of 1992 (incorporated
by reference to exhibits filed with
Registration Statement on Form S-4,
Registration No. 33-52052).
12
<PAGE> 15
Exhibit No. Description of Exhibit
10.2* First National Corporation Executive
Incentive Compensation Plan
(incorporated by reference to exhibits
filed with Registration Statement on
Form S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend
Reinvestment Plan (incorporated by
reference to exhibits filed with
Registration Statement on Form S-8,
Registration No. 33-58692).
10.4* First National Corporation Incentive
Stock Option Plan of 1996 (incorporated
by reference to Registrant's Definitive
Proxy Statement filed in connection with
its 1996 Annual Meeting of
Shareholders).
10.5* Employment Agreement between the
Registrant and C. John Hipp, III, dated
May 1, 1994 (incorporated by reference
to Registrant's Form 10-K for the year
ended December 31, 1995).
13 Portions of the 1997 Annual Report to
Shareholders incorporated by
reference in Form 10-K.
21 Subsidiaries of the Registrant
(incorporated by reference to exhibits
filed with Registration Statement on
Form S-4, Registration No. 33-52052).
23 Consent of J. W. Hunt and Company, LLP.
27 Financial Data Schedule.
* Denotes a management compensatory plan or arrangement.
(b) No reports were filed on Form 8-K during the fourth quarter of 1997.
13
<PAGE> 16
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Orangeburg
and State of South Carolina, on the 31st day of March, 1998.
First National Corporation
By /s/ C. John Hipp, III
--------------------------------
C. John Hipp, III
President and Chief Executive
Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on March 31, 1998.
/s/ C. John Hipp, III
----------------------------------------
C. John Hipp, III
President and Chief Executive Officer
/s/ W. Louis Griffith
----------------------------------------
W. Louis Griffith
Chief Financial Officer
----------------------------------------
Charles W. Clark
Director
/s/ C. Parker Dempsey
----------------------------------------
C. Parker Dempsey
Director
/s/ Dwight W. Frierson
----------------------------------------
Dwight W. Frierson
Director
14
<PAGE> 17
----------------------------------------
E. Everett Gasque, Jr.
Director
/s/ John L. Gramling, Jr.
----------------------------------------
John L. Gramling, Jr.
Director
/s/ Robert R. Hill, Jr.
----------------------------------------
Robert R. Hill, Jr.
Director
/s/ Robert R. Horger
----------------------------------------
Robert R. Horger
Director
/s/ J. C. McAlhany
----------------------------------------
J. C. McAlhany
Director
----------------------------------------
Dick Gregg McTeer
Director
/s/ Harry M. Mims, Jr.
----------------------------------------
Harry M. Mims, Jr.
Director
/s/ E. V. Mirmow, Jr.
----------------------------------------
E. V. Mirmow, Jr.
Director
----------------------------------------
Ralph W. Norman
Director
15
<PAGE> 18
----------------------------------------
Anne H. Oswald
Director
/s/ James W. Roquemore
----------------------------------------
James W. Roquemore
Director
/s/ Walter L. Tobin
----------------------------------------
Walter L. Tobin
Director
----------------------------------------
Johnny E. Ward
Director
/s/ A. Dewall Waters
----------------------------------------
A. Dewall Waters
Director
/s/ L. D. Westbury
----------------------------------------
L. D. Westbury
Director
/s/ Cathy Cox Yeadon
----------------------------------------
Cathy Cox Yeadon
Director
16
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description of Exhibit
13 Certain Portions of 1997 Annual Report to Shareholders
23 Consent of J. W. Hunt and Company, LLP.
27 Financial Data Schedule.
17
<PAGE> 1
EXHIBIT 13
CERTAIN PORTIONS OF 1997 ANNUAL REPORT TO SHAREHOLDERS
<PAGE> 2
Certain Portions of
FIRST NATIONAL
CORPORATION
--------------------------------------------
1997 ANNUAL REPORT
<PAGE> 3
First National Corporation Consolidated Financial Highlights
<TABLE>
<CAPTION>
For the Year (Dollars in thousands,
except per share) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 6,466 $ 5,528 $ 4,640 $ 4,061 $ 3,773
Per share 1.26 1.14 .98 .86 .80
Total assets at year end 565,571 497,632 436,322 374,043 349,056
Cash dividends declared per share 0.40 0.37 0.34 0.32 0.30
Book value per share at year end 10.39 9.48 8.41 7.67 7.10
<CAPTION>
Financial Ratios 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.20% 1.19% 1.13% 1.10% 1.09%
Return on average equity 12.72 12.85 12.25 11.67 11.79
Dividend payout ratio 31.84 31.13 30.24 29.45 28.62
Average equity to average assets 9.40 9.29 9.25 9.44 9.20
</TABLE>
<TABLE>
<CAPTION>
December 31 Average Daily Balance
------------------------------------------ ---------------------------------
Balance Sheet Highlights Percent Percent
(Dollars in thousands) 1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans-net of unearned income $355,513 $293,619 21.1% $323,420 $264,701 22.2%
Total earning assets 521,574 454,500 14.8% 503,565 427,084 17.9%
Total assets 565,571 497,632 13.7% 540,643 463,252 16.7%
Demand deposits 70,052 67,232 4.2% 67,134 60,225 11.5%
Total deposits 454,375 414,153 9.7% 441,982 387,086 14.2%
Total interest-bearing liabilities 438,636 379,468 15.6% 419,700 356,680 17.7%
Shareholders' equity 53,900 48,346 11.5% 50,827 43,015 18.2%
</TABLE>
Per share data have been retroactively adjusted to give effect to a five percent
common stock dividend paid to shareholders of record on August 31, 1993, and ten
percent common stock dividends paid to shareholders of record on each of October
28, 1994, and October 31, 1995, and a five percent common stock dividend paid to
shareholders of record on October 31, 1996, and a 2 for 1 stock split paid to
shareholders of record on May 19, 1997.
This information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and is qualified in
its entirety by reference to the more detailed financial statements and the
notes thereto contained elsewhere in this report.
3
<PAGE> 4
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Overview
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of First
National Corporation and its subsidiaries, First National Bank and National Bank
of York County. The five year period 1993 through 1997 is discussed with
particular emphasis on the years 1995, 1996 and 1997. This commentary should be
reviewed in conjunction with the financial statements and related footnotes and
the other statistical information related to First National Corporation
contained elsewhere herein, (see "Consolidated Financial Statements of First
National Corporation"). In 1995, the Corporation acquired two branches of
another commercial bank in Walterboro, South Carolina. The excess of the
purchase price over the fair value of the net tangible assets acquired was
$3,034,000. Total assets were increased by approximately $34,000,000. The
transaction was completed during the second quarter of 1995.
In 1996, the Corporation sponsored the organization of National Bank of
York County in Rock Hill, South Carolina, and sold 170,000 shares of the
Corporation's common stock to capitalize the new bank and pay organizational and
pre-opening expenses. National Bank of York County began operations on July 11,
1996, as a wholly-owned subsidiary of the Corporation.
In 1997, the Corporation is sponsoring the organization of a national
bank in Florence, South Carolina. The organizers have filed an application with
the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation, respectively, for a charter to form the Florence County National
Bank and for insurance of deposits. The Corporation has also filed applications
with the Board of Governors of the Federal Reserve System and the South Carolina
State Board of Financial Institutions to acquire all of the bank's stock upon
completion of its organization, so that the newly formed bank will be a
wholly-owned subsidiary of the Corporation. Florence County National Bank (In
Organization) is expected to begin operations during 1998.
Year 2000
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 Company's systems may be affected by this so-called
millennium bug. The Company is investigating the extent to which its systems are
affected and communicating with all its computer vendors concerning timely and
completed remedies for those systems that require modification. The Company 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 Company 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, First National Corporation does not expect that the cost of addressing
the year 2000 issue will be a material event or certainty that would cause its
reported financial information not to be materially indicative of future
operating results or future financial conditions.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as forward looking statements for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. First National Corporation cautions readers that
forward looking statements, including without limitation, those relating to
First National Corporation's future business prospects, revenues, working
capital, liquidity, capital needs, interest
6
<PAGE> 5
Overview (continued)
costs, and income, are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward
looking statements, due to several important factors herein identified, among
others, and other risks and factors identified from time to time in First
National Corporation's reports filed with the Securities and Exchange
Commission.
Summary of Operations
Earnings of First National Corporation were $6,466,000, $5,528,000 and
$4,640,000 in 1997, 1996 and 1995, respectively. Net income increased 17.0
percent in 1997 when compared to 1996 and increased 19.1 percent in 1996 when
compared to 1995. Net income per share increased to $1.26 compared to $1.14 in
1996. Per share earnings in 1995 were $0.98. The increase in net income in 1997
primarily resulted from an increase in interest income as well as an increase in
noninterest income. The increase in net income in 1996 compared to 1995 also
resulted primarily from an increase in interest income as well as an increase in
noninterest income.
The per share cash dividend declared in 1997 was $0.40 compared to $0.37
in 1996 and $0.34 in 1995.
The book value per share of First National Corporation increased $0.91
or 9.6 percent in 1997, $1.07 or 17.7 percent in 1996, and $0.74 or 9.6 percent
in 1995. The return on average assets was 1.20 percent in 1997, 1.19 percent in
1996 and 1.13 percent in 1995. The return on average shareholders' equity was
12.72 percent for 1997 and was 12.85 percent for 1996 and 12.25 percent in 1995.
Increases in both deposits and earning assets were realized during 1997
compared to 1996. Deposits at December 31, 1997 were $454,375,000, up
$40,222,000 or 9.7 percent, compared to December 31, 1996. At year-end 1996,
deposits were $414,153,000, up $45,838,000, or 12.4 percent, compared to
December 31, 1995. Average deposits in 1997 were $441,982,000, up $54,896,000 or
14.2 percent from 1996. The average deposits in 1996 were $387,086,000 compared
to $343,723,000 in 1995, an increase of $43,363,000 or 12.6 percent. Earning
assets reached $521,574,000, up $67,074,000, or 14.8 percent at December 31,
1997 when compared to year-end 1996. At year-end 1996, earning assets were
$454,500,000, up $55,121,000, or 13.8 percent from year-end 1995. Average
earning assets for 1997 were $503,565,000, an increase of $76,481,000, or 17.9
percent, compared to 1996. In 1996 average earning assets were $427,084,000, up
$48,608,000, or 12.8 percent, compared to 1995. The increase in earning assets
in 1997 and 1996 resulted primarily from banking operations at First National
Bank and National Bank of York County. The increases in earning assets in 1995
resulted primarily from the acquisition of two branch offices in Walterboro from
NationsBank. This transaction added approximately $34,000,000 to the deposit
base and approximately $ 15,000,000 to the loan portfolio.
Interest income increased by $6,881,000, or 20.1 percent, for the year
ended December 31, 1997 when compared to December 31, 1996. This increase is a
result of a $67,074,000 or 14.8 percent increase in earning assets. For the year
ended December 31, 1996, interest income increased $4,080,000, or 13.5 percent,
when compared to the same period in 1995. This increase was a result of loans
and investments being repriced at higher levels due to the increase in the prime
lending rate and bond yields as well as a $55,121,000 or 13.8% increase in
earning assets.
Interest expense increased by $ 3,379,000 or 24.2 percent, for the year
ended December 31, 1997 compared to the same period in 1996. For the year ended
December 31, 1996, interest expense increased $1,461,000 or 11.7 percent, when
compared to the same period in 1995. The 1997 increase is a direct result of a
$59,168,000 or 15.6 percent increase in interest-bearing liabilities just as the
1996 increase was a direct result of a $42,055,000 or 12.5 percent increase in
interest-bearing liabilities.
7
<PAGE> 6
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Competition
First National Corporation competes with a number of financial
institutions and other firms that engage in activities similar to banking. For
example, the Corporation competes for deposits with savings and loan
associations, credit unions, brokerage firms and other commercial banks. First
National continues to receive high marks from bank rating services. This has
contributed to deposit growth. In its attempt to make loans, the Corporation
competes with the industries mentioned above as well as consumer finance
companies, leasing companies and other lenders. In today's uncertain financial
climate, all lenders are searching for quality borrowers. Acquisition of
acceptable grade loans becomes more and more difficult.
Additional financial institution mergers were completed in 1997 and
1996, continuing the trend toward consolidation. Although these mergers reduced
the number of banks and branches, the changes resulted in intensified
competition for quality funds and loans.
Net Interest Income
Net interest income is the difference between interest income and
interest expense. Two significant elements in analyzing a bank's net interest
income are net interest spread and net interest margin. Net interest spread is
the difference between the yield on average earning assets and the rate on
average interest-bearing liabilities. Net interest margin is the difference
between the yield on average earning assets and the rate on all average
liabilities, interest and noninterest bearing, utilized to support earning
assets. The significant distinction between spread and net interest margin is
that net interest margin reflects the volume of interest free funds supporting
earning assets.
Net interest income increased $3,502,000 or 17.3 percent during 1997
compared to 1996. The increase was due primarily to an increase in volume of
earning assets. Net interest income increased $2,619,000 or 14.8 percent in 1996
when compared to 1995. The increase was also due primarily to increased volume
of earning assets. The average yield on earning assets was 8.2 percent in 1997
and was 8.0 percent in 1996 and 1995 respectively. Total average earning assets
increased $76,481,000, or 17.9 percent, from 1996 to 1997, and $48,608,000 or
12.8 percent, from 1995 to 1996. Total average interest bearing liabilities
increased $63,020,000, or 17.7 percent, from 1996 to 1997, and $40,196,000, or
12.7 percent, from 1995 to 1996. Growth in earning assets was funded primarily
through interest-bearing liabilities. The total volume growth in 1997 compared
to 1996 had a positive impact on net interest income of $3,718,000, which was
decreased by $216,000 due to rates paid on liabilities increasing more than
yields on assets. In 1996 compared to 1995 net interest income was positively
affected by $2,317,000 attributable to volume which was enhanced by $302,000
attributable to rate decreases. In 1997 compared to 1996, net interest spread
decreased approximately .1 percent and net interest margin remained the same. In
1996 compared to 1995, net interest spread increased approximately .1 percent
and net interest margin increased by .1 percent.
Average noninterest-bearing funds supporting earning assets as a
percentage of earning assets changed from 13.9 percent in 1995 to 14.1 percent
in 1996 and to 13.3 percent in 1997.
8
<PAGE> 7
Table 1
Volume and Rate
Variance Analysis
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Changes Due to Increase Changes Due to Increase
(Decrease) In (Decrease) In
------------------------------------------------------------------------------------
(Dollars in Thousands) Volume (l) Rate (l) Total Volume (l) Rate (l) Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (2) $5,522 $(240) $5,282 $3,536 $(417) $3,119
Investments:
Taxable 1,262 467 1,729 455 436 891
Tax exempt (3) (76) 10 (66) 59 (50) 9
Funds sold (70) 6 (64) 119 (58) 61
------------------------------------------------------------------------------------
Total interest income 6,638 243 6,881 4,169 (89) 4,080
------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Interest bearing transaction 67 17 84 139 (248) (109)
Saving 299 326 625 133 (198) (65)
Certificates of deposit 1,839 68 1,907 1,362 187 1,549
Funds purchased 725 58 783 198 (132) 66
Notes payable (10) (10) (20) 20 0 20
------------------------------------------------------------------------------------
Total interest expense 2,920 459 3,379 1,852 (391) 1,461
------------------------------------------------------------------------------------
Net interest income $3,718 $(216) $3,502 $2,317 $ 302 $2,619
====================================================================================
</TABLE>
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the
percentage of rate or volume variance to the sum of the two absolute
variances.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a tax equivalent basis in the
above analysis.
9
<PAGE> 8
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Table 2
Yields on Average Earning Assets and
Rates on Average Interest-bearing Liabilities
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
Average Interest Average
(Dollars in thousands) Balance Earned/Paid Yield/Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income $323,420 $30,421 9.41%
Investment securities:
Taxable 138,474 8,638 6.24
Tax exempt (1) 32,593 1,602 4.92
Funds sold 9,078 483 5.32
-------- --------
Total earning assets 503,565 41,144 8.17
--------
Cash and other assets 42,239
Less allowance for loan losses (5,161)
--------
Total assets $540,643
========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 86,188 1,715 1.99
Savings 88,743 2,643 2.98
Certificates of deposit 199,917 10,876 5.44
Funds purchased 44,852 2,132 4.75
Notes payable 0 0
-------- --------
Total interest-bearing liabilities 419,700 17,366 4.14
--------
Demand deposits 67,134
Other liabilities 2,982
Shareholders' equity 50,827
--------
Total liabilities and shareholders' equity $540,643
========
Net interest spread 4.03%
====
Impact of interest free funds .69%
====
Net interest margin 4.72%
====
Net interest income $23,778
=======
</TABLE>
10
<PAGE> 9
Table 2
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$264,701 $25,139 9.50% $227,466 $22,020 9.68%
117,822 6,908 5.86 109,864 6,017 5.48
34,142 1,668 4.89 32,924 1,659 5.04
10,419 548 5.26 8,222 487 5.92
-------- ------- -------- -------
427,084 34,263 8.02 378,476 30,183 7.98
------- -------
40,356 34,348
(4,188) (3,398)
-------- --------
$463,252 $409,426
======== ========
$82,820 1,632 1.97 $ 76,476 1,741 2.28
77,699 2,001 2.58 73,524 2,066 2.81
166,342 8,985 5.40 141,113 7,436 5.27
29,546 1,348 4.56 25,371 1,282 5.05
273 20 7.33
-------- ------- -------- -------
356,680 13,986 3.92 316,484 12,525 3.96
------- -------
60,225 52,611
3,332 2,458
43,015 37,873
-------- --------
$463,252 $409,426
======== ========
4.10% 4.02%
==== ====
.65% .65%
==== ====
4.75% 4.67%
==== ====
$20,277 $17,658
======= =======
</TABLE>
(1) Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
11
<PAGE> 10
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Investment Securities
Investment securities are the second largest category of earning assets.
These assets comprised 31.8 percent of earning assets at December 31, 1997 and
35.4 percent at year-end 1996. Investment securities are utilized by the
Corporation 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 deposits and purchased funds.
The portfolio taxable income was $8,637,000 in 1997 compared with
$6,908,000 in 1996, a net increase of $1,729,000. Of this increase, a gain of
approximately $1,262,000 was attributable to the $20,652,000 average volume
increase of taxable securities. The higher income generated by the increased
volume was augmented by an increase of $467,000 resulting from a 38 basis point
increase in yield. The taxable income was $6,908,000 in 1996, compared with
$6,017,000 in 1995, an increase of $891,000. Of this increase, a gain of
approximately $455,000 was attributable to the $7,958,000 average volume
increase in taxable securities. The gain generated by the increased volume was
aided by an increase of $436,000, resulting from a 38 basis point increase in
yield. This is indicative of the increases in overall interest rates in the past
year and their effect upon portfolio investments as lower-yielding securities
mature and are replaced by higher yielding investments. The average maturity of
the taxable portfolio at December 31, 1997 was 2.0 years compared with average
maturities at year-end 1996 of 2.4 years and at year-end 1995 of 2.1 years.
The portfolio non-taxable investment income was $ 1,602,000 in 1997
compared with $1,668,000 in 1996 and $1,659,000 in 1995, a net decrease of
$66,000 or 4.0 percent, and an increase of $9,000 or 4.0 percent, respectively.
Of the decrease in 1997, a decline of $76,000 was attributable to a decrease in
average volume of $1,549,000 in municipal securities offset by an increase of
$10,000 resulting from a 3 basis point increase in yield. The increase from 1995
to 1996 was $9,000 of which $59,000 was attributable to an increase in volume
which was offset by a decrease of $ 50,000 resulting from a 15 basis point
decrease in yield. The average maturity of the non-taxable portfolio at December
31, 1997 was 3.8 years compared to 2.9 years and 2.5 years in 1996 and 1995,
respectively. First National Corporation continues to actively purchase bank
qualified tax-free securities to supplement the taxable portfolio. However, with
the negative yield adjustment due to the Tax Equity and Fiscal Responsibility
Act of 1982 and the alternative minimum tax considerations, the value to First
National Corporation of each individual purchase continues to be closely
evaluated.
At December 31, 1997 the fair value of the securities portfolio totalled
$166,684,000, a .8 percent premium. The market valued the Corporation's 1996
portfolio at a .8 percent premium and its 1995 portfolio at a .6 percent
premium.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards Board in May,
1993. As required, the Corporation adopted the provisions of this statement
effective December 31, 1993, without retroactive application to prior years'
financial statements. At December 31, 1997, investment securities with an
amortized cost of $114,903,000 and an estimated fair value of $115,658,000 were
classified as available-for-sale. The effect of adoption of this accounting
standard was to increase the carrying value of securities $755,000 and directly
increase shareholders' equity $476,000, net of an estimated income tax liability
of $279,000.
12
<PAGE> 11
Investment Securities (continued)
The increase, net of income tax effect, is presented in the statement of
changes in shareholders' equity as an adjustment of the balance of the
separate component of shareholders' equity required by SFAS No. 115 for the
unrealized holding of gains and losses on available-for-sale securities.
On an ongoing basis, management assigns securities upon purchase into
one of the categories designated by SFAS No. 115 based on intent, taking into
consideration other factors including expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements.
There were no realized gains or losses on sales of investment securities
during 1997. There were realized losses on sales of investment securities during
1996 of $50,000 and no realized gains or losses during 1995.
[Graph indicating trends in average interest
rates denoting the prime rate of interest to
be 6.00%, 8.50%, 8.80%, 8.25% and 8.43% for
the years ended December 31, 1993, 1994, 1995,
1996 and 1997, respectively, and the Company's
average yield on loans to be 9.20%, 9.20%, 9.70%,
9.50% and 9.40% for the years ended December 31,
1993, 1994, 1995, 1996 and 1997, respectively.]
[Graph indicating the Company's [Graph indicating the Company's
net interest income during 1993, net interest margin during 1993,
1994, 1995, 1996 and 1997.] 1994, 1995, 1996 and 1997.]
13
<PAGE> 12
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Table 3
Book Value of Investment Securities
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 33,791 $ 37,853 $ 49,959 $ 49,164 $ 39,972
U. S. Government Agencies
and Corporations 96,826 87,840 63,600 53,914 54,345
Other Securities 593 610 475 476 371
- ---------------------------------------------------------------------------------------------------------------------------
Total Taxable 131,210 126,303 114,034 103,554 94,688
- ---------------------------------------------------------------------------------------------------------------------------
State, County and Municipal
Obligations 34,851 34,578 37,462 29,802 33,796
- ---------------------------------------------------------------------------------------------------------------------------
Total Tax-exempt 34,851 34,578 37,462 29,802 33,796
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities $166,061 $160,881 $151,496 $133,356 $128,484
===========================================================================================================================
</TABLE>
Table 4
Maturity Distribution and Yields of Investment Securities
<TABLE>
<CAPTION>
Due in Due After Due After Due After
December 31, 1997 1 yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury
Securities $ 5,539 6.04% $ 28,252 6.09% $ % $ % $ 33,791 6.08% $ 33,800 $ 33,819
U.S. Government Agencies
and Corporations 18,674 6.12 78,152 6.45 96,826 6.39 96,847 96,847
Other Securities (1) 593 6.00 593 6.00 593 593
- ------------------------------------------------------------------------------------------------------------------------------------
Total Taxable 24,213 6.10 106,404 6.35 593 6.00 131,210 6.31 130,799 131,259
- ------------------------------------------------------------------------------------------------------------------------------------
State, County and
Municipal Obligations (2) 7,153 4.93 14,751 5.08 12,947 4.66 34,851 4.89 34,619 35,425
- ------------------------------------------------------------------------------------------------------------------------------------
Total $31,366 5.83% $121,155 6.20% $12,947 4.66% $593 6.00% $166,061 6.01% $165,418 $166,684
====================================================================================================================================
Percent of Total 19% 73% 8%
Cumulative % of Total 19% 92% 100% 100%
</TABLE>
(1) Federal Reserve Bank and other corporate stocks have no set maturity but
are classified in "Due after 10 years."
(2) Tax exempt yield is not presented on a tax equivalent basis.
14
<PAGE> 13
Loans
Loans, net of unearned income, at December 31, 1997, were $355,513,000,
which represents an increase of $61,894,000, or 21.1 percent when compared to
year-end 1996. Average loans for 1997 increased 22.2 percent to $323,420,000
from $264,701,000 for 1996.
The largest element of the loan portfolio continues to be the real
estate mortgage category. All loans secured by real estate, except real estate
construction, are placed in this category regardless of the loan purpose. The
use of real estate as security for loans is common in First National
Corporation's market area and this, along with other collateral, increases the
likelihood of repayment. The real estate mortgage category grew by 16.3 percent
to $207,630,000 at year-end and represents 58.4 percent of total loans. This is
a decrease from 60.8 percent in 1996. Commercial, financial and agricultural
loans increased to $67,519,000 from $46,392,000 the previous year representing
19.0 percent of the loan portfolio compared to 15.8 percent at December 31,
1996. Consumer loans represented 19.1 percent of total loans compared to 20.1
percent at year-end 1996. Table 5 provides the distribution of loans for the
past five years.
The prime rate increased once in 1997, and the yield on the loan
portfolio for 1997 was 9.4 percent, down from 9.5 percent for 1996.
Notwithstanding this decrease in yield, the volume growth of the loan portfolio
resulted in an interest and fee income increase of $5,282,000, or 21.0 percent,
to $30,421,000. Table 6 shows the maturity and interest sensitivity of the
commercial, financial and agricultural category of the loan portfolio and the
real estate construction category of the loan portfolio as of December 31, 1997.
As of that date, loans that mature in one year or less were $83,174,000. Of the
loans that mature after one year, $183,537,000 or 75.0 percent, had fixed
interest rates while $61,315,000, or 25.0 percent, had variable rates.
The placement of loans on a nonaccrual status is dependent upon the type
of loan, collateral values and the collection activities in progress. Loans
which are well secured and in the process of collection are allowed to remain on
an accrual basis until they become 120 days past due. Unsecured commercial loans
and well secured loans not in the process of collection are charged off on or
before the date they become 90 days past due and, therefore, do not reach a
nonaccrual status. Commercial and real estate loans which are partially secured
are written down to the collateral value and placed on nonaccrual status on or
before becoming 90 days past due. Consumer loans are charged off on or before
becoming 120 days past due. All interest accrued in the current year but unpaid
at the date a loan goes on nonaccrual status is deducted from interest income,
while interest accrued from previous years is charged against the reserve for
loan losses. At December 31, 1997, nonaccrual loans were $1,016,000 compared
with $974,000 at year-end 1996. At December 31, 1997, loans which were 90 days
or more past due were $283,000 compared to $220,000 at year-end 1996.
During 1997, income of $54,000 on nonaccrual loans would have been
recorded if these loans had been accruing throughout 1997. No interest income on
nonaccrual loans was included in net income for 1997. First National Corporation
does not have any loans which have been restructured or any foreign loans.
Concentrations of credit are considered to exist when the amounts loaned
to a multiple number of borrowers engaged in similar business activities which
would cause them to be similarly impacted by general economic conditions
represents 25% of equity. As of December 31,
15
<PAGE> 14
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Loans (continued)
1997, the Corporation had no concentrations of credit.
Table 7 provides the level of risk elements in the loan portfolio for
the past five years.
Table 5
Distribution of Net Loans
By Type
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 67,519 $ 46,392 $ 43,108 $ 34,476 $ 28,169
Real estate - construction 12,429 9,625 5,792 4,781 3,321
Real estate - mortgage 207,630 178,544 148,853 126,751 110,113
Consumer 67,935 59,058 50,130 42,544 36,854
- --------------------------------------------------------------------------------------------------------------------
Total $ 355,513 $ 293,619 $ 247,883 $ 208,552 $ 178,457
====================================================================================================================
Percent of Total
- --------------------------------------------------------------------------------------------------------------------
Commercial, financial,
agricultural and other 19.0% 15.8% 17.4% 16.5% 15.8%
Real estate - construction 3.5 3.3 2.3 2.3 1.9
Real estate - mortgage 58.4 60.8 60.1 60.8 61.7
Consumer 19.1 20.1 20.2 20.4 20.6
- --------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====================================================================================================================
</TABLE>
16
<PAGE> 15
Table 6
Maturity Distribution of Loans
<TABLE>
<CAPTION>
Maturity
--------------------------------------
December 31, 1997 1 Year 1 - 5 Over 5
(Dollars in thousands) or Less Years Years
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial
agricultural and other $ 67,518 $22,204 $ 39,483 $ 5,831
Real estate - construction 12,429 10,875 1,554 0
Real estate - mortgage 207,630 35,816 101,220 70,594
Consumer 67,936 22,419 41,441 4,076
- --------------------------------------------------------------------------------------
Total $355,513 $91,314 $183,698 $80,501
======================================================================================
Loans due after one year
with:
Predetermined interest rates $196,457
Floating or adjustable interest rates $ 67,742
</TABLE>
17
<PAGE> 16
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Asset Quality
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment, loan, or short-term
investment portfolio, is reviewed by management for credit risk. To facilitate
this review, First National Corporation has established credit policies which
include credit limits, documentation, periodic examination and follow-up. In
addition, these portfolios are examined for exposure to concentration in any one
industry, government agency, or geographic location. In examining the portfolios
at December 31, 1997 and 1996, the Corporation did not have more than ten
percent of the loan portfolio in any one industry and had no foreign loans.
Each category of earning assets has a degree of credit risk. To measure
credit risk, various techniques are utilized. Credit risk in the investment
portfolio can be measured through bond ratings published by independent
agencies. In the investment portfolio, 97.3 percent of the investments consist
of U.S. Treasury securities, U.S. Agency securities and tax-free securities
having a rating of "A" or better. The credit risk of the loan portfolio can be
measured by historical experience. The Corporation maintains its loan portfolio
in accordance with its established credit policies. Net loan charge-offs over
the past five years have not exceeded .27 percent of net average loans. In 1997
net loan charge-offs as a percentage of net average loans were .14 percent
compared to .12 percent in 1996. See "Loans" for a discussion of the Company's
charge-off and nonaccrual policies.
[Graph indicating the Company's [Graph indicating the Company's
return on average assets during return on average equity during
1993, 1994, 1995, 1996 and 1997.] 1993, 1994, 1995, 1996 and 1997.]
18
<PAGE> 17
Table 7
Nonaccrual and Past Due Loans
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $ 283 $ 220 $ 354 $ 97 $ 209
Loans on a nonaccruing basis 1,016 974 845 1,214 983
- ----------------------------------------------------------------------------------------------------------------------
Total $ 1,299 $ 1,194 $ 1,199 $ 1,311 $ 1,192
======================================================================================================================
</TABLE>
Table 8
Summary of Loan
Loss Experience
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
January 1 $ 4,705 $ 3,703 $ 3,194 $ 2,955 $ 2,685
- ----------------------------------------------------------------------------------------------------------------------
Charge-offs during the year
Real estate - construction 0 0 0 0 0
Real estate - mortgage (25) (35) (130) (175) (61)
Consumer (615) (584) (514) (378) (330)
Commercial, financial,
agricultural and other (121) (72) (47) (80) (284)
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs (761) (691) (691) (633) (675)
- ----------------------------------------------------------------------------------------------------------------------
Recoveries during the year
Real estate - construction 0 0 0 0 0
Real estate - mortgage 12 151 123 58 9
Consumer 299 185 143 178 140
Commercial, financial,
agricultural and other 12 38 90 61 63
- ----------------------------------------------------------------------------------------------------------------------
Total recoveries 323 374 356 297 212
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (437) (317) (335) (336) (463)
Provisions from earnings 1,251 1,319 844 575 733
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses -
December 31 $ 5,518 $ 4,705 $ 3,703 $ 3,194 $ 2,955
======================================================================================================================
Average loans - net of
unearned income $ 323,420 $ 264,701 $ 227,466 $ 193,135 $ 173,415
Ratio of net charge-offs
to average loans - net of
unearned income .14% .12% .15% .17% .27%
</TABLE>
19
<PAGE> 18
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Loan Loss Provision
First National Corporation maintains a reserve for possible loan losses
(the allowance for loan losses) at a level which management believes is
sufficient to provide for potential losses in the loan portfolio. Management
periodically evaluates the adequacy of the allowance utilizing its internal risk
rating system and regulatory agency examinations to assess the quality of the
loan portfolio and identify problem loans. The evaluation process also includes
management's analysis of current and future economic conditions, composition of
the loan portfolio, past due and nonaccrual loans, concentrations of credit,
lending policies and procedures and historical loan loss experience. The
provision for loan losses is charged to the income statement in the amount
necessary to maintain the allowance at the appropriate level.
The allowance is established on an overall portfolio basis, and
management does not subsequently allocate the allowance by geographic area or
loan category.
The provision for loan losses for the year ended December 31, 1997, was
$1,251,000, compared to $1,319,000 in 1996, which represents a 5.2 percent
decrease. The decrease in the provision for loan losses was due to continued
strong loan growth.
The allowance for loan losses was $5,518,000, or 1.55 percent of
outstanding loans at the end of 1997, and $4,705,000, or 1.60 percent at
year-end 1996. Total charge-offs were $761,000 in 1997 and $691,000 in 1996.
Recoveries were $323,000 for 1997 and $374,000 for 1996. Net charge-offs were
$438,000 in 1997 and $317,000 for 1996. Net charge-offs were greatest in
consumer loans which decreased from $399,000 in 1996 to $316,000 in 1997. Real
estate loan net charge-offs increased by $128,000 in 1997 while commercial loan
losses increased by $75,000. Net charge-offs to average loans were .14 percent
in 1997 and .12 percent in 1996. A summary of loan loss experience for 1993
through 1997 is provided in Table 8.
Other real estate owned includes certain real estate acquired as a
result of foreclosure and deeds in lieu of foreclosure, as well as amounts
reclassified as in-substance foreclosures. For the period ended December 31,
1997, other real estate owned was $61,000 compared to $63,000 at December 31,
1996. This decrease resulted from properties being sold or written down.
Management anticipates that the level of charge-offs for 1998 will be
somewhat higher than the level experienced in 1997. Although changes in economic
conditions in the Corporation's market area can always affect this level, the
loan loss provision is considered adequate by management.
Liquidity
Liquidity is defined as the ability of an entity to generate cash to
meet its financial obligations. For a bank, liquidity means the consistent
ability to meet loan demand and deposit withdrawals. The Corporation has
employed its funds in a manner to provide liquidity in both assets and
liabilities.
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. As noted in Table 4, 19.0 percent of the investment portfolio
matures in one year or less. This part of the investment portfolio consists of
U.S. Treasury securities, U.S. Agency securities and bank qualified municipal
securities. Loans and other investments are of a longer term nature and are not
utilized for day-to-day bank liquidity needs.
Increases in the Corporation's liabilities provide liquidity on a
day-to-day basis. Daily liquidity needs may be met from deposits or from the
Corporation's use of federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings at favorable interest rates.
20
<PAGE> 19
Liquidity (continued)
The Corporation places an increasing reliance on borrowed funds which
are primarily cash management or "sweep" accounts that are accommodations to
corporate and governmental customers pursuant to sale of securities sold under
agreement to repurchase arrangements. During 1997, the Corporation maintained an
even higher level of liquidity with an influx of interest sensitive deposits.
Table 9
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
After After Six Greater
Within Three Through Than One
December 31, 1997 three Through Twelve Within Year and
(Dollars in thousands) Months Six Months Months One Year Insensitive(l) Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 160,775 $ 22,009 $ 27,892 $ 210,676 $144,837 $355,513
Investments 8,437 9,087 12,877 30,401 135,660 166,061
Funds 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 169,212 $ 31,096 $ 40,769 $ 241,077 $280,497 $521,574
===================================================================================================================================
Percent 32.4% 6.0% 7.8% 46.2% 53.8% 100.0%
===================================================================================================================================
Interest-bearing deposits,
excluding CDs greater than
$100,000 $ 100,343 $ 41,263 $ 22,825 $ 164,431 $179,097 $343,528
CDs greater than $100,000 21,093 7,171 7,091 35,355 5,440 40,795
Short-term borrowings 54,312 0 0 54,312 0 54,312
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liab. 175,748 48,434 29,916 254,098 184,537(2) 438,635
Interest-free funds 0 0 0 0 82,939 82,939
- -----------------------------------------------------------------------------------------------------------------------------------
Funds supporting interest
earning assets $ 175,748 $ 48,434 $ 29,916 $ 254,098 $267,476 $521,574
- -----------------------------------------------------------------------------------------------------------------------------------
Percent 33.7% 9.3% 5.7% 48.7% 51.3% 100.0%
===================================================================================================================================
Interest sensitivity gap $ (6,536) $(17,338) $ 10,853 $ (13,021) $ 13,021
Cumulative gap $ (6,536) $(23,874) $ (13,021) $ (13,021)
Percent of total interest earning
assets 1.3% 4.6% 2.5% 2.5%
</TABLE>
(1) These items are considered insensitive because they are not generally
affected by fluctuations in market interest rates.
(2) Includes savings and NOW deposits of $141,854.
Table 9 discloses the cumulative gap as a percentage of assets included
in the computation of gap (total earning assets) rather than as a percentage of
total assets.
Table 10
Principal/Notional Amount By Expected Maturity
Average Interest Rate
<TABLE>
<CAPTION>
Fair
There Value
(Dollars in millions) 1998 1999 2000 2001 2002 After Total 12-31-97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Available For Sale Securities $9,912 $ 23,613 $ 25,262 $28,529 $12,977 $15,365 $ 115,658 $115,658
Average Interest Rate 6.12% 5.97% 6.35% 6.52% 6.72% 5.95% 6.28%
</TABLE>
21
<PAGE> 20
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Interest Sensitivity
Interest sensitivity analysis refers to the potential impact of interest
rate changes on net interest income. Normally this sensitivity is expressed in
interest sensitivity gap and cumulative gap. Interest sensitivity analysis
utilizes the concept of matching interest sensitive assets with interest
sensitive liabilities over a stated time period. Interest sensitivity applies to
both assets and liabilities which carry a variable rate or mature during a
stated time period. A positive interest sensitivity gap demonstrates that assets
are repriced before liabilities during the stated time period. Conversely, a
negative gap demonstrates liabilities are repriced before assets.
The objective of interest sensitivity management is to maintain stable
growth in net interest income while minimizing adverse changes. Management is
continually changing the gap position of the Corporation in response to changes
in money markets and other external factors.
Table 9 presents the interest sensitive position of the Corporation's
balance sheet at December 31, 1997. The analysis illustrates the Corporation's
interest sensitivity position at prescribed intervals. Reflected in the table
are interest sensitivity gap and cumulative gap for immediate through one year
maturities. Management particularly attempts to control gap from zero to twelve
months. The position of First National Corporation at December 31, 1997 with
regard to the cumulative gap at the 12 month time frame is a negative gap of
$13,021,000. Assuming that no other variable changed, the potential impact to
First National Corporation's net interest income before taxes in the next year
should rates on the asset and liability sides change immediately and equally
would be as follows:
a rise of 1% would decrease earnings by $130,210
a rise of 2% would decrease earnings by $260,420
a rise of 3% would decrease earnings by $390,630
a decline of 1% would increase earnings by $130,210
a decline of 2% would increase earnings by $260,420
a decline of 3% would increase earnings by $390,630
Table 9 reflects the balances of interest earning assets and interest-bearing
liabilities at the earlier of their repricing or maturity dates. Scheduled
payment amounts of amortizing fixed rate loans are reflected at each scheduled
payment date. Variable rate amortizing loans reflect scheduled repayments at
each scheduled payment date until the loan may be repriced contractually, and
the unamortized balance is reflected at this point. Investments are reflected at
each instrument's ultimate maturity date or pre-refunded call date. Funds sales
are reflected at the immediate repricing interval due to the overnight
availability of the instruments. A portion of interest-bearing liabilities with
no contractual maturity, such as money market deposit accounts are reflected in
the immediate repricing period due to the contractual arrangements that give
First National Corporation the ability to vary the rates paid on those deposits
within a thirty-day or shorter period. First National Corporation reflects a
portion of its savings and NOW deposits as noninterest sensitive to more
accurately reflect their anticipated repricing characteristics. Fixed rate time
deposits, principally certificates of deposit, are reflected at their
contractual maturity date.
Variable rate time deposits are reflected at the earlier of their next
repricing or maturity date. Short-term borrowings (principally securities sold
under repurchase agreements secured by investment securities) are reflected in
the immediate repricing period due to the contractual arrangements which give
First National Corporation the ability to vary the rates paid on those
borrowings overnight.
22
<PAGE> 21
Interest Sensitivity (continued)
The Company does not use interest rate swaps to modify the interest rate
characteristics of certain long-term debt.
The only derivatives the Company owns are $ 2,000,000 U.S. Government
Agency securities held as available-for-sale.
Table 10 provides information about the Company's derivative financial
instruments and other financial instruments as of December 31, 1997, that are
sensitive to changes in interest rates. For debt obligations, the table presents
principal cash flows and related weighted-average interest rates by expected
maturity dates. Weighted-average variable rates are based on implied forward
rates in the yield curve at the reporting date.
Deposits
The deposit base provides First National Corporation with funds for the
long-term growth of loans and investments. At December 31, 1997, when compared
to year-end 1996, total deposits were $454,375,000, up $40,222,000, or 9.7
percent. Noninterest-bearing deposits for the same period were $70,052,000, an
increase of $2,820,000, or 4.2 percent, and interest-bearing deposits were
$384,323,000, an increase of $37,402,000, or 10.8 percent when compared to
December 31, 1996. For the year ended December 31, 1997, total average deposits
increased $54,896,000, or 14.2 percent. This growth was comprised of an increase
of average interest-bearing accounts of $47,987,000, or 14.7 percent, and
average noninterest-bearing accounts of $6,909,000, or 11.5 percent. Growth in
the interest-bearing accounts was composed of an increase in interest-bearing
transaction accounts of $3,368,000, or 4.1 percent, and certificates of deposit
of $33,575,000, or 20.2 percent, and an increase in savings accounts of
$11,044,000, or 14.2 percent.
At December 31, 1997, the ratio of average interest-bearing deposits to
total deposits increased to 84.8 percent from 84.4 percent at year-end 1996 and
was 84.7 percent at year-end 1995. The average rate paid on interest-bearing
accounts increased to 4.1 percent from 3.9 percent at year-end 1996 and was 4.0
percent at year-end 1995.
[Graph indicating total average [Graph indicating total average
short-term investments, total demand deposits, total average
average interest bearing investments, interest bearing transactions,
total average net loans and total average savings deposits,
total average earning total average CD deposits and
assets during 1993, 1994, 1995, total average deposits during
1996 and 1997.] 1993, 1994, 1995, 1996 and 1997.]
23
<PAGE> 22
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Table 11
Maturity Distribution of
CD's of $100,000 or more
<TABLE>
<CAPTION>
December 31 1997 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Within three months $21,093 $15,096
After three through six months 7,171 7,603
After six through twelve months 7,091 9,851
After twelve months 5,440 6,066
- --------------------------------------------------------------------------------
Total $40,795 $38,616
================================================================================
</TABLE>
Short-Term Borrowed Funds
The distribution of First National Corporation's short-term borrowings at
the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
--------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $54,312 5.14% $32,547 4.69% $25,833 5.44%
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and
other borrowings $44,852 4.75% $29,546 4.56% $25,371 5.05%
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $57,838 $36,568 $30,196
</TABLE>
24
<PAGE> 23
Equity and Dividends
Throughout the years the strength of the shareholders' equity base has
provided stability to current operations and capital adequacy to support growth.
The Corporation's shareholder equity base was 9.5 percent of total assets as of
December 31, 1997, compared with 9.7 percent at year-end 1996, and 9.1 percent
at year-end 1995.
The Corporation has achieved a consistent record of increasing earnings
over the past years. Even though dividends have historically been increased, the
Corporation has maintained a relatively constant dividend pay-out policy. The
dividend pay-out ratio for 1997 was 31.8 percent compared to 31.1 percent in
1996 and 30.2 percent for 1995. Cash dividend payments in 1997 were $2,059,000
as compared to $1,721,000 in 1996. The retention of the remaining earnings has
provided the basis for expansion of loans and investments, and acquisitions.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Banks; however, certain restrictions exist
regarding the ability of the Banks to transfer funds to the Corporation in the
form of cash dividends, loans or advances. The approval of the Office of the
Comptroller of the Currency is required to pay dividends in excess of the Banks'
net profits for the current year plus retained net profits (net profits less
dividends paid) for the preceding two years, less any required transfers to
surplus. As of December 31, 1997, $9,466,000 of the Banks' retained earnings
were available for distribution to the Corporation as dividends without prior
regulatory approval. In 1997 the Banks paid dividends to the Corporation of
$2,054,000.
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, 1997, 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 for First National Corporation at
December 31, 1997 was 13.5 percent compared to 15.8 percent at year-end 1996.
The total capital ratio was 14.7 at December 31, 1997 compared to 17.1 percent
at year-end 1996.
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage ratio of total capital to total assets
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 December 31, 1997, First
National Corporation's leverage ratio was 9.2 percent, compared to 9.5 percent
at year-end 1996. First National Corporation's ratios exceed the minimum
standards by substantial margins.
25
<PAGE> 24
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Price Range of Common Stock and Dividends
The Company's Common Stock is listed on the American Stock Exchange
under the trading symbol "FNC". The following table sets forth the high and low
sale prices and the quarterly dividends declared on the Common Stock for the
periods shown. Per share information set forth below has been adjusted to give
retroactive effect to stock dividends and stock splits effected during the
periods shown.
<TABLE>
<CAPTION>
Price Per Share Dividend
Declared
High Low Per Share
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996:
First Quarter * * $ .09
Second Quarter * * .09
Third Quarter * * .095
Fourth Quarter * * .095
1997:
First Quarter * * .095
Second Quarter $27.94 $21.44 .095
Third Quarter 27.06 25.00 .10
Fourth Quarter 26.75 22.00 .11
1998:
First Quarter (through February 23, 1998) $25.38 $22.75 .11
</TABLE>
* On January 28, 1997, the Common Stock was listed for trading on the
American Stock Exchange. Trading on the American Stock Exchange opened
at $16.00 per share, and trading prices ranged from $16.00 per share to
$21.63 per share from January 28, 1997 to March 31, 1997. The Company
believes that, after giving retroactive effect to stock dividends and
stock splits, the Common Stock traded at prices ranging from $11.00 to
$14.00 per share during the period from January 1, 1996 to January 27,
1997. However, management has knowledge of only a limited number of
trades during such period and has no independent means of verifying the
price at which any such trades occurred.
Noninterest Income and Expense
In today's banking environment, noninterest income provides a stable
source of revenue for the Corporation. The expansion of banking services and the
use of explicit pricing enables the Corporation to manage its fee income and
price services to more closely reflect actual costs. Income from noninterest
sources in 1997 was $6,259,000, an increase of $915,000, or 17.1 percent,
compared to 1996. For the period ended December 31, 1996 income from noninterest
sources was $5,344,000, an increase of $1,295,000, or 32.0 percent over 1995.
Service charges on transaction accounts in 1997 increased $233,000 or
5.8 percent when compared to 1996 and $894,000, or 28.9 percent, in 1996
compared to 1995. This increase was due to increased account activity, as well
as an increase in service fees. The deposit fee pricing structure is continually
being reviewed and updated for new services and rising costs.
Other charges, commissions and fees increased $682,000 or 50.3 percent
in 1997 compared to an increase of $401,000 or 42.0 percent in 1996. The
increase is a result of an increase in secondary market origination fees, ATM
surcharge fees, and alternative investment fee income.
Noninterest expense increased $3,102,000 or 19.0 percent in 1997
compared with $2,031,000 or 14.2 percent in 1996.
26
<PAGE> 25
Noninterest Income and Expense (continued)
Salary and employee benefits expense was the largest component of
noninterest expense in 1997. Salaries and employee benefits increased 16.4
percent or $1,480,000 in 1997 as compared with a 16.7 percent or $1,289,000
increase in 1996. The number of full time equivalent employees was 281 at
December 31, 1997 as compared with 281 in 1996 and 253 in 1995. The number of
full time equivalent employees remained relatively unchanged for 1996 to 1997.
The increase in 1996 as compared to 1995 was primarily the result of the
commencement of operations by the National Bank of York County. In 1994
management adopted an employee cash incentive plan covering all employees. Cash
incentives paid during 1997 under this program were $751,000.
Net occupancy expense increased 19.8 percent in 1997 compared to an
increase of 2.9 percent in 1996. The increase is attributable to higher
operating expenses including utilities, maintenance and depreciation.
Furniture and equipment expense increased 12.8 percent in 1997 compared
with a 26.8 percent increase in 1996. The increased costs in 1997 were due to
increases in depreciation expense and equipment service contracts.
Total other expense for 1997 was $6,414,000 compared with $5,078,000 in
1996 and $4,710,000 in 1995, or increases of 26.3 percent and 7.8 percent
respectively. Included in other noninterest expense is $657,000 in 1997 for the
amortization of intangibles, principally core deposit values, under the purchase
accounting method utilized for bank acquisitions, compared with $644,000 in 1996
and $540,000 in 1995. Included in expenses for amortization of intangibles for
1997, is $348,000 attributable to the two branches in Walterboro acquired from
NationsBank as compared to $375,000 in 1996. Also included in other expense is
$52,000 attributed to Federal Deposit Insurance premiums, an increase of
$50,000, or 2,500.0 percent in 1997 as compared to 1996 and a decrease of
$371,000, or 99.5 percent in 1996 as compared to 1995. The decrease in the
Federal Deposit Insurance premiums in 1995 included a $201,000 refund as the
result of the Bank Insurance Fund of the FDIC reaching the 1.25 percent
capitalization level for every $100 of deposits insured by the FDIC. The
remainder of the increase in other expense for 1997 is distributed among the
following expense categories: advertising, insurance and surety bond, office and
printing supplies, postage, telephone and line charges, and other expenses.
Table 12
Quarterly Results of Operations
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
---------------------------------------- -------------------------------------
(Dollars in thousands, except per share) Fourth Third Second First Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $10,718 $10,645 $10,222 $9,559 $9,127 $8,609 $8,373 $8,154
Interest expense 4,522 4,520 4,354 3,968 3,726 3,484 3,356 3,420
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 6,196 6,125 5,868 5,591 5,401 5,125 5,017 4,734
Provision for loan losses 378 275 314 285 530 269 300 220
Noninterest income 1,673 1,589 1,492 1,505 1,423 1,260 1,294 1,313
Noninterest expense 5,342 4,963 4,651 4,498 4,350 4,119 3,949 3,879
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,149 2,476 2,395 2,313 1,944 1,997 2,062 1,948
Income taxes 636 770 753 708 598 611 663 551
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,513 $ 1,706 $ 1,642 $1,605 $1,346 $1,386 $1,399 $1,397
=============================================================================================================================
Earnings per share $0.30 $0.33 $0.32 $0.31 $0.28 $0.28 $0.29 $0.29
=============================================================================================================================
</TABLE>
27
<PAGE> 26
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measure of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation. Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While the effect of inflation on banks is normally not as significant as
is its influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses. Inflation also affects the bank's customers which may result in an
indirect effect on the banks' business.
Report of Management
The financial statements, accompanying notes, and other financial
information in this Annual Report to Shareholders were prepared by management of
First National Corporation which is responsible for the integrity of the
information given. The statements have been prepared in conformity with
generally accepted accounting principles and include amounts which are based on
management's judgment or best estimates.
The Corporation maintains a system of internal controls to reasonably
assure the safeguarding of assets and proper execution of transactions according
to management's directives. The control system consists of written policies and
procedures, segregation of duties, and an extensive internal audit program.
Management is cognizant of the limitations of such controls, but feels
reasonable assurance of effectiveness is achieved without extending costs beyond
benefits derived.
Internal audit reports are prepared for the Audit Committee of the Board
of Directors and copies are made available to the independent auditors. The
Audit Committee of the Board of Directors consists solely of outside directors
who meet periodically with management, internal auditors, and the independent
auditors. The Audit Committee reviews matters relating to the audit scope,
quality of financial reporting and control, and evaluation of management's
performance of its financial reporting responsibility. Access to the Audit
Committee is available to both internal and independent auditors without
management present.
J. W. Hunt and Company, LLP independent auditors, have audited the
financial statements and notes included in this Annual Report. Their audit was
conducted in accordance with generally accepted auditing standards and their
opinion presents an objective evaluation of management's discharge of its
responsibility to fairly present the financial statements of the Corporation.
Their opinion is contained in their report on the facing page. All financial
information appearing in this Annual Report is consistent with that in the
audited financial statements.
First National Corporation
Orangeburg, South Carolina
February 2, 1998
28
<PAGE> 27
Report of Independent Certified Public Accountants
<TABLE>
<CAPTION>
J. W. Hunt and Company, LLP
William R Hunt CPA Certified Public Accountants Middleburg Office Park
John c. Creech, Jr., CPA 1607 ST. Julian Place
Anne N. Ron, CPA Members Post Office Box 265
William F Quattlebaum CPA American Institute of Columbia, SC 29202.0265
Susan R Benard, CPA Certified Public Accountants 803-254-8196
Private Companies AND SEC Practice Sections Fax 803-256-1524
Member of CPA Associates with Associated Offices in
J.W. Hunt, CPA (1907-1987) Principal US And International Cities
<S> <C>
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
the Board of Directors
First National Corporation
We have audited the consolidated balance sheets of First National Corporation
and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The audits include examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. The audits also include
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years m the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Columbia, South Carolina
February 2, 1998
29
<PAGE> 28
First National Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
<TABLE>
<CAPTION>
...DECEMBER 31,...
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 3) $ 30,802 $ 28,824
--------- ---------
Investment securities (Note 4):
Securities held-to-maturity:
Taxable 15,552 30,619
Tax-exempt 34,851 34,578
--------- ---------
Total (fair value of $51,026 in 1997 and $65,504 in 1996) 50,403 65,197
Securities available-for-sale, at fair value 115,658 95,684
--------- ---------
Total investment securities 166,061 160,881
--------- ---------
Loans (Note 5) 359,167 296,865
Less, unearned income (3,654) (3,246)
Less, allowance for loan losses (5,518) (4,705)
--------- ---------
Loans, net 349,995 288,914
--------- ---------
Premises and equipment, net (Note 6) 9,946 10,848
--------- ---------
Other assets (Note 7) 8,767 8,165
--------- ---------
Total assets $ 565,571 $ 497,632
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 70,052 $ 67,232
Interest-bearing transaction accounts 93,259 85,402
Savings 90,731 79,739
CDs of $100,000 and over 40,795 38,616
Other time 159,538 143,164
--------- ---------
Total deposits 454,375 414,153
Federal funds purchased and securities
sold under agreements to repurchase (Note 10) 54,312 32,547
Other liabilities 2,984 2,586
--------- ---------
Total liabilities 511,671 449,286
--------- ---------
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000
shares, issued and outstanding 5,188,097shares in
1997 and 5,100,048 shares in 1996 12,970 12,750
Surplus 23,257 22,856
Retained earnings (Note 14) 17,197 12,790
Unrealized gain (loss) on securities available
for-sale, net of applicable deferred income taxes 476 (50)
--------- ---------
Total shareholders' equity 53,900 48,346
--------- ---------
Total liabilities and shareholders' equity $ 565,571 $ 497,632
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
30
<PAGE> 29
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars. except per share data)
<TABLE>
<CAPTION>
...YEAR ENDED DECEMBER 31,...
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans, including fees $30,421 $25,139 $22,020
Investment securities
Taxable:
Held-to-maturity 1,426 2,553 4,384
Available-for-sale 7,211 4,355 1,633
Tax-exempt-held-to-maturity 1,602 1,668 1,659
Federal funds sold 484 548 487
------- ------- -------
Total interest income 41,144 34,263 30,183
------- ------- -------
Interest expense:
Interest-bearing transaction accounts 1,716 1,632 1,741
Savings 2,626 2,001 2,066
Certificates of deposit 10,892 8,985 7,436
Federal funds purchased and securities
sold under agreements to repurchase 2,131 1,348 1,282
Notes payable -- 20 --
------- ------- -------
Total interest expense 17,365 13,986 12,525
------- ------- -------
Net interest income:
Net interest income 23,779 20,277 17,658
Provision for loan losses (Note 5) 1,251 1,319 844
------- ------- -------
Net interest income after provision for loan losses 22,528 18,958 16,814
------- ------- -------
Non-interest income:
Service charges on deposit accounts 4,221 3,988 3,094
Other service charges and fees 1,990 1,314 906
Other income 48 42 49
------- ------- -------
Total non-interest income 6,259 5,344 4,049
------- ------- -------
Non-interest expense:
Salaries and employee benefits (Note 15) 10,501 9,021 7,732
Net occupancy expense 926 773 751
Furniture and equipment expense 1,613 1,430 1,128
Loss on sale of securities available-for-sale -- 50 --
Other expense (Note 12) 6,414 5,078 4,710
------- ------- -------
Total non-interest expense 19,454 16,352 14,321
------- ------- -------
Earnings:
Income before income taxes 9,333 7,950 6,542
Applicable income taxes (Note 11) 2,867 2,422 1,902
------- ------- -------
Net income $ 6,466 $ 5,528 $ 4,640
======= ======= =======
Earnings per common share (Note 13):
Net income per common share $ 1.26 $ 1.14 $ 0.98
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
31
<PAGE> 30
First National Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
On Securities
Available-For
Sale, Net Of
Applicable
Common Stock Retained Deferred
Shares Amount Surplus Earnings Income Taxes Total
------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 2,035,000 $ 10,175 $ 11,871 $ 14,304 $(169) $ 36,181
Net income for year ended
December 31, 1995 - - - 4,640 - 4,640
Cash dividends declared at $.68 per share - - - (1,403) - (1,196)
Common stock dividend of 10%, date
of record, October 31, 1995 203,042 1,015 4,285 (5,300) - -
Common stock issued 6,297 32 104 - - 136
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $ 135 - - - - 233 233
--------- -------- -------- -------- ------ --------
Balance December 31, 1995 2,244,339 11,222 16,260 12,241 54 39,777
Net income for year ended
December 31, 1996 - - - 5,528 - 5,528
Cash dividends declared at $.74 per share - - - (1,721) - (1,721)
Common stock dividend of 5%,
date of record, October 31, 1996 120,891 604 2,654 (3,258)
Common stock issued 184,794 924 3,942 - - 4,866
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $64 - - - - (104) (104)
--------- -------- -------- -------- ------ --------
Balance, December 31, 1996 2,550,024 12,750 22,856 12,790 (50) 48,346
Net income for year ended
December 31, 1997 - - - 6,466 - 6,466
Cash dividends declared at $.40 per share - - - (2,059) - (2,059)
Two-for-one common stock split
date of record, May 19, 1997 2,556,427 - - - - -
Common stock issued 81,646 220 401 - - 621
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $310 - - - - 526 526
--------- -------- -------- -------- ------ --------
Balance, December 31, 1997 5,188,097 $ 12,970 $ 23,257 $ 17,197 $ 476 $ 53,900
========= ======== ======== ======== ====== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
32
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
...YEAR ENDED DECEMBER 31,...
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,466 $ 5,528 $ 4,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,851 1,674 1,430
Provision for loan losses 1,251 1,319 844
Provision for deferred taxes (249) (379) (50)
(Gain) loss on sale of securities available-for-sale (2) 50 --
(Gain) loss on sale of premises and equipment 35 (6) 5
Increase (decrease) in accrued income taxes 296 (156) 23
Increase in interest receivable (923) (140) (740)
Premium amortization and discount accretion 2 298 315
Increase in interest payable 126 157 652
Increase in miscellaneous assets (523) (89) (3,355)
Decrease in prepaid assets 83 225 31
Increase (decrease) in other liabilities 168 (2) (137)
-------- -------- --------
Net cash provided by operating activities 8,415 8,479 3,658
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 3,066 2,951 149
Proceeds from maturities of investment securities held-to-maturity 22,893 39,002 30,021
Proceeds from maturities of investment securities available-for-sale 22,876 12,320 7,265
Purchases of investment securities held-to-maturity (8,267) (8,865) (22,131)
Purchases of investment securities available-for-sale (44,912) (55,309) (33,401)
Net increase in customer loans (62,655) (46,371) (40,009)
Recoveries on loans previously charged off 323 318 343
Proceeds from sale of other real estate -- 70 188
Purchases of premises and equipment (717) (3,692) (1,865)
Proceeds from sale of premises and equipment 407 80 3
Decrease in federal funds sold -- -- --
-------- -------- --------
Net cash used in investing activities (66,986) (59,496) (59,437)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts
savings accounts and certificates of deposit 40,222 45,838 47,608
Net increase in federal funds purchased and
securities sold under agreements to repurchase 21,765 6,714 10,536
Proceeds from issuance of other borrowings -- 2,000 --
Repayment of other borrowings -- (2,000) --
Common stock issuance 14 4,655 95
Dividends paid (2,059) (1,721) (1,403)
Stock options exercised 607 211 41
-------- -------- --------
Net cash provided by financing activities $ 60,549 $ 55,697 $ 56,877
======== ======== ========
</TABLE>
33
<PAGE> 32
First National Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
...YEAR ENDED DECEMBER 31,...
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Net increase in cash and cash equivalents $ 1,978 $ 4,680 $ 1,098
Cash and cash equivalents at beginning of year 28,824 24,144 23,046
------- -------- -------
Cash and cash equivalents at end of year $30,802 $ 28,824 $24,144
======= ======== =======
Supplemental disclosures of cash flow information:
Cash paid for
Interest $17,239 $ 13,829 $11,873
======= ======== =======
Income taxes $ 2,820 $ 2,957 $ 1,929
======= ======== =======
Supplemental disclosures of noncash investing activities:
Real estate acquired in full or partial settlement of loans $ 61 $ 28 $ 268
======= ======== =======
Transfer of securities from held-to-maturity to
available-for-sale on December 1, 1995 -- -- $15,948
======= ======== =======
Change in unrealized gain (loss) on securities
available-for-sale $ 836 $ (168) $ 358
======= ======== =======
Change in deferred income tax on unrealized
gain (loss) on securities available-for-sale $ 310 $ (64) $ 135
======= ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE IN INTEGRAL PART OF THE FINANCIAL STATEMENTS
34
<PAGE> 33
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The accounting and reporting policies of First National Corporation (the
Corporation) and subsidiaries conform with generally accepted accounting
principles and with the prevailing practices within the banking industry. The
Company provides general banking services in the State of South Carolina.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the First National
Corporation and its wholly-owned subsidiaries, First National Bank (FNB) and
National Bank of York County (NBYC). All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES:
Debt securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Securities available-for-sale
also include the required capital stock of the Federal Reserve Bank. Unrealized
gains and losses on securities available-for-sale are recognized as direct
increases or decreases in shareholders' equity. Cost of securities sold is
recognized using the specific identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. Unearned discount on installment loans is
recognized as income over the terms of the loans by methods which generally
approximate the interest method. Interest on other loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding. Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 120
days or more. A nonaccrual loan may not be considered impaired if it is expected
that the delay in payment is minimal. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
35
<PAGE> 34
Notes to Consolidated Financial Statements (Cont.)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED):
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. An allowance for impaired loans is 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.
OTHER REAL ESTATE OWNED (OREO):
Real estate acquired in satisfaction of a loan and in-substance foreclosures are
reported in other assets. In-substance foreclosures are properties in which the
borrower has little or no equity in the collateral. Properties acquired by
foreclosure or deed in lieu of foreclosure and in-substance foreclosures are
transferred to 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.
PREMISES AND EQUIPMENT:
Office equipment, furnishings, and buildings are stated at cost less accumulated
depreciation computed principally on the declining-balance method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. Additions to premises and
equipment and major replacements are added to the accounts at cost. Maintenance
and repairs and minor replacements are charged to expense when incurred. Gains
and losses on routine dispositions are reflected in current operations.
INTANGIBLE ASSETS:
Intangible assets consist primarily of core deposit premium costs which resulted
from the acquisition of branches from other commercial banks. The excess of the
purchase price over the fair value of the net tangible assets acquired in the
transactions is included in other assets and is being amortized over the
estimated useful lives of the deposit accounts acquired on a method which
reasonably approximates the anticipated benefit stream from the accounts. (SEE
NOTE 7.)
36
<PAGE> 35
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED):
EMPLOYEE BENEFIT PLANS:
Pension Plan - The Corporation and its subsidiaries have a non-contributory
defined benefit pension plan covering all employees who have attained age
twenty-one and have completed one year of eligible service. The Company's
funding policy is to contribute annually the amount necessary to satisfy the
Internal Revenue Service's funding standards.
Profit Sharing Plan - The Corporation and its subsidiaries have a profit-sharing
plan, including Internal Revenue Code Section 401(k) provisions. Electing
employees are eligible to participate after attaining age twenty-one and
completing one year of eligible service. Plan participants elect to contribute
1% to 4% of annual base compensation as a before tax contribution. The Company
matches 50% of these contributions. Employer contributions may be made from
current or accumulated net profits. Participants may additionally elect to
contribute 1% to 6% of annual base compensation as a before tax contribution
with no employer matching contribution.
Retiree Medical Plan - Post-retirement health and life insurance benefits are
provided to eligible employees which is limited to those employees of the
Corporation eligible for early retirement under the pension plan on or before
December 31, 1993, and former employees who are currently receiving benefits.
The plan was unfunded at December 31, 1997, and the liability for future
benefits has been recorded in the consolidated financial statements.
LEASE COMMITMENTS:
The Corporation's subsidiaries have entered into a number of operating lease
agreements for land and buildings used in operations. The agreements expire over
various terms with the longest such term extending to the year 2002. Certain of
the leases contain renewal options. In addition, the subsidiaries pay
maintenance, property taxes and insurance on certain of the leased properties.
CASH AND CASH EQUIVALENTS:
For the purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and due from banks". These amounts include cash on hand,
cash items in process of collection, and amounts due from banks. Due from bank
balances are maintained in other financial institutions.
INCOME TAXES:
The Company is subject to federal and state income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
37
<PAGE> 36
Notes to Consolidated Financial Statements (Cont.)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED):
ADVERTISING COSTS:
The Company expenses the cost of advertising as incurred.
OTHER:
Certain amounts previously reported have been restated in order to conform with
current year presentation. Such reclassifications had no effect on net income.
NOTE 2 - FORMATION OF BANKING SUBSIDIARIES:
NATIONAL BANK OF YORK COUNTY:
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.
FLORENCE COUNTY NATIONAL BANK:
The Corporation is sponsoring the organization of a national bank in Florence,
South Carolina. The organizers have filed an application with the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation,
respectively, for a charter to form the Florence County National Bank and for
insurance of deposits. The Corporation has also filed applications with the
Board of Governors of the Federal Reserve System and the South Carolina State
Board of Financial Institutions to acquire all of the bank's stock upon
completion of its organization, so that the newly formed bank will be a
wholly-owned subsidiary of the Corporation. Florence County National Bank (In
Organization) is expected to begin operations during 1998.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
As a members of the Federal Reserve System, the Corporation's banking
subsidiaries are required by regulation to maintain an average cash reserve
balance with the Federal Reserve Bank. The average amount of such reserve
balance as of December 31, 1997, was approximately $4,309,000.
At December 31, 1997, the Corporation and its subsidiaries had due from bank
balances in excess of federally insured limits in the amount of $769,000. The
risks associated with this excess is limited due to the soundness of the
financial institutions with which the funds are deposited.
38
<PAGE> 37
NOTE 4 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities
held-to-maturity at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
............................... 1997 ............................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 3,231 $ 28 $ - $ 3,259
Obligations of
U. S. Government
Agencies and
Corporations 12,321 39 (18) 12,342
Obligations of states
and political
subdivisions 34,851 581 (7) 35,425
--------------------------------------------------------------------------------
Total $ 50,403 $ 648 $ (25) $ 51,026
================================================================================
<CAPTION>
............................... 1996 ............................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 13,794 $ 50 $ (2) $ 13,842
Obligations of
U. S. Government
Agencies and
Corporations 16,825 70 (167) 16,728
Obligations of states
and political
subdivisions 34,578 432 (76) 34,934
--------------------------------------------------------------------------------
Total $ 65,197 $ 552 $ (245) $ 65,504
================================================================================
</TABLE>
39
<PAGE> 38
Notes to Consolidated Financial Statements (Cont.)
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
The market values of state, county, and municipal securities are established
with the assistance of an independent pricing service. The values are based on
data which often reflect transactions of relatively small size and are not
necessarily indicative of the value of the securities when traded in large
volumes.
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
.............................. 1997 ..............................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 30,320 $ 240 $ - $ 30,560
Obligations of
U. S. Government
Agencies and
Corporations 83,990 538 (23) 84,505
Federal Reserve Bank stock 475 - - 475
Other securities 118 - - 118
--------------------------------------------------------------------------------
Total $ 114,903 $ 778 $ (23) $ 115,658
================================================================================
<CAPTION>
....................................... 1996 ......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 24,094 $ 27 $ (62) $ 24,059
Obligations of
U. S. Government
Agencies and
Corporations 71,061 224 (270) 71,015
Federal Reserve Bank stock 492 - - 492
Other securities 118 - - 118
--------------------------------------------------------------------------------
Total $ 95,765 $ 251 $ (332) $ 95,684
================================================================================
</TABLE>
40
<PAGE> 39
NOTE 4 - INVESTMENT SECURITIES (CONTINUED):
The amortized cost and fair value of debt securities at December 31, 1997 by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 13,154 $ 13,181 $ 17,211 $ 17,247
Due after one year through
five years 20,982 21,328 94,422 95,133
Due after five years through
ten years 12,947 13,188 - -
Due after ten years - - - -
- ----------------------------------------------------------------------------------------------------------------------
Subtotal 47,083 47,697 111,633 112,380
No contractual maturity 3,320 3,329 3,270 3,278
- ----------------------------------------------------------------------------------------------------------------------
Total $ 50,403 $ 51,026 $ 114,903 $ 115,658
======================================================================================================================
</TABLE>
There were no transfers of held-to-maturity securities in 1997 or 1996. There
were no sales of securities held-to-maturity during 1997 or 1996.
Proceeds from calls and maturities of available-for-sale securities totaled
$3,066,000 and $2,951,000 for the years ended December 31, 1997 and 1996,
respectively. Gross realized losses on calls and maturities of
available-for-sale securities were $2,000 during the year ended December 31,
1997. During the year ended December 31, 1996, there were gross realized losses
of $50,000 on sales of securities available-for-sale. There were no realized
gains or losses on sales of investment securities during the years ended
December 31, 1995.
Investment securities with a book value of $88,276,000 and a market value of
$88,931,000 at December 31, 1997 were pledged to secure public deposits, trust
deposits, securities sold under agreements to repurchase, and for other purposes
as required and permitted by law.
41
<PAGE> 40
Notes to Consolidated Financial Statements (Cont.)
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands of dollars)
<S> <C> <C>
Commercial, financial and agricultural $ 67,519 $ 46,392
Real estate - construction 12,429 9,625
Real estate - mortgage 207,630 178,544
Consumer, net of unearned income 67,935 59,058
------------------------------------
Total loans $ 355,513 $ 293,619
====================================
</TABLE>
Changes in the allowance for loan losses for the three years ended December 31,
1997, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 4,705 $ 3,703 $ 3,194
Charge-offs (761) (691) (691)
Recoveries 323 374 356
----------------------------------------------------------
Balance before provision for loan losses 4,267 3,386 2,859
Provision for loan losses 1,251 1,319 844
----------------------------------------------------------
Balance at end of year $ 5,518 $ 4,705 $ 3,703
==========================================================
</TABLE>
At December 31, 1997 and 1996, the aggregate amount of loans, including those
for which impairment has been recognized, for which the accrual of interest had
been discontinued was $1,016,000 and $974,000, respectively. Interest income
which was foregone was an immaterial amount for each of the three years ended
December 31, 1997.
There were no restructured loans at December 31, 1997 and 1996.
Included in the balance sheet under the caption, "Other Assets" are certain real
properties which were acquired as a result of completed foreclosure proceedings.
Also included in the caption are amounts reclassified as in-substance
foreclosures. Other real estate totaled $61,000 and $63,000 at December 31, 1997
and 1996, respectively.
42
<PAGE> 41
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED):
The Corporation's banking subsidiaries grant agribusiness, commercial, and
residential loans to customers throughout the state. Although the subsidiaries
have a diversified loan portfolio, a substantial portion of their debtors'
ability to honor their contracts is dependent upon the economy of Orangeburg
County, York County, and other surrounding areas.
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 banking subsidiaries' credit
card, residential mortgage, overdraft protection, home equity lines, accounts
receivable financing, and consumer installment loans.
There were no impaired loans at December 31, 1997 and 1996.
Under guidelines established by the Company, concentrations of credit are
considered to exist when the amounts loaned to a multiple number of borrowers
engaged in similar business activities which would cause them to be similarly
impacted by general economic conditions represents 25% of equity. There were no
concentrations of credit at December 31, 1997.
43
<PAGE> 42
Notes to Consolidated Financial Statements (Cont.)
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31. consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands of dollars)
<S> <C> <C>
Land $ 1,976 $ 1,995
Buildings and leasehold improvements 9,101 9,319
Equipment and furnishings 7,866 7,389
-----------------------------------
Total 18,943 18,703
Less, accumulated depreciation and amortization 8,997 7,855
-----------------------------------
Premises and equipment - net $ 9,946 $ 10,848
===================================
</TABLE>
Depreciation expense charged to operations was $1,177,000, $1,020,000, and
$891,000 in 1997, 1996, and 1995, respectively.
NOTE 7 - INTANGIBLE ASSETS:
Core deposit premium cost in the original amount of $1,822,000, which resulted
from the purchase of two branches of another commercial bank, is being amortized
on the straight-line basis over the estimated useful lives of the deposit
accounts acquired, which range from two to fourteen years. The acquisition cost
was allocated to the assets acquired based on their fair market value.
Amortization expense, which is included in other non-interest expense, for the
years ended December 31, 1997, 1996, and 1995, was $34,000, $80,000, and
$120,000, respectively.
On July 1, 1991, FNB completed the purchase of a branch of another commercial
bank. The excess of the purchase price over the fair value of the net tangible
assets acquired has been recorded as core deposit premium cost in the amount of
$1,124,000, and is being amortized over ten years on a method which reasonably
approximates the anticipated benefit stream from the related deposit accounts.
Amortization expense for the years ended December 31, 1997, 1996, and 1995, was
$98,000, $110,000, and $122,000, respectively.
On June 16, 1995, FNB completed the purchase of two branches of another
commercial bank. The excess of the purchase price over the fair value of the net
tangible assets acquired has been recorded as core deposit premium cost in the
amount of $3,034,000, and is being amortized over fifteen years on a method
which reasonably approximates the anticipated benefit stream from the related
deposit accounts. Amortization expense for the year ended December 31, 1997,
1996, and 1995, was $348,000, $375,000 and $231,000, respectively.
Computer software (acquired by purchase) with an original cost of $1,068,000 is
being amortized on the straight-line method over thirty-six months. Amortization
expense was $177,000, $75,000, and $66,000, for the years ended December 31,
1997, 1996, and 1995, respectively.
44
<PAGE> 43
NOTE 8 - IMPAIRMENT OF LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES:
In March, 1995, the Financing Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed Of, effective for
fiscal years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
total of the expected future cash flows expected to result from the use of the
asset and its eventual disposition is less than the carrying amount of the
assets, an impairment loss is recognized. Impairment losses resulting from the
application of this statement should be reported in the period in which the
recognition criteria are first applied and met. The initial application of SFAS
121 is to be reported as the cumulative effect of a change in accounting
principle. As of December 31, 1997, the Corporation and its banking subsidiaries
did not hold any long-lived assets or intangibles which have to be considered
impaired as a result of the application of SFAS 121.
NOTE 9 - DEPOSITS:
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000 was approximately $40,795,000 and $38,616,000 at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
<S> <C>
1998 $ 142,103
1999 44,803
2000 9,791
2001 770
2002 1,014
Thereafter 1,760
---------
$ 200,241
=========
</TABLE>
45
<PAGE> 44
Notes to Consolidated Financial Statements (Cont.)
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to three days from the transaction date. Certain of
the borrowings have no defined maturity date. All securities underlying these
agreements are institution-owned securities.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Average balance during the year $ 44,852 $ 29,819
Average interest rate during the year 4.75% 4.59%
Maximum month-end balance during the year $ 57,838 $ 36,568
</TABLE>
NOTE 11 - INCOME TAXES:
Income tax expense for the three years ended December 31, 1997, consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Current:
Federal $ 2,776 $ 2,507 $ 1,715
State 340 294 237
-----------------------------------------------------------
Total current 3,116 2,801 1,952
Deferred (249) (379) (50)
-----------------------------------------------------------
Total $ 2,867 $ 2,422 $ 1,902
===========================================================
</TABLE>
Timing differences in the recognition of revenue and expense for tax and
financial reporting purposes resulted in deferred income taxes as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Provision for loan losses $ (317) $ (341) $ (183)
Pension cost and post-retirement benefits 36 47 79
Consumer loan income 18 13 38
Depreciation 6 14 2
Other 8 (112) 14
-----------------------------------------------------------
Total $ (249) $ (379) $ (50)
===========================================================
</TABLE>
46
<PAGE> 45
NOTE 11 - INCOME TAXES (CONTINUED):
The reasons for the difference between income tax expense and the amount
computed by applying the statutory income tax rate of 34% to pre-tax income are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Income taxes at statutory rate on
pre-tax income $ 3,173 $ 2,703 $ 2,224
Increase (reduction) of taxes:
State income taxes, net of federal
tax benefit 277 236 194
Tax-exempt interest income (594) (606) (588)
Other 11 89 72
--------------------------------------------------------------
Total $ 2,867 $ 2,422 $ 1,902
==============================================================
</TABLE>
The net deferred tax asset included in other assets in the accompanying
consolidated financial statements includes the following components:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands of dollars)
<S> <C> <C>
Allowance for loan losses $ 1,736 $ 1,419
Post-retirement benefits 80 64
Intangible assets 181 125
Unrealized losses on investment securities available-for-sale - 31
Start-up expenses 39 51
---------------------------------------
Total deferred tax assets 2,036 1,690
---------------------------------------
Depreciation (814) (808)
Consumer loan income (177) (159)
Bond discount accretion (136) (84)
Pension plan (120) (68)
Unrealized gains on investment securities available-for-sale (279) -
---------------------------------------
Total deferred tax liabilities (1,526) (1,119)
---------------------------------------
Net deferred tax asset $ 510 $ 571
=======================================
</TABLE>
47
<PAGE> 46
Notes to Consolidated Financial Statements (Cont.)
NOTE 12 - OTHER EXPENSES:
The following is a summary of the components of other non-interest expense for
the three years ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Office supplies $ 528 $ 482 $ 406
Advertising 527 432 371
Amortization of intangible assets 657 644 540
Federal depository insurance 52 2 373
Other 4,650 3,518 3,020
--------------------------------------------------------------
Total $ 6,414 $ 5,078 $ 4,710
==============================================================
</TABLE>
NOTE 13 - COMMON STOCK AND PER SHARE INFORMATION:
Earnings per share are calculated on the weighted-average number of shares
outstanding, giving retroactive effect to stock dividends and stock splits.
Grants under the incentive stock option plans represented less than 3% dilution
in the computation of average shares outstanding. The number of weighted-average
shares outstanding was 5,146,699, 4,869,698, and 4,721,944 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Dividends per share are calculated using the current equivalent of the number of
common shares outstanding at the time of the dividend based on First National
Corporation shares outstanding.
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
Dividends are paid by the Corporation from its assets which are mainly provided
by dividends from the banking subsidiaries. However, certain restrictions exist
regarding the ability of the subsidiaries to transfer funds to the Corporation
in the form of cash dividends, loans or advances. The approval of the Office of
the Comptroller of the Currency (OCC) is required to pay dividends in excess of
the subsidiaries' net profits for the current year plus retained net profits
(net profits less dividends paid) for the preceding two years, less any required
transfers to surplus. As of December 31, 1997, $9,466,000 of FNB's retained
earnings are available for distribution to the Corporation as dividends without
prior regulatory approval.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to the Corporation unless such loans are
collateralized by specified obligations. The maximum amount available for
transfer from FNB and NBYC to the Corporation in the form of loans or advances
approximated $9,146,000 and $798,000, respectively, at December 31, 1997.
48
<PAGE> 47
NOTE 15 - RETIREMENT PLANS:
The following sets forth the pension plan's funded status and amounts recognized
in the Company's consolidated financial statements at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands of dollars)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$3,872 for 1997 and $3,508 for 1996 $ 4,023 $ 3,616
========================================
Projected benefit obligation for cervices rendered to date $ 5,910 $ 5,229
Plan assets at fair value, primarily guaranteed interest
contracts, money market accounts and annuity contracts 5,698 4,525
----------------------------------------
Excess of projected benefit obligation over the plan assets (212) (704)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 780 1,131
Unrecognized prior service costs 10 13
Unrecognized net asset being amortized over 16 years (127) (160)
----------------------------------------
(Prepaid) pension cost included in other
(assets) $ (451) $ (280)
========================================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Net pension expense included the
following expense (income) components:
Service cost - benefits earned
during the period $ 289 $ 269 $ 231
Interest cost on projected
benefit obligation 386 342 314
Actual return on plan assets (637) (70) (257)
Net amortization and deferral 238 (281) (42)
-----------------------------------------------------
Net periodic pension expense $ 276 $ 260 $ 246
=====================================================
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 5.0%, respectively, for each of the years ended
December 31, 1997, 1996 and 1995. The expected long-term rate of return on
pension plan assets was 8.0% for each of the three years ended December 3 l, l
997.
49
<PAGE> 48
Notes to Consolidated Financial Statements (Cont.)
NOTE 15 - RETIREMENT PLANS (CONTINUED):
Expenses incurred and charged against operations with regard to all of the
Company's retirement plans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Pension $ 276 $ 260 $ 246
Profit sharing 110 100 89
--------------------------------------------------
Total $ 386 $ 360 $ 335
==================================================
</TABLE>
NOTE 16 - POST-RETIREMENT BENEFITS:
The following sets forth the plan's funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands of dollars)
<S> <C> <C>
Accumulated post-retirement- benefit obligation $ 477 $ 503
Plan assets at fair value - -
---------------------------
Funded status (477) (503)
Unrecognized net transition obligation 473 505
Unrecognized gain (163) (133)
---------------------------
Accrued post-retirement benefit cost
included in other liabilities $ (167) $ (131)
===========================
</TABLE>
Net periodic post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 39 36 36
Net amortization and deferral 18 7 7
--------------------------------------------------
Net periodic poet-retirement benefit cost $ 57 $ 43 $ 43
==================================================
</TABLE>
50
<PAGE> 49
NOTE 16 - POST-RETIREMENT BENEFITS (CONTINUED):
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5%. For measurement purposes, a 13%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 1993; the rate was assumed to decrease by 1% per year to 6% at
the end of seven years. Increasing the assumed health care cost trend rates by 1
percentage point in each year would increase the accumulated post retirement
benefit obligation as of December 31, 1997 by $48,000 and the aggregate of the
service and interest cost components of net periodic post-retirement benefit
cost for the year then ended by $4,000.
NOTE 17 - STOCK-BASED COMPENSATION PLANS:
The Corporation has reserved 133,402 shares of common stock for issuance to key
employees under the Incentive Stock Option Plan of 1992 and an additional
153,300 shares of common stock for issuance to key employees under the 1996
Incentive Stock Option Plan. Options under both plans may not be exercised in
whole or in part within one year following the date of the grant of the options,
and thereafter become exercisable in 25% increments over the next four years.
The exercise price of the options may not be less than fair market value of the
common stock on the date of the grant. No options may be exercised after five
years from the date of the grant. No option shall be granted under the 1992 plan
after March 12, 1997, at which time the plan terminated. Options granted before
such date may extend beyond that date in accordance with the Plan.
Activity in both stock option plans is summarized below. All information has
been retroactively restated to reflect stock dividends and stock splits.
<TABLE>
<CAPTION>
............... 1997 ............... ................ 1996 ..............
WEIGHTED WEIGHTED
RANGE OF AVERAGE RANGE OF AVERAGE
1992 EXERCISE EXERCISE EXERCISE EXERCISE
STOCK OPTION PLAN: SHARES PRICES PRICE SHARES PRICES PRICE
------------------ ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 110,742 $6.75-8.26 $ 7.94 121,294 $6.75-8.26 $ 7.25
Granted
Exercised 85,949 $ 6.75 $ 7.06 10,552 $ 6.75 $ 6.75
Expired 12,087 - $ 6.75 -
------- -------
Outstanding, December 31 12,706 $ 8.26 110,742 $ 7.94
======= =======
Exercisable, December 31 12,706 $ 8.26 110,742 $ 7.94
======= =======
Available for Grant,
December 31 - 133,402
======= =======
</TABLE>
51
<PAGE> 50
Notes to Consolidated Financial Statements (Cont.)
NOTE 17 - STOCK OPTION PLAN (CONTINUED):
<TABLE>
<CAPTION>
................ 1997 ............... ................ 1996 ..............
WEIGHTED WEIGHTED
RANGE OF AVERAGE RANGE OF AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICES PRICE SHARES PRICES PRICE
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996 Incentive Stock Option Plan:
Outstanding, January 1 94,500 $12.86 $12.86 - - -
Granted - - - 94,500 $12.86 $12.86
Exercised 2,100 $12.86 $12.86 - - -
------- -------
Outstanding, December 31 92,400 94,500 $12.86
======= =======
Exercisable, December 31 23,100 -
======= =======
Available for Grant,
December 31 153,300 153,300
======= =======
Weighted-average fair value
of options granted during
the year $ - $ 2.75
======= =======
</TABLE>
The Corporation has entered into a Restricted Stock Agreement with the chief
executive officer. The agreement grants to the employee 10,888 shares of
restricted common stock conditioned upon continued employment. The options vest
free of restrictions as follows: 25% in 1999, 25% in 2001, and 50% in 2003.
Termination of employment prior to a vesting date would terminate any interest
in non-vested shares. Prior to vesting of the shares, as long as employed as
chief executive officer, the employee will have the right to vote such shares
and to receive dividends paid with respect to such shares. All restricted shares
will fully vest in the event of change of control of the Corporation or upon the
death of the employee. The weighted average fair value of the shares granted
under this agreement is $6.34.
The fair value of the options granted and the stock issued was estimated on the
date of the grant using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 6.125%, dividend yield of
2.7%, expected life of options of 5 years, expected life of restricted stock of
7 years, and volatility of 7.85%.
52
<PAGE> 51
NOTE 17 - STOCK OPTION PLAN (CONTINUED):
The Corporation currently accounts for its stock-based compensation plans using
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). In 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123) effective for transactions entered into after December 15, 1995.
Under the provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value-based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in APB 25. Had compensation cost for the 1996 stock option plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS 123, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
........ 1997 ......... ........ 1996 .........
(In thousands of dollars, except per share data) AS AS
REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income $6,466 $6,403 $5,528 $5,505
Earnings per share $1.26 $1.24 $1.14 $1.13
</TABLE>
NOTE 18- LONG-TERM LEASES:
The Corporation's banking subsidiaries were obligated at December 31, 1997,
under certain operating leases extending to the year 2002 for land and buildings
used primarily for banking purposes. Some of the leases provide for the payment
of property taxes and insurance and contain various renewal options. The
exercise of renewal options is, of course, dependent upon future events.
Accordingly, the following summary does not reflect possible additional payments
due if renewal options are exercised.
<TABLE>
<CAPTION>
(In thousands of dollars)
APPROXIMATE REQUIRED
YEAR ANNUAL RENTALS
---- --------------
<S> <C>
1998 $ 56,000
1999 50,000
2000 37,000
2001 19,000
2002 6,000
---------
Total $ 168,000
=========
</TABLE>
Rental expense for operating leases for the years ended December 31, 1997, 1996,
and 1995 was $53,000, $32,000, and $39,000, respectively.
53
<PAGE> 52
Notes to Consolidated Financial Statements (Cont.)
NOTE 19 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation and its banking subsidiaries are involved at times in various
litigation arising out of the normal course of business. In the opinion of the
Company's legal counsel, there is no pending or threatened litigation of any
material consequence at this time.
The Corporation has entered into a $4,500,000 unsecured line of credit from an
unaffiliated bank. There were no borrowings outstanding at December 31, 1997.
NOTE 20 - RELATED PARTY TRANSACTIONS:
During 1997 and 1996, the Corporation's banking subsidiaries had loan and
deposit relationships with certain related parties; principally, directors and
executive officers, their immediate families and their business interests. All
of these relationships were in the ordinary course of business. Total loans
outstanding to this group (including immediate families and business interests)
amounted to $8,025,000 at December 31, 1997, and $8,970,000 at December 31,
1996. During 1997, $15,535,000 of new loans were made to this group. Repayments
of $15,677,000 were made during the year. Other changes, which included loans
outstanding to new or former officers and directors, resulted in a decrease of
$803,000.
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Corporation's banking subsidiaries are parties to financial instruments with
off-balance sheet risks in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit, interest rate, or
liquidity risk in excess of the amounts recognized in the balance sheet. The
contract amounts of these instruments express the extent of involvement the
banks have in particular classes of financial instruments.
The subsidiaries' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments.
<TABLE>
<CAPTION>
...... DECEMBER 31, ......
(In thousands of dollars) 1997 1996
---- ----
<S> <C> <C>
Financial instruments whose contract amount represents credit risks:
Commitments to extend credit $ 87,067 $ 49,145
Standby letters of credit and
financial guarantees written $ 1,702 $ 1,135
</TABLE>
54
<PAGE> 53
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (continued)
COMMITMENTS TO EXTEND CREDIT:
These are legally binding agreements to lend to a customer. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The banking subsidiaries evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the subsidiaries upon extension of credit, is
based on management's credit assessment of the counter party. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and personal guarantees.
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN:
These instruments are conditional commitments issued by the banking subsidiaries
guaranteeing the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. All
standby letters of credit outstanding at December 31, 1997, expire in 1998. The
credit risk involved in issuing a letter of credit is essentially the same as
that involved in extending loan facilities to customers. The amount of
collateral obtained, if deemed necessary, is based on management's credit
evaluation of the customer.
NOTE 22 - DERIVATIVE FINANCIAL INSTRUMENTS:
In accordance with established policy, the Corporation and its banking
subsidiaries hold derivative financial instruments which meet the following
criteria: (1) government agency security, (2) five years or less in maturity,
(3) readily identifiable indexes, and (4) "conservative" investment. The total
amount of the investment in structured notes, as a percentage of capital, has
been set by policy not to exceed 61 percent. The Company no longer purchases
structured notes.
The financial derivatives held by the Company as of December 31, 1997 and 1996,
consist of structured notes which meet the above criteria. The purpose of such
holdings include the ability to take advantage of enhanced basis point yield
spread and to take advantage of variable rate products to facilitate in the
management of the gap ratio. All such investments are classified as
available-for-sale and, therefore, recorded at fair value in the financial
statements. During the year ended December 31, 1996, derivative financial
instruments were sold and a loss of $50,000 reported. No gains or losses were
reported in the income statements from these holdings in 1997 and 1995.
As of December 31, 1997 and 1996, the Corporation and its subsidiaries held
derivative financial instruments in the amount of $2,000,000 and $7,999,000.
55
<PAGE> 54
Notes to Consolidated Financial Statements (Cont.)
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
INVESTMENT SECURITIES:
For securities held as investments, fair value equals quoted market price, if
available. If a quoted price is not available, fair value is estimated using
quoted market prices for similar securities.
LOANS RECEIVABLES:
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED:
The fair value of federal funds purchased is estimated based on the current
rates offered for borrowings of the same remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of guarantees
and letters of credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle the obligations
with the counter parties at the reporting date.
56
<PAGE> 55
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN (CONTINUED):
The estimated fair value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
.......... 1997 .......... .......... 1996 .........
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(In thousands of dollars) -------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 30,802 $ 30,802 $ 28,824 $ 28,824
Investment securities 166,061 166,684 160,881 161,188
Loans:
Loans 355,513 355,067 293,619 308,618
Less, allowance for loan
losses (5,518) (5,518) (4,705) (4,705)
------------------------------------------------------------------------
Net loans 349,995 349,549 288,914 303,913
Financial liabilities:
Deposits 454,375 454,261 414,153 404,731
Federal funds purchased 54,312 54,312 32,547 32,547
Unrecognized financial
instruments:
Commitments to extend
credit 87,067 87,045 49,145 51,616
Standby letters of credit 1,702 1,702 1,135 1,135
</TABLE>
NOTE 24 - REGULATORY MATTERS
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and its subsidiaries must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
57
<PAGE> 56
Notes to Consolidated Financial Statements (Cont.)
NOTE 24 - REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Corporation and its subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Corporation and its subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the entities must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the institutions' category.
Actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
(In thousands of dollars) To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital (to risk weighted assets):
Consolidated $55,713 14.72% $30,279 8.00% $37,849 10.00%
First National Bank 46,707 14.26 26,207 8.00 32,758 10.00
National Bank of York County 4,192 17.55 1,911 8.00 2,388 10.00
Tier I Capital (to risk weighted assets):
Consolidated 50,972 13.47 15,136 4.00 22,705 6.00
First National Bank 42,598 13.00 13,103 4.00 19,655 6.00
National Bank of York County 3,917 13.80 1,135 4.00 1,703 6.00
Tier I Capital (to average assets)
Consolidated 50,972 9.16 22,259 4.00 27,823 5.00
First National Bank 42,598 8.39 20,309 4.00 25,386 5.00
National Bank of York County 3,917 9.66 1,622 4.00 2,027 5.00
As of December 31, 1996:
Total capital (to risk weighted assets):
Consolidated $49,479 17.10 $23,162 8.00 $28,952 10.00%
First National Bank 40,533 14.80 21,910 8.00 27,387 10.00
National Bank of York County 4,166 33.30 1,001 8.00 1,251 10.00
Tier I Capital (to risk weighted assets):
Consolidated 45,846 15.80 11,585 4.00 17,377 6.00
First National Bank 37,571 13.70 10,970 4.00 16,454 6.00
National Bank of York County 4,166 33.30 500 4.00 751 6.00
Tier I Capital (to average assets)
Consolidated 45,846 9.50 19,344 4 00 24,180 5.00
First National Bank 37,571 8.10 18,554 4.00 23,192 5.00
National Bank of York County 4,166 22.40 744 4.00 930 5.00
</TABLE>
58
<PAGE> 57
NOTE 25 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for First National
Corporation (Parent Company only):
<TABLE>
<CAPTION>
.............. DECEMBER 31, ..............
(In thousands of dollars) 1997 1996
---- ----
<S> <C> <C>
Balance Sheets:
Assets:
Cash $ 469 $ 461
Investment securities 3,417 3,040
Investment in banking subsidiaries 49,722 44,649
Premises and equipment 116 126
Other assets 189 83
--------------------------------------------
Total assets $ 53,913 $ 48,359
============================================
Liabilities:
Other liabilities $ 13 $ 13
--------------------------------------------
Total liabilities 13 13
Shareholders' equity 53,900 48,346
--------------------------------------------
Total liabilities and shareholders' equity $ 53,913 $ 48,359
============================================
</TABLE>
<TABLE>
<CAPTION>
........... YEAR ENDED DECEMBER 31, ...........
1997 1996 1995
(In thousands of dollars) ---- ---- ----
<S> <C> <C> <C>
Statements of Income:
Income:
Dividends from banking subsidiaries $ 2,054 $ 4,499 $ 1,384
Interest and dividends 177 51 22
Other income - 10 -
---------------------------------------------------
Total income 2,231 4,560 1,406
---------------------------------------------------
Expenses:
Interest expense - 20 -
Other general expense 398 144 27
---------------------------------------------------
Total expenses 398 164 27
---------------------------------------------------
Income before income taxes and equity in
undistributed earnings of subsidiaries 1,833 4,396 1,379
Applicable income tax benefit (expense) 86 41 3
Equity in undistributed earnings of
subsidiaries 4,547 1,091 3,258
---------------------------------------------------
Net income $ 6,466 $ 5,528 $ 4,640
===================================================
</TABLE>
59
<PAGE> 58
Notes to Consolidated Financial Statements (Cont.)
NOTE 25 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
Statements of Changes in Shareholders' Equity:
<TABLE>
<CAPTION>
(In thousands of dollars, except Unrealized
per share data) Gain (Loss)
On Securities
Available-For
Sale, Net Of
Applicable
Common Stock Retained Deferred
Shares Amount Surplus Earnings Income Taxes Total
------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 2,035,000 10,175 11,871 14,304 (169) 36,181
Net income - 1995 - - - 4,640 - 4,640
Cash dividends declared - - - (1,403) - (1,403)
Stock dividends declared 203,042 1,015 4,285 (5,300) - -
Common stock issued 6,297 32 104 - - 136
Changes in unrealized gain (loss) on
securities available-for-sale, net
of applicable deferred income taxes - - - - 223 223
---------------------------------------------------------------------------
Balance, December 31, 1995 2,244,339 11,222 16,260 12,241 54 39,777
Net income for - 1996 - - - 5,528 - 5,528
Cash dividends declared - - - (1,721) - (1,721)
Stock dividend declared 120,891 604 2,654 (3,258) - -
Common stock issued 184,794 924 3,942 - - 4,866
Changes in unrealized gain (loss) on
securities available-for-sale, net
of applicable deferred income taxes - - - - (104) (104)
---------------------------------------------------------------------------
Balance, December 31, 1996 2,550,024 $ 12,750 $ 22,856 $ 12,790 $ (50) $ 48,346
Net income - 1997 - - - 6,466 - 6,466
Cash dividends declared - - - (2,059) - (2,059)
Stock split declared 2,556,427 - - - - -
Common stock issued 81,646 220 401 - - 621
Changes in unrealized gain (loss) on
securities available-for-sale, net
of applicable deferred income taxes - - - - 526 526
---------------------------------------------------------------------------
Balance, December 31, 1997 5,188,097 $ 12,970 $ 23,257 $ 17,197 $ 476 $ 53,900
===========================================================================
</TABLE>
60
<PAGE> 59
NOTE 25 - CONDENSED FINANCIAL, STATEMENTS (CONTINUED);
<TABLE>
<CAPTION>
.... YEAR ENDED DECEMBER 31, ....
(In thousands of dollars) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 6,466 $ 5,528 $ 4,640
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 11 10 -
Discount accretion (153) (4) (22)
Increase in other assets (106) - (78)
(Decrease) in other liabilities - (1) (6)
Undistributed earnings of subsidiaries (4,547) (1,091) (3,258)
-------------------------------------------------
Net cash provided by operating
activities 1,671 4,442 1,276
-------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities - - 149
Proceeds from maturities of investment
securities 9,000 320 1,265
Purchases of investment securities (9,224) (2,922) (1,401)
Purchases of premises and equipment (26) (136) -
Proceeds from sale of premises and
equipment 24 - -
Purchase of stock of banking subsidiary - (4,500) -
-------------------------------------------------
Net cash provided (used) by
investing activities (226) (7,238) 13
-------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (2,059) (1,721) (1,403)
Common stock issuance 607 4,655 95
Stock options exercised 14 211 41
-------------------------------------------------
Net cash provided (used) by
financing activities (1,438) 3,145 (1,267)
-------------------------------------------------
Net increase in cash and cash equivalents 7 349 22
Cash and cash equivalents at beginning
of year 461 112 90
-------------------------------------------------
Cash and cash equivalents at end of year $ 468 $ 461 $ 112
=================================================
</TABLE>
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
61
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
First National Corporation
We consent to the incorporation by reference of our Report, dated
February 2, 1998, included in First National Corporation's annual report on Form
10-K for the year ended December 31, 1997, into the Registration Statement on
Form S-3 (File No. 333-45435) filed by First National Corporation with respect
to 105,000 shares of Common Stock, the Registration Statement on Form S-8 (File
No. 333-26029) filed by First National Corporation with respect to the First
National Corporation Employee Savings Plan, the Registration Statement on Form
S-8 (File No. 333-26031) filed by First National Corporation with respect to the
First National Corporation Incentive Stock Option Plan of 1996, and the
Registration Statement on Form S-8 (File No. 333-26033) filed by First National
Corporation with respect to the First National Corporation Incentive Stock
Option Plan of 1992.
/s/ J. W. Hunt and Company, LLP
----------------------------------
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,802
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,658
<INVESTMENTS-CARRYING> 50,403
<INVESTMENTS-MARKET> 51,026
<LOANS> 355,513
<ALLOWANCE> 5,518
<TOTAL-ASSETS> 565,571
<DEPOSITS> 454,375
<SHORT-TERM> 54,312
<LIABILITIES-OTHER> 2,984
<LONG-TERM> 0
0
0
<COMMON> 12,970
<OTHER-SE> 40,930
<TOTAL-LIABILITIES-AND-EQUITY> 565,571
<INTEREST-LOAN> 30,421
<INTEREST-INVEST> 10,239
<INTEREST-OTHER> 484
<INTEREST-TOTAL> 34,263
<INTEREST-DEPOSIT> 15,234
<INTEREST-EXPENSE> 17,365
<INTEREST-INCOME-NET> 23,779
<LOAN-LOSSES> 1,251
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 19,454
<INCOME-PRETAX> 9,333
<INCOME-PRE-EXTRAORDINARY> 6,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,466
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.02
<LOANS-NON> 1,016
<LOANS-PAST> 283
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,670
<ALLOWANCE-OPEN> 4,705
<CHARGE-OFFS> 761
<RECOVERIES> 323
<ALLOWANCE-CLOSE> 5,518
<ALLOWANCE-DOMESTIC> 5,518
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
