FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
March 31, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended MARCH 31, 1998 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
(803) 534-2175
Registrant's telephone number, including area code
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period, that
the registrant was required to file such report) and (2) has been subject
to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of March 31, 1998
Common Stock, $2.50 par value 5,188,097
<PAGE>
FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997
Consolidated Statements of Changes
in Shareholders' Equity -
Three Months Ended
March 31, 1998 and 1997
Consolidated Statement of Income -
Three Months Ended
March 31, 1998 and 1997
Consolidated Statement of Cash Flows -
Three Months Ended
March 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
<PAGE>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS 3-31-98 12-31-97
(Dollars in thousands)
Cash and due from banks $ 26,997 $ 30,802
Federal funds sold 22,200 0
Investment securities - Note 2
Securities held-to-maturity (fair value of
$46,784 in 1998 and $51,026 in 1997) 46,154 50,403
Securities available-for-sale, at fair value 137,116 115,658
Total Investment securities 183,270 166,061
Loans - Note 3 357,861 359,167
Less: Unearned income (3,521) (3,654)
Allowance for loan losses - Note 4 (5,745) (5,518)
Loans, net 348,595 349,995
Premises and equipment 9,769 9,946
Intangible assets 2,583 2,732
Other real estate - Note 6 211 61
Other assets 6,835 5,974
TOTAL ASSETS $600,460 $565,571
<PAGE>
Consolidated Balance Sheets - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY
3-31-98 12-31-97
(Dollars in thousands)
LIABILITIES:
Deposits in domestic offices:
Noninterest-bearing $ 76,276 $ 70,052
Interest-bearing - Note 7 413,451 384,323
Total deposits 489,727 454,375
Federal funds purchased & securities
sold under agreement to repurchase 49,422 54,312
Other liabilities 6,079 2,984
TOTAL LIABILITIES 545,228 511,671
Commitments & contingent liabilities - Note 8
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
5,188,097 shares in 1998, and 5,102,182
shares in 1997 - Note 9 12,970 12,970
Additional paid-in capital 23,257 23,257
Retained earnings 18,540 17,197
Accumulated other comprehensive income: Note 11
Unrealized gain (loss) on securities available-
for-sale, net of applicable deferred income
taxes 465 476
TOTAL STOCKHOLDERS' EQUITY 55,232 53,900
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $600,460 $565,571
<PAGE>
FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income(Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,100,048 $ 12,750 $ 22,856 $ 12,790 $ (50) $ 48,346
Comprehensive income:
Net income - - - 1,605 - 1,605
Other comprehensive income
loss) net of tax - - - - (535) (535)
Comprehensive income - - - - - 1,070
Common stock issued 2,134 6 25 - - 31
Cash dividends - - - (485) - (485)
Balance, March 31, 1997 5,102,182 12,756 22,881 13,910 (585) 48,962
Balance, December 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900
Comprehensive income:
Net income - - - 1,913 - 1,913
Other comprehensive income
(loss) net of tax - - - - (11) (11)
Comprehensive income - - - - - 1,902
Cash dividends - - - (570) - (570)
Balance, March 31, 1998 5,188,097 $ 12,970 $ 23,257 $ 18,540 $ 465 $ 55,232
</TABLE>
<PAGE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
3 Months Ended
03-31-98 03-31-97
(Dollars in thousands,
except per share data)
Interest income:
Interest & fees on loans $8,123 $6,899
Interest & dividends on investment sec.:
Taxable income 2,066 2,027
Non-taxable income 408 409
Dividends on stock 7 17
Interest on federal funds sold 220 207
Total interest income 10,824 9,559
Interest expense:
Interest on deposits 3,988 3,504
Interest on federal funds purchased &
securities sold under agreements to
repurchase 632 465
Total interest Expense 4,620 3,969
Net Interest Income 6,204 5,590
Provision for loan losses - Note 4 222 284
Net interest income after provision
for loan losses 5,982 5,306
Noninterest income:
Service charges on deposit accounts 1,116 1,005
Other service charges commissions, fees 647 490
Investment securities, gains (losses) 18 0
Other operating income 11 10
Total noninterest income 1,792 1,505
Noninterest expense:
Salaries & employee benefits 2,837 2,427
Occupancy expense of bank premises-net 251 326
Furniture & equipment expense - net 388 386
Amortization expense-Intangible assets 152 145
Other expense 1,366 1,214
Total noninterest expense 4,994 4,498
Income before income taxes 2,780 2,313
Applicable income taxes 867 708
Net income $1,913 $1,605
Net income per common share - Basic $0.37 $0.31
Net income per common share - Diluted $0.37 $0.31
Cash dividends per common share $0.11 $0.10
<PAGE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
3 Months Ended 3 Months Ended
03-31-98 03-31-97
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 1,913 $ 1,605
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 405 418
Provision for loan losses 222 284
Provision for deferred taxes 0 0
Increase (decrease) in reserve
for income taxes - current 848 707
(Gain) loss on sale of premises
and equipment (2) 0
(Increase) decrease in interest
receivables 88 (305)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net (170) (32)
Increase (decrease) in interest
payable 140 212
(Increase) decrease in miscellaneous
assets (936) (21)
(Increase) decrease in prepaid
assets (159) (339)
Increase (decrease) in other
liabilities (379) (197)
Total adjustments 57 727
Net cash provided by operating
activities 1,970 2,332
<PAGE>
Consolidated Statements of Cash Flows - Continued.......
3 Months Ended 3 Months Ended
03-31-98 03-31-97
( Dollars in thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity 8,072 7,476
Purchase of investment securities
held-to-maturity (3,894) (1,238)
Proceeds from maturities of investment
securities available-for-sale 18,485 5,967
Purchase of investment securities
available-for-sale (39,886) (20,923)
Net (increase) decrease in customer
loans 1,115 (10,885)
Additions to premises and equipment 76 (225)
Proceeds from sale of premises and
equipment 2 0
Recoveries from loans previously charged
off 64 100
(Increase) decrease in funds sold (22,200) (16,450)
Net cash used in investing
activities (38,166) (36,178)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 35,352 27,198
Sale of common stock 0 30
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (4,890) 5,592
Proceeds from issuance of other
borrowings 2,500 0
Dividends paid (571) (485)
Net cash provided by financing
activities 32,391 32,335
Net increase (decrease) in cash and cash
equivalents (3,805) (1,511)
Cash and cash equivalents at beginning of
year $30,802 $28,824
Cash and cash equivalents at end of period $26,997 $27,313
<PAGE>
FIRST NATIONAL CORPORATION
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1997. All dollar amounts are stated in
thousands, except per share data.
Note 2 - Investment Securities:
The following is the amortized cost and fair value of investment
securities held-to-maturity at March 31, 1998 and December 31,
1997:
03-31-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
U S Treasury
securities 3,227 30 0 3,257 3,231 28 0 3,259
Obligations of
U S government
agencies & corps 8,016 46 (26) 8,036 12,321 39 (18) 12,342
Obligations of state
and political
subdivisions 34,911 584 (4) 35,491 34,851 581 (7) 35,425
Total 46,154 660 (30) 46,784 50,403 648 (25) 51,026
<PAGE>
Note 2 - Continued...
The following is the amortized cost and fair value of securities
available-for-sale at March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
03-31-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 39,211 385 (38) 39,558 30,320 240 0 30,560
Obligations of
U S government
agencies & corps 96,500 540 (75) 96,965 83,990 538 (23) 84,505
Other securities 593 0 0 593 593 0 0 593
Total 136,304 925 (113) 137,116 114,903 778 (23) 115,658
</TABLE>
Investment securities with an aggregate amortized cost of $79,328
on March 31, 1998 and $88,276 on December 31, 1997, were pledged to
secure public deposits and for other purposes as required and
permitted by law.
Note 3 - Loans:
The following is a summary of loans at: 3-31-98 12-31-97
Commercial, financial & agricultural 66,507 67,519
Real Estate - construction 12,276 12,429
Real estate - mortgage 207,671 207,630
Consumer 67,886 67,935
Total loans 354,340 355,513
As of March 31, 1998 and December 31, 1997 the aggregate dollar
amount of loans to related parties; principally, directors and
executive officers, their immediate families and their business
interests, was $6,823 and $8,025 respectively. The following is an
analysis of the activity with respect to loans to related parties
for the three months ended March 31, 1998.
Balance, beginning of period 8,025
Add:
New loans 4,293
Deduct:
Payments 5,417
Other changes (78)
Balance, end of period 6,823
<PAGE>
Note 4 - Allowance for Loan Losses:
Amount
03-31-98 12-31-97
Balance, beginning of period (year) 5,518 4,705
Add:
Recoveries 64 323
Provisions for loan losses charged
to income 222 1,251
Total 5,804 6,279
Deduct:
Loans charged off 59 761
Balance, end of period (year) 5,745 5,518
The allowance for loan losses is maintained at a level which, in
management's judgment is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
For impairment recognized in accordance with Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting By Creditors
For Impairment Of A Loan", the entire change in present value of
expected cash flows is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be
reported.
Note 5 - Adoption of Statement of Financial Accounting Standards No. 114
and No. 118:
Effective January 1, 1995, the bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting By Creditors
For Impairment Of A Loan", and Statement of Financial Accounting
Standards No. 118 (SFAS 118), "Accounting By Creditors For
Impairment Of A Loan - Income Recognition And Disclosures". These
statements require creditors to account for impaired loans, except
for those loans that are accounted for at fair value or at the
lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
<PAGE>
Note 5 - Continued...
The Company determines when loans become impaired through its
normal loan administration and review functions. Those loans
identified as substandard or doubtful as a result of the loan
review process are potentially impaired loans. A loan is impaired
when, based on current information and events, it is probable that
a creditor will be unable to collect all principal and interest
amounts due according to the contractual terms of the loan
agreement. A loan is not impaired during a period of delay in
payment if the Company expects to collect all amounts due,
including interest accrued at the contractual interest rate, for
the period of delay.
In accordance with these standards, the Company does not apply SFAS
114 and SFAS 118 to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. These groups
include the Company's credit card, residential mortgage, overdraft
protection, home equity lines, accounts receivable financing, and
consumer installment loans.
The Company's adoption of these accounting standards did not have
a material effect on the financial condition and results of
operations of the Company.
In accordance with SFAS 114, historical information has not been
restated to reflect the application of this standard.
Note 6 - Other Real Estate:
Real estate acquired in satisfaction of a loan is reported in other
assets. Properties acquired by foreclosure or deed in lieu of
foreclosure are transferred to Other Real Estate Owned ("OREO")
and recorded at the lower of the outstanding loan balance at the
time of acquisition or the estimated market value. Market value is
determined on the basis of the properties being disposed of in the
normal course of business and not on a liquidation or distress
basis. Loan losses arising from the acquisition of such properties
are charged against the allowance for loan losses. Gains or losses
arising from the sale of OREO are reflected in current operations.
Note 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $56,185 and
$40,794 at March 31, 1998 and December 31, 1997 respectively.
<PAGE>
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various
commitments and incurs certain contingent liabilities, which are
not reflected in the accompanying financial statements. The
commitments and contingent liabilities include guarantees,
commitments to extend credit and standby letters of credit. At
March 31, 1998, commitments to extend credit and standby letters of
credit aggregated $86,506. The Company does not anticipate any
material losses as a result of these transactions.
Note 9 - Common Stock:
As of December 31, 1997, the common stock outstanding was
5,188,097. The board of directors of the Company approved a 2 for
1 stock split payable May 30, 1997. As of March 31, 1998, the
common stock outstanding was 5,188,097 shares.
Note 10 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number
of shares of common stock outstanding, giving retroactive effect to
stock dividends and stock splits.
In 1997, the Financial Accounting Standards Board "FASB" issued SFAS No.
128, "Earnings Per Share", which establishes standards for computing and
presenting earnings per share ("EPS") by replacing the presentation of
primary EPS with a presentation of basic EPS. In addition, SFAS No. 128
requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and
denominator of the diluted EPS calculation.
In accordance with SFAS 128, the calculation of basic net income per
share and diluted net income per share is presented below:
3 Months 3 Months
Ended Ended
Net income per share - basic: 03/31/98 03/31/97
Net income $ 1,913 $ 1,605
Income available
to common shareholders $ 1,913 $ 1,605
Average common shares
outstanding-basic 5,188,097 5,102,040
Net income per share-basic $ .37 $ .31
<PAGE>
Note 10 - Continued...
3 Months 3 Months
Ended Ended
Net income per share-diluted: 03/31/98 03/31/98
Income available to common
shareholders $ 1,913 $ 1,605
Average common shares
outstanding-basic 5,188,097 5,102,040
Incremental shares from
assumed conversion of stock
options 19,796 74,976
Average common shares
outstanding-diluted 5,207,893 5,177,016
Net income per share-
diluted $ .37 $ .31
Dividends per share are calculated using the current equivalent of
number of common shares outstanding at the time of the dividend based on
the Company's shares outstanding.
Note 11 - Comprehensive Income:
The following is the related tax effects allocated to other
comprehensive income at March 31, 1998:
Before Tax Tax (Expense) Net of
In thousands of dollars) Amount Benefit Tax Amount
Unrealized gain (loss) on
securities available-for-sale $738 $(273) $465
The following is the other comprehensive income balance at March 31, 1998:
Beginning Current Period Ending
Balance Change Balance
Accumulated other comprehensive
income-Unrealized gain (loss)
on securities available-for-
sale $476 $ (11) $465
<PAGE>
FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in
this report. For further information refer to the Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The National Bank of York County commenced business operations as a
national bank in Rock Hill, South Carolina, on July 11, 1996. The National
Bank of York County is also a full service commercial bank and its deposits
are insured to applicable limits by the Federal Deposit Insurance Corporation
(FDIC). Upon completion of its organization, 100% of the common stock of the
National Bank of York County was acquired by First National Corporation, and
the bank operates as a wholly owned subsidiary of the Corporation with its
own Board of Directors and operating policies.
The 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.
For the first quarter of 1998, First National Corporation (" The
Corporation ") had consolidated net income of $1,913,000, an increase of 19.2
percent over the $1,605,000 earned in the first quarter of 1997. Earnings
per share amounted to $0.37 for the three months ended March 31, 1998, a 19.4
percent increase over the $0.31 per share earned in the first quarter of
1997.
NET INTEREST INCOME
For the first three months of 1998, net interest income was $6,204,000
compared to $5,590,000 for the same period in 1997. This is an increase of
$614,000 or 11.0 percent. The increase resulted from a 16.4 percent increase
in loan outstandings, net of unearned income, as well as an 8.6 percent
increase in investment security outstandings, when compared to the first
three months of 1997.
<PAGE>
Management's Discussion Continued...
The yield on a major portion of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first three months of 1997, the year to date taxable equivalent yield on
earning assets was 7.99 percent. During the same period in 1998, the yield
decreased to 7.97 percent or a decrease of 2 basis points. The cost of the
liabilities used to support these earning assets increased 19 basis points
from 3.94 percent in 1997 to 4.13 percent in 1998. Interest rates paid on
interest-bearing liabilities increased more rapidly than yields on earning
assets due to the Company's negative asset/liability position.
First quarter net interest margin decreased from 4.67 percent in 1997 to
4.47 percent in 1998. The impact of interest-free funds for the same period
increased from .62 percent to .68 percent or an increase of 6 basis points.
The largest category of earning assets is loans. At the end of the
first quarter 1998, loans outstanding, less unearned income, were
$354,340,000 compared to $355,513,000 at December 31, 1997. This represents
a decrease of $1,173,000. For the three months ended March 31, 1998 interest
and fees on loans was $8,123,000 compared to $6,899,000 for the comparable
period in 1997, an increase of $1,224,000 or 17.7 percent.
For the three months ended March 31, 1998, loans averaged $356,332,000
and yielded 8.80 percent on a taxable equivalent basis compared to
$323,420,000 with a taxable equivalent yield of 8.93 percent or a decrease
of 13 basis points for the year ended December 31, 1997.
Investment securities are the second largest category of earning assets.
Investment securities are utilized by the Company as a vehicle for the
employment of excess funds, to provide liquidity, to fund loan demand or
deposit liquidation, and to pledge as collateral for certain deposit and
purchased funds.
At March 31, 1998, investment securities were $183,270,000 compared to
$166,061,000 at December 31, 1997. This is an increase of $17,209,000 or
10.4 percent. This increase is the result of management's decision to
utilize excess funds in the investment function in an attempt to increase
yields and profitability.
For the three months ended March 31, 1998, investment income was
$2,481,000 compared with $2,453,000 for the comparable period in 1997, a net
increase of $28,000 or 1.1 percent. Management attributes this increase in
income to higher volume and yields on investment securities.
For the first quarter 1998, securities averaged $163,491,000 and yielded
6.43 percent on a taxable equivalent basis, compared to $167,895,000 with a
yield of 6.36 percent for the year ended December 31, 1997, resulting in a 7
basis point increase in yield.
<PAGE>
Management's Discussion Continued...
As of March 31, 1998 the Company had unrealized gains in the U S
Treasury and agency portfolio, denoted as held-to-maturity, of $76,000 and in
the municipal portfolio $584,000. Also at March 31, 1998, the Company had an
unrealized loss of $26,000 in the U S Treasury and agency portfolio and an
$4,000 unrealized loss in the municipal portfolio.
At year end 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" for the investment portfolio, and showed a net unrealized gain at
March 31, 1998 of approximately $812,000 on the $137,116,000 of securities
denoted as available-for-sale.
Although securities classified as available-for-sale may be sold from
time to time to meet liquidity or other needs, it is not the normal activity
of the Company to trade the investment portfolio. Management has the intent
and the ability to hold securities on a long-term basis or until maturity.
During the first three months of 1998, interest-bearing liabilities
averaged $450,085,000 and carried an average rate of 4.18 percent. This
compares to an average level of $420,190,000 with an average rate of 4.14
percent at December 31, 1997 or an increase of 4 basis points. Approximately
half of these interest-bearing liabilities have fixed rates. They are
expected to be renewed at prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended March 31,
1998 was $222,000 compared to $284,000 for the same period in 1997 which
represents a 21.8 percent decrease. The decrease in the provision for loan
losses was due primarily to the slight decrease in loan growth. The
allowance for loan losses was $5,745,000 or 1.62 percent of outstanding loans
at March 31, 1998 compared to 1.55 percent of outstanding loans at year-end
1997.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicates the estimated loan losses.
Management feels that the allowance for loan losses in adequately funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure. For the period ended March 31, 1998, other real
estate owned was $211,000 compared to $61,000 at December 31, 1997. This
increase resulted from the foreclosure of several real estate properties.
Management anticipates that the level of charge-offs for 1998 will be
near the levels of 1997. The loan loss allowance is considered adequate by
management. However, changes in economic conditions in the Company's market
area could affect these levels.
<PAGE>
Management's Discussion Continued...
NONINTEREST INCOME AND EXPENSE
Noninterest income for the first quarter of 1998 was $1,792,000 compared
to $1,505,000 for the same period in 1997, representing an increase of
$287,000 or 19.1 percent. During the first quarter of 1998, other service
charges, commissions and fees increased $157,000 or 32.0 percent compared to
the same period in 1997. This increase can be primarily attributed to the
increase in debit card fees as well as fees collected on mutual fund sales.
Noninterest expense for the first quarter of 1998 was $4,994,000
compared to $4,498,000, an increase of $496,000 or 11.0 percent. Salaries
and employee benefits for the three month period ended March 31, 1998,
increased $410,000 or 16.9 percent compared to the same period in 1997.
These increases can be largely attributed to the opening of the Florence
County National Bank on April 1, 1998. Occupancy expense along with furniture
and equipment expense decreased $73,000 or 10.3 percent for the three month
period ended March 31, 1998 when compared to the same period in 1997. This
decrease can be primarily attributed to the decrease in depreciation expense.
NET INCOME
Net income was up 19.2 percent for the first three months of 1998 when
compared to the same period in 1997. The $614,000 or 11.0 percent increase
in net interest income and the $287,000 or 19.1 percent increase in
noninterest income for the first quarter ended March 31, 1998 were the
primary factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the first quarter
1998, stockholder's equity was $55,232,000 compared to $53,900,000 at
December 31, 1997.
The Corporation and subsidiaries are subject to certain risk-based
capital guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of both
balance sheet and off balance sheet items will be adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to the Office of the Comptroller of
the Currency guidelines, as of December 31, 1995 Tier 1 capital must be at
least 4 percent of risk-weighted assets, while total capital must be 8
percent of risk-weighted assets. The Tier 1 capital ratio at March 31, 1998
was 14.6 percent compared to 13.5 percent at December 31, 1997. The total
capital ratio was 15.9 percent at March 31, 1998 compared to 14.7 percent at
December 31, 1997.
<PAGE>
Management's Discussion Continued...
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage capital ratio in evaluating capital
strength and adequacy. The minimum leverage ratio required for banks is
between 3 percent and 5 percent, depending on the institution's composite
rating as determined by its regulators. At March 31, 1998, First National
Corporation's leverage ratio was 9.1 percent, compared to 9.5 percent at
December 31, 1997. First National Corporation's ratio exceeds the minimum
standards by substantial margins.
Liquidity is the ability of the Company to meet its cash flow
requirements which arise primarily from withdrawal of deposits, extension of
credit and payment of operating expenses. Asset liquidity is maintained by
the maturity structure of loans, investment securities and other short-term
investments. Management has policies and procedures governing the length of
time to maturity on loans and investments. Normally changes in the earning
asset mix are of a longer term nature and are not utilized for day-to-day
Corporation liquidity needs.
The Company's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from the Company's use
of federal funds purchased and securities sold under agreement to repurchase.
Additional liquidity can be secured from lines of credit extended to the
Company from its correspondent banks. Management feels that its liquidity
position is adequate.
OTHER
Many existing computer programs use only two digits to identify a year
in the data field. These Programs were designed and developed without
considering the impact of the upcoming century. If uncorrected, many
computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.
Certain of the Bank's systems may be affected by this so-called
millennium bug. The Bank is investigating the extent to which its systems
are affected and communicating with all of its computer vendors concerning
timely and completed remedies for those systems that require modification.
The Bank is also communicating with all third parties on which it relies to
assess their progress in evaluating their systems and implementing any
corrective measures. The Bank has been taking and will continue to pursue
all reasonably necessary steps to protect its operations and assets.
Based upon discussions with its computer vendors and other third
parties, the Bank does not expect that the cost of addressing the year 2000
issue, will be a material event or uncertainty that would cause its reported
financial information not to be materially indicative of future operating
results or future financial conditions.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries
are party to nor is any of their property the subject of any
material or other pending legal proceedings, other than ordinary
routine proceedings incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: May 14, 1998 C. John Hipp, III
President and Chief Executive Officer
Date: May 14, 1998 W. Louis Griffith
Principal Accounting Officer and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
27 Financial Data Schedule Attached
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at March 31, 1998 (Unaudited) and
the Consolidated Statement of Income (Unaudited) for the three months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,997
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,116
<INVESTMENTS-CARRYING> 46,154
<INVESTMENTS-MARKET> 46,784
<LOANS> 354,340
<ALLOWANCE> 5,745
<TOTAL-ASSETS> 600,460
<DEPOSITS> 489,727
<SHORT-TERM> 49,422
<LIABILITIES-OTHER> 6,079
<LONG-TERM> 0
0
0
<COMMON> 12,970
<OTHER-SE> 42,262
<TOTAL-LIABILITIES-AND-EQUITY> 600,460
<INTEREST-LOAN> 8,123
<INTEREST-INVEST> 2,481
<INTEREST-OTHER> 220
<INTEREST-TOTAL> 10,824
<INTEREST-DEPOSIT> 3,988
<INTEREST-EXPENSE> 4,620
<INTEREST-INCOME-NET> 6,204
<LOAN-LOSSES> 222
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,994
<INCOME-PRETAX> 2,780
<INCOME-PRE-EXTRAORDINARY> 1,913
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,913
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 7.97
<LOANS-NON> 985
<LOANS-PAST> 368
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,735
<ALLOWANCE-OPEN> 5,518
<CHARGE-OFFS> 59
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 5,745
<ALLOWANCE-DOMESTIC> 5,745
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
