<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
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
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
950 JOHN C. CALHOUN DRIVE, S.E.
ORANGEBURG, SOUTH CAROLINA 29115
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 534-2175
----------------------------------------------------
(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.
<PAGE> 2
EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
filed with the Securities and Exchange Commission on March 31, 1998 solely for
the purpose of revising and restating the following items in their entirety:
2
<PAGE> 3
ITEM 7. 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 sponsored the organization of a national bank
in Florence, South Carolina. Florence County National Bank began operations on
April 1, 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
3
<PAGE> 4
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.
4
<PAGE> 5
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.
5
<PAGE> 6
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.
6
<PAGE> 7
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>
7
<PAGE> 8
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.
8
<PAGE> 9
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.
9
<PAGE> 10
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.
10
<PAGE> 11
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.
11
<PAGE> 12
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,
12
<PAGE> 13
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>
13
<PAGE> 14
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>
14
<PAGE> 15
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.
15
<PAGE> 16
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>
16
<PAGE> 17
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.
17
<PAGE> 18
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.
18
<PAGE> 19
In January 1997, the Securities and Exchange Commission adopted new
rules that require more comprehensive disclosure of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative financial instruments and other financial
instruments. The market risk disclosures must be presented for most financial
instruments, which must be classified into two portfolios: financial
instruments entered into for trading purposes and all other instruments
(non-trading purposes). The Corporation does not maintain a trading portfolio.
Table 10
Financial Instruments
<TABLE>
<CAPTION>
Fair Value
(Dollars in Thousands) 1998 1999 2000 2001 2002 Thereafter Total 12/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Loans, net of unearned
income
Fixed Rate:
Book Value $ 9,383 $17,545 $26,481 $27,909 $29,799 $50,416 $161,533 $161,330
Average interest rate 8.85% 9.59% 9.31% 8.95% 8.82% 8.69% 8.97% --
Variable Rate:
Book Value $ 62,120 $18,906 $22,367 $16,595 $22,161 $51,831 $193,980 $193,737
Average interest rate 8.41% 11.55% 8.78% 8.57% 8.84% 8.76% 8.92% --
Securities held to
maturity:
Fixed Rate:
Book Value $ 9,698 $ 5,246 $11,608 $ -- $ -- $23,851 $ 50,403 $ 51,026
Average interest rate 5.40% 5.52% 5.84% -- -- 4.67% 5.17% --
Variable Rate:
Book Value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Average interest rate -- -- -- -- -- -- -- --
Securities available
for sale:
Fixed Rate:
Book Value $ 13,611 $25,613 $27,012 $31,279 $16,143 $ -- $113,658 $113,658
Average interest rate 5.95% 5.99% 6.34% 6.51% 6.77% -- 6.32% --
Variable Rate:
Book Value $ 1,000 $ 1,000 $ -- $ -- $ -- $ -- $ 2,000 $ 2,000
Average interest rate 4.49% 5.36% -- -- -- -- 4.93% --
Financial liabilities:
Non-interest bearing
deposits $ 17,513 $10,507 $10,507 $10,507 $10,507 $ 10,511 $ 70,052 $ 70,052
Average interest rate N/A -- -- -- -- -- N/A --
Interest bearing
savings and checking $ 45,997 $27,599 $27,598 $27,598 $27,599 $ 27,599 $183,990 $183,990
Average interest rate 3.13% 3.13% 3.13% 3.13% 3.13% 3.13% 3.13% --
Time deposits $123,626 $63,430 $11,181 $ 886 $ 1,210 $ -- $200,333 $200,219
Average interest rate 5.32% 5.67% 5.87% 6.05% 5.75% -- 5.47% --
Federal funds purchased
and securities sold
under agreements to
repurchase $ 54,312 $ -- $ -- $ -- $ -- $ -- $ 54,312 $ 54,312
Average interest rate 5.14% -- -- -- -- -- 5.14% --
</TABLE>
Table 10 summarizes the expected maturities and average interest rates
associated with the Corporations's financial instruments. Non-interest bearing
deposits and interest-bearing savings and checking deposits have no contractual
maturity dates. For purposes of Table 10, projected maturity dates for such
deposits were determined based on decay rate assumptions used internally by the
Corporation to evaluate such deposits. For further information on the fair
value of financial instruments, see Note 23 to the consolidated financial
statements.
19
<PAGE> 20
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
Interest Sensitivity
As a bank holding company, the Corporation's earnings are subject to the
risk of interest rate fluctuations. The Corporation uses a number of tools to
measure interest rate risk, including simulating the effect on earnings of
fluctuations in interest rates, monitoring the present value of asset and
liability portfolios under various interest rate scenarios and monitoring the
difference, or gap, between rate sensitive assets and liabilities, as discussed
below. The Corporation's computer model and other gap analyses take into account
the Corporation's contractual agreements with regard to investments, loans and
deposits. Although the Corporation's computer simulation model is subject to the
accuracy of the assumptions that underlie the process, the Corporation believes
that such model provides a better illustration of the interest sensitivity of
earnings than does static sensitivity gap analyses.
The Corporation monitors exposure to a gradual increase or decrease in
rates of 200 basis points over a rolling 12-month period. The Corporation's
policy limit for the maximum negative impact on net interest income from a
gradual change in interest rates of 200 basis points over 12 months is 8%. The
Corporation generally has maintained a risk position well within the policy
guideline level. As of December 31, 1997, the model indicated that the impact of
a 200 basis point gradual increase in rates over 12 months would result in an
approximately 1.35% decrease in net interest income, while a 200 basis point
gradual decrease in rates over the same period would result in an approximately
1.14% increase from an unchanged rate environment. Actual results will differ
from simulated results due to the timing, magnitude and frequency of interest
rate changes and changes in market conditions and management strategies, among
other factors.
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.
20
<PAGE> 21
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.
21
<PAGE> 22
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.
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.
22
<PAGE> 23
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>
23
<PAGE> 24
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.
24
<PAGE> 25
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations (cont.)
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.
25
<PAGE> 26
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>
26
<PAGE> 27
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.
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 and under the caption "Interest
Sensitivity" immediately following such table in Item 7, above.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
/s/ J.W. Hunt and Company, LLP
Columbia, South Carolina
February 2, 1998
28
<PAGE> 29
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
29
<PAGE> 30
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 - basic $ 1.26 $ 1.14 $ 0.98
======= ======= =======
Net income per common share - diluted $ 1.25 $ 1.12 $ 0.97
======= ======= =======
Weighted average common shares outstanding - basic 5,146,699 4,869,698 4,721,944
========= ========= =========
Weighted average common shares outstanding - diluted 5,165,443 4,921,464 4,775,154
========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
30
<PAGE> 31
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
31
<PAGE> 32
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>
32
<PAGE> 33
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
33
<PAGE> 34
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.
34
<PAGE> 35
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.)
35
<PAGE> 36
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.
36
<PAGE> 37
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.
37
<PAGE> 38
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>
38
<PAGE> 39
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>
39
<PAGE> 40
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.
40
<PAGE> 41
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.
41
<PAGE> 42
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.
42
<PAGE> 43
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.
43
<PAGE> 44
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>
44
<PAGE> 45
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>
45
<PAGE> 46
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>
46
<PAGE> 47
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:
In 1997, the Financial Accounting Standards Board 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.
The Corporation has adopted SFAS No. 128 as of December 31, 1997.
In accordance with SFAS 128, the calculation of basic net income per share and
diluted net income per share is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income per share - basic:
Net income (in 000s) $ 6,466 $ 5,528 $ 4,640
------------------------------------
Income available to common
shareholders (in 000s) $ 6,466 $ 5,528 $ 4,640
------------------------------------
Average common shares
outstanding - basic 5,146,699 4,869,698 4,721,944
------------------------------------
Net income per share - basic $ 1.26 $ 1.14 $ 0.98
====================================
Net income per share - diluted:
Income available to common
shareholders (in 000s) $ 6,466 $ 5,528 $ 4,640
------------------------------------
Average common shares
outstanding - basic 5,146,699 4,869,698 4,721,944
------------------------------------
Incremental shares from assumed
conversion of stock options 18,744 51,766 53,210
------------------------------------
Average common shares
outstanding - diluted 5,165,443 4,921,464 4,775,154
------------------------------------
Net income per share - diluted $ 1.25 $ 1.12 $ 0.97
====================================
</TABLE>
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.
47
<PAGE> 48
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.
48
<PAGE> 49
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>
49
<PAGE> 50
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>
50
<PAGE> 51
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%.
51
<PAGE> 52
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.
52
<PAGE> 53
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>
53
<PAGE> 54
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.
54
<PAGE> 55
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.
55
<PAGE> 56
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.
56
<PAGE> 57
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>
57
<PAGE> 58
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>
58
<PAGE> 59
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>
59
<PAGE> 60
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
60
<PAGE> 61
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
23 Consent of J. W. Hunt and Company, LLP.
(b) No reports were filed on Form 8-K during the fourth quarter of 1997.
61
<PAGE> 62
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 24th day of April, 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 April 24, 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
----------------------------------------
C. Parker Dempsey
Director
/s/ Dwight W. Frierson
----------------------------------------
Dwight W. Frierson
Director
62
<PAGE> 63
----------------------------------------
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
63
<PAGE> 64
----------------------------------------
Anne H. Oswald
Director
/s/ James W. Roquemore
----------------------------------------
James W. Roquemore
Director
----------------------------------------
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
64
<PAGE> 65
EXHIBIT INDEX
Exhibit No. Description of Exhibit
23 Consent of J. W. Hunt and Company, LLP.
65
<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/A (Amendment No. 1) 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
April 24, 1998
