FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
June 30, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 1998 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period, that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days.
YES "X" NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of June 30, 1998
Common Stock, $2.50 par value 5,293,097
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet -
June 30, 1998 and December 31, 1997
Consolidated Statements of Changes
In Shareholders' Equity -
Six Months Ended
June 30, 1998 and 1997
Consolidated Statement of Income -
Three and Six Months Ended
June 30, 1998 and 1997
Consolidated Statement of Cash Flows -
Six Months Ended
June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports of Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
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PART I - FINANCIAL INFORMATION
Item l. FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS 6-30-98 12-31-97
(In Thousands) (In Thousands)
Cash and due from banks $26,063 $30,802
Federal funds sold 9,200 0
Investment securities - Note 2
Securities held-to-maturity (fair value
of $45,400 in 1998 and $51,026 in 1997) 44,830 50,403
Securities available-for-sale, at fair
value 155,300 115,658
Total investment securities 200,130 166,061
Loans - Note 3 371,935 359,167
Less: Unearned income 3,439 3,654
Allowance for loan losses-Note 4 5,790 5,518
Loans, net 362,706 349,995
Premises and equipment 9,825 9,946
Intangible assets 2,375 2,732
Other real estate - Note 6 227 61
Other assets 7,100 5,974
TOTAL ASSETS $617,626 $565,571
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 6-30-98 12-31-97
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest bearing $72,995 $70,052
Interest-bearing - Note 7 430,397 384,323
TOTAL DEPOSITS 503,392 454,375
Federal funds purchased & securities
sold under agreement to repurchase 49,856 54,312
Other liabilities 5,129 2,984
TOTAL LIABILITIES 558,377 511,671
Commitments & Contingent liabilities - Note 8
Stockholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
5,293,097 shares in 1998 and 5,188,097
shares in 1997 - Note 9 13,233 12,970
Additional paid-in capital 25,669 23,257
Retained earnings 19,922 17,197
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes 425 476
TOTAL SHAREHOLDERS' EQUITY 59,249 53,900
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $617,626 $565,571
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income(Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,100,048 $ 12,750 $ 22,856 $ 12,790 $ (50) $ 48,346
Comprehensive income:
Net income - - - 3,247 - 3,247
Other comprehensive income
(loss) net of tax - - - - 102 102
Comprehensive income - - - - - 3,349
Common stock issued 34,725 87 162 - - 249
Cash dividends - - - (972) - (972)
Balance, June 31, 1997 5,134,773 12,837 23,018 15,065 52 50,972
Balance, December 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900
Comprehensive income:
Net income - - - 3,866 - 3,866
Other comprehensive income
(loss) net of tax - - - - (51) (51)
Comprehensive income - - - - - 3,815
Common stock issued 105,000 263 2,412 - - 2,675
Cash dividends - - - (1,141) - (1,141)
Balance, June 31, 1998 5,293,097 $ 13,233 $ 25,669 $ 19,922 $ 425 $59,249
</TABLE>
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 6 Months Ended
06-30-98 06-30-97 06-30-98 06-30-97
(In Thousands) (In Thousands)
Interest income:
Interest and fees on loans $8,366 $7,424 $16,489 $14,323
Interest & dividends on investment sec.:
Taxable income 2,525 2,223 4,591 4,250
Non-taxable income 437 379 845 788
Dividends on stock 13 11 20 28
Interest on federal funds sold 174 185 394 392
Total Interest income 11,515 10,222 22,339 19,781
Interest expense:
Interest on deposits 4,357 3,841 8,345 7,345
Interest on federal funds purchased &
securities sold under agreement to
repurchase 612 513 1,244 978
Other interest expense 19 0 19 0
Total interest expense 4,988 4,354 9,608 8,323
Net Interest Income 6,527 5,868 12,731 11,458
Provisions for loan losses - Note 4 166 314 388 598
Net interest income after provisions
for loan losses 6,361 5,554 12,343 10,860
Noninterest income:
Service charges on deposit accounts 1,188 1,045 2,304 2,050
Other service charges commissions, fees 692 433 1,339 923
Gains (losses) on investment securities 20 2 38 2
Other operating income 24 12 35 22
Total noninterest income 1,924 1,492 3,716 2,997
Noninterest expense:
Salaries & employee benefits 3,034 2,550 5,871 4,977
Occupancy expense of bank premises -
net 246 299 497 625
Furniture & equipment expense - net 377 348 765 734
Amortization expense-Intangible assets 208 166 360 311
Other expense 1,566 1,288 2,932 2,502
Total noninterest expense 5,431 4,651 10,425 9,149
Income before income taxes 2,854 2,395 5,634 4,708
Applicable income taxes 901 753 1,768 1,461
Net Income $1,953 $1,642 $3,866 $3,247
Net income per common share - Basic $0.37 $0.32 $0.74 $0.64
Net income per common share - Diluted $0.37 $0.32 $0.74 $0.64
Cash dividends per common share $0.11 $0.95 $0.22 $0.10
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended 6 Months Ended
06-30-98 06-30-97
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 3,866 $ 3,247
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 896 867
Provision for loan losses 388 598
Increase (decrease) in reserve
for income taxes-current 42 116
(Gain)loss on sale of premises
and equipment (2) 0
(Increase) decrease in interest
receivables (224) (596)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net (228) (37)
Increase (decrease) in interest
payable 289 260
(Increase) decrease in miscellaneous
assets (596) (36)
(Increase) decrease in prepaid
assets (83) (672)
Increase (decrease) in other
liabilities 1,927 285
Total adjustments 2,409 785
Net cash provided by operating
activities $ 6,275 $ 4,032
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Consolidated Statement of Cash Flows - Continued.......
6 Months Ended 6 Months Ended
06-30-98 06-30-97
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $10,479 $15,034
Purchase of investment securities
held-to-maturity (6,702) (2,422)
Proceeds from maturities of investment
securities available-for-sale 47,901 9,929
Purchase of investment securities
available-for-sale (86,882) (35,577)
Net (increase) decrease in customer
loans (13,230) (29,869)
Additions to premises and equipment 415 (365)
Proceeds from sale of premises and
equipment 2 0
Recoveries from loans previously charged
off 108 187
(Increase) decrease in funds sold (9,200) (507)
Net cash used in investing
activities (57,109) (43,590)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 49,017 33,587
Sale of common stock 2,674 250
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (4,455) 7,764
Proceeds from issuance of other
borrowings 2,500 0
Repayment of other borrowings (2,500) 0
Dividends paid (1,141) (971)
Net cash provided by financing
activities 46,095 40,630
Net increase (decrease) in cash and
cash equivalents (4,739) 1,072
Cash and cash equivalents at beginning
of year 30,802 28,824
Cash and cash equivalents at end of
reporting period $ 26,063 $ 29,896
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FIRST NATIONAL CORPORATION
NOTE 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997. All dollar amounts are stated in
thousands, except per share data.
NOTE 2 - Investment Securities:
The following is the amortized cost and fair value of investment securities
held-to-maturity at June 30, 1998 and December 31, 1997:
06-30-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
U S Treasury
securities 3,222 24 0 3,246 3,231 28 0 3,259
Obligations of
U S government
agencies & corps 7,629 42 (20) 7,651 12,321 39 (18) 12,342
Obligations of state
and political
subdivisions 33,979 540 (16) 34,503 34,851 581 (7) 35,425
Total 44,830 606 (36) 45,400 50,403 648 (25) 51,026
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NOTE 2 - Continued...
The following is the amortized cost and fair value of securities
available-for-sale at June 30, 1998 and December 31, 1997:
06-30-98 12-31-97
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
U S Treasury
securities 46,878 281 (13) 47,146 30,320 240 0 30,560
Obligations of
U S government
agencies & corps 105,101 480 (80) 105,501 83,990 538 (23) 84,505
Other securities 2,653 0 0 2,653 593 0 0 593
Total 154,632 761 (93) 155,300 114,903 778 (23) 115,658
Investment securities with an aggregate amortized cost of $79,328
on June 30, 1998, and $88,276 on December 31, 1997, were pledged
to secure public deposits and for other purposes as required and
permitted by law.
NOTE 3 - Loans:
The following is a summary of loans at: 6-30-98 12-31-97
Commercial, financial & agricultural 71,492 67,519
Real Estate - construction 11,284 12,429
Real estate - mortgage 214,271 207,630
Consumer 71,449 67,935
Total loans 368,496 355,513
As of June 30, 1998 and December 31, 1997 the aggregate dollar
amount of loans to related parties; principally, directors and
executive officers, their immediate families and their business
interests, was $5,694 and $8,025 respectively. The following is an
analysis of the activity with respect to loans to related parties
for the six months ended June 30, 1998:
Balance, beginning of period 8,025
Add:
New loans 4,232
Deduct:
Payments 5,014
Other changes (1,549)
Balance, end of period 5,694
<PAGE>
NOTE 4 - Allowance for Loan Losses:
Amount
06-30-98 12-31-97
Balance, beginning of period (year) 5,518 4,705
Add:
Recoveries 108 323
Provisions for loan losses charged
to income 388 1,251
Total 6,014 6,279
Deduct:
Loans charged off 224 761
Balance, end of period (year) 5,790 5,518
The allowance for loan losses is maintained at a level which, in
management's judgement is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
For impairment recognized in accordance with Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", the entire change in present value of
expected cash flows is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be
reported.
NOTE 5 - Adoption of Statement of Financial Accounting Standards No. 114
and No. 118:
Effective January 1, 1995, the bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", and Statement of Financial Accounting
Standards No. 118 (SFAS 118), "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". These
statements require creditors to account for impaired loans, except
for those loans that are accounted for at fair value or at the
lower of cost or fair value, at the present value of the expected
future cash flows discounted to the loan's effective interest rate.
<PAGE>
NOTE 5 - continued...
The Company determines when loans become impaired through its
normal loan administration and review functions. Those loans
identified as substandard or doubtful as a result of the loan
review process are potentially impaired loans. A loan is impaired
when, based on current information and events, it is probable that
a creditor will be unable to collect all principal and interest
amounts due according to the contractual terms of the loan
agreement. A loan is not impaired during a period of delay in
payment if the Company expects to collect all amounts due,
including interest accrued at the contractual interest rate, for
the period of delay.
In accordance with these standards, the Company does not apply SFAS
114 and SFAS 118 to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. These groups
include the Company's credit card, residential mortgage, overdraft
protection, home equity lines, accounts receivable financing, and
consumer installment loans.
The Company's adoption of these accounting standards did not have
a material effect on the financial condition and results of
operations of the Company.
In accordance with SFAS 114, historical information has not been
restated to reflect the application of this standard.
NOTE 6 - Other Real Estate:
Real estate acquired in satisfaction of a loan is reported in other
assets. Properties acquired by foreclosure or deed in lieu of
foreclosure are transferred to Other Real Estate Owned ("OREO") and
recorded at the lower of the outstanding loan balance at the time
of acquisition or the estimated market value. Market value is
determined on the basis of the properties being disposed of in the
normal course of business and not on a liquidation or distress
basis. Loan losses arising from the acquisition of such properties
are charged against the allowance for losses. Gains or losses
arising from the sale of OREO are reflected in current operations.
<PAGE>
NOTE 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $60,990 and
$40,794 at June 30, 1998 and December 31, 1997 respectively.
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various
commitments and incurs certain contingent liabilities, which are
not reflected in the accompanying financial statements. The
commitments and contingent liabilities include guarantees,
commitments to extend credit and standby letters of credit. At
June 30, 1998, commitments to extend credit and standby letters of
credit aggregated $87,341. The Company does not anticipate any
material losses as a result of these transactions.
Note 9 - Common Stock:
As of December 31, 1997, the common stock outstanding was
5,188,097. The board of directors of the Company approved a 2 for
1 stock split payable May 30, 1997. As a result of a stock
offering, the Company sold and issued 105,000 shares of First
National Corporation stock during the second quarter of 1998. The
proceeds from this offering are to be used to purchase all the
common stock of the newly formed Florence County National Bank.
As of June 30, 1998, the common stock outstanding was 5,293,097
shares.
Note 10 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number
of shares of common stock outstanding, giving retroactive effect to
stock dividends and stock splits.
In 1997, the Financial Accounting Standards Board "FASB" issued
SFAS No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earnings per share ("EPS") by replacing
the presentation of primary EPS with a presentation of basic EPS.
In addition, SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denominator of the diluted EPS
calculation.
<PAGE>
Note 10 - Continued...
In accordance with SFAS 128, the calculation of basic net income per
share and diluted net income per share is presented below:
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
Net income per share - basic: 06/30/98 06/30/97 06/30/98 06/30/97
<S> <C> <C> <C> <C>
Net income $1,953 $1,642 $3,866 $3,247
Income available
to common shareholders $1,953 $1,642 $3,866 $3,247
Average common shares
outstanding-basic 5,205,202 5,108,925 5,205,202 5,108,925
Net income per share-basic $ .37 $ .32 $ .74 $ .64
Net income per share-diluted:
Income available to common
shareholders $1,953 $1,642 $3,866 $3,247
Average common shares
outstanding-basic 5,205,202 5,108,925 5,205,202 5,108,925
Incremental shares from
assumed conversion of stock
options 53,543 50,550 53,543 50,550
Average common shares
outstanding-diluted 5,258,745 5,159,475 5,258,745 5,159,475
Net income per share-
diluted $ .37 $ .32 $ .74 $ .63
</TABLE>
Dividends per share are calculated using the current equivalent of
number of common shares outstanding at the time of the dividend based
on the Company's shares outstanding.
<PAGE>
Note 11 - Comprehensive Income:
The following is the related tax effects allocated to other
comprehensive income at June 30, 1998:
Before Tax Tax (Expense) Net of
(In thousands of dollars) Amount Benefit Tax Amount
Unrealized gain (loss) on
securities available-for-sale $668 $(243) $425
The following is the other comprehensive income balance at June 30, 1998:
Beginning Current Period Ending
Balance Change Balance
Accumulated other comprehensive
income-Unrealized gain (loss)
on securities available-for-
sale $476 $ (51) $425
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FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in
this report. For further information refer to the Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The National Bank of York County commenced business operations as a
national bank in Rock Hill, South Carolina, on July 11, 1996. The National
Bank of York County is also a full service commercial bank and its deposits
are insured to applicable limits by the Federal Deposit Insurance
Corporation (FDIC). Upon completion of its organization, 100% of the common
stock of the National Bank of York County was acquired by First National
Corporation, and the bank operates as a wholly owned subsidiary of the
Corporation with its own Board of Directors and operating policies.
The Florence County National Bank commenced business operations as a
national bank in Florence, South Carolina, on April 1, 1998. Florence
County National Bank is also a full service commercial bank and its deposits
are insured to applicable limits by the Federal Deposit Insurance
Corporation (FDIC). Upon completion of its organization, 100% of the common
stock of the Florence County National Bank was acquired by First National
Corporation, and the bank operates as a wholly owned subsidiary of the
Corporation with its own Board of Directors and operating policies.
For the second quarter of 1998, First National Corporation ("the
Corporation") had consolidated net income of $1,953,000, an increase of 18.9
percent over the $1,642,000 earned in the second quarter of 1997. Earnings
per share amounted to $0.37 for the three months ended June 30, 1998, a 15.6
percent increase over the $0.32 per share earned in the second quarter of
1997. Net income for the first six months of 1998 was $3,866,000, an
increase of 19.1 percent over the $3,247,000 earned for the same period in
1997. Earnings per share amounted to $0.74 for the six months ended June 30,
1998, a 15.6 percent increase over the $0.64 per share earned in the first
six months of 1997.
<PAGE>
Management's Discussion Continued...
NET INTEREST INCOME
For the second quarter of 1998, net interest income was $6,527,000
compared to $5,868,000 for the same period in 1997. This is an increase of
$659,000 or 11.2 percent. Net interest income for the first six months of
1998 was $12,731,000 compared to $11,458,000 for the same period in 1997.
This represents an increase of $1,273,000 or 11.1 percent. This increase
resulted from a 3.7 percent increase in loan outstandings, net of unearned
income as well as a 20.5 percent increase in investment security
outstandings, when compared to the first six months of 1997.
The yield on a major portion of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first six months of 1997, the year to date taxable equivalent yield on
earning assets was 8.00 percent. During the same period of 1998, the yield
decreased to 7.83 percent, or a decrease of 17 basis points. The cost of
the liabilities used to support these earning assets increased 14 basis
points from 4.02 percent in 1997 to 4.16 percent in 1998. Interest rates
paid on interest-bearing liabilities increased more rapidly than yields on
earning assets due to the Company's negative asset/liability position.
For the first six months net interest margins decreased from 4.62
percent in 1997 to 4.36 percent in 1998. The impact of interest-free funds
for the same period increased from .63 percent to .69 percent or an increase
of 6 basis points.
The largest category of earning assets is loans. At the end of the
second quarter 1998, loans outstanding, less unearned income, were
$368,496,000 compared to $355,513,000 at December 31, 1997. This represents
an increase of $12,983,000 or 3.7 percent. For the second quarter ended
June 30, 1998, interest and fees on loans were $8,366,000 compared to
$7,424,000 for the comparable period in 1997, an increase of $942,000 or
12.7 percent. For the six months ended June 30, 1998, interest and fees on
loans were $16,489,000 compared with $14,323,000 for the same period in
1997. This represents an increase of $2,166,000 or 15.1 percent.
For the six months ended June 30, 1998, loans averaged $358,358,000 and
yielded 8.79 percent on a taxable equivalent basis compared to $323,420,000
with a taxable equivalent yield of 8.93 percent or a decrease of 14 basis
points for the year ended December 31, 1997.
Investment securities are the second largest category of earning
assets. Investment securities are utilized by the Company as a vehicle for
the employment of excess funds, to provide liquidity, to fund loan demand or
deposit liquidation, and to pledge as collateral for certain deposit and
purchased funds.
<PAGE>
Management's Discussion Continued...
At June 30, 1998, investment securities were $200,130,000 compared to
$166,061,000 at December 31, 1997. This is an increase of $34,069,000 or
20.5 percent. This increase is the result of management's decision to
utilize excess funds in the investment function in an attempt to increase
yields and profitability.
For the second quarter ended June 30, 19987, investment income was
$2,975,000 compared with $2,613,000 for the comparable period in 1997, a net
increase of $362,000 or 13.9 percent. For the six month period ended June
30, 1998, investment income was $5,456,000 compared with $5,066,000 for the
same period in 1997, a net increase of $390,000 or 7.7 percent. Management
attributes this increase in income to higher yields on investment
securities.
At the end of the second quarter 1998, securities averaged $182,012,000
and yielded 6.32 percent on a taxable equivalent basis, compared to
$167,895,000 with a yield of 6.36 percent for the year ended December 31,
1997, resulting in a 4 basis point decrease in yield.
As of June 30, 1998, the Company had unrealized gains in the U.S.
Treasury and agency portfolio denoted as held-to-maturity, of $66,000 and in
the municipal portfolio $540,000. Also at June 30, 1998, the Company had an
unrealized loss of $20,000 in the U. S. Treasury and agency portfolio and an
$16,000 unrealized loss in the municipal portfolio.
At year end 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debit and Equity
Securities" for the investment portfolio, and showed a net unrealized gain
at June 30, 1998 of approximately $668,000 on the $155,300,000 of securities
denoted as available-for-sale.
For the first six months ended June 30, 1998, the Company had a $38,000
realized gain due to called agency bonds.
Although securities classified as available-for-sale may be sold from
time to time to meet liquidity or other needs, it is not the normal activity
of the Company to trade the investment portfolio. Management has the intent
and the ability to hold securities on a long-term basis or until maturity.
During the first six months of 1998, interest-bearing liabilities
averaged $467,742,000 and carried an average rate of 4.16 percent. This
compares to an average level of $420,190,000 with a rate of 4.14 percent at
December 31, 1997 or an increase of 2 basis points. Approximately half of
these interest-bearing liabilities have fixed rates. They are expected to
be renewed at prevailing market rates as they mature.
<PAGE>
Management's Discussion Continued...
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended June 30,
1998 was $166,000 compared to $314,000 for the same period in 1997 which
represents a 47.1 percent decrease. For the six month period ended June 30,
1998, the provision for loan loss was $388,000 compared to $598,000 for the
same period in 1997 which represents a 35.1 percent decrease. The decrease
in the provision for loan losses was due to a weakening loan demand. The
allowance for loan losses was $5,790,000 or 1.57 percent of outstanding
loans at June 30, 1998 compared to 1.55 percent of outstanding loans at
year-end 1997.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicated the estimated loan
losses. Management feels that the allowance for loan losses is adequately
funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure. For the period ended June 30, 1998, other real
estate owned was $227,000 compared to $61,000 at December 31, 1997. This
increase resulted from the foreclosure of real estate properties.
Management anticipates that the level of charge-offs for 1998 will be
near the levels of 1997. The loan loss allowance is considered adequate by
management. However, changes in economic conditions in the Company's market
area could affect these levels.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the second quarter of 1998 was $1,924,000
compared to $1,492,000 for the same period in 1997, representing an increase
of $432,000 or 29.0 percent. For the first six months of 1998 noninterest
income was $3,716,000 compared to $2,997,000 for the same period in 1997,
representing an increase of $724,000 or 24.2 percent. During the first six
months of 1998, other service charges, commissions, and fees increased
$416,000 or 45.1 percent compared to the same period in 1997. This increase
can be primarily attributed to the increase in debit card fees as well as
fees collected on mutual fund sales.
<PAGE>
Management's Discussion continued...
Noninterest expense for the second quarter of 1998 was $5,431,000
compared to $4,651,000 for the same period in 1997, representing an increase
of $780,000 or 16.8 percent. For the six months ended June 30, 1998,
noninterest expense was $10,425,000 compared to $9,149,000, an increase of
$1,276,000 or 13.9 percent. Salaries and employee benefits for the second
quarter ended June 30, 1998 increased $484,000 or 19.0 percent compared to
the same period in 1997. For the first six months of 1998 salaries and
employee benefits increased $894,000 or 18.0 percent compared to the same
period in 1997. These increases can be largely attributed to the opening of
the Florence County National Bank on April 1, 1998. Depreciation expense
decreased $24,000 or 3.7 percent for the second quarter of 1998 compared to
the same period in 1997. For the six months ended June 30, 1998
depreciation expense decreased $97,000 or 7.1 percent compared to the same
period in 1997. These decreases can be largely attributed to a decrease in
both building and furniture and equipment depreciation expense, reductions
in maintenance and repairs on buildings as well as a decrease in equipment
service contract costs. Other expenses increased $278,000 or 21.6 percent
for the second quarter of 1998 compared to the same period in 1997. For the
six months ended June 30, 1998, other expenses increased $430,000 or 17.2
percent compared to the same period in 1997. This increase in other
expenses is distributed among the following expense categories:
advertising, insurance, office and printing supplies, postage, telephone and
line charges, and other expenses.
NET INCOME
Net income was up 18.9 percent for the second quarter of 1998 when
compared to the same period in 1997. For the six months ended June 30,
1998, net income was up 19.1 percent compared to the same period in 1997.
The $1,483,000 or 13.7 percent increase in net interest income and the
$719,000 or 24.0 percent increase in noninterest income for the six months
ended June 30, 1998 as compared to the same period in 1997 were the primary
factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date, the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the second
quarter, 1998, stockholder's equity was $59,249,000 compared to $53,900,000
at December 31, 1997.
<PAGE>
Management's Discussion Continued...
The Corporation and subsidiaries are subject to certain risk-based
capital guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of
both balance sheet and off balance sheet items will be adjusted to reflect
credit risk. Under the guidelines of the Board of Governors of the Federal
Reserve System, which are substantially similar to the Office of the
Comptroller of the Currency guidelines, as of December 31, 1995, Tier 1
capital must be at least 4 percent of risk-weighted assets, while total
capital must be 8 percent of risk-weighted assets. The Tier 1 capital ratio
at June 30, 1998 was 15.3 percent compared to 13.5 percent at December 31,
1997. The total capital ratio was 16.5 percent at June 30, 1998 compared to
14.7 percent at December 31, 1997.
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage capital ratio in evaluating capital
strength and adequacy. The minimum leverage ratio required for banks is
between 3 percent and 5 percent, depending on the institution's composite
rating as determined by its regulators. At June 30, 1998, First National
Corporation's leverage ratio was 9.4 percent, compared to 9.5 percent at
December 31, 1997. First National Corporation's ratio exceeds the minimum
standards by substantial margins.
Liquidity is the ability of the Company to meet its cash flow
requirements which arise primarily from withdrawal of deposits, extension of
credit and payment of operating expenses. Asset liquidity is maintained by
the maturity structure of loans, investment securities and other short-term
investments. Management has policies and procedures governing the length of
time to maturity on loans and investments. Normally changes in the earning
asset mix are of a longer term nature and are not utilized for day-to-day
Corporation liquidity needs.
The Company's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from the Company's use
of federal funds purchased and securities sold under agreement to
repurchase. Additional liquidity can be secured from lines of credit
extended to the Company from its correspondent banks. Management feels that
its liquidity position is adequate.
<PAGE>
Management's Discussion Continued...
OTHER
Many existing computer programs use only two digits to identify a year
in the data field. These Programs were designed and developed without
considering the impact of the upcoming century. If uncorrected, many
computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.
Certain of the Bank's systems may be affected by this so-called
millennium bug. The Bank is investigating the extent to which its systems
are affected and communicating with all of its computer vendors concerning
timely and completed remedies for those systems that require modification.
The Bank is also communicating with all third parties on which it relies to
assess their progress in evaluating their systems and implementing any
corrective measures. The Bank has been taking and will continue to pursue
all reasonably necessary steps to protect its operations and assets.
Based upon discussions with its computer vendors and other third
parties, the Bank does not expect that the cost of addressing the year 2000
issue, will be a material event or uncertainty that would cause its reported
financial information not to be materially indicative of future operating
results or future financial conditions.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries, First National
Bank, National Bank of York County, and Florence County National Bank
is a party to nor is any of their property the subject of any material
or other pending legal proceedings, other than ordinary routine
proceedings incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
The annual shareholders meeting of the Registrant was held April
28, 1998 for the following purposes:
(1) To elect seven(7) directors whose terms will expire in 2001.
The following directors were elected:
E. Everett Gasque, Jr. Harry M. Mims, Jr.
John L. Gramling, Jr. Cathy Cox Yeadon
Robert R. Horger James W. Roquemore
Johnny E. Ward
Elect one (1) director whose term will expire in 1999.
The following director was elected:
Dick G. McTeer 3,534,731 For 9,670 Withheld
(2) To ratify the appointment of J. W. Hunt and Company, LLP, as
independent auditors for the Company for the fiscal year
ending December 31, 1998:
3,524,638 For 16,923 Withheld 2,840 Against
Item 5. Other Information:
Not Applicable
<PAGE>
Item 6. Exhibits and Reports of Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: August 14, 1998 C. JOHN HIPP, III
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: August 14, 1998 W. LOUIS GRIFFITH
PRINCIPAL ACCOUNTING OFFICER AND
CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule Attached
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at June 30, 1998 (Unaudited) and
the Consolidated Statement of Income (Unaudited) for the six months ended June
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,063
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155,300
<INVESTMENTS-CARRYING> 44,830
<INVESTMENTS-MARKET> 45,400
<LOANS> 368,496
<ALLOWANCE> 5,790
<TOTAL-ASSETS> 617,626
<DEPOSITS> 503,392
<SHORT-TERM> 49,856
<LIABILITIES-OTHER> 5,129
<LONG-TERM> 0
0
0
<COMMON> 13,233
<OTHER-SE> 46,016
<TOTAL-LIABILITIES-AND-EQUITY> 617,626
<INTEREST-LOAN> 16,489
<INTEREST-INVEST> 5,456
<INTEREST-OTHER> 394
<INTEREST-TOTAL> 22,339
<INTEREST-DEPOSIT> 8,345
<INTEREST-EXPENSE> 9,608
<INTEREST-INCOME-NET> 12,731
<LOAN-LOSSES> 388
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,425
<INCOME-PRETAX> 5,634
<INCOME-PRE-EXTRAORDINARY> 3,866
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,866
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 7.83
<LOANS-NON> 973
<LOANS-PAST> 439
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,614
<ALLOWANCE-OPEN> 5,518
<CHARGE-OFFS> 224
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 5,790
<ALLOWANCE-DOMESTIC> 5,790
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
