FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
September 30, 1999
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1999 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period, that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days.
YES "X" NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of September 30, 1999
Common Stock, $2.50 par value 7,026,957
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998
Consolidated Statements of Changes
In Shareholders' Equity -
Nine Months Ended
September 30, 1999 and 1998
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1999 and 1998
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1999 and 1998
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
<PAGE>
PART I - FINANCIAL INFORMATION
Item l. FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS 9-30-99 12-31-98
(In Thousands) (In Thousands)
Cash and due from banks $32,029 $35,106
Federal funds sold 3,599 0
Investment securities - Note 2
Securities held-to-maturity (fair value
of $45,373 in 1999 and $47,456 in 1998) 45,972 46,381
Securities available-for-sale, at fair
value 160,030 159,857
Total investment securities 206,002 206,238
Loans - Notes 3, 5 577,832 496,218
Less: Unearned income (6,845) (3,074)
Allowance for loan losses-Note 4 (7,709) (6,934)
Loans, net 563,278 486,210
Premises and equipment 15,773 12,392
Intangible assets 5,743 2,055
Other real estate - Note 6 591 184
Other assets 9,899 8,214
TOTAL ASSETS $836,914 $750,399
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 9-30-99 12-31-98
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest bearing $102,455 $124,985
Interest-bearing - Note 7 556,840 486,893
TOTAL DEPOSITS 659,295 611,878
Federal funds purchased & securities
sold under agreement to repurchase 63,167 52,150
Long-term debt 34,200 6,350
Other liabilities 4,891 5,595
TOTAL LIABILITIES 761,553 675,973
Commitments & Contingent liabilities - Note 8
Stockholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
7,026,957 shares in 1999 and 6,899,679
shares in 1998 - Note 9 17,567 17,249
Additional paid-in capital 47,558 47,172
Retained earnings 12,170 8,744
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes (1,934) 1,261
TOTAL SHAREHOLDERS' EQUITY 75,361 74,426
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $836,914 $750,399
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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, 1997 6,024,837 $ 15,062 $ 27,421 $ 18,937 $ 461 $ 61,881
Comprehensive income:
Net income - - - 6,590 - 6,590
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects - - - - 973 973
Total comprehensive income - - - - - 7,563
Cash dividends - - - (1,829) - (1,829)
Common stock issued 346,164 865 5,220 - - 6,085
BALANCE, SEPTEMBER 30, 1998 6,371,001 15,927 32,641 23,698 1,434 73,700
BALANCE, DECEMBER 31, 1998 6,899,679 17,249 47,172 8,744 1,261 74,426
Comprehensive income:
Net income - - - 5,700 - 5,700
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects - - - - (3,195) (3,195)
Total comprehensive income - - - - - 2,505
Cash dividends - - - (2,274) - (2,274)
Common stock issued 127,656 319 394 - - 713
Redemption of common stock (378) (1) (8) - - (9)
BALANCE, SEPTEMBER 30, 1999 7,026,957 $ 17,567 $ 47,558 $ 12,170 $ (1,934) $ 75,361
</TABLE>
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended
09-30-99 09-30-98 09-30-99 09-30-98
(In Thousands) (In Thousands)
Interest income:
Interest and fees on loans $15,516 $10,853 $34,388 $30,971
Interest & dividends on investment sec.:
Taxable income 2,863 2,724 7,895 7,507
Non-taxable income 471 406 1,368 1,251
Dividends on stock 142 69 164 89
Interest on federal funds sold 367 159 541 553
Other interest income 9 0 9 0
Total Interest income 19,368 14,211 44,365 40,371
Interest expense:
Interest on deposits 6,341 5,359 14,406 15,349
Interest on federal funds purchased &
securities sold under agreement to
repurchase 761 620 2,119 1,864
Other interest expense 587 61 1,005 129
Total interest expense 7,689 6,040 17,530 17,342
Net Interest Income 11,679 8,171 26,835 23,029
Provisions for loan losses - Note 4 472 261 1,110 746
Net interest income after provisions
for loan losses 11,207 7,910 25,725 22,283
Noninterest income:
Service charges on deposit accounts 1,731 1,466 4,226 4,095
Other service charges commissions, fees 1,382 501 2,982 2,097
Gains (losses) on investment securities (23) (38) 222 0
Other operating income 59 183 99 218
Total noninterest income 3,149 2,112 7,529 6,410
Noninterest expense:
Salaries & employee benefits 5,290 3,487 12,562 10,273
Occupancy expense of bank premises -
net 700 448 1,377 1,210
Furniture & equipment expense - net 960 462 2,286 1,227
Amortization expense-Intangible assets 106 220 328 580
Other expense 5,585 2,109 8,836 5,648
Total noninterest expense 12,641 6,726 25,389 18,938
Income before income taxes 1,715 3,296 7,865 9,755
Applicable income taxes 240 1,074 2,165 3,165
Net Income $1,475 $2,222 $5,700 $6,590
Net income per common share - Basic $0.22 $0.32 $0.86 $0.94
Net income per common share - Diluted $0.22 $0.31 $0.85 $0.93
Cash dividends per common share $0.13 $0.13 $0.39 $0.35
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended 9 Months Ended
09-30-99 09-30-98
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 5,700 $ 6,590
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,431 1,643
Provision for loan losses 891 746
Increase (decrease) in reserve
for income taxes (597) 20
(Gain)loss on sale of premises
and equipment 0 2
Gain on sale of securities
available-for-sale (204) 0
(Increase) decrease in interest
receivables 312 (459)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net 147 138
(Increase) decrease in real estate
loans held for sale 0 (1,223)
Increase (decrease) in interest
payable 240 515
(Increase) decrease in miscellaneous
assets (4,341) (292)
(Increase) decrease in prepaid
assets (380) (192)
Increase (decrease) in other
liabilities (99) 133
Total adjustments (2,600) 1,031
Net cash provided by operating
activities $ 3,100 $ 7,621
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Consolidated Statement of Cash Flows - Continued.......
9 Months Ended 9 Months Ended
09-30-99 09-30-98
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $ 7,359 $15,934
Purchase of investment securities
held-to-maturity (7,192) (8,349)
Proceeds from sales and maturities
of investment securities available-
for-sale 59,299 56,576
Purchase of investment securities
available-for-sale (64,384) (105,515)
Net (increase) decrease in customer
loans (77,960) (29,212)
Loans originated or acquired, net 0 984
Proceeds from the sale of foreclosed
real estate 0 104
Additions to premises and equipment (4,488) (55)
Proceeds from sale of premises and
equipment 0 2
Recoveries from loans previously charged
off 0 191
(Increase) decrease in funds sold 3,291 0
Net cash used in investing
activities (84,075) (69,340)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 46,220 66,401
Common stock issuance 645 6,046
Common stock redemption (9) 0
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase 8,792 (38)
Proceeds from issuance of long-term
debt 34,200 0
Proceeds from issuance of other
borrowings 0 9,600
Repayment of other borrowings (6,350) (8,250)
Increase in amounts due to depository
institutions 0 333
Proceeds from stock options exercised 169 38
Dividends paid (2,274) (1,830)
Net cash provided by financing
activities 81,393 72,300
Net increase (decrease) in cash and
cash equivalents 418 10,581
Cash and cash equivalents at beginning
of year 31,611 36,898
Cash and cash equivalents at end of
reporting period $ 32,029 $ 47,479
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FIRST NATIONAL CORPORATION
NOTE 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. 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, 1998. All dollar amounts are
stated in thousands, except per share data.
NOTE 2 - Investment Securities:
The following is the amortized cost and fair value of investment securities
held-to-maturity at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
09-30-99 12-31-98
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 0 0 0 0 3,213 31 0 3,244
Obligations of
U S government
agencies & corps 4,481 17 (42) 4,456 5,029 72 0 5,101
Obligations of state
and political
subdivisions 41,491 126 (700) 40,917 38,138 1,018 (45) 39,111
Total 45,972 143 (742) 45,373 46,380 1,121 (45) 47,456
</TABLE>
<PAGE>
NOTE 2 - Continued...
The following is the amortized cost and fair value of securities available-
for-sale at September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
09-30-99 12-31-98
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 34,557 86 (260) 34,383 45,830 1,023 0 46,853
Obligations of
U S government
agencies & corps 124,816 115 (3,038) 121,893 108,476 1,078 (99) 109,455
Other securities 3,754 0 0 3,754 3,549 0 0 3,549
Total 163,127 201 (3,298) 160,030 157,855 2,101 (99) 159,857
</TABLE>
Investment securities with an aggregate amortized cost of $120,133 on
September 30, 1999, and $108,878 on December 31, 1998, were pledged to
secure public deposits and for other purposes as required and permitted
by law.
NOTE 3 - Loans:
The following is a summary of loans at: 9-30-99 12-31-98
Commercial, financial & agricultural 101,018 87,610
Real Estate - construction 28,374 19,113
Real estate - mortgage 356,071 301,560
Consumer 92,369 83,121
Total loans 577,832 491,404
As of September 30, 1999 and December 31, 1998 the aggregate dollar amount of
loans to related parties; principally, directors and executive officers,
their immediate families and their business interests, was $9,017 and $8,992
respectively. The following is an analysis of the activity with respect to
loans to related parties for the nine months ended September 30, 1999:
Balance, beginning of period 8,992
Add:
New loans 3,029
Deduct:
Payments 3,436
Other changes 432
Balance, end of period 9,017
<PAGE>
NOTE 4 - Allowance for Loan Losses:
Amount
09-30-99 12-31-98
Balance, beginning of period (year) 6,075 6,246
Add:
Recoveries 133 263
Changes incident to mergers and
absorptions 840 0
Provisions for loan losses charged
to income 1,110 1,213
Total 8,158 7,722
Deduct:
Loans charged off 449 788
Balance, end of period (year) 7,709 6,934
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.
NOTE 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $75,503 and $78,065
at September 30, 1999 and December 31, 1998 respectively.
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities, which are not reflected in the
accompanying financial statements. The commitments and contingent
liabilities include guarantees, commitments to extend credit and standby
letters of credit. At September 30, 1999, commitments to extend credit and
standby letters of credit aggregated $129,002. The Company does not
anticipate any material losses as a result of these transactions.
<PAGE>
Note 9 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number of shares
of common stock outstanding, giving retroactive effect to stock dividends and
stock splits.
In 1997, the Financial Accounting Standards Board "FASB" issued SFAS No. 128,
"Earnings Per Share", which establishes standards for computing and
presenting earnings per share ("EPS") by replacing the presentation of
primary EPS with a presentation of basic EPS. In addition, SFAS No. 128
requires dual presentation of basic and diluted EPS on the face of the income
statement and requires a reconciliation of the numerator and denominator of
the diluted EPS calculation.
In accordance with SFAS 128, the calculation of basic net income per share
and diluted net income per share is presented below:
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Net income per share - basic: 09/30/99 09/30/98 09/30/99 09/30/98
Net income $1,475 $2,222 $5,700 $6,590
Income available
to common shareholder $1,475 $2,222 $5,700 $6,590
Average common shares
outstanding-basic 6,624,049 6,988,213 6,624,049 6,988,213
Net income per share-basic $ .22 $ .32 $ 0.86 $ .94
Net income per share - diluted: 09/30/99 09/30/98 09/30/99 09/30/98
Income available to common
shareholders $1,475 $2,222 $5,700 $6,590
Average common shares
outstanding-basic 6,624,049 6,988,213 6,624,049 6,988,213
Incremental shares from
assumed conversion of stock
options 52,594 111,824 52,594 111,824
Average common shares
outstanding-diluted 6,676,643 7,100,037 6,676,643 7,100,037
Net income per share-
diluted $ .22 $ .31 $ .85 $ .93
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 10 - Comprehensive Income:
The following is the related tax effects allocated to other comprehensive
income at September 30, 1999:
Before Tax Tax (Expense) Net of
(In thousands of dollars) Amount Benefit Tax Amount
Unrealized gain (loss) on
securities available-for-sale $(3,097) $1,163 $(1,934)
The following is the other comprehensive income balance at September 30, 1999:
Beginning Current Period Ending
Balance Change Balance
Accumulated other comprehensive
income-Unrealized gain (loss)
on securities available-for-
sale $1,261 $(3,195) $(1,934)
Note 11 - Disclosure for pooling of interests combination:
On August 27, 1999, the Corporation and FirstBancorporation, Inc.,
(FirstBanc") completed the merger as approved by the board of directors of
both companies. Under the terms of the agreement, 1.222 shares of First
National Corporation common stock were exchanged for each share of FirstBanc
common stock. The transaction was accounted for by the pooling of interests
method of accounting for business combinations and was tax-free to
FirstBanc's shareholders. The transaction was subject to several conditions,
including regulatory approvals, shareholder approvals, and customary closing
conditions, all of which have been satisfied.
As a result of the combination, 1,186,325 shares of common stock of First
National Corporation were issued to shareholders of FirstBancorporation.
In the table that follows are the details of the results of operations for
each separate company, prior to the date of the combination, that are
included in the current combined net income.
<PAGE>
NOTE 11 - Continued...
Balance Sheets: FIRST NATIONAL FIRSTBANCORPORATION
(In thousands of dollars) CORPORATION INC
07-31-99 07-31-99
Assets:
Cash and due from banks $ 22,173 $ 4,594
Funds sold 0 5,934
Investment Securities 211,493 16,965
Loans, Net 440,923 83,994
Premises and equipment 12,465 1,752
Other assets 11,564 1,691
Total Assets 698,618 114,930
Liabilities:
Deposits 548,555 95,781
Funds purchased & other borrowings 62,914 4,200
Other liabilities 24,725 1,631
Total Liabilities 636,194 101,612
Shareholders' equity 62,424 13,318
Total Liabilities and shareholders'
equity $698,618 $114,930
Income Statements: FIRST NATIONAL FIRSTBANCORPOATION
(In thousands of dollars) CORPORATION INC
07-31-99 YTD 07-31-99 YTD
Income:
Interest on loans $ 22,156 $ 4,383
Interest on investment securities 6,918 584
Other interest income 222 37
Other income 5,092 478
Total income $ 34,388 $ 5,482
Expenses:
Interest on deposits 9,368 1,816
Other interest expense 2,099 190
Salaries and employee benefits 8,466 1,272
Provision for loan losses 753 125
Other expense 6,433 1,407
Total expenses 27,119 4,810
Income before income taxes 7,269 672
Applicable income taxes 2,289 77
Net income $ 4,980 $ 595
<PAGE>
FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in
this report. For further information refer to the Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
First National Corporation (the "Company" or "Corporation") is a bank
holding company incorporated under the laws of South Carolina in 1985. The
Company owns 100 percent of First National Bank, a national bank which
opened for business in 1932, 100 percent or National Bank of York County, a
national bank which opened for business in 1996, 100 percent of Florence
County National Bank, a national bank which opened for business in 1998, and
80 percent of CreditSouth Financial Services Corporation, an upscale finance
company which opened for business in 1998. The Company engages in no
significant operations other than the ownership of its subsidiaries.
On August 27, 1999, the Corporation and FirstBancorporation, Inc.,
("FirstBanc") completed the merger as approved by the board of directors of
both companies. Under the terms of the agreement, 1.222 shares of First
National Corporation common stock were exchanged for each share of FirstBanc
common stock. The transaction was accounted for by the pooling of interests
method of accounting for business combinations and was tax-free to
FirstBanc's shareholders. The transaction was subject to several
conditions, including regulatory approvals, shareholder approvals, and
customary closing conditions, all of which have been satisfied.
On September 10, 1999, First National Bank, a subsidiary of First
National Corporation, purchased two offices from Carolina First Bank. Those
offices had total deposits of approximately $45 million.
Some of the major services which the Company provided through its
banking subsidiaries include checking, NOW accounts, savings and other time
deposits of various types, alternative investment products such as annuities
and mutual funds, loans for businesses, agriculture, real estate, personal
use, home improvement and automobiles, credit cards, letters of credit, home
equity lines of credit, safe deposit boxes, bank money orders, wire transfer
services, trust services, discount brokerage services, and use of ATM
facilities. The Company has no material concentration of deposits from any
single customer or group of customers, and no significant portion of its
loans is concentrated within a single industry or group of related
industries. There are no material seasonal factors that would have a
material adverse effect on the Company. The Company does not have foreign
loans.
<PAGE>
Management's Discussion Continued...
For the third quarter of 1999, First National Corporation ("the
Corporation") had consolidated net income without nonrecurring items, of
$3,163,000, an increase of 42.3 percent over the $2,222,000 earned in the
same period last year. After-tax, nonrecurring items in the third quarter
of this year included merger-related expenses of $1,688,000 associated with
the acquisition of FirstBancorporation and several Carolina First branches.
Diluted earnings per share increased 32.4 percent growing to $.45 for the
quarter ended September 30, 1999, when compared to $.34 for the same period
in 1998. Annualized returns on average assets and returns on average
shareholders' equity for the three month period ended September 30, 1999,
without nonrecurring items, were 1.53 percent and 16.75 percent
respectively, compared to 1.22 percent and 12.39 percent respectively, for
the same period in 1998.
Without nonrecurring items, net income for the nine months ended
September 30, 1999 was $7,388,000, an increase of 12.1 percent over the
$6,590,000 earned in the same period last year. Diluted earnings per share
increased 7.1 percent growing to $1.05 for the nine months ended September
30,1999, when compared to $.98 for the same period in 1998. Annualized
returns on average assets and returns on average shareholders' equity for
the nine months ended September 30, 1999, without nonrecurring items, were
1.22 percent and 13.11 percent respectively, compared to 1.25 percent and
13.16 percent respectively, for the same period in 1998.
Including nonrecurring items, First National Corporation reports
earnings of $1,475,000 for the quarter ended September 30, 1999 compared to
2,222,000 for the same period in 1998. Diluted earnings per share for the
period were $.21 compared to $.34 for the same period in 1998. The
annualized return on average assets and return on average shareholders'
equity were .72 percent and 7.82 percent respectively, for the quarter ended
September 30, 1999, compared to 1.22 percent and 12.38 percent respectively,
for the same period in 1998.
For the nine months ended September 30, 1999, including nonrecurring
items, earnings were $5,700,000 compared to $6,590,000 for the same period
in 1998. Diluted earnings per share for the period were $.81 compared to
$.98 for the same period in 1998. The annualized return on average assets
and return on average shareholders' equity were .94 percent and 10.12
percent respectively, for the nine months ended September 30, 1999, compared
to 1.25 percent and 13.16 percent respectively, for the same period in 1998.
<PAGE>
Management's Discussion Continued...
NET INTEREST INCOME
For the third quarter of 1999, net interest income was $11,679,000
compared to $8,171,000 for the same period in 1998. This is an increase of
$3,508,000 or 42.9 percent. Net interest income for the first nine months
of 1999 was $26,835,000 compared to $23,029,000 for the same period in 1998.
This represents an increase of $3,806,000 or 16.5 percent. This increase
resulted from a 22.6 percent increase in loan outstandings, net of unearned
income, when compared to the first nine months of 1998. The acquisition of
two branches of Carolina First resulted in an increase in loans, net of
unearned, of $10,039,000.
The yield on a major portion of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first nine months of 1998, the year to date taxable equivalent yield on
earning assets was 7.90 percent. During the same period of 1999, the yield
decreased to 7.50 percent, or a decrease of 40 basis points. The cost of
the liabilities used to support these earning assets decreased 8 basis
points from 3.77 percent in 1998 to 3.69 percent in 1999. Yields on earning
assets decreased more rapidly than interest rates paid on interest-bearing
liabilities.
For the first nine months net interest margins increased from 4.73
percent in 1998 to 4.42 percent in 1999. The impact of interest-free funds
for the same period stayed the same at .60 percent.
The largest category of earning assets is loans. At the end of the
third quarter 1999, loans outstanding, less unearned income, were
$570,987,000 compared to $493,144,000 at December 31, 1998. This represents
an increase of $77,843,000 or 15.8 percent. For the third quarter ended
September 30, 1999, interest and fees on loans were $15,516,000 compared to
$10,853,000 for the comparable period in 1998, an increase of $4,663,000 or
43.0 percent. For the nine months ended September 30, 1999, interest and
fees on loans were $34,388,000 compared with $30,971,000 for the same period
in 1998. This represents an increase of $3,417,000 or 11.0 percent.
For the nine months ended September 30, 1999, loans averaged
$524,941,000 and yielded 8.27 percent on a taxable equivalent basis compared
to $452,684,000 with a taxable equivalent yield of 9.12 percent or a
decrease of 85 basis points for the year ended December 31, 1998.
Investment securities are the second largest category of earning
assets. Investment securities are utilized by the Company as a vehicle for
the employment of excess funds, to provide liquidity, to fund loan demand or
deposit liquidation, and to pledge as collateral for certain deposit and
purchased funds.
<PAGE>
Management's Discussion Continued...
At September 30, 1999, investment securities were $206,002,000 compared
to $206,238,000 at December 31, 1998. The investment portfolio remained
about the same during this period.
For the third quarter ended September 30, 1999, investment income was
$3,476,000 compared with $3,199,000 for the comparable period in 1998, a net
increase of $277,000 or 8.7 percent. For the nine month period ended
September 30, 1999, investment income was $9,427,000 compared with
$8,847,000 for the same period in 1998, a net increase of $580,000 or 6.6
percent. Management attributes this increase in income to higher yields on
investment securities.
At the end of the third quarter 1999, securities averaged $213,640,000
and yielded 5.96 percent on a taxable equivalent basis, compared to
$198,875,000 with a yield of 5.85 percent for the year ended December 31,
1998, resulting in a 11 basis point decrease in yield.
As of September 30, 1999, the Company had unrealized gains in the U.S.
Treasury and agency portfolio denoted as held-to-maturity, of $17,000 and in
the municipal portfolio $126,000. Also at September 30, 1999, the Company
had an unrealized loss of $42,000 in the U. S. Treasury and agency portfolio
and an $700,000 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 loss
at September 30, 1999 of approximately $3,097,000 on the $160,030,000 of
securities denoted as available-for-sale.
For the first nine months ended September 30, 1999, the Company had a
$222,000 realized gain due to called agency bonds and the sale of investment
securities.
Although securities classified as available-for-sale may be sold from
time to time to meet liquidity or other needs, it is not the normal activity
of the Company to trade the investment portfolio. Management has the intent
and the ability to hold securities on a long-term basis or until maturity.
During the first nine months of 1999, interest-bearing liabilities
averaged $635,410,000 and carried an average rate of 3.69 percent. This
compares to an average level of $557,148,000 with a rate of 4.15 percent at
December 31, 1998 or an decrease of 46 basis points. Approximately half of
these interest-bearing liabilities have fixed rates. They are expected to
be renewed at prevailing market rates as they mature.
<PAGE>
Management's Discussion Continued...
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended
September 30, 1999 was $472,000 compared to $261,000 for the same period in
1998 which represents a 80.8 percent increase. For the nine month period
ended September 30, 1999, the provision for loan loss was $1,110,000
compared to $746,000 for the same period in 1998 which represents a 48.8
percent increase. The increase in the provision for loan losses was due to
an increasing loan demand as well as the acquisition of FirstBancorporation
and two branches of Carolina First. The allowance for loan losses was
$7,707,000 or 1.35 percent of outstanding loans at September 30, 1999
compared to 1.41 percent of outstanding loans at year-end 1998.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicated the estimated loan
losses. Management feels that the allowance for loan losses is adequately
funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure. For the period ended September 30, 1999, other real
estate owned was $591,000 compared to $144,000 at December 31, 1998. This
increase resulted from the foreclosure of real estate properties.
Management anticipates that the level of charge-offs for 1999 will be
near the levels of 1998. The loan loss allowance is considered adequate by
management. However, changes in economic conditions in the Company's market
area could affect these levels.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 1999 was $3,149,000 compared
to $2,112,000 for the same period in 1998, representing an increase of
$1,037,000 or 49.1 percent. For the first nine months of 1999 noninterest
income was $7,529,000 compared to $6,410,000 for the same period in 1998,
representing an increase of $1,119,000 or 17.6 percent. During the first
nine months of 1999, other service charges, commissions, and fees increased
$885,000 or 42.2 percent compared to the same period in 1998. This increase
can be primarily attributed to the increase in debit card fees, mortgage
loan origination fees for secondary market loans, as well as fees collected
on mutual fund sales.
<PAGE>
Management's Discussion Continued...
Noninterest expense for the third quarter of 1999 was $12,641,000
compared to $6,726,000 for the same period in 1998, representing an increase
of $5,915,000 or 87.9 percent. For the nine months ended September 30,
1999, noninterest expense was $25,389,000 compared to $18,938,000, an
increase of $6,451,000 or 34.0 percent. Salaries and employee benefits for
the third quarter ended September 30, 1999 increased $1,803,000 or 51.7
percent compared to the same period in 1998. For the first nine months of
1999 salaries and employee benefits increased $2,289,000 or 22.3 percent
compared to the same period in 1998. These increases can be largely
attributed to the opening of the Florence County National Bank on April 1,
1998, a branch of National Bank of York County in York on January 12, 1999,
an upscale finance company, CreditSouth Financial Services Corporation Inc
in November, 1998, and the acquisition of FirstBancorporation on August 27,
1999. Occupancy expense along with furniture and equipment expense
increased $750,000 or 82.4 percent for the third quarter of 1999 compared to
the same period in 1998. For the nine months ended September 30, 1999
occupancy together with furniture and equipment expense increased $1,193,000
or 49.0 percent compared to the same period in 1998. These increases can be
largely attributed to an increase in both building and furniture and
equipment depreciation expense, maintenance and repairs on buildings as well
as an increase in equipment rental/lease expense. Rental/lease expense
increases resulted from the investment in a new computer system for First
National Corporation. Other expenses increased $3,476,000 or 164.8 percent
for the third quarter of 1999 compared to the same period in 1998. For the
nine months ended September 30, 1999, other expenses increased $3,188,000 or
56.4 percent compared to the same period in 1998. This increase in other
expenses is attributable to the nonrecurring merger-related expenses of
$2,679,000 associated with the acquisition of FirstBancorporation and
several Carolina First branches.
NET INCOME
Net income was down 33.6 percent for the third quarter of 1999 when
compared to the same period in 1998. For the nine months ended September
30, 1999, net income was down 13.5 percent compared to the same period in
1998. Without the nonrecurring after-tax charge to net income for the third
quarter in 1999, net income would have been $3,163,000, an increase of 42.3
percent over the same period in 1998. For the nine month period ended
September 30, 1999, without the nonrecurring charge, net income would have
been $7,388,000, an increase of 12.1 percent as compared to the same period
in 1998.
CAPITAL RESOURCES AND LIQUIDITY
To date, the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the third quarter,
1999, stockholder's equity was $75,361,000 compared to $74,426,000 at
December 31, 1998.
<PAGE>
Management's Discussion Continued...
The Corporation and subsidiaries are subject to certain risk-based
capital guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of
both balance sheet and off balance sheet items will be adjusted to reflect
credit risk. Under the guidelines of the Board of Governors of the Federal
Reserve System, which are substantially similar to the Office of the
Comptroller of the Currency guidelines, as of December 31, 1995, Tier 1
capital must be at least 4 percent of risk-weighted assets, while total
capital must be 8 percent of risk-weighted assets. The Tier 1 capital ratio
at September 30, 1999 was 12.95 percent compared to 14.3 percent at December
31, 1998. The total capital ratio was 14.2 percent at September 30, 1999
compared to 15.6 percent at December 31, 1998.
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage capital ratio in evaluating capital
strength and adequacy. The minimum leverage ratio required for banks is
between 3 percent and 5 percent, depending on the institution's composite
rating as determined by its regulators. At September 30, 1999, First
National Corporation's leverage ratio was 9.2 percent, compared to 9.0
percent at December 31, 1998. 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.
YEAR 2000
The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Such software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in system failures or miscalculations leading to disruptions in the
Company's activities and operations. If the Company, its significant
customers, or suppliers fail to make necessary modifications and conversions
on a timely basis, the year 2000 issue could have a material adverse effect
on Company operations. However, the impact cannot be quantified at this
time. The Company believes that its competitors face a similar risk.
<PAGE>
Management's Discussion Continued...
In August 1997, the Company established a corporate-wide project team
to identify non-compliant software and complete the corrections required by
the year 2000 issue. The Company intends to fix or replace non-compliant
internal software with code or software that is year 2000 compliant. While
a plan is in place, minor work remains to be done. The Company's current
target is to resolve compliance issues in important business information
systems by June 30, 1999. Remediation and testing activities are underway
on the Company's core business applications. The Company is also focusing
on major customers and suppliers to assess their compliance. Nevertheless,
there can be no absolute assurance that there will not be a material adverse
effect on the Company if third party governmental or business entities do
not convert or replace their systems in a timely manner and in a way that is
compatible with the Company's systems.
Costs related to the year 2000 issue are funded through operating cash
flows. Through fiscal 1998, the Company expended approximately $575,000 in
remediation efforts, including the cost of new software and modifying the
applicable code of existing software. The Company estimates remaining costs
to be negligible. The Company presently believes that the total cost of
achieving year 2000 compliant systems is not expected to be material to
First National Corporation's financial condition, liquidity, or results of
operations.
Time and cost estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to,
the availability and cost of trained personnel; the ability to locate and
correct all relevant computer code and systems; and remediation success of
the Company's customers and suppliers.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries are a party to
nor is any of their property the subject of any material or other
pending legal proceedings, other than ordinary routine proceedings
incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
Not Applicable
Item 6. Exhibits and Reports of Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: November 15, 1999 C. JOHN HIPP, III
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: November 15, 1999 W. LOUIS GRIFFITH
PRINCIPAL ACCOUNTING OFFICER AND
CHIEF FINANCIAL OFFICER
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule Attached
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at September 30, 1999 (Unaudited)
and the Consolidated Statement of Income (Unaudited) for the nine months ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 32,029
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 160,030
<INVESTMENTS-CARRYING> 45,972
<INVESTMENTS-MARKET> 45,373
<LOANS> 570,987
<ALLOWANCE> 7,709
<TOTAL-ASSETS> 836,914
<DEPOSITS> 659,295
<SHORT-TERM> 63,167
<LIABILITIES-OTHER> 4,891
<LONG-TERM> 34,200
0
0
<COMMON> 17,567
<OTHER-SE> 57,794
<TOTAL-LIABILITIES-AND-EQUITY> 836,914
<INTEREST-LOAN> 34,388
<INTEREST-INVEST> 9,427
<INTEREST-OTHER> 550
<INTEREST-TOTAL> 44,365
<INTEREST-DEPOSIT> 14,406
<INTEREST-EXPENSE> 17,530
<INTEREST-INCOME-NET> 26,835
<LOAN-LOSSES> 1,110
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 25,389
<INCOME-PRETAX> 7,865
<INCOME-PRE-EXTRAORDINARY> 5,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,700
<EPS-BASIC> .82
<EPS-DILUTED> .81
<YIELD-ACTUAL> 7.50
<LOANS-NON> 1,479
<LOANS-PAST> 1,476
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,931
<ALLOWANCE-OPEN> 6,075
<CHARGE-OFFS> 449
<RECOVERIES> 133
<ALLOWANCE-CLOSE> 7,709
<ALLOWANCE-DOMESTIC> 7,709
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
