FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
June 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 JUNE 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 June 30, 1999
Common Stock, $2.50 par value 5,835,750
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998
Consolidated Statements of Changes
In Shareholders' Equity -
Six Months Ended
June 30, 1999 and 1998
Consolidated Statement of Income -
Three and Six Months Ended
June 30, 1999 and 1998
Consolidated Statement of Cash Flows -
Six Months Ended
June 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 6-30-99 12-31-98
(In Thousands) (In Thousands)
Cash and due from banks $ 32,032 $ 24,254
Federal funds sold 0 0
Investment securities - Note 2
Securities held-to-maturity (fair value
of $46,665 in 1999 and $47,456 in 1998) 46,938 46,380
Securities available-for-sale, at fair
value 166,101 150,791
Total investment securities 213,039 197,171
Loans - Note 3 448,337 411,035
Less: Unearned income (3,252) (3,074)
Allowance for loan losses-Note 4 (6,492) (6,075)
Loans, net 438,593 401,886
Premises and equipment 12,090 10,460
Intangible assets 1,935 2,090
Other real estate - Note 6 913 144
Other assets 8,337 6,678
TOTAL ASSETS $706,939 $642,683
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 6-30-99 12-31-98
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest bearing $90,577 $79,325
Interest-bearing - Note 7 458,964 444,813
TOTAL DEPOSITS 549,541 524,138
Federal funds purchased & securities
sold under agreement to repurchase 71,067 52,150
Long-Term debt 20,000 0
Other liabilities 4,068 4,094
TOTAL LIABILITIES 644,676 580,382
Commitments & Contingent liabilities - Note 8
Stockholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
5,835,750 shares in 1999 and 5,821,775
shares in 1998 - Note 9 14,589 14,554
Additional paid-in capital 40,305 40,235
Retained earnings 8,947 6,238
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes (1,578) 1,274
TOTAL SHAREHOLDERS' EQUITY 62,263 62,301
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $706,939 $642,683
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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> <C>
BALANCE, DECEMBER 31, 1997 5,188,097 $ 12,970 $ 23,257 $ 17,197 $ 476 $ 53,900
Comprehensive income:
Net income - - - 3,866 - 3,866
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects - - - - (51) (51)
Total Comprehensive income - - - - - 3,815
Cash dividends - - - (1,141) - (1,141)
Common stock issued 105,000 263 2,412 - - 2,675
BALANCE, JUNE 30, 1998 5,293,097 $ 13,233 $ 25,669 $ 19,922 $ 425 $ 59,249
BALANCE, DECEMBER 31, 1998 5,821,775 $ 14,554 $ 40,235 $ 6,238 $ 1,274 $ 62,301
Comprehensive income:
Net income - - - 4,225 - 4,225
Change in net unrealized gain
(loss) on securities available-
for-sale, net of reclassification
adjustment and tax effects - - - - (2,852) (2,852)
Total comprehensive income - - - - - 1,373
Cash dividends - - - (1,516) - (1,516)
Common stock issued 13,975 35 70 - - 105
BALANCE, JUNE 30, 1999 5,835,750 $ 14,589 $ 40,305 $ 8,947 $ (1,578) $62,263
</TABLE>
<PAGE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months Ended 6 Months Ended
06-30-99 06-30-98 06-30-99 06-30-98
(In Thousands) (In Thousands)
Interest income:
Interest and fees on loans $9,659 $8,366 $18,872 $16,489
Interest & dividends on investment sec.:
Taxable income 2,583 2,525 5,032 4,591
Non-taxable income 452 437 897 845
Dividends on stock 10 13 22 20
Interest on federal funds sold 52 174 174 394
Total Interest income 12,756 11,515 24,997 22,339
Interest expense:
Interest on deposits 4,067 4,357 8,065 8,345
Interest on federal funds purchased &
securities sold under agreement to
repurchase 669 612 1,358 1,244
Other interest expense 251 19 418 19
Total interest expense 4,987 4,988 9,841 9,608
Net Interest Income 7,769 6,527 15,156 12,731
Provisions for loan losses - Note 4 345 166 638 388
Net interest income after provisions
for loan losses 7,424 6,361 14,518 12,343
Noninterest income:
Service charges on deposit accounts 1,270 1,188 2,495 2,304
Other service charges commissions, fees 807 692 1,600 1,339
Gains (losses) on investment securities 43 20 245 38
Other operating income 14 24 40 35
Total noninterest income 2,134 1,924 4,380 3,716
Noninterest expense:
Salaries & employee benefits 3,543 3,034 7,272 5,871
Occupancy expense of bank premises -
net 353 246 677 497
Furniture & equipment expense - net 703 377 1,326 765
Amortization expense-Intangible assets 112 208 222 360
Other expense 1,815 1,566 3,251 2,932
Total noninterest expense 6,526 5,431 12,748 10,425
Income before income taxes 3,032 2,854 6,150 5,634
Applicable income taxes 930 901 1,925 1,768
Net Income $2,102 $1,953 $4,225 $3,866
Net income per common share - Basic $0.36 $0.34 $ .72 $0.67
Net income per common share - Diluted $0.36 $0.34 $ .72 $0.67
Cash dividends per common share $0.13 $0.11 $0.26 $0.22
<PAGE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months Ended 6 Months Ended
06-30-99 06-30-98
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 4,225 $ 3,866
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 726 896
Provision for loan losses 638 388
Increase (decrease) in reserve
for income taxes-current 283 42
(Gain)loss on sale of premises
and equipment (20) (2)
(Increase) decrease in interest
receivables 308 (224)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net 152 (228)
Increase (decrease) in interest
payable 37 289
(Increase) decrease in miscellaneous
assets (2,257) (596)
(Increase) decrease in prepaid
assets (477) (83)
Increase (decrease) in other
liabilities 495 1,927
Total adjustments (115) 2,409
Net cash provided by operating
activities $ 4,110 $ 6,275
<PAGE>
Consolidated Statement of Cash Flows - Continued.......
6 Months Ended 6 Months Ended
06-30-99 06-30-98
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $ 4,733 $10,479
Purchase of investment securities
held-to-maturity (5,091) (6,702)
Proceeds from maturities of investment
securities available-for-sale 48,766 47,901
Purchase of investment securities
available-for-sale (72,505) (86,882)
Net (increase) decrease in customer
loans (37,414) (13,230)
Additions to premises and equipment 2,149 415
Proceeds from sale of premises and
equipment 20 2
Recoveries from loans previously charged
off 91 108
(Increase) decrease in funds sold 0 (9,200)
Net cash used in investing
activities (59,251) (57,109)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 25,412 49,017
Sale of common stock 105 2,674
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase 18,917 (4,455)
Proceeds from issuance of other
borrowings 20,000 0
Dividends paid (1,515) (1,141)
Net cash provided by financing
activities 62,919 46,095
Net increase (decrease) in cash and
cash equivalents 7,778 (4,739)
Cash and cash equivalents at beginning
of year 24,254 30,802
Cash and cash equivalents at end of
reporting period $ 32,032 $ 26,063
<PAGE>
FIRST NATIONAL CORPORATION
NOTE 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 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 June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
06-30-99 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 2,005 7 0 2,012 3,213 31 0 3,244
Obligations of
U S government
agencies & corps 4,724 28 (37) 4,715 5,029 72 0 5,101
Obligations of state
and political
subdivisions 40,209 225 (496) 39,938 38,138 1,018 (45) 39,111
Total 46,938 260 (533) 46,665 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 June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
06-30-99 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 46,801 137 (257) 46,681 45,830 1,023 0 46,853
Obligations of
U S government
agencies & corps 118,888 181 (2,619) 116,450 100,285 1,078 (78) 101,285
Other securities 2,970 0 0 2,970 2,653 0 0 2,653
Total 168,659 318 (2,876) 166,101 148,768 2,101 (78) 150,791
</TABLE>
Investment securities with an aggregate amortized cost of $129,407 on June 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: 6-30-99 12-31-98
Commercial, financial & agricultural 74,092 78,077
Real Estate - construction 10,950 10,456
Real estate - mortgage 283,291 243,743
Consumer 76,752 75,685
Total loans 445,085 407,961
As of June 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 $8,553 and
$8,992 respectively. The following is an analysis of the activity with
respect to loans to related parties for the six months ended June 30, 1999:
Balance, beginning of period 8,992
Add:
New loans 1,927
Deduct:
Payments 2,367
Other changes 1
Balance, end of period 8,553
<PAGE>
NOTE 4 - Allowance for Loan Losses:
Amount
06-30-99 12-31-98
Balance, beginning of period (year) 6,075 5,518
Add:
Recoveries 91 260
Provisions for loan losses charged
to income 638 1,013
Total 6,804 6,791
Deduct:
Loans charged off 312 716
Balance, end of period (year) 6,492 6,075
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 $66,804 and $67,765
at June 30, 1999 and December 31, 1998 respectively.
<PAGE>
NOTE 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities, which are not reflected in the
accompanying financial statements. The commitments and contingent
liabilities include guarantees, commitments to extend credit and standby
letters of credit. At June 30, 1999, commitments to extend credit and
standby letters of credit aggregated $110,599. The Company does not
anticipate any material losses as a result of these transactions.
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:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
6/30/99 6/30/98 6/30/99 6/30/98
<S> <C> <C> <C> <C>
Numerator:
Net income for the period $ 2,102 $ 1,953 $ 4,225 $ 3,866
Denominator:
Denominator for basic EPS:
Weighted-average shares
outstanding for the period 5,830,345 5,733,880 5,830,345 5,733,880
Effect of dilutive securities:
Incremental shares-stock
option plans 54,331 46,826 54,331 46,826
Denominator for diluted EPS 5,884,676 5,780,706 5,884,676 5,780,706
Basic EPS $ 0.36 $ 0.34 $ 0.72 $ 0.67
Diluted EPS $ 0.36 $ 0.34 $ 0.72 $ 0.67
</TABLE>
<PAGE>
NOTE 9 - Continued...
Dividends per share are calculated using the current equivalent of
number of common shares outstanding at the time of the dividend based
on the Company's shares outstanding.
Note 10 - Comprehensive Income:
The following is the related tax effects allocated to other
comprehensive income at June 30, 1999:
Before Tax Tax (Expense) Net of
(In thousands of dollars) Amount Benefit Tax Amount
Unrealized gain (loss) on
securities available-for-sale $(2,558) $ 980 $ (1,578)
The following is the other comprehensive income balance at June 30, 1999:
Beginning Current Period Ending
Balance Change Balance
Accumulated other comprehensive
income-Unrealized gain (loss)
on securities available-for-
sale $ 1,274 $(2,852) $ (1,578)
<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% of First National Bank, a national bank which opened for
business in 1932, 100% of National Bank of York County, a national bank
which opended for business in 1996, 100% of Florence County National Bank,
a national bank which opened for business in 1998, and 80% 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 March 4, 1999, the Corporation and FirstBancorporation, Inc.,
("FirstBanc") announced that a definitive merger agreement was approved by
the board of directors of both companies. Under the terms of the agreement,
1.222 shares of First National Corporation common stock would be exchanged
for each share of FirstBanc Common stock. The transaction will be accounted
for by the pooling of interests method of accounting for business
combinations and is expected to be tax-free to FirstBanc's shareholders.
The transaction is subject to several conditions, including regulatory
approvals, shareholder approvals, and customary closing conditions. The
transaction may also be terminated by either party in certain circumstances.
On March 23, 1999, First National Bank, a subsidiary of First National
Corporation, and Carolina First Bank, a subsidiary of Carolina First
Corporation, announced the signing of a definitive agreement by which First
National Bank will purchase three offices from Carolina First Bank. These
offices have total deposits of approximately $45 million. The transaction
is expected to be completed during the third quarter of 1999, pending
regulatory and certain other conditions of closing.
<PAGE>
Management' Discussion Continued...
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
servicse, 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.
For the second quarter of 1999, First National Corporation ("the
Corporation") had consolidated net income of $2,102,000, an increase of 7.6
percent over the $1,953,000 earned in the second quarter of 1998. Earnings
per share amounted to $0.36 for the three months ended June 30, 1999, a 5.9
percent increase over the $0.34 per share earned in the second quarter of
1998. Net income for the first six months of 1999 was $4,225,000, an
increase of 9.3 percent over the $3,866,000 earned for the same period in
1998. Earnings per share amounted to $0.72 for the six months ended June 30,
1999, a 7.5 percent increase over the $0.67 per share earned in the first
six months of 1998.
NET INTEREST INCOME
For the second quarter of 1999, net interest income was $7,769,000
compared to $6,527,000 for the same period in 1998. This is an increase of
$1,242,000 or 19.0 percent. Net interest income for the first six months of
1999 was $15,156,000 compared to $12,731,000 for the same period in 1998.
This represents an increase of $2,425,000 or 19.1 percent. This increase
resulted from a 9.1 percent increase in loan outstandings, net of unearned
income as well as a 8.1 percent increase in investment security
outstandings, when compared to the first six months of 1998.
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 1998, the year to date taxable equivalent yield on
earning assets was 7.83 percent. During the same period of 1999, the yield
decreased to 7.52 percent, or a decrease of 31 basis points. The cost of
the liabilities used to support these earning assets decreased 50 basis
points from 4.16 percent in 1998 to 3,66 percent in 1999. Interest rates
paid on interest-bearing liabilities decreased more rapidly than yields on
earning assets due to the Company's negative asset/liability position.
<PAGE>
Management's Discussion Continued...
For the first six months net interest margins increased from 4.36
percent in 1998 to 4.44 percent in 1999. The impact of interest-free funds
for the same period decreased from .69 percent to .58 percent or an decrease
of 11 basis points.
The largest category of earning assets is loans. At the end of the
second quarter 1999, loans outstanding, less unearned income, were
$445,085,000 compared to $407,961,000 at December 31, 1998. This represents
an increase of $37,124,000 or 9.1 percent. For the second quarter ended
June 30, 1999, interest and fees on loans were $9,659,000 compared to
$8,366,000 for the comparable period in 1998, an increase of $1,293,000 or
15.5 percent. For the six months ended June 30, 1999, interest and fees on
loans were $18,872,000 compared with $16,489,000 for the same period in
1998. This represents an increase of $2,383,000 or 14.5 percent.
For the six months ended June 30, 1999, loans averaged $429,140,000 and
yielded 8.30 percent on a taxable equivalent basis compared to $371,223,000
with a taxable equivalent yield of 8.71 percent or a decrease of 41 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.
At June 30, 1999, investment securities were $213,039,000 compared to
$197,171,000 at December 31, 1998. This is an increase of $15,868,000 or
8.1 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, 1999, investment income was
$3,045,000 compared with $2,975,000 for the comparable period in 1998, a net
increase of $70,000 or 2.4 percent. For the six month period ended June 30,
1999, investment income was $5,951,000 compared with $5,456,000 for the same
period in 1998, a net increase of $495,000 or 9.1 percent. Management
attributes this increase in income to higher yields on investment
securities.
At the end of the second quarter 1999, securities averaged $209,035,000
and yielded 5.95 percent on a taxable equivalent basis, compared to
$194,661,000 with a yield of 6.13 percent for the year ended December 31,
1998, resulting in a 18 basis point decrease in yield.
<PAGE>
Management's Discussion Continued...
As of June 30, 1999, the Company had unrealized gains in the U.S.
Treasury and agency portfolio denoted as held-to-maturity, of $35,000 and in
the municipal portfolio $225,000. Also at June 30, 1999, the Company had an
unrealized loss of $37,000 in the U. S. Treasury and agency portfolio and an
$496,000 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 June 30, 1999 of approximately $2,558,000 on the $166,101,000 of
securities denoted as available-for-sale.
For the first six months ended June 30, 1999, the Company had a $245,000
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 six months of 1999, interest-bearing liabilities
averaged $544,355,000 and carried an average rate of 3.66 percent. This
compares to an average level of $420,190,000 with a rate of 4.14 percent at
December 31, 1998 or a decrease of 48 basis points. Approximately half of
these interest-bearing liabilities have fixed rates. They are expected to
be renewed at prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended June 30,
1999 was $345,000 compared to $166,000 for the same period in 1998 which
represents a 107.8 percent increase. For the six month period ended June
30, 1999, the provision for loan loss was $638,000 compared to $388,000 for
the same period in 1998 which represents a 64.0 percent increase. The
increase in the provision for loan losses was due to an increasing loan
demand. The allowance for loan losses was $6,492,000 or 1.46 percent of
outstanding loans at June 30, 1999 compared to 1.49 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.
<PAGE>
Management's Discussion Continued...
Other real estate owned includes certain real estate acquired as a
result of foreclosure. For the period ended June 30, 1999, other real
estate owned was $913,000 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 second quarter of 1999 was $2,134,000
compared to $1,924,000 for the same period in 1998, representing an increase
of $210,000 or 10.9 percent. For the first six months of 1999 noninterest
income was $4,380,000 compared to $3,716,000 for the same period in 1998,
representing an increase of $664,000 or 17.9 percent. During the first six
months of 1999, other service charges, commissions, and fees increased
$261,000 or 19.5 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.
Noninterest expense for the second quarter of 1999 was $6,526,000
compared to $5,431,000 for the same period in 1998, representing an increase
of $1,095,000 or 20.2 percent. For the six months ended June 30, 1999,
noninterest expense was $12,748,000 compared to $10,425,000, an increase of
$2,323,000 or 22.3 percent. Salaries and employee benefits for the second
quarter ended June 30, 1999 increased $509,000 or 16.8 percent compared to
the same period in 1998. For the first six months of 1999 salaries and
employee benefits increased $1,401,000 or 23.9 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 and the opening of an
upscale finance company, CreditSouth Financial Services Corporation Inc in
November, 1998. Occupancy expense along with furniture and equipment
expense increased $433,000 or 69.5 percent for the second quarter of 1999
compared to the same period in 1998. For the six months ended June 30, 1999
occupancy together with furniture and equipment expense increased $741,000
or 59.7 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 $249,000 or 15.9 percent for
the second quarter of 1999 compared to the same period in 1998. For the six
months ended June 30, 1999, other expenses increased $319,000 or 10.9
percent compared to the same period in 1998. 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.
<PAGE>
Management's Discussion Continued...
NET INCOME
Net income was up 7.6 percent for the second quarter of 1999 when
compared to the same period in 1998. For the six months ended June 30,
1999, net income was up 9.3 percent compared to the same period in 1998.
The $2,425,000 or 19.1 percent increase in net interest income and the
$664,000 or 17.9 percent increase in noninterest income for the six months
ended June 30, 1999 as compared to the same period in 1998 were the primary
factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date, the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the second
quarter, 1999, stockholder's equity was $62,263,000 compared to $62,301,000
at December 31, 1998.
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, 1999 was 13.75 percent compared to 14.3 percent at December 31,
1998. The total capital ratio was 15.0 percent at June 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 June 30, 1999, First National
Corporation's leverage ratio was 8.1 percent, compared to 9.0 percent at
December 31, 1998. First National Corporation's ratio exceeds the minimum
standards by substantial margins.
<PAGE>
Management's Discussion Continued...
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 the
time. The Company believes that its competitors face a similar risk.
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.
<PAGE>
Management's Discussion Continued...
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: August 16, 1999 C. JOHN HIPP, III
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: August 16, 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 June 30, 1999 (Unaudited) and
the Consolidated Statement of Income (Unaudited) for the six months ended June
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> JUN-30-1999
<CASH> 32,032
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 166,101
<INVESTMENTS-CARRYING> 46,938
<INVESTMENTS-MARKET> 46,665
<LOANS> 445,085
<ALLOWANCE> 6,492
<TOTAL-ASSETS> 706,939
<DEPOSITS> 549,541
<SHORT-TERM> 71,067
<LIABILITIES-OTHER> 4,068
<LONG-TERM> 20,000
0
0
<COMMON> 14,589
<OTHER-SE> 47,674
<TOTAL-LIABILITIES-AND-EQUITY> 706,939
<INTEREST-LOAN> 18,872
<INTEREST-INVEST> 5,951
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 24,997
<INTEREST-DEPOSIT> 8,065
<INTEREST-EXPENSE> 9,841
<INTEREST-INCOME-NET> 15,156
<LOAN-LOSSES> 638
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,748
<INCOME-PRETAX> 6,150
<INCOME-PRE-EXTRAORDINARY> 4,225
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,225
<EPS-BASIC> .72
<EPS-DILUTED> .72
<YIELD-ACTUAL> 7.52
<LOANS-NON> 950
<LOANS-PAST> 720
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,114
<ALLOWANCE-OPEN> 6,075
<CHARGE-OFFS> 312
<RECOVERIES> 91
<ALLOWANCE-CLOSE> 6,492
<ALLOWANCE-DOMESTIC> 6,492
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
