<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
Commission file number 001-12669
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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South Carolina 57-0799315
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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950 John C. Calhoun Drive, S.E.
Orangeburg, South Carolina 29115
(Address of principal executive offices, including zip code)
(803) 534-2175
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $2.50 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at March 12, 1999 was $152,402,251 based on the closing sale
price of $29.50 per share on that date. For purposes of the foregoing
calculation only, all directors and executive officers of the registrant have
been deemed affiliates. The number of shares of common stock outstanding as of
March 12, 1999 was 5,821,775.
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Form 10-K Cross-Reference Index
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Page
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PART I
Item 1. Business ............................................................................... 1
Item 2. Properties ............................................................................. 6
Item 3. Legal Proceedings ...................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders .................................... 6
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters(1) ........... 6
Item 6. Selected Financial Data(1) ............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations(1) 8
Item 7A Quantitative and Qualitative Disclosure about Market Risk .............................. 26
Item 8. Financial Statements and Supplementary Data(1) ......................................... 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures .. 54
PART III
Item 10. Directors and Executive Officers of the Registrant(2) .................................. 55
Item 11. Executive Compensation(2) .............................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management(2) ...................... 61
Item 13. Certain Relationships and Related Transactions(2) ...................................... 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 62
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PART I
Item 1. Business
General
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 1934, 100% of National Bank of York County, a national bank which
opened for business in 1996, 100% of Florence County National Bank, a national
bank which opened for business in 1998, and 80% of NewSouth 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 First Bancorporation, Inc.
("First Banc") 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 First Banc 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 First Banc'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.
Some of the major services which the Company provides 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.
Territory Served and Competition
First National Bank conducts its business from twenty locations in
thirteen South Carolina towns. National Bank of York County conducts its
business from three locations in three South Carolina towns. Florence County
National Bank conducts its business from two locations in two South Carolina
towns, while NewSouth Financial Services Corporation (the "Finance Company")
conducts its business from two locations in two South Carolina towns. In their
markets, First National Bank, National Bank of York County, and Florence County
National Bank (the "Banks") encounter strong competition from several major
banks that dominate the commercial banking industry in their service areas and
in South Carolina generally. Several competitors have substantially greater
resources and higher lending limits than the Banks and they offer certain
services for their customers that the Banks do not offer. In addition to
commercial banks, savings institutions and credit unions, the Banks compete for
deposits and loans with other financial intermediaries and investment
alternatives, including but not limited to mortgage companies, captive finance
companies, money market mutual funds, brokerage firms, governmental and
corporation bonds and other securities. Various of these nonbank competitors are
not subject to the same regulatory restrictions as the Company and many have
substantially greater resources than the Company.
As a bank holding company, the Company is a legal entity separate and
distinct from its bank and non-bank subsidiaries. The Company coordinates the
financial resources of the consolidated enterprise and maintains financial,
operational and administrative systems that allow centralized evaluation of
subsidiary operations and coordination of selected policies and activities. The
Company's operating revenues and net income are derived primarily from its
subsidiaries through dividends, fees for services performed and interest on
advances and loans.
Employees
The Company does not have any salaried employees. As of December 31,
1998, the Banks and Finance Company had 353 full-time equivalent employees. The
Company considers its relationship with its employees to be excellent. The
employee benefit programs the Company provides include group life, health and
dental insurance, paid vacation, sick leave, educational
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opportunities, stock option plans for officers and key employees, a defined
benefit pension plan, and a 401K plan for employees.
Supervision and Regulation
General
The Company is a registered "bank holding company" with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and is
subject to the supervision of, and to regular inspection by, the Federal Reserve
Board. Each of the Banks is organized as a national banking association and
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency (the "OCC"). In addition, the Company and each of
the Banks is subject to regulation (and in certain cases examination) by the
Federal Deposit Insurance Corporation (the "FDIC"), other federal regulatory
agencies and the South Carolina State Board of Financial Institutions (the
"State Board"). The following discussion summarizes certain aspects of banking
and other laws and regulations that affect the Company and its subsidiaries.
Under the Bank Holding Company Act (the "BHC Act"), the Company's
activities and those of its subsidiaries are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries, or any other activity which the Federal Reserve Board determines
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. The BHC Act requires prior Federal Reserve Board
approval for, among other things, the acquisition by a bank holding company of
direct or indirect ownership or control of more than 5% of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. The BHC Act also
prohibits a bank holding company from acquiring direct or indirect control of
more than 5% of the outstanding voting stock of any company engaged in a
non-banking business unless such business is determined by the Federal Reserve
Board to be so closely related to banking as to be a proper incident thereto.
Further, under South Carolina law, it is unlawful without the prior approval of
the State Board for any South Carolina bank holding company (i) to acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank or any other bank holding company, (ii) to acquire all or substantially
all of the assets of a bank or any other bank holding company, or (iii) to merge
or consolidate with any other bank holding company.
Interstate Banking
In July 1994, South Carolina enacted legislation which effectively
provided that, after June 30, 1996, out-of-state bank holding companies may
acquire other banks or bank holding companies in South Carolina, subject to
certain conditions. Further, pursuant to the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a
bank holding company became able to acquire banks in states other than its home
state, beginning in September 1995, without regard to the permissibility of such
acquisition under state law, subject to certain exceptions. The Interstate
Banking and Branching Act also authorized banks to merge across state lines,
thereby creating interstate branches, unless a state, prior to the July 1, 1997
effective date, determined to "opt out" of coverage under this provision. In
addition, the Interstate Banking and Branching Efficiency Act authorized a bank
to open new branches in a state in which it does not already have banking
operations if such state enacted a law permitting such "de novo" branching.
Effective July 1, 1996, South Carolina law was amended to permit interstate
branching but not de novo branching by an out-of-state bank. The Company
believes that the foregoing legislation has increased takeover activity of South
Carolina financial institutions by out-of-state financial institutions.
Obligations of Holding Company to its Subsidiary Banks
Under the policy of the Federal Reserve Board, a bank holding company
is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it otherwise might not desire or be able to do. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan.
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In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC's claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and if any
such assessment is not paid by any shareholder after three months notice, to
sell the stock of such shareholder to make good the deficiency.
Capital Adequacy
The various federal bank regulators, including the Federal Reserve
Board and the OCC, have adopted risk-based capital requirements for assessing
bank holding company and bank capital adequacy. These standards define what
qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks. Capital is
classified into two tiers. For bank holding companies, Tier 1 or "core" capital
consists primarily of common and qualifying preferred shareholders' equity, less
certain intangibles and other adjustments ("Tier 1 Capital"). Tier 2 capital
consists primarily of the allowance for possible loan losses (subject to certain
limitations) and certain subordinated and other qualifying debt ("Tier 2
Capital"). A minimum ratio of total capital to risk-weighted assets of 8.00% is
required and Tier 1 capital must be at least 50% of total capital. The Federal
Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to
adjusted average total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital
to total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and will be used in conjunction with the
risk-based ratio in determining the overall capital adequacy of banking
organizations.
The Federal Reserve Board and the OCC have emphasized that the
foregoing standards are supervisory minimums and that an institution would be
permitted to maintain such levels of capital only if it had a composite rating
of "1" under the regulatory rating systems for bank holding companies and banks.
All other bank holding companies are required to maintain a leverage ratio of 3%
plus at least 1% to 2% of additional capital. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve Board has not advised the Company of any
specific minimum leverage ratio applicable to it. As of December 31, 1998, the
Company, First National Bank, National Bank of York County and Florence County
National Bank had leverage ratios of 9.08%, 8.41%, 6.63% and 15.29%,
respectively, and total risk adjusted capital ratios of 15.56%, 14.28%, 10.93%
and 24.33%, respectively.
FDICIA, among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal relatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA also imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure
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to meet the capital guidelines could also subject a banking institution to
capital raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan (see "--Obligations of Holding Company to its
Subsidiary Banks," above). In addition, FDICIA requires the various regulatory
agencies to prescribe certain non-capital standards for safety and soundness
relating generally to operations and management, asset quality and executive
compensation and permits regulatory action against a financial institution that
does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
under-capitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of a least 8% and a leverage
ratio of a least 4%, or 3% in some cases. Under these guidelines, each of the
Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentration of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position), and (iii) risks from non-traditional activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with the amended guidelines, the
Company and the Banks with significant trading activity (as defined in the
amendment) must incorporate a measure for market risk in their respective
regulatory capital calculations effective for reporting periods after January 1,
1998. The revised guidelines are not expected to have a material impact on the
Company or the Banks' regulatory capital ratios or their well capitalized
status.
Payment of Dividends
The Company is a legal entity separate and distinct from its
subsidiaries, and the Company's funds for cash distributions to its shareholders
are derived primarily from dividends received from the Banks. Each of the Banks
is subject to various general regulatory policies and requirements relating to
the payment of dividends. Any restriction on the ability of the Banks to pay
dividends will indirectly restrict the ability of the Company to pay dividends.
The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year will exceed the total of its
retained net profits for that year combined with its retained net profits for
the two preceding years, less any required transfers to surplus. In addition,
national banks can only pay dividends to the extent that retained net profits
(including the portion transferred to surplus) exceed bad debts. Further, if in
the opinion of the OCC a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the OCC may
require, after notice and a hearing, that such bank cease and desist from such
practice. The OCC has indicated that paying dividends that deplete a national
bank's capital base to an inadequate level would be an unsafe and unsound
banking practice. The Federal Reserve Board, the OCC and the FDIC have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
In addition to the foregoing, the ability of the Company and the Banks
to pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors.
Certain Transactions by the Company and its Affiliates
Various legal limitations place restrictions on the ability of the
Banks to lend or otherwise supply funds to the Company. The Federal Reserve Act
limits a bank's "covered transactions," which include extensions of credit, with
any affiliate to 10% of such bank's capital and surplus. All covered
transactions with all affiliates cannot in the aggregate exceed 20% of a bank's
capital and surplus. All covered and exempt transactions between a bank and its
affiliates must be on terms and conditions consistent with safe and sound
banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality
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assets from the bank's affiliates. Also, the Federal Reserve Act requires that
all of a bank's extensions of credit to an affiliate be appropriately secured by
acceptable collateral, generally United States government or agency securities.
In addition, the Federal Reserve Act limits covered and other transactions among
affiliates to terms and circumstances, including credit standards, that are
substantially the same or at least as favorable to a bank holding company, a
bank or a subsidiary of either as prevailing at the time for transactions with
unaffiliated companies.
Insurance of Deposits
As FDIC-insured institutions, First National Bank, National Bank of
York County, and Florence County National Bank are subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions is as specified in a schedule required to
be issued by the FDIC that specifies, at semi-annual intervals, target reserve
ratios designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department of
the Treasury. The FDIC has implemented a risk-based assessment schedule that
provides for assessments ranging from 0.00% to 0.27% of an institution's average
assessment base. The actual assessment to be paid by each FDIC-insured
institution is based on the institution's assessment risk classification, which
is determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized", as such terms have been defined
in applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns
(see "--Capital Adequacy" above). As a result of the current provisions of
federal law, the assessment rates on deposits could increase over present
levels. Based on the current financial condition and capital levels of the
Banks, the Company does not expect that the current FDIC risk-based assessment
schedule will have a material adverse effect on the Banks' earnings in 1999.
Other Laws and Regulations
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Community
Reinvestment Act requiring financial institutions to meet their obligations to
provide for the total credit needs of the communities they serve (which includes
the investment of assets in loans to low- and moderate-income borrowers), the
Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks also are subject to the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and Regulation E issued
by the Federal Reserve Board to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
From time to time, bills are pending before the United States Congress
and in the South Carolina state legislature which in certain cases contain
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking, and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company and its
subsidiaries may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, consti-
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tute the major portion of a bank's earnings. Thus, the earnings and growth of
the Company will be subject to the influence of economic conditions generally,
both domestic and foreign, and also to the monetary and fiscal policies of the
United States and its agencies, particularly the Federal Reserve Board. The
Federal Reserve Board regulates the supply of money through various means,
including open-market dealings in United States government securities, the
discount rate at which banks may borrow from the Federal Reserve Board, and the
reserve requirements on deposits. The nature and timing of any changes in such
policies and their impact on the Company cannot be predicted.
Item 2. Properties
First National Bank's main office and the Company's executive offices
are located at 950 John C. Calhoun Drive, S.E., Orangeburg, South Carolina.
These quarters are owned by First National Bank and afford approximately 48,000
square feet of space for operating and administrative purposes. First National
Bank owns twenty-six other properties and leases six properties, substantially
all of which are used for branch locations or housing other operational units of
First National Bank.
National Bank of York County owns the property located at 1127 Ebenezer
Road, Rock Hill, South Carolina. National Bank of York County also leases two
properties, which are used as branches. Florence County National Bank owns the
property located at 1600 W. Palmetto Street, Florence, South Carolina, and
leases one property which is used as a branch. NewSouth Financial Services
Corporation leases two offices, one in Orangeburg, South Carolina used for
finance company operations, and one in Florence, South Carolina used as a
mortgage loan production office.
Although the properties leased and owned are generally considered
adequate, there is a continuing program of modernization, expansion, and as
needs materialize, the occasional replacement of facilities.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders in the fourth
quarter of the Company's fiscal year.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Price Range of Common Stock and Dividends
The Company's Common Stock is listed on the American Stock Exchange
under the trading symbol "FNC". The following table sets forth the high and low
sale prices and the quarterly dividends declared on the Common Stock for the
periods shown. Per share information set forth below has been adjusted to give
retroactive effect to stock dividends and stock splits effected during the
periods shown.
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Price Per Share Dividend
Declared
High Low Per Share
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1997:
First Quarter (*) (*) $ .095
Second Quarter $25.15 $19.30 .095
Third Quarter 24.35 22.50 .10
Fourth Quarter 24.08 19.80 .11
1998:
First Quarter $23.40 $21.38 .11
Second Quarter 25.09 21.49 .11
Third Quarter 25.65 21.49 .13
Fourth Quarter 28.80 22.50 .13
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(*) On January 28, 1997, the Common Stock was listed for trading on the American
Stock Exchange. Trading on the American Stock Exchange opened at $14.40 per
share, and trading prices ranged from $14.40 per share to $19.47 per share from
January 28, 1997 to March 31, 1997. The Company believes that, after giving
retroactive effect to stock dividends and stock splits, the Common Stock traded
at prices ranging from $9.90 to $12.60 per share during the period from January
1, 1996 to January 27, 1997. However, management has knowledge of only a limited
number of trades during such period and has no independent means of verifying
the price at which any such trades occurred.
(*) On January 28, 1997, the Common Stock was listed for trading on the American
Stock Exchange. Trading on the American Stock Exchange opened at $14.40 per
share, and trading prices ranged from $14.40 per share to $19.47 per share from
January 28, 1997 to March 31, 1997. The Company believes that, after giving
retroactive effect to stock dividends and stock splits, the Common Stock traded
at prices ranging from $9.90 to $12.60 per share during the period from January
1, 1996 to January 27, 1997. However, management has knowledge of only a limited
number of trades during such period and has no independent means of verifying
the price at which any such trades occurred.
Item 6. Selected Financial Data
(dollars in thousands except per share)
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<CAPTION>
1998 1997 1996 1995 1994
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For the Year
Net Income $ 7,505 $ 6,466 $ 5,528 $ 4,640 $ 4,061
Per share
Basic: 1.30 1.26 1.14 0.98 0.86
Diluted: 1.29 1.25 1.13 0.97 0.85
Total assets 642,683 565,571 497,632 436,322 374,043
Cash dividends declared per share 0.48 0.40 0.37 0.34 0.32
Book value per share at year end 10.70 10.39 9.48 8.41 7.67
Financial Ratios
Return on average assets 1.22% 1.20% 1.19% 1.13% 1.10%
Return on average equity 12.89 12.72 12.85 12.25 11.67
Dividend payout ratio 33.82 31.84 31.13 30.24 29.45
Average equity to average assets 9.46 9.40 9.29 9.25 9.44
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Balance Sheet Highlights
(dollars in thousands)
<TABLE>
<CAPTION>
December 31 Average Daily Balance
1998 1997 % Change 1998 1997 % Change
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Loans-net of unearned income $407,961 $355,513 14.8% $371,139 $323,420 14.8%
Total earning assets 605,132 521,574 16.0% 575,926 503,565 14.4%
Total assets 642,683 565,571 13.6% 615,361 540,643 13.8%
Demand Deposits 79,325 70,052 13.2% 74,689 67,134 11.3%
Total Deposits 524,138 454,375 15.4% 499,168 441,982 12.9%
Total interest-bearing liabilities 496,963 438,636 13.3% 477,200 419,700 13.7%
Shareholder's equity 62,301 53,900 15.6% 58,220 50,827 14.5%
</TABLE>
Per share data have been retroactively adjusted to give effect to a ten percent
common stock dividend paid to shareholders of record on each of October 28,
1994, and October 31, 1995, a five percent common stock dividend paid to
shareholders of record October 31, 1996, a 2 for 1 stock split paid to
shareholders of record on May 19, 1997, and a ten percent common
<PAGE> 10
stock dividend paid to shareholders of record on November 2, 1998.
This information should be read in conjunction with Management's Discussion and
Analysis of Operations and Financial Condition and is qualified in its entirety
by reference to the more detailed financial statements and the notes thereto
contained elsewhere in this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of First
National Corporation and its subsidiaries, First National Bank, National Bank of
York County, Florence County National Bank and NewSouth Financial Services
Corporation. The five year period 1994 through 1998 is discussed with particular
emphasis on the years 1996, 1997 and 1998. This commentary should be reviewed in
conjunction with the financial statements and related footnotes and the other
statistical information related to First National Corporation contained
elsewhere herein (see "Consolidated Financial Statements of First National
Corporation").
In 1996, the Corporation sponsored the organization of National Bank of
York County in Rock Hill, South Carolina, and sold shares of the Corporation's
common stock to capitalize the new bank and pay organizational and pre-opening
expenses. National Bank of York County began operations on July 11, 1996, as a
wholly-owned subsidiary of the Corporation.
In 1998, the Corporation sponsored the organization of Florence County
National Bank in Florence, South Carolina, and sold shares of the Corporation's
common stock to capitalize the new bank and pay organizational and pre-opening
expenses. Florence County National Bank began operations on April 1, 1998, as a
wholly-owned subsidiary of the Corporation.
Also in 1998, the Corporation sponsored the organization of NewSouth
Financial Services Corporation, an upscale finance company which began
operations in Orangeburg, South Carolina, on November 1, 1998. Upon
organization, the Corporation acquired 80 percent of NewSouth's common stock.
The remaining 20 percent of NewSouth common stock was issued to minority
employee shareholders pursuant to their employment agreements. The minority
shares are subject to vesting and forfeiture in accordance with the terms of the
agreements. Since vesting had not occurred as of December 31, 1998, minority
interest has not been reflected in the Corporation's financial statements.
On March 4, 1999, the Corporation and First Bancorporation, Inc.
("First Banc") 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 First Banc 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 First Banc'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.
Year 2000
Many existing computer programs use only two digits to identify a year
in the data field. These programs were designed and developed without
considering the impact of the upcoming century. If uncorrected, many computer
applications could fail or create erroneous results by or at the year 2000. The
year 2000 issue affects virtually all companies and organizations.
Certain of the Corporation's systems may be affected by this so-called
millennium bug. The Corporation is investigating the extent to which its systems
are affected and communicating with all its computer vendors concerning timely
and completed remedies for those systems that require modification. The
Corporation is also communicating with all third parties on which it relies to
assess their progress in evaluating their systems and implementing any
corrective measures. The Company has been taking and will continue to pursue all
reasonably necessary steps to protect its operations and assets.
Based upon discussions with its software vendors and other third
parties as well as the execution of its year 2000 plan to date, management does
not expect 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
necessarily indicative of future operating results or future condition, or that
the costs or consequences of incomplete or untimely resolution of any year 2000
issue represent a known material event or uncertainty that is reasonably likely
to affect its future financial results, or cause its reported financial
information not to be necessarily
<PAGE> 11
indicative of future operating results or future financial condition. Costs to
address the year 2000 issue are estimated to total approximately $450,000, of
which approximately $300,000 was incurred in 1998.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as, forward looking statements for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. First National Corporation cautions readers that
forward looking statements, including without limitation, those relating to
First National Corporation's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, year 2000 compliance issues
and income, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in First National
Corporation's reports filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
See Notes to Consolidated Financial Statements for information relating
to recent accounting pronouncements.
Summary of Operations
Earnings of First National Corporation were $7,505,000, $6,466,000, and
$5,528,000 in 1998, 1997 and 1996, respectively. Net income increased 16.1
percent in 1998 when compared to 1997 and increased 17.0 percent in 1997 when
compared to 1996. Basic earnings per share increased to $1.30 compared to $1.26
in 1997. Per share earnings in 1996 were $1.14. The increase in net income in
1998 primarily resulted from an increase in interest income as well as an
increase in noninterest income. The increase in net income in 1997 compared to
1996 also resulted primarily from an increase in interest income as well as an
increase in noninterest income.
The per share cash dividend declared in 1998 was $0.48 compared to
$0.40 in 1997 and $0.37 in 1996.
The book value per share of First National Corporation increased $0.31
or 3.0 percent in 1998, $0.91 or 9.6 percent in 1997, and $1.07 or 17.7 percent
in 1996. The return on average assets was 1.22 percent in 1998, 1.20 percent in
1997 and 1.19 percent in 1996. The return on average shareholders' equity was
12.89 percent for 1998 and was 12.72 percent for 1997 and 12.85 percent in 1996.
Increases in both deposits and earning assets were realized during 1998
compared to 1997. Deposits at December 31, 1998 were $524,138,000, up
$69,763,000 or 15.4 percent compared to December 31, 1997. At year-end 1997,
deposits were $454,375,000, up $40,222,000 or 9.7 percent compared to December
31, 1996. Average deposits in 1998 were $499,168,000, up $57,186,000 or 12.9
percent from 1997. The average deposits in 1997 were $441,982,000 compared to
$387,086,000 in 1996, an increase of $54,896,000 or 14.2 percent. Earning assets
reached $605,132,000 in 1998, up $83,558,000, or 16.0 percent when compared to
year-end 1997. At year-end 1997, earning assets were $521,574,000, up
$67,074,000 or 14.8 percent from year-end 1996. Average earning assets for 1998
were $575,926,000, an increase of $72,361,000, or 14.4 percent, compared to
1997. In 1997 average earning assets were $503,565,000, an increase of
$76,481,000, or 17.9 percent, compared to 1996. The increase in earning assets
in 1998 and 1997 resulted primarily from banking operations at First National
Bank, National Bank of York County, and Florence County National Bank. The
increases in earning assets in 1996 resulted primarily from banking operations
at First National Bank and National Bank of York County.
Interest income increased by $4,976,000 or 12.1 percent, for the year
ended December 31, 1998 when compared to December 31, 1997. This increase is
primarily a result of an $83,558,000, or 16.0 percent, increase in earning
assets. For the year ended December 31, 1997, interest income increased
$6,881,000, or 20.1 percent, when compared to the same period in 1996. This
increase was primarily the result of a $67,074,000 or 14.8 percent increase in
earning assets.
Interest expense increased by $2,192,000, or 12.6 percent, for the year
ended December 31, 1998 compared to the same period in 1997. For the year ended
December 31, 1997, interest expense increased $3,379,000, or 24.2 percent, when
compared to the same period in 1996. The 1998 increase is primarily the result
of a $58,327,000 or 13.3 percent increase in interest-bearing liabilities just
as the 1997 increase was primarily the result of a $59,168,000 or 15.6 percent
increase in interest-bearing liabilities.
<PAGE> 12
Competition
First National Corporation competes with a number of financial
institutions and other firms that engage in activities similar to banking. For
example, the Corporation competes for deposits with savings and loan
associations, credit unions, brokerage firms and other commercial banks. In its
attempt to make loans, the Corporation competes with the industries mentioned
above as well as consumer finance companies, leasing companies and other
lenders. In today's uncertain financial climate, all lenders are searching for
quality borrowers. Acquisition of acceptable grade loans becomes more and more
difficult.
Additional financial institution mergers were completed in 1998 and
1997, continuing the trend toward consolidation. Although these mergers reduced
the number of banks and branches, they intensified competition for quality funds
and loans.
Net Interest Income
Net interest income is the difference between interest income and
interest expense. Two significant elements in analyzing a bank's net interest
income are net interest spread and net interest margin. Net interest spread is
the difference between the yield on average earning assets and the rate on
average interest-bearing liabilities. Net interest margin is the difference
between the yield on average earning assets and the rate on all average
liabilities, interest and noninterest bearing, utilized to ,support earning
assets. The significant distinction between spread and net interest margin is
that net interest margin reflects the volume of interest free funds supporting
earning assets.
Net interest income increased $2,784,000 or 11.7 percent during 1998
compared to 1997. The increase was due primarily to an increase in volume of
earning assets. Net interest income increased $3,502,000 or 17.3 percent during
1997 when compared to 1996. The increase was also due primarily to increased
volume of earning assets. The average yield on earning assets was 8.0 percent in
1998, 8.2 percent in 1997, and 8.0 percent in 1996. Total average earning assets
increased $72,361,000, or 14.4 percent, from 1997 to 1998, and $76,481,000, or
17.9 percent, from 1996 to 1997. Total average interest bearing liabilities
increased $57,500,000, or 13.7 percent, from 1997 to 1998, and $63,020,000, or
17.7 percent, from 1996 to 1997. Growth in earning assets was funded primarily
through interest-bearing liabilities. The net total volume growth in 1998
compared to 1997 had a positive impact on net interest income of $3,392,000,
which was decreased by $608,000 due to rates paid on liabilities increasing more
than yields on assets. In 1997 compared to 1996 net interest income was
positively affected by $3,718,000 attributable to volume which was decreased by
$216,000 attributable to rate decreases. In 1998 compared to 1997, net interest
spread decreased approximately .1 percent and net interest margin decreased by
.1 percent. In 1997 compared to 1996, net interest spread decreased
approximately .1 percent and net interest margin remained the same.
Average noninterest-bearing funds supporting earning assets as a
percentage of earning assets changed from 14.1 percent in 1996 to 13.3 percent
in 1997 and to 13.0 percent in 1998.
Table 1
Volume and Rate
Variance Analysis
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Changes Due to Increase Changes Due to Increase
(Decrease) In (Decrease) In
(Dollars in thousands) Volume (l) Rate (l) Total Volume (l) Rate (l) Total
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (2) $ 4,490 $ (788) $ 3,702 $ 5,522 $ (240) $ 5,282
Investments:
Taxable 1,388 (279) 1,109 1,262 467 1,729
Tax exempt (3) 95 (25) 70 (76) 10 (66)
Funds sold 25 70 95 (70) 6 (64)
Total interest income 5,998 (1,022) 4,976 6,638 243 6,881
Interest-bearing liabilities:
Deposits:
Interest bearing transaction 100 (405) (305) 67 17 84
Saving 364 148 512 299 326 625
Certificates of deposit 1,762 (90) 1,672 1,839 68 1,907
Funds purchased 361 (67) 294 725 58 783
Notes payable 19 0 19 (10) (10) (20)
Total interest expense 2,606 (414) 2,192 2,920 459 3,379
Net interest income $ 3,392 $ (608) $ 2,784 $ 3,718 $ (216) $ 3,502
</TABLE>
<PAGE> 13
(1)The rate/volume variance for each category has been allocated on a consistent
basis between rate and volume variances based on the percentage of rate or
volume variance to the sum of the two absolute variances.
(2)Nonaccrual loans are included in the above analysis.
(3)Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
Table 2
Yields on Average Earning Assets and
Rates on Average Interest-bearing Liabilities
<TABLE>
<CAPTION>
1998
Average Interest Average
(Dollars in thousands) Balance Earned/Paid Yield/Rate
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income (2) $ 371,139 $ 34,123 9.19%
Investment securities:
Taxable 160,725 9,746 6.06
Tax exempt (1) 34,516 1,672 4.84
Funds sold 9,546 579 6.07
Total earning assets 575,926 46,120 8.01
Cash and other assets 45,230
Less allowance for loan losses (5,795)
Total assets $ 615,361
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 91,222 1,411 1.55
Savings 100,946 3,138 3.11
Certificates of deposit 232,311 12,564 5.41
Funds purchased 52,461 2,425 4.62
Notes payable 260 19 7.31
Total interest-bearing liabilities 477,200 19,557 4.10
Demand deposits 74,689
Other liabilities 5,252
Shareholders' equity 58,220
Total liabilities and shareholders' equity $ 615,361
Net interest spread 3.91%
Impact of interest free funds .70%
Net interest margin 4.61%
Net interest income $ 26,563
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
1997
Average Interest Average
(Dollars in thousands) Balance Earned/Paid Yield/Rate
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income (2) $ 323,420 $ 30,421 9.41%
Investment securities:
Taxable 138,474 8,638 6.24
Tax exempt (1) 32,593 1,602 4.92
Funds sold 9,078 483 5.32
Total earning assets 503,565 41,144 8.17
Cash and other assets 42,239
Less allowance for loan losses (5,161)
Total assets $ 540,643
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 86,188 1,715 1.99
Savings 88,743 2,643 2.98
Certificates of deposit 199,917 10,876 5.44
Funds purchased 44,852 2,132 4.75
Notes payable 0 0
Total interest-bearing liabilities 419,700 17,366 4.14
Demand deposits 67,134
Other liabilities 2,982
Shareholders' equity 50,827
Total liabilities and shareholders' equity $ 540,643
Net interest spread 4.03%
Impact of interest free funds .769%
Net interest margin 4.72%
Net interest income $ 23,778
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
1996
Average Interest Average
(Dollars in thousands) Balance Earned/Paid Yield/Rate
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income (2) $ 264,701 $ 25,139 9.50%
Investment securities:
Taxable 117,822 6,908 5.86
Tax exempt (1) 34,142 1,668 4.89
Funds sold 10,419 548 5.26
Total earning assets 427,084 34,263 8.02
Cash and other assets 40,356
Less allowance for loan losses (4,188)
Total assets $ 463,252
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 82,820 1,632 1.97
Savings 77,699 2,001 2.58
Certificates of deposit 166,342 8,985 5.40
Funds purchased 29,546 1,348 4.56
Notes payable 273 20 7.33
Total interest-bearing liabilities 356,680 13,986 3.92
Demand deposits 60,225
Other liabilities 3,332
Shareholders' equity 43,015
Total liabilities and shareholders' equity $ 463,252
Net interest spread 4.10%
Impact of interest free funds .65%
Net interest margin 4.75%
Net interest income $ 20,277
</TABLE>
(1) Tax exempt income is not presented on a tax equivalent basis in the
above analysis.
(2) Nonaccrual loans are included in the above analysis.
Investment Securities
Investment securities are the second largest category of earning
assets. These assets comprised 32.6 percent of earning assets at December 31,
1998 and 31.8 percent at year-end 1997. Investment securities are utilized by
the Corporation as a vehicle for the employment of excess funds, to provide
liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for certain deposits and purchased funds.
13
<PAGE> 16
The portfolio taxable income was $9,746,000 in 1998 compared with
$8,637,000 in 1997, a net increase of $1,109,000. Of this increase, an increase
of approximately $1,388,000 was attributable to the $22,251,000 average volume
increase of taxable securities. The higher income generated by the increased
volume was decreased by $279,000 resulting from an 18 basis point decrease in
yield. The taxable income was $8,637,000 in 1997, compared with $6,908,000 in
1996, an increase of $1,729,000. Of this increase, an increase of approximately
$1,262,000 was attributable to the $20,652,000 average volume increase in
taxable securities. The gain generated by the increased volume was aided by an
increase of $467,000, resulting from a 38 basis point increase in yield. This
is indicative of the decreases in overall interest rates in the past year and
their effect upon portfolio investments as higher-yielding securities mature
and are replaced by lower-yielding investments. The average maturity of the
taxable portfolio at December 31, 1998 was 3.5 years compared with average
maturities at year-end 1997 of 2.0 years and at year-end 1996 of 2.4 years.
The portfolio non-taxable investment income was $1,672,000 in 1998
compared with $1,602,000 in 1997 and $1,668,000 in 1996, a net increase of
$70,000 or 4.4 percent, in 1998 and a decrease of $66,000 or 4.0 percent, in
1997. Of the increase in 1998, an increase of $95,000 was attributable to an
increase in average volume of $1,923,000 in municipal securities offset by a
decrease of $25,000 resulting from an 8 basis point decrease in yield. The
decrease from 1996 to 1997 was $66,000 of which $76,000 was attributable to a
decrease in volume which was offset by an increase of $ 10,000 resulting from a
3 basis point increase in yield. The average maturity of the non-taxable
portfolio at December 31, 1998 was 4.0 years compared to 3.8 years and 2.9
years in 1997 and 1996, respectively. First National Corporation continues to
actively purchase bank qualified tax-free securities to supplement the taxable
portfolio. However, with the negative yield adjustment due to the Tax Equity
and Fiscal Responsibility Act of 1982 and the alternative minimum tax
considerations, the value to First National Corporation of each individual
purchase continues to be closely evaluated.
At December 31, 1998 the fair value of the securities portfolio
totalled $198,247,000, a 1.6 percent premium. The market valued the
Corporation's 1997 portfolio at a .8 percent premium and its 1996 portfolio at
a .8 percent premium.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards Board in May,
1993. As required, the Corporation adopted the provisions of this statement
effective December 31, 1993, without retroactive application to prior years'
financial statements. At December 31, 1998, investment securities with an
amortized cost of $148,768,000 and an estimated fair value of $150,791,000 were
classified as available- for-sale. The effect of adoption of this accounting
standard was to increase the carrying value of securities $2,023,000 and
directly increase shareholders' equity $1,274,000, net of an estimated income
tax liability of $749,000.
The increase, net of income tax effect, is presented in the statement
of changes in shareholders' equity as a separate component of shareholders'
equity and comprehensive income required by SFAS No. 115 and SFAS No. 130
"Reporting Comprehensive Income".
On an ongoing basis, management assigns securities upon purchase into
one of the categories designated by SFAS No. 115 based on intent, taking into
consideration other factors including expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and
capital requirements.
There were realized gains on sales of investment securities during
1998 of $95,000 and $2,000 in 1997, and realized losses on sales of investment
securities during 1996 of $50,000.
14
<PAGE> 17
Table 3
Book Value of Investment Securities
December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 50,066 $ 33,791 $ 37,853 $ 49,959 $ 49,164
U.S. Government Agencies
and Corporations 106,314 96,826 87,840 63,600 53,914
Other Securities 2,653 593 610 475 476
Total Taxable 159,033 131,210 126,303 114,034 103,554
State, County and Municipal
Obligations 38,138 34,851 34,578 37,462 29,802
Total Tax-exempt 38,138 34,851 34,578 37,462 29,802
Total Investment Securities $ 197,171 $ 166,061 $ 160,881 $ 151,496 $ 133,356
</TABLE>
Table 4
Maturity Distribution and Yields of Investment Securities
<TABLE>
<CAPTION>
Due in Due After Due After Due After
December 31, 1998 1 yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $17,588 5.96% $ 32,478 5.82% $50,066 5.87% $ 50,450 $ 50,097
U.S. Government Agencies
and Corporations 9,574 5.89 93,690 6.17 3,050 6.39 5.87 106,314 6.15 105,880 106,386
Other Securities (1) 2,653 6.91 2,653 6.91 2,653 2,653
Total Taxable 27,162 5.94 126,168 6.08 3,050 6.39 2,653 6.50 159,033 6.07 158,983 159,136
State, County and
Municipal Obligations 4,210 7.45 13,858 7.21 18,353 6.40 1,717 5.87 38,138 6.78 38,356 39,111
Total $31,372 6.13% $140,026 6.19% $21,403 6.40% $4,370 6.32% $197,171 6.21% $197,339 $198,247
Percent of Total 16% 71% 11% 2%
Cumulative % of Total 16% 87% 98% 100%
</TABLE>
(1) Federal Reserve Bank and other corporate stocks have no set maturity
but are classified in "Due after 10 years." Loans
Loans
Loans, net of unearned income, at December 31, 1998, were
$407,961,000, which represents an increase of $52,448,000, or 14.8 percent when
compared to year-end 1997. Average loans for 1998 increased 14.8 percent to
$371,139,000 from $323,420,000 for 1997.
The largest element of the loan portfolio continues to be the real
estate mortgage category. All loans secured by real estate, except real estate
construction, are placed in this category regardless of the loan purpose. The
use of real estate as security for loans is common in First National
Corporation's market area. The real estate mortgage category grew by 17.4
percent to $243,743,000 at year-end and represents 59.7 percent of total loans.
This is an increase from 58.4 percent in 1997. Commercial, financial and
agricultural loans increased to $78,077,000 from $67,519,000 the previous year
representing 19.1 percent of the loan portfolio compared to 19.0 percent at
December 31, 1997. Consumer loans represented 18.6 percent of total loans
compared to 19.1 percent at year-end 1997. Table 5 provides the distribution of
loans for the past five years.
The prime rate decreased twice in 1998, and the yield on the loan
portfolio for 1998 was 9.2 percent, down from 9.4 percent for 1997.
Notwithstanding this decrease in yield, the volume growth of the loan portfolio
resulted in an interest and fee income increase of $3,702,000 or 12.2 percent,
to $34,123,000. Table 6 shows the maturity and interest sensitivity of the
commercial, financial and agricultural category of the loan portfolio and the
real estate construction category of the loan portfolio as of December 31,
1998. As of that date, loans that mature in one year or less were $187,542,000.
Of the loans that mature after one year, $152,089,000 or 69.0 percent, had
fixed interest rates while $68,330,000, or 31.0 percent, had variable rates.
The placement of loans on a nonaccrual status is dependent upon the
type of loan, collateral values and the collection activities in progress.
Loans which are well secured and in the process of collection are allowed to
remain on an accrual basis until they become 120 days past due. Unsecured
commercial loans and well secured loans not in the process of collection are
charged
15
<PAGE> 18
off on or before the date they become 90 days past due and, therefore, do not
reach a nonaccrual status. Commercial and real estate loans which are partially
secured are written down to the collateral value and placed on nonaccrual
status on or before becoming 90 days past due. Consumer loans are charged off
on or before becoming 120 days past due. All interest accrued in the current
year but unpaid at the date a loan goes on nonaccrual status is deducted from
interest income, while interest accrued from previous years is charged against
the reserve for loan losses. At December 31, 1998, nonaccrual loans were
$1,067,000 compared with $1,016,000 at year-end 1997. At December 31, 1998,
loans which were 90 days or more past due were $616,000 compared to $283,000 at
year-end 1997.
Interest income which was foregone was an immaterial amount for each
of the three years ended December 31, 1998. First National Corporation does not
have any loans which have been restructured or any foreign loans.
Concentrations of credit are considered to exist when the amounts
loaned to a multiple number of borrowers engaged in similar business activities
which would cause them to be similarly impacted by general economic conditions
represents 25% of equity. As of December 31, 1998, the Corporation had
$16,925,000 in outstanding loans to businesses that develop and operate hotels
and motels, which represented a concentration.
Table 7 provides the level of risk elements in the loan portfolio for
the past five years.
Table 5
Distribution of Net Loans
By Type
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 78,077 $ 67,519 $ 46,392 $ 43,108 $ 34,476
Real estate - construction 10,456 12,429 9,625 5,792 4,781
Real estate - mortgage 243,743 207,630 178,544 148,853 126,751
Consumer 75,685 67,935 59,058 50,130 42,544
Total $407,961 $355,513 $293,619 $247,883 $ 208,552
Percent of Total
Commercial, financial,
agricultural and other 19.1% 19.0% 15.8% 17.4% 16.5%
Real estate - construction 2.6 3.5 3.3 2.3 2.3
Real estate - mortgage 59.7 58.4 60.8 60.1 60.8
Consumer 18.6 19.1 20.1 20.2 20.4
Total 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Table 6
Maturity Distribution of Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Maturity
December 31, 1998 1 Year 1 - 5 Over 5
(Dollars in thousands) Total or Less Years Years
Commercial, financial
agricultural and other $ 78,077 $ 38,258 $ 33,573 $ 6,246
Real estate - construction 10,456 5,634 4,822 0
Real estate - mortgage 243,743 106,564 112,414 24,765
Consumer 75,685 37,086 32,544 6,055
Total $407,961 $187,542 $183,353 $ 37,066
Loans due after one year with:
Predetermined interest rates $152,089
Floating or adjustable interest rates $ 68,330
</TABLE>
16
<PAGE> 19
Asset Quality
Asset quality is maintained through the management of credit risk.
Each individual earning asset, whether in the investment, loan, or short-term
investment portfolio, is reviewed by management for credit risk. To facilitate
this review, First National Corporation has established credit policies which
include credit limits, documentation, periodic examination and follow-up. In
addition, these portfolios are examined for exposure to concentration in any
one industry, government agency, or geographic location. In examining the
portfolios at December 31, 1998 and 1997, the Corporation did not have more
than ten percent of the loan portfolio in any one industry and had no foreign
loans.
Each category of earning assets has a degree of credit risk. To
measure credit risk, various techniques are utilized. Credit risk in the
investment portfolio can be measured through bond ratings published by
independent agencies. In the investment portfolio, 98.0 percent of the
investments consist of U.S. Treasury securities, U.S. Agency securities and
tax-free securities having a rating of "A" or better. The credit risk of the
loan portfolio can be measured by historical experience. The Corporation
maintains its loan portfolio in accordance with its established credit
policies. Net loan charge-offs over the past five years have not exceeded .17
percent of net average loans. In 1998 net loan charge-offs as a percentage of
net average loans were .12 percent compared to .14 percent in 1997. See "Loans"
for a discussion of the Corporation's charge-off and nonaccrual policies.
Table 7
Nonaccrual and Past Due Loans
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $ 616 $ 283 $ 220 $ 354 $ 97
Loans on a nonaccruing basis 1,067 1,016 974 845 1,214
Total $1,683 $1,299 $1,194 $1,199 $1,311
</TABLE>
17
<PAGE> 20
Table 8
Summary of Loan
Loss Experience
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
January 1 $ 5,518 $ 4,705 $ 3,703 $ 3,194 $ 2,955
Charge-offs during the year
Real estate - construction 0 0 0 0 0
Real estate - mortgage (59) (25) (35) (130) (175)
Consumer (585) (615) (584) (514) (378)
Commercial, financial,
agricultural and other (72) (121) (72) (47) (80)
Total charge-offs (716) (761) (691) (691) (633)
Recoveries during the year
Real estate - construction 0 0 0 0 0
Real estate - mortgage 12 12 151 123 58
Consumer 190 299 185 143 178
Commercial, financial,
agricultural and other 58 12 38 90 61
Total recoveries 260 323 374 356 297
Net charge-offs (456) (438) (317) (335) (336)
Provisions from earnings 1,013 1,251 1,319 844 575
Allowance for loan losses -
December 31 $ 6,075 $ 5,518 $ 4,705 $ 3,703 $ 3,194
Average loans - net of
unearned income $ 371,139 $ 323,420 $ 264,701 $ 227,466 $ 193,135
Ratio of net charge-offs
to average loans - net of
unearned income .12% .14% .12% .15% .17%
</TABLE>
Loan Loss Provision
First National Corporation maintains a reserve for possible loan
losses (the allowance for loan losses) at a level which management believes is
sufficient to provide for potential losses in the loan portfolio. Management
periodically evaluates the adequacy of the allowance utilizing its internal
risk rating system and regulatory agency examinations to assess the quality of
the loan portfolio and identify problem loans. The evaluation process also
includes management's analysis of current and future economic conditions,
composition of the loan portfolio, past due and nonaccrual loans,
concentrations of credit, lending policies and procedures and historical loan
loss experience. The provision for loan losses is charged to the income
statement in the amount necessary to maintain the allowance at the appropriate
level.
The allowance is established on an overall portfolio basis, and
management does not subsequently allocate the allowance by geographic area or
loan category.
The provision for loan losses for the year ended December 31, 1998,
was $1,013,000, compared to $1,251,000 in 1997, which represents a 19.1 percent
decrease. The decrease in the provision for loan losses was due to the
continued strong quality of loan growth. The allowance for loan losses was
$6,075,000, or 1.49 percent of outstanding loans at the end of 1998, and
$5,518,000, or 1.55 percent at year-end 1997. Total charge-offs were $716,000
in 1998 and $761,000 in 1997. Recoveries were $260,000 for 1998 and $323,000
for 1997. Net charge-offs were $456,000 in 1998 and $438,000 for 1997. Net
charge-offs were greatest in consumer loans which increased from $316,000 in
1997 to $395,000 in 1998. Real estate loan net charge-offs increased by $34,000
in 1998 while commercial loan losses decreased by $95,000. Net charge-offs to
average loans were .12 percent in 1998 and .14 percent in 1997. A summary of
loan loss experience for 1994 through 1998 is provided in Table 8.
Other real estate owned includes certain real estate acquired as a
result of foreclosure and deeds in lieu of foreclosure, as well as amounts
reclassified as in-substance foreclosures. For the period ended December 31,
1998, other real estate owned was $144,000 compared to $61,000 at December 31,
1997. This increase resulted from properties being acquired as a result of
foreclosure.
Management anticipates that the level of charge-offs for 1999 will be
somewhat higher than the level experienced in 1998. The OCC handbook recommends
that banks take a broad look at certain factors in considering allowance for
loan loss. These factors include loan loss experience, specific allocations and
other subjective factors. First National Corporation continues to consider such
factors recognized in the handbook to evaluate the allowance for loan loss.
Although changes in economic conditions in the Corporation's market area can
always affect this level, the loan loss provision is considered adequate by
management.
18
<PAGE> 21
Liquidity
Liquidity is defined as the ability of an entity to generate cash to
meet its financial obligations. For a bank, liquidity means the consistent
ability to meet loan demand and deposit withdrawals. The Corporation has
employed its funds in a manner to provide liquidity in both assets and
liabilities.
Asset liquidity is maintained by the maturity structure of loans,
investment securities and other short-term investments. Management has policies
and procedures governing the length of time to maturity on loans and
investments. As noted in Table 4, 16.0 percent of the investment portfolio
matures in one year or less. This part of the investment portfolio consists of
U.S. Treasury securities, U.S. Agency securities and bank qualified municipal
securities. Loans and other investments are of a longer term nature and are not
utilized for day-to-day bank liquidity needs.
Increases in the Corporation's liabilities provide liquidity on a
day-to-day basis. Daily liquidity needs may be met from deposits or from the
Corporation's use of federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowing.
The Corporation places an increasing reliance on borrowed funds which
are primarily cash management or "sweep" accounts that are accommodations to
corporate and governmental customers pursuant to sale of securities sold under
agreement to repurchase arrangements. During 1998, the Corporation maintained
an even higher level of liquidity with an influx of interest sensitive
deposits.
Table 9
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
After After Six Greater
Within Three Through Than One
December 31, 1998 three Through Twelve Within Year and
(Dollars in thousands) Months Six Months Months One Year Insensitive(1) Total
<S> <C> <C> <C> <C> <C> <C>
Loans $ 184,398 $ 25,294 $ 31,821 $ 241,513 $166,448 $407,961
Investments 12,446 6,512 9,769 28,727 168,444 197,171
Funds 0 0 0 0 0
Total interest earning assets $ 196,844 $ 31,806 $ 41,590 $ 270,240 $334,892 $605,132
Percent 32.5% 5.3% 6.9% 44.7% 55.3% 100.0%
Interest-bearing deposits,
excluding CDs greater than
$100,000 $ 117,708 $ 48,707 $ 24,354 $ 190,769 $186,279 $377,048
CDs greater than $100,000 35,034 11,927 11,791 58,752 9,013 67,765
Short-term borrowings 52,150 0 0 52,150 0 52,150
Total interest-bearing liab 204,892 60,634 36,145 301,671 195,292(2) 496,963
Interest-free funds 0 0 0 0 108,169 108,169
Funds supporting interest
earning assets $ 204,892 $ 60,634 $ 36,145 $ 301,671 $303,461 $605,132
Percent 33.9% 10.0% 6.0% 49.9% 50.1% 100.0%
Interest sensitivity gap $ (8,048) $(28,828) $ 5,445 $ (31,431) $ 31,431
Cumulative gap $ (8,048) $(36,876) $(31,431) $ (31,431)
Percent of total interest earning
assets 1.3% 6.1% 5.2% 5.2%
</TABLE>
(1) These items are considered insensitive because they are not generally
affected by fluctuations in market interest rates.
(2) Includes savings and NOW deposits of $145,914. Table 9 discloses the
cumulative gap as a percentage of assets included in the computation
of gap (total earning assets) rather than as a percentage of total
assets.
19
<PAGE> 22
Derivatives and Disclosure of Market Risk
In January 1997, the Securities and Exchange Commission adopted new
rules that require more comprehensive disclosure of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative financial instruments and other financial
instruments. The market risk disclosures must be classified into two
portfolios: financial instruments, entered into for trading purposes and all
other instruments (non-trading purposes). The Corporation does not maintain a
trading portfolio.
Table 10
Financial Instruments
<TABLE>
<CAPTION>
Fair
There Value
(Dollars in thousands) 1999 2000 2001 2002 2003 After Total 12-31-98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book Value $121,902 $42,437 $31,366 $18,451 $37,681 $25,576 $277,413 $279,875
Average interest rate 8.63% 8.62% 8.64% 8.48% 8.38% 8.27% 8.62%
Variable Rate:
Book Value $ 65,640 $17,773 $13,137 $ 7,727 $14,781 $11,490 $130,548 $131,706
Average interest rate 8.04% 8.12% 8.07% 8.09% 8.10% 7.85% 8.08%
Securities held to maturity:
Fixed Rate:
Book Value $ 7,164 $ 8,030 $ 3,385 $ 2,668 $ 4,708 $20,425 $ 46,380 $ 47,456
Average interest rate 5.63% 5.64% 5.23% 4.81% 4.96% 4.44% 4.96%
Variable Rate:
Book Value -- -- -- -- -- -- -- --
Average interest rate -- -- -- -- -- -- --
Securities available for sale:
Fixed Rate:
Book Value $ 18,064 $ 6,781 $30,501 $35,465 $31,111 $27,869 $149,791 $149,791
Average interest rate 5.87% 5.84% 6.38% 6.02% 5.97% 6.02% 6.06%
Variable Rate:
Book Value $ 1,000 -- -- -- -- -- $ 1,000 $ 1,000
Average interest rate 4.49% -- -- -- -- -- 4.49%
Financial liabilities:
Non-interest bearing deposits: $ 19,831 $11,899 $11,899 $11,899 $11,899 $11,898 $ 79,325 $ 79,325
Average interest rate N/A N/A
Interest bearing
savings and checking: $ 49,964 $29,978 $29,978 $29,978 $29,978 $29,979 $199,855 $199,855
Average interest rate 1.12% 1.12% 1.12% 1.12% 1.12% 1.12% 1.12%
Time deposits: $223,973 $16,451 $ 4,534 -- -- -- $244,958 $246,042
Average interest rate 5.09% 5.30% 5.95% -- -- -- 5.12%
Federal funds purchased
and securities sold under
agreements to repurchase: $ 52,150 $52,150 $52,150
Average interest rate 3.75% 3.75%
</TABLE>
Table 10 provides information about the Corporation's financial instruments as
of December 31, 1998, that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related
weighted-average interest rates by expected maturity dates. Weighted-average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
20
<PAGE> 23
Table 10 summarizes the expected maturities and average interest rates
associated with the Corporation's financial instruments. Non-interest bearing
deposits and interest-bearing savings and checking deposits have no contractual
maturity dates. For purposes of Table 10, projected maturity dates for such
deposits were determined based on decay rate assumptions used internally by the
Corporation to evaluate such deposits. For further information on the fair
value of financial instruments, see Note 23 to the consolidated financial
statements.
Interest Sensitivity
As a bank holding company, the Corporation's earnings are subject to
the risk of interest rate fluctuations. The Corporation uses a number of tools
to measure interest rate risk, including simulating the effect on earnings of
fluctuations in interest rates, monitoring the present value of asset and
liability portfolios under various interest rate scenarios and monitoring the
difference, or gap, between rate sensitive assets and liabilities, as discussed
below. The Corporation's computer model and other gap analyses take into
account the Corporation's contractual agreements with regard to investments,
loans and deposits. Although the Corporation's computer simulation model is
subject to the accuracy of the assumptions that underlie the process, the
Corporation believes that such model provides a better illustration of the
interest sensitivity of earnings than does static sensitivity gap analyses.
The Corporation monitors exposure to a gradual increase or decrease in
rates of 200 basis points over a rolling 12-month period. The Corporation's
policy limit for the maximum negative impact on net interest income from a
gradual change in interest rates of 200 basis points over 12 months is 8
percent. The Corporation generally has maintained a risk position well within
the policy guideline level. As of December 31, 1998 the model indicated that
the impact of a 200 basis point gradual increase in rates over 12 months would
result in an approximately 1.36 percent decrease in net interest income, while
a 200 basis point gradual decrease in rates over the same period would result
in an approximately 1.26 percent increase from an unchanged rate environment.
Actual results will differ from simulated results due to the timing, magnitude
and frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
Interest sensitivity analysis refers to the potential impact of
interest rate changes on net interest income. Normally this sensitivity is
expressed in interest sensitivity gap and cumulative gap. Interest sensitivity
analysis utilizes the concept of matching interest sensitive assets with
interest sensitive liabilities over a stated time period. Interest sensitivity
applies to both assets and liabilities which carry a variable rate or mature
during a stated time period. A positive interest sensitivity gap demonstrates
that assets are repriced before liabilities during the stated time period.
Conversely, a negative gap demonstrates liabilities are repriced before assets.
The objective of interest sensitivity management is to maintain stable
growth in net interest income while minimizing adverse changes. Management is
continually changing the gap position of the Corporation in response to changes
in money markets and other external factors.
Table 9 presents the interest sensitive position of the Corporation's
balance sheet at December 31, 1998. The analysis illustrates the Corporation's
interest sensitivity position at prescribed intervals. Reflected in the table
are interest sensitivity gap and cumulative gap for immediate through one year
maturities. Management particularly attempts to control gap from zero to twelve
months. The position of First National Corporation at December 31, 1998 with
regard to the cumulative gap at the 12 month time frame is a negative gap of
$31,431,000. Assuming that no other variable changed, the potential impact to
First National Corporation's net interest income before taxes in the next year
should rates on the asset and liability sides change immediately and equally
would be as follows:
a rise of 1% would decrease income before taxes by $314,310
a rise of 2% would decrease income before taxes by $628,620
a rise of 3% would decrease income before taxes by $942,930
a decline of 1% would increase income before taxes by $314,310
a decline of 2% would increase income before taxes by $628,620
a decline of 3% would increase income before taxes by $942,930
Table 9 reflects the balances of interest earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Scheduled payment amounts of amortizing fixed rate loans are reflected
at each scheduled payment date. Variable rate amortizing loans reflect
scheduled repayments at each scheduled payment date until the loan may be
repriced contractually, and the unamortized balance is reflected at this point.
Investments are reflected at each instrument's ultimate maturity date or
pre-refunded call date. Funds sales are reflected at the immediate repricing
interval due to the overnight availability of the instruments. A portion of
interest-bearing liabilities with no contractual maturity, such as money market
deposit accounts, are
21
<PAGE> 24
reflected in the immediate repricing period due to the contractual arrangements
that give First National Corporation the ability to vary the rates paid on
those deposits within a thirty-day or shorter period. First National
Corporation reflects a portion of its savings and NOW deposits as noninterest
sensitive to more accurately reflect their anticipated repricing
characteristics. Fixed rate time deposits, principally certificates of deposit,
are reflected at their contractual maturity date.
Variable rate time deposits are reflected at the earlier of their next
repricing or maturity date. Short-term borrowings (principally securities sold
under repurchase agreements secured by investment securities) are reflected in
the immediate repricing period due to the contractual arrangements which give
First National Corporation the ability to vary the rates paid on those
borrowings overnight.
The Company does not use interest rate swaps to modify the interest
rate characteristics of certain long-term debt.
The Company owns no derivatives.
Deposits
The deposit base provides First National Corporation with funds for
the long-term growth of loans and investments. At December 31, 1998, when
compared to year-end 1997, total deposits were $524,138,000, up $69,763,000, or
15.4 percent. Noninterest-bearing deposits for the same period were
$79,325,000, an increase of $9,273,000, or 13.2 percent, and interest-bearing
deposits were $444,813,000, an increase of $60,490,000, or 15.7 percent when
compared to December 31, 1997. For the year ended December 31, 1998, total
average deposits increased $57,186,000, or 12.9 percent. This growth was
comprised of an increase of average interest-bearing accounts of $49,631,000,
or 13.2 percent, and average noninterest-bearing accounts of $7,555,000, or
11.3 percent. Growth in the interest-bearing accounts was composed of an
increase in interest-bearing transaction accounts of $5,034,000, or 5.8
percent, and certificates of deposit of $32,394,000, or 16.2 percent, and an
increase in savings accounts of $12,203,000, or 13.8 percent.
At December 31, 1998, the ratio of average interest-bearing deposits
to total deposits increased to 85.0 percent from 84.8 percent at year-end 1997
and was 84.4 percent at year-end 1996. The average rate paid on
interest-bearing accounts remained at 4.1 percent at year-end 1998 and 1997 and
was 3.9 percent at year-end 1996.
Table 11
Maturity Distribution of
CD's of $100,000 or more
<TABLE>
<CAPTION>
December 31 1998 1997
(Dollars in thousands)
<S> <C> <C>
Within three months $35,034 $21,093
After three through six months 11,927 7,171
After six through twelve months 11,791 7,091
After twelve months 9,013 5,440
Total $67,765 $40,795
</TABLE>
Short-Term Borrowed Funds
The distribution of First National Corporation's short-term borrowings
at the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below. Federal funds purchased and securities sold under agreement to
repurchase generally mature within one to three days from the transaction date.
Certain of the borrowings have no defined maturity date.
22
<PAGE> 25
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1998 1997 1996
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $52,150 3.75% $54,312 5.14% $32,547 4.69%
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and
other borrowings $52,461 4.62% $44,852 4.75% $29,546 4.56%
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $66,618 $57,838 $36,568
</TABLE>
Equity and Dividends
Throughout the years the strength of the shareholders' equity base has
provided stability to current operations and capital adequacy to support
growth. The Corporation's shareholder equity base was 9.7 percent of total
assets as of December 31, 1998, compared with 9.5 percent at year-end 1997, and
9.7 percent at year-end 1996.
The Corporation has achieved a consistent record of increasing
earnings over the past years. Even though dividends have historically been
increased, the Corporation has maintained a relatively constant dividend
pay-out policy. The dividend pay-out ratio for 1998 was 33.8 percent compared
to 31.8 percent in 1997 and 31.1 percent for 1996. Cash dividend payments in
1998 were $2,538,000 as compared to $2,059,000 in 1997. The retention of the
remaining earnings has provided the basis for expansion of loans and
investments, and acquisitions.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Banks; however, certain restrictions exist
regarding the ability of the Banks to transfer funds to the Corporation in the
form of cash dividends, loans or advances. The approval of the Office of the
Comptroller of the Currency is required to pay dividends in excess of the
Banks' net profits for the current year plus retained net profits (net profits
less dividends paid) for the preceding two years, less any required transfers
to surplus. As of December 31, 1998, $9,508,000 of the Banks' retained earnings
were available for distribution to the Corporation as dividends without prior
regulatory approval. In 1998 the Banks paid dividends to the Corporation of
$4,518,000.
The Corporation and subsidiaries are subject to certain risk-based
capital guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of both
balance sheet and off-balance sheet items will be adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to the Office of the Comptroller of the
Currency guidelines, as of December 31, 1998, Tier 1 capital must be at least
50% of total capital, while total capital must be 8 percent of risk-weighted
assets. The Tier 1 capital ratio for First National Corporation at December 31,
1998 was 14.3 percent compared to 13.5 percent at year-end 1997. The total
capital ratio was 15.6 at December 31, 1998 compared to 14.7 percent at
year-end 1997.
In conjunction with the risk-based capital ratio, applicable
regulatory agencies have also prescribed a leverage ratio of total capital to
total assets in evaluating capital strength and adequacy. The minimum leverage
ratio required for banks is between 3 percent and 5 percent, depending on the
institution's composite rating as determined by its regulators. At December 31,
1998, First National Corporation's leverage ratio was 9.1 percent, compared to
9.2 percent at year-end 1997. First National Corporation's ratios exceed the
minimum standards by substantial margins.
23
<PAGE> 26
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the American Stock Exchange under the
trading symbol "FNC". The following table sets forth the high and low sale
prices and the quarterly dividends declared on the Common Stock for the periods
shown. Per share information set forth below has been adjusted to give
retroactive effect to stock dividends and stock splits effected during the
periods shown.
<TABLE>
<CAPTION>
PRICE PER SHARE DIVIDEND
DECLARED
HIGH LOW PER SHARE
<S> <C> <C> <C>
1997:
First Quarter (*) (*) $ .095
Second Quarter $25.15 $19.30 .095
Third Quarter 24.35 22.50 .10
Fourth Quarter 24.08 19.80 .11
1998:
First Quarter $23.40 $21.38 .11
Second Quarter 25.09 21.49 .11
Third Quarter 25.65 21.49 .13
Fourth Quarter 28.80 22.50 .13
</TABLE>
(*) On January 28, 1997, the Common Stock was listed for trading on the American
Stock Exchange. Trading on the American Stock Exchange opened at $14.40 per
share, and trading prices ranged from $14.40 per share to $19.47 per share from
January 28, 1997 to March 31, 1997. The Company believes that, after giving
retroactive effect to stock dividends and stock splits, the Common Stock traded
at prices ranging from $9.90 to $12.60 per share during the period from January
1, 1996 to January 27, 1997. However, management has knowledge of only a limited
number of trades during such period and has no independent means of verifying
the price at which any such trades occurred.
NONINTEREST INCOME AND EXPENSE
In today's banking environment, noninterest income provides a stable source of
revenue for the Corporation. The expansion of banking services and the use of
explicit pricing enables the Corporation to manage its fee income and price
services to more closely reflect actual costs. Income from noninterest sources
in 1998 was $7,893,000, an increase of $1,634,,000, or 26.1 percent, compared to
1997. For the period ended December 31, 1997, income from noninterest sources
was $6,259,000, an increase of $915,000, or 17.1 percent over 1996.
Service charges on transaction accounts in 1998 increased $753,000 or 17.8
percent when compared to 1997 and $233,000 or 5.8 percent in 1997 compared to
1996. This increase was due to increased account activity. The deposit fee
pricing structure is continually being reviewed and updated for new services and
rising costs.
Other charges, commissions and fees increased $881,000 or 43.2 percent in
1998 compared to an increase of $682,000 or 50.3 percent in 1997. The increase
is a result of an increase in secondary market origination fees, ATM surcharge
fees, and alternative investment fee income.
Noninterest expense increased $3,095,000 or 15.9 percent in 1998 compared
with $3,102,000 or 19.0 percent in 1997.
Salary and employee benefits expense was the largest component of noninterest
expense in 1998.
Salaries and employee benefits increased 16.7 percent or $1,758,000 in 1998
as compared with a 16.4 percent or $1,480,000 in 1997. The number of full time
equivalent employees was 353 at December 31, 1998 as compared with 281 in 1997
and 281 in 1996. The increase in 1998 as compared to 1997 was primarily the
result of the commencement of operations of Florence County National Bank and
NewSouth Financial Services Corporation. In 1994 management adopted an employee
cash incentive plan covering all employees. Cash incentives paid during 1998
under this program were approximately $645,000.
Net occupancy expense increased 9.7 percent in 1998 compared to an increase
of 19.8 percent in 1997. The increase is attributable to higher operating
expenses including utilities, maintenance and depreciation.
24
<PAGE> 27
Furniture and equipment expense increased 1.0 percent in 1998 compared with a
12.8 percent increase in 1997. The increased costs in 1998 were due to increases
in depreciation expense and equipment service contracts.
Total other expense for 1998 was $7,645,000 compared with $6,414,000 in 1997
and $5,078,000 in 1996 or increases of 19.2 percent and 26.3 percent
respectively. Included in other noninterest expense is $749,000 in 1998 for the
amortization of intangibles, principally core deposit values, under the purchase
accounting method utilized for bank acquisitions, compared with $657,000 in 1997
and $644,000 in 1996. Included in expenses for amortization of intangibles for
1998 is $321,000 attributable to the two branches in Walterboro acquired from
NationsBank as compared to $348,000 in 1997. Also included in other expense is
$329,000 attributed to amortization of computer software, which increased
$152,000 or 85.9 percent in 1998 as compared to 1997. This increase is due to
the write-off of obsolete mainframe software. The remainder of the increase in
other expense for 1998 is distributed among the following expense categories:
advertising, insurance and surety bond, office and printing supplies, postage,
telephone and line charges, and other expenses.
TABLE 12
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE) 1998 QUARTERS 1997 QUARTERS
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,917 $11,864 $11,515 $10,824 $10,718 $10,645 $10,222 $9,559
Interest expense 4,813 5,136 4,988 4,620 4,522 4,520 4,354 3,968
Net interest income 7,104 6,728 6,527 6,204 6,196 6,125 5,868 5,591
Provision for loan losses 409 216 166 222 378 275 314 285
Noninterest income 2,081 2,096 1,924 1,792 1,673 1,589 1,492 1,505
Noninterest expense 6,469 5,655 5,431 4,994 5,342 4,963 4,651 4,498
Income before income taxes 2,307 2,953 2,854 2,780 2,149 2,476 2,395 2,313
Income taxes 676 945 901 867 636 770 753 708
Net income $ 1,631 $ 2,008 $ 1,953 $ 1,913 $ 1,513 $ 1,706 $ 1,642 $1,605
Basic earnings per share $ 0.28 $ 0.35 $ 0.34 $ 0.33 $ 0.30 $ 0.33 $ 0.32 $ 0.31
</TABLE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measure of financial
position and results of operations in terms of historical dollars, without
consideration of changes in the relative purchasing power over time due to
inflation. Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While the effect of inflation on banks is normally not as significant as is
its influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses. Inflation also affects the bank's customers which may result in an
indirect effect on the banks' business.
25
<PAGE> 28
REPORT OF MANAGEMENT
The financial statements, accompanying notes, and other financial information
in this Report were prepared by management of First National Corporation which
is responsible for the integrity of the information given. The statements have
been prepared in conformity with generally accepted accounting principles and
include amounts which are based on management's judgment or best estimates.
The Corporation maintains a system of internal controls to reasonably assure
the safeguarding of assets and proper execution of transactions according to
management's directives. The control system consists of written policies and
procedures, segregation of duties, and an internal audit program. Management is
cognizant of the limitations of such controls, but feels reasonable assurance of
effectiveness is achieved without extending costs beyond benefits derived.
Internal audit reports are prepared for the Audit Committee of the Board of
Directors and copies are made available to the independent auditors. The Audit
Committee of the Board of Directors consists solely of outside directors who
meet periodically with management, internal auditors, and the independent
auditors. The Audit Committee reviews matters relating to the audit scope,
quality of financial reporting and control, and evaluation of management's
performance of its financial reporting responsibility. Access to the Audit
Committee is available to both internal and independent auditors without
management present.
J. W. Hunt and Company, LLP independent auditors, has audited the financial
statements and notes included in this Annual Report. Their audit was conducted
in accordance with generally accepted auditing standards and their opinion
presents an objective evaluation of management's discharge of its responsibility
to fairly present the financial statements of the Corporation. Their opinion is
contained in their report on the facing page. All financial information
appearing in this Annual Report is consistent with that in the audited financial
statements.
First National Corporation
Orangeburg, South Carolina
February 2, 1999
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In January 1997, the Securities and Exchange Commission adopted new rules
that require more comprehensive disclosure of accounting policies for
derivatives as well as enhanced quantitative and qualitative disclosures of
market risk for derivative financial instruments and other financial
instruments. The market risk disclosures must be classified into two portfolios:
financial instruments, entered into for trading purposes and all other
instruments (non-trading purposes). The Corporation does not maintain a trading
portfolio.
26
<PAGE> 29
TABLE 10
FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
FAIR
THERE VALUE
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 AFTER TOTAL 12-31-98
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book Value $121,902 $42,437 $31,366 $18,451 $37,681 $25,576 $277,413 $279,875
Average interest rate 8.63% 8.62% 8.64% 8.48% 8.38% 8.27% 8.62%
Variable Rate:
Book Value $ 65,640 $17,773 $13,137 $ 7,727 $14,781 $11,490 $130,548 $131,706
Average interest rate 8.04% 8.12% 8.07% 8.09% 8.10% 7.85% 8.08%
Securities held to maturity:
Fixed Rate:
Book Value $ 7,164 $ 8,030 $ 3,385 $ 2,668 $ 4,708 $20,425 $ 46,380 $ 47,456
Average interest rate 5.63% 5.64% 5.23% 4.81% 4.96% 4.44% 4.96%
Variable Rate:
Book Value -- -- -- -- -- -- -- --
Average interest rate -- -- -- -- -- -- --
Securities available for sale:
Fixed Rate:
Book Value $ 18,064 $ 6,781 $30,501 $35,465 $31,111 $27,869 $149,791 $149,791
Average interest rate 5.87% 5.84% 6.38% 6.02% 5.97% 6.02% 6.06%
Variable Rate:
Book Value $ 1,000 -- -- -- -- -- $ 1,000 $ 1,000
Average interest rate 4.49% -- -- -- -- -- 4.49%
Financial liabilities:
Non-interest bearing deposits: $ 19,831 $11,899 $11,899 $11,899 $11,899 $11,898 $ 79,325 $ 79,325
Average interest rate N/A N/A
Interest bearing
savings and checking: $ 49,964 $29,978 $29,978 $29,978 $29,978 $29,979 $199,855 $199,855
Average interest rate 1.12% 1.12% 1.12% 1.12% 1.12% 1.12% 1.12%
Time deposits: $223,973 $16,451 $ 4,534 -- -- -- $244,958 $246,042
Average interest rate 5.09% 5.30% 5.95% -- -- -- 5.12%
Federal funds purchased
and securities sold under
agreements to repurchase: $ 52,150 $52,150 $ 52,150
Average interest rate 3.75% 3.75%
</TABLE>
Table 10 provides information about the Corporation's financial instruments as
of December 31, 1998, that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related
weighted-average interest rates by expected maturity dates. Weighted-average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
Table 10 summarizes the expected maturities and average interest rates
associated with the Corporation's financial instruments. Non-interest bearing
deposits and interest-bearing savings and checking deposits have no contractual
maturity dates. For purposes of Table 10, projected maturity dates for such
deposits were determined based on decay rate assumptions used internally by the
Corporation to evaluate such deposits. For further information on the fair value
of financial instruments, see Note 23 to the consolidated financial statements.
As a bank holding company, the Corporation's earnings are subject to the risk
of interest rate fluctuations. The Corporation uses a number of tools to measure
interest rate risk, including simulating the effect on earnings of fluctuations
in interest rates, monitoring the present value of asset and liability
portfolios under various interest rate scenarios and monitoring the difference,
or gap, between rate sensitive assets and liabilities, as discussed below. The
Corporation's computer model and other gap analyses take into account the
Corporation's contractual agreements with regard to investments, loans and
deposits. Although the Corporation's computer simulation model is subject to the
accuracy of the assumptions that underlie the process, the Corporation believes
that such model provides a better illustration of the interest sensitivity of
earnings than does static sensitivity gap analyses.
The Corporation monitors exposure to a gradual increase or decrease in rates
of 200 basis points over a rolling 12-month period. The Corporation's policy
limit for the maximum negative impact on net interest income from a gradual
change in interest rates of 200 basis points over 12 months is 8 percent. The
Corporation generally has maintained a risk position well within the policy
guideline level. As of December 31, 1998 the model indicated that the impact of
a 200 basis point gradual increase in rates over 12 months would result in an
approximately 1.36 percent decrease in net interest income, while a 200 basis
point gradual decrease in rates over the same period would result in an
approximately 1.26 percent increase from an unchanged rate environment. Actual
results will differ from simulated results due to the timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
27
<PAGE> 30
Item 8. Financial Statements and Supplementary Data
Financial Statements
J. W. Hunt and Company, LLP
[Letterhead]
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
the Board of Directors
First National Corporation
We have audited the consolidated balance sheets of First National Corporation
and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
February 2, 1999 (Except for Note 26,
as to which the date is March 4, 1999)
28
<PAGE> 31
FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks (Note 3) $ 24,254 $ 30,789
Investment securities (Note 4):
Securities held-to-maturity:
Taxable 8,242 15,552
Tax-exempt 38,138 34,851
Total (fair value of $47,456 in 1998 and $51,026 in 1997) 46,380 50,403
Securities available-for-sale, at fair value 150,791 115,658
Total investment securities 197,171 166,061
Loans (Note 5) 411,035 359,167
Less, unearned income (3,074) (3,654)
Less, allowance for loan losses (6,075) (5,518)
Loans, net 401,886 349,995
Premises and equipment, net (Note 6) 10,460 9,946
Other assets (Note 7) 8,912 8,767
Total assets $ 642,683 $ 565,558
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 79,325 $ 70,052
Interest-bearing transaction accounts 95,284 93,259
Savings 104,571 90,731
CDs of $100,000 and over 67,765 40,795
Other time 177,193 159,538
Total deposits 524,138 454,375
Federal funds purchased and securities
sold under agreements to repurchase (Note 9) 52,150 54,312
Other liabilities 4,094 2,971
Total liabilities 580,382 511,658
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000
shares, issued and outstanding 5,821,775 shares in
1998 and 5,188,097 shares in 1997 14,554 12,970
Surplus 40,235 23,257
Retained earnings (Note 14) 6,238 17,197
Accumulated other comprehensive income 1,274 476
Total shareholders' equity 62,301 53,900
Total liabilities and shareholders' equity $ 642,683 $ 565,558
</TABLE>
29
<PAGE> 32
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars. except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans, including fees $34,123 $30,421 $25,139
Investment securities
Taxable:
Held-to-maturity 676 1,426 2,553
Available-for-sale 9,070 7,211 4,355
Tax-exempt - held-to-maturity 1,672 1,602 1,668
Federal funds sold 579 484 548
Total interest income 46,120 41,144 34,263
Interest expense:
Interest-bearing transaction accounts 1,411 1,716 1,632
Savings 3,138 2,626 2,001
Certificates of deposit 12,564 10,892 8,985
Federal funds purchased and securities
sold under agreements to repurchase 2,425 2,131 1,348
Notes payable 19 -- 20
Total interest expense 19,557 17,365 13,986
Net interest income:
Net interest income 26,563 23,779 20,277
Provision for loan losses (Note 5) 1,013 1,251 1,319
Net interest income after provision for loan losses 25,550 22,528 18,958
Non-interest income:
Service charges on deposit accounts 4,974 4,221 3,988
Other service charges and fees 2,833 1,990 1,314
Other income 86 48 42
Total non-interest income 7,893 6,259 5,344
Non-interest expense:
Salaries and employee benefits (Note 15) 12,259 10,501 9,021
Net occupancy expense 1,016 926 773
Furniture and equipment expense 1,629 1,613 1,430
Loss on sale of securities available-for-sale -- -- 50
Other expense (Note 11) 7,645 6,414 5,078
Total non-interest expense 22,549 19,454 16,352
Earnings:
Income before provision for income taxes 10,894 9,333 7,950
Provision for income taxes (Note 10) 3,389 2,867 2,422
Net income $ 7,505 $ 6,466 $ 5,528
Earnings per share (Note 12):
Basic $ 1.30 $ 1.26 $ 1.14
Diluted $ 1.29 $ 1.25 $ 1.13
</TABLE>
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, 1995 2,244,339 $11,222 $16,260 $ 12,241 $ 54 $ 39,777
Comprehensive income:
Net income -- -- -- 5,528 -- 5,528
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- (104) (104)
Total comprehensive income 5,424
Cash dividends declared at $.74 per share -- -- -- (1,721) -- (1,721)
Common stock dividend of 10%, date of
record, October 31, 1996 120,891 604 2,654 (3,258) -- --
Common stock issued 184,794 924 3,942 -- -- 4,866
BALANCE, DECEMBER 31, 1996 2,550,024 12,750 22,856 12,790 (50) 48,346
Comprehensive income:
Net income -- -- -- 6,466 -- 6,466
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- 526 526
Total comprehensive income 6,992
Cash dividends declared at $.40 per share -- -- -- (2,059) -- (2,059)
Two-for-one common stock split, date of
record, May 19, 1997 2,556,427 -- -- -- -- --
Common stock issued 81,646 220 401 -- -- 621
BALANCE, DECEMBER 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900
Comprehensive income:
Net income -- -- -- 7,505 -- 7,505
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- 798 798
Total comprehensive income 8,303
Cash dividends declared at $.48 per share -- -- -- (2,538) -- (2,538)
Common stock issued 105,000 263 2,373 -- -- 2,636
Common stock dividend of 10%, date of
record, November 2, 1998 528,678 1,321 14,605 (15,926) -- --
BALANCE, DECEMBER 31, 1998 5,821,775 $14,554 $40,235 $ 6,238 $1,274 $ 62,301
</TABLE>
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
<S> <C> <C> <C>
Net income $ 7,505 $ 6,466 $ 5,528
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,933 1,851 1,674
Provision for loan losses 1,013 1,251 1,319
Deferred income taxes (263) (249) (379)
(Gain) loss on sale of securities available-for-sale (95) (2) 50
(Gain) loss on sale of premises and equipment 74 35 (6)
Net amortization (accretion) of investment securities (23) 2 298
Net change in:
Accrued interest receivable (462) (923) (140)
Prepaid assets (138) (83) 225
Miscellaneous other assets (449) (523) (89)
Accrued interest payable 416 126 157
Accrued income taxes 80 296 (156)
Miscellaneous other liabilities 564 168 (1)
Net cash provided by operating activities 10,155 8,415 8,480
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 28,798 3,066 2,951
Proceeds from maturities of investment securities
held-to-maturity 18,132 22,893 39,002
Proceeds from maturities of investment securities
available-for-sale 36,900 22,876 12,320
Purchases of investment securities held-to maturity (14,101) (8,267) (8,865)
Purchases of investment securities available-for-sale (99,453) (44,912) (55,309)
Net increase in customer loans (53,164) (62,655) (46,371)
Recoveries on loans previously charged off 260 323 318
Proceeds from sale of other real estate - - 70
Purchases of premises and equipment (1,763) (717) (3,692)
Proceeds from sale of premises and equipment 2 407 80
Net cash used by investing activities (84,389) (66,986) (59,496)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
savings accounts and certificates of deposit 69,763 40,222 45,838
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (2,162) 21,765 6,714
Proceeds from issuance of other borrowings 2,500 - 2,000
Repayment of other borrowings (2,500) - (2,000)
Common stock issuance 2,636 14 4,655
Dividends paid (2,538) (2,059) (1,721)
Stock options exercised - 607 211
Net cash provided by financing activities 67,699 60,549 55,697
Net increase (decrease) in cash and cash equivalents $ (6,535) $ 1,978 $ 4,681
Cash and cash equivalents at beginning of year 30,789 28,811 24,130
Cash and cash equivalents at end of year $ 24,254 $ 30,789 $ 28,811
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest $ 19,262 $ 17,239 $ 13,829
Income taxes $ 3,619 $ 2,820 $ 2,957
Schedule of Noncash Investing Transactions:
Real estate acquired in full or partial settlement of loans $ 144 $ 61 $ 28
</TABLE>
31
<PAGE> 34
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
First National Corporation (the "Corporation") is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiaries, First National Bank, National Bank of York County, and Florence
County National Bank (the "Banks"), and its 80%-owned subsidiary, NewSouth
Financial Services Corporation ("NewSouth"). The accounting and reporting
policies of the Corporation and its subsidiaries conform with generally accepted
accounting principles and with the prevailing practices within the banking
industry. The Banks provide general banking services while NewSouth provides
consumer finance services. All services provided are within the State of South
Carolina ("South Carolina").
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of First National
Corporation and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
SEGMENTS:
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes standards for the
way that business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The standard does not address issues of
recognition or measurement and, therefore, the implementation of the statement
did not have an impact on the Corporation's consolidated financial position or
consolidated results of operations.
32
<PAGE> 35
The Corporation, through its subsidiaries, provides a broad range of financial
services to individuals and companies in South Carolina. These services include
demand, time and savings deposits; lending and credit card servicing; ATM
processing; and trust services. While the Corporation's decision-makers monitor
the revenue streams of the various financial products and services, operations
are managed and financial performance is evaluated on an organization-wide
basis. Accordingly, all of the Corporation's banking and finance operations are
considered by management to be aggregated in one reportable operating segment.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of deferred tax assets.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
The Corporation's subsidiaries grant agribusiness, commercial, and residential
loans to customers throughout South Carolina. Although the subsidiaries have a
diversified loan portfolio, a substantial portion of their debtors' ability to
honor their contracts is dependent upon economics conditions within South
Carolina and the surrounding region.
The Corporation considers concentrations of credit to exist when the amounts
loaned to a multiple number of borrowers engaged in similar business activities
which would cause them to be similarly impacted by general economic conditions
represents 25% of equity.
INVESTMENT SECURITIES:
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held-to-maturity" and carried at amortized cost.
Securities not classified as held-to-maturity are classified as
"available-for-sale" and carried at fair value with unrealized gains and losses
excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using methods
approximating the interest method over the terms of the securities. Declines in
the fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. Realized gains (losses) on the sale of securities
available-for-sale are included in other income (expense) and, when applicable,
are reported as a reclassification adjustment, net of tax, in other
comprehensive income. Gains and losses on sales of securities are determined
using the specific identification method.
LOANS:
Loans are stated at unpaid principal balances, less unearned discounts and the
allowance for loan losses. Unearned discounts on installment loans are
recognized as income over the terms of the loans by methods which generally
approximate the interest method. Interest on other loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding. Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 120
days or more. A nonaccrual loan may not be considered impaired if it is expected
that the delay in payment is minimal. All interest accrued but not collected for
loans that are placed on nonaccrual is reversed against interest income.
Interest income is subsequently recognized only to the extent of interest
payments received.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, eco-
33
<PAGE> 36
nomic conditions, and other risks inherent in the portfolio. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. Although management uses available
information to recognize losses on loans, because of uncertainties associated
with local economic conditions, collateral values, and future cash flows on
impaired loans, it is reasonably possible that a material change could occur in
the allowance for loan losses in the near term. However, the amount of the
change that is reasonably possible cannot be estimated. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Management 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. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired provided that management expects to
collect all amounts due, including interest accrued at the contractual interest
rate, for the period of delay.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
credit card, residential mortgage, overdraft protection, home equity lines,
accounts receivable financing, and consumer installment loans for impairment
disclosures.
OTHER REAL ESTATE OWNED (OREO):
Real estate acquired in satisfaction of a loan and in-substance foreclosures are
reported in other assets. In-substance foreclosures are properties in which the
borrower has little or no equity in the collateral. Properties acquired by
foreclosure or deed in lieu of foreclosure and in-substance foreclosures are
transferred to OREO and recorded at the lower of the outstanding loan balance at
the time of acquisition or the estimated market value. Market value is
determined on the basis of the properties being disposed of in the normal course
of business and not on a liquidation or distress basis. Loan losses arising from
the acquisition of such properties are charged against the allowance for loan
losses. Gains or losses arising from the sale of OREO are reflected in current
operations.
PREMISES AND EQUIPMENT:
Office equipment, furnishings, and buildings are stated at cost less accumulated
depreciation computed principally on the declining-balance method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. Additions to premises and
equipment and major replacements are added to the accounts at cost. Maintenance
and repairs and minor replacements are charged to expense when incurred. Gains
and losses on routine dispositions are reflected in current operations.
INTANGIBLE ASSETS:
Intangible assets consist primarily of core deposit premium costs which resulted
from the acquisition of branches from other commercial banks. The excess of the
purchase price over the fair value of the net tangible assets acquired in the
transactions is included in other assets and is being amortized over the
estimated useful lives of the deposit accounts acquired on a method which
reasonably approximates the anticipated benefit stream from the accounts. (See
NOTE 7.)
EMPLOYEE BENEFIT PLANS:
On January 1, 1998, the Corporation adopted SFAS 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS 132 revises the
Corporation's disclosure about pension and other post-retirement benefit plans.
SFAS 132 does not change the method of accounting for such plans. A summary of
the Corporation's various employee benefit plans follows:
Pension Plan - The Corporation and its subsidiaries have a non-contributory
defined benefit pension plan covering all employees who have attained age
twenty-one and have completed one year of eligible service. The Corporation's
funding policy is to contribute annually the amount necessary to satisfy the
Internal Revenue Service's funding standards.
Profit-Sharing Plan - The Corporation and its subsidiaries have a profit-sharing
plan, including Internal Revenue Code Section 401(k) provisions. Electing
employees are eligible to participate after attaining age twenty-one and
completing one year of eligible service. Plan participants elect to contribute
1% to 4% of annual base compensation as a before tax contribution. The
34
<PAGE> 37
Corporation matches 50% of these contributions. Employer contributions may be
made from current or accumulated net profits. Participants may additionally
elect to contribute 1% to 6% of annual base compensation as a before tax
contribution with no employer matching contribution.
Retiree Medical Plan - Post-retirement health and life insurance benefits are
provided to eligible employees which is limited to those employees of the
Corporation eligible for early retirement under the pension plan on or before
December 31, 1993, and former employees who are currently receiving benefits.
The plan was unfunded at December 31, 1998, and the liability for future
benefits has been recorded in the consolidated financial statements.
CASH AND CASH EQUIVALENTS:
For the purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and due from banks". These amounts include cash on hand,
cash items in process of collection, and amounts due from banks. Due from bank
balances are maintained in other financial institutions.
INCOME TAXES:
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, accumulated depreciation, consumer loan
income, accretion income, intangible assets, and pension plan and
post-retirement benefits. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred tax assets and liabilities are reflected at income tax rates applicable
to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes. The
Corporation files a consolidated federal income tax return with its
subsidiaries.
ADVERTISING COSTS:
The cost of advertising is expensed as incurred.
STOCK COMPENSATION PLANS:
SFAS 123, Accounting for Stock-Based Compensation, allows all entities to adopt
a fair value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Corporation's stock option plans have no
intrinsic value at the grant date, and under APB Opinion No. 25 no compensation
cost is recognized for them. The Corporation has elected to continue with the
accounting methodology in APB Opinion No. 25 and, as a result, has provided pro
forma disclosures of net income and earnings per share and other disclosures, as
if the fair value based method of accounting has been applied. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995. (See NOTE 17.)
EARNINGS PER SHARE:
Basic earnings per share represents income available to stockholders divided by
the weighted-average number of shares outstanding during the period. Diluted
earnings per share reflects additional shares that would have been outstanding
if dilutive potential shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential shares that may be
issued by the Corporation relate solely to outstanding stock options, and are
determined using the treasury stock method, if dilutive. Under the treasury
stock method, the number of incremental shares is determined by assuming the
issuance of the outstanding stock options, reduced by the number of shares
assumed to be repurchased from the issuance proceeds, using the average market
price for the year of the Corporation's stock.
COMPREHENSIVE INCOME:
The Corporation adopted SFAS 130, Reporting Comprehensive Income, as of January
1, 1998. Accounting principles generally
35
<PAGE> 38
require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income. The adoption of SFAS 130 had no
effect on the Corporation's net income or shareholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98- 1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires
capitalization of computer software costs that meet certain criteria. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1998. The adoption of SOP 98-1 is not expected to have a material
effect on the Corporation's consolidated financial statements.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs requiring start-up costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The adoption of this statement is not expected to have a material effect
on the Corporation's consolidated financial statements.
In June 1998, the FASB issued SFAS133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts. The statement requires that all derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value, and that changes in the fair value of derivatives be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. The
adoption of SFAS 133 is not expected to have a material effect on the
Corporation's consolidated financial statements.
In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. The statement amends SFAS 65, Accounting for
Certain Mortgage Banking Activities and conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
SFAS 134 is effective for fiscal years beginning after December 15, 1998, and is
not expected to have a material effect on the Corporation's consolidated
financial statements.
OTHER:
Certain amounts previously reported have been restated in order to conform with
current year presentation. Such reclassifications had no effect on net income.
NOTE 2 - FORMATION OF SUBSIDIARIES
FLORENCE COUNTY NATIONAL BANK:
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 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.
FINANCIAL SERVICES CORPORATION:
NewSouth Financial Services Corporation commenced business operations as a
finance company in Florence, South Carolina, on November 1, 1998. Upon
completion of its organization, the Corporation acquired 80% of NewSouth's
common stock. Consequently, NewSouth operates as a subsidiary of the Corporation
with its own board of directors and operating policies.
36
<PAGE> 39
The remaining 20% of NewSouth's stock was issued to minority employee
shareholders pursuant to separate employment agreements. The minority shares are
subject to vesting and forfeiture in accordance with the terms of the
agreements. Since vesting had not occurred as of December 31, 1998, minority
interest has not been reflected in the accompanying financial statements.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Banks are required to maintain an average cash reserve balance with the
Federal Reserve Bank. The average amount of such reserve balance as of December
31, 1998, was approximately $11,799,000.
At December 31, 1998, the Corporation and its subsidiaries had due from bank
balances in excess of federally insured limits in the amount of $2,501,000. The
risks associated with this excess is limited due to the soundness of the
financial institutions with which the funds are deposited.
NOTE 4 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities
held-to-maturity at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 3,213 $ 31 $ -- $ 3,244
Obligations of
U. S. Government
Agencies and
Corporations 5,029 72 -- 5,101
Obligations of states
and political
subdivisions 38,138 1,018 (45) 39,111
Total $46,380 $1,121 $(45) $47,456
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 3,231 $ 28 $ -- $ 3,259
Obligations of
U. S. Government
Agencies and
Corporations 12,321 39 (18) 12,342
Obligations of states
and political
subdivisions 34,851 581 (7) 35,425
Total $50,403 $648 $(25) $51,026
</TABLE>
The market values of state, county, and municipal securities are established
with the assistance of an independent pricing service. The values are based on
data which often reflect transactions of relatively small size and are not
necessarily indicative of
37
<PAGE> 40
the value of the securities when traded in large volumes.
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 45,830 $1,023 $ -- $ 46,853
Obligations of
U. S. Government
Agencies and
Corporations 100,285 1,078 (78) 101,285
Other securities 2,653 -- -- 2,653
Total $148,768 $2,101 $(78) $150,791
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 30,320 $240 $ -- $ 30,560
Obligations of
U. S. Government
Agencies and
Corporations 83,990 538 (23) 84,505
Other securities 593 -- -- 593
Total $114,903 $778 $(23) $115,658
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1998 by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities
Held-To-Maturity Available-For-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 7,424 $ 7,479 $ 23,844 $ 23,948
Due after one year through
five years 16,857 17,322 97,851 99,703
Due after five years through
ten years 18,353 18,917 3,026 3,050
Due after ten years 1,717 1,690 -- --
Subtotal 44,351 45,408 124,721 126,701
No contractual maturity 2,029 2,048 24,047 24,090
Total $46,380 $47,456 $148,768 $105,791
</TABLE>
38
<PAGE> 41
There were no transfers of held-to-maturity securities in 1998 or 1997. There
were no sales of securities held-to-maturity during 1998 or 1997.
Proceeds from the sales of available-for-sale securities totaled $28,798,000,
$3,066,000, and $2,951,000 for the years ended December 31, 1998, 1997, and
1996, respectively. Gross realized gains on sales of available-for-sale
securities were $95,000 and $2,000 during the years ended December 31, 1998 and
1997, respectively. During the year ended December 31, 1996, there were gross
realized losses of $50,000 on sales of securities available-for-sale.
At December 31, 1998 and 1997, investment securities with a carrying value of
$56,466,000 and $46,709,000, respectively, were pledged to secure public
deposits, and for other purposes required and permitted by law. At December 31,
1998 and 1997, the carrying amount of securities pledged to secure repurchase
agreements was $48,881,000 and $42,223,000, respectively.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
(In thousands of dollars)
<S> <C> <C>
Commercial, financial and agricultural $ 78,077 $ 67,519
Real estate - construction 10,456 12,429
Real estate - mortgage 243,743 207,630
Consumer 78,759 71,589
Total loans $ 411,035 $ 359,167
Less, unearned income (3,074) (3,654)
Less, allowance for loan losses (6,075) (5,518)
Loans, net $ 401,866 $ 349,995
</TABLE>
Changes in the allowance for loan losses for the three years ended December 31,
1998, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $5,518 $4,705 $3,703
Loans charged-off (716) (761) (691)
Recoveries of loans previously charged-off 260 323 374
Balance before provision for loan losses 5,062 4,267 3,386
Provision for loan losses 1,013 1,251 1,319
Balance at end of year $6,075 $5,518 $4,705
</TABLE>
At December 31, 1998 and 1997, the aggregate amount of loans for which the
accrual of interest had been discontinued was $1,067,000 and $1,016,000,
respectively. Interest income which was foregone was an immaterial amount for
each of the three
39
<PAGE> 42
years ended December 31, 1998. There were no restructured loans at December 31,
1998 and 1997.
Included in the balance sheet under the caption, "Other assets" are certain real
properties which were acquired as a result of completed foreclosure proceedings.
Also included in the caption are amounts reclassified as in-substance
foreclosures. Other real estate totaled $144,000 and $61,000 at December 31,
1998 and 1997, respectively.
There were no impaired loans at December 31, 1998 and 1997. At December 31,
1998, the Corporation had $16,925,000 outstanding to hotels and motels, which
represented a concentration of credit risk.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consisted of the following:
<TABLE>
<CAPTION>
1998 1997
(In thousands of dollars)
<S> <C> <C>
Land $ 2,315 $ 1,976
Buildings and leasehold improvements 9,496 9,101
Equipment and furnishings 8,079 7,866
Total 19,890 18,943
Less, accumulated depreciation and amortization 9,430 8,997
Premises and equipment - net $10,460 $ 9,946
</TABLE>
Depreciation expense charged to operations was $1,148,000, $1,177,000, and
$1,020,000, in 1998, 1997, and 1996, respectively.
NOTE 7 - INTANGIBLE ASSETS:
Core deposit premium cost in the original amount of $1,822,000, which resulted
from the purchase of two branches of another commercial bank, is being amortized
on the straight-line basis over the estimated useful lives of the deposit
accounts acquired, which range from two to fourteen years. The acquisition cost
was allocated to the assets acquired based on their fair market value.
Amortization expense, which is included in other non-interest expense, for the
years ended December 31, 1998, 1997, and 1996, was $8,000, $34,000, and $80,000,
respectively.
On July 1, 1991, First National Bank ("FNB") completed the purchase of a branch
of another commercial bank. The excess of the purchase price over the fair value
of the net tangible assets acquired has been recorded as core deposit premium
cost in the amount of $1,124,000, and is being amortized over ten years on a
method which reasonably approximates the anticipated benefit stream from the
related deposit accounts. Amortization expense for the years ended December 31,
1998, 1997, and 1996, was $85,000, $98,000, and $110,000, respectively.
On June 16, 1995, FNB completed the purchase of two branches of another
commercial bank. The excess of the purchase price over the fair value of the net
tangible assets acquired has been recorded as core deposit premium cost in the
amount of $3,034,000, and is being amortized over fifteen years on a method
which reasonably approximates the anticipated benefit stream from the related
deposit accounts. Amortization expense for the year ended December 31, 1998,
1997, and 1996 was $321,000, $348,000, and $375,000, respectively.
Computer software (acquired by purchase) with an original cost of $1,074,000 is
being amortized on the straight-line method over thirty-six months. Amortization
expense was $329,000, $177,000, and $75,000, for the years ended December 31,
1998, 1997, and 1996, respectively.
40
<PAGE> 43
NOTE 8 - DEPOSITS:
The aggregate amount of certificates of deposit in denominations of $100,000 or
more was approximately $67,765,000 and $40,795,000 at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars)
<S> <C>
1999 $225,145
2000 12,140
2001 4,453
2002 2,922
2003 280
$244,940
</TABLE>
NOTE 9 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to three days from the transaction date. Certain of
the borrowings have no defined maturity date. Securities sold under agreements
to repurchase are reflected at the amount of cash received in connection with
the transaction. The Corporation monitors the fair value of the underlying
securities on a daily basis. All securities underlying these agreements are
institution-owned securities.
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $3,271 $2,776 $2,507
State 380 340 294
Total current tax expense 3,651 3,116 2,801
Deferred:
Federal (241) (229) (348)
State (21) (20) (31)
Total deferred tax benefit (262) (249) (379)
Provision for income taxes $3,389 $2,867 $2,422
</TABLE>
Temporary differences in the recognition of revenue and expense for tax and
financial reporting purposes resulted in net deferred income tax benefits as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Provision for loan losses $(217) $(317) $(341)
Pension cost and post-retirement benefits 47 36 47
Consumer loan income 21 18 13
Depreciation (25) 6 14
Other(88) 8 (112)
Total $(262) $(249) $(379)
</TABLE>
41
<PAGE> 44
The provision for income taxes differs from that computed by applying Federal
statutory income tax rates to income before provision for income taxes, as
indicated in the following analysis:
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
(In thousands of dollars)
<S> <C> <C> <C>
Income taxes at Federal statutory rate
of 34% $3,704 $3,173 $2,703
Increase (reduction) of taxes resulting from:
State income taxes, net of federal
tax benefit 323 277 236
Tax-exempt interest income (614) (594) (606)
Other (24) 11 89
Total $3,389 $2,867 $2,422
</TABLE>
The components of the net deferred tax asset, included in other assets, are as
follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands of dollars)
<S> <C> <C>
Allowance for loan losses $ 1,953 $ 1,736
Post-retirement benefits 86 80
Intangible assets 226 181
Start-up expenses 28 39
Total deferred tax assets 2,293 2,036
Depreciation (788) (814)
Consumer loan income (199) (177)
Bond discount accretion (81) (136)
Pension plan (174) (120)
Unrealized gains on investment securities available-for-sale (789) (279)
Total deferred tax liabilities (2,031) (1,526)
Net deferred tax asset $ 262 $ 510
</TABLE>
NOTE 11 - OTHER EXPENSES:
The following is a summary of the components of other non-interest expense:
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Office supplies $ 731 $ 528 $ 482
Advertising 664 527 432
Amortization of intangible assets 749 657 644
Federal depository insurance 59 52 2
Other 5,442 4,650 3,518
Total $7,645 $6,414 $5,078
</TABLE>
42
<PAGE> 45
NOTE 12 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Net income - numerator for basic and diluted earnings per share $7,505 $6,466 $5,528
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 5,778 5,147 4,870
Effect of dilutive securities:
Employee stock options 54 43 32
Dilutive potential shares:
Denominator for diluted earnings per share -
adjusted weighted-average shares and assumed conversions 5,832 5,190 4,902
Basic earnings per share $ 1.30 $ 1.26 $ 1.14
Diluted earnings per share $ 1.29 $ 1.25 $ 1.13
</TABLE>
NOTE 13 - OTHER COMPREHENSIVE INCOME:
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains (losses) on
available-for-sale securities $1,267 $ 836 $(168)
Tax effect (469) (310) 64
Net-of-tax amount $ 798 $ 526 $(104)
</TABLE>
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
Dividends are paid by the Corporation from its assets which are mainly provided
by dividends from the banking subsidiaries. However, certain restrictions exist
regarding the ability of the subsidiaries to transfer funds to the Corporation
in the form of cash dividends, loans or advances. The approval of the Office of
the Comptroller of the Currency (OCC) is required to pay dividends in excess of
the subsidiaries' net profits for the current year plus retained net profits
(net profits less dividends paid) for the preceding two years, less any required
transfers to surplus. As of December 31, 1998, $9,508,000 of First National
Bank's retained earnings are available for distribution to the Corporation as
dividends without prior regulatory approval.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to the Corporation unless such loans are
collateralized by specified obligations. The maximum amount available for
transfer from First National Bank, National Bank of York County, and Florence
National Bank to the Corporation in the form of loans or advances approximated
$9,946,000, $811,000, and $869,000, respectively, at December 31, 1998.
43
<PAGE> 46
NOTE 15 - RETIREMENT PLANS:
The following sets forth the pension plan's funded status and amounts recognized
in the Corporation's consolidated financial statements at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
(In thousands of dollars)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $5,910 $5,229
Service cost 333 289
Interest cost 436 386
Actuarial loss 193 180
Benefits paid (212) (174)
Benefit obligation at end of year 6,660 5,910
Change in Plan Assets:
Fair value of plan assets at beginning of year 5,699 4,525
Actual return on plan assets 769 901
Employer contribution 462 447
Benefits paid (212) (174)
Fair value of plan assets at end of year 6,718 5,699
Funded status 58 (211)
Unrecognized net actuarial loss 649 780
Unrecognized prior service cost 9 10
Unrecognized transition asset (94) (127)
Prepaid benefit cost $ 622 $ 452
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
(In thousands of dollars)
Service cost $ 333 $ 289 $ 269
Interest cost 436 386 341
Expected return on plan assets (459) (390) (338)
Amortization of prior service cost 1 1 1
Amortization of transition asset (33) (33) (33)
Recognized net actuarial loss 14 23 20
Net periodic benefit cost $ 292 $ 276 $ 260
</TABLE>
Expenses incurred and charged against operations with regard to all of the
Corporation's retirement plans were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
(In thousands of dollars)
<S> <C> <C> <C>
Pension $292 $276 $260
Profit-sharing 126 110 100
Total $418 $386 $360
</TABLE>
44
<PAGE> 47
NOTE 16 - POST-RETIREMENT BENEFITS:
The following sets forth the plan's funded status and amounts recognized in the
Corporation's consolidated financial statements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 477 $ 503
Interest cost 35 39
Actuarial gain (12) (41)
Benefits paid (19) (24)
Benefit obligation at end of year 481 477
Change in Plan Assets:
Fair value of plan assets at beginning of year -- --
Employer contribution 19 24
Benefits paid (19) (24)
Fair value of plan assets at end of year -- --
Funded status (481) (477)
Unrecognized net actuarial gain (125) (160)
Unrecognized transition obligation 442 473
Accrued benefit cost $(164) $(164)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Weighted-Average Assumptions as of
December 31:
Discount rate 7.50% 7.50% 7.50%
Expected return on plan assets N/A N/A N/A
</TABLE>
For measurement purposes, a 13 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1993. The rate was assumed
to decrease gradually to 5 percent for 1999 and remain at that level thereafter.
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost:
Interest cost $ 35 $ 39 $ 36
Amortization of transition obligation 31 31 31
Recognized net actuarial gain (33) (13) (24)
Net periodic benefit cost $ 33 $ 57 $ 43
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
<S> <C> <C>
Effect on total service and interest cost components $ 4,000 $ (3,000)
Effect on post-retirement benefit obligation 52,000 (45,000)
</TABLE>
NOTE 17 - STOCK-BASED COMPENSATION PLANS:
The Corporation has reserved 13,975 shares of common stock for issuance to key
employees under the Incentive Stock Option Plan of 1992 and an additional
154,770 shares of common stock for issuance to key employees under the 1996
Incentive Stock
45
<PAGE> 48
Option Plan. Options under both plans may not be exercised in whole or in part
within one year following the date of the grant of the options, and thereafter
become exercisable in 25% increments over the next four years. The exercise
price of the options may not be less than fair market value of the common stock
on the date of the grant. No options may be exercised after five years from the
date of the grant. No options were granted under the 1992 plan after March 12,
1997, at which time the plan terminated. Options granted before such date may
extend beyond that date in accordance with the Plan.
Activity in both stock option plans is summarized below. All information has
been retroactively restated to reflect stock dividends and stock splits.
<TABLE>
<CAPTION>
1998 1997 1996
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1992 INCENTIVE STOCK SHARES PRICE SHARES PRICE SHARES PRICE
OPTION PLAN:
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 13,975 $ 9.66 112,011 $ 7.94 122,563 $ 7.25
Granted -- -- -- -- -- --
Exercised -- -- 85,949 $ 7.06 10,552 $ 6.75
Expired -- -- 12,087 $ 6.75 -- --
Outstanding, December 31 13,975 $ 9.66 13,975 $ 8.26 112,011 $ 7.94
Exercisable, December 31 13,975 $ 9.66 13,975 $ 8.26 112,011 $ 7.94
1996 INCENTIVE STOCK
OPTION PLAN:
Outstanding, January 1 95,590 $13.43 97,690 $12.86 -- --
Granted 10,450 $25.10 -- -- 97,690 --
Exercised -- -- 2,100 $12.86 -- --
Outstanding, December 31 106,040 $13.17 95,590 $12.86 97,690 $12.86
Exercisable, December 31 47,795 $12.71 23,898 $12.86 -- --
Weighted-average fair value
of options granted during
the year $ 5.76 $ -- $ 2.75
</TABLE>
Information pertaining to options outstanding at December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
----Options Outstanding---- - Options Exercisable -
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
<S> <C> <C> <C> <C> <C> <C>
1992 Incentive Stock
Option Plan: $ 9.66 13,975 0.5 years $ 9.66 13,975 $ 9.66
1996 Incentive Stock
Option Plan $12.71 95,590 3.0 years $12.71 47,795 $12.71
$22.73 - $22.84 10,450 4.7 years $22.82 -- --
106,040 3.2 years $13.17 47,795 $12.71
</TABLE>
46
<PAGE> 49
The Corporation has entered into a Restricted Stock Agreement with its chief
executive officer. The agreement grants to the employee 10,888 shares of
restricted common stock conditioned upon continued employment. The options vest
free of restrictions as follows: 25% in 1999, 25% in 2001, and 50% in 2003.
Termination of employment prior to a vesting date would terminate any interest
in non-vested shares. Prior to vesting of the shares, as long as employed as
chief executive officer, the employee will have the right to vote such shares
and to receive dividends paid with respect to such shares. All restricted shares
will fully vest in the event of change of control of the Corporation or upon the
death of the employee. The weighted average fair value of the shares granted
under this agreement is $6.34.
The fair value of the options granted and the stock issued was estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1996
<S> <C> <C>
Dividend yield 1.7% 2.7%
Expected life 5 years 5 years
Expected volatility 21% 8%
Risk-free interest rate 4.700% 6.125%
</TABLE>
The Corporation applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized. Had compensation cost for the Corporation's 1996
Incentive Stock Option Plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of SFAS 123, the
Corporation's net income and earnings per share would have been adjusted to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C> <C>
Net income As reported $7,505 $6,466 $5,528
Pro forma $7,364 $6,338 $5,480
Earnings per share As reported $ 1.30 $ 1.26 $ 1.14
Pro forma $ 1.27 $ 1.24 $ 1.13
Earnings per share - As reported $ 1.29 $ 1.25 $ 1.13
Assuming dilution Pro forma $ 1.26 $ 1.22 $ 1.12
</TABLE>
NOTE 18 - LONG-TERM LEASES:
The Corporation's subsidiaries were obligated at December 31, 1998, under
certain noncancelable operating leases extending to the year 2005 pertaining to
banking premises and equipment. Some of the leases provide for the payment of
property taxes and insurance and contain various renewal options. The exercise
of renewal options is, of course, dependent upon future events. Accordingly, the
following summary does not reflect possible additional payments due if renewal
options are exercised. Future minimum lease payments, by year and in the
aggregate, under noncancelable operating leases with initial or remaining terms
in excess of one year are as follows:
<TABLE>
<CAPTION>
(In thousands of dollars) YEAR ENDING DECEMBER 31,
<S> <C> <C>
1999 $706,000
2000 686,000
2001 688,000
2002 677,000
</TABLE>
47
<PAGE> 50
<TABLE>
<S> <C> <C>
2003 667,000
Later years 65,000
Total 3,489,000
</TABLE>
Rental expense for operating leases for the years ended December 31, 1998, 1997,
and 1996 was $159,000, $74,000, and $32,000, respectively.
NOTE 19 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation and its subsidiaries are involved at times in various litigation
arising out of the normal course of business. In the opinion of the
Corporation's legal counsel, there is no pending or threatened litigation of any
material consequence at this time.
YEAR 2000 CONSIDERATIONS:
Many existing computer programs use only two digits to identify a year in the
date 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 Corporation's systems may be affected by the so-called millennium
bug. The Corporation is investigating the extent to which its systems are
affected and communicating with all of its software vendors concerning timely
and completed remedies for those systems that require modification. The
Corporation 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 Corporation has been taking and will continue to pursue
all reasonably necessary steps to protect its operations and assets.
Based upon discussion with its software vendors and other third parties as well
as the execution of its year 2000 plan to date, management does not expect 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 necessarily
indicative of future operating results or future financial condition, or that
the costs or consequences of incomplete or untimely resolution of any year 2000
issue represents a known material event or uncertainty that is reasonably likely
to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition. Costs to address the year 2000 issue are estimated
to total approximately $450,000, of which approximately $300,000 was incurred in
1998.
NOTE 20 - RELATED PARTY TRANSACTIONS:
During 1998 and 1997, the Corporation's banking subsidiaries had loan and
deposit relationships with certain related parties; principally, directors and
executive officers, their immediate families and their business interests. All
of these relationships were in the ordinary course of business. Total loans
outstanding to this group (including immediate families and business interests)
amounted to $8,995,000 at December 31, 1998, and $8,025,000 at December 31,
1997. During 1998, $5,817,000 of new loans were made to this group. Repayments
of $4,769,000 were made during the year. Other changes, which included loans
outstanding to new or former officers and directors, resulted in a decrease of
$78,000.
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation's subsidiaries are parties to credit related financial
instruments with off-balance sheet risks in the normal course of business to
meet the financing needs of their customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Such commitments involve, to varying degrees, elements of credit,
interest rate, or liquidity risk in excess of the amounts recognized in the
consolidated balance sheets. The contract amounts of these instruments express
the extent of involvement the subsidiaries have in particular classes of
financial instruments.
The subsidiaries' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments. At December 31, 1998 and 1997, the following
financial instruments were outstanding whose contract amounts represent credit
risk:
48
<PAGE> 51
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997
<S> <C> <C>
Commitments to
extend credit $95,889 $87,067
Standby letters of
credit and financial
guarantees written $ 2,449 $ 1,702
</TABLE>
COMMITMENTS TO EXTEND CREDIT:
These are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future liquidity
requirements. The banking subsidiaries evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the subsidiaries upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and personal
guarantees.
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN:
These instruments are conditional commitments issued by the banking subsidiaries
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements.
Essentially all standby letters of credit have expiration dates within one year.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The amount of
collateral obtained, if deemed necessary, is based on management's credit
evaluation of the customer.
NOTE 22 - DERIVATIVE FINANCIAL INSTRUMENTS:
In accordance with established policy, the Corporation and its banking
subsidiaries hold derivative financial instruments which meet the following
criteria: (1) government agency security, (2) five years or less in maturity,
(3) readily identifiable indexes, and (4) "conservative" investment. The total
amount of the investment in structured notes, as a percentage of capital, has
been set by policy not to exceed 61 percent. The Corporation no longer purchases
structured notes.
The financial derivatives held by the Corporation as of December 31, 1997
consisted of structured notes which meet the above criteria. The purposes of
such holdings include the ability to take advantage of enhanced basis point
yield spread and to take advantage of variable rate products to facilitate in
the management of the gap ratio. All such investments are classified as
available-for-sale and, therefore, are recorded at fair value in the financial
statements. During the year ended December 31, 1996, derivative financial
instruments were sold and a loss of $50,000 reported. No gains or losses were
reported in the income statements from these holdings in 1998 and 1997.
As of December 31, 1998, the Corporation and its subsidiaries no longer hold any
derivative financial instruments. As of December 31, 1997, derivative financial
instruments held totaled $2,000,000.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
INVESTMENT SECURITIES:
For securities held as investments, fair value equals quoted market price, if
available. If a quoted price is not available, fair value is estimated using
quoted market prices for similar securities.
LOAN RECEIVABLES:
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
49
<PAGE> 52
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED:
The fair value of federal funds purchased is estimated based on the current
rates offered for borrowings of the same remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES WRITTEN:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
The estimated fair value of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 24,254 $ 24,254 $ 30,789 $ 30,789
Investment securities 197,171 198,247 166,061 166,684
Loans:
Loans 407,961 411,581 355,513 355,067
Less, allowance for loan
losses (6,075) (6,075) (5,518) (5,518)
Net loans 401,886 405,506 349,995 349,549
Financial liabilities:
Deposits 524,138 525,222 454,375 454,261
Federal funds purchased 52,150 52,150 54,312 54,312
Unrecognized financial
instruments:
Commitments to extend
credit 95,889 96,740 87,067 87,045
Standby letters of credit 2,449 2,449 1,702 1,702
</TABLE>
NOTE 24 - REGULATORY MATTERS
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and its subsidiaries must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance-sheet-items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
50
<PAGE> 53
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1998 and 1997, that the Corporation and its subsidiaries met all
capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the OCC categorized
the Corporation and its subsidiaries as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following tables. There are no
conditions or events since that notification that management believes have
changed the institutions' category. Actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
(In thousands of dollars) Actual Requirement Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets):
Consolidated $64,409 15.56% $33,118 8.00% $41,398 10.00%
First National Bank 51,112 14.28% 28,633 8.00% 35,792 10.00%
National Bank of York County 4,468 10.93% 3,269 8.00% 4,086 10.00%
Florence County National Bank 4,268 24.33% 1,403 8.00% 1,754 10.00%
Tier I Capital (to risk weighted assets):
Consolidated $59,223 14.31% $16,559 4.00% $24,839 6.00%
First National Bank 46,625 13.03% 14,317 4.00% 21,475 6.00%
National Bank of York County 4,019 9.84% 1,634 4.00% 2,452 6.00%
Florence County National Bank 4,180 23.83% 702 4.00% 1,052 6.00%
Tier I Capital (to average assets):
Consolidated $59,223 9.08% $26,079 4.00% $32,598 5.00%
First National Bank 46,625 8.41% 22,172 4.00% 27,715 5.00%
National Bank of York County 4,019 6.63% 2,426 4.00% 3,032 5.00%
Florence County National Bank 4,180 15.29% 1,094 4.00% 1,367 5.00%
As of December 31, 1997:
Total capital (to risk weighted assets):
Consolidated $55,713 14.72% $30,279 8.00% $37,849 10.00%
First National Bank 46,707 14.26% 26,207 8.00% 32,758 10.00%
National Bank of York County 4,192 14.77% 1,911 8.00% 2,388 10.00%
Tier I Capital (to risk weighted assets):
Consolidated $50,972 13.47% $15,136 4.00% $22,705 6.00%
First National Bank 42,598 13.00% 13,103 4.00% 19,655 6.00%
National Bank of York County 3,917 13.80% 1,135 4.00% 1,703 6.00%
Tier I Capital (to average assets)
Consolidated $50,972 9.16% $22,259 4.00% $27,823 5.00%
First National Bank 42,598 8.39% 20,309 4.00% 25,386 5.00%
National Bank of York County 3,917 9.66% 1,622 4.00% 2,027 5.00%
</TABLE>
51
<PAGE> 54
NOTE 25 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for First National
Corporation (Parent Company only):
<TABLE>
<CAPTION>
December 31,
(In thousands of dollars) 1998 1997
<S> <C> <C> <C>
Balance Sheets:
Assets:
Cash $ 1,365 $ 456
Investment securities 3,767 3,417
Investment in subsidiaries 56,827 49,722
Premises and equipment 102 116
Other assets 240 189
Total assets $62,301 $53,900
Shareholders' equity $62,301 $53,900
Total liabilities and shareholders' equity $62,301 $53,900
Year Ended December 31,
1998 1997 1996
(In thousands of dollars)
Statements of Income:
Income:
Dividends from subsidiaries $ 4,518 $ 2,054 $4,499
Interest and dividends 113 177 51
Other income 26 -- 10
Total income 4,657 2,231 4,560
Expenses:
Interest expense 19 -- 20
Other general expense 249 398 144
Total expenses 268 398 164
Income before income taxes and equity in
undistributed earnings of subsidiaries 4,407 1,833 4,396
Applicable income tax benefit 42 86 41
Equity in undistributed earnings of
subsidiaries 3,056 4,547 1,091
Net income $ 7,505 $ 6,466 $5,528
</TABLE>
52
<PAGE> 55
Statements of Changes in Shareholders' Equity:
<TABLE>
<CAPTION>
(In thousands of dollars, except Accumulated
per share data) Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 2,244,339 $11,222 $16,260 $12,241 $ 54 $39,777
Comprehensive income:
Net income -- -- -- 5,528 -- 5,528
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- (104) (104)
Total comprehensive income 5,424
Cash dividends declared at $.74 per share -- -- -- (1,721) -- (1,721)
Common stock dividend of 10%, date of
record, October 31, 1996 120,891 604 2,654 (3,258) -- --
Common stock issued 184,794 924 3,942 -- -- 4,866
52
BALANCE, DECEMBER 31, 1996 2,550,024 12,750 22,856 12,790 (50) 48,346
Comprehensive income:
Net income -- -- -- 6,466 -- 6,466
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- 526 526
Total comprehensive income 6,992
Cash dividends declared at $.40 per share -- -- -- (2,059) -- (2,059)
Two-for-one common stock split, date of
record, May 19, 1997 2,556,427 -- -- -- -- --
Common stock issued 81,646 220 401 -- -- 621
BALANCE, DECEMBER 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900
Comprehensive income:
Net income -- -- -- 7,505 -- 7,505
Change in net unrealized gain (loss) on
securities available-for-sale, net of
reclassification adjustment and tax effects -- -- -- -- 798 798
Total comprehensive income 8,303
Cash dividends declared at $.48 per share -- -- -- (2,538) -- (2,538)
Common stock issued 105,000 263 2,373 -- -- 2,636
Common stock dividend of 10%, date of
record, November 2, 1998 528,678 1,321 14,605 (15,926) -- --
BALANCE, DECEMBER 31, 1998 5,821,775 $14,554 $40,235 $ 6,238 $1,274 $62,301
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 7,505 $ 6,466 $ 5,528
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 17 11 10
Discount accretion (161) (153) (4)
Increase in other assets (61) (106) --
Increase (decrease) in other liabilities 37 -- (1)
Undistributed earnings of subsidiaries (3,056) (4,547) (1,091)
Net cash provided by operating
activities 4,281 1,671 4,442
Cash flows from investing activities:
Proceeds from sales of investment
securities 6,537 -- --
Proceeds from maturities of investment
securities 2,328 9,000 320
Purchases of investment securities (7,780) (9,224) (2,922)
Purchases of premises and equipment (29) (26) (136)
Proceeds from sale of premises and equipment -- 24 --
Purchase of stock of subsidiaries (4,525) -- (4,500)
Net cash used by
investing activities (3,469) (226) (7,238)
Cash flows from financing activities:
Cash dividends paid (2,539) (2,059) (1,721)
Common stock issuance 2,636 607 4,655
Stock options exercised -- 14 211
Net cash provided (used) by
financing activities 97 (1,438) 3,145
Net increase in cash and cash equivalents 909 7 349
Cash and cash equivalents at beginning
of year 456 449 100
Cash and cash equivalents at end of year $ 1,365 $ 456 $ 449
</TABLE>
NOTE 26 - SUBSEQUENT EVENT:
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.
Supplementary Data
<TABLE>
<CAPTION>
Quarterly Results of Operations
(Dollars in thousands, except per share) 1998 Quarters 1997 Quarters
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $11,917 $11,864 $11,515 $10,824 $10,718 $10,645 $10,222 $9,559
Interest expense 4,813 5,136 4,988 4,620 4,522 4,520 4,354 3,968
Net interest income 7,104 6,728 6,527 6,204 6,196 6,125 5,868 5,591
Provision for loan losses 409 216 166 222 378 275 314 285
Noninterest income 2,081 2,096 1,924 1,792 1,673 1,589 1,492 1,505
Noninterest expense 6,469 5,655 5,431 4,994 5,342 4,963 4,651 4,498
Income before income taxes 2,307 2,953 2,854 2,780 2,149 2,476 2,395 2,313
Income taxes 676 945 901 867 636 770 753 708
Net income $ 1,631 $ 2,008 $ 1,953 $ 1,913 $ 1,513 $ 1,706 $ 1,642 $1,605
Basic earnings per share $ 0.28 $ 0.35 $ 0.34 $ 0.33 $ 0.30 $ 0.33 $ 0.32 $ 0.31
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
Not applicable
54
<PAGE> 57
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Terms Expiring in 1999
<TABLE>
<CAPTION>
Name, Age and Address Position in FNC Business Experience for the Past Five Years
<S> <C> <C>
Robert R. Hill, Jr.
Rock Hill, SC (32) Director Senior Executive Vice President of First National Bank since
November, 1998; President of the National Bank of York County
July, 1996 to November, 1998; organizer of the National Bank of
York County from October, 1995 to July, 1996; team leader for
NationsBank northern region of South Carolina from March, 1995 to
October, 1995; Vice President of Commercial Lending, Rock Hill
National Bank from October, 1990 to March, 1995.
William W. Coleman, Jr. Director President of Florence County National Bank since April, 1998;
Florence, SC (49) organizer of Florence County National Bank from September, 1997
to April, 1998; area executive of National Bank of South Carolina
from 1992 to 1997.
Ralph W. Norman Director President, Warren Norman Co., Inc. - Real estate
Rock Hill, SC (45) brokerage firm; Chairman of the Board, the National Bank of York
County.
C. Parker Dempsey Director Secretary, Dempsey Wood Products, Inc. (since 1990)
Orangeburg, SC (70) - Lumber Manufacturer; Executive Vice President, Stone Forest
Industries (prior to 1990) - Forestry services.
Samuel A. Rodgers Director Vice Chairman, Carolina Eastern, Inc. - agricultural products;
Scranton, SC (67) Chairman of the Board, Florence County National Bank.
Anne H. Oswald Director Partner, Oswald and White Realty - Real estate
Walterboro, SC (51) brokerage agency.
A. Dewall Waters Director Partner, Main Waters Enterprises Partnership -
Orangeburg, SC (54) Owner/Operator, McDonald's Restaurants.
Terms Expiring in 2000
Walter L. Tobin Director Superintendent, Orangeburg School District Five
Orangeburg, SC (57)
Charles W. Clark Director President, Santee Shores, Inc. - Real Estate
Santee, SC (49) Development and Management.
C. John Hipp, III President and Chief 1994 - present, President and Chief Executive Officer,
Orangeburg, SC (47) Executive Officer First National Bank and First National Corporation; 1991 to 1994,
President, Rock Hill National Bank and Rock Hill National Bank
Corporation; 1990 to 1991, Executive Vice President, Rock Hill
National Bank.
Dwight W. Frierson Director Vice President and General Manager, Orangeburg
Orangeburg, SC (42) Coca-Cola Bottling Company; Owner/Operator, TCBY Orangeburg;
</TABLE>
55
<PAGE> 58
<TABLE>
<S> <C> <C>
Partner, TCBY, Lexington.
Edward V. Mirmow, Jr. Director Retired Attorney (since 1991).
Orangeburg, SC (68)
Larry D. Westbury Vice Chairman of Vice Chairman of the Board, First National Bank and
Orangeburg, SC (66) the Board First National Corporation since 1998; Chairman of the
Board, First National Bank and First National Corporation from
1994 to 1998; Retired in 1994 as President and Chief Executive
Officer of First National Corporation and First National Bank.
Terms Expiring in 2001
E. Everett Gasque, Jr. Director President, E. E. Gasque & Son, Inc. - Farming
Elloree, SC (68) Supplies and Products.
John L. Gramling, Jr. Director Farmer.
Orangeburg, SC (67)
Robert R. Horger Chairman Chairman of the Board, First National Bank and
Orangeburg, SC (48) of the Board First National Corporation since 1998;
Vice Chairman of the Board, First National Bank and First National
Corporation from 1994 to 1998; Attorney-Horger, Barnwell and Reid.
Harry M. Mims, Jr. Director President, J. F. Cleckley & Company - Site
Orangeburg, SC (57) development and paving.
Cathy Cox Yeadon Director Human Resources Manager - Cox Wood Preserving
Orangeburg, SC (49) Co., Inc - Wood Preserving and Processing
James W. Roquemore Director Executive Vice President, Patten Seed Company, Inc.,
Orangeburg, SC (43) Lakeland, Georgia; General Manager of Super Sod/Carolina -
Production and marketing of turf, grass, sod and seed. Owner and
operator of golf courses in Georgia.
Johnny E. Ward Director President, W & W Truck & Tractor Company, Inc. -
Moncks Corner, SC (57) Logging and farming equipment, sales and service.
</TABLE>
Executive Officers
C. John Hipp, III (Age 47). Mr. Hipp has served as President and Chief
Executive Officer of the Company and First National Bank since April 1994. From
1991 to 1994, Mr. Hipp served as President of Rock Hill National Bank and Rock
Hill National Corporation.
Robert R. Horger (Age 48). Mr. Horger was named Chairman of the Company and
First National Bank in January 1998 and served as Vice Chairman of the Company
and First National Bank from April 1994 to January 1998. Mr. Horger became a
director of the Company in April 1991. Mr. Horger is an attorney with Horger,
Barnwell and Reid.
L.D. Westbury (Age 66). Mr. Westbury has served as Vice Chairman of the Company
and First National Bank since January 1998 and served as Chairman of the
Company and First National Bank from April 1994 to January 1998. Mr. Westbury
served as President of the Company and First National Bank from November 1986
to March 1994, as Executive Vice President of First National Bank from May 1986
until November 1986, and as Senior Vice President of First National Bank from
April 1975 until May 1986.
W. Louis Griffith (Age 47). Mr. Griffith has served as Chief Financial Officer
of the Company since October 1995, and as Senior Vice President and Chief
Financial Officer of First National Bank since December 1994. He served as Vice
President and Chief Financial Officer of First National Bank from August until
December 1994, and as Vice President of First National
56
<PAGE> 59
Bank from March 1986 until August 1994.
James C. Hunter, Jr. (Age 56). Mr. Hunter has served as Secretary and Treasurer
of the Company since May 1986 and as Executive Vice President of First National
Bank since April 1993. He served as Senior Vice President of First National
Bank from May 1987 until April 1993 and Vice President of First National Bank
from March 1976 until May 1987.
Robert R. Hill, Jr. (Age 32). Mr. Hill has served as Senior Executive Vice
President of First National Bank since November 1998. He served as President
and Chief Executive Officer of National Bank of York County from July 1996 to
November 1998, organizer of the National Bank of York County from October 1995
to July 1996 and team leader for NationsBank northern region of South Carolina
from March 1995 to October 1995.
Dane H. Murray (Age 49). Mr. Murray has served as Executive Vice President of
First National Bank since August 1997. Mr. Murray served as Senior Vice
President of First National Bank from May 1987 until August 1997.
Phil M. Smith (Age 46). Mr. Smith has served as Executive Vice President of
First National Bank since February 1997. Mr. Smith served as Senior Vice
President of First National Bank from April 1988 until February 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
As required by Section 16(a) of the Securities Exchange Act of 1934,
the Company's directors and executive officers are required to report
periodically their ownership of the Company's Common Stock and any changes in
ownership to the Securities and Exchange Commission. Based on a review of Forms
3, 4 and 5 and written representations made to the Company, it appears that all
such reports for these persons were filed in a timely fashion in 1998.
Item 11. Executive Compensation
The following table summarizes for the years indicated current and
long-term compensation and stock related compensation for the Chief Executive
Officer and the four most highly compensated executive officers other than the
Chief Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation (1) Awards
Long-Term
Name and Year Salary Bonus (2) Restricted Securities Underlying All Other
Principal Position Stock Awards Options (3) Compensation (4)
<S> <C> <C> <C> <C> <C> <C>
C. John Hipp, III 1998 $204,721 $68,875 -- -- $5,556
President and Chief 1997 174,231 49,157 -- -- 4,523
Executive Officer 1996 157,772 30,704 11,977(5) 18,480 4,172
James C. Hunter, Jr 1998 $105,250 $42,031 -- -- $3,215
Executive Vice 1997 93,534 24,229 -- -- 2,578
President 1996 92,043 15,960 -- 11,550 2,467
Robert R. Hill, Jr 1998 $105,077 $ 6,000 -- -- $3,245
Senior Executive 1997 94,603 4,500 -- -- 2,781
Vice President 1996 85,213 -- -- 11,550 850
Dane H. Murray 1998 $ 95,631 $31,164 -- -- $2,951
Executive Vice 1997 81,236 25,459 -- -- 2,292
President 1996 72,312 22,558 -- 11,550 2,063
Phil M. Smith 1998 $ 93,000 $31,040 -- -- $2,947
Executive Vice 1997 82,543 24,207 -- -- 2,283
President 1996 70,897 21,458 -- 11,550 2,040
</TABLE>
57
<PAGE> 60
(1) Prerequisites and personal benefits did not exceed the lesser of
$50,000 or 10% of total salary plus bonus.
(2) Figures shown represent actual cash bonuses paid during the year
indicated. First National Bank maintains an incentive compensation
plan known as the Employee Incentive Compensation Plan ("Plan").
Amounts payable under the Plan are based on the Company's performance
in terms of its Return on Equity (ROE) for any calendar year. The
First National Bank Compensation Committee sets performance goals for
the Company at the beginning of any calendar year. The Board of
Directors of the Company, however, has the discretion to change during
any year the performance goals, payment amounts and other requirements
of the Plan. The Plan creates an "incentive pool" determined by
multiplying a certain percentage of First National Bank income over a
stated percentage ROE for the calendar year in question. Amounts paid
into the incentive pool are distributed to participating employees
based on the individual employee's merit and salary level.
(3) Figures shown represent the number of shares of Company stock subject
to options awarded to the named executive officer during the years
indicated. Option grants have been adjusted to give effect to stock
dividends and splits.
(4) Includes contributions by First National Bank through matching or
discretionary contributions to its Employee Savings Plan allocated to
the named executive officers' accounts, and term life insurance
premiums paid by First National Bank for the benefit of the named
executive officers as follows:
(5) Value of restricted stock holdings at December 31, 1998 was $335,356.
<TABLE>
<CAPTION>
Employee Savings Plan Life Insurance Premiums
<S> <C> <C> <C>
C. John Hipp, III 1998 $3,200 $2,356
1997 3,200 1,323
1996 3,000 1,172
James C. Hunter, Jr. 1998 2,031 1,184
1997 1,870 708
1996 1,789 678
Robert R. Hill, Jr. 1998 $2,150 1,095
1997 1,806 975
1996 0 850
Dane H. Murray 1998 1,868 1,083
1997 1,647 645
1996 1,497 566
Phil M. Smith 1998 1,877 1,070
1997 1,650 632
1996 1,479 561
</TABLE>
The Employee Savings Plan is a "tax qualified" plan under Section
401(a) of the Internal Revenue Code and covers all First National Bank
employees.
Employment Agreement
In March, 1994, C. John Hipp, III, entered into an Employment
Agreement with the Company providing for his employment as President and Chief
Executive Officer of First National Bank. The term of the agreement began May
1, 1994, and ended April 30, 1997, with provision for Mr. Hipp's continued
employment at will after April 30, 1997. The agreement provides for
compensation for Mr. Hipp at the 1994 level or a greater rate set by the Board
of Directors of the Company or by
58
<PAGE> 61
committee appointed by the Board of Directors, plus fringe benefits and
reimbursement of expenses. Under the terms of the agreement, Mr. Hipp has also
been granted options to purchase up to a total of 13,975 after adjustments for
stock dividends and splits, shares of the Company's common stock under the
terms and conditions of First National Corporation's Incentive Stock Option
Plan of 1992. If Mr. Hipp's employment is terminated for any reason by either
Mr. Hipp or by the Company after April 30, 1997 and prior to April 30, 2004,
following a sale or merger, Mr. Hipp will be entitled to continued compensation
at the rate then in effect for a period of three years or until April 30, 2004,
whichever period is shorter. In the event of Mr. Hipp's termination after April
30, 1997 and prior to April 30, 2004 without cause or because of death or
disability, Mr. Hipp (or his estate) will be entitled to be paid his then
current salary for a period of one year from the date of such termination. Upon
termination without cause, after a sale or merger, or after disability,
however, Mr. Hipp is under an affirmative obligation for one year following
termination to actively seek and accept comparable alternative employment, and
any compensation received by him or earnable by him with reasonable diligence
following such termination will be deducted from amounts owed to him by the
Company under the agreement.
Restricted Stock Plan
On January 25, 1996, the Board of Directors of the Company approved
the issuance of restricted stock to C. John Hipp, III, President and Chief
Executive Officer of the Company. On March 7, 1996, the Board of Directors
fixed the number of restricted shares issuable at 11,977. The grant is
conditioned upon continued employment of Mr. Hipp as Chief Executive Officer of
the Company at each vesting date as follows: a) 25% of the shares vest free of
restrictions in 1999; b) an additional 25% of the shares vest free of
restrictions in 2001; and c) the remaining 50% of the shares vest free of
restrictions in 2003. Termination of Mr. Hipp's employment as Chief Executive
Officer for any reason (except death or change in control of the Company) prior
to a vesting date would terminate any interest in non-vested shares. Prior to
vesting of the shares, as long as Mr. Hipp remains Chief Executive Officer of
the Company, he will have the right to vote such shares and to receive
dividends paid with respect to such shares. All restricted shares will fully
vest in the event of a change in control of First National Corporation or upon
death of Mr. Hipp while serving as Chief Executive Officer.
AGGREGATED OPTION EXERCISES DURING LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table shows aggregated option exercises during 1998 and
year end 1998 option values.
<TABLE>
<CAPTION>
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised In
on Value Options (1) the-Money Options (2)
Executive Officer Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C> <C> <C>
C. John Hipp, III -- -- 23,215 9,240 $407,006 $150,704
James C. Hunter, Jr -- -- 5,775 5,775 94,190 94,190
Robert R. Hill, Jr -- -- 5,775 5,775 94,190 94,190
Dane H. Murray -- -- 5,775 5,775 94,190 94,190
Phil M. Smith -- -- 5,775 5,775 94,190 94,190
</TABLE>
(1) Figures shown represent the total number of shares subject to
unexercised options held by the indicated executive officers at year
end 1998. The number of shares subject to options which were
exercisable and unexercisable at year end 1998 are also shown. The
number of options granted have been adjusted to reflect stock
dividends and splits.
(2) Dollar amounts shown represent the value of stock options held by the
indicated executive officers at year end 1998. Only those shares
subject to options which are "in the money" are reported. Shares
subject to an option are considered to be "in the money" if the fair
market value at year-end 1998 of such shares of the Company's Common
Stock exceeds the exercise or base price of such shares. At year end
1998, the Company's stock price exceeded the exercise price of all
shares subject to option, thus all stock options were considered "in
the money." For those options "in the money," value is computed based
on the difference between the fair market value of the Company Common
Stock at year end 1998 and the exercise or base price of the shares
subject to underlying option. The value of shares subject to options
exercisable and unexercisable at year end 1998 is also shown.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee for the year ended December 31, 1998, was
composed of A. Dewall Waters, Chairman, C. Parker Dempsey, Harry M. Mims, Jr.,
Larry D. Westbury and C. John Hipp, III. Mr. Hipp is currently President and
Chief
59
<PAGE> 62
Executive Officer of the Company and First National Bank, and Mr. Westbury is
currently Vice Chairman of the Board of the Company and is a former Chairman,
President and Chief Executive Officer of the Company and First National Bank.
Although Mr. Hipp specifically excluded himself from any Compensation Committee
discussions concerning his own compensation, he did participate in discussions
concerning the compensation of other executive officers.
DEFINED BENEFIT PENSION PLAN
First National Bank maintains a noncontributory, defined benefit
pension plan ("Pension Plan") covering its employees, including executive
officers. The Pension Plan is a "tax qualified" plan under Section 401(a) of the
Internal Revenue Code and must also comply with provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
The pension table below shows estimated annual benefits payable upon
retirement to persons in the specified remuneration and years of service
categories as if retirement had occurred on December 31, 1998. The benefits
shown are computed on a single life only annuity basis.
ESTIMATED ANNUAL BENEFITS UNDER FIRST NATIONAL BANK'S PENSION PLAN
Years of Service
<TABLE>
<CAPTION>
FAC* 10 20 30 40
<S> <C> <C> <C> <C>
$ 30,000 $ 2,700 $ 5,400 $ 8,100 $ 9,450
40,000 4,172 8,344 12,516 14,602
50,000 5,722 11,444 17,166 20,027
60,000 7,272 14,544 21,816 25,452
70,000 8,822 17,644 26,466 30,877
80,000 10,372 20,744 31,116 36,302
90,000 11,922 23,844 35,766 41,727
100,000 13,472 26,944 40,416 47,152
110,000 15,022 30,044 45,066 52,577
120,000 16,572 33,144 49,716 58,002
</TABLE>
*FAC: Final Average Compensation' computed as the average amount of
a participant's compensation earned over the last 60 months
prior to his or her retirement date or early termination of
employment.
Benefits. Upon a participant's retirement at his normal retirement date
(age 65), a monthly retirement benefit will be paid in accordance with Pension
Plan provisions. The amount of such monthly retirement benefit will equal 1/12
of the sum of (i) and (ii) as follows: (i) .90% of the Pension Plan
participant's final average compensation multiplied by his years of credited
service up to a maximum of 35 years; and (ii) .65% of the Pension Plan
participant's final average compensation in excess of his covered compensation
multiplied by his years of credited service up to a maximum of 35 years. For
purposes of the above formula, a participant's final average compensation
consists of the average amount of a participant's compensation earned over the
last 60 months prior to early or normal retirement. In addition, a participant
is credited with one year of credited service under the Pension Plan for each
year in which 1,000 or more hours are worked. Benefits under the Pension Plan
are not subject to deduction for Social Security or other offset amounts.
Compensation Under the Pension Plan. For purposes of computing a
participant's final average compensation, the Pension Plan uses the following
definition of participant compensation: W-2 earnings, including bonuses,
overtime and commissions, but excluding employer contributions to employee
benefit plans, as limited by Internal Revenue Code Section 401 (a)(17).
Information as to Executive Officer Participation. For purposes of
executive officer participation in the Pension Plan, the executive officer
compensation used for purposes of computing executive officer benefits under the
Pension Plan is the same as that shown in the Summary Compensation Table. As of
December 31, 1998 the named executive officers had accumulated
<PAGE> 63
the following years of credited service toward retirement: C. John Hipp, III, 5
years of credited service; James C. Hunter, Jr., 34 years credited service;
Robert R. Hill, Jr., 3 years credited service; Dane H. Murray, 28 years of
credited service; and Phil M. Smith, 25 years of credited service.
DIRECTOR COMPENSATION
During 1998, First National Corporation Directors each received an
annual retainer of $ 1,200, payable quarterly, plus a fee of $250 per month. In
addition, members of the Executive Committee also received an annual retainer of
$7,800, paid at the rate of $150 per week. Members of the Audit Committee were
paid $100 per committee meeting attended. Directors who are also officers of
First National Bank, National Bank of York County, or Florence County National
Bank do not receive any such fees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 12, 1999, the number and
percentage of outstanding shares beneficially owned by (i) each director of the
Company, (ii) each person named in the Summary Compensation Table, and (iii) all
executive officers and directors of the Company as a group. No person is known
by the Company to own more than 5% of the outstanding Common Stock.
<TABLE>
<CAPTION>
Name Elected Director Beneficially Owned Ownership
<S> <C> <C> <C>
E. Everett Gasque, Jr. 1993 47,941(1) *
John L. Gramling, Jr. 1974+ 6,573(2) *
Robert R. Horger 1991 31,601(3) *
Harry M. Mims, Jr. 1988 29,316 *
Samuel A. Rodgers 1998 11,036 *
James W. Roquemore 1994 15,601(4) *
Johnny E. Ward 1991 55,723(5) *
Ralph W. Norman 1996 5,785(6) *
Walter L. Tobin 1996 462(7) *
Charles W. Clark 1993 68,611 1.2%
C. John Hipp, III 1994 58,015(8) 1.0%
Dwight W. Frierson 1996 5,217(9) *
Edward V. Mirmow, Jr. 1983+ 94,707(10) 1.6%
Larry D. Westbury 1986 22,694 *
Cathy Cox Yeadon 1997 7,500(11) *
C. Parker Dempsey 1983+ 8,582 *
William W. Coleman, Jr. 1998 12,452(12) *
Anne H. Oswald 1991 727 *
Robert R. Hill, Jr. 1996 17,716(13) *
A. Dewall Waters 1987 24,078(14) *
James C. Hunter, Jr. N/A 28,922(15) *
Dane H. Murray N/A 45,435(16) *
Phil M. Smith N/A 29,955(17) *
All directors and executive
officers as a Group (22 Persons) 655,597(18) 11.3%
</TABLE>
* Less than 1% of outstanding FNC Common Stock.
+ Includes service as a director of First National Bank prior to formation of
the Company in 1985.
(1) Includes 2,736 shares owned by Mr. Gasque's spouse.
(2) Includes 748 shares owned by Mr. Gramling's spouse.
(3) Includes 7,741 shares held in an IRA; 693 shares held as custodian for Mr.
Horger's daughter; and 3,300 shares owned by Mr. Horger's spouse.
(4) Includes 1,152 shares in an IRA; 2,891 shares owned by Mr. Roquemore's
spouse in an IRA; and 5,027 shares held by
<PAGE> 64
Mr. Roquemore as custodian for his three children.
(5) Includes 19,623 shares held in an IRA; 231 shares held by Mr. Ward as
custodian for his grandchild; 4,800 shares held by a partnership in which
Mr. Ward is a partner; 2,956 shares owned by Mr. Ward's spouse; and 4,829
shares held in a retirement plan.
(6) Includes 1,509 shares held by Mr. Norman's spouse as custodian for their
children.
(7) Jointly owned with Mr. Tobin's spouse.
(8) Includes 4,506 shares in an IRA; 382 shares owned by Mr. Hipp's spouse in
an IRA; 5,788 shares owned by a general partnership in which Mr. Hipp owns
an interest; 23,215 shares subject to currently exercisable options; 13,158
shares of restricted stock which Mr. Hipp presently has the right to vote;
and 6,690 shares owned by a general partnership in which Mr. Hipp owns an
interest.
(9) Includes 3,306 shares jointly owned with Mr. Frierson's spouse; and 1,911
shares held as custodian for Mr. Frierson's children.
(10) Includes 2,310 shares owned by Mr. Mirmow's spouse.
(11) Includes 2,015 shares owned by Mrs. Yeadon's spouse.
(12) Includes 110 shares owned jointly with Mr. Coleman's spouse; 2,541 shares
held in an IRA;and 6,686 shares owned by a general partnership in which Mr.
Coleman owns an interest.
(13) Includes 1,005 shares held in an IRA; 5,775 shares subject to currently
exercisable options; and 6,686 shares owned by a general partnership in
which Mr. Hill owns an interest.
(14) Includes 11,391 shares held in an IRA.
(15) Includes 1,846 shares owned jointly with Mr. Hunter's spouse; 401 shares
owned by Mr. Hunter's spouse; 4,330 shares in an IRA; 5,775 shares subject
to currently exercisable options; 5,788 shares owned by a general
partnership in which Mr. Hunter owns an interest; and 3,343 shares owned by
a general partnership in which Mr. Hunter owns an interest.
(16) Includes 5,794 shares in an IRA; 1,910 shares owned by Mr. Murray's spouse
in an IRA; 670 shares held by Mr. Murray's wife as custodian for a child;
5,775 shares subject to currently exercisable options; 5,788 shares owned
by a general partnership in which Mr. Murray owns an interest; and 3,343
shares owned by a general partnership in which Mr. Murray owns an interest.
(17) Includes 14,241 shares owned jointly with Mr. Smith's spouse; 808 shares in
a 401-K; 5,775 shares subject to currently exercisable options; 5,788
shares owned by a general partnership in which Mr. Smith owns an interest;
and 3,343 shares owned by a general partnership in which Mr. Smith owns an
interest.
(18) Includes 8,085 shares subject to currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
First National Bank, National Bank of York County, and Florence County
National Bank have loan and deposit relationships with some of the directors of
the Company and Banks and with companies with which the directors are associated
as well as with members of the immediate families of the directors ("Affiliated
Persons"). (The term "members of the immediate families" for purposes of this
paragraph includes each person's spouse, parents, children, siblings, mothers
and fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.)
Loans to Affiliated Persons were made in the ordinary course of business, were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons,
and did not, at the time they were made, involve more than the normal risk of
collectibility or present other unfavorable features.
Director Robert R. Horger is a partner in the law firm of Horger,
Barnwell & Reid, which First National Bank has retained as general counsel
during the past five years. First National Bank proposes to retain the firm
during the current fiscal year.
<PAGE> 65
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Filed:
First National Corporation and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed: None
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
3.1 Articles of Incorporation of the Registrant, as
amended (incorporated by reference to exhibits filed
with the Registrant's Form 10-Q for the quarter ended
June 30, 1996).
3.2 Bylaws of the Registrant, as amended (incorporated by
reference to exhibits filed with the Registrant's
Form 10-K for the year ended December 31, 1995).
10.1* First National Corporation Incentive Stock Option
Plan of 1992 (incorporated by reference to exhibits
filed with Registration Statement on Form S-4,
Registration No. 33-52052).
10.2* First National Corporation Executive Incentive
Compensation Plan (incorporated by reference to
exhibits filed with Registration Statement on Form
S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend Reinvestment Plan
(incorporated by reference to exhibits filed with
Registration Statement on Form S-8, Registration No.
33-58692).
10.4* First National Corporation Incentive Stock Option
Plan of 1996 (incorporated by reference to
Registrant's Definitive Proxy Statement filed in
connection with its 1996 Annual Meeting of
Shareholders).
10.5* Employment Agreement between the Registrant and C.
John Hipp, III, dated May 1, 1994 (incorporated by
reference to Registrant's Form 10-K for the year
ended December 31, 1995).
21 Subsidiaries of the Registrant (incorporated by
reference to exhibits filed with Registration
Statement on Form S-4, Registration No. 33-52052).
23 Consent of J. W. Hunt and Company, LLP.
27 Financial Data Schedule. (for SEC use only)
</TABLE>
* Denotes a management compensatory plan or arrangement.
(b) No reports were filed on Form 8-K during the fourth quarter of 1998.
<PAGE> 66
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Orangeburg
and State of South Carolina, on the 18 day of March, 1999.
First National Corporation
By /s/ C. John Hipp, III
----------------------------------------
C. John Hipp, III
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on March 18, 1999.
/s/ C. John Hipp, III
--------------------------------------------
C. John Hipp, III
President and Chief Executive Officer
/s/ W. Louis Griffith
--------------------------------------------
W. Louis Griffith
Chief Financial Officer
/s/ Charles W. Clark
--------------------------------------------
Charles W. Clark
Director
/s/ C. Parker Dempsey
--------------------------------------------
C. Parker Dempsey
Director
/s/ Dwight W. Frierson
--------------------------------------------
Dwight W. Frierson
Director
/s/ E. Everett Gasque, Jr.
--------------------------------------------
E. Everett Gasque, Jr.
Director
/s/ John L. Gramling, Jr.
--------------------------------------------
John L. Gramling, Jr.
Director
/s/ Robert R. Hill, Jr.
--------------------------------------------
Robert R. Hill, Jr.
Director
/s/ Robert R. Horger
--------------------------------------------
Robert R. Horger
Director
--------------------------------------------
Samuel A. Rodgers
Director
--------------------------------------------
William W. Coleman, Jr.
Director
<PAGE> 67
/s/ Harry M. Mims, Jr.
--------------------------------------------
Harry M. Mims, Jr.
Director
/s/ E.V. Mirmow, Jr.
--------------------------------------------
E.V. Mirmow, Jr.
Director
--------------------------------------------
Ralph W. Norman
Director
/s/ Anne H. Oswald
--------------------------------------------
Anne H. Oswald
Director
/s/ James W. Roquemore
--------------------------------------------
James W. Roquemore
Director
/s/ Walter L. Tobin
--------------------------------------------
Walter L. Tobin
Director
/s/ Johnny E. Ward
--------------------------------------------
Johnny E. Ward
Director
/s/ A. Dewall Waters
--------------------------------------------
A. Dewall Waters
Director
/s/ L.D. Westbury
--------------------------------------------
L. D. Westbury
Director
/s/ Cathy Cox Yeadon
--------------------------------------------
Cathy Cox Yeadon
Director
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
<S> <C>
23 Consent of J. W. Hunt and Company, LLP.
27 Financial Data Schedule. (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Board of Directors
First National Corporation
We consent to the incorporation by reference of our Report, dated February 2,
1999, included in First National Corporation's annual report on Form 10-K for
the year ended December 31, 1998, into the Registration Statement on Form S-8
(File No. 333-26029) filed by First National Corporation with respect to the
First National Corporation Employee Savings Plan, the Registration Statement on
Form S-8 (File No. 333-26031) filed by First National Corporation with respect
to the First National Corporation Incentive Stock Option Plan of 1996, and the
Registration Statement on Form S-8 (File No. 333-26033) filed by First National
Corporation with respect to the First National Corporation Incentive Stock
Option Plan of 1992.
/s/ J.W. Hunt and Company, LLP
-----------------------------------------
J.W. Hunt and Company, LLP
Columbia, South Carolina
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF INCOME OF FIRST NATIONAL CORPORATION FOR THE TWELVE MONTHS ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,254
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,791
<INVESTMENTS-CARRYING> 46,380
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<LONG-TERM> 0
0
0
<COMMON> 14,554
<OTHER-SE> 47,747
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<INTEREST-INVEST> 11,418
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<INTEREST-DEPOSIT> 17,113
<INTEREST-EXPENSE> 19,557
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<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 8.01
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<RECOVERIES> 260
<ALLOWANCE-CLOSE> 6,075
<ALLOWANCE-DOMESTIC> 6,075
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
