<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, 1999
Commission file number 001-12669
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-0799315
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
950 John C. Calhoun Drive, S.E.
Orangeburg, South Carolina 29115
(Address of principal executive offices, including zip code)
(803) 534-2175
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $2.50 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at March 16, 2000 was $118,584,797 based on the closing sale
price of $18.625 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 16, 2000 was 7,041,101.
Documents Incorporated by Reference
Portions of the Registrant's 1999 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Registrant's Proxy Statement for its
2000 Annual Meeting of Shareholders are incorporated by reference into Part III.
<PAGE> 2
Form 10-K Cross-Reference Index
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Item 1. Business ................................................................................ 1
Item 2. Properties .............................................................................. 6
Item 3. Legal Proceedings ....................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters (1) ........... 7
Item 6. Selected Financial Data (1) ............................................................. 8
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 ............................... 25
Item 8. Financial Statements and Supplementary Data (1) ......................................... 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures ... 55
PART III
Item 10. Directors and Executive Officers of the Registrant (2) .................................. 55
Item 11. Executive Compensation (2) .............................................................. 55
Item 12. Security Ownership of Certain Beneficial Owners and Management (2) ...................... 55
Item 13. Certain Relationships and Related Transactions (2) ...................................... 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 55
</TABLE>
(1) Incorporated by reference to the Registrant's 1999 Annual Report to
Shareholders.
(2) Incorporated by reference to the Registrant's Proxy Statement for its 2000
Annual Meeting of Shareholders.
<PAGE> 3
PART I
Item 1. Business
General
First National Corporation (the "Company") 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 CreditSouth Financial Services Corporation, an upscale
finance company which opened for business in 1998. The Company engages in no
significant operations other than the ownership of its subsidiaries.
On July 31, 1999, the Company and FirstBancorporation, Inc. ("FirstBanc")
consummated the merger of FirstBanc into the Company. Under the terms of the
merger, 1.222 shares of First National Corporation common stock were exchanged
for each share of FirstBanc common stock. The transaction was accounted for by
the pooling of interests method of accounting for business combinations.
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-three locations in
eighteen 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 CreditSouth Financial Services Corporation conducts its business
from four locations in three 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.
1
<PAGE> 4
Employees
The Company does not have any salaried employees. As of December 31, 1999,
the Company's subsidiaries had 426 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 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.
2
<PAGE> 5
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.
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
3
<PAGE> 6
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, 1999, the Company, First National Bank, National Bank of York
County and Florence County National Bank had leverage ratios of 8.64%, 8.04%,
7.63% and 10.94%, respectively, and total risk adjusted capital ratios of
13.95%, 13.10%, 11.87% and 14.95%, 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 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
undercapitalized. 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.
4
<PAGE> 7
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 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 2000.
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
5
<PAGE> 8
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, constitute 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-seven other properties and leases twelve 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. CreditSouth Financial Services
Corporation leases four offices, one in Orangeburg, South Carolina used for
finance company operations, two in Florence, South Carolina used as a mortgage
loan production office and finance company operations, and one in Socastee,
South Carolina used for finance company operations.
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.
6
<PAGE> 9
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.
Executive Officers
C. John Hipp, III (Age 48). 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 49). 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.
Dwight W. Frierson (Age 43). Mr. Frierson has served as Vice Chairman of First
National Corporation and First National Bank since January 2000 and served as
director of the Company from April 1996. Mr. Frierson is Vice President and
General Manager of a local bottling company.
W. Louis Griffith (Age 48). 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 Bank from March 1986
until August 1994. Mr. Griffith has announced his intention to resign from the
Company effective March 29, 2000.
James C. Hunter, Jr. (Age 57). 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 33). 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 50). 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 47). 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.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Certain information required by this item is incorporated herein by
reference to the information under the caption "Price Range of Common Stock and
Dividends" on page 23 of the Company's 1999 Annual Report to Shareholders. As of
March 16, 2000, the Company had issued and outstanding 7,041,101 shares of
Common Stock which were held of record by approximately 2,900 persons.
Dividends are paid by the Company from its assets which are provided
primarily by dividends paid to the Company by First National Bank. Certain
restrictions exist regarding the ability of the Company's subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances.
The approval of the OCC is required to pay dividends in excess of the Banks'
respective 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, 1999, $12,208,000 of the banking
subsidiaries' retained earnings were available for distribution to First
National Corporation as dividends without prior regulatory approval. For the
year ended December 31, 1999, the banking subsidiaries paid dividends to the
Company of approximately $5,227,000.
7
<PAGE> 10
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference to
the information set forth under the caption "Consolidated Financial Highlights"
on page 2 and 25 of the Company's 1999 Annual Report to Shareholders.
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 CreditSouth Financial Services
Corporation. The five year period 1995 through 1999 is discussed with particular
emphasis on the years 1997, 1998 and 1999. 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 CreditSouth
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 CreditSouth's common stock.
The remaining 20 percent of CreditSouth 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.
On July 31, 1999, the Corporation completed the merger with
FirstBancorporation, Inc. ("FirstBanc") through the issuance of 1.222 shares of
First National Corporation common stock for each share of outstanding common
stock of FirstBanc. The transaction was accounted for by the pooling of
interests method of accounting for business combinations.
Year 2000
First National Corporation addressed the Year 2000 challenges in a prompt
and responsible manner. The Corporation dedicated resources to ensure that
systems and services would not be compromised or otherwise negatively impacted
by the century date change. First National Corporation also put in place
processes to monitor liquidity, fiduciary and credit quality issues related to
the Year 2000.
The Corporation successfully completed its transition to the Year 2000 with
no impact to the Corporation's results of operations or financial condition
other than the cost of the project. In addition, the Corporation is not aware of
any significant third party relationships which were negatively impacted by
their lack of Year 2000 readiness; however, First National continues to monitor
its third party relationships for such problems.
The expenses associated with Year 2000 did not have a material effect on the
results of operations or financial condition of First National Corporation.
8
<PAGE> 11
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 $7,940,000, $8,271,000, and
$7,413,000 in 1999, 1998 and 1997, respectively. Net income decreased 4.0
percent in 1999 when compared to 1998 and increased 11.6 percent in 1998 when
compared to 1997. Basic earnings per share decreased to $1.14 compared to $1.24
in 1998. Per share earnings in 1997 were $1.14. Diluted earnings per share
deceased to $1.13 compared to $1.21 in 1998 and $1.11 in 1997. The decrease in
net income in 1999 resulted primarily from the non-recurring expenses associated
with the acquisition of FirstBanc and two Carolina First branches. The increase
in net income in 1998 compared to 1997 resulted primarily from an increase in
interest income as well as an increase in noninterest income.
The per share cash dividend declared in 1999 was $0.52 compared to $0.48 in
1998 and $0.40 in 1997.
The book value per share of First National Corporation remained the same in
1999, and increased $0.51 or 5.0 percent in 1998, and $0.82 or 8.7 percent in
1997. The return on average assets was .98 percent in 1999, 1.18 percent in 1998
and 1.19 percent in 1997. The return on average shareholders' equity was 10.58
percent for 1999 and was 12.14 percent for 1998 and 12.64 percent in 1997.
Increases in both deposits and earning assets were realized during 1999
compared to 1998. Deposits at December 31, 1999 were $689,665,000, up
$77,774,000 or 12.7 percent compared to December 31, 1998. At year-end 1998,
deposits were $611,891,000, up $80,054,000 or 15.1 percent compared to December
31, 1997. Average deposits in 1999 were $637,682,000, up $53,731,000 or 9.2
percent from 1998. The average deposits in 1998 were $583,951,000 compared to
$514,903,000 in 1997, an increase of $69,048,000 or 13.4 percent. Earning assets
reached $807,961,000 in 1999, up $101,916,000, or 14.4 percent when compared to
year-end 1998. At year-end 1998, earning assets were $706,045,000, up
$100,820,000 or 16.7 percent from year-end 1997. Average earning assets for 1999
were $778,598,000, an increase of $99,915,000, or 14.7 percent, compared to
1998. In 1998 average earning assets were $678,683,000, an increase of
$87,172,000, or 14.7 percent, compared to 1997. The increase in earning assets
in 1999, 1998 and 1997 resulted primarily from banking operations at First
National Bank, National Bank of York County, and Florence County National Bank.
Interest income increased by $6,082,000 or 11.2 percent, for the year ended
December 31, 1999 when compared to December 31, 1998. This increase is primarily
a result of an $101,916,000, or 14.4 percent, increase in earning assets. For
the year ended December 31, 1998, interest income increased $5,591,000, or 11.4
percent, when compared to the same period in 1997. This increase was primarily
the result of a $100,820,000 or 16.7 percent increase in earning assets.
Interest expense increased by $794,000, or 3.4 percent, for the year ended
December 31, 1999 compared to the same period in 1998. For the year ended
December 31, 1998, interest expense increased $2,334,000, or 11.2 percent, when
compared to the same period in 1997. The 1999 increase is primarily the result
of a $103,686,000 or 17.8 percent increase in interest-bearing liabilities just
as the 1998 increase was primarily the result of a $70,094,000 or 13.6 percent
increase in interest-bearing liabilities.
9
<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 1999 and 1998,
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 $5,288,000 or 16.9 percent during 1999
compared to 1998. The increase was due primarily to an increase in volume of
earning assets. Net interest income increased $3,257,000 or 11.6 percent during
1998 when compared to 1997. The increase was also due primarily to increased
volume of earning assets. The average yield on earning assets was 7.8 percent in
1999, 8.0 percent in 1998, and 8.3 percent in 1997. Total average earning assets
increased $99,915,000, or 14.7 percent, from 1998 to 1999, and $87,172,000, or
14.7 percent, from 1997 to 1998. Total average interest-bearing liabilities
increased $69,667,000, or 12.5 percent, from 1998 to 1999, and $56,889,000, or
11.4 percent, from 1997 to 1998. Growth in earning assets was funded primarily
through interest-bearing liabilities. The net total volume growth in 1999
compared to 1998 had a positive impact on net interest income of $5,383,000,
which was decreased by $95,000 due to rates paid on liabilities increasing more
than yields on assets. In 1998 compared to 1997 net interest income was
positively affected by $3,722,000 attributable to volume which was decreased by
$774,000 attributable to rate increases. In 1999 compared to 1998, net interest
spread increased approximately .1 percent and net interest margin increased by
.1 percent. In 1998 compared to 1997, net interest spread decreased
approximately .2 percent and net interest margin decreased by approximately .1
percent
Average noninterest-bearing funds supporting earning assets as a percentage
of earning assets changed from 11.5 percent in 1997 to 12.3 percent in 1998 and
to 12.1 percent in 1999.
10
<PAGE> 13
Table 1
Volume and Rate
Variance Analysis
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
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> <C>
Interest earning assets:
Loans (2) $8,208 $(2,306) $5,902 $4,511 $ (935) $3,576
Investments:
Taxable 1,358 (1,025) 333 1,458 (289) 1,169
Tax exempt (3) 244 (69) 175 95 (25) 70
Funds sold (375) 252 (123) 25 70 95
Interest-bearing deposits with banks (239) 34 (205) 377 (5) 372
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 9,196 (3,114) 6,082 6,466 (1,184) 5,282
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction (268) (1,155) (1,423) 282 (379) (97)
Saving 1,150 (306) 844 346 149 495
Certificates of deposit 1,035 (1,265) (230) 1,722 (116) 1,606
Funds purchased 202 191 393 361 (67) 294
Notes payable 1,694 (484) 1,210 33 3 36
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,813 (3,019) 794 2,744 (410) 2,334
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $5,383 $ (95) $5,288 $3,722 $ (774) $2,948
===========================================================================================================================
</TABLE>
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
11
<PAGE> 14
Table 2
Yields on Average Earning Assets and
Rates on Average Interest-bearing Liabilities
<TABLE>
<CAPTION>
1999
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) $541,434 $47,701 8.81%
Investment securities:
Taxable 186,763 10,299 5.51
Tax exempt (1) 39,566 1,847 4.67
Funds sold 6,529 456 6.98
Interest-bearing deposits with banks 4,306 266 6.18
-------- -------
Total earning assets 778,598 60,569 7.78
-------
Cash and other assets 35,996
Less allowance for loan losses (7,295)
--------
Total assets $807,299
========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $110,967 $ 1,014 0.91%
Savings 143,087 4,090 2.86
Certificates of deposit 289,431 14,540 5.02
Funds purchased 59,724 2,818 4.72
Notes payable 23,606 1,454 6.16
-------- -------
Total interest-bearing liabilities 626,815 23,916 3.82
-------
Demand deposits 94,197
Other liabilities 12,714
Shareholders' equity 73,573
--------
Total liabilities and shareholders' equity $807,299
========
Net interest spread 3.96%
=====
Impact of interest free funds 0.75%
=====
Net interest margin 4.71%
=====
Net interest income $36,653
=======
</TABLE>
12
<PAGE> 15
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) $452,600 $41,799 9.24%
Investment securities:
Taxable 164,359 9,966 6.06
Tax exempt (1) 34,516 1,672 4.84
Funds sold 18,456 579 3.14
Interest-bearing deposits with banks 8,752 471 5.38
-------- -------
Total earning assets 678,683 54,487 8.03
-------
Cash and other assets 43,856
Less allowance for loan losses (5,795)
--------
Total assets $716,744
========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $124,663 $ 2,437 1.95%
Savings 105,635 3,246 3.07
Certificates of deposit 270,474 14,770 5.46
Funds purchased 50,676 2,425 4.79
Notes payable 5,700 244 4.28
-------- -------
Total interest-bearing liabilities 557,148 23,122 4.15
-------
Demand deposits 83,179
Other liabilities 8,572
Shareholders' equity 67,845
--------
Total liabilities and shareholders' equity $716,744
========
Net interest spread 3.88%
=====
Impact of interest free funds 0.74%
=====
Net interest margin 4.62%
=====
Net interest income $31,365
=======
</TABLE>
13
<PAGE> 16
Table 2
Yields on Average Earning Assets and
Rates on Average Interest-bearing Liabilities
<TABLE>
<CAPTION>
1997
Average Interest Average
(Dollars in thousands) Balance Earned/Paid Yield/Rate
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income (2) $404,641 $37,913 9.37%
Investment securities:
Taxable 140,824 8,797 6.25
Tax exempt (1) 32,593 1,602 4.92
Funds sold 10,893 483 4.43
Interest-bearing deposits with banks 2,560 101 3.95
-------- -------
Total earning assets 591,511 48,896 8.27
-------
Cash and other assets 45,476
Less allowance for loan losses (5,161)
--------
Total assets $631,826
========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $113,667 $ 2,533 2.22%
Savings 94,222 2,753 2.92
Certificates of deposit 238,764 13,164 5.51
Funds purchased 48,281 2,131 4.41
Notes payable 5,325 207 3.89
-------- -------
Total interest-bearing liabilities 500,259 20,788 4.16
-------
Demand deposits 68,250
Other liabilities 5,047
Shareholders' equity 58,270
--------
Total liabilities and shareholders' equity $631,826
========
Net interest spread 4.11%
=====
Impact of interest free funds 0.64%
=====
Net interest margin 4.75%
=====
Net interest income $28,108
=======
</TABLE>
14
<PAGE> 17
Investment Securities
Investment securities are the second largest category of earning assets.
These assets comprised 24.2 percent of earning assets at December 31, 1999 and
29.2 percent at year-end 1998. Investment securities are utilized by the
Corporation as a vehicle for the employment of excess funds, to provide
liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for certain deposits and purchased funds.
The portfolio taxable income was $10,299,000 in 1999 compared with
$9,966,000 in 1998, a net increase of $333,000. Of this increase, an increase of
approximately $1,358,000 was attributable to the $22,404,000 average volume
increase of taxable securities. The higher income generated by the increased
volume was decreased by $1,025,000 resulting from a 55 basis point decrease in
yield. The taxable income was $9,966,000 in 1998, compared with $8,797,000 in
1997, an increase of $1,169,000. Of this increase, an increase of approximately
$1,458,000 was attributable to the $23,535,000 average volume increase in
taxable securities. The gain generated by the increased volume was decreased by
$289,000, resulting from a 19 basis point decrease 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, 1999 was 3.8 years compared with average maturities at year-end
1998 of 2.6 years and at year-end 1997 of 2.0 years.
The portfolio non-taxable investment income was $1,847,000 in 1999 compared
with $1,672,000 in 1998 and $1,602,000 in 1997, a net increase of $175,000 or
10.5 percent, in 1999 and an increase of $70,000 or 4.4 percent, in 1998. Of the
increase in 1999, $244,000 was attributable to an increase in average volume of
$5,050,000 in municipal securities offset by a decrease of $69,000 resulting
from a 17 basis point decrease in yield. The increase from 1997 to 1998 was
$70,000 of which $95,000 was attributable to an increase in volume which was
offset by a decrease of $25,000 resulting from an 8 basis point decrease in
yield. The average maturity of the non-taxable portfolio at December 31, 1999
was 5.2 years compared to 4.0 years and 3.8 years in 1998 and 1997,
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, 1999 the fair value of the securities portfolio totalled
$194,833,000, a .4 percent discount. The market valued the Corporation's 1998
portfolio at a .5 percent premium and its 1997 portfolio at a .8 percent
premium.
At December 31, 1999, investment securities with an amortized cost of
$152,980,000 and an estimated fair value of $148,304,000 were classified as
available-for-sale, resulting in a decrease in the carrying value of the
securities of $4,676,000. An offsetting decrease, 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.
On an ongoing basis, management assigns securities upon purchase into the
available for sale and held to maturity categories 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 1999 of
$214,000, $95,000 in 1998, and $2,000 during 1997.
Table 3
Book Value of Investment Securities
December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 28,946 $ 50,066 $ 33,791 $ 37,853 $ 49,959
U. S. Government Agencies and Corporations 119,924 114,484 98,430 89,747 65,756
Other Securities 3,769 3,449 1,171 1,188 949
- --------------------------------------------------------------------------------------------------------------------
Total Taxable 152,639 167,999 133,392 128,788 116,664
State, County and Municipal Obligations 42,933 38,138 34,851 34,578 37,462
Total Tax-exempt 42,933 38,138 34,851 34,578 37,462
- --------------------------------------------------------------------------------------------------------------------
Total Investment Securities $195,572 $206,137 $168,243 $163,366 $154,126
====================================================================================================================
</TABLE>
15
<PAGE> 18
Table 4
Maturity Distribution and Yields of Investment Securities
<TABLE>
<CAPTION>
Due in Due After Due After Due After
December 31, 1999 1 yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 5,997 5.19% $ 25,960 5.59% $ 31,957 5.52% $ 32,250 $ 31,957
U.S. Government Agencies
and Corporations 9,101 5.73 77,021 6.01 $30,792 5.97% 116,914 5.98 117,133 116,887
Other Securities (1) $3,768 6.91% 3,768 6.91 3,768 3,768
- ----------------------------------------------------------------------------------------------------------------------------------
Total Taxable 15,098 5.53 102,981 5.91 30,792 5.97 3,768 6.91 152,639 5.91 153,151 152,612
State, County and
Municipal Obligations 7,192 6.90 13,357 6.71 21,543 6.30 841 6.52 42,933 6.54 42,416 42,221
- ----------------------------------------------------------------------------------------------------------------------------------
Total $22,290 5.98% $116,338 5.98% $52,335 6.12% $4,609 6.81% $195,572 6.04% $195,567 $194,833
==================================================================================================================================
Percent of Total 11% 59% 27% 3%
Cumulative % of Total 11% 70% 97% 100%
</TABLE>
(1) Federal Reserve Bank and other corporate stocks have no set maturity but are
classified in "Due after 10 years."
Loans
Loans, net of unearned income, at December 31, 1999, were $610,541,000,
which represents an increase of $117,397,000, or 23.8 percent when compared to
year-end 1998. Average loans for 1999 increased 19.6 percent to $541,434,000
from $452,600,000 for 1998.
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 31.4
percent to $423,713,000 at year-end and represents 69.0 percent of total loans.
This is an increase from 65.0 percent in 1998. Commercial, financial and
agricultural loans decreased to $87,098,000 from $87,610,000 the previous year
representing 14.2 percent of the loan portfolio compared to 17.7 percent at
December 31, 1998. Consumer loans represented 16.8 percent of total loans
compared to 17.3 percent at year-end 1998. Table 5 provides the distribution of
loans for the past five years.
The prime rate increased three times in 1999, although the yield on the loan
portfolio for 1999 was 8.8 percent, down from 9.2 percent for 1998.
Notwithstanding this decrease in yield, the volume growth of the loan portfolio
resulted in an interest and fee income increase of $5,902,000 or 14.1 percent,
to $47,701,000. 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, 1999.
As of that date, loans that mature in one year or less were $151,939,000. Of the
loans that mature after one year, $343,197,000 or 74.3 percent, had fixed
interest rates while $118,825,000, or 25.7 percent, had variable rates.
The placement of loans on a nonaccrual status is dependent upon the type of
loan, collateral values and the collection activities in progress. Loans which
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become 120 days past due. Unsecured commercial loans
and well secured loans not in the process of collection are charged off on or
before the date they become 90 days past due and, therefore, do not reach a
nonaccrual status. Commercial and real estate loans which are partially secured
are written down to the collateral value and placed on nonaccrual status on or
before becoming 90 days past due. Consumer loans are charged off on or before
becoming 120 days past due. All interest accrued in the current year but unpaid
at the date a loan goes on nonaccrual status is deducted from interest income,
while interest accrued from previous years is charged against the reserve for
loan losses. At December 31, 1999, nonaccrual loans were $1,537,000 compared
with $1,547,000 at year-end 1998. At December 31, 1999, loans which were 90 days
or more past due were $729,000 compared to $1,426,000 at year-end 1998.
16
<PAGE> 19
Interest income which was foregone was an immaterial amount for each of the
three years ended December 31, 1999. 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, 1999, no credit concentrations were
noted.
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) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 87,098 $ 87,610 $ 72,312 $ 49,380 $ 46,616
Real estate - construction 27,555 19,113 18,378 18,971 13,850
Real estate - mortgage 396,158 303,300 268,153 239,779 203,842
Consumer 103,150 86,195 78,139 64,932 56,323
- --------------------------------------------------------------------------------------------------------------------------
Total $613,961 $496,218 $436,982 $373,062 $320,631
==========================================================================================================================
Percent of Total
Commercial, financial,
agricultural and other 14.2% 17.7% 16.5% 13.2% 14.5%
Real estate - construction 4.5 3.9 4.2 5.1 4.3
Real estate - mortgage 64.5 61.1 61.4 64.3 63.6
Consumer 16.8 17.3 17.9 17.4 17.6
- --------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================================================================
</TABLE>
Table 6
Maturity Distribution of Loans
<TABLE>
<CAPTION>
Maturity
December 31, 1999 1 Year 1 - 5 Over 5
(Dollars in thousands) Total or Less Years Years
<S> <C> <C> <C> <C>
Commercial, financial
agricultural and other $ 87,098 $ 44,694 $ 35,109 $ 7,295
Real estate - construction 27,555 16,406 8,167 2,982
Real estate - mortgage 396,158 74,007 177,589 144,562
Consumer 103,150 16,832 72,817 13,501
- ----------------------------------------------------------------------------------------------------
Total $613,961 $151,939 $293,682 $168,340
====================================================================================================
Loans due after one year with:
Predetermined interest rates $343,197
Floating or adjustable interest rates $118,825
</TABLE>
17
<PAGE> 20
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, 1999 and 1998, 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, 96.0 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 .13 percent of net average loans. In 1999
net loan charge-offs as a percentage of net average loans were .12 percent
compared to .12 percent in 1998. 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) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $ 729 $ 1,426 $ 488 $ 412 $ 567
Loans on a nonaccruing basis 1,537 1,547 1,445 1,423 1,341
- ------------------------------------------------------------------------------------------------------
Total $2,266 $2,973 $1,933 $1,835 $1,908
======================================================================================================
</TABLE>
Table 8
Summary of Loan
Loss Experience
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
January 1 $ 6,934 $ 6,246 $ 5,336 $ 4,173 $ 3,539
- ---------------------------------------------------------------------------------------------------------
Total charge-offs (826) (785) (829) (720) (761)
- ---------------------------------------------------------------------------------------------------------
Total recoveries 165 260 323 401 359
- ---------------------------------------------------------------------------------------------------------
Net charge-offs (661) (525) (506) (319) (402)
Provisions for loan losses 1,613 1,213 1,416 1,481 1,036
- ---------------------------------------------------------------------------------------------------------
Allowance for loan losses -
December 31 $ 7,886 $ 6,934 $ 6,246 $ 5,335 $ 4,173
=========================================================================================================
Average loans - net of
unearned income $541,434 $452,600 $404,641 $342,311 $299,048
Ratio of net charge-offs
to average loans - net of
unearned income .12% .12% .13% .09% .13%
</TABLE>
18
<PAGE> 21
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 expense in an 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, 1999, was
$1,613,000, compared to $1,213,000 in 1998, which represents a 33.0 percent
increase. The increase in the provision for loan losses was due to the overall
loan growth and entry into new markets.
The allowance for loan losses was $7,886,000, or 1.29 percent of outstanding
loans at the end of 1999, and $6,934,000, or 1.41 percent at year-end 1998.
Total charge-offs were $826,000 in 1999 and $785,000 in 1998. Recoveries were
$165,000 for 1999 and $260,000 for 1998. Net charge-offs were $661,000 in 1999
and $525,000 for 1998. Net charge-offs to average loans were .12 percent in 1999
and 1998. A summary of loan loss experience for 1995 through 1999 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. At December 31, 1999, other real estate owned was
$227,000 compared to $202,000 at December 31, 1998. This increase resulted from
properties being acquired as a result of foreclosure.
Management anticipates that the level of charge-offs for 2000 will be
somewhat higher than the level experienced in 1999. 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.
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, 11.0 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 1999, the Corporation maintained a
satisfactory level of liquidity with an influx of interest sensitive deposits.
Derivatives and Disclosure of Market Risk
In January 1998, 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.
19
<PAGE> 22
Table 9
Financial Instruments
<TABLE>
<CAPTION>
Fair
There Value
(Dollars in thousands) 2000 2001 2002 2003 2004 After Total 12-31-99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book Value $ 97,710 $ 48,239 $ 49,221 $ 63,217 $103,348 $ 79,172 $440,907 $431,310
Average interest rate 7.76% 9.20% 8.87% 8.42% 7.85% 8.03% 8.21%
Variable Rate:
Book Value $ 54,229 $ 98,878 $ 7,901 $ 421 $ 1,611 $ 6,594 $169,634 $167,732
Average interest rate 8.81% 7.75% 7.34% 7.69% 7.02% 7.80% 8.66%
- --------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Fixed Rate:
Book Value $ 6,672 $ 3,094 $ 2,510 $ 3,275 $ 4,505 $ 27,212 $ 47,268 $ 46,529
Average interest rate 6.92% 7.32% 6.63% 6.75% 6.31% 6.36% 6.54%
Variable Rate:
Book Value - - - - - - - -
Average interest rate - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Fixed Rate:
Book Value $ 14,797 $ 14,737 $ 29,552 $ 25,160 $ 29,419 $ 33,818 $147,483 $147,483
Average interest rate 5.14% 6.25% 5.88% 5.78% 5.85% 6.12% 5.91%
Variable Rate:
Book Value $ 821 - - - - - $ 821 $ 821
Average interest rate 4.74% - - - - - 4.74%
- --------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Non-interest bearing
deposits: $ 26,255 $ 15,753 $ 15,753 $ 15,753 $ 15,753 $ 15,751 $105,018 $105,018
Average interest rate N/A N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking: $ 64,450 $ 38,670 $38,670 $ 38,670 $ 38,670 $ 38,670 $257,800 $257,800
Average interest rate 1.86% 1.86% 1.86% 1.86% 1.86% 1.86% 1.86%
Time deposits: $298,738 $ 21,899 $6,210 - - - $326,847 $325,865
Average interest rate 4.90% 4.96% 5.21% - - - 4.91%
Federal funds purchased
and securities sold under
agreements to repurchase: $ 76,400 - - - - - $ 76,400 $ 76,400
Average interest rate 4.47% - - - - - 4.47%
Notes payable $ 26,750 - - - - - $ 26,750 $ 27,053
5.22% - - - - - 5.22%
</TABLE>
Table 9 provides information about the Corporation's financial instruments as of
December 31, 1999, 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 9 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 9, 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.
20
<PAGE> 23
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, 1999 the model indicated that the impact of
a 200 basis point gradual increase in rates over 12 months would result in an
approximately .52 percent increase in net interest income, while a 200 basis
point gradual decrease in rates over the same period would result in an
approximately .27 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.
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, 1999, when compared
to year-end 1998, total deposits were $689,665,000, up $77,774,000, or 12.7
percent. Noninterest-bearing deposits for the same period were $105,018,000, an
increase of $18,738,000, or 21.7 percent, and interest-bearing deposits were
$584,647,000, an increase of $59,036,000, or 11.2 percent when compared to
December 31, 1998. For the year ended December 31, 1999, total average deposits
increased $53,731,000, or 9.2 percent. This growth was comprised of an increase
of average interest-bearing accounts of $42,713,000, or 8.5 percent, and average
noninterest-bearing accounts of $11,018,000, or 13.2 percent. Growth in the
interest-bearing accounts was composed of a decrease in interest-bearing
transaction accounts of $13,696,000, or 11.0 percent, and growth in certificates
of deposit of $18,957,000, or 7.0 percent, and an increase in savings accounts
of $37,452,000, or 35.5 percent.
At December 31, 1999, the ratio of average interest-bearing deposits to
total deposits decreased to 85.2 percent from 85.8 percent at year-end 1998 and
was 86.7 percent at year-end 1997. The average rate paid on interest-bearing
accounts was 3.8 percent at year-end 1999 and in 1998 and 1997 was 4.2 percent.
Table 10
Maturity Distribution of
CD's of $100,000 or more
December 31 1999 1998
(Dollars in thousands)
Within three months $47,044 $40,594
After three through six months 15,977 14,052
After six through twelve months 15,090 13,271
After twelve months 10,651 10,148
- ------------------------------------------------------------------------
Total $88,762 $78,065
========================================================================
21
<PAGE> 24
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.
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1999 1998 1997
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 $70,610 5.75% $52,150 3.75% $54,312 5.14%
- ---------------------------------------------------------------------------------------------------
Other borrowings 7,700 5.92 100 6.35 100 6.03
- ---------------------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and $59,724 4.72% $55,414 4.68% $48,281 4.41%
- ---------------------------------------------------------------------------------------------------
Other borrowings 7,750 6.16 600 7.48 100 3.98
- ---------------------------------------------------------------------------------------------------
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $70,610 $66,618 $57,838
- ---------------------------------------------------------------------------------------------------
Other borrowings 7,800 2,100 100
- ---------------------------------------------------------------------------------------------------
</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 8.7 percent of total assets as of
December 31, 1999, compared with 9.9 percent at year-end 1998, and 9.4 percent
at year-end 1997.
The Corporation has maintained a relatively constant dividend pay-out
policy. The dividend pay-out ratio for 1999 was 40.14 percent compared to 30.69
percent in 1998 and 27.78 percent for 1997. Cash dividend payments in 1999 were
$3,187,000 as compared to $2,538,000 in 1998. 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, 1999, $12,208,000 of the Banks' retained earnings
were available for distribution to the Corporation as dividends without prior
regulatory approval. In 1999 the Banks paid dividends to the Corporation of
$5,227,000.
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, 1999, 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, 1999 was
12.70 percent compared to 14.78 percent at year-end 1998. The total capital
ratio was 13.95 percent at December 31, 1999 compared to 16.02 percent at
year-end 1998.
22
<PAGE> 25
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, 1999, First
National Corporation's leverage ratio was 8.64 percent, compared to 9.37 percent
at year-end 1998. First National Corporation's ratios exceed the minimum
standards by substantial margins.
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 1999 was $9,727,000, an increase of $871,000, or 9.8 percent, compared to
1998. For the period ended December 31, 1998, income from noninterest sources
was $8,856,000, an increase of $1,854,000, or 26.5 percent over 1997.
Service charges on transaction accounts in 1999 increased $219,000 or 3.9
percent when compared to 1998 and $821,000 or 17.1 percent in 1998 compared to
1997. 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 $536,000 or 17.3 percent in
1999 compared to an increase of $982,000 or 46.5 percent in 1998. The increase
is a result of an increase in secondary market origination fees, ATM surcharge
fees, and alternative investment fee income.
Noninterest expense increased $6,936,000 or 25.8 percent in 1999 compared
with $4,033,000 or 17.7 percent in 1998.
Salary and employee benefits expense was the largest component of
noninterest expense in 1999.
Salaries and employee benefits increased 17.2 percent or $2,474,000 in 1999
as compared with a 17.2 percent or $2,110,000 in 1998. The number of full time
equivalent employees was 426 at December 31, 1999 as compared with 353 in 1998
and 288 in 1997. The increase in 1999 as compared to 1998 was primarily the
result of the non-recurring expenses associated with the acquisition of
FirstBanc and two Carolina First branches. In 1994 management adopted an
employee cash incentive plan covering all employees. Cash incentives paid during
1999 under this program were approximately $829,000.
Net occupancy expense increased 25.1 percent in 1999 compared to an increase
of 16.3 percent in 1998. The increase is attributable to higher operating
expenses including utilities, maintenance, and the opening of several new
financial centers.
Furniture and equipment expense increased 57.1 percent in 1999 compared with
a 3.5 percent increase in 1998. The increased costs in 1999 were due to
increases in equipment service contracts.
Total other expense for 1999 was $12,146,000 compared with $9,145,000 in
1998 and $7,486,000 in 1997 or increases of 32.8 percent and 22.2 percent
respectively. Included in other noninterest expense is $594,000 in 1999 for the
amortization of intangibles, principally core deposit values, under the purchase
accounting method utilized for bank acquisitions, compared with $750,000 in 1998
and $656,000 in 1997. The remainder of the increase in other expense for 1999 is
distributed among the following expense categories: advertising, insurance and
surety bond, office and printing supplies, postage, telephone and line charges,
and other expenses.
23
<PAGE> 26
Table 11
<TABLE>
<CAPTION>
Quarterly Results of Operations
(Dollars in thousands, except per share) 1999 Quarters 1998 Quarters
Fourth Third Second First Fourth Third Second First
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $16,204 $19,368 $10,735 $14,262 $13,878 $13,969 $13,450 $13,190
Interest expense 6,386 7,689 4,124 5,717 5,803 6,054 5,850 5,415
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,818 11,679 6,611 8,545 8,075 7,915 7,600 7,775
- ------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 503 472 291 347 466 261 218 268
Noninterest income 2,198 3,149 1,850 2,530 2,812 2,354 2,257 1,433
Noninterest expense 8,413 12,641 5,308 7,440 7,894 6,712 6,356 5,904
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,100 1,715 2,862 3,288 2,527 3,296 3,283 3,036
Income taxes 860 240 859 1,066 846 1,074 1,068 883
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,240 $ 1,475 $ 2,003 $ 2,222 $ 1,681 $ 2,222 $ 2,215 $ 2,153
==============================================================================================================================
</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.
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 1, 2000
24
<PAGE> 27
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.
Financial Instruments
<TABLE>
<CAPTION>
Fair
There Value
(Dollars in thousands) 2000 2001 2002 2003 2004 After Total 12-31-99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Loans, net of unearned income
Fixed Rate:
Book Value $ 97,710 $ 48,239 $ 49,221 $ 63,217 $103,348 $ 79,172 $440,907 $431,310
Average interest rate 7.76% 9.20% 8.87% 8.42% 7.85% 8.03% 8.21%
Variable Rate:
Book Value $ 54,229 $ 98,878 $ 7,901 $ 421 $ 1,611 $ 6,594 $169,634 $167,732
Average interest rate 8.81% 7.75% 7.34% 7.69% 7.02% 7.80% 8.66%
- --------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Fixed Rate:
Book Value $ 6,672 $ 3,094 $ 2,510 $ 3,275 $ 4,505 $ 27,212 $ 47,268 $ 46,529
Average interest rate 6.92% 7.32% 6.63% 6.75% 6.31% 6.36% 6.54%
Variable Rate:
Book Value - - - - - - - -
Average interest rate - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
Fixed Rate:
Book Value $ 14,797 $ 14,737 $ 29,552 $ 25,160 $ 29,419 $ 33,818 $147,483 $147,483
Average interest rate 5.14% 6.25% 5.88% 5.78% 5.85% 6.12% 5.91%
Variable Rate:
Book Value $ 821 - - - - - $ 821 $ 821
Average interest rate 4.74% - - - - - 4.74%
- --------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Non-interest bearing
deposits: $ 26,255 $ 15,753 $ 15,753 $ 15,753 $ 15,753 $ 15,751 $105,018 $105,018
Average interest rate N/A N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking: $ 64,450 $ 38,670 $38,670 $ 38,670 $ 38,670 $ 38,670 $257,800 $257,800
Average interest rate 1.86% 1.86% 1.86% 1.86% 1.86% 1.86% 1.86%
Time deposits: $ 298,738 $ 21,899 $6,210 - - - $326,847 $325,865
Average interest rate 4.90% 4.96% 5.21% - - - 4.91%
Federal funds purchased
and securities sold under
agreements to repurchase: $ 76,400 - - - - - $ 76,400 $ 76,400
Average interest rate 4.47% - - - - - 4.47%
Notes payable $ 26,750 - - - - - $ 26,750 $ 27,053
5.22% - - - - - 5.22%
</TABLE>
Table 9 provides information about the Corporation's financial instruments as of
December 31, 1999, 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 9 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 9, 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.
25
<PAGE> 28
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, 1999 the model indicated that the impact of
a 200 basis point gradual increase in rates over 12 months would result in an
approximately .52 percent increase in net interest income, while a 200 basis
point gradual decrease in rates over the same period would result in an
approximately .27 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.
The Company does not use interest rate swaps to modify the interest rate
characteristics of certain long-term debt.
The Company owns no derivatives.
26
<PAGE> 29
Item 8. Financial Statements and Supplementary Data
J. W. HUNT AND COMPANY, LLP
<TABLE>
<S> <C> <C>
John C. Creech, Jr., CPA Certified Public Accountants Middleburg Office Park
Anne H. Ross, CPA 1607 ST. Julian Place
William F. Quattlebaum, CPA Members Post Office Box 265
William T. Pouncy, CPA American Institute of Columbia, SC 29202-0265
David G. Sheffield, CPA Certified Public Accountants 803-254-8196
W. Dale Dyches, CPA Private Companies and SEC Practice Sections Fax 803-256-1524
William R. Hunt, CPA Member of CPA Associates with Associated Offices in
Principal US And International Cities
J.W. Hunt, CPA (1907-1987)
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
the Board of Directors
First National Corporation
We have audited the accompanying consolidated balance sheets of First National
Corporation and Subsidiaries as of December 31, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
February 1, 2000
27
<PAGE> 30
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks (Note 3) $ 39,479 $ 28,343
Interest-bearing deposits with banks 1,848 6,764
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 41,327 35,107
- ------------------------------------------------------------------------------------------------------------
Investment securities (Note 4):
Securities held-to-maturity:
Taxable 4,335 8,242
Tax-exempt 42,933 38,138
- ------------------------------------------------------------------------------------------------------------
Total (fair value of $46,529 in 1999 and $47,456 in 1998) 47,268 46,380
Securities available-for-sale, at fair value 148,304 159,757
- ------------------------------------------------------------------------------------------------------------
Total investment securities 195,572 206,137
- ------------------------------------------------------------------------------------------------------------
Loans (Note 5) 613,961 496,218
Less, unearned income (3,420) (3,074)
Less, allowance for loan losses (7,886) (6,934)
- ------------------------------------------------------------------------------------------------------------
Loans, net 602,655 486,210
- ------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 6) 15,693 12,392
- ------------------------------------------------------------------------------------------------------------
Other assets (Note 7) 17,151 10,231
- ------------------------------------------------------------------------------------------------------------
Total assets $872,398 $750,077
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $105,018 $ 86,280
Interest-bearing transaction accounts 123,597 134,002
Savings 134,203 109,137
CDs of $100,000 and over 88,762 78,065
Other time 238,085 204,407
- ------------------------------------------------------------------------------------------------------------
Total deposits 689,665 611,891
Federal funds purchased and securities
sold under agreements to repurchase (Note 9) 76,400 52,150
Notes payable (Note 10) 26,750 6,350
Other liabilities 3,764 5,361
- ------------------------------------------------------------------------------------------------------------
Total liabilities 796,579 675,752
- ------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000
shares, issued and outstanding 7,041,101 shares in
1999 and 6,899,679 shares in 1998 17,603 17,249
Surplus 47,666 47,072
Retained earnings 13,496 8,743
Accumulated other comprehensive income (loss) (Note 14) (2,946) 1,261
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 75,819 74,325
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $872,398 $750,077
============================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
28
<PAGE> 31
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Interest Income:
Loans, including fees $47,701 $41,799 $37,913
Investment securities:
Taxable:
Held-to-maturity 400 676 1,426
Available-for-sale 9,899 9,290 7,371
Tax-exempt - held-to-maturity 1,847 1,672 1,602
Federal funds sold 456 579 483
Deposits with banks 266 471 101
- -------------------------------------------------------------------------------------------------------
Total interest income 60,569 54,487 48,896
- -------------------------------------------------------------------------------------------------------
Interest Expense:
Interest-bearing transaction accounts 1,014 2,437 2,533
Savings 4,090 3,246 2,753
Certificates of deposit 14,540 14,770 13,164
Federal funds purchased and securities
sold under agreements to repurchase 2,818 2,425 2,131
Notes payable 1,454 244 207
- -------------------------------------------------------------------------------------------------------
Total interest expense 23,916 23,122 20,788
- -------------------------------------------------------------------------------------------------------
Net Interest Income:
Net interest income 36,653 31,365 28,108
Provision for loan losses (Note 5) 1,613 1,213 1,416
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 35,040 30,152 26,692
- -------------------------------------------------------------------------------------------------------
Noninterest Income:
Service charges on deposit accounts 5,838 5,619 4,798
Other service charges and fees 3,632 3,096 2,114
Gain on sale of securities available-for-sale 214 95 3
Other income 43 46 87
- -------------------------------------------------------------------------------------------------------
Total noninterest income 9,727 8,856 7,002
- -------------------------------------------------------------------------------------------------------
Noninterest Expenses:
Salaries and employee benefits (Note 15) 16,841 14,367 12,257
Net occupancy expense 1,773 1,417 1,218
Furniture and equipment expense 3,042 1,937 1,872
Other expense (Note 12) 12,146 9,145 7,486
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 33,802 26,866 22,833
- -------------------------------------------------------------------------------------------------------
Earnings:
Income before provision for income taxes 10,965 12,142 10,861
Provision for income taxes (Note 11) 3,025 3,871 3,448
- -------------------------------------------------------------------------------------------------------
Net income $ 7,940 $ 8,271 $ 7,413
=======================================================================================================
Earnings per share (Note 13):
Basic $ 1.14 $ 1.24 $ 1.14
=======================================================================================================
Diluted $ 1.13 $ 1.21 $ 1.11
=======================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
29
<PAGE> 32
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,933,479 $14,667 $26,387 $14,398 $ (61) $55,391
Comprehensive income:
Net income - - - 7,413 - 7,413
Change in net unrealized gain (loss) on
securities available-for-sale, net of
tax effects - - - - 522 522
-------
Total comprehensive income 7,935
-------
Cash dividends declared at $.40 per share - - - (2,059) - (2,059)
-------
Common stock dividend of 5%, date of
record, February 21, 1997 38,332 192 616 (815) - (7)
-------
Two-for-one common stock split, date
of record, May 19, 1997 2,978,215 - - - - -
Common stock issued 81,646 220 401 - - 621
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,031,672 15,079 27,404 18,937 461 61,881
Comprehensive income:
Net income - - - 8,271 - 8,271
Change in net unrealized gain (loss) on
securities available-for-sale, net of
tax effects - - - - 800 800
-------
Total comprehensive income 9,071
-------
Cash dividends declared at $.48 per share - - - (2,538) - (2,538)
Common stock issued 339,329 848 5,063 - - 5,911
Common stock dividend of 10%, date of record,
November 2, 1998 528,678 1,322 14,605 (15,927) - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,899,679 17,249 47,072 8,743 1,261 74,325
Comprehensive income:
Net income - - - 7,940 - 7,940
Change in net unrealized gain (loss) on
securities available-for-sale, net of
tax effects - - - - (4,207) (4,207)
-------
Total comprehensive income 3,733
-------
Cash dividends declared at $.52 per share - - - (3,187) - (3,187)
-------
Common stock issued 141,422 354 594 - - 948
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 7,041,101 $17,603 $47,666 $13,496 $(2,946) $75,819
===========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,940 $ 8,271 $ 7,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,926 2,402 2,118
Provision for loan losses 1,613 1,213 1,416
Deferred income taxes (419) (336) (327)
Gain on sale of securities available-for-sale (214) (95) (2)
Loss on sale of premises and equipment 26 74 34
Gain on sale of other real estate - (7) (5)
Net amortization (accretion) of investment securities 212 (23) 2
Net change in:
Accrued interest receivable 147 (422) (976)
Prepaid assets (581) (446) (140)
Miscellaneous other assets (4,181) (1,511) (535)
Accrued interest payable 446 488 215
Accrued income taxes (225) 80 296
Miscellaneous other liabilities (1,818) 460 490
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,872 10,148 9,999
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale 36,520 36,499 3,066
Proceeds from maturities of investment securities
held-to-maturity 8,149 18,132 22,893
Proceeds from maturities of investment securities
available-for-sale 52,528 36,900 23,263
Purchases of investment securities held-to-maturity (9,149) (14,101) (8,267)
Purchases of investment securities available-for-sale (84,157) (111,854) (45,010)
Net increase in customer loans (118,223) (57,927) (64,749)
Recoveries on loans previously charged off 165 260 323
Proceeds from sale of other real estate - 162 149
Purchases of premises and equipment (4,945) (2,692) (1,104)
Proceeds from sale of premises and equipment 276 2 408
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (118,836) (94,619) (69,028)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts,
savings accounts and certificates of deposit 77,773 80,084 39,362
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 24,250 (2,162) 21,765
Proceeds from issuance of debt 22,600 9,600 16,450
Repayment of debt (2,200) (8,300) (17,000)
Common stock issuance 635 5,873 6
Dividends paid (3,187) (2,538) (2,059)
Stock options exercised 313 38 607
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 120,184 82,595 59,131
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents $ 6,220 $(1,876) $ 102
Cash and cash equivalents at beginning of year 35,107 36,983 36,881
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $41,327 $35,107 $36,983
===========================================================================================================================
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest $23,606 $22,756 $20,572
===========================================================================================================================
Income taxes $ 4,416 $ 4,231 $ 3,458
===========================================================================================================================
Schedule of Noncash Investing Transactions:
Real estate acquired in full or partial settlement of loans $ 227 $ 202 $ 105
===========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE 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, CreditSouth
Financial Services Corporation ("CreditSouth"). The accounting and reporting
policies of the Corporation and its subsidiaries conform with generally accepted
accounting principles. The Banks provide general banking services while
CreditSouth provides consumer finance services. All services are provided within
the State of South Carolina ("South Carolina").
On August 1, 1999, First National Corporation merged with FirstBancorporation,
Inc. ("FirstBanc"). The surviving entity was First National Corporation. The
transaction was accounted for as a pooling-of-interests. The consolidated
financial statements have been restated to present combined financial
information of the Corporation as if the merger had been in effect for all
periods presented. All expenses relating to effecting the pooling-of-interests
have been deducted in determining the net income of the Corporation for 1999.
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:
During the year ended December 31, 1998, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of
an Enterprise and Related Information. This Statement establishes standards for
the way 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.
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, the Corporation's banking and finance operations are not
considered by management to be more than in one reportable operating segment.
32
<PAGE> 35
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 economic 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 (loss).
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.
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.
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.
33
<PAGE> 36
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, economic 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.
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 No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 revises the
Corporation's disclosure about pension and other post-retirement benefit plans.
SFAS No. 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
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, 1999, and the liability for future
benefits has been recorded in the consolidated financial statements.
34
<PAGE> 37
CASH AND CASH EQUIVALENTS:
For the purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, cash items in process of
collection, amounts due from banks, and time deposits. 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 accompanying consolidated 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 No. 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 18.)
EARNINGS PER SHARE:
Basic earnings per share represents income available to shareholders divided by
the weighted-average number of shares outstanding during the year. 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 (LOSS):
The Corporation adopted SFAS No. 130, Reporting Comprehensive Income, as of
January 1, 1998. Accounting principles generally 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. (See NOTE 14.)
35
<PAGE> 38
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 No. 98-1 requires
capitalization of computer software costs that meet certain criteria. The
requirements of SOP No. 98-1 have been included in the Corporation's
consolidated financial statements.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up
Activities. SOP No. 98-5 provides guidance on the financial reporting of
start-up costs and organization costs requiring start-up costs to be expensed as
incurred. The adoption of this statement in 1999 did not have a material effect
on the Corporation's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, 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. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, which
delays the original effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 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 - MERGER
On August 1, 1999, the Corporation completed the merger with FirstBanc through
the issuance of 1.222 shares of the Corporation's common stock for each share of
outstanding common stock of FirstBanc, or 976,666 shares.
At December 31, 1998, the Corporation owned 5,555 shares of FirstBanc common
stock with a recorded value of $100,000. This pre-merger intercompany balance
has been eliminated.
Separate results of the pooled entities for the period beginning January 1, 1999
through August 1, 1999 and for the two years ended December 31, 1998, in
thousands, are as follows:
<TABLE>
<CAPTION>
Corporation FirstBanc Adjustments Combined
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Total Interest and Noninterest Income:
1999 $ 34,388 $ 5,481 $ - $ 39,869
1998 54,013 9,330 - 63,343
1997 47,403 8,495 - 55,898
Net Interest Income:
1999 17, 289 2,724 - 20, 553
1998 26,563 4,283 519 (1) 31,365
1997 23,779 4,119 210 (1) 28,108
Net Income:
1999 4,980 595 - 5,575
1998 7,505 766 - 8,271
1997 6,466 947 - 7,413
</TABLE>
- ---------------------------------
(1) The Corporation reclassified certain items classified by FirstBanc as
non-interest income to interest income.
36
<PAGE> 39
NOTE 3 - RESTRICTION ON CASH AND DUE FROM BANKS:
The Banks are required to maintain average reserve funds in cash or on deposit
with the Federal Reserve Bank. The average amount of such reserve funds at
December 31, 1999, was approximately $5,551,000. At December 31, 1999, the
Corporation and its subsidiaries had due from bank balances in excess of
federally insured limits of $1,833,000. 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
Securities of
U. S. Government
agencies and
corporations $ 4,335 $ 7 $ (34) $ 4,308
Obligations of states
and political
subdivisions 42,933 82 (794) 42,221
- -------------------------------------------------------------------------------------------------------
Total $ 47,268 $ 89 $ (828) $ 46,529
=======================================================================================================
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
U. S. Treasury securities $ 3,213 $ 31 $ - $ 3,244
Securities of other
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
=======================================================================================================
</TABLE>
The fair values of obligations of states and political subdivisions are
established with the assistance of an independent pricing service. The values
are based on data which often reflect transactions of relatively small size and
are not necessarily indicative of the value of the securities when traded in
large volumes.
37
<PAGE> 40
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 32,446 $ 19 $ (508) $ 31,957
Securities of other
U. S. Government
agencies and
corporations 116,780 17 (4,218) 112,579
Other securities 3,754 14 - 3,768
- ---------------------------------------------------------------------------------------------------------------------------
Total $152,980 $ 50 $ (4,726) $148,304
===========================================================================================================================
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands of dollars)
U. S. Treasury securities $ 45,830 $1,023 $ - $ 46,853
Securities of other
U. S. Government
agencies and
corporations 108,477 1,078 (99) 109,456
Other securities 3,448 - - 3,448
- ---------------------------------------------------------------------------------------------------------------------------
Total $157,755 $2,101 $(99) $159,757
===========================================================================================================================
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1999 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 $ 10,577 $ 10,577 $ 11,791 $ 11,713
Due after one year through
five years 14,307 14,250 104,907 102,031
Due after five years through
ten years 21,544 20,914 32,528 30,791
Due after ten years 840 788 - -
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 47,268 46,529 149,226 144,535
No contractual maturity - - 3,754 3,769
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 47,268 $ 46,529 $152,980 $148,304
===========================================================================================================================
</TABLE>
There were no sales or transfers of held-to-maturity securities during 1999,
1998 or 1997.
Proceeds from the sales of available-for-sale securities totaled $36,520,000,
$36,499,000, and $3,066,000 for the years ended December 31, 1999, 1998, and
1997, respectively. Gross realized gains and gross realized losses on sales of
available-for-sale securities were $246,000 and $32,000, respectively, in 1999.
Gross realized gains on sales of available-for-sale securities were $95,000 and
$2,000 in 1998 and 1997, respectively.
38
<PAGE> 41
The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are
required to own capital stock in the FHLB of Atlanta based generally upon their
balances of residential mortgage loans and FHLB advances. FHLB capital stock
owned by the Banks is pledged as collateral on FHLB advances. No ready market
exists for this stock, and it has no quoted market price. However, redemption of
this stock has historically been at par value.
At December 31, 1999 and 1998, investment securities with a carrying value of
$58,974,000 and $57,339,000, respectively, were pledged to secure public
deposits, FHLB advances and for other purposes required and permitted by law. At
December 31, 1999 and 1998, the carrying amount of securities pledged to secure
repurchase agreements was $36,111,000 and $48,881,000, respectively.
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 1999 and 1998:
1999 1998
---- ----
(In thousands of dollars)
Commercial, financial and agricultural $ 87,098 $ 87,610
Real estate - construction 27,555 19,113
Real estate - mortgage 396,158 303,300
Consumer 103,150 86,195
- --------------------------------------------------------------------------
Total loans 613,961 496,218
Less, unearned income (3,420) (3,074)
Less, allowance for loan losses (7,886) (6,934)
- --------------------------------------------------------------------------
Loans, net $ 602,655 $ 486,210
==========================================================================
Changes in the allowance for loan losses for the three years ended December 31,
1999, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 6,934 $ 6,246 $ 5,336
Loans charged-off (826) (785) (829)
Recoveries of loans previously charged-off 165 260 323
- ---------------------------------------------------------------------------------------------------
Balance before provision for loan losses 6,273 5,721 4,830
Provision for loan losses 1,613 1,213 1,416
- ---------------------------------------------------------------------------------------------------
Balance at end of year $ 7,886 $ 6,934 $ 6,246
===================================================================================================
</TABLE>
At December 31, 1999 and 1998, the aggregate amount of loans for which the
accrual of interest had been discontinued was $1,537,000 and $1,067,000,
respectively. Interest income which was foregone was an immaterial amount for
each of the three years ended December 31, 1999. There were no restructured
loans at December 31, 1999 and 1998.
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 $227,000 and $202,000 at December 31,
1999 and 1998, respectively.
There were no impaired loans at December 31, 1999 and 1998.
39
<PAGE> 42
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consisted of the following:
<TABLE>
<CAPTION>
Useful Life 1999 1998
-----------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Land $ 2,406 $ 2,813
Buildings and leasehold improvements 15-40 years 14,270 10,143
Equipment and furnishings 5-10 years 9,096 10,399
- ---------------------------------------------------------------------------------------
Total 25,772 23,355
Less, accumulated depreciation 10,079 10,963
- ---------------------------------------------------------------------------------------
Premises and equipment, net $ 15,693 $ 12,392
=======================================================================================
</TABLE>
Depreciation expense charged to operations was $1,342,000, $1,432,000, and
$1,423,000, in 1999, 1998, and 1997, respectively.
NOTE 7 - INTANGIBLE ASSETS:
CORE DEPOSIT PREMIUM COST:
Purchases in prior years of branches of other commercial banks resulted in core
deposit premium cost of $5,980,000. Amortization expense, which is included in
other noninterest expense, for the years ended December 31, 1999, 1998 and 1997
was $366,000, $414,000, and $480,000 respectively.
On September 30, 1999, First National Bank 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 of $3,743,000 has been recorded
as core deposit premium cost. Amortization expense for the year ended December
31, 1999 totaled to $117,000.
COMPUTER SOFTWARE:
Computer software with an original cost of $1,331,000 is being amortized using
the straight-line method over thirty-six months. Amortization expense totaled
$79,000, $329,000 and $177,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
NOTE 8 - DEPOSITS:
At December 31, 1999, the scheduled maturities of certificates of deposit are as
follows:
(In thousands of dollars)
2000 $ 295,642
2001 23,285
2002 4,682
2003 227
2004 2,923
Thereafter 88
-----------
$ 326,847
===========
40
<PAGE> 43
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 - NOTES PAYABLE:
The Banks have entered into advance agreements with the FHLB of Atlanta.
Advances under these agreements are collateralized by stock in the FHLB of
Atlanta, and qualifying first mortgage loans under a blanket floating lien. A
summary of advances during the years ended December 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Advances outstanding at December 31 $26,750,000 $4,250,000
====================================================================================
Maximum amount outstanding at any month-end 26,800,000 4,250,000
====================================================================================
Average amount outstanding during the year 23,401,000 2,954,000
====================================================================================
Weighted-average interest rate at December 31 5.20% 5.57%
====================================================================================
Weighted-average interest rate during the year 5.14% 5.79%
====================================================================================
</TABLE>
Principal maturities of FHLB advances are summarized below:
Year ending December 31:
2000 $ 7,700,000
2001 5,050,000
2002 -
2003 1,000,000
2004 -
2005 and thereafter 13,000,000
-----------
Total $26,750,000
===========
In August 1998, FirstBanc borrowed $2,100,000 from another bank with principal
originally scheduled to be repaid monthly over a five year period, beginning
October 1, 2003, with interest at prime less one percent payable monthly
beginning October 1, 1998. The entire amount of the loan was repaid in 1999 in
connection with the merger as disclosed in NOTE 2.
41
<PAGE> 44
NOTE 11 - INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands of dollars) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Current:
Federal $3,043 $3,777 $3,365
State 381 431 408
- -------------------------------------------------------------------------------------
Total current tax expense 3,424 4,208 3,773
- -------------------------------------------------------------------------------------
Deferred:
Federal (281) (286) (299)
State (118) (51) (26)
- -------------------------------------------------------------------------------------
Total deferred tax benefit (399) (337) (325)
- -------------------------------------------------------------------------------------
Provision for income taxes $3,025 $3,871 $3,448
- -------------------------------------------------------------------------------------
</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) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Provision for loan losses $ (397) $ (251) $ (350)
Pension cost and post-retirement benefits 64 47 36
Consumer loan income 41 21 18
Depreciation 9 (25) 6
Other (116) (129) (35)
- ---------------------------------------------------------------------------------------
Total $ (399) $ (337) $ (325)
=======================================================================================
</TABLE>
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,
(In thousands of dollars) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Income taxes at Federal statutory rate
of 34% $3,728 $4,128 $3,693
Increase (reduction) of taxes resulting from:
State income taxes, net of federal
tax benefit 248 356 317
Tax-exempt interest income (663) (614) (594)
Other, net (288) 1 32
- -----------------------------------------------------------------------------------------
Total $3,025 $3,871 $3,448
=========================================================================================
</TABLE>
42
<PAGE> 45
The components of the net deferred tax asset, included in other assets, are as
follows:
<TABLE>
<CAPTION>
(In thousands of dollars) 1999 1998
---- ----
<S> <C> <C>
Allowance for loan losses $2,628 $2,231
Unrealized losses on investment securities available-for-sale 1,730 -
Post-retirement benefits 83 86
Intangible assets 281 226
Start-up expenses 115 103
State net operating less carry forward 62 31
Other 5 20
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 4,904 2,697
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation (797) (788)
Consumer loan income (240) (199)
Bond discount accretion (61) (81)
Pension plan (235) (174)
Unrealized gains on investment securities available-for-sale - (781)
Other - (44)
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,333) (2,067)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 3,571 630
Less, valuation allowance (62) (31)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $3,509 $ 599
===========================================================================================================================
</TABLE>
At December 31, 1999, the Corporation had net operating loss carryforwards for
state income tax purposes of approximately $1,242,000 available to offset future
state taxable income. The carryforwards expire in the years 2010 to 2014. The
valuation allowance is based on management's estimate of the ultimate
realization of the deferred tax asset.
NOTE 12 - OTHER EXPENSE:
The following is a summary of the components of other noninterest expense:
Year Ended December 31,
(In thousands of dollars) 1999 1998 1997
-----------------------------------
Telephone and postage $1,062 $927 $862
Professional fees 864 441 435
Office supplies 804 932 675
Advertising 780 807 615
Amortization of intangible assets 594 750 656
Regulatory fees 525 436 349
Insurance 235 344 253
Other (1) 7,282 4,508 3,641
- --------------------------------------------------------------------------------
Total $12,146 $9,145 $7,486
================================================================================
(1) Other expenses for the year ended December 31, 1999, include nonrecurring
charges of approximately $2,381,000 related to the costs associated with
completing the merger as disclosed in NOTE 2.
43
<PAGE> 46
NOTE 13 - 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,
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Net income - numerator for basic
and diluted earnings per share $7,940 $8,271 $7,413
- -------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 6,996 6,693 6,519
Effect of dilutive securities:
Employee stock options 57 156 145
- -------------------------------------------------------------------------------------------
Dilutive potential shares:
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,053 6,849 6,664
- -------------------------------------------------------------------------------------------
Basic earnings per share $ 1.14 $ 1.24 $ 1.14
- -------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.13 $ 1.21 $ 1.11
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 - OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax effects are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Unrealized holding gains (losses) on
available-for-sale securities $(6,678) $1,270 $830
Tax effect 2,471 (470) (308)
- ------------------------------------------------------------------------------------
Net-of-tax amount $(4,207) $ 800 $522
====================================================================================
</TABLE>
NOTE 15 - 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, 1999, $12,208,000 of the Banks'
retained earnings are available for distribution to the Corporation as dividends
without prior regulatory approval.
Under Federal Reserve regulation, the Banks 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 the Banks
to the Corporation in the form of loans or advances was approximately
$14,169,000 at December 31, 1999.
44
<PAGE> 47
NOTE 16 - RETIREMENT PLANS:
The following sets forth the pension plan's funded status and amounts recognized
in the Corporation's accompanying consolidated financial statements at December
31, 1999 and 1998:
(In thousands of dollars) 1999 1998
--------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $6,660 $5,910
Service cost 416 333
Interest cost 492 436
Actuarial loss 267 193
Benefits paid (216) (212)
- -----------------------------------------------------------------------------
Benefit obligation at end of year 7,619 6,660
- -----------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year 6,718 5,699
Actual return on plan assets 781 769
Employer contribution 468 462
Benefits paid (216) (212)
- -----------------------------------------------------------------------------
Fair value of plan assets at end of year 7,751 6,718
- -----------------------------------------------------------------------------
Funded status 131 58
Unrecognized net actuarial loss 678 649
Unrecognized prior service cost 8 9
Unrecognized transition asset (61) (94)
- -----------------------------------------------------------------------------
Prepaid benefit cost $ 756 $ 622
=============================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<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 $ 416 $ 333 $ 289
Interest cost 492 436 386
Expected return on plan assets (542) (459) (390)
Amortization of prior service cost 1 1 1
Amortization of transition asset (33) (33) (33)
Recognized net actuarial loss - 14 23
- ------------------------------------------------------------------------------------
Net periodic benefit cost $ 334 $ 292 $ 276
====================================================================================
</TABLE>
Expenses incurred and charged against operations with regard to all of the
Corporation's retirement plans were as follows:
Year Ended December 31,
(In thousands of dollars) 1999 1998 1997
-----------------------------------
Pension $ 334 $ 292 $ 276
Profit-sharing 174 191 171
- ----------------------------------------------------------------------
Total $ 508 $ 483 $ 447
======================================================================
45
<PAGE> 48
NOTE 17 - POST-RETIREMENT BENEFITS:
The following sets forth the plan's funded status and amounts recognized in the
Corporation's accompanying consolidated financial statements at December 31,
1999 and 1998:
In thousands of dollars) 1999 1998
----------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 481 $ 477
Interest cost 34 35
Actuarial loss 31 (2)
Benefits paid (30) (33)
- ----------------------------------------------------------------------------
Benefit obligation at end of year 516 481
Change in Plan Assets:
Fair value of plan assets at beginning of year - -
Employer contribution 30 33
Benefits paid (30) (33)
- ----------------------------------------------------------------------------
Fair value of plan assets at end of year - -
Funded status (516) (481)
Unrecognized net actuarial gain (63) (125)
Unrecognized transition obligation 410 442
- ----------------------------------------------------------------------------
Accrued benefit cost $ (169) $ (164)
============================================================================
Year Ended December 31,
1999 1998 1997
---- ---- ----
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
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) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost:
Interest cost $ 34 $ 35 $ 39
Amortization of transition obligation 32 31 31
Recognized net actuarial gain (31) (33) (13)
- ------------------------------------------------------------------------------------------
Net periodic benefit cost $ 35 $ 33 $ 57
==========================================================================================
</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 of service and interest cost components $ 4,000 $ (3,000)
Effect on post-retirement benefit obligation 49,000 (43,000)
</TABLE>
46
<PAGE> 49
NOTE 18 - STOCK-BASED COMPENSATION PLANS:
During 1992 and 1996, the Corporation adopted stock options plans covering
certain of its officers and key employees. 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. The final
options outstanding under the 1992 plan were exercised during the current year.
FirstBanc adopted stock option plans in 1987 and 1996 covering certain of its
officers and non-employee directors. A committee of its Board of Directors
determined the periods of vesting and exercise. However, vesting was accelerated
in connection with the merger with FirstBanc.
During the current year, the Corporation adopted the First National Corporation
1999 Stock Option Plan, under which incentive and nonqualified stock options may
be granted periodically to key employees and non-employee directors. The options
are granted at an exercise price at least equal to the fair value of the common
stock at the date of grant, they have a term of no more than ten years, and they
may be exercised at any time prior to expiration. As of December 31, 1999, no
options had been granted under this plan.
Activity in the Corporation's stock option plans is summarized below. All
information has been retroactively restated to reflect stock dividends and stock
splits.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 269,840 $ 10.06 255,005 $ 9.23 346,699 $ 8.41
Granted 9,400 $ 26.25 19,727 $ 22.15 12,465 $ 16.73
Exercised (141,801) $ 6.96 (4,756) $ 11.03 (88,259) $ 7.20
Expired (5,449) $ 5.51 (136) $ 8.43 (15,900) $ 6.13
Outstanding, December 31 131,990 $ 14.74 269,840 $ 10.06 255,005 $ 9.23
Exercisable, December 31 82,852 $ 12.70 160,841 $ 8.16 142,646 $ 7.20
Weighted-average fair value
of options granted during
the year $ 6.65 $ 5.76 $ 6.27
</TABLE>
Information pertaining to options outstanding at December 31, 1999, is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Outstanding Price
<S> <C> <C> <C> <C> <C>
$ 11.69 101,640 1.4 years $ 11.69 76,239 $ 11.69
$ 22.73-$ 28.00 30,350 3.7 years $ 24.97 6,613 $ 24.33
131,990 82,852
</TABLE>
The Corporation has entered into a Restricted Stock Agreement with its chief
executive officer. The agreement grants to the officer 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 officer 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 officer. The weighted average fair value of the shares granted
under this agreement was $6.34 at the date of the grant.
47
<PAGE> 50
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:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Dividend yield 2.3% 1.7% 2.5%
Expected life 5 years 5 years 6-7 years
Expected volatility 24.0% 21.0% 22.0%
Risk-free interest rate 5.875% 4.700% 6.000%
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 stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the method prescribed by 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,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income As reported $ 7,940 $ 8,271 $ 7,413
Pro forma $ 7,765 $ 8,115 $ 7,258
Earnings per share As reported $ 1.14 $ 1.24 $ 1.14
Pro forma $ 1.11 $ 1.21 $ 1.11
Earnings per share - As reported $ 1.13 $ 1.21 $ 1.11
Assuming dilution Pro forma $ 1.10 $ 1.18 $ 1.09
</TABLE>
NOTE 19 - LEASE COMMITMENTS:
The Corporation's subsidiaries were obligated at December 31, 1999, under
certain noncancelable operating leases extending to the year 2013 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:
(In thousands of dollars)
Year Ending December 31,
2000 $ 1,011,000
2001 1,007,000
2002 973,000
2003 856,000
2004 182,000
Later years 919,000
-----------
Total $ 4,948,000
===========
Total rental expense for the years ended December 31, 1999, 1998, and 1997 was
$1,881,000, $352,000, and $235,000, respectively.
48
<PAGE> 51
NOTE 20 - CONTINGENT LIABILITIES:
The Corporation and its subsidiaries are involved at times in various litigation
arising in the normal course of business. In the opinion of management, there is
no pending or threatened litigation that will have a material effect on the
Corporation's consolidated Financial position or results of operations.
NOTE 21 - RELATED PARTY TRANSACTIONS:
During 1999 and 1998, 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. Loans
outstanding to this group (including immediate families and business interests)
totaled $10,429,000 and $10,458,000 at December 31, 1999 and 1998, respectively.
During 1999, $1,664,000 of new loans were made to this group while repayments of
$2,109,000 were received during the year. Other changes, which included loans
outstanding to new or former officers and directors, resulted in a increase of
$416,000.
Related party deposits totaled approximately $10,113,000 and $11,398,000 at
December 31, 1999 and 1998, respectively.
NOTE 22 - 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 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, 1999 and 1998, the following
financial instruments were outstanding whose contract amounts represent credit
risk:
(In thousands of dollars) 1999 1998
---- ----
Commitments to extend credit $ 126,333 $ 111,645
- --------------------------------------------------------------------------
Standby letters of credit and
financial guarantees $ 1,983 $ 2,942
- --------------------------------------------------------------------------
COMMITMENTS TO EXTEND CREDIT:
Commitments to extend credit 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:
Standby letters of credit and financial guarantees 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.
49
<PAGE> 52
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:
CASH AND CASH EQUIVALENTS:
The carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES:
Securities available-for-sale are valued at quoted market prices where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable securities. Securities held-to-maturity are
valued at quoted market prices or dealer quotes.
LOANS:
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES:
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The fair value of federal funds purchased and securities sold under agreements
to repurchase is estimated based on the current rates offered for borrowings of
the same remaining maturities.
NOTES PAYABLE:
The carrying amount of short-term borrowings is a reasonable estimate of fair
value. The fair value of long-term borrowings is estimated using discounted cash
flow analysis and the Corporation's current incremental borrowing rates for
similar types of instruments.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES:
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.
50
<PAGE> 53
The estimated fair value of the Corporation's financial instruments at December
31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $ 41,327 $ 41,327 $ 35,107 $ 35,107
Investment securities 195,572 194,833 206,137 207,213
Loans:
Loans 610,541 599,042 493,144 497,520
Less, allowance for loan
losses (7,886) (7,886) (6,934) (6,934)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 602,655 591,156 486,210 490,586
Financial liabilities:
Deposits 689,665 688,683 611,891 613,156
Federal funds purchased
and securities sold under
agreements to repurchase 76,400 76,400 52,150 52,150
Notes payable 26,750 27,053 6,350 6,419
Unrecognized financial
instruments:
Commitments to extend credit 126,333 123,954 111,645 112,636
Standby letters of credit 1,983 1,983 2,942 2,942
</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.
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, at
December 31, 1999 and 1998, that the Corporation and its subsidiaries met all
capital adequacy requirements to which they are subject.
As of their most recent regulatory examinations, the Corporation and its
subsidiaries were considered 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.
51
<PAGE> 54
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>
At December 31, 1999:
Total capital (to risk weighted assets):
Consolidated $ 80,560 13.95% $ 46,199 8.00% $ 57,749 10.00%
First National Bank 65,577 13.10% 40,041 8.00% 50,052 10.00%
National Bank of York County 6,043 11.87% 4,072 8.00% 5,091 10.00%
Florence County National Bank 4,149 14.95% 2,220 8.00% 2,775 10.00%
Tier I Capital (to risk weighted assets):
Consolidated $ 73,333 12.70% $ 23,100 4.00% $ 34,649 6.00%
First National Bank 59,313 11.85% 20,021 4.00% 30,031 6.00%
National Bank of York County 5,406 10.62% 2,036 4.00% 3,054 6.00%
Florence County National Bank 3,873 13.96% 1,110 4.00% 1,665 6.00%
At December 31, 1999 (Continued):
Tier I Capital (to average assets):
Consolidated $ 73,333 8.64% $ 33,934 4.00% $ 42,418 5.00%
First National Bank 59,313 8.04% 29,501 4.00% 36,877 5.00%
National Bank of York County 5,406 7.63% 2,836 4.00% 3,545 5.00%
Florence County National Bank 3,873 10.94% 1,416 4.00% 1,771 5.00%
At December 31, 1998:
Total capital (to risk weighted assets):
Consolidated $ 77,352 16.02% $ 38,623 8.00% $ 48,279 10.00%
First National Bank 64,762 15.20% 34,092 8.00% 42,615 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 $ 71,354 14.78% $ 19,311 4.00% $ 28,967 6.00%
First National Bank 59,463 13.95% 17,046 4.00% 25,569 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 $ 71,354 9.37% $ 30,461 4.00% $ 38,076 5.00%
First National Bank 59,463 8.99% 26,455 4.00% 33,069 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%
</TABLE>
52
<PAGE> 55
NOTE 25 - FIRST NATIONAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL
INFORMATION:
First National Corporation's condensed balance sheets at December 31, 1999 and
1998, and condensed statements of income and cash flows for each of the years in
the three-year period ended December 31, 1999, are presented below. The
condensed financial statements have been restated for all period presented to
reflect the merger with FirstBanc, which was accounted for as a
pooling-of-interests.
<TABLE>
<CAPTION>
December 31,
(In thousands of dollars) 1999 1998
---- ----
<S> <C> <C>
Balance Sheets - Parent only:
Assets:
Cash $ 1,264 $ 2,535
Investment securities available-for-sale 348 3,654
Investment in subsidiaries 73,524 69,672
Premises and equipment 85 102
Other assets 598 462
- -------------------------------------------------------------------------------------------
Total assets $ 75,819 $ 76,425
===========================================================================================
Liabilities:
Notes payable $ - $ 2,100
Shareholders' equity 75,819 74,325
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 75,819 $ 76,425
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statements of Income:
Income:
Dividends from subsidiaries $ 5,227 $ 5,378 $ 2,154
Gain on sale of securities available-for-sale 204 - -
Interest and dividends 145 114 177
Other income 18 26 -
- -----------------------------------------------------------------------------------------------
Total income 5,594 5,518 2,331
- -----------------------------------------------------------------------------------------------
Expenses:
Interest 51 54 -
Other general 592 278 454
- -----------------------------------------------------------------------------------------------
Total expenses 643 332 454
- -----------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 4,951 5,186 1,877
Applicable income tax benefit 137 63 107
Equity in undistributed earnings of
subsidiaries 2,852 3,022 5,429
- -----------------------------------------------------------------------------------------------
Net income $ 7,940 $ 8,271 $ 7,413
===============================================================================================
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands of dollars) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statements of Cash Flows - Parent only:
Cash flows from operating activities:
Net income $ 7,940 $ 8,271 $ 7,413
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 19 40 19
Discount accretion (126) (161) (153)
Gain on sale of securities available-for-sale (204) - -
Increase in other assets (387) (89) (184)
Increase in other liabilities 244 28 9
Undistributed earnings of subsidiaries (2,852) (3,022) (5,429)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 4,634 5,067 1,675
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment
securities available-for-sale 309 6,537 -
Proceeds from maturities of investment
securities available-for-sale 5,430 2,328 9,000
Purchases of investment securities
available-for-sale (6,302) (7,680) (9,224)
Purchases of premises and equipment (3) (29) (26)
Proceeds from sale of premises and
equipment - - 24
Investment in subsidiaries (1,000) (9,633) -
- --------------------------------------------------------------------------------------------------
Net cash used by
investing activities (1,566) (8,477) (226)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt - 2,100 -
Repayment of debt (2,100) - -
Cash dividends paid (3,187) (2,538) (2,059)
Common stock issuance 635 5,873 6
Stock options exercised 313 38 607
- --------------------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (4,339) 5,473 (1,446)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,271) 2,063 3
Cash and cash equivalents at beginning
of year 2,535 472 469
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,264 $ 2,535 $ 472
==================================================================================================
</TABLE>
Supplementary financial information regarding the Company is incorporated herein
by reference to the information in Table 11 of Item 7 above.
54
<PAGE> 57
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by reference to
the information under the caption "Election of Directors" on pages 4 and 5 of
the definitive proxy statement of the Company to be filed in connection with the
Company's 2000 Annual Meeting of the Shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to
the information under the captions "Executive Compensation," "Employment
Agreement," "Stock Options," "Defined Benefit Pension Plan" and "Election of
Directors -- Compensation of Directors" on pages 6 through 9, and 11 of the
definitive proxy statement of the Company to be filed in connection with the
Company's 2000 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the
information under the caption "Principal Shareholders" on pages 3 and 4 of the
definitive proxy statement of the Company to be filed in connection with the
Company's 2000 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to
the information under the caption "Certain Relationships and Related
Transactions" on page 13 of the definitive proxy statement of the Company to be
filed in connection with the Company's 2000 Annual Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Filed:
First National Corporation and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed: None
3. Exhibits
Exhibit No. Description of Exhibit
2.1 Merger Agreement, dated March 4, 1999, between
First National Corporation and
FirstBancorporation, Inc. (incorporated by
reference to the Registrant's Registration
Statement on Form S-4, Registration No.
333-80047).
55
<PAGE> 58
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).
10.6* First National Corporation 1999 Stock Option
Plan (incorporated by reference to Registrant's
Registration Statement From S-8. Registration
No. 333-33092)
13 1999 Annual Report to Shareholders
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.
* Denotes a management compensatory plan or arrangement.
(b) No reports were filed on Form 8-K during the fourth quarter of 1999.
56
<PAGE> 59
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 30th day of March, 2000.
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 30, 2000.
/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 Colden R. Battey, Jr.
-------------------------------------
Colden R. Battey, Jr.
Director
/S Charles W. Clark
-------------------------------------
Charles W. Clark
Director
/S William W. Coleman, Jr.
-------------------------------------
William W. Coleman, Jr.
Director
/S Dwight W. Frierson
-------------------------------------
Dwight W. Frierson
Director
/S John L. Gramling, Jr.
-------------------------------------
John L. Gramling, Jr.
Director
/S Richard L. Gray
-------------------------------------
Richard L. Gray
Director
57
<PAGE> 60
/S Robert R. Hill, Jr.
-------------------------------------
Robert R. Hill, Jr.
Director
/S Robert R. Horger
-------------------------------------
Robert R. Horger
Director
/S Harry M. Mims, Jr.
-------------------------------------
Harry M. Mims, Jr.
Director
/S Ralph W. Norman
-------------------------------------
Ralph W. Norman
Director
/S Anne H. Oswald
-------------------------------------
Anne H. Oswald
Director
/S Samuel A. Rodgers
-------------------------------------
Samuel A. Rodgers
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 Cathy Cox Yeadon
-------------------------------------
Cathy Cox Yeadon
Director
58
<PAGE> 61
EXHIBIT INDEX
Exhibit No. Description of Exhibit
13 1999 Annual Report to Shareholders
23 Consent of J. W. Hunt and Company, LLP.
27 Financial Data Schedule.
59
<PAGE> 1
EXHIBIT 13
A Breed Apart
1999 Annual Report
First National Corporation
Mission Statement
Our mission is to be a progressive financial services company with emphasis on
community banking that is dedicated to the growth and development of communities
we serve. We intend to provide a wide array of high quality financial services
and products in a customer friendly and professional atmosphere. We plan to
provide our shareholders an investment with a focus on soundness, profitability,
and growth with the proper balance to achieve success in each category. At the
same time, we believe we should provide our employees career advancement
opportunities in a professional environment with competitive rewards and
recognition based on performance.
About this Report
For more financial information about the Company, please refer to First National
Corporation's Annual Report on Form 10-K, a copy of which is included with the
package provided to the Company's shareholders in connection with the Company's
2000 annual meeting of shareholders.
Financial Highlights
<TABLE>
<CAPTION>
At or for the Year Ended % Change
December 31, Increase
(dollars in thousands except per share) 1999 1998 (Decrease)
<S> <C> <C> <C>
For The Year
Interest income $ 60,569 $ 54,487 11.16%
- -------------------------------------------------------------------------------------------------------------------
Interest expense 23,916 23,122 3.43%
- -------------------------------------------------------------------------------------------------------------------
Net interest income 36,653 31,365 16.86%
- -------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,613 1,213 32.98%
- -------------------------------------------------------------------------------------------------------------------
Other income 9,727 8,856 9.84%
- -------------------------------------------------------------------------------------------------------------------
Non-interest expense 33,802 26,866 25.82%
- -------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 10,965 12,142 (9.69%)
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes 3,025 3,871 (21.85%)
- -------------------------------------------------------------------------------------------------------------------
Net income 7,940 8,271 (4.00%)
- -------------------------------------------------------------------------------------------------------------------
Per Common Share
Net income $ 1.14 $ 1.24 (8.06%)
- -------------------------------------------------------------------------------------------------------------------
Net income, diluted 1.13 1.21 (6.61%)
- -------------------------------------------------------------------------------------------------------------------
Cash dividends 0.52 0.48 8.33%
- -------------------------------------------------------------------------------------------------------------------
Book value 10.77 10.77 -
- -------------------------------------------------------------------------------------------------------------------
Key Performance Ratios
Return on average assets .98% 1.15% (14.78%)
- -------------------------------------------------------------------------------------------------------------------
Return on average equity 10.79 12.19 (11.48%)
- -------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percentage of assets .18 .21 (14.29%)
- -------------------------------------------------------------------------------------------------------------------
Average stockholder's equity
as a percentage of average assets 9.25 9.68 (4.44%)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 2
Selected Year End Balances
<TABLE>
<S> <C> <C> <C>
Assets $ 872,398 $ 750,077 16.31%
- -----------------------------------------------------------------------------------------------------
Loans, net of unearned income 610,541 493,144 23.81%
- -----------------------------------------------------------------------------------------------------
Investment securities 195,572 206,137 (5.13%)
- -----------------------------------------------------------------------------------------------------
Deposits 689,665 611,891 12.71%
- -----------------------------------------------------------------------------------------------------
Borrowings 103,150 58,500 76.32%
- -----------------------------------------------------------------------------------------------------
Stockholders' equity 75,819 74,325 2.01%
- -----------------------------------------------------------------------------------------------------
Common shares outstanding 7,041,101 6,899,679 2.05%
- -----------------------------------------------------------------------------------------------------
</TABLE>
* The decrease in 1999 Net Income is directly attributable to non-recurring
expenses associated with the acquisition of FirstBancorporation and two
Carolina First branches which reduced net income after taxes by $1,684,000.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
(dollars in thousands except per share) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $60,569 $54,487 $48,896 $41,302 $36,573
- -------------------------------------------------------------------------------------------------------
Interest expense 23,916 23,122 20,788 17,267 15,631
- -------------------------------------------------------------------------------------------------------
Net interest income 36,653 31,365 28,108 24,035 20,942
- -------------------------------------------------------------------------------------------------------
Provision for loan losses 1,613 1,213 1,416 1,481 1,036
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 35,040 30,152 26,692 22,554 19,906
- -------------------------------------------------------------------------------------------------------
Other income 9,727 8,856 7,002 5,962 4,541
- -------------------------------------------------------------------------------------------------------
Noninterest expense 33,802 26,866 22,833 19,742 17,028
- -------------------------------------------------------------------------------------------------------
Income before provision for income taxes 10,965 12,142 10,861 8,774 7,419
- -------------------------------------------------------------------------------------------------------
Provision for income taxes 3,025 3,871 3,448 2,745 2,252
- -------------------------------------------------------------------------------------------------------
Net income 7,940 8,271 7,413 6,029 5,167
- -------------------------------------------------------------------------------------------------------
Per Common Share
Net income $ 1.14 $ 1.24 $ 1.14 $ .97 $ .85
- -------------------------------------------------------------------------------------------------------
</TABLE>
A Breed Apart
When it comes to picking a winner, some consider pedigree. Others reflect on
past performance. There are those who look simply at numbers.
We at First National Corporation suggest you look at all of the above when
considering a financial services partner.
For more than 65 years, we have set the standards for community banking in South
Carolina, first in Orangeburg and now throughout the Midlands, Lowcountry, Pee
Dee and Piedmont regions. We offer a rare combination of personal service,
attention to individual needs, financial resources that are far and above those
of our peers, and a stable of up-to-the-minute products and services. This
strategy has proved to be a sure thing for today First National is a
$872,398,000 million corporation with three powerful community bank divisions
and a growing finance company that together account for 31 locations in 11
counties across South Carolina. Few financial services corporations in our class
have the muscle, the stamina, and the wherewithal to compete at nearly all
levels of the banking game. First National is quite frankly, a breed apart.
A Letter to Our Shareholders, Customers and Friends
The stakes in today's banking environment are incredibly high. Megabanks
continue to treat customers impersonally and we often see businesses and
individuals who are less than enamored with these monolithic entities. At the
opposite end of the spectrum are small, community-based banks that attempt to
counter the influx of the megabanks with personal service. While attractive to
the disenchanted, these community-oriented financial institutions simply do not
have the clout many customers require to compete in their own fields.
Then there is First National Corporation.
61
<PAGE> 3
It is not our intent to sound boastful when we say that First National is a
breed apart. It is, however, the truth. We have the foundation, the commitment
to innovation, the breadth of products and services, and the people necessary to
compete and win. Our performance in 1999 gives credence to this statement. Net
income for 1999 without one-time charges for the FirstBank acquisition totaled
$9,624,000, or $1.36 diluted earnings per share representing a 16.4 percent
increase over the same period in 1998. Including merger-related charges, net
income was $7,940,000. The Company achieved a return on assets and a return on
equity of .98 percent and 10.58 percent respectively. Investments made in 1998
in Florence County National Bank and CreditSouth Financial Services Corporation,
are beginning to show progress. The new affiliates support our strategic goals
to balance slow and high growth markets, diversify revenue streams, and further
enhance our geographical reach.
Throughout 1999 First National experienced superior balance sheet growth,
maintaining our established record of stability and strength. Total assets grew
16.3 percent, from $750,077,000 to $872,398,000 at year-end. Total deposits were
up 12.7 percent over the same period in 1998. Noninterest bearing deposits
reached $105,018,000, up 21.7 percent from the previous year. Loan growth was
exceptional in 1999. Total loans were up 23.8 percent to $610,541,000.
Relationship banking is a key driver of First National's future growth, with
loans often serving as the starting point for both relationships and future
income generation. For this reason, we continued to place emphasis on quality
loans in 1999. These efforts paid off as our loan accounts continued to deliver
enviable results. At year-end, total net charge-offs were $661,000 or .12
percent of outstanding loans. Other real estate owned property was $227,000. Non
accruals also were well managed, ending the year at $1,537,000. At the closing
of 1999, the Company had $7,886,000 in loan reserves or 1.29 percent, which
compares favorably with South Carolina averages. In summary, our overall lending
record clearly establishes First National as a first class lending institution.
Capital is also used to judge performance and once again First National has
proven it can go the distance. Shareholder equity rose to $75,819,000 in 1999,
up 2.0 percent from $74,325,000 in 1998. While this increase is not as
pronounced as in previous years, it reinforces the consistency and reliability
delivered year after year by the Company. Our strong capital position allows us
to take advantage of opportunities and leveraging existing capital remains a top
corporate goal.
A major goal of the Company is to grow into a statewide organization and we are
well on our way. Today First National serves a total of 23 communities through
31 offices in 11 counties. In September 1999 we completed the acquisition of
FirstBank in Columbia and Beaufort County, adding four locations in the process.
We also purchased two branches from Carolina First in Jasper County, achieving a
leadership position in this community. These acquisitions are important for a
number of reasons. The addition of the Columbia branch gives us a greater
presence in the Capitol City, which is both a center of influence and a dynamic
growth market. Our foothold in Columbia is now significantly enhanced and we are
aggressively pursuing further expansion in this market. The new locations in
Beaufort and Jasper Counties has further enhanced our position in what is among
the fastest growing areas in South Carolina. It also strengthens our Lowcountry
presence and paves the way for expansion into Charleston. Additionally, two
offices were bought in Ridgeland and Hardeeville solidifying our number one
position in marketshare in Jasper County.
While growth is important, we are not growing just to be large. We are executing
our expansion in a careful, calculated manner, with strong focus on the
long-term goal of becoming a statewide community-based banking organization.
Too, we remain cognizant of the concurrent goals of remaining sound and
profitable.
Technology was a major area of focus as we prepared to be Y2K compliant and also
as we worked toward the successful implementation of our new $5 million computer
systems and software. While the capital investment was made primarily in 1998,
the hard part - integration - occupied our thoughts and our efforts in 1999.
Investing in a system and making it perform are two distinctly separate issues.
Metaphorically speaking, First National bought a blue-blooded thoroughbred and
needed the jockeys to make the horse run up to speed. Therefore training at all
levels of the organization was and continues to be a top priority.
But what an incredible tool! With this state-of-the-art technology, First
National joins the upper echelons of financial institutions and can now compete
in e-commerce and e-business arenas, with greatly advanced product offerings and
better customer service. At the same time, we are positioned to achieve
significant operational efficiencies.
First National is high tech, but we haven't lost sight of what got us where we
are today: high touch. We recognize the need for face to face interaction, for
compassion and understanding. Our loan officers continued to earn high marks for
their ability to go beyond numbers when evaluating loan applications. In some
markets we introduced a new courier service, ZipBanking that delivers a new
level of service to our business customers. A 24-hour customer service line was
launched and while it is technology driven, it delivers something customers
crave: convenience.
The importance of our people can never be underestimated. First National is
nearly a one billion-dollar organization and we need people with the skills and
attitudes to grow with the Company. This year we made significant additions to
our management team.
62
<PAGE> 4
Don Kerr is our new chief technology officer. Prior to joining First National,
he was with MainStreet Financial Services in Virginia. Frank G. Carter is our
new senior vice president/director of marketing, coming to us from First Union.
Please join us in welcoming these able people to First National.
The momentum is here. We have made incredible strides in growing the business,
adding and integrating technology, developing exciting new products and
services, and in preparing our people to be the best in the business. We thank
our shareholders for your continued support and confidence. We thank our
employees for their ongoing commitment and hard work. We thank our customers for
your loyalty and your business. Together we make First National what we are
today, a breed apart.
Respectfully,
/S C. John Hipp, III
- -------------------------------------
C. John Hipp, III
President and Chief Executive Officer
/S Robert R. Horger
- -------------------------------------
Robert R. Horger
Chairman of the Board
/S Dwight W. Frierson
- -------------------------------------
Dwight W. Frierson
Vice Chairman of the Board
1999: The Year in Review
In 1999, First National deliberately picked up the pace in our bid to become a
statewide financial institution, using strategic acquisitions to solidify our
position in important growth markets.
The Midlands, home of the state's capitol city of Columbia and Lexington County,
among the fastest growing and most prosperous counties in South Carolina,
represents a prime opportunity. The Company established a mortgage office in
Columbia in 1998 and despite a full field of competitors, it is generating a
high volume of loans. We have also established a local board of directors who
are playing an instrumental role in plotting our course.
In August the Company made a key move, acquiring FirstBank, which included
locations in Columbia, Beaufort, Bluffton and Lady's Island. In addition to
gaining a stronger position in Columbia, the deal succeeded in cementing First
National's position as one of the leading financial institutions in Beaufort
County, also among the fastest growing counties in the state. With a growing
population of affluent retirees and established core of residents, First
National's blend of highly personalized service; progressive lending, investment
and trust services; and full range of commercial and individual products make
for a good fit.
The momentum continued with the acquisition of two branches of Carolina First in
Hardeeville and Ridgeland, giving First National a huge share of the Jasper
County market. This and the FirstBank acquisition has established the Company as
a major force in the Lowcountry and provides an excellent starting point for our
anticipated move into Charleston.
While acquisitions certainly provided significant highlights in 1999, the
Company also worked hard bringing other areas of the business in racing form.
The Company announced plans to build a new branch of the National Bank of York
County in York. A more customer-friendly office is currently under construction
and should be completed by year-end. Y2K was also a priority and employees
throughout the organization were instrumental in guaranteeing all aspects of the
business were Y2K compliant. These efforts were rewarded and we welcomed the new
millennium without any difficulty.
Taking the Lead with Technology
If a company does not have the right technological resources available, it may
as well be put out to pasture. Intent on staying in the lead, First National
invested more than $5 million in 1998 to upgrade its computer systems. This
investment was seen as a critical move toward maintaining our competitive
advantage and speeding our transition from a traditional, paper-based operation
to the world of e-business and e-commerce. The resources found at far larger
financial institutions are now available at First National.
63
<PAGE> 5
Acquiring the technology was merely a beginning. In 1999, First National
underwent a massive implementation project to ensure these systems were
successfully integrated throughout the organization. A major training initiative
was conducted to prepare employees at all levels. This was not, however, an
exercise in showing people how to push buttons. Our goal was too introduce an
entirely new way of doing business that uses state-of-the-art technology to
enhance customer service, accuracy, efficiency and ultimately, profitability.
By year-end, all of the Company's offices were linked by a wide area network. A
new check imaging system was in use and commercial and individual products
adjusted to take full advantage of the system. Telephone banking and automated
teller machine (ATM) systems were enhanced, bringing new functionality to
customers. The Year 2000 was met with total compliance, without any
interruptions to service. Finally, a new generation of advanced products and
services such as Internet banking will be available in the near future.
The best, as they say, is yet to come. First National is now better positioned
to grow our business, enhance customer relationships and win.
Process Improvement:
Getting Better at What We Do Best
Growing the business isn't just an external function. It also involves growing
from the inside by establishing processes that are more efficient, more
results-oriented and that employ human resources in the most effective manner
possible. First National recognizes the need to maximize operating efficiency
and in 1999 laid the groundwork for a major process improvement project.
Our ultimate goal is to meld technology, processes and people so that we can
provide the best products, services and support to our customers while
maximizing our resources.
A core objective is to maintain our cost advantage across all of our businesses
by streamlining our processes. One reason First National is so successful is our
use of highly competitive pricing structures in the lending arena. Relationships
established through loans are then leveraged into other product lines, which
also offer attractive fee structures and interest rates. Therefore it is
critical to gain operating efficiencies to protect this important advantage.
This initiative will also serve to make us more attractive to customers and the
marketplace at large as we offer more market-driven products and services such
as Internet and phone banking. We are expanding our emphasis on sales,
incorporating it into our culture through highly targeted employee training.
Instead of waiting to respond to our customers, we will actively take new
products to customers and the market.
It is important to understand that given the dramatic changes revolutionizing
business that process improvement at First National is ongoing. We must adapt to
the new dynamics of e-commerce and e-business and embrace change in a logical
and measured fashion so that we may take advantage of the opportunities that
accompany change. With our process improvement initiative, we are doing just
that.
The Sport of Kings: Commercial Services
When it comes to delivering exceptional commercial banking services, First
National's breeding shines, clearly defining our unique position as a
community-based bank with muscle.
Our offerings are diverse, blending high tech with high touch. A full range of
checking accounts designed for all sizes of businesses, from large corporations
to sole proprietors. The ability to lend up to $7.5 million dollars to any
single borrower via competitive loan products that can be structured to
complement individual business objectives. A bonded courier service that
redefines convenience for simple but essential banking transactions. A new realm
of sophisticated banking services that leverage the advantages of technology.
All of this is coupled with something other financial institutions cannot
duplicate: First National's absolute commitment to fostering personal
relationships with the communities we serve and the businesses we partner with.
Trust. Loyalty. Integrity. These words guide and inspire us.
Leadership is also paramount at First National. And we are now using our
advanced technology to usher in a new wave of products and services that will
assist our customers in meeting their own business goals. Electronic banking
forms the cornerstone of these
64
<PAGE> 6
new offerings. Commercial customers can now access their accounts at any time of
the day or night, with speed, accuracy and convenience. Other options allow
customers to receive important financial information such as monthly statements
on CD-ROM, eliminating paperwork and in the process, inefficiency.
The strength of First National is our ability to match the needs of the customer
with the right solutions. Being able to listen and respond immediately. Making
decisions at a local level so as to advance rather than impede progress. It's
what makes First National and more importantly, our customers, winners.
Table Stakes:
Individual Financial Services
First National's bread and butter continues to be our individual customers;
South Carolinians of all ages, backgrounds and income levels. We're committed to
answering each customer's financial services needs with options that fit a wide
range of personal goals. While our table stakes are products such as checking
and savings accounts, bank cards and debit cards, certificates of deposit and
individual retirement accounts, we have picked up the pace in developing and
offering products and services that meet today's changing lifestyles. Extensive
lending products are available with less hassle and red tape that mega banks
require.
Because convenience is a personal matter, customers can choose from a number of
ways to access their accounts, from traditional branch and drive-through banking
to automated teller machines. First National is part of the STAR(R) ATM network,
giving customers thousands of outlets for their financial transactions. Our
newest option is 24-hour self-service telephone banking. All the customer needs
is a touch tone phone to check balances of checking and savings accounts, check
deposits or withdrawals, transfer funds between accounts, and make loan payments
from either checking or savings.
Realizing that the financial needs of its customers are increasingly complex and
geared toward the future rather than just the here and now, First National's
Asset Management Group offers trust and investment services, combining
innovative solutions with personalized guidance and professional counsel to help
customers secure immediate and long-term financial goals.
We are quickly becoming leaders in the growing field of wealth management. In
addition to comprehensive fee-only financial planning and investment management,
First National's Asset Management Group also serves our customers in its roles
as trustee, custodian, escrow agent, and executor. We have also developed strong
capabilities in IRA planning, Management and distribution during the customer's
lifetime and in their estate.
First National also helps customers make informed decisions on a wide range of
investment options through UVEST Investment Services. Experienced investment
consultants located in First National branch banks are available for consulting
and will develop personalized investment strategies. Some of the investment
vehicles available include mutual funds, unit investment trusts, tax-deferred
annuities, municipal bonds, U.S. government securities and qualified retirement
plans.
Friends You Can Count On:
Community Involvement
In South Carolina, a promise made is a promise kept. When First National makes
the statement that we are "Friends You Can Count On," it's a promise we take to
heart. Our customers count on us to protect their interests, offer sound
products and services and treat them with respect, regardless of the size of the
account. But we look after our customers in other ways as well.
Our employees are also exceptionally generous with their time, talents and
treasures, serving as little league coaches, Sunday school teachers and scout
leaders as well as participating in First National's annual fund drive for
United Way.
65
<PAGE> 7
FIRST NATIONAL CORPORATION
OFFICERS
Robert R. Horger
Chairman of the Board
C. John Hipp, III
President and Chief Executive Officer
Dwight W. Frierson
Vice Chairman of the Board
W. Louis Griffith
Chief Financial Officer
James C. Hunter, Jr.
Secretary
John C. Pollok
Executive Vice President
Colden R. Battey, Jr.
Partner and Attorney
Harvey & Battey
Beaufort, SC
Charles W. Clark*
President
Santee Shores, Inc.
Santee, SC
William W. Coleman, Jr.
President and Chief Executive Officer
Florence County National Bank
Florence, SC
Dwight W. Frierson*
Vice President and General Manager
Coca-Cola Bottling Company
Orangeburg, SC
John L. Gramling, Jr.
Farmer
Orangeburg, SC
Richard L. Gray
Chairman of the Board
Grayco Company
Beaufort, SC
Robert R. Hill, Jr.
Senior Executive Vice President and Chief Operating Officer
First National Bank
Orangeburg, SC
C. John Hipp, III*
President and Chief Executive Officer
First National Corporation
66
<PAGE> 8
First National Bank
Orangeburg, SC
Robert R. Horger*
Chairman
First National Corporation
First National Bank
Attorney
Horger, Barnwell & Reid
Orangeburg, SC
Harry M. Mims, Jr.*
President
J.F. Cleckley & Company
Orangeburg, SC
Ralph W. Norman
President
Warren Norman Co., Inc.
Rock Hill, SC
Anne H. Oswald
Oswald, White & Associates, Inc.
Walterboro, SC
Samuel A. Rodgers
Vice Chairman
Carolina Eastman, Inc.
Florence, SC
James W. Roquemore*
Executive Vice President
Patten Seed Company, Inc.
General Manager
Super-Sod
Orangeburg, SC
Walter L. Tobin
Retired Consultant and Educator
Columbia, SC
Johnny E. Ward
President
W&W Truck & Tractor, Inc.
Moncks Corner, SC
A. Dewall Waters
Partner
Main-Waters Enterprises Partnership
Orangeburg, SC
Cathy Cox Yeadon
Cox Wood Preserving Co., Inc.
Orangeburg, SC
C. Parker Dempsey (Emeritus )
Dempsey Wood Products, Inc.
Orangeburg, SC
67
<PAGE> 9
E. Everett Gasque, Jr. (Emeritus)
EE Gasque & Son, Inc.
Gasque Farms
Elloree, SC
R.H. Jennings, III
(Chairman Emeritus)
First National Corporation
First National Bank
J.C. McAlhany
(Emeritus)
Retired Farmer and Cotton Broker
St. George, SC
L.D. Westbury
Retired President and Chairman Emeritus
First National Corporation
First National Bank
Orangeburg, SC
*Member Executive Committee
FIRST NATIONAL BANK
EXECUTIVE OFFICERS
Robert R. Horger
Chairman of the Board
C. John Hipp, III
President and Chief Executive Officer
Dwight W. Frierson
Vice Chairman of the Board
W. Louis Griffith
Senior Vice President
Chief Financial Officer
Allen M. Hay, Jr.
Senior Vice President
Support Division
Robert R. Hill, Jr.
Senior Executive Vice President and Chief Operating Officer
James C. Hunter, Jr.
Executive Vice President
Secretary
Dane H. Murray
Executive Vice President
Regional Executive - Region II
Philip M. Smith
68
<PAGE> 10
Executive Vice President
Chief Credit Officer
Alex Shuford
Executive Vice President
BOARD OF DIRECTORS
Colden R. Battey, Jr.
Partner and Attorney
Harvey & Battey
Beaufort, SC
Charles W. Clark*
President
Santee Shores, Inc.
Santee, SC
C. Parker Dempsey
Secretary
Dempsey Wood Products, Inc.
Orangeburg, SC
Ozzie Fogle
President and Chief Executive Officer
Decolam, Inc.
Orangeburg, SC
Dwight W. Frierson*
Vice President and General Manager
Coca-Cola Bottling Company
Orangeburg, SC
E. Everett Gasque, Jr.
President
EE Gasque & Son, Inc.
Gasque Farms
Elloree, SC
John L. Gramling, Jr.
Farmer
Orangeburg, SC
Richard L. Gray
Chairman of the Board
Grayco Company
Beaufort, SC
C. John Hipp, III*
President and Chief Executive Officer
First National Corporation
First National Bank
Orangeburg, SC
Robert R. Horger*
Chairman
First National Corporation
First National Bank
69
<PAGE> 11
Attorney
Horger, Barnwell & Reid
Orangeburg, SC
Harry M. Mims, Jr.*
President
J.F. Cleckley & Company
Orangeburg, SC
Anne H. Oswald
Oswald, White & Associates, Inc.
Walterboro, SC
James W. Roquemore*
Executive Vice President
Patten Seed Company, Inc.
General Manager
Super-Sod
Orangeburg, SC
Thomas E. Suggs
President
Rooney, McArthur & Suggs, Inc.
Columbia, SC
Walter L. Tobin
Retired Consultant and Educator
Columbia, SC
Johnny E. Ward
President
W & W Truck & Tractor, Inc.
Moncks Corner, SC
A. Dewall Waters
Partner
Main-Waters Enterprises Partnership
Orangeburg, SC
J.W. Williamson, III
President
J.W. Williamson Ginnery, Inc.
Denmark, SC
Cathy Cox Yeadon
Cox Wood Preserving Co., Inc.
Orangeburg, SC
L.D. Westbury
Chairman Emeritus
Orangeburg, SC
NATIONAL BANK OF YORK COUNTY
EXECUTIVE OFFICERS
Ralph W. Norman, Jr.
Chairman of the Board
70
<PAGE> 12
Bernard N. Ackerman
Vice Chairman of the Board
Thomas S. Camp
President and Chief Executive Officer
Board of Directors
Bernard N. Ackerman, CPA, PA
Rock Hill, SC
Thomas S. Camp
President and Chief Executive Officer
National Bank of York County
Rock Hill, SC
Ronnie P. Campbell
Chief Executive Officer
AME, Inc.
Fort Mill, SC
Dwight W. Frierson
Vice President and General Manager
Coca-Cola Bottling Company
Orangeburg, SC
R. Wesley Hayes, Jr.
Attorney
Harrelson and Hayes
Rock Hill, SC
C. John Hipp, III
President and Chief Executive Officer
First National Corporation
First National Bank
Orangeburg, SC
Ralph W. Norman, Jr.
President
Warren Norman Co., Inc.
Rock Hill, SC
Jacob D. Smith
President
Smith Enterprises, Inc.
Rock Hill, SC
Jolene Stepp
President
Step-Tuttle Realty
Rock Hill, SC
Frank M. Wilkerson, Jr.
President
Wilkerson Fuel Co., Inc.
Rock Hill, SC
FLORENCE COUNTY NATIONAL BANK
71
<PAGE> 13
EXECUTIVE OFFICERS
Samuel A. Rodgers
Chairman of the Board
William W. Coleman, Jr.
President and Chief Executive Officer
John L. Hanna
Senior Vice President
BOARD OF DIRECTORS
Samuel A. Rodgers
Vice Chairman
Carolina Eastern
Scranton, SC
Starlee B. Alexander
State Farm Insurance
Florence, SC
Dr. J. William Burch
Dentist-Farmer-Businessman
Lake City, SC
William W. Coleman, Jr.
President and Chief Executive Officer
Florence County National Bank
Florence, SC
Dr. W. S. "Bill" Edwards
Orthopedic Surgeon
Florence, SC
Dr. F. Gregg Jones
Anesthesiologist
Florence, SC
James C. Gregg, Jr.
Sheriff, Florence County
Effingham, SC
D.P. "Tilly" Thompson
Retired Executive Officer - Belk
Florence, SC
C. John Hipp, III
President and Chief Executive Officer
First National Corporation
First National Bank
Orangeburg, SC
Robert R. Horger
Chairman of Board
First National Corporation
Orangeburg, SC
CREDITSOUTH FINANCIAL SERVICES CORPORATION
EXECUTIVE OFFICERS
72
<PAGE> 14
Robert R. Horger
Chairman of the Board
George M. Creel
President
Jay J. Creel
Executive Vice President
BOARD OF DIRECTORS
George M. Creel
President
CreditSouth Financial Services
Jay J. Creel
Executive Vice President
CreditSouth Financial Services
Dwight W. Frierson
Vice President and General Manager
Coca-Cola Bottling Company
Orangeburg, SC
C. John Hipp, III
President and Chief Executive Officer
First National Corporation
First National Bank
Orangeburg, SC
Robert R. Horger*
Chairman of the Board
First National Corporation
Attorney
Horger, Barnwell & Reid
Orangeburg, SC
A. Dewall Waters
Partner
Main-Waters Enterprises Partnership
Orangeburg, SC
FIRST NATIONAL CORPORATION LOCATIONS
FIRST NATIONAL BANK
Bamberg
317 North Main Street
Bamberg, SC 29003
(803) 245-2416
Beaufort
1121 Boundary Street
Beaufort, SC 29901
(843) 521-5600
Lady's Island
184 Sea Island Parkway
73
<PAGE> 15
Beaufort, SC 29901
(843) 521-5660
Bluffton
1328 Fording Island Road
Bluffton, SC 29910
(843) 837-2100
Cameron
202 North Main Street
Cameron, SC 29042
(803) 823-2333
Columbia
1900 Assembly Street
Columbia, SC 29201
(803) 771-2265
Denmark
127 South Palmetto Ave.
Denmark, SC 29042
(803) 793-3324
Elloree
6512 Old No. 6 Highway
Elloree, SC 29047
(803) 897-2121
Hardeeville
26 Highway 17
Hardeeville, SC 29927
(843) 784-3151
Harleyville
122 West Main Street
Harleyville, SC 29448
(843) 462-7687
Hilton Head
81 Main Street
Hilton Head, SC 29926
(843) 342-2100
Moncks Corner
317 North Highway 52
Moncks Corner, SC 29416
(843) 761-8024
Norway
8703 Savannah Highway
Norway, SC 29113
(803) 263-4295
Orangeburg
Bank Center
950 John C. Calhoun Drive
Orangeburg, SC 29115
(803) 534-2175
74
<PAGE> 16
1501 Old Edisto Drive
Orangeburg, SC 29115
(803) 531-0540
1255 St. Matthews Road
Orangeburg, SC 29118
(803) 531-0520
3025 St. Matthews Road
Orangeburg, SC 29115
(803) 531-0550
Ridgeland
207 Jacob Smart Boulevard
Ridgeland, SC 29936
(843) 726-5596
Santee
657 Bass Drive
Santee, SC 29142
(803) 854-2451
St. George
5542 Memorial Boulevard
St. George, SC 29477
(843) 563-2324
Walterboro
520 N. Jefferies Boulevard
Walterboro, SC 29844
(843) 549-1553
600 Robertson Boulevard
Walterboro, SC 29488
NATIONAL BANK
OF YORK COUNTY
Fort Mill
808 Tom Hall Street
Fort Mill, SC 29715
(803) 548-6292
Rock Hill
1127 Ebenezer Road
Rock Hill, SC 29732
(803) 329-1222
York
1 South Congress Street
York, SC 29745
(803) 684-5554
FLORENCE COUNTY NATIONAL BANK
75
<PAGE> 17
Florence
1600 W. Palmetto Street
Florence, SC 29501
(843) 673-9900
Lake City
266 W. Main Street
Lake City, SC 29560
(843) 394-1417
CREDITSOUTH
FINANCIAL SERVICES CORPORATION
Florence
609 Chestnut Street
Florence, SC 29501
(843) 669-0778
480 Second Loop Road
Florence, SC 29501
(843) 669-4616
Orangeburg
552 John C. Calhoun Drive
Orangeburg, SC 29115
(803) 536-0706
Myrtle Beach
4505 Socastee Boulevard
Socastee Plaza - Suite L
Myrtle Beach, SC 29577
(843) 293-3050
STOCK PERFORMANCE AND STATISTICS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Stock Performance
Dividends paid per share $ .52 $ .48 $ .40 $ .37 $ .34
- ---------------------------------------------------------------------------------------------------------------------------
Dividend payout percentage 40.14% 30.69% 27.78% 28.55% 33.31%
Dividend yield
(based on the average of the high
and low price for the year) 1.97% 1.94% 1.78% 1.38% 1.37%
- ---------------------------------------------------------------------------------------------------------------------------
Price/earnings ratio
(based on year-end stock price
and diluted earnings per share) 19.80x 20.83x 19.10x 12.60x 12.05x
- ---------------------------------------------------------------------------------------------------------------------------
Price/book ratio
(end of year) 2.08x 2.34x 2.07x 2.97x 2.93x
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock Statistics
Stock price ranges:
- ---------------------------------------------------------------------------------------------------------------------------
High $30.750 $28.800 $25.144 $11.970 $10.000
- ---------------------------------------------------------------------------------------------------------------------------
Low 22.000 20.750 19.800 10.900 9.042
- ---------------------------------------------------------------------------------------------------------------------------
Close 22.375 25.200 21.206 11.970 10.000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C>
Volume Traded 281,300 351,800 281,100 n/a n/a
- ---------------------------------------------------------------------------------------------------------------------------
As a percentage of average shares outstanding 4.02% 5.26% 4.31% n/a n/a
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share (basic) $ 1.14 $ 1.24 $ 1.14 $ .97 $ .85
- ---------------------------------------------------------------------------------------------------------------------------
Earning per share (diluted) 1.13 1.21 1.11 .95 .83
- ---------------------------------------------------------------------------------------------------------------------------
Book value per share 10.77 10.77 10.26 9.44 8.84
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly Common Stock Price Ranges and Dividends
<TABLE>
<CAPTION>
1999 1998 1997
Quarter High Low Dividend High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st $30.250 $25.000 $0.13 $23.400 $20.475 $0.12 $19.463 $14.400 $0.10
- ------------------------------------------------------------------------------------------------------------------------------
2nd 28.500 26.000 0.13 25.088 21.488 0.12 25.144 19.294 0.10
- ------------------------------------------------------------------------------------------------------------------------------
3rd 31.000 22.125 0.13 25.650 21.488 0.12 24.356 22.500 0.10
- ------------------------------------------------------------------------------------------------------------------------------
4th 30.750 22.000 0.13 28.800 22.500 0.12 24.075 19.800 0.10
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Per share data have been retroactively adjusted to give effect to a ten percent
common stock dividend paid to shareholders of record on October 31, 1995, 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 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.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
(dollars in thousands except per share) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
At December 31
Assets $872,398 $750,077 $657,256 $589,352 $519,356
- -------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 610,541 493,144 436,982 373,062 320,631
- -------------------------------------------------------------------------------------------------------------------
Investment securities 195,572 206,137 168,243 163,366 154,126
- -------------------------------------------------------------------------------------------------------------------
Deposits 689,665 611,891 531,837 492,454 443,220
- -------------------------------------------------------------------------------------------------------------------
Borrowings 103,150 58,500 59,361 38,146 26,833
- -------------------------------------------------------------------------------------------------------------------
Stockholders' equity 75,819 74,325 61,881 55,391 46,295
- -------------------------------------------------------------------------------------------------------------------
Number of offices 31 25 21 21 18
- -------------------------------------------------------------------------------------------------------------------
Full-time equivalent employees 426 353 288 281 253
- -------------------------------------------------------------------------------------------------------------------
Selected Ratios
Return on average equity 10.58% 12.14% 12.64% 11.86% 11.73%
- -------------------------------------------------------------------------------------------------------------------
Return on average assets .98 1.18 1.19 1.09 1.05
- -------------------------------------------------------------------------------------------------------------------
Average equity as a percentage of average assets 9.25 9.68 9.22 9.03 8.98
- -------------------------------------------------------------------------------------------------------------------
Asset Quality Ratios
Allowance for loan losses to period end loans 1.29% 1.41% 1.43% 1.43% 1.30%
- -------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period end
non-performing loans 513.08 448.22 432.25 374.91 311.86
- -------------------------------------------------------------------------------------------------------------------
Nonperforming assets to period end loans .26 .31 .34 .38 .43
- -------------------------------------------------------------------------------------------------------------------
Nonperforming assets to period end total assets .18 .21 .22 .24 .26
- -------------------------------------------------------------------------------------------------------------------
Net charge-offs to average loans .12 .12 .13 .09 .13
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE> 19
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
(dollars in thousands except per share) 1999 1998
<S> <C> <C>
Assets Cash and cash equivalents:
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 39,479 $ 28,343
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits with banks 1,848 6,764
- -------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 41,327 35,107
- -------------------------------------------------------------------------------------------------------------------
Investment securities:
Securities held-to-maturity:
- -------------------------------------------------------------------------------------------------------------------
Taxable 4,335 8,242
- -------------------------------------------------------------------------------------------------------------------
Tax-exempt 42,933 38,138
- -------------------------------------------------------------------------------------------------------------------
Total (fair value of $46,529 in 1999 and $47,456 in 1998) 47,268 46,380
- -------------------------------------------------------------------------------------------------------------------
Securities available-for-sale, at fair value 148,304 159,757
- -------------------------------------------------------------------------------------------------------------------
Total investment securities 195,572 206,137
- -------------------------------------------------------------------------------------------------------------------
Loans 613,961 496,218
- -------------------------------------------------------------------------------------------------------------------
Less, unearned income (3,420) (3,074)
- -------------------------------------------------------------------------------------------------------------------
Less, allowance for loan losses (7,886) (6,934)
- -------------------------------------------------------------------------------------------------------------------
Loans, net 602,655 486,210
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 15,693 12,392
- -------------------------------------------------------------------------------------------------------------------
Other assets 17,151 10,231
- -------------------------------------------------------------------------------------------------------------------
Total assets $872,398 $750,077
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits:
Demand $105,018 $ 86,280
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing transaction accounts 123,597 134,002
- -------------------------------------------------------------------------------------------------------------------
Savings 134,203 109,137
- -------------------------------------------------------------------------------------------------------------------
CDs of $100,000 and over 88,762 78,065
- -------------------------------------------------------------------------------------------------------------------
Other time 238,085 204,407
- -------------------------------------------------------------------------------------------------------------------
Total deposits 689,665 611,891
- -------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 76,400 52,150
- -------------------------------------------------------------------------------------------------------------------
Notes payable 26,750 6,350
- -------------------------------------------------------------------------------------------------------------------
Other liabilities 3,764 5,361
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 796,579 675,752
- -------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000 shares, issued and
outstanding 7,041,101 shares in 1999 and 6,899,679 shares in 1998 17,603 17,249
- -------------------------------------------------------------------------------------------------------------------
Surplus 47,666 47,072
- -------------------------------------------------------------------------------------------------------------------
Retained earnings 13,496 8,743
- -------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) (2,946) 1,261
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 75,819 74,325
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $872,398 $750,077
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE> 20
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
(dollars in thousands except per share) 1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans, including fees $47,701 $41,799 $37,913
- -------------------------------------------------------------------------------------------------------------------
Investment securities:
Taxable:
- -------------------------------------------------------------------------------------------------------------------
Held-to-maturity 400 676 1,426
- -------------------------------------------------------------------------------------------------------------------
Available-for-sale 9,899 9,290 7,371
- -------------------------------------------------------------------------------------------------------------------
Tax-exempt - held-to-maturity 1,847 1,672 1,602
- -------------------------------------------------------------------------------------------------------------------
Federal funds sold 456 579 483
- -------------------------------------------------------------------------------------------------------------------
Deposits with banks 266 471 101
- -------------------------------------------------------------------------------------------------------------------
Total interest income 60,569 54,487 48,896
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing transaction accounts 1,014 2,437 2,533
- -------------------------------------------------------------------------------------------------------------------
Savings 4,090 3,246 2,753
- -------------------------------------------------------------------------------------------------------------------
Certificates of deposit 14,540 14,770 13,164
- -------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase 2,818 2,425 2,131
- -------------------------------------------------------------------------------------------------------------------
Notes payable 1,454 244 207
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 23,916 23,122 20,788
- -------------------------------------------------------------------------------------------------------------------
Net interest income:
Net interest income 36,653 31,365 28,108
- -------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,613 1,213 1,416
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 35,040 30,152 26,692
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 5,838 5,619 4,798
- -------------------------------------------------------------------------------------------------------------------
Other service charges and fees 3,632 3,096 2,114
- -------------------------------------------------------------------------------------------------------------------
Gain on sale of securities available-for-sale 214 95 3
- -------------------------------------------------------------------------------------------------------------------
Other income 43 46 87
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 9,727 8,856 7,002
- -------------------------------------------------------------------------------------------------------------------
Noninterest expenses:
Salaries and employee benefits 16,841 14,367 12,257
- -------------------------------------------------------------------------------------------------------------------
Net occupancy expense 1,773 1,417 1,218
- -------------------------------------------------------------------------------------------------------------------
Furniture and equipment expense 3,042 1,937 1,872
- -------------------------------------------------------------------------------------------------------------------
Other expense 12,146 9,145 7,486
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expenses: 33,802 26,866 22,833
- -------------------------------------------------------------------------------------------------------------------
Earnings:
Income before provision for income taxes 10,965 12,142 10,861
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes 3,025 3,871 3,448
- -------------------------------------------------------------------------------------------------------------------
Net income $ 7,940 $ 8,271 $ 7,413
- -------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 1.14 $ 1.24 $ 1.14
- -------------------------------------------------------------------------------------------------------------------
Diluted $ 1.13 $ 1.21 $ 1.1
</TABLE>
79
<PAGE> 21
Corporate Information
General Offices
950 John C. Calhoun Drive, SE
Orangeburg, South Carolina 29115-6715
803-534-2175
Annual Meeting
The Annual Meeting of Shareholders will be held at 2 p.m. on Tuesday, April 25,
2000 in the Oak Room of First National Bank, 950 John C. Calhoun Drive, SE,
Orangeburg, South Carolina.
Analyst Contact
Milton E. Smith
Controller
First National Corporation
Post Office Box 1287
Orangeburg, South Carolina 29116-1287
803-534-2175
Form 10-K and Other Information
Copies of First National Corporation's Annual Report to the Securities and
Exchange Commission on Form 10-K (excluding exhibits thereto), and other
information may be obtained without charge by written request to:
Milton E. Smith
Controller
First National Corporation
Post Office Box 1287
Orangeburg, South Carolina 29116-1287
803-534-2175
Stock Information
The Company's Common Stock is listed on the American Stock Exchange under the
trading symbol FNC.
80
<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 1,
2000, included in First National Corporation's annual report on Form 10-K for
the year ended December 31, 1999, 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, 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 and the Registration Statement on Form S-8 (File No.
333-33092) filed by First National Corporation with respect to the First
National Corporation 1999 Stock Option Plan.
/S J. W. Hunt and Company, LLP
--------------------------------------------
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 28, 2000
81
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 39,479
<INT-BEARING-DEPOSITS> 1,848
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,304
<INVESTMENTS-CARRYING> 47,268
<INVESTMENTS-MARKET> 46,529
<LOANS> 610,541
<ALLOWANCE> 7,886
<TOTAL-ASSETS> 872,398
<DEPOSITS> 689,665
<SHORT-TERM> 84,100
<LIABILITIES-OTHER> 3,764
<LONG-TERM> 19,050
0
0
<COMMON> 17,603
<OTHER-SE> 58,216
<TOTAL-LIABILITIES-AND-EQUITY> 872,398
<INTEREST-LOAN> 47,701
<INTEREST-INVEST> 12,602
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 60,569
<INTEREST-DEPOSIT> 19,644
<INTEREST-EXPENSE> 23,916
<INTEREST-INCOME-NET> 36,653
<LOAN-LOSSES> 1,613
<SECURITIES-GAINS> 214
<EXPENSE-OTHER> 33,802
<INCOME-PRETAX> 10,965
<INCOME-PRE-EXTRAORDINARY> 7,940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,940
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 7.78
<LOANS-NON> 1,537
<LOANS-PAST> 729
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,266
<ALLOWANCE-OPEN> 6,934
<CHARGE-OFFS> 826
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 7,886
<ALLOWANCE-DOMESTIC> 7,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
