FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
June 30, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended JUNE 30, 2000 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period, that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days.
YES "X" NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of June 30, 2000
Common Stock, $2.50 par value 7,041,101
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Six Months Ended
June 30, 2000 and 1999
Condensed Consolidated Statements of Income -
Three and Six Months Ended
June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Six Months Ended
June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
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PART I - FINANCIAL INFORMATION
Item l. FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
6-30-00 12-31-99
(Unaudited) (Note 1)
ASSETS
Cash and cash equivalents:
Cash and due from banks $35,761 $39,479
Interest-bearing deposits with banks 343 1,848
Total cash and cash equivalents 36,104 41,327
Federal funds sold and securities purchased 62,000 -
Investment securities:
Held-to-maturity (fair value of $41,858
in 2000 and $46,529 in 1999) 42,754 47,268
Available-for-sale 145,782 148,304
Total investment securities 188,536 195,572
Loans 687,389 613,961
Less, unearned income (3,772) (3,420)
Less, allowance for loan losses (8,361) (7,883)
Loans, net 675,256 602,655
Premises and equipment, net 16,467 15,693
Other assets 19,300 17,151
TOTAL ASSETS $997,663 $872,398
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $116,227 $105,018
Interest-bearing transaction accounts 622,420 584,647
Total deposits 738,647 689,665
Federal funds purchased & securities
sold under agreements to repurchase 151,840 76,400
Notes payable 23,100 26,750
Other liabilities 5,098 3,764
Total liabilities 918,685 796,579
Shareholders' equity:
Common stock-$2.50 par value; authorized
40,000,000 shares; issued and outstanding
7,041,101 shares 17,603 17,603
Surplus 47,666 47,666
Retained earnings 16,967 13,496
Accumulated other comprehensive loss (3,258) (2,946)
Total shareholders' equity 78,978 75,819
Total liabilities and shareholders' equity $997,663 $872,398
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income(Loss) Total
BALANCE, DECEMBER 31, 1998 6,899,679 $ 17,249 $ 47,072 $ 8,743 $ 1,261 $ 74,325
Comprehensive income:
Net income - - - 4,714 - 4,714
Change in net unrealized gain
(loss) on securities available-
for-sale, net of tax effects - - - - (2,899) (2,899)
Total comprehensive income - - - - - 1,815
Cash dividends declared at
$.26 per share - - - (1,516) - (1,516)
Common stock issued 106,466 266 347 - - 613
BALANCE, JUNE 30, 1999 7,006,145 $ 17,515 $ 47,419 $ 11,941 (1,638) $ 75,237
BALANCE, DECEMBER 31, 1999 7,041,101 $ 17,603 $ 47,666 $ 13,496 $ (2,946) $ 75,819
Comprehensive income:
Net income - - - 5,301 - 5,301
Change in net unrealized gain
(loss) on securities available-
for-sale, net of tax effects - - - - (312) (312)
Total comprehensive income - - - - - 4,989
Cash dividends declared at
$.26 per share - - - (1,830) - (1,830)
BALANCE, JUNE 30, 2000 7,041,101 $ 17,603 $ 47,666 $ 16,967 $ (3,258) $78,978
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
06-30-00 06-30-99 06-30-00 06-30-99
Interest income:
Loans, including fees $15,051 $11,463 $29,098 $22,464
Investment securities:
Taxable 2,338 2,873 4,662 5,567
Nontaxable 433 452 904 897
Federal funds sold 1,095 52 1,189 174
Deposits with banks 96 - 110 -
Total interest income 19,013 14,840 35,963 29,102
Interest expense:
Interest on deposits 6,348 4,848 12,077 9,610
Federal funds purchased & securities
sold under agreements to repurchase 2,006 669 2,976 1,358
Notes payable 446 322 876 588
Total interest expense 8,800 5,839 15,929 11,556
Net interest income:
Net interest income 10,213 9,001 20,034 17,546
Provision for loan losses 440 397 758 744
Net interest income after
provision for loan losses 9,773 8,604 19,276 16,802
Non-interest income:
Service charges on deposit accounts 1,950 1,421 3,738 2,801
Other service charges and fees 1,045 1,059 1,845 1,981
Gain on sale of securities
available-for-sale - 43 - 245
Other income - 14 - 40
Total non-interest income 2,995 2,537 5,583 5,067
Non-interest expense:
Salaries & employee benefits 4,406 4,054 8,922 8,354
Net occupancy expense 446 517 932 1,028
Furniture and equipment expense 862 703 1,707 1,326
Loss on sale of securities
available-for-sale 12 - 12 -
Other expense 2,930 2,458 5,399 4,464
Total non-interest expense 8,656 7,732 16,972 15,172
Earnings:
Income before provision for
income taxes 4,112 3,409 7,887 6,697
Provision for income taxes 1,361 918 2,586 1,983
Net Income $2,751 $2,491 $5,301 $4,714
Comprehensive income $2,953 $ 606 $4,989 $1,815
Earnings per share:
Basic $ 0.39 $ 0.36 $ 0.75 $ 0.68
Diluted $ 0.39 $ 0.35 $ 0.75 $ 0.67
Cash dividends per common share $ 0.13 $ 0.13 $ 0.26 $ 0.26
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Six Months Ended
06-30-00 06-30-99
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,301 $ 4,714
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,134 918
Provision for loan losses 476 744
Deferred income taxes 183 -
Gain on sale of securities available-
for-sale - (202)
Gain on sale of premises and equipment - (20)
Net amortization of investment securities (9) 152
Net change in:
Miscellaneous other assets (2,099) (2,893)
Miscellaneous other liabilities 1,333 330
Net cash provided by operating
activities 6,319 3,743
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment
securities available-for-sale 17,129 309
Proceeds from maturities of investment
securities held-to-maturity 6,633 4,733
Proceeds from maturities of investment
securities available-for-sale 5,619 51,039
Purchases of investment securities
held-to-maturity (2,181) (5,091)
Purchases of investment securities
available-for-sale (20,649) (73,399)
Net increase in customer loans (73,125) (36,527)
Recoveries of loans previously charged off - 91
Purchases of premises and equipment (1,909) (2,239)
Proceeds from sale of premises and equipment - 20
Net increase in federal funds sold (62,000) -
Net cash used by investing activities (130,483) (61,064)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED...
Six Months Ended
06-30-00 06-30-99
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts, savings accounts and certificates
of deposit 48,982 34,558
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase 75,439 18,917
Proceeds from issuance of debt - 20,000
Repayment of debt (3,650) (2,150)
Dividends paid (1,830) (1,516)
Stock options exercised - 613
Net cash provided by financing
activities 118,941 70,422
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (5,223) $ 13,101
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 41,327 35,107
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36,104 $ 48,208
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. All prior period information has been restated to
reflect the merger with FirstBancorporation, Inc., which was accounted
for as a pooling-of-interests. Operating results for the three and six
months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
The condensed consolidated balance sheet at December 31, 1999, has been
derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The information contained in the consolidated financial statements and
accompanying footnotes included in the Corporation's annual report on Form
10-K for the year ended December 31, 1999 should be referenced when
reading these unaudited condensed consolidated financial statements.
NOTE 2 - Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
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NOTE 3 - Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the
weighted-average shares of common stock outstanding during each period.
Diluted earnings per share is based on the weighted-average shares of
common stock outstanding during each period plus the maximum dilutive
effect of common stock issuable upon exercise of stock options. The
weighted average number of shares and equivalents are determined after
giving retroactive effect to stock dividends and stock splits.
Weighted-average shares outstanding used in calculating earnings per
share for the three and six months ended June 30, 2000 and 1999 are as
follows:
3 Months Ended 6 Months Ended
6/30/00 6/30/99 6/30/00 6/30/99
Basic 7,041,101 7,006,145 7,041,101 6,963,437
Diluted 7,071,502 7,084,107 7,076,345 7,042,100
Dividends per share are calculated using the current equivalent number of
common shares outstanding at the time of the dividend based on the
Corporation's shares outstanding.
NOTE 4 - Commitments and Contingent Liabilities:
In the normal course of business, the Corporation makes various
commitments and incurs certain contingent liabilities, which are not
reflected in the accompanying financial statements. The commitments and
contingent liabilities include guarantees, commitments to extend credit
and standby letters of credit. At June 30, 2000, commitments to extend
credit and standby letters of credit totaled $133,615,000. The
Corporation does not anticipate any material losses as a result of these
transactions.
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FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in this
report. For further information refer to the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
First National Corporation (the "Corporation") is a bank holding company
incorporated under the laws of South Carolina in 1985. The Corporation owns
100% of First National Bank, a national bank which opened for business in
1932, 100% of National Bank of York County, a national bank which opened for
business in 1996, 100% of Florence County National Bank, a national bank
which opened for business in 1998, and 90% of CreditSouth Financial Services
Corporation, an upscale finance company which opened for business in 1998.
The Corporation engages in no significant operations other than the ownership
of its subsidiaries.
Some of the major services which the Corporation provided through its
banking subsidiaries include checking, NOW accounts, savings and other time
deposits of various types, alternative investment products such as annuities
and mutual funds, loans for businesses, agriculture, real estate, personal
use, home improvement and automobiles, credit cards, letters of credit, home
equity lines of credit, safe deposit boxes, bank money orders, wire transfer
services, trust services, discount brokerage services, and use of ATM
facilities. The Corporation 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 Corporation. The Corporation does not have
foreign loans.
For the second quarter of 2000, First National Corporation ("the
Corporation") had consolidated net income of $2,751,000, an increase of 10.6
percent over the $2,491,000 earned in the second quarter of 1999. Diluted
earnings per share amounted to $0.39 for the three months ended June 30,
2000, an 11.4 percent increase over the $0.35 per share earned in the second
quarter of 1999. Net income for the first six months of 2000 was $5,301,000,
an increase of 12.5 percent over the $4,714,000 earned for the same period in
1999. Diluted earnings per share amounted to $0.75 for the six months ended
June 30, 2000, an 11.9 percent increase over the $0.67 per share earned in
the first six months of 1999.
NET INTEREST INCOME
For the second quarter of 2000, net interest income was $9,773,000
compared to $8,604,000 for the same period in 1999. This is an increase of
$1,169,000 or 13.6 percent. Net interest income for the first six months of
2000 was $19,276,000 compared to $16,802,000 for the same period in 1999.
This represents an increase of $2,474,000 or 14.7 percent. This increase
resulted from a 29.1 percent increase in loan outstandings, net of unearned
income when compared to the first six months of 1999.
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Management's Discussion Continued...
The yield on a major portion of the Corporation's earning assets adjusts
simultaneously but to varying degrees of magnitude, with changes in the
general level of interest rates. In the first six months of 1999, the year
to date taxable equivalent yield on earning assets was 7.54 percent. During
the same period of 2000, the yield increased to 7.86 percent, or an increase
of 32 basis points. The cost of the interest-bearing liabilities used to
fund most of these earning assets increased 55 basis points from 3.68 percent
in 1999 to 4.23 percent in 2000. Interest rates paid on interest-bearing
liabilities increased more rapidly than yields on earning assets during the
period.
For the first six months net interest margins decreased from 4.44 percent
in 1999 to 4.27 percent in 2000. The positive impact of interest-free funds
for the same period remained constant at .58 percent.
The largest category of earning assets is loans. At the end of the second
quarter 2000, loans outstanding, less unearned income, were $683,617,000
compared to $610,541,000 at December 31, 1999. This represents an increase
of $73,076,000 or 11.9 percent in the six month period. For the second
quarter ended June 30, 2000, interest and fees on loans were $15,051,000
compared to $11,463,000 for the comparable period in 1999, an increase of
$3,588,000 or 31.3 percent. For the six months ended June 30, 2000, interest
and fees on loans were $29,098,000 compared with $22,464,000 for the same
period in 1999. This represents an increase of $6,634,000 or 29.5 percent.
For the six months ended June 30, 2000, loans averaged $651,215,000 and
decreased in yield by 34 basis points to 8.47 percent on a taxable equivalent
basis, compared to $541,434,000 with a taxable equivalent yield of 8.81
percent for the full year ended December 31, 1999.
Investment securities are the second largest category of earning assets.
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 deposit and
purchased funds.
At June 30, 2000, investment securities were $188,536,000 compared to
$195,572,000 at December 31, 1999. The investment portfolio remained about
the same during this period.
For the second quarter ended June 30, 2000, investment and money market
income was $3,962,000 compared with $3,377,000 for the comparable period in
1999, a net increase of $585,000 or 17.3 percent. For the six month period
ended June 30, 2000, investment income was $6,865,000 compared with
$6,638,000 for the same period in 1999, a net increase of $227,000 or 3.4
percent. The increase was attributable to higher second quarter balances of
securities purchased under agreement to resell.
For the second quarter 2000, securities averaged $188,157,000 and yielded
6.10 percent on a taxable equivalent basis, compared to $226,329,000 with a
yield of approximately 5.75 percent for the full year ended December 31,
1999, resulting in a 35 basis point increase in yield.
<PAGE>
Management's Discussion Continued...
At June 30, 2000, the Corporation had net unrealized losses in the U.S.
Treasury and agency portfolio denoted as held-to-maturity, of $29,000 and in
the municipal portfolio $867,000. Also at June 30, 2000, the Corporation had
a net unrealized loss of approximately $5,171,000 on the $145,782,000 balance
of securities denoted as available-for-sale.
For the six months ended June 30, 2000, the Corporation had a $12,000
realized loss due to called agency bonds and the sale of investment
securities.
Although securities classified as available-for-sale may be sold from time
to time to meet liquidity or other needs, it is not the normal activity or
intent of the Corporation to trade the investment portfolio. Management has
the intent and the ability to hold securities on a long-term basis or until
maturity.
During the first six months of 2000, interest-bearing liabilities averaged
$749,262,000 and carried an average rate of 4.23 percent. This compares to
an average level of $626,815,000 with a rate of 3.82 percent for the full
year ended December 31, 1999, or an increase of 41 basis points.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended June 30,
2000 was $440,000 compared to $397,000 for the same period in 1999 which
represents a 10.8 percent increase. For the six month period ended June 30,
2000, the provision for loan loss was $758,000 compared to $744,000 for the
same period in 1999 which represents a 1.9 percent increase. The allowance
for loan losses was $8,361,000 or 1.22 percent of outstanding loans at June
30, 2000 compared to 1.29 percent of outstanding loans at year-end 1999.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicates the estimated loan losses.
Management feels that the allowance for loan losses is adequately funded.
Other real estate owned includes certain real estate acquired as a result
of foreclosure. For the period ended June 30, 2000, other real estate owned
was $482,000 compared to $227,000 at December 31, 1999. This increase
resulted from the foreclosure of real estate properties.
Management anticipates that the level of charge-offs for 2000 will be near
the levels of 1999. The loan loss allowance is considered adequate by
management. However, changes in economic conditions in the Corporation's
market area could affect these levels.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the second quarter of 2000 was $2,995,000 compared
to $2,537,000 for the same period in 1999, representing an increase of
$458,000 or 18.1 percent. For the first six months of 2000 noninterest
income was $5,583,000 compared to $5,067,000 for the same period in 1999,
representing an increase of $516,000 or 10.2 percent. This increase is
primarily attributed to deposit account service charges and other service
charges, fees and commissions. It is also noted that the second quarter for
1999 included $202,000 gains on sale of securities as compared to a $12,000
loss in the quarter ending June 30, 2000.
<PAGE>
Management's Discussion Continued...
Noninterest expense for the second quarter of 2000 was $8,656,000 compared
to $7,732,000 for the same period in 1999, representing an increase of
$924,000 or 12.0 percent. For the six months ended June 30, 2000, non-interest
expense was $16,972,000 compared to $15,172,000 in 1999, an increase
of $1,800,000 or 11.9 percent. Salaries and employee benefits for the second
quarter ended June 30, 2000 increased $352,000 or 8.7 percent compared to the
same period in 1999. For the first six months of 2000 salaries and employee
benefits increased $568,000 or 6.8 percent compared to the same period in
1999. Occupancy expense along with furniture and equipment expense increased
$88,000 or 7.2 percent for the second quarter of 2000 compared to the same
period in 1999. For the six months ended June 30, 2000 occupancy together
with furniture and equipment expense increased $285,000 or 12.1 percent
compared to the same period in 1999. These increases can be largely
attributed to an increase in both building and furniture and equipment
depreciation expense, maintenance and repairs on buildings as well as an
increase in equipment rental/lease expense. Rental/lease expense increases
resulted from the investment in a new computer system for First National
Corporation. Other expenses were $472,000 or 19.2 percent higher in the
second quarter of 2000 compared to the same period in 1999. For the six
months ended June 30, 2000, other expenses increased $935,000 or 20.9 percent
compared to the same period in 1999. This increase in other expenses is
distributed among the following expense categories: advertising, insurance,
office and printing supplies, postage, telephone and line charges, and other
expenses.
NET INCOME
Net income was up 10.4 percent for the second quarter of 2000 when
compared to the same period in 1999. For the six months ended June 30, 2000,
net income was up 12.5 percent compared to the same period in 1999. The
$2,474,000 or 14.7 percent increase in net interest income and the $516,000
or 10.2 percent increase in noninterest income for the six months ended June
30, 2000 as compared to the same period in 1999 were the primary factors in
the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date, the capital needs of the Corporation have been met through the
retention of earnings less cash dividends. At the end of the second quarter,
2000, stockholder's equity was $78,978,000 compared to $75,819,000 at
December 31, 1999.
The Corporation and subsidiaries are subject to certain risk-based capital
guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of both
balance sheet and off balance sheet items will be adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to the Office of the Comptroller of
the Currency guidelines, as of December 31, 1995, Tier 1 capital must be at
least 4 percent of risk-weighted assets, while total capital must be 8
percent of risk-weighted assets. The Tier 1 capital ratio at June 30, 2000
was 12.21 percent compared to 12.70 percent at December 31, 1999. The total
capital ratio was 13.46 percent at June 30, 2000 compared to 13.95 percent at
December 31, 1999.
<PAGE>
Management's Discussion Continued...
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage capital ratio in evaluating capital
strength and adequacy. The minimum leverage ratio required for banks is
between 3 percent and 5 percent, depending on the institution's composite
rating as determined by its regulators. At June 30, 2000, First National
Corporation's leverage ratio was 7.91 percent, compared to 8.64 percent at
December 31, 1999. First National Corporation's ratios exceed the minimum
standards by substantial margins.
Liquidity is the ability of the Corporation to meet its cash flow
requirements which arise primarily from withdrawal of deposits, extension of
credit and payment of operating expenses. Asset liquidity is maintained by
the maturity structure of loans, investment securities and other short-term
investments. Management has policies and procedures governing the length of
time to maturity on loans and investments. Normally changes in the earning
asset mix are of a longer term nature and are not utilized for day-to-day
Corporation liquidity needs.
The Corporation's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from the Corporation's
use of federal funds purchased and securities sold under agreement to
repurchase. Additional liquidity can be secured from lines of credit
extended to the Corporation from its correspondent banks and other sources
such as the Federal Home Loan Bank. Management feels that its liquidity
position is adequate.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries are a party to nor
is any of their property the subject of any material or other pending
legal proceedings, other than ordinary routine proceedings incidental to
their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
Not Applicable
Item 6. Exhibits and Reports of Form 8-K
(A) Exhibit 27 - Financial Data Schedule
(B) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: August 14, 2000 C. JOHN HIPP, III
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: August 14, 2000 RICHARD C. MATHIS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule Attached
