FIRST NATIONAL CORPORATION Financial Statements (Form 10-Q) September 30, 1997
Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended SEPTEMBER 30, 1997 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) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of issuer's class of securities. CLASS OUTSTANDING as of September 30, 1997 (Common Stock, $2.50 par value) 5,188,097
FIRST NATIONAL CORPORATION INDEX Part I: Financial Information Consolidated Balance Sheet - September 30, 1997 and December 31, 1996 Consolidated Statement of Income - Three and Nine Months Ended September 30, 1997 and 1996 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II: Other Information Item 1 - Legal Proceedings Item 6 - Exhibits and Reports of Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: None
PART I - FINANCIAL INFORMATION Item l. Financial Statements FIRST NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) 9-30-97 12-31-96 ASSETS (In Thousands) (In Thousands) Cash and due from banks $29,160 $28,824 Federal funds sold 1,975 0 Investment securities - Note 2 Securities held-to-maturity Total (fair value of $53,508 in 1997 and $65,504 in 1996) 53,011 65,197 Securities available-for-sale, at fair value 120,401 95,684 Total investment securities 173,412 160,881 Loans - Note 3 345,637 296,865 Less: Unearned income (3,655) (3,246) Allowance for loan losses-Note 4 (5,426) (4,705) Loans, net 336,556 288,914 Premises and equipment 10,559 10,848 Intangible assets 2,583 2,962 Other real estate - Note 6 15 63 Other assets 5,473 5,140 TOTAL ASSETS $559,733 $497,632
Consolidated Balance Sheet - Continued....... LIABILITIES & STOCKHOLDERS' EQUITY 9-30-97 12-31-96 (In Thousands) (In Thousands) Liabilities: Deposits in domestic offices: Noninterest-bearing $69,731 $67,232 Interest-bearing - Note 7 383,077 346,921 TOTAL DEPOSITS 452,808 414,153 Federal funds purchased & securities sold under agreement to repurchase 50,948 32,547 Other liabilities 3,080 2,586 TOTAL LIABILITIES 506,836 449,286 Commitments & Contingent liabilities - Note 8 Shareholders' equity: Common stock - $2.50 par value; authorized 40,000,000 shares; issued and outstanding 5,188,097 shares in 1997 and 5,100,048 shares in 1996 - Note 9 12,970 12,750 Additional paid-in capital 23,257 22,856 Retained earnings 16,255 12,790 Unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes 415 (50) TOTAL SHAREHOLDERS' EQUITY 52,897 48,346 TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $559,733 $497,632
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 09-30-97 09-30-96 09-30-97 09-30-96 (In Thousands) (In Thousands) Interest income: Interest & fees on loans $7,929 $6,352 $22,252 $18,417 Interest & dividends on investment sec.: Taxable income 2,238 1,726 6,488 4,993 Non-taxable income 396 409 1,184 1,263 Dividends on stock 6 6 34 19 Interest on federal funds sold 76 116 468 444 Total interest income 10,645 8,609 30,426 25,136 Interest expense: Interest on deposits 3,972 3,170 11,317 9,254 Interest on federal funds purchased & securities sold under agreement to repurchase 548 314 1,526 1,006 Total interest expense 4,520 3,484 12,843 10,260 Net interest income 6,125 5,125 17,583 14,876 Provisions for loan losses - Note 4 275 269 873 789 Net interest income after provision for loan losses 5,850 4,856 16,710 14,087 Noninterest income: Service charges on deposit accounts 1,056 956 3,106 2,954 Other service charges commissions, fees 518 304 1,441 895 Investment securities, gains (losses) 0 (9) 2 (7) Other operating income 15 9 37 25 Total noninterest income 1,589 1,260 4,586 3,867 Noninterest expense: Salaries & employee benefits 2,708 2,335 7,685 6,547 Occupancy expense of bank premises-net 329 225 954 743 Furniture & equipment expense - net 375 344 1,109 954 Amortization expense-Intangible assets 171 163 482 476 Other expense 1,380 1,052 3,882 3,227 Total noninterest expense 4,963 4,119 14,112 11,947 Income before income taxes 2,476 1,997 7,184 6,007 Applicable income taxes 770 611 2,231 1,825 Net Income $1,706 $1,386 $4,953 $4,182 Net income per common share - Note 10 $0.33 $0.29 $0.96 $0.87 Cash dividends per common share $0.10 $0.95 $0.29 $0.275
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) 9 Months Ended 9 Months Ended 09-30-97 09-30-96 (In Thousands) (In Thousands) Cash flows from operating activities: Net income $ 4,953 $ 4,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,341 1,156 Provision for loan losses 873 789 Provision for deferred taxes 0 0 Increase (decrease) in reserve for income taxes-current 75 (457) (Gain) loss on sale of premises and equipment 0 (0) (Increase) decrease in interest receivables (697) 7 Increase (decrease) in accumulated premium amortization and discount accretion - net 8 43 Increase (decrease) in interest payable 277 121 (Increase) decrease in miscellaneous assets (23) (171) (Increase) decrease in prepaid assets (146) 226 Increase (decrease) in other liabilities 332 454 Total adjustments 2,040 2,168 Net cash provided by operating activities $ 6,993 $ 6,350
Consolidated Statement of Cash Flows - Continued....... 9 Months Ended 9 Months Ended 09-30-97 09-30-96 (In Thousands) (In Thousands) Cash flows from investing activities: Proceeds from maturities of investment securities held-to-maturity $17,716 $47,533 Purchase of investment securities held-to-maturity (5,533) (7,283) Proceeds from maturities of investment securities available-for-sale 19,965 12,308 Purchase of investment securities available-for-sale (43,935) (54,678) Net (increase) decrease in customer loans (48,809) (26,874) Additions to premises and equipment (569) (2,699) Recoveries from loans previously charged off 294 316 (Increase) decrease in funds sold (1,975) 0 Proceeds from issuance of debt 0 2,000 Repayment of debt 0 (2,000) Net cash used in investing activities (62,846) (31,377) Cash flows from financing activities: Net increase in demand deposits, NOW accounts, savings accounts and certificates of deposit 38,654 30,905 Purchase of treasury stock 0 (125) Sale of common stock 622 4,902 Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase 18,401 (4,894) Dividends paid (1,488) (1,239) Net cash provided by financing activities 56,189 29,549 Net increase (decrease) in cash and cash equivalents 336 4,522 Cash and cash equivalents at beginning of year 28,824 24,144 Cash and cash equivalents at end of reporting period $ 29,160 $ 28,666
FIRST NATIONAL CORPORATION Note 1 - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. All dollar amounts are stated in thousands, except per share data. Note 2 - Investment Securities: The following is the amortized cost and fair value of investment securities held-to-maturity at September 30, 1997 and December 31, 1996: <TABLE> <CAPTION> 09-30-97 12-31-96 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value <S> <C> <C> <C> <C> <C> <C> <C> <C> U S Treasury securities 7,432 35 0 7,467 13,794 50 (2) 13,842 Obligations of U S government agencies & corps 12,478 50 (26) 12,502 16,825 70 (167) 16,728 Obligations of state and political subdivisions 33,101 469 (31) 33,539 34,578 432 (76) 34,934 Total 53,011 554 (57) 53,508 65,197 552 (245) 65,504 </TABLE>
Note 2 - Continued... The following is the amortized cost and fair value of securities available-for-sale at September 30, 1997 and December 31, 1996: <TABLE> <CAPTION> 09-30-97 12-31-96 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value <S> <C> <C> <C> <C> <C> <C> <C> <C> U S Treasury securities 31,368 169 (1) 31,536 24,094 27 (62) 24,059 Obligations of U S government agencies & corps 87,752 544 (41) 88,255 71,061 224 (270) 71,015 Other securities 610 0 0 610 610 0 0 610 Total 119,730 713 (42) 120,401 95,765 251 (332) 95,684 </TABLE> Investment securities with an aggregate amortized cost of $100,028 on September 30, 1997 and $65,885 on December 31, 1996, were pledged to secure public deposits and for other purposes as required and permitted by law. Note 3 - Loans: The following is a summary of loans at: 9-30-97 12-31-96 Commercial, financial & agricultural 63,568 46,392 Real estate - construction 11,547 9,625 Real estate - mortgage 199,316 178,544 Consumer, net of unearned 67,551 59,058 Total loans 341,982 293,619 As of September 30, 1997, and December 31, 1996, the aggregate dollar amount of loans to related parties; principally, directors and executive officers, their immediate families and their business interests, was $8,969 and $7,945 respectively. The following is an analysis of the activity with respect to loans to related parties for the nine months ended September 30, 1997: Balance, beginning of period 8,970 Add: New loans: 14,518 Deduct: Payments (10,871) Other changes (3,647) Balance, end of period 8,970
Note 4 - Allowance for Loan Losses: Amount 09-30-97 12-31-96 Balance, beginning of period (year) 4,705 3,703 Add: Recoveries 294 374 Provisions for loan losses charged to income 873 1,319 Total 5,872 5,396 Deduct: Loans charged off 446 691 Balance, end of period (year) 5,426 4,705 The allowance for loan losses is maintained at a level which, in management's judgement, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. For impairment recognized in accordance with Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan", the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Note 5 - Adoption of Statement of Financial Accounting Standards No. 114 and No. 118: Effective January 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan", and Statement of Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These statements require creditors to account for impaired loans, except for those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate.
Note 5 - Continued... The Company determines when loans become impaired through its normal loan administration and review functions. Those loans identified as substandard or doubtful as a result of the loan review process are potentially impaired loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. In accordance with these standards, the Company does not apply SFAS 114 and SFAS 118 to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. These groups include the Company's credit card, residential mortgage, overdraft protection, home equity lines, accounts receivable financing, and consumer installment loans. The Company's adoption of these accounting standards did not have a material effect on the financial condition and results of operations of the Company. In accordance with SFAS 114, historical information has not been restated to reflect the application of this standard. Note 6 - Other Real Estate: Real estate acquired in satisfaction of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to Other Real Estate Owned ("OREO") and recorded at the lower of the outstanding loan balance at the time of acquisition or the estimated market value. Market value is determined on the basis of the properties being disposed of in the normal course of business and not on a liquidation or distress basis. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Gains or losses arising from the sale of OREO are reflected in current operations. Note 7 - Interest Bearing Deposits: Certificates of deposit in excess of $100,000 totaled $44,694 and $38,616 at September 30, 1997 and December 31, 1996 respectively.
Note 8 - Commitments and Contingent Liabilities: In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit and standby letters of credit. At September 30, 1997, commitments to extend credit and standby letters of credit aggregated $67,481. The Company does not anticipate any material losses as a result of these transactions. Note 9 - Common Stock As of December 31, 1996, the common stock outstanding was 2,550,024. The board of directors of the Company approved a 2 for 1 stock split payable May 30, 1997. During the first and second quarters, the Company granted options to purchase an aggregate of 88,049 shares under the incentive stock option plan. As of September 30, 1997, the common stock outstanding was 5,188,097 shares. Note 10 - Earnings Per Share: Earnings per share are calculated on the weighted-average of number of shares of common stock outstanding, giving retroactive effect to stock dividends and stock splits. The number of weighted-average shares outstanding at September 30, 1997 was 5,132,457 and 4,869,698 at December 31, 1996. Dividends per share are calculated using the current equivalent number of common shares outstanding at the time of the dividend based on the Company's shares outstanding.
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, 1996. First National Corporation opened its second bank, the National Bank of York County, on July 11, 1996 in Rock Hill, South Carolina to join its existing bank, First National Bank, Orangeburg, South Carolina. A second office of National Bank of York County was opened in Fort Mill, South Carolina on September 18, 1996. For the third quarter of 1997, First National Corporation ("The Corporation") had consolidated net income of $1,706,000, an increase of 23.1 percent over the $1,386,000 earned in the third quarter of 1996. Earnings per share amounted to $0.33 for the three months ended September 30, 1997, a 13.8 percent increase over the $0.29 per share earned in the third quarter of 1996. Net income for the first nine months of 1997 was $4,953,000 an increase of 18.4 percent over the $4,182,000 earned for the same period in 1996. Earnings per share amounted to $0.96 for the nine months ended September 30, 1997, a 10.3 percent increase over the 0.87 per share earned in the first nine months of 1996. NET INTEREST INCOME For the third quarter of 1997, net interest income was $6,125,000 compared to $5,125,000 for the same period in 1996. This is an increase of $1,000,000 or 19.5 percent. Net interest income for the first nine months of 1997 was $17,583,000 compared to $14,876,000 for the same period in 1996. This represents an increase of $2,707,000 or 18.2 percent. This increase resulted from a 24.6 percent increase in loan outstandings, net of unearned income as well as an 13.5 percent increase in investment security outstandings, when compared to the first nine months of 1996. The yield on a major portion of the Company's earning assets adjusts simultaneously with changes in the general level of interest rates. In the first nine months of 1996, the year to date taxable equivalent yield on earning assets was 7.93 percent. During the same period of 1997, the yield increased to 8.01 percent, or an increase of 8 basis points. The cost of the liabilities used to support these earning assets increased 17 basis points from 3.89 percent in 1996 to 4.06 percent in 1997. Interest rates paid on interest-bearing liabilities increased more rapidly than yields on earning assets due to the Company's negative asset/liability position.
Management's Discussion Continued... For the first nine months net interest margins decreased from 4.66 percent in 1996 to 4.60 percent in 1997. The impact of interest-free funds for the same period increased from .62 percent to .64 percent or an increase of 2 basis points. The largest category of earning assets is loans. At the end of the third quarter 1997, loans outstanding, less unearned income, were $341,982,000 compared to $293,619,000 at December 31, 1996. This represents an increase of $48,363,000 or 16.5 percent. For the third quarter ended September 30, 1997, interest and fees on loans were $7,929,000 compared to $6,352,000 for the comparable period in 1996, an increase of $1,577,000 or 24.8 percent. For the nine months ended September 30, 1997, interest and fees on loans were $22,252,000 compared with $18,417,000 for the same period in 1996. This represents an increase of $3,835,000 or 20.8 percent. The major volume increase in the loan portfolio was in commercial and agricultural loans. For the first nine month period ended September 30, 1997, commercial loans increased $17,176,000 or 37.0 percent when compared to December 31, 1996. This increase in the loan portfolio was brought about due to a renewed confidence in overall economic trends as well as the opening of the National Bank of York County and the Bluffton Branch of First National Bank. The Company has no foreign loans nor loans for highly leveraged transactions. For the nine months ended September 30, 1997, loans averaged $296,535,000 and yielded 8.99 percent on a taxable equivalent basis compared to $261,448,000 with a taxable equivalent yield of 9.11 percent or a decrease of 12 basis points for the year ended December 31, 1996. Investment securities are the second largest category of earning assets. Investment securities are utilized by the Company as a vehicle for the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for certain deposit and purchased funds. At September 30, 1997, investment securities were $173,412,000 compared to $160,881,000 at December 31, 1996. This is an increase of $12,531,000 or 7.8 percent. This increase is the result of management's decision to utilize excess funds in the investment function in an attempt to increase yields and profitability. For the third quarter ended September 30, 1997, investment income was $2,640,000 compared with $2,141,000 for the comparable period in 1996, a net increase of $499,000 or 23.3 percent. For the nine month period ended September 30, 1997, investment income was $7,706,000 compared with $6,275,000 for the same period in 1996, a net increase of $1,431,000 or 22.8 percent. Management attributes this increase in income to higher yields on investment securities.
Management's Discussion Continued... At the end of the third quarter 1997, securities averaged $157,188,000 and yielded 6.29 percent on a taxable equivalent basis, compared to $149,453,000 with a yield of 6.10 percent for the year ended December 31, 1996, resulting in a 19 basis point increase in yield. As of September 30, 1997, The Company had unrealized gains in the U. S. Treasury and agency portfolio denoted as held-to-maturity, of $85,000 and in the municipal portfolio $469,000. Also at September 30, 1997, the Company had an unrealized loss of $26,000 in the U. S. Treasury and agency portfolio and a $31,000 unrealized loss in the municipal portfolio. At year end 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" for the investment portfolio, and showed a net unrealized gain at September 30, 1997 of approximately $671,000 on the $120,401,000 of securities denoted as available-for-sale. For the first nine months ended September 30, 1997, the Company had a $2,000 realized gain due to called municipal bonds. Although securities classified as available-for-sale may be sold from time to tome to meet liquidity or other needs, it is not the normal activity of the Company to trade the investment portfolio. Management has the intent and the ability to hold securities on a long-term basis or until maturity. During the first nine months of 1997, interest-bearing liabilities averaged $391,570,000 and carried an average rate of 4.06 percent. This compares to an average level of $353,810,000 with a rate of 3.90 percent at December 31, 1996 or an increase of 16 basis points. Approximately half of these interest-bearing liabilities have fixed rates. They are expected to be renewed at prevailing market rates as they mature. PROVISION FOR LOAN LOSSES The provision for loan losses for the three month period ended September 30, 1997 was $275,000 compared to $269,000 for the same period in 1996 which represents a 2.2 percent increase. For the nine month period ended September 30, 1997, the provision for loan loss was $873,000 compared to $789,000 for the same period in 1996 which represents a 10.6 percent increase. The increase in the provision for loan losses was due to continued strong loan growth. The allowance for loan losses was 5,426,000 or 1.59 percent of outstanding loans at September 31, 1997 compared to 1.60 percent of outstanding loans at year-end 1996.
Management's Discussion Continued... 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 September 30, 1997, other real estate owned was $15,000 compared to $63,000 at December 31, 1996. This decrease resulted from the sale of several real estate properties. Management anticipates that the level of charge-offs for 1997 will be near or below the levels of 1996. The loan loss allowance is considered adequate by management. However, changes in economic conditions in the Company's market area could affect these levels. NONINTEREST INCOME AND EXPENSE Noninterest income for the third quarter of 1997 was $1,589,000 compared to $1,260,000 for the same period in 1996, representing an increase of $329,000 or 26.1 percent. For the first nine months of 1997 noninterest income was $4,586,000 compared to $3,867,000 for the same period in 1996, representing an increase of $719,000 or 18.6 percent. During the first nine months of 1997, other service charges, commissions, and fees increased $546,000 or 61.0 percent compared to the same period in 1996. This increase can be primarily attributed to the increase in debit card fees as well as ATM fees charged on non-bank customer transactions. Noninterest expense for the third quarter of 1997 was $4,963,000 compared to $4,119,000 for the same period in 1996, representing an increase of $844,000 or 20.5 percent. For the nine months ended September 30, 1997, noninterest expense was $14,112,000 compared to $11,947,000, an increase of $2,165,000 or 18.1 percent. Salaries and employee benefits for the third quarter ended September 30, 1997 increased $373,000 or 16.0 percent compared to the same period in 1996. For the first nine months of 1997 salaries and employee benefits increased $1,138,000 or 17.4 percent compared to the same period in 1996. Occupancy expense along with furniture and equipment expense increased 135,000 or 23.7 percent for the third quarter of 1997 compared to the same period in 1996. For the nine months ended September 30, 1997 occupancy expense along with furniture and equipment expense increased $366,000 or 21.6 percent compared to the same period in 1996. These increases can be largely attributed to the opening of the National Bank of York County and the Bluffton branch of First National Bank during the third quarter of 1996. Other expenses increased $328,000 or 31.2 percent for the third quarter of 1997 compared to the same period in 1996. For the nine months ended June 30, 1997, other expenses increased $655,000 or 20.3 percent compared to the same period in 1996. 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.
Management's Discussion Continued... NET INCOME Net income was up 23.1 percent for the third quarter of 1997 when compared to the same period in 1996. For the nine months ended September 30, 1997, net income was up 18.4 percent compared to the same period in 1996. The $2,707,000 or 18.2 percent increase in net interest income and the $719,000 or 18.6 percent increase in noninterest income for the nine months ended September 30, 1997 as compared to the same period in 1996 were the primary factors in the growth in net income. CAPITAL RESOURCES AND LIQUIDITY To date the capital needs of the Company have been met through the retention of earnings less cash dividends. At the end of the third quarter, 1997, stockholder's equity was $52,897,000 compared to $48,346,000 at December 31, 1996. 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 ration at September 30, 1997 was 14.6 percent compared to 15.8 percent at December 31, 1996. The total capital ratio was 15.9 percent at September 30, 1997 compared to 17.1 percent at December 31, 1996. 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 and 5 percent, depending on the institution's composite rating as determined by its regulators. At September 30, 1997, First National Corporation's leverage ratio was 9.1 percent compared to 9.5 percent at December 31, 1996. First National Corporation's ratio exceeds the minimum standards by substantial margins. Liquidity is the ability of The Company to meet its cash flow requirements which arise primarily from withdrawal of deposits, extension of credit and payment of operating expenses. Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally changes in the earning asset mix are of a longer term nature and are not utilized for day-to-day Corporation liquidity needs.
Management's Discussion Continued... The Company's liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from The Company's use of federal funds purchased and securities sold under agreement to repurchase. Additional liquidity can be secured from lines of credit extended to the Company from its correspondent banks. Management feels that its liquidity position is adequate. OTHER Many existing computer programs use only two digits to identify a year in the data field. These Programs were designed and developed without considering the impact of the upcoming century. If uncorrected, many computer applications could fail or create erroneous results by or at the year 2000. The year 2000 issue affects virtually all companies and organizations. Certain of the Bank's systems may be affected by this so-called millennium bug. The Bank is investigating the extent to which its systems are affected and communicating with all of its computer vendors concerning timely and completed remedies for those systems that require modification. The Bank is also communicating with all third parties on which it relies to assess their progress in evaluating their systems and implementing any corrective measures. The Bank has been taking and will continue to pursue all reasonably necessary steps to protect its operations and assets. Based upon discussions with its computer vendors and other third parties, the Bank does not expect that the cost of addressing the year 2000 issue, will be a material event or uncertainty that would cause its reported financial information not to be materially indicative of future operating results or future financial conditions.
PART II - OTHER INFORMATION Item l. Legal Proceedings: Neither First National Corporation nor its subsidiaries, First National Bank and National Bank of York County, is a party to nor is any of their property the subject of any material or other pending legal proceedings, other than ordinary routine proceedings incidental to their business. Item 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
Pursuant to the requirements 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. FIRST NATIONAL CORPORATION Date: November 12, 1997 C. John Hipp, III ----------------------------------- President & Chief Executive Officer Date: November 10, 1997 W. Louis Griffith ----------------------------------- Principle Accounting Officer and Chief Financial Officer
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT 27 Financial Data Schedule Attached