FIRST NATIONAL CORPORATION Financial Statements (Form 10-Q) June 30, 1998
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, 1998 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, 1998 Common Stock, $2.50 par value 5,293,097
FIRST NATIONAL CORPORATION INDEX Part I: Financial Information Item 1 - Financial Statements Consolidated Balance Sheet - June 30, 1998 and December 31, 1997 Consolidated Statements of Changes In Shareholders' Equity - Six Months Ended June 30, 1998 and 1997 Consolidated Statement of Income - Three and Six Months Ended June 30, 1998 and 1997 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1998 and 1997 Notes to Consolidated Financial Statements Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Part II: Other Information Item 1 - Legal Proceedings Item 6 - Exhibits and Reports of Form 8-K (A) Exhibit 27 - Financial Data Schedule (B) Reports on Form 8-K: None
PART I - FINANCIAL INFORMATION Item l. FINANCIAL STATEMENTS FIRST NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS 6-30-98 12-31-97 (In Thousands) (In Thousands) Cash and due from banks $26,063 $30,802 Federal funds sold 9,200 0 Investment securities - Note 2 Securities held-to-maturity (fair value of $45,400 in 1998 and $51,026 in 1997) 44,830 50,403 Securities available-for-sale, at fair value 155,300 115,658 Total investment securities 200,130 166,061 Loans - Note 3 371,935 359,167 Less: Unearned income 3,439 3,654 Allowance for loan losses-Note 4 5,790 5,518 Loans, net 362,706 349,995 Premises and equipment 9,825 9,946 Intangible assets 2,375 2,732 Other real estate - Note 6 227 61 Other assets 7,100 5,974 TOTAL ASSETS $617,626 $565,571
Consolidated Balance Sheet - Continued....... LIABILITIES & STOCKHOLDERS' EQUITY 6-30-98 12-31-97 (In Thousands) (In Thousands) Liabilities: Deposits in domestic offices: Noninterest bearing $72,995 $70,052 Interest-bearing - Note 7 430,397 384,323 TOTAL DEPOSITS 503,392 454,375 Federal funds purchased & securities sold under agreement to repurchase 49,856 54,312 Other liabilities 5,129 2,984 TOTAL LIABILITIES 558,377 511,671 Commitments & Contingent liabilities - Note 8 Stockholders' equity: Common stock - $2.50 par value; authorized 40,000,000 shares; issued and outstanding 5,293,097 shares in 1998 and 5,188,097 shares in 1997 - Note 9 13,233 12,970 Additional paid-in capital 25,669 23,257 Retained earnings 19,922 17,197 Unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes 425 476 TOTAL SHAREHOLDERS' EQUITY 59,249 53,900 TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $617,626 $565,571
FIRST NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands of dollars, except per share data) <TABLE> <CAPTION> Accumulated Other Common Stock Retained Comprehensive Shares Amount Surplus Earnings Income(Loss) Total <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1996 5,100,048 $ 12,750 $ 22,856 $ 12,790 $ (50) $ 48,346 Comprehensive income: Net income - - - 3,247 - 3,247 Other comprehensive income (loss) net of tax - - - - 102 102 Comprehensive income - - - - - 3,349 Common stock issued 34,725 87 162 - - 249 Cash dividends - - - (972) - (972) Balance, June 31, 1997 5,134,773 12,837 23,018 15,065 52 50,972 Balance, December 31, 1997 5,188,097 12,970 23,257 17,197 476 53,900 Comprehensive income: Net income - - - 3,866 - 3,866 Other comprehensive income (loss) net of tax - - - - (51) (51) Comprehensive income - - - - - 3,815 Common stock issued 105,000 263 2,412 - - 2,675 Cash dividends - - - (1,141) - (1,141) Balance, June 31, 1998 5,293,097 $ 13,233 $ 25,669 $ 19,922 $ 425 $59,249 </TABLE>
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 3 Months Ended 6 Months Ended 06-30-98 06-30-97 06-30-98 06-30-97 (In Thousands) (In Thousands) Interest income: Interest and fees on loans $8,366 $7,424 $16,489 $14,323 Interest & dividends on investment sec.: Taxable income 2,525 2,223 4,591 4,250 Non-taxable income 437 379 845 788 Dividends on stock 13 11 20 28 Interest on federal funds sold 174 185 394 392 Total Interest income 11,515 10,222 22,339 19,781 Interest expense: Interest on deposits 4,357 3,841 8,345 7,345 Interest on federal funds purchased & securities sold under agreement to repurchase 612 513 1,244 978 Other interest expense 19 0 19 0 Total interest expense 4,988 4,354 9,608 8,323 Net Interest Income 6,527 5,868 12,731 11,458 Provisions for loan losses - Note 4 166 314 388 598 Net interest income after provisions for loan losses 6,361 5,554 12,343 10,860 Noninterest income: Service charges on deposit accounts 1,188 1,045 2,304 2,050 Other service charges commissions, fees 692 433 1,339 923 Gains (losses) on investment securities 20 2 38 2 Other operating income 24 12 35 22 Total noninterest income 1,924 1,492 3,716 2,997 Noninterest expense: Salaries & employee benefits 3,034 2,550 5,871 4,977 Occupancy expense of bank premises - net 246 299 497 625 Furniture & equipment expense - net 377 348 765 734 Amortization expense-Intangible assets 208 166 360 311 Other expense 1,566 1,288 2,932 2,502 Total noninterest expense 5,431 4,651 10,425 9,149 Income before income taxes 2,854 2,395 5,634 4,708 Applicable income taxes 901 753 1,768 1,461 Net Income $1,953 $1,642 $3,866 $3,247 Net income per common share - Basic $0.37 $0.32 $0.74 $0.64 Net income per common share - Diluted $0.37 $0.32 $0.74 $0.64 Cash dividends per common share $0.11 $0.95 $0.22 $0.10
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 6 Months Ended 6 Months Ended 06-30-98 06-30-97 (In Thousands) (In Thousands) Cash flows from operating activities: Net income $ 3,866 $ 3,247 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 896 867 Provision for loan losses 388 598 Increase (decrease) in reserve for income taxes-current 42 116 (Gain)loss on sale of premises and equipment (2) 0 (Increase) decrease in interest receivables (224) (596) Increase (decrease) in accumulated premium amortization and discount accretion - net (228) (37) Increase (decrease) in interest payable 289 260 (Increase) decrease in miscellaneous assets (596) (36) (Increase) decrease in prepaid assets (83) (672) Increase (decrease) in other liabilities 1,927 285 Total adjustments 2,409 785 Net cash provided by operating activities $ 6,275 $ 4,032
Consolidated Statement of Cash Flows - Continued....... 6 Months Ended 6 Months Ended 06-30-98 06-30-97 (In Thousands) (In Thousands) Cash flows from investing activities: Proceeds from maturities of investment securities held-to-maturity $10,479 $15,034 Purchase of investment securities held-to-maturity (6,702) (2,422) Proceeds from maturities of investment securities available-for-sale 47,901 9,929 Purchase of investment securities available-for-sale (86,882) (35,577) Net (increase) decrease in customer loans (13,230) (29,869) Additions to premises and equipment 415 (365) Proceeds from sale of premises and equipment 2 0 Recoveries from loans previously charged off 108 187 (Increase) decrease in funds sold (9,200) (507) Net cash used in investing activities (57,109) (43,590) Cash flows from financing activities: Net increase in demand deposits, NOW accounts, savings accounts and certificates of deposit 49,017 33,587 Sale of common stock 2,674 250 Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase (4,455) 7,764 Proceeds from issuance of other borrowings 2,500 0 Repayment of other borrowings (2,500) 0 Dividends paid (1,141) (971) Net cash provided by financing activities 46,095 40,630 Net increase (decrease) in cash and cash equivalents (4,739) 1,072 Cash and cash equivalents at beginning of year 30,802 28,824 Cash and cash equivalents at end of reporting period $ 26,063 $ 29,896
FIRST NATIONAL CORPORATION NOTE 1 - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 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, 1997. All dollar amounts are stated in thousands, except per share data. NOTE 2 - Investment Securities: The following is the amortized cost and fair value of investment securities held-to-maturity at June 30, 1998 and December 31, 1997: 06-30-98 12-31-97 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value U S Treasury securities 3,222 24 0 3,246 3,231 28 0 3,259 Obligations of U S government agencies & corps 7,629 42 (20) 7,651 12,321 39 (18) 12,342 Obligations of state and political subdivisions 33,979 540 (16) 34,503 34,851 581 (7) 35,425 Total 44,830 606 (36) 45,400 50,403 648 (25) 51,026
NOTE 2 - Continued... The following is the amortized cost and fair value of securities available-for-sale at June 30, 1998 and December 31, 1997: 06-30-98 12-31-97 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value U S Treasury securities 46,878 281 (13) 47,146 30,320 240 0 30,560 Obligations of U S government agencies & corps 105,101 480 (80) 105,501 83,990 538 (23) 84,505 Other securities 2,653 0 0 2,653 593 0 0 593 Total 154,632 761 (93) 155,300 114,903 778 (23) 115,658 Investment securities with an aggregate amortized cost of $79,328 on June 30, 1998, and $88,276 on December 31, 1997, were pledged to secure public deposits and for other purposes as required and permitted by law. NOTE 3 - Loans: The following is a summary of loans at: 6-30-98 12-31-97 Commercial, financial & agricultural 71,492 67,519 Real Estate - construction 11,284 12,429 Real estate - mortgage 214,271 207,630 Consumer 71,449 67,935 Total loans 368,496 355,513 As of June 30, 1998 and December 31, 1997 the aggregate dollar amount of loans to related parties; principally, directors and executive officers, their immediate families and their business interests, was $5,694 and $8,025 respectively. The following is an analysis of the activity with respect to loans to related parties for the six months ended June 30, 1998: Balance, beginning of period 8,025 Add: New loans 4,232 Deduct: Payments 5,014 Other changes (1,549) Balance, end of period 5,694
NOTE 4 - Allowance for Loan Losses: Amount 06-30-98 12-31-97 Balance, beginning of period (year) 5,518 4,705 Add: Recoveries 108 323 Provisions for loan losses charged to income 388 1,251 Total 6,014 6,279 Deduct: Loans charged off 224 761 Balance, end of period (year) 5,790 5,518 The allowance for loan losses is maintained at a level which, in management's judgement is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. For impairment recognized in accordance with Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan", the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. NOTE 5 - Adoption of Statement of Financial Accounting Standards No. 114 and No. 118: Effective January 1, 1995, the bank adopted Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan", and Statement of Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These statements require creditors to account for impaired loans, except for those loans that are accounted for at fair value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted to the loan's effective interest rate.
NOTE 5 - continued... The Company determines when loans become impaired through its normal loan administration and review functions. Those loans identified as substandard or doubtful as a result of the loan review process are potentially impaired loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. In accordance with these standards, the Company does not apply SFAS 114 and SFAS 118 to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. These groups include the Company's credit card, residential mortgage, overdraft protection, home equity lines, accounts receivable financing, and consumer installment loans. The Company's adoption of these accounting standards did not have a material effect on the financial condition and results of operations of the Company. In accordance with SFAS 114, historical information has not been restated to reflect the application of this standard. NOTE 6 - Other Real Estate: Real estate acquired in satisfaction of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to Other Real Estate Owned ("OREO") and recorded at the lower of the outstanding loan balance at the time of acquisition or the estimated market value. Market value is determined on the basis of the properties being disposed of in the normal course of business and not on a liquidation or distress basis. Loan losses arising from the acquisition of such properties are charged against the allowance for losses. Gains or losses arising from the sale of OREO are reflected in current operations.
NOTE 7 - Interest Bearing Deposits: Certificates of deposit in excess of $100,000 totaled $60,990 and $40,794 at June 30, 1998 and December 31, 1997 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 June 30, 1998, commitments to extend credit and standby letters of credit aggregated $87,341. The Company does not anticipate any material losses as a result of these transactions. Note 9 - Common Stock: As of December 31, 1997, the common stock outstanding was 5,188,097. The board of directors of the Company approved a 2 for 1 stock split payable May 30, 1997. As a result of a stock offering, the Company sold and issued 105,000 shares of First National Corporation stock during the second quarter of 1998. The proceeds from this offering are to be used to purchase all the common stock of the newly formed Florence County National Bank. As of June 30, 1998, the common stock outstanding was 5,293,097 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. In 1997, the Financial Accounting Standards Board "FASB" issued SFAS No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. In addition, SFAS No. 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and denominator of the diluted EPS calculation.
Note 10 - Continued... In accordance with SFAS 128, the calculation of basic net income per share and diluted net income per share is presented below: <TABLE> <CAPTION> 3 Months 3 Months 6 Months 6 Months Ended Ended Ended Ended Net income per share - basic: 06/30/98 06/30/97 06/30/98 06/30/97 <S> <C> <C> <C> <C> Net income $1,953 $1,642 $3,866 $3,247 Income available to common shareholders $1,953 $1,642 $3,866 $3,247 Average common shares outstanding-basic 5,205,202 5,108,925 5,205,202 5,108,925 Net income per share-basic $ .37 $ .32 $ .74 $ .64 Net income per share-diluted: Income available to common shareholders $1,953 $1,642 $3,866 $3,247 Average common shares outstanding-basic 5,205,202 5,108,925 5,205,202 5,108,925 Incremental shares from assumed conversion of stock options 53,543 50,550 53,543 50,550 Average common shares outstanding-diluted 5,258,745 5,159,475 5,258,745 5,159,475 Net income per share- diluted $ .37 $ .32 $ .74 $ .63 </TABLE> Dividends per share are calculated using the current equivalent of number of common shares outstanding at the time of the dividend based on the Company's shares outstanding.
Note 11 - Comprehensive Income: The following is the related tax effects allocated to other comprehensive income at June 30, 1998: Before Tax Tax (Expense) Net of (In thousands of dollars) Amount Benefit Tax Amount Unrealized gain (loss) on securities available-for-sale $668 $(243) $425 The following is the other comprehensive income balance at June 30, 1998: Beginning Current Period Ending Balance Change Balance Accumulated other comprehensive income-Unrealized gain (loss) on securities available-for- sale $476 $ (51) $425
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, 1997. The National Bank of York County commenced business operations as a national bank in Rock Hill, South Carolina, on July 11, 1996. The National Bank of York County is also a full service commercial bank and its deposits are insured to applicable limits by the Federal Deposit Insurance Corporation (FDIC). Upon completion of its organization, 100% of the common stock of the National Bank of York County was acquired by First National Corporation, and the bank operates as a wholly owned subsidiary of the Corporation with its own Board of Directors and operating policies. The Florence County National Bank commenced business operations as a national bank in Florence, South Carolina, on April 1, 1998. Florence County National Bank is also a full service commercial bank and its deposits are insured to applicable limits by the Federal Deposit Insurance Corporation (FDIC). Upon completion of its organization, 100% of the common stock of the Florence County National Bank was acquired by First National Corporation, and the bank operates as a wholly owned subsidiary of the Corporation with its own Board of Directors and operating policies. For the second quarter of 1998, First National Corporation ("the Corporation") had consolidated net income of $1,953,000, an increase of 18.9 percent over the $1,642,000 earned in the second quarter of 1997. Earnings per share amounted to $0.37 for the three months ended June 30, 1998, a 15.6 percent increase over the $0.32 per share earned in the second quarter of 1997. Net income for the first six months of 1998 was $3,866,000, an increase of 19.1 percent over the $3,247,000 earned for the same period in 1997. Earnings per share amounted to $0.74 for the six months ended June 30, 1998, a 15.6 percent increase over the $0.64 per share earned in the first six months of 1997.
Management's Discussion Continued... NET INTEREST INCOME For the second quarter of 1998, net interest income was $6,527,000 compared to $5,868,000 for the same period in 1997. This is an increase of $659,000 or 11.2 percent. Net interest income for the first six months of 1998 was $12,731,000 compared to $11,458,000 for the same period in 1997. This represents an increase of $1,273,000 or 11.1 percent. This increase resulted from a 3.7 percent increase in loan outstandings, net of unearned income as well as a 20.5 percent increase in investment security outstandings, when compared to the first six months of 1997. The yield on a major portion of the Company's earning assets adjusts simultaneously with changes in the general level of interest rates. In the first six months of 1997, the year to date taxable equivalent yield on earning assets was 8.00 percent. During the same period of 1998, the yield decreased to 7.83 percent, or a decrease of 17 basis points. The cost of the liabilities used to support these earning assets increased 14 basis points from 4.02 percent in 1997 to 4.16 percent in 1998. Interest rates paid on interest-bearing liabilities increased more rapidly than yields on earning assets due to the Company's negative asset/liability position. For the first six months net interest margins decreased from 4.62 percent in 1997 to 4.36 percent in 1998. The impact of interest-free funds for the same period increased from .63 percent to .69 percent or an increase of 6 basis points. The largest category of earning assets is loans. At the end of the second quarter 1998, loans outstanding, less unearned income, were $368,496,000 compared to $355,513,000 at December 31, 1997. This represents an increase of $12,983,000 or 3.7 percent. For the second quarter ended June 30, 1998, interest and fees on loans were $8,366,000 compared to $7,424,000 for the comparable period in 1997, an increase of $942,000 or 12.7 percent. For the six months ended June 30, 1998, interest and fees on loans were $16,489,000 compared with $14,323,000 for the same period in 1997. This represents an increase of $2,166,000 or 15.1 percent. For the six months ended June 30, 1998, loans averaged $358,358,000 and yielded 8.79 percent on a taxable equivalent basis compared to $323,420,000 with a taxable equivalent yield of 8.93 percent or a decrease of 14 basis points for the year ended December 31, 1997. 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.
Management's Discussion Continued... At June 30, 1998, investment securities were $200,130,000 compared to $166,061,000 at December 31, 1997. This is an increase of $34,069,000 or 20.5 percent. This increase is the result of management's decision to utilize excess funds in the investment function in an attempt to increase yields and profitability. For the second quarter ended June 30, 19987, investment income was $2,975,000 compared with $2,613,000 for the comparable period in 1997, a net increase of $362,000 or 13.9 percent. For the six month period ended June 30, 1998, investment income was $5,456,000 compared with $5,066,000 for the same period in 1997, a net increase of $390,000 or 7.7 percent. Management attributes this increase in income to higher yields on investment securities. At the end of the second quarter 1998, securities averaged $182,012,000 and yielded 6.32 percent on a taxable equivalent basis, compared to $167,895,000 with a yield of 6.36 percent for the year ended December 31, 1997, resulting in a 4 basis point decrease in yield. As of June 30, 1998, the Company had unrealized gains in the U.S. Treasury and agency portfolio denoted as held-to-maturity, of $66,000 and in the municipal portfolio $540,000. Also at June 30, 1998, the Company had an unrealized loss of $20,000 in the U. S. Treasury and agency portfolio and an $16,000 unrealized loss in the municipal portfolio. At year end 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debit and Equity Securities" for the investment portfolio, and showed a net unrealized gain at June 30, 1998 of approximately $668,000 on the $155,300,000 of securities denoted as available-for-sale. For the first six months ended June 30, 1998, the Company had a $38,000 realized gain due to called agency bonds. Although securities classified as available-for-sale may be sold from time to time to meet liquidity or other needs, it is not the normal activity of the Company to trade the investment portfolio. Management has the intent and the ability to hold securities on a long-term basis or until maturity. During the first six months of 1998, interest-bearing liabilities averaged $467,742,000 and carried an average rate of 4.16 percent. This compares to an average level of $420,190,000 with a rate of 4.14 percent at December 31, 1997 or an increase of 2 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.
Management's Discussion Continued... PROVISION FOR LOAN LOSSES The provision for loan losses for the three month period ended June 30, 1998 was $166,000 compared to $314,000 for the same period in 1997 which represents a 47.1 percent decrease. For the six month period ended June 30, 1998, the provision for loan loss was $388,000 compared to $598,000 for the same period in 1997 which represents a 35.1 percent decrease. The decrease in the provision for loan losses was due to a weakening loan demand. The allowance for loan losses was $5,790,000 or 1.57 percent of outstanding loans at June 30, 1998 compared to 1.55 percent of outstanding loans at year-end 1997. To determine the adequacy of the allowance for loan losses, management performs an internal loan analysis which indicated the estimated loan losses. Management feels that the allowance for loan losses is adequately funded. Other real estate owned includes certain real estate acquired as a result of foreclosure. For the period ended June 30, 1998, other real estate owned was $227,000 compared to $61,000 at December 31, 1997. This increase resulted from the foreclosure of real estate properties. Management anticipates that the level of charge-offs for 1998 will be near the levels of 1997. The loan loss allowance is considered adequate by management. However, changes in economic conditions in the Company's market area could affect these levels. NONINTEREST INCOME AND EXPENSE Noninterest income for the second quarter of 1998 was $1,924,000 compared to $1,492,000 for the same period in 1997, representing an increase of $432,000 or 29.0 percent. For the first six months of 1998 noninterest income was $3,716,000 compared to $2,997,000 for the same period in 1997, representing an increase of $724,000 or 24.2 percent. During the first six months of 1998, other service charges, commissions, and fees increased $416,000 or 45.1 percent compared to the same period in 1997. This increase can be primarily attributed to the increase in debit card fees as well as fees collected on mutual fund sales.
Management's Discussion continued... Noninterest expense for the second quarter of 1998 was $5,431,000 compared to $4,651,000 for the same period in 1997, representing an increase of $780,000 or 16.8 percent. For the six months ended June 30, 1998, noninterest expense was $10,425,000 compared to $9,149,000, an increase of $1,276,000 or 13.9 percent. Salaries and employee benefits for the second quarter ended June 30, 1998 increased $484,000 or 19.0 percent compared to the same period in 1997. For the first six months of 1998 salaries and employee benefits increased $894,000 or 18.0 percent compared to the same period in 1997. These increases can be largely attributed to the opening of the Florence County National Bank on April 1, 1998. Depreciation expense decreased $24,000 or 3.7 percent for the second quarter of 1998 compared to the same period in 1997. For the six months ended June 30, 1998 depreciation expense decreased $97,000 or 7.1 percent compared to the same period in 1997. These decreases can be largely attributed to a decrease in both building and furniture and equipment depreciation expense, reductions in maintenance and repairs on buildings as well as a decrease in equipment service contract costs. Other expenses increased $278,000 or 21.6 percent for the second quarter of 1998 compared to the same period in 1997. For the six months ended June 30, 1998, other expenses increased $430,000 or 17.2 percent compared to the same period in 1997. 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 18.9 percent for the second quarter of 1998 when compared to the same period in 1997. For the six months ended June 30, 1998, net income was up 19.1 percent compared to the same period in 1997. The $1,483,000 or 13.7 percent increase in net interest income and the $719,000 or 24.0 percent increase in noninterest income for the six months ended June 30, 1998 as compared to the same period in 1997 were the primary factors in the growth in net income. CAPITAL RESOURCES AND LIQUIDITY To date, the capital needs of the Company have been met through the retention of earnings less cash dividends. At the end of the second quarter, 1998, stockholder's equity was $59,249,000 compared to $53,900,000 at December 31, 1997.
Management's Discussion Continued... 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, 1998 was 15.3 percent compared to 13.5 percent at December 31, 1997. The total capital ratio was 16.5 percent at June 30, 1998 compared to 14.7 percent at December 31, 1997. 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, 1998, First National Corporation's leverage ratio was 9.4 percent, compared to 9.5 percent at December 31, 1997. 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. 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.
Management's Discussion Continued... 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, National Bank of York County, and Florence County National Bank 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: The annual shareholders meeting of the Registrant was held April 28, 1998 for the following purposes: (1) To elect seven(7) directors whose terms will expire in 2001. The following directors were elected: E. Everett Gasque, Jr. Harry M. Mims, Jr. John L. Gramling, Jr. Cathy Cox Yeadon Robert R. Horger James W. Roquemore Johnny E. Ward Elect one (1) director whose term will expire in 1999. The following director was elected: Dick G. McTeer 3,534,731 For 9,670 Withheld (2) To ratify the appointment of J. W. Hunt and Company, LLP, as independent auditors for the Company for the fiscal year ending December 31, 1998: 3,524,638 For 16,923 Withheld 2,840 Against 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 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, 1998 C. JOHN HIPP, III PRESIDENT & CHIEF EXECUTIVE OFFICER Date: August 14, 1998 W. LOUIS GRIFFITH PRINCIPAL ACCOUNTING OFFICER AND CHIEF FINANCIAL OFFICER
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT 27 Financial Data Schedule Attached