FIRST NATIONAL CORPORATION Financial Statements (Form 10-Q) September 30, 1999
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 SEPTEMBER 30, 1999 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 September 30, 1999 Common Stock, $2.50 par value 7,026,957
FIRST NATIONAL CORPORATION INDEX Part I: Financial Information Item 1 - Financial Statements Consolidated Balance Sheet - September 30, 1999 and December 31, 1998 Consolidated Statements of Changes In Shareholders' Equity - Nine Months Ended September 30, 1999 and 1998 Consolidated Statement of Income - Three and Nine Months Ended September 30, 1999 and 1998 Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1999 and 1998 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 9-30-99 12-31-98 (In Thousands) (In Thousands) Cash and due from banks $32,029 $35,106 Federal funds sold 3,599 0 Investment securities - Note 2 Securities held-to-maturity (fair value of $45,373 in 1999 and $47,456 in 1998) 45,972 46,381 Securities available-for-sale, at fair value 160,030 159,857 Total investment securities 206,002 206,238 Loans - Notes 3, 5 577,832 496,218 Less: Unearned income (6,845) (3,074) Allowance for loan losses-Note 4 (7,709) (6,934) Loans, net 563,278 486,210 Premises and equipment 15,773 12,392 Intangible assets 5,743 2,055 Other real estate - Note 6 591 184 Other assets 9,899 8,214 TOTAL ASSETS $836,914 $750,399
Consolidated Balance Sheet - Continued....... LIABILITIES & STOCKHOLDERS' EQUITY 9-30-99 12-31-98 (In Thousands) (In Thousands) Liabilities: Deposits in domestic offices: Noninterest bearing $102,455 $124,985 Interest-bearing - Note 7 556,840 486,893 TOTAL DEPOSITS 659,295 611,878 Federal funds purchased & securities sold under agreement to repurchase 63,167 52,150 Long-term debt 34,200 6,350 Other liabilities 4,891 5,595 TOTAL LIABILITIES 761,553 675,973 Commitments & Contingent liabilities - Note 8 Stockholders' equity: Common stock - $2.50 par value; authorized 40,000,000 shares; issued and outstanding 7,026,957 shares in 1999 and 6,899,679 shares in 1998 - Note 9 17,567 17,249 Additional paid-in capital 47,558 47,172 Retained earnings 12,170 8,744 Unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes (1,934) 1,261 TOTAL SHAREHOLDERS' EQUITY 75,361 74,426 TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $836,914 $750,399
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, 1997 6,024,837 $ 15,062 $ 27,421 $ 18,937 $ 461 $ 61,881 Comprehensive income: Net income - - - 6,590 - 6,590 Change in net unrealized gain (loss) on securities available- for-sale, net of reclassification adjustment and tax effects - - - - 973 973 Total comprehensive income - - - - - 7,563 Cash dividends - - - (1,829) - (1,829) Common stock issued 346,164 865 5,220 - - 6,085 BALANCE, SEPTEMBER 30, 1998 6,371,001 15,927 32,641 23,698 1,434 73,700 BALANCE, DECEMBER 31, 1998 6,899,679 17,249 47,172 8,744 1,261 74,426 Comprehensive income: Net income - - - 5,700 - 5,700 Change in net unrealized gain (loss) on securities available- for-sale, net of reclassification adjustment and tax effects - - - - (3,195) (3,195) Total comprehensive income - - - - - 2,505 Cash dividends - - - (2,274) - (2,274) Common stock issued 127,656 319 394 - - 713 Redemption of common stock (378) (1) (8) - - (9) BALANCE, SEPTEMBER 30, 1999 7,026,957 $ 17,567 $ 47,558 $ 12,170 $ (1,934) $ 75,361 </TABLE>
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 3 Months Ended 9 Months Ended 09-30-99 09-30-98 09-30-99 09-30-98 (In Thousands) (In Thousands) Interest income: Interest and fees on loans $15,516 $10,853 $34,388 $30,971 Interest & dividends on investment sec.: Taxable income 2,863 2,724 7,895 7,507 Non-taxable income 471 406 1,368 1,251 Dividends on stock 142 69 164 89 Interest on federal funds sold 367 159 541 553 Other interest income 9 0 9 0 Total Interest income 19,368 14,211 44,365 40,371 Interest expense: Interest on deposits 6,341 5,359 14,406 15,349 Interest on federal funds purchased & securities sold under agreement to repurchase 761 620 2,119 1,864 Other interest expense 587 61 1,005 129 Total interest expense 7,689 6,040 17,530 17,342 Net Interest Income 11,679 8,171 26,835 23,029 Provisions for loan losses - Note 4 472 261 1,110 746 Net interest income after provisions for loan losses 11,207 7,910 25,725 22,283 Noninterest income: Service charges on deposit accounts 1,731 1,466 4,226 4,095 Other service charges commissions, fees 1,382 501 2,982 2,097 Gains (losses) on investment securities (23) (38) 222 0 Other operating income 59 183 99 218 Total noninterest income 3,149 2,112 7,529 6,410 Noninterest expense: Salaries & employee benefits 5,290 3,487 12,562 10,273 Occupancy expense of bank premises - net 700 448 1,377 1,210 Furniture & equipment expense - net 960 462 2,286 1,227 Amortization expense-Intangible assets 106 220 328 580 Other expense 5,585 2,109 8,836 5,648 Total noninterest expense 12,641 6,726 25,389 18,938 Income before income taxes 1,715 3,296 7,865 9,755 Applicable income taxes 240 1,074 2,165 3,165 Net Income $1,475 $2,222 $5,700 $6,590 Net income per common share - Basic $0.22 $0.32 $0.86 $0.94 Net income per common share - Diluted $0.22 $0.31 $0.85 $0.93 Cash dividends per common share $0.13 $0.13 $0.39 $0.35
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 9 Months Ended 9 Months Ended 09-30-99 09-30-98 (In Thousands) (In Thousands) Cash flows from operating activities: Net income $ 5,700 $ 6,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,431 1,643 Provision for loan losses 891 746 Increase (decrease) in reserve for income taxes (597) 20 (Gain)loss on sale of premises and equipment 0 2 Gain on sale of securities available-for-sale (204) 0 (Increase) decrease in interest receivables 312 (459) Increase (decrease) in accumulated premium amortization and discount accretion - net 147 138 (Increase) decrease in real estate loans held for sale 0 (1,223) Increase (decrease) in interest payable 240 515 (Increase) decrease in miscellaneous assets (4,341) (292) (Increase) decrease in prepaid assets (380) (192) Increase (decrease) in other liabilities (99) 133 Total adjustments (2,600) 1,031 Net cash provided by operating activities $ 3,100 $ 7,621
Consolidated Statement of Cash Flows - Continued....... 9 Months Ended 9 Months Ended 09-30-99 09-30-98 (In Thousands) (In Thousands) Cash flows from investing activities: Proceeds from maturities of investment securities held-to-maturity $ 7,359 $15,934 Purchase of investment securities held-to-maturity (7,192) (8,349) Proceeds from sales and maturities of investment securities available- for-sale 59,299 56,576 Purchase of investment securities available-for-sale (64,384) (105,515) Net (increase) decrease in customer loans (77,960) (29,212) Loans originated or acquired, net 0 984 Proceeds from the sale of foreclosed real estate 0 104 Additions to premises and equipment (4,488) (55) Proceeds from sale of premises and equipment 0 2 Recoveries from loans previously charged off 0 191 (Increase) decrease in funds sold 3,291 0 Net cash used in investing activities (84,075) (69,340) Cash flows from financing activities: Net increase in demand deposits, NOW accounts, savings accounts and certificates of deposit 46,220 66,401 Common stock issuance 645 6,046 Common stock redemption (9) 0 Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase 8,792 (38) Proceeds from issuance of long-term debt 34,200 0 Proceeds from issuance of other borrowings 0 9,600 Repayment of other borrowings (6,350) (8,250) Increase in amounts due to depository institutions 0 333 Proceeds from stock options exercised 169 38 Dividends paid (2,274) (1,830) Net cash provided by financing activities 81,393 72,300 Net increase (decrease) in cash and cash equivalents 418 10,581 Cash and cash equivalents at beginning of year 31,611 36,898 Cash and cash equivalents at end of reporting period $ 32,029 $ 47,479
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, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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, 1998. 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, 1999 and December 31, 1998: <TABLE> <CAPTION> 09-30-99 12-31-98 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 0 0 0 0 3,213 31 0 3,244 Obligations of U S government agencies & corps 4,481 17 (42) 4,456 5,029 72 0 5,101 Obligations of state and political subdivisions 41,491 126 (700) 40,917 38,138 1,018 (45) 39,111 Total 45,972 143 (742) 45,373 46,380 1,121 (45) 47,456 </TABLE>
NOTE 2 - Continued... The following is the amortized cost and fair value of securities available- for-sale at September 30, 1999 and December 31, 1998: <TABLE> <CAPTION> 09-30-99 12-31-98 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 34,557 86 (260) 34,383 45,830 1,023 0 46,853 Obligations of U S government agencies & corps 124,816 115 (3,038) 121,893 108,476 1,078 (99) 109,455 Other securities 3,754 0 0 3,754 3,549 0 0 3,549 Total 163,127 201 (3,298) 160,030 157,855 2,101 (99) 159,857 </TABLE> Investment securities with an aggregate amortized cost of $120,133 on September 30, 1999, and $108,878 on December 31, 1998, 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: 9-30-99 12-31-98 Commercial, financial & agricultural 101,018 87,610 Real Estate - construction 28,374 19,113 Real estate - mortgage 356,071 301,560 Consumer 92,369 83,121 Total loans 577,832 491,404 As of September 30, 1999 and December 31, 1998 the aggregate dollar amount of loans to related parties; principally, directors and executive officers, their immediate families and their business interests, was $9,017 and $8,992 respectively. The following is an analysis of the activity with respect to loans to related parties for the nine months ended September 30, 1999: Balance, beginning of period 8,992 Add: New loans 3,029 Deduct: Payments 3,436 Other changes 432 Balance, end of period 9,017
NOTE 4 - Allowance for Loan Losses: Amount 09-30-99 12-31-98 Balance, beginning of period (year) 6,075 6,246 Add: Recoveries 133 263 Changes incident to mergers and absorptions 840 0 Provisions for loan losses charged to income 1,110 1,213 Total 8,158 7,722 Deduct: Loans charged off 449 788 Balance, end of period (year) 7,709 6,934 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 $75,503 and $78,065 at September 30, 1999 and December 31, 1998 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, 1999, commitments to extend credit and standby letters of credit aggregated $129,002. The Company does not anticipate any material losses as a result of these transactions.
Note 9 - 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. In accordance with SFAS 128, the calculation of basic net income per share and diluted net income per share is presented below: 3 Months 3 Months 9 Months 9 Months Ended Ended Ended Ended Net income per share - basic: 09/30/99 09/30/98 09/30/99 09/30/98 Net income $1,475 $2,222 $5,700 $6,590 Income available to common shareholder $1,475 $2,222 $5,700 $6,590 Average common shares outstanding-basic 6,624,049 6,988,213 6,624,049 6,988,213 Net income per share-basic $ .22 $ .32 $ 0.86 $ .94 Net income per share - diluted: 09/30/99 09/30/98 09/30/99 09/30/98 Income available to common shareholders $1,475 $2,222 $5,700 $6,590 Average common shares outstanding-basic 6,624,049 6,988,213 6,624,049 6,988,213 Incremental shares from assumed conversion of stock options 52,594 111,824 52,594 111,824 Average common shares outstanding-diluted 6,676,643 7,100,037 6,676,643 7,100,037 Net income per share- diluted $ .22 $ .31 $ .85 $ .93 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 10 - Comprehensive Income: The following is the related tax effects allocated to other comprehensive income at September 30, 1999: Before Tax Tax (Expense) Net of (In thousands of dollars) Amount Benefit Tax Amount Unrealized gain (loss) on securities available-for-sale $(3,097) $1,163 $(1,934) The following is the other comprehensive income balance at September 30, 1999: Beginning Current Period Ending Balance Change Balance Accumulated other comprehensive income-Unrealized gain (loss) on securities available-for- sale $1,261 $(3,195) $(1,934) Note 11 - Disclosure for pooling of interests combination: On August 27, 1999, the Corporation and FirstBancorporation, Inc., (FirstBanc") completed the merger as approved by the board of directors of both companies. Under the terms of the agreement, 1.222 shares of First National Corporation common stock were exchanged for each share of FirstBanc common stock. The transaction was accounted for by the pooling of interests method of accounting for business combinations and was tax-free to FirstBanc's shareholders. The transaction was subject to several conditions, including regulatory approvals, shareholder approvals, and customary closing conditions, all of which have been satisfied. As a result of the combination, 1,186,325 shares of common stock of First National Corporation were issued to shareholders of FirstBancorporation. In the table that follows are the details of the results of operations for each separate company, prior to the date of the combination, that are included in the current combined net income.
NOTE 11 - Continued... Balance Sheets: FIRST NATIONAL FIRSTBANCORPORATION (In thousands of dollars) CORPORATION INC 07-31-99 07-31-99 Assets: Cash and due from banks $ 22,173 $ 4,594 Funds sold 0 5,934 Investment Securities 211,493 16,965 Loans, Net 440,923 83,994 Premises and equipment 12,465 1,752 Other assets 11,564 1,691 Total Assets 698,618 114,930 Liabilities: Deposits 548,555 95,781 Funds purchased & other borrowings 62,914 4,200 Other liabilities 24,725 1,631 Total Liabilities 636,194 101,612 Shareholders' equity 62,424 13,318 Total Liabilities and shareholders' equity $698,618 $114,930 Income Statements: FIRST NATIONAL FIRSTBANCORPOATION (In thousands of dollars) CORPORATION INC 07-31-99 YTD 07-31-99 YTD Income: Interest on loans $ 22,156 $ 4,383 Interest on investment securities 6,918 584 Other interest income 222 37 Other income 5,092 478 Total income $ 34,388 $ 5,482 Expenses: Interest on deposits 9,368 1,816 Other interest expense 2,099 190 Salaries and employee benefits 8,466 1,272 Provision for loan losses 753 125 Other expense 6,433 1,407 Total expenses 27,119 4,810 Income before income taxes 7,269 672 Applicable income taxes 2,289 77 Net income $ 4,980 $ 595
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, 1998. First National Corporation (the "Company" or "Corporation") is a bank holding company incorporated under the laws of South Carolina in 1985. The Company owns 100 percent of First National Bank, a national bank which opened for business in 1932, 100 percent or National Bank of York County, a national bank which opened for business in 1996, 100 percent of Florence County National Bank, a national bank which opened for business in 1998, and 80 percent of CreditSouth Financial Services Corporation, an upscale finance company which opened for business in 1998. The Company engages in no significant operations other than the ownership of its subsidiaries. On August 27, 1999, the Corporation and FirstBancorporation, Inc., ("FirstBanc") completed the merger as approved by the board of directors of both companies. Under the terms of the agreement, 1.222 shares of First National Corporation common stock were exchanged for each share of FirstBanc common stock. The transaction was accounted for by the pooling of interests method of accounting for business combinations and was tax-free to FirstBanc's shareholders. The transaction was subject to several conditions, including regulatory approvals, shareholder approvals, and customary closing conditions, all of which have been satisfied. On September 10, 1999, First National Bank, a subsidiary of First National Corporation, purchased two offices from Carolina First Bank. Those offices had total deposits of approximately $45 million. Some of the major services which the Company 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 Company has no material concentration of deposits from any single customer or group of customers, and no significant portion of its loans is concentrated within a single industry or group of related industries. There are no material seasonal factors that would have a material adverse effect on the Company. The Company does not have foreign loans.
Management's Discussion Continued... For the third quarter of 1999, First National Corporation ("the Corporation") had consolidated net income without nonrecurring items, of $3,163,000, an increase of 42.3 percent over the $2,222,000 earned in the same period last year. After-tax, nonrecurring items in the third quarter of this year included merger-related expenses of $1,688,000 associated with the acquisition of FirstBancorporation and several Carolina First branches. Diluted earnings per share increased 32.4 percent growing to $.45 for the quarter ended September 30, 1999, when compared to $.34 for the same period in 1998. Annualized returns on average assets and returns on average shareholders' equity for the three month period ended September 30, 1999, without nonrecurring items, were 1.53 percent and 16.75 percent respectively, compared to 1.22 percent and 12.39 percent respectively, for the same period in 1998. Without nonrecurring items, net income for the nine months ended September 30, 1999 was $7,388,000, an increase of 12.1 percent over the $6,590,000 earned in the same period last year. Diluted earnings per share increased 7.1 percent growing to $1.05 for the nine months ended September 30,1999, when compared to $.98 for the same period in 1998. Annualized returns on average assets and returns on average shareholders' equity for the nine months ended September 30, 1999, without nonrecurring items, were 1.22 percent and 13.11 percent respectively, compared to 1.25 percent and 13.16 percent respectively, for the same period in 1998. Including nonrecurring items, First National Corporation reports earnings of $1,475,000 for the quarter ended September 30, 1999 compared to 2,222,000 for the same period in 1998. Diluted earnings per share for the period were $.21 compared to $.34 for the same period in 1998. The annualized return on average assets and return on average shareholders' equity were .72 percent and 7.82 percent respectively, for the quarter ended September 30, 1999, compared to 1.22 percent and 12.38 percent respectively, for the same period in 1998. For the nine months ended September 30, 1999, including nonrecurring items, earnings were $5,700,000 compared to $6,590,000 for the same period in 1998. Diluted earnings per share for the period were $.81 compared to $.98 for the same period in 1998. The annualized return on average assets and return on average shareholders' equity were .94 percent and 10.12 percent respectively, for the nine months ended September 30, 1999, compared to 1.25 percent and 13.16 percent respectively, for the same period in 1998.
Management's Discussion Continued... NET INTEREST INCOME For the third quarter of 1999, net interest income was $11,679,000 compared to $8,171,000 for the same period in 1998. This is an increase of $3,508,000 or 42.9 percent. Net interest income for the first nine months of 1999 was $26,835,000 compared to $23,029,000 for the same period in 1998. This represents an increase of $3,806,000 or 16.5 percent. This increase resulted from a 22.6 percent increase in loan outstandings, net of unearned income, when compared to the first nine months of 1998. The acquisition of two branches of Carolina First resulted in an increase in loans, net of unearned, of $10,039,000. 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 1998, the year to date taxable equivalent yield on earning assets was 7.90 percent. During the same period of 1999, the yield decreased to 7.50 percent, or a decrease of 40 basis points. The cost of the liabilities used to support these earning assets decreased 8 basis points from 3.77 percent in 1998 to 3.69 percent in 1999. Yields on earning assets decreased more rapidly than interest rates paid on interest-bearing liabilities. For the first nine months net interest margins increased from 4.73 percent in 1998 to 4.42 percent in 1999. The impact of interest-free funds for the same period stayed the same at .60 percent. The largest category of earning assets is loans. At the end of the third quarter 1999, loans outstanding, less unearned income, were $570,987,000 compared to $493,144,000 at December 31, 1998. This represents an increase of $77,843,000 or 15.8 percent. For the third quarter ended September 30, 1999, interest and fees on loans were $15,516,000 compared to $10,853,000 for the comparable period in 1998, an increase of $4,663,000 or 43.0 percent. For the nine months ended September 30, 1999, interest and fees on loans were $34,388,000 compared with $30,971,000 for the same period in 1998. This represents an increase of $3,417,000 or 11.0 percent. For the nine months ended September 30, 1999, loans averaged $524,941,000 and yielded 8.27 percent on a taxable equivalent basis compared to $452,684,000 with a taxable equivalent yield of 9.12 percent or a decrease of 85 basis points for the year ended December 31, 1998. 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 September 30, 1999, investment securities were $206,002,000 compared to $206,238,000 at December 31, 1998. The investment portfolio remained about the same during this period. For the third quarter ended September 30, 1999, investment income was $3,476,000 compared with $3,199,000 for the comparable period in 1998, a net increase of $277,000 or 8.7 percent. For the nine month period ended September 30, 1999, investment income was $9,427,000 compared with $8,847,000 for the same period in 1998, a net increase of $580,000 or 6.6 percent. Management attributes this increase in income to higher yields on investment securities. At the end of the third quarter 1999, securities averaged $213,640,000 and yielded 5.96 percent on a taxable equivalent basis, compared to $198,875,000 with a yield of 5.85 percent for the year ended December 31, 1998, resulting in a 11 basis point decrease in yield. As of September 30, 1999, the Company had unrealized gains in the U.S. Treasury and agency portfolio denoted as held-to-maturity, of $17,000 and in the municipal portfolio $126,000. Also at September 30, 1999, the Company had an unrealized loss of $42,000 in the U. S. Treasury and agency portfolio and an $700,000 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 loss at September 30, 1999 of approximately $3,097,000 on the $160,030,000 of securities denoted as available-for-sale. For the first nine months ended September 30, 1999, the Company had a $222,000 realized gain 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 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 1999, interest-bearing liabilities averaged $635,410,000 and carried an average rate of 3.69 percent. This compares to an average level of $557,148,000 with a rate of 4.15 percent at December 31, 1998 or an decrease of 46 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 September 30, 1999 was $472,000 compared to $261,000 for the same period in 1998 which represents a 80.8 percent increase. For the nine month period ended September 30, 1999, the provision for loan loss was $1,110,000 compared to $746,000 for the same period in 1998 which represents a 48.8 percent increase. The increase in the provision for loan losses was due to an increasing loan demand as well as the acquisition of FirstBancorporation and two branches of Carolina First. The allowance for loan losses was $7,707,000 or 1.35 percent of outstanding loans at September 30, 1999 compared to 1.41 percent of outstanding loans at year-end 1998. 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 September 30, 1999, other real estate owned was $591,000 compared to $144,000 at December 31, 1998. This increase resulted from the foreclosure of real estate properties. Management anticipates that the level of charge-offs for 1999 will be near the levels of 1998. 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 1999 was $3,149,000 compared to $2,112,000 for the same period in 1998, representing an increase of $1,037,000 or 49.1 percent. For the first nine months of 1999 noninterest income was $7,529,000 compared to $6,410,000 for the same period in 1998, representing an increase of $1,119,000 or 17.6 percent. During the first nine months of 1999, other service charges, commissions, and fees increased $885,000 or 42.2 percent compared to the same period in 1998. This increase can be primarily attributed to the increase in debit card fees, mortgage loan origination fees for secondary market loans, as well as fees collected on mutual fund sales.
Management's Discussion Continued... Noninterest expense for the third quarter of 1999 was $12,641,000 compared to $6,726,000 for the same period in 1998, representing an increase of $5,915,000 or 87.9 percent. For the nine months ended September 30, 1999, noninterest expense was $25,389,000 compared to $18,938,000, an increase of $6,451,000 or 34.0 percent. Salaries and employee benefits for the third quarter ended September 30, 1999 increased $1,803,000 or 51.7 percent compared to the same period in 1998. For the first nine months of 1999 salaries and employee benefits increased $2,289,000 or 22.3 percent compared to the same period in 1998. These increases can be largely attributed to the opening of the Florence County National Bank on April 1, 1998, a branch of National Bank of York County in York on January 12, 1999, an upscale finance company, CreditSouth Financial Services Corporation Inc in November, 1998, and the acquisition of FirstBancorporation on August 27, 1999. Occupancy expense along with furniture and equipment expense increased $750,000 or 82.4 percent for the third quarter of 1999 compared to the same period in 1998. For the nine months ended September 30, 1999 occupancy together with furniture and equipment expense increased $1,193,000 or 49.0 percent compared to the same period in 1998. 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 increased $3,476,000 or 164.8 percent for the third quarter of 1999 compared to the same period in 1998. For the nine months ended September 30, 1999, other expenses increased $3,188,000 or 56.4 percent compared to the same period in 1998. This increase in other expenses is attributable to the nonrecurring merger-related expenses of $2,679,000 associated with the acquisition of FirstBancorporation and several Carolina First branches. NET INCOME Net income was down 33.6 percent for the third quarter of 1999 when compared to the same period in 1998. For the nine months ended September 30, 1999, net income was down 13.5 percent compared to the same period in 1998. Without the nonrecurring after-tax charge to net income for the third quarter in 1999, net income would have been $3,163,000, an increase of 42.3 percent over the same period in 1998. For the nine month period ended September 30, 1999, without the nonrecurring charge, net income would have been $7,388,000, an increase of 12.1 percent as compared to the same period in 1998. 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, 1999, stockholder's equity was $75,361,000 compared to $74,426,000 at December 31, 1998.
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 September 30, 1999 was 12.95 percent compared to 14.3 percent at December 31, 1998. The total capital ratio was 14.2 percent at September 30, 1999 compared to 15.6 percent at December 31, 1998. 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 September 30, 1999, First National Corporation's leverage ratio was 9.2 percent, compared to 9.0 percent at December 31, 1998. 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. YEAR 2000 The year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company, its significant customers, or suppliers fail to make necessary modifications and conversions on a timely basis, the year 2000 issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. The Company believes that its competitors face a similar risk.
Management's Discussion Continued... In August 1997, the Company established a corporate-wide project team to identify non-compliant software and complete the corrections required by the year 2000 issue. The Company intends to fix or replace non-compliant internal software with code or software that is year 2000 compliant. While a plan is in place, minor work remains to be done. The Company's current target is to resolve compliance issues in important business information systems by June 30, 1999. Remediation and testing activities are underway on the Company's core business applications. The Company is also focusing on major customers and suppliers to assess their compliance. Nevertheless, there can be no absolute assurance that there will not be a material adverse effect on the Company if third party governmental or business entities do not convert or replace their systems in a timely manner and in a way that is compatible with the Company's systems. Costs related to the year 2000 issue are funded through operating cash flows. Through fiscal 1998, the Company expended approximately $575,000 in remediation efforts, including the cost of new software and modifying the applicable code of existing software. The Company estimates remaining costs to be negligible. The Company presently believes that the total cost of achieving year 2000 compliant systems is not expected to be material to First National Corporation's financial condition, liquidity, or results of operations. Time and cost estimates are based on currently available information. Developments that could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and systems; and remediation success of the Company's customers and suppliers.
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
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: November 15, 1999 C. JOHN HIPP, III PRESIDENT & CHIEF EXECUTIVE OFFICER Date: November 15, 1999 W. LOUIS GRIFFITH PRINCIPAL ACCOUNTING OFFICER AND CHIEF FINANCIAL OFFICER
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT 27 Financial Data Schedule Attached