FIRST NATIONAL CORPORATION
Strasburg, Virginia
FINANCIAL REPORT
DECEMBER 31, 1998
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3 and 4
Consolidated statements of cash flows 5 and 6
Consolidated statements of changes in
stockholders' equity 7 and 8
Notes to consolidated financial statements 9-31
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
First National Corporation
Strasburg, Virginia
We have audited the accompanying consolidated balance sheets of First
National Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
National Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 15, 1999
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------------ --------------
Cash and due from banks $ 5 025 590 $ 3 623 386
Federal funds sold 2 859 000 - -
Securities (fair value: 1998, $48,262,497;
1997, $41,699,077) 48 262 527 41 698 525
Loans, net 128 371 407 112 493 701
Bank premises and equipment 4 317 646 3 933 602
Interest receivable 1 150 951 1 148 462
Other real estate 343 181 919 239
Other assets 805 382 771 836
----------- -----------
Total assets $191 135 684 $164 588 751
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 19 555 288 $ 16 969 015
Savings and interest-bearing demand deposits 74 990 558 68 289 401
Time deposits 60 461 938 54 503 436
----------- ------------
Total deposits $155 007 784 $139 761 852
Federal funds purchased - - 1 417 000
Long-term debt 17 709 827 6 461 236
Accrued expenses 817 065 766 388
Commitments and contingent liabilities - - - -
----------- ------------
Total liabilities $173 534 676 $148 406 476
----------- ------------
Stockholders' Equity
Common stock, par value $5 per share; authorized
2,000,000 shares; issued and outstanding
788,903 and 775,547 shares $ 3 944 515 $ 3 887 735
Surplus 1 417 280 1 187 023
Retained earnings 11 892 298 10 772 543
Accumulated other comprehensive income 346 915 334 974
------------ ------------
Total stockholders' equity $ 17 601 008 $ 16 182 275
------------ ------------
Total liabilities and stockholders'
equity $191 135 684 $164 588 751
============ ============
See Notes to Consolidated Financial Statements.
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ----------
Interest Income:
Interest and fees on loans $11 119 247 $ 9 626 462 $8 686 663
Interest on federal funds sold 85 556 72 338 98 316
Interest on deposits in banks 28 121 27 828 24 626
Interest on investment securities,
taxable 31 061 142 761 237 132
Interest and dividends on securities
available for sale:
Taxable 2 385 641 1 669 348 1 336 188
Nontaxable 357 030 356 755 383 185
Dividends 73 050 78 267 67 175
----------- ----------- ----------
Total interest income $14 079 706 $11 973 759 $10 833 285
----------- ----------- ----------
Interest Expense:
Interest on deposits $ 6 202 042 $ 5 614 295 $4 995 935
Interest on federal funds purchased 29 462 19 612 2 799
Interest on long-term debt 878 732 104 182 98 241
----------- ----------- ----------
Total interest expense $ 7 110 236 $ 5 738 089 $5 096 975
----------- ----------- ----------
Net interest income $ 6 969 470 $ 6 235 670 $5 736 310
Provision for loan losses 330 000 220 000 120 000
----------- ----------- ----------
Net interest income after
provision for loan losses $ 6 639 470 $ 6 015 670 $5 616 310
----------- ----------- ----------
See Notes to Consolidated Financial Statements.
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ---------
Other Operating Income:
Service charges $ 620 479 $ 568 276 $ 471 680
Fees for other customer services 156 336 118 097 87 545
Profits on securities available for sale 198 325 11 149 19 549
Gain (loss) on sale of assets and
other real estate 9 216 2 268 (23 059)
Other 178 900 178 678 92 185
----------- ----------- ---------
Total other operating income $ 1 163 256 $ 878 468 $ 647 900
----------- ----------- ---------
Other Operating Expenses:
Salaries and employee benefits $ 2 608 261 $ 2 365 875 $2 230 677
Occupancy expense 273 930 245 429 215 270
Equipment expense 514 828 528 289 527 615
Advertising 218 121 271 294 202 839
Supplies and stationery 118 227 124 874 123 600
Telephone 160 235 138 256 107 143
Other 1 212 558 972 464 872 204
----------- ----------- ----------
Total other operating expenses $ 5 106 160 $ 4 646 481 $4 279 348
----------- ----------- -----------
Income before income taxes $ 2 696 566 $ 2 247 657 $1 984 862
Provision for income taxes 791 884 636 335 530 596
----------- ----------- ----------
Net income $ 1 904 682 $ 1 611 322 $1 454 266
=========== =========== ==========
Earnings Per Common Share, basic $ 2.43 $ 2.08 $ 1.88
=========== =========== ==========
Earnings Per Common Share, diluted $ 2.42 $ 2.08 $ 1.88
=========== =========== ==========
Cash Dividends Per Share $ 1.00 $ .82 $ .70
=========== =========== ==========
See Notes to Consolidated Financial Statements.
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Cash Flows from Operating Activities
Net income $1 904 682 $1 611 322 $1 454 266
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 428 114 419 751 443 274
Provision for loan losses 330 000 220 000 120 000
(Gain) loss on sale of assets and other
real estate (9 216) (2 268) 23 059
(Profits) on securities available for
sale (198 325) (11 149) (19 549)
Accretion of security discounts (53 129) (49 763) (30 764)
Amortization of security premiums 188 545 107 910 99 723
Deferred tax expense (benefit) (69 254) (70 181) 9 726
Changes in assets and liabilities:
(Increase) in interest receivable (2 489) (257 112) (51 077)
(Increase) decrease in other assets 12 500 (217 728) 143 932
(Increase) in other real estate (39 225) (115 431) - -
Increase (decrease) in accrued
expenses 67 733 159 315 (18 225)
----------- ----------- -----------
Net cash provided by
operating activities $2 559 936 $1 794 666 $2 174 365
----------- ----------- ----------
Cash Flows from Investing Activities
Proceeds from sale of securities
available for sale $11 529 144 $9 105 427 $2 319 615
Proceeds from maturities, calls,
and principal payments of
investment securities 1 640 428 1 364 430 3 041 039
Proceeds from maturities, calls,
and principal payments of securities
available for sale 17 842 596 5 892 658 6 399 218
Purchase of securities available for
sale (37 495 168) (23 906 086) (8 993 267)
(Increase) in federal funds sold (2 859 000) - - - -
Proceeds on sale of equipment 23 725 13 030 - -
Purchases of bank premises and equipment (834 415) (1 044 089) (673 897)
Net (increase) in loans (16 322 706) (14 292 570) (12 822 646)
Proceeds on sale of other real estate 738 031 - - 244 416
------------ ------------ ------------
Net cash (used in)
investing activities $(25 737 365) $(22 867 200) $(10 485 522)
------------ ------------ ------------
See Notes to Consolidated Financial Statements.
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ----------- ----------
Cash Flows from Financing Activities
Net increase in demand deposits,
NOW accounts, and savings accounts $ 9 287 430 $17 138 568 $ 9 200 571
Net increase (decrease) in certificates of
deposit 5 958 502 (1 465 131) (1 122 247)
Proceeds from long-term debt 11 300 000 5 000 000 - -
Principal payments on long-term debt (51 409) (20 188) (18 576)
Net proceeds from issuance of common
stock 287 037 70 090 55 717
Cash dividends paid (784 927) (639 870) (540 872)
Increase (decrease) in federal funds
purchased (1 417 000) 1 102 000 (67 000)
---------- ---------- ----------
Net cash provided by
financing activities $24 579 633 $21 185 469 $ 7 507 593
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents $ 1 402 204 $ 112 935 $ (803 564)
Cash and Cash Equivalents
Beginning 3 623 386 3 510 451 4 314 015
----------- ----------- -----------
Ending $ 5 025 590 $ 3 623 386 $ 3 510 451
=========== =========== ===========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 7 073 034 $ 5 714 898 $ 5 091 883
=========== =========== ===========
Income taxes $ 906 157 $ 652 286 $ 540 281
=========== =========== ===========
Supplemental Disclosures of Noncash
Investing and Financing Activities
Other real estate acquired in
settlement of loans $ 115 000 $ - - $ 267 475
=========== =========== ============
Unrealized gain (loss) on securities
available for sale $ 18 093 $ 459 908 $ (60 474)
=========== =========== ============
See Notes to Consolidated Financial Statements.
FIRST NATIONAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Common Capital Retained
Stock Surplus Earnings
----------- ---------- ----------
Balance, December 31, 1995 $ 3 858 490 $1 090 461 $8 887 697
Comprehensive income:
Net income - 1996 - - - - 1 454 266
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $13,915) - - - - - -
Reclassification adjustment (net of tax, $6,647) - - - - - -
Other comprehensive income (net of tax, $20,562) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1996 - - - - (540 872)
Issuance of 2,078 shares of common stock, dividend
reinvestment plan 13 540 42 177 - -
---------- --------- ----------
Balance, December 31, 1996 $3 872 030 $1 132 638 $9 801 091
Comprehensive income:
Net income - 1997 - - - - 1 611 322
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $160,159) - - - - - -
Reclassification adjustment (net of tax, $3,791) - - - - - -
Other comprehensive income (net of tax, $156,369) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1997 - - - - (639 870)
Issuance of 3,141 shares of common stock, dividend
reinvestment plan 15 705 54 385 - -
---------- ---------- -----------
Balance, December 31, 1997 $3 887 735 $1 187 023 $10 772 543
Comprehensive income:
Net income - 1998 - - - - 1 904 682
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $73,583) - - - - - -
Reclassification adjustment (net of tax, $67,431) - - - - - -
Other comprehensive income (net of tax, $6,152) - - - - - -
Total comprehensive income - - - - - -
Cash dividends - 1998 - - - - (784 927)
Issuance of 8,542 shares of common stock, employee
stock options 42 710 158 680 - -
Issuance of 2,814 shares of common stock, dividend
reinvestment plan 14 070 71 577 - -
----------- ---------- -----------
Balance, December 31, 1998 $ 3 944 515 $1 417 280 $11 892 298
=========== ========== ===========
See Notes to Consolidated Financial Statements.
Accumulated
Other
Comprehensive Comprehensive
Income Income Total
------------- ------------- -------
Balance, December 31, 1995 $ 71 347 $13 907 995
Comprehensive income:
Net income - 1996 - - $ 1 454 266 1 454 266
Other comprehensive income net of tax:
Unrealized holding (losses) arising during the
period (net of tax, $13,915
Reclassification adjustment (net of tax, $6,647) - - (27 010) - -
Other comprehensive income (net of tax, $20,562) - - (12 902) - -
-------------
Total comprehensive income (39 912) $ (39 912) (39 912)
-------------
Cash dividends - 1996 - - $ 1 414 354 - -
=============
Issuance of 2,078 shares of common stock, dividend - - (540 872)
reinvestment plan
- - 55 717
------------ -----------
Balance, December 31, 1996 $ 31 435 $14 837 194
Comprehensive income:
Net income - 1997 - - $ 1 611 322 1 611 322
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $160,159)
Reclassification adjustment (net of tax, $3,791) - - 310 897 - -
Other comprehensive income (net of tax, $156,369) - - (7 358) - -
-------------
Total comprehensive income 303 539 $ 303 539 303 539
-------------
Cash dividends - 1997 - - $ 1 914 861 - -
=============
Issuance of 3,141 shares of common stock, dividend - - (639 870)
reinvestment plan
- - 70 090
------------ -----------
Balance, December 31, 1997 $ 334 974 $16 182 275
Comprehensive income:
Net Income - 1998 - - $ 1 904 682 1 904 682
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $73,583)
Reclassification adjustment (net of tax, $67,431) - - 142 835 - -
Other comprehensive income (net of tax, $6,152) - - (130 894) - -
-------------
Total comprehensive income 11 941 $ 11 941 11 941
-------------
Cash dividends - 1998 - - $ 1 916 623 - -
=============
Issuance of 8,542 shares of common stock, employee - - (784 927)
stock options
Issuance of 2,814 shares of common stock, dividend - - 201 390
reinvestment plan
- - 85 647
------------ -----------
Balance, December 31, 1998 $ 346 915 $17 601 008
============ ===========
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
First National Corporation and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to
customers in the Shenandoah Valley Region of Virginia. The loan
portfolio is well diversified and generally is collateralized by
assets of the customers. The loans are expected to be repaid from cash
flow or proceeds from the sale of selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to accepted practices
within the banking industry.
Principles of Consolidation
The consolidated financial statements of First National Corporation
and its wholly-owned subsidiaries, First Bank (the Bank) and First
Bank Financial Corporation (the Financial Corporation), include the
accounts of all three companies. All material intercompany balances
and transactions have been
eliminated in consolidation.
Securities
Investments are classified in three categories and are accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the
Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in earnings.
Notes to Consolidated Financial Statements
c. Trading Securities
Trading securities, which are generally held for the short term
in anticipation of market gains, are carried at fair value.
Realized and unrealized gains and losses on trading account
assets are included in interest income on trading account
securities. The Corporation held no assets classified as trading
securities at December 31, 1998 and 1997.
Derivatives
The Corporation has no securities defined as derivatives by FASB
No. 119, "Disclosures for Derivative Financial Instruments".
Loans
Loans are shown on the balance sheets net of unearned discounts and
the allowance for loan losses. Interest is computed by methods which
result in level rates of return on principal. Loans are charged off
when in the opinion of management they are deemed to be
uncollectible after taking into consideration such factors as the
current financial condition of the customer and the underlying
collateral and guarantees.
The Corporation adopted FASB No. 114, "Accounting by Creditors for
Impairment of a Loan". This statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures". Statement 114, as amended, requires
that the impairment of loans that have been separately identified
for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for
those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying
collateral) and for which management has determined foreclosure is
probable, the measure of impairment of those loans is to be based on
the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and
the allowance for credit losses and interest income recognized on
loans.
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loans are
not subject to impairment under FASB 114. A loan is considered
impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and the
current economic conditions. A performing loan may be considered
impaired, if the factors above indicate a need for impairment. A
loan on nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than
5% of the required principal and interest payment generally does not
indicate an impairment situation, if in management's judgment the
loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired
loan under FASB 114. Charge-offs for impaired loans occur when the
loan, or a portion of the loan is determined to be uncollectible, as
is the case for all loans.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined
based on the 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. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. For financial reporting, depreciation is computed
using the straight-line method over the estimated useful lives of
the assets, which range from five to forty years. Gains and losses
on routine dispositions are reflected in current operations.
Other Real Estate
Real estate acquired by foreclosure is carried at the lower of cost
or fair market value less estimated costs of disposal.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences,
operating loss carryforwards, and tax credit carryforwards. Deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Pension Plan
In 1998, the Corporation adopted FASB No 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
pronouncement does not change the measurement or recognition of
amounts recognized in the Corporation's financial statements
applicable to its defined benefit plan. Statement No. 132 revises
the existing disclosure requirements by standardizing the disclosure
requirements for pensions requiring certain additional information
on changes in the benefit obligations and fair values of plan
assets, and eliminating certain disclosures.
Earnings Per Share
In 1997, the Corporation adopted FASB No. 128, "Earnings Per Share."
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the
Statement 128 requirements.
Nonrefundable Loan Fees and Costs
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized as
an adjustment of the related loan's yield.
Cash and Cash Equivalents
The Corporation has defined cash equivalents as those amounts
included in the balance sheet caption "Cash and Due from Banks".
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Advertising Costs
The Corporation follows the policy of charging the production costs
of advertising to expense as incurred. Total advertising expense
incurred for 1998, 1997 and 1996 was $218,121, $271,294 and
$202,839, respectively.
Comprehensive Income
As of January 1, 1998, the Corporation adopted FASB No. 130,
"Reporting Comprehensive Income". Statement 130 establishes new
rules for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact on
the Corporation's net income or stockholders' equity. The Statement
requires other comprehensive income to include adjustments for
unrealized gains and losses on available for sale securities, which
prior to adoption were reported separately in stockholders' equity.
The financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Emerging Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning
after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Corporation
has not determined whether to adopt the new statement early. The
Statement will require the Corporation to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately
recognized in earnings.
Because the Corporation does not use derivatives, management does
not anticipate that the adoption of the new Statement will have any
effect on the Corporation's earnings or financial position.
Note 2. Securities
Amortized costs and fair values of securities being held to maturity
as of December 31, 1998 and 1997, are as follows:
1998
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
Mortgage-backed
securities $ 19 486 $ - - $ (30) $ 19 456
========== =========== ========= =========
1997
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
Mortgage-backed
securities $1 661 684 $ 3 012 $ (2460) $1 662 236
========== ======= ======= ==========
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be
called or repaid without any penalties, therefore these securities are
not included in a maturity analysis.
Amortized costs and fair values of securities available for sale as of
December 31, 1998 and 1997 are as follows:
1998
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $36 397 397 $ 270 233 $ (84 329) $ 36 583 301
Obligations of states and
political subdivisions 6 558 718 326 143 (1 218) 6 883 643
Corporate securities 4 010 27 350 - - 31 360
Mortgage-backed
Securities 3 569 371 2 075 (14 625) 3 556 821
Other 1 187 916 - - - - 1 187 916
----------- ---------- ---------- ------------
$47 717 412 $ 625 801 $ (100 172) $ 48 243 041
=========== ========== ========== ============
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $31 961 244 $ 225 632 $ (25 039) $ 32 161 837
Obligations of states and
political subdivisions 6 478 299 306 944 - - 6 785 243
Corporate securities 4 010 - - - - 4 010
Other 1 085 751 - - - - 1 085 751
----------- ---------- ---------- ------------
$39 529 304 $ 532 576 $ (25 039) $ 40 036 841
=========== ========== ========== ============
The amortized cost and fair value of securities available for sale as
of December 31, 1998, by contractual maturity, are shown below.
Maturities may differ from contractual maturities in corporate and
mortgage-backed securities because the securities and mortgages
underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the
maturity categories in the following maturity summary.
Amortized Fair
Cost Value
--------- -----
Due in one year or less $ 6 018 481 $ 6 055 707
Due after one year through
five years 17 950 041 18 163 240
Due after five years through
ten years 17 078 557 17 333 403
Due after ten years 1 909 036 1 914 594
Corporate securities 4 010 31 360
Mortgage-backed securities 3 569 371 3 556 821
Other 1 187 916 1 187 916
----------- -----------
$47 717 412 $48 243 041
=========== ===========
There were no sales of securities being held to maturity during 1998,
1997 and 1996.
Proceeds from sales of securities available for sale during 1998,
1997, and 1996 were $11,529,144, $9,105,427, and $2,319,615,
respectively. Gross gains of $199,657, $41,973, and $19,549 and gross
losses of $1,332, $30,824, and $-0- were realized on those sales.
Securities having a book value of $7,786,481 and $9,403,358 at
December 31, 1998 and 1997, were pledged to secure public deposits and
for other purposes required by law.
Note 3. Loans
Loans at December 31, 1998 and 1997, are summarized as follows:
1998 1997
------ ------
(Thousands)
Real estate loans:
Construction and land development $ 5 415 $ 3 583
Secured by farm land 851 947
Secured by 1-4 family
residential 47 965 45 133
Other real estate loans 21 381 17 126
Loans to farmers (except those
secured by real estate) 585 647
Commercial and industrial loans
(except those secured by real
estate) 25 632 19 576
Loans to individuals for
personal expenditures 27 376 26 574
All other loans 513 461
-------- --------
Total loans $129 718 $114 047
Less: Unearned income 121 441
Allowance for loan losses 1 226 1 112
-------- --------
Loans, net $128 371 $112 494
======== ========
Note 4. Allowance for Loan Losses
Transactions in the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996
Balance at beginning of year $1 112 318 $ 974 412 $ 900 812
Provision charged to operating
expense 330 000 220 000 120 000
Loan recoveries 17 184 14 914 16 425
Loan charge-offs (233 306) (97 008) (62 825)
---------- ----------- -----------
Balance at end of year $1 226 196 $ 1 112 318 $ 974 412
========== =========== ===========
Impairment of loans having recorded investments of $164,569 at
December 31, 1998 has been recognized in conformity with FASB
Statement No. 114. The average recorded investment in impaired loans
during 1998 was $195,574. The total allowance for loan losses related
to these loans was $78,228. There was no interest income on impaired
loan recognized for cash payments received in 1998. There were no
impaired loans in 1997.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $42,385 and $23,642 at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income
would have approximated $1,326 and $3,490 for 1998 and 1997.
Note 5. Bank Premises and Equipment
Bank premises and equipment are summarized as follows at December 31,
1998 and 1997:
1998 1997
Land $ 669 425 $ 468 785
Buildings and leasehold improvements 3 745 278 3 392 827
Furniture and equipment 4 075 850 3 827 693
----------- ------------
$ 8 490 553 $ 7 689 305
Less accumulated depreciation 4 172 907 3 755 703
----------- ------------
$ 4 317 646 $ 3 933 602
=========== ============
Depreciation expense included in operating expenses for 1998, 1997 and
1996 was $428,114, $419,751, and $443,274, respectively.
Note 6. Deposits
The aggregate amount of short-term jumbo certificates of deposit, each
with a minimum denomination of $100,000, was $11,262,920 and
$12,243,178 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
1999 $39 612 473
2000 8 642 312
2001 6 600 016
2002 2 285 419
2003 3 321 718
-----------
$60 461 938
===========
Note 7. Short-Term Borrowings
The Corporation had unused lines of credit totaling $24,873,000
available with non-affiliated banks at December 31, 1998.
Note 8. Long-Term Debt
At December 31, 1998, the Corporation had borrowings from the Federal
Home Loan Bank system totaling $17,709,827 which mature through April
1, 2013. The interest rate on these notes payable ranges from 5.515%
to 6.25%. The Corporation has pledged real estate loans and Federal
Home Loan Bank stock as collateral on these borrowings. Principal
payments on these notes are due as follows:
1999 $ 71 287
2000 77 550
2001 84 363
2002 5 091 774
2003 99 837
Later years 12 285 016
-----------
$17 709 827
===========
Note 9. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:
1998 1997
---------- ---------
Deferred tax assets:
Allowance for loan losses $ 330 738 $ 292 020
Pension payable 103 294 103 545
Interest on nonaccrual loans 8 766 1 187
---------- ---------
$ 442 798 $ 396 752
---------- ---------
Deferred tax liabilities:
Depreciation $ 69 500 $ 53 822
Bond accretion 5 862 6 107
Loan origination costs 28 537 67 178
Securities available for sale 178 714 172 562
---------- ---------
$ 282 613 $ 299 669
---------- ---------
$ 160 185 $ 97 083
========== =========
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996 consists of the following:
1998 1997 1996
-------- -------- ---------
Current tax expense $861 138 $706 516 $ 520 870
Deferred tax expense (benefit) (69 254) (70 181) 9 726
-------- -------- ---------
$791 884 $636 335 $ 530 596
======== ======== =========
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1998, 1997 and 1996, due to
the following:
1998 1997 1996
---------- ---------- ---------
Computed "expected" tax expense $ 916 832 $ 764 203 $ 674 853
(Decrease) in income taxes
resulting from:
Tax-exempt interest income (106 451) (110 540) (128 063)
Other (18 497) (17 328) (16 194)
---------- ---------- ---------
$791 884 $636 335 $530 596
========== ========== =========
Low income housing credits totalled $32,179 for the years ended
December 31, 1998, 1997 and 1996 respectively.
Note 10. Fund Restrictions and Reserve Balance
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of December
31, 1998, the aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totalled $3,518,821.
The Bank must maintain a reserve against its deposits in accordance
with Regulation D of the Federal Reserve Act. For the final weekly
reporting period in the years ended December 31, 1998 and 1997, the
aggregate amounts of daily average required balances were
approximately $702,000 and $612,000, respectively.
Note 11. Benefit Plans
The Bank has a noncontributory, defined benefit pension plan for all
full-time employees over 21 years of age with one year of service.
Benefits are generally based upon years of service and average
compensation for the five highest-paid consecutive years of service.
The Bank funds pension costs in accordance with the funding provisions
of the Employee Retirement Income Security Act.
Information about the plan follows:
1998 1997
Change in Benefit Obligation
Benefit obligation, beginning
of year $1 822 867 $ 1 400 560
Service cost 156 069 145 319
Interest cost 136 715 105 042
Actuarial loss 36 572 184 053
Benefits paid (593 076) (12 107)
---------- -----------
Benefit obligation, end of year $1 559 147 $ 1 822 867
========== ===========
Changes in Plan Assets
Fair value of plan assets,
beginning of year $1 689 889 $ 1 270 505
Actual return on plan assets 26 745 281 660
Employer contributions 139 074 149 831
Benefits paid (593 076) (12 107)
---------- -----------
Fair value of assets, end of year $1 262 632 $ 1 689 889
========== ===========
Funded status $ (296 515) $ (132 978)
Unrecognized net actuarial
(gain) loss 13 485 (148 432)
Unrecognized net obligation at
transition (67 507) (73 133)
Unrecognized prior service cost 45 771 49 041
---------- -----------
Accrued benefit cost included in
other liabilities $ (304 766) $ (305 502)
========== ===========
1998 1997 1996
-------- -------- --------
Components of Net Periodic
Benefit Cost
Service cost $156 069 $145 319 $133 691
Interest cost 136 715 105 042 91 351
Expected return on plan assets (152 090) (114 345) (91 375)
Amortization of prior service
cost 3 270 3 270 - -
Amortization of net obligation
at transition (5 626) (5 626) (2 626)
Recognized net actuarial
(gain) - - (1 256) - -
-------- -------- --------
Net periodic benefit cost $138 338 $132 404 $131 041
======== ======== ========
Weighted-Average Assumptions as
of December 31
Discount rate 7.50% 7.50% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 5.00% 5.00% 6.00%
The Corporation provides a profit sharing thrift plan for all eligible
employees. Participating employees may elect to contribute up to 6% of
their salaries. The Corporation contributes an amount equal to
one-half of the employees' contributions. The Corporation's
contributions in 1998, 1997 and 1996 were $50,187, $54,399 and
$52,616, respectively.
On January 6, 1999 the Bank adopted a Director Split Dollar Life
Insurance Plan. This Plan provides life insurance coverage to
insurable directors of the Bank. The Bank owns the policies and is
entitled to all values and proceeds. The Plan provides retirement
benefits and the payment of benefits at the death of the insured
director. The amount of benefits will be determined by the performance
of the policies over the director's life.
Note 12. Commitments and Contingencies
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as guarantees,
commitments to extend credit, etc., which are not reflected in the
accompanying financial statements. The Corporation does not anticipate
losses as a result of these transactions.
The Corporation is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year
2000 Issue, and is developing a remediation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Corporation is heavily dependent
on computer processing in the conduct of its business activities.
Failure of these systems could have a significant impact on the
Corporation's operations.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at these banks at December 31, 1998, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by
approximately $152,000.
See Note 16 with respect to financial instruments with
off-balance-sheet risk.
Note 13. Transactions With Related Parties
During the year, employees, executive officers and directors (and
companies controlled by them) were customers of and had transactions
with the Corporation in the normal course of business. These
transactions were made on substantially the same terms as those
prevailing for other customers.
An analysis of loans (exclusive of loans to any such person which in
the aggregate did not exceed $60,000) made by the Corporation to
directors, executive officers, or principal stockholders or to any
associate of such persons is shown in the following table:
Balance Balance
January 1, New Loan December 31,
1998 Loans Repayments 1998
---------- ----- ---------- ------------
$3 059 826 $ 886 681 $1 143 959 $2 802 548
========== ========= ========== ==========
Note 14. Winchester Branch Office
The branch office in Winchester has been leased for a five-year period
beginning June 1, 1986, with options to renew for three additional
five-year periods. The current annual rent is $20,039, with an
allowable increase based on the Consumer Price Index. The annual rent
for the third five-year period cannot exceed $21,175.
Note 15. Dividend Reinvestment Plan
The Company has in effect a Dividend Reinvestment Plan which provides
an automatic conversion of dividends into common stock for enrolled
shareholders. Stock is issued at 100% of fair market value on each
dividend record date.
Note 16. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments.
The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1998 and 1997,
is as follows:
1998 1997
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 19 734 000 $ 9 442 000
Standby letters of credit $ 729 665 $ 348 700
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds security
agreements on accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at
December 31, 1998, varies from 0 percent to 100 percent; the average
amount collateralized is 55.4 percent.
Note 17. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair values are based
on quoted market prices or dealer quotes.
Loan Receivables
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The
fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits
of similar remaining maturities.
Borrowings
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings under
repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analyses based
on the Corporation's current incremental borrowing rates for similar
types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter similar agreements, taking into
account the remaining terms of the agreements and the present credit
worthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 1998 and 1997, the carrying amounts and fair values
of loan commitments and stand-by letters of credit were deemed
immaterial.
The estimated fair values of the Corporation's financial instruments
are as follows:
1998 1997
-------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- -----
(in thousands) (in thousands)
Financial assets:
Cash and short-term investments $ 7 885 $ 7 885 $ 3 623 $ 3 623
Securities 48 263 48 263 41 699 41 699
Loans 128 371 132 930 112 494 114 091
-------- -------- -------- ---------
Total financial assets $184 519 $189 078 $157 816 $ 159 413
======== ======== ======== =========
Financial liabilities:
Deposits $155 008 $156 075 $139 762 $ 139 788
Federal funds purchased - - - - 1 417 1 417
Long-term debt 17 710 18 623 6 461 6 304
-------- -------- -------- ---------
Total financial liabilities $172 718 $174 698 $147 640 $ 147 509
======== ======== ======== =========
Note 18. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31,
1998, that the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Corporation's actual capital amounts and ratios are also presented
in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 18 480 14.8% >=$10 017 >=8.0% N/A
First Bank $ 18 269 14.6% >=$10 007 >=8.0% >=$12 509 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 17 254 13.8% >=$5 009 >=4.0% N/A
First Bank $ 17 043 13.6% >=$5 004 >=4.0% >=$ 7 505 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 17 254 9.0% >=$7 655 >=4.0% N/A
First Bank $ 17 043 8.9% >=$7 650 >=4.0% >=$ 9 562 >= 5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 16 959 15.2% >=$8 945 >=8.0% N/A
First Bank $ 16 700 15.0% >=$8 930 >=8.0% >=$11 162 >=10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 15 847 14.2% >=$4 472 >=4.0% N/A
First Bank $ 15 588 14.0% >=$4 465 >=4.0% >=$ 6 697 >= 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 15 847 10.0% >=$6 343 >=4.0% N/A
First Bank $ 15 588 9.8% >=$6 337 >=4.0% >=$ 7 922 >= 5.0%
Note 19. Incentive Stock Option Plan
The Corporation has an incentive stock option plan for all full-time
employees. Under the plan, the Corporation may grant options for up to
21,000 shares of the common stock. The exercise price of each option
is equal to the market price of the Corporation's stock on the date of
grant. The maximum term of the option is five years, and they vest
immediately upon grant.
The Corporation applies APB Opinion 25 in accounting for its incentive
stock option plan. Accordingly, no compensation cost has been
recognized for the plan in 1998, 1997 and 1996. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement
No. 123, net income and earnings per share would not have been
materially different from the amounts presented.
The status of the stock option plan during 1998, 1997 and 1996 is as
follows:
1998 1997 1996
---------------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at
January 1 15 780 $ 23.51 19 003 $ 23.55 23 179 $ 23.40
Granted - - - - - - - - - - - -
Exercised (8 542) 23.58 - - - - - - - -
Forfeited (683) 23.58 (3 223) 23.76 (4 176) 22.72
------ ------ ------
Outstanding and
exercisable at
December 31 6 555 23.43 15 780 23.51 19 003 23.55
====== ====== ======
The status of the options outstanding at December 31, 1998 is as
follows:
Weighted
Weighted Number Average
Average Outstanding Remaining
Exercise and Contractual
Price Exercisable Life
-------- ----------- -----------
$ 24.00 2 820 .5 year
23.00 3 735 1.5 years
-----
23.43 6 555 1.0 year
=====
Note 20. Earnings Per Share
The following table presents the amounts used in computing earnings
per share and the effect on the weighted average number of shares of
dilutive potential common stock. Potential dilutive common stock has
no effect on income available to common stockholders.
1998 1997 1996
------------------- -------------------- ------------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ --------- ------ --------- ------ ---------
Basic EPS 783 897 $ 2.43 775 508 $ 2.08 772 557 $ 1.88
========= ========= =======
Effect of dilutive
securities, stock
options 3 006 445 - -
-------- ------- -------
Diluted EPS 786 903 $ 2.42 775 953 $ 2.08 772 557 $ 1.88
======== ========== ======= ======== ======= =======
Options on 19,003 shares of common stock were not included in
computing diluted earnings per share for the year ended December 31,
1996, because their effects were antidilutive.
Notes to Consolidated Financial Statements
Note 21. Parent Corporation Only Financial Statements
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---------- -----------
Cash $ 39 041 $ 70 493
Investment in subsidiaries, at cost, plus
undistributed net income 17 389 973 15 923 036
Other assets 171 994 188 746
----------- -----------
Total assets $17 601 008 $16 182 275
=========== ===========
Liabilities and Stockholders' Equity
Liabilities, accounts payable $ - - $ - -
----------- -----------
Stockholders' Equity
Common stock $ 3 944 515 $ 3 887 735
Surplus 1 417 280 1 187 023
Retained earnings 11 892 298 10 772 543
Accumulated other comprehensive income 346 915 334 974
------------ -----------
Total stockholders' equity $ 17 601 008 $16 182 275
------------ -----------
Total liabilities and stockholders'
equity $ 17 601 008 $16 182 275
============ ===========
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- ------------
Income, dividends from subsidiary $ 464 000 $ 535 000 $ 465 000
----------- ----------- ------------
Expenses:
Registration fees $ 850 $ 850 $ 850
Stationery and supplies 11 290 10 363 11 686
Legal and professional fees 14 487 6 677 12 610
Other 42 215 32 358 19 447
----------- ----------- ------------
Total expenses $ 68 842 $ 50 248 $ 44 593
----------- ----------- ------------
Income before allocated tax
benefits and undistributed
income of subsidiary $ 395 158 $ 484 752 $ 420 407
Allocated income tax benefits 54 528 49 263 47 341
----------- ----------- ------------
Income before equity in
undistributed income
of subsidiary $ 449 686 $ 534 015 $ 467 748
Equity in undistributed income of
subsidiary 1 454 996 1 077 307 986 518
----------- ------------ ------------
Net income $ 1 904 682 $ 1 611 322 $ 1 454 266
=========== =========== ============
FIRST NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash Flows from Operating Activities
Net income $1 904 682 $1 611 322 $ 1 454 266
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of
subsidiary (1 454 996) (1 077 307) (986 518)
Decrease in other assets 16 752 17 062 11 877
(Decrease) in accounts payable - - - - (319)
--------- ---------- ------------
Net cash provided by operating
activities $ 466 438 $ 551 077 $ 479 306
--------- ---------- ------------
Cash Flows from Financing Activities
Net proceeds from issuance of common
stock $ 287 037 $ 70 090 $ 55 717
Cash dividends paid (784 927) (639 870) (540 872)
--------- ---------- ------------
Net cash (used in) financing
activities $ (497 890) $ (569 780) $ (485 155)
---------- ---------- ------------
(Decrease) in cash and
cash equivalents $ (31 452) $ (18 703) $ (5 849)
Cash and Cash Equivalents
Beginning 70 493 89 196 95 045
---------- ---------- ------------
Ended $ 39 041 $ 70 493 $ 89 196
========== ========== ============