FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
September 30, 1995
<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1995 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.)
345 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of September 30, 1995
(Common Stock, $5 par value) 2,036,201
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Consolidated Balance Sheet -
September 30, 1995 and December 31, 1994
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1995 and 1994
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 5 - Other Information
Item 6 - Exhibits and Reports of Form 8-K
<PAGE>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
9-30-95 12-31-94
ASSETS (In Thousands) (In Thousands)
Cash and due from banks 21,352 23,046
Federal funds sold 0 0
Investment securities - Note 2
Securities held-to-maturity 117,447 119,847
Total (fair value of $117,329 in 1995
and $116,135 in 1994) 117,447 119,847
Securities available-for-sale, at fair
value 38,809 13,509
Total investment securities 156,256 133,356
Loans - Note 3 242,792 211,054
Less: Unearned income 2,524 2,502
Allowance for loan losses-Note 4 3,476 3,194
Loans, net 236,792 205,358
Premises and equipment 8,335 7,284
Intangible assets 3,708 982
Other real estate - Note 5 263 133
Other assets 4,602 3,884
TOTAL ASSETS 431,308 374,043
<PAGE>
Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 9-30-95 12-31-94
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest-bearing 54,927 48,035
Interest-bearing - Note 6 305,812 272,672
TOTAL DEPOSITS 360,739 320,707
Federal funds purchased & securities
sold under agreement to repurchase 29,277 15,297
Other liabilities 2,461 1,858
TOTAL LIABILITIES 392,477 337,862
Commitments & Contingent liabilities - Note 7
Stockholders' equity:
Common stock - $5 par value; authorized
5,000,000 shares; issued and outstanding
2,037,657 shares in 1995 and 1,848,597
shares in 1994 - Note 8 10,188 10,175
Additional paid-in capital 11,899 11,871
Retained earnings 16,779 14,304
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes (35) (169)
TOTAL STOCKHOLDERS' EQUITY 38,831 36,181
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY 431,308 374,043
<PAGE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended
09-30-95 09-30-94 09-30-95 09-30-94
(In Thousands) (In Thousands)
Interest income:
Interest & fees on loans 5,741 4,539 16,077 12,907
Interest & dividends on investment sec.:
Taxable income 1,665 1,478 4,401 4,181
Non-taxable income 449 343 1,209 1,067
Dividends on stock 6 5 18 18
Interest on federal funds sold 11 39 435 388
Total interest income 7,872 6,404 22,140 18,561
Interest expense:
Interest on deposits 2,997 2,179 8,131 6,257
Interest on federal funds purchased &
securities sold under agreement to
repurchase 335 123 970 387
Total interest expense 3,332 2,302 9,101 6,644
Net interest income 4,540 4,102 13,039 11,917
Provisions for loan losses - Note 4 100 120 340 360
Net interest income after provision
for loan losses 4,440 3,982 12,699 11,557
Noninterest income:
Service charges on deposit accounts 784 685 2,233 1,920
Other service charges commissions, fees 231 202 695 661
Investment securities gains (losses) 9 0 11 10
Other operating income 8 4 28 38
Total noninterest income 1,032 891 2,967 2,629
Noninterest expense:
Salaries & employee benefits 1,936 1,911 5,736 5,535
Occupancy expense of bank premises-net 239 210 664 595
Furniture & equipment expense - net 325 267 840 720
FDIC insurance premium 180 176 539 515
Amortization expense-Intangible assets 177 81 330 240
Other expense 989 797 2,676 2,328
Total noninterest expense 3,846 3,442 10,785 9,933
Income before income taxes 1,626 1,431 4,881 4,253
Applicable income taxes 447 413 1,389 1,210
Net Income 1,179 1,018 3,492 3,043
Net income per common share - Note 9 $0.58 $0.50 $1.72 $1.50
Cash dividends per common share $0.17 $0.16 $0.50 $0.48
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<TABLE>
FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
9 Months Ended 9 Months Ended
09-30-95 09-30-94
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 3,492 3,043
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 991 787
Provision for loan losses 340 360
Provision for deferred taxes 81 (88)
Increase (decrease) in reserve for
income taxes-current (127) 65
(Gain) loss on sale of premises
and equipment (3) (20)
(Increase) decrease in interest
receivables (875) (66)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net (68) 395
Increase (decrease) in interest
payable 527 (52)
(Increase) decrease in miscellaneous
assets (3,076) (52)
(Increase) decrease in prepaid
assets 291 (26)
Increase (decrease) in other
liabilities 202 157
Total adjustments (1,717) 1,460
Net cash provided by operating
activities 1,775 4,503
</TABLE>
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<TABLE>
Consolidated Statement of Cash Flows - Continued.......
<CAPTION>
9 Months Ended 9 Months Ended
09-30-95 09-30-94
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity 22,678 41,809
Purchase of investment securities
held-to-maturity (20,583) (47,899)
Proceeds from maturities of investment
securities available-for-sale 2,618 1,407
Purchase of investment securities
available-for-sale (27,693) (4,414)
Net (increase) decrease in customer
loans (32,051) (22,102)
Additions to premises and equipment (1,713) (694)
Proceeds from sale of premises and
equipment 3 58
Recoveries from loans previously charged
off 278 241
(Increase) decrease in funds sold 0 9,400
Net cash used in investing
activities (56,463) (22,194)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 40,031 11,274
Sale of common stock 0 0
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase 13,981 4,718
Dividends paid (1,018) (887)
Net cash provided by financing
activities 52,994 15,105
Net increase (decrease) in cash and
cash equivalents (1,694) (2,586)
Cash and cash equivalents at beginning
of year 23,046 22,153
Cash and cash equivalents at end of
reporting period 21,352 19,567
</TABLE>
<PAGE>
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, 1995 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 1995. 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, 1994.
Note 2 - Investment Securities:
The following is the amortized cost and fair value of investment
securities held-to-maturity at September 30, 1995 and December 31,
1994:
<TABLE>
<CAPTION>
09-30-95 12-31-94
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 38,565 70 (167) 38,468 46,911 2 (1,399) 45,514
Obligations of
U S government
agencies & corps 42,254 108 (647) 41,715 43,134 31 (2,131) 41,034
Obligations of state
and political
subdivisions 36,628 612 (94) 37,146 29,802 253 (468) 29,587
Other securities 0 0 0 0 0 0 0 0
Total 117,447 790 (908) 117,329 119,847 286 (3,998) 116,135
</TABLE>
<PAGE>
Note 2 - Continued...
<TABLE>
The following is the amortized cost and fair value of securities
available-for-sale at September 30, 1995 and December 31, 1994:
<CAPTION>
09-30-95 12-31-94
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 17,530 17 (65) 17,482 2,304 0 (51) 2,253
Obligations of
U S government
agencies & corps 20,860 77 (85) 20,852 11,000 15 (235) 10,780
Other securities 475 0 0 475 476 0 0 476
Total 38,865 94 (150) 38,809 13,780 15 (286) 13,509
</TABLE>
Investment securities with an aggregate amortized cost of $53,703
on 9-30-95, and $41,208 on 12-31-94, 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: 9-30-95 12-31-94
Commercial, financial & agricultural 39,214 34,476
Real estate - construction 5,446 4,781
Real estate - mortgage 145,546 126,751
Consumer 51,371 45,046
All other 1,215 0
Total loans, gross 242,792 211,054
As of 9-30-95, and December 31, 1994, the aggregate dollar amount
of loans to related parties; principally, directors and executive
officers, their immediate families and their business interests,
was $7,499 and $9,474 respectively. The following is an analysis
of the activity with respect to loans to related parties for the
nine months ended September 30, 1995:
Balance, beginning of period 9,474
Add:
New loans: 10,224
Deduct:
Payments 12,193
Other changes (6)
Balance, end of period 7,499
<PAGE>
Note 4 - Allowance for Loan Losses:
Amount
09-30-95 12-31-94
Balance, beginning of period (year) 3,194 2,955
Add:
Recoveries 278 297
Provisions for loan losses charged
to income 340 575
Total 3,812 3,827
Deduct:
Loans charged off 336 633
Balance, end of period (year) 3,476 3,194
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. Allowance for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
For impairment recognized in accordance with Statement of Financial
Accounting Standards No. 114 (SFAS 114), ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN, the entire change in present value of
expected cash flows is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be
reported.
Note 5 - Adoption of Statement of Financial Accounting Standards No. 114 and
No. 118:
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN, and Statement of Financial Accounting
Standards No. 118 (SFAS 118), ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES. These
statements require creditors to account for impaired loans, except
for those loans that are accounted for at fair value or at the
lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
<PAGE>
Note 5 - Continued...
The Bank 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 Bank
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 Bank 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 Bank's credit card, residential mortgage, overdraft
protection, home equity lines, Business Manager, and consumer
installment loans.
The Bank's adoption of these accounting standards did not have a
material effect on the financial condition and results of
operations of the Bank.
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 and in-substance
foreclosures are reported in other assets. In-substance
foreclosures are properties in which the borrower has little or no
equity in the collateral. Properties acquired by foreclosure or
deed in lieu of foreclosure and in-substance foreclosures are
transferred to OREO and recorded at the lower of the outstanding
loan balance at the time of acquisition or the estimated market
value. Market value is determined on the basis of the properties
being disposed of in the normal course of business and not on a
liquidation or distress basis. Loan losses arising from the
acquisition of such properties are charged against the allowance
for loan losses. Gains or losses arising from the sale of OREO are
reflected in current operations.
Note 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $27,872 and
$25,935 at 9-30-95 and December 31, 1994 respectively.
<PAGE>
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Bank 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, 1995, commitments to extend credit and standby
letters of credit aggregated $43,335. The Bank does not anticipate
any material losses as a result of these transactions.
Note 9 - Common Stock
As of December 31, 1994, the common stock outstanding was
2,035,000. During the first quarter, the Company granted options
to purchase an aggregate of 2,657 shares under the incentive stock
option plan. As of September 30, 1995, the common stock
outstanding was 2,037,657.
Note 10 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number
of shares of common stock outstanding, giving retroactive effect to
stock dividends and stock splits. The number of weighted-average
shares outstanding at September 30, 1995 was 2,035,989 and
2,033,188 at December 31, 1994.
Dividends per share are calculated using the current equivalent
number of common shares outstanding at the time of the dividend
based on First National Corporation's shares outstanding.
<PAGE>
FIRST NATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the third quarter of 1995, First National Corporation ("The
Company") had consolidated net income of $1,179,000 or $0.58 per share
compared to $1,018,000 or $0.50 per share for the same period in 1994. Net
income for the first nine months of 1995 increased to $3,492,000 or $1.72 per
share compared to $3,043,000 or $1.50 per share for the same period in 1994.
This represents an increase of 14.8 percent. Total assets as of September
30, 1995 were $431,308,000, an increase of $57,265,000 or 15.3 percent
compared to year end 1994.
NET INTEREST INCOME
Net interest income is the difference between interest income on average
assets and interest expense on average interest-bearing liabilities. Two
significant elements in analyzing banks' net interest income are net interest
spread and net interest margin. Net interest spread is the difference
between the yield on average earning assets and the rate on average interest-
bearing liabilities. Net interest margin is the difference between the yield
on average earning assets and the rate on all average funds, interest and
noninterest-bearing, utilized to support earning assets. The significant
distinction between spread and net interest margin is that net interest
margin reflects the volume of interest-free funds supporting earning assets.
Net interest income for the third quarter of 1995 was $4,440,000
compared to $3,982,000 for the same period of 1994, representing an increase
of $458,000 or 11.5 percent. For the first nine months of 1995, net interest
income was $12,699,000 compared to $11,557,000 for the same period of 1994.
This is an increase of $1,142,000 or 9.9 percent. This increase was due
primarily to an increase in earning assets.
The yield on a major portion of the bank's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first nine months of 1994, the year to date taxable equivalent yield on
earning assets was 7.34 percent. During the same period of 1995, the yield
fell to 7.95 percent, or an increase of 61 basis points. The rate on the
liabilities used to support these assets has increased 79 basis points from
3.13 percent in 1994 to 3.92 percent in 1995.
<PAGE>
Management's Discussion Continued...
Year to date net interest margin decreased from 4.71 percent in 1994 to
4.68 percent in 1995. Even with this 3 basis point decline, net interest
margin exceeds bank policy. The impact of interest-free funds for the same
period increased from .50 percent to .65 percent or an increase of 15 basis
points.
The largest category of earning assets is loans. At the end of the
third quarter 1995, loans outstanding, less unearned income, were
$240,268,000 compared to $208,552,000 at year end 1994. This represents an
increase of $31,716,000 or 15.2 percent. For the three months ended
September 30, 1995, interest and fees on loans were $5,741,000 compared to
$4,539,000 in the comparable period in 1994, an increase of $1,202,000 or
26.5 percent. For the nine months ended September 30, 1995, interest and fee
income was $16,077,000 compared with $12,907,000 for the same period in 1994,
an increase of $3,170,000 or 24.6 percent. On June 19, 1995, two offices of
NationsBank were acquired adding approximately $15,000,000 to our portfolio.
The major volume increase in the loan portfolio was in real estate-
mortgage loans. For the nine month period ended September 30, 1995, mortgage
loans increased $18,795,000 or 14.8 percent of which $16,095,000 was secured
by 1-4 family residential properties when compared to December 31, 1994.
During this same period consumer loans reflected an increase of $6,325,000 or
14.0 percent while commercial loans increased $4,738,000 or 13.7 percent when
compared to year end 1994. This increase in the loan portfolio was brought
about due to a renewed confidence in overall economic trends as well as
through the acquisition of two branches of NationsBank. The Company has no
foreign loans nor loans for highly leveraged transactions.
For the nine months ended September 30, 19954, loans averaged
$222,150,000 and yielded 9.38 percent on a taxable equivalent basis compared
to $193,205,000 with a taxable equivalent yield of 8.85 percent, or an
increase of 53 basis points when compared to December 31, 1994.
At September 30, 1995, the Bank had loans amounting to approximately
$290,000 that were specifically classified as impaired. The average recorded
investment in such impaired loans during 1995 was $291,000. The allowance
for loan losses related to impaired loans amounted to approximately $50,000
at September 30, 1995. Interest income on impaired loans of $14,417 was
recognized for cash payments received in 1995.
In addition, at September 30, 1995, the Bank had other nonaccrual loans
of approximately $743,517 for which impairment had not been recognized. The
amount of interest income that would have been recognized on these loans at
the original interest rates was an immaterial amount through September 30,
1995.
<PAGE>
Management's Discussion Continued...
Certain risks are inherent in making loans, particularly commercial,
consumer, construction and commercial mortgage loans. Credit risks encompass
the period of time over which loans may be repaid, uncertainties as to the
future value of collateral, changes in economic conditions and risks inherent
in dealing with individual borrowers. Long maturities increase the risks
that economic conditions will change and adversely affect collectibility.
The Company attempts to deal with these risks through a variety of
means. It utilizes variable rate loans or endeavors to make fixed rate loans
over shorter periods of time. The Company also tries to rely primarily on
the cash flow of a debtor as the source of repayment rather than collateral.
The adherence to internal credit policies and procedures is another means of
managing credit risks.
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.
For the first nine months of 1995, investment securities were
$156,256,000 compared to $133,356,000 at December 31, 1994, representing an
increase of $22,900,000 or 17.2 percent. This increase is the result of
management's decision to utilize excess funds in the investment function in
an attempt to increase yields and profitability.
At September 30, 1995, U. S. Treasury securities and U. S. government
and agency securities increased $16,075,000 while municipal securities
increased $6,826,000 when compared to December 31, 1994. This shift to U. S.
Treasury and U. S. government and agency securities was an attempt to
increase portfolio yields along with the lack of the availability of bank
qualified municipal obligations within the same time period.
For the third quarter ended September 30, 1995, investment income was
$2,120,000 compared with $1,826,000 for the comparable period in 1994, a net
increase of $294,000 or 16.1 percent. For the nine month period ended
September 30, 1995, investment income was $5,628,000 compared with $5,266,000
for the same period in 1994 resulting in an increase of $362,000 or 6.9
percent. This increase can be attributed to the shift of short term funds to
U. S. government and agency securities to take advantage of the increase in
yields as compared to overnight federal funds sales.
At the end of the third quarter 1995, securities averaged $139,856,000
and yielded 5.75 percent on a taxable equivalent basis, compared to
$130,738,000 with a yield of 5.71 percent at December 31, 1994, resulting in
a 4 basis point increase in yield.
<PAGE>
Management's Discussion Continued...
As of September 30, 1995, The Company had unrealized gains in the U. S.
Treasury and agency portfolio of $272,000 and in the municipal portfolio an
unrealized gain of $612,000. For the same period, The Company had an
unrealized loss of $964,000 in the U. S. Treasury and agency portfolio and a
$94,000 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, 1995 of approximately $35,000 on the $38,831,000 of securities
denoted as available-for-sale.
For the first nine months ended September 30, 1995, the Company had an
$11,000 realized gain due to called municipal bonds.
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, other than those securities in the
available-for-sale category which may be used to control unacceptable
interest rate risk levels.
For the third quarter of 1995, interest expense increased $1,030,000 or
44.7 percent when compared to the same period in 1994. For the nine months
ended September 30, 1995, interest expense increased $2,457,000 or 37.0
percent compared to the same period in 1994.
During the first nine months of 1995, interest-bearing liabilities
averaged $310,497,000 and carried a rate of 3.92 percent. This compares to
an average level of $284,152,000 with a rate of 3.13 percent at September 30,
1994 or an increase of 79 basis points. Approximately half of these
interest-bearing liabilities have fixed rate maturities and will be renewed
at a more favorable market rate as they mature.
PROVISION FOR LOAN LOSSES
The Company maintains a reserve for possible loan losses at a level
which management believes is sufficient to provide for potential losses in
the loan portfolio. Management evaluates the adequacy of the reserve
utilizing its internal risk rating system and regulatory agency examinations
to assess the quality of the loan portfolio and identify problem loans. The
evaluation process also includes management's analysis of current and future
economic conditions, composition of the loan portfolio, past due and
nonaccrual loans, concentrations of credit, lending policies and procedures
and historical loan loss experience. The provision for loan losses is
charged to the income statement in the amount necessary to maintain the
allowance at the appropriate level. The allowance is established on an
overall portfolio basis, and management does not subsequently allocate the
allowance by geographic area or loan category.
<PAGE>
Management's Discussion Continued...
Loans are placed on nonaccrual when a loan is specifically determined to
be impaired or then principal or interest is delinquent for 120 days or more.
A nonaccrual loan may not be considered impaired if it is expected that the
delay in payment is minimal. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received. Unsecured
commercial loans and well secured loans not in the process of collection are
charged-off on or before the date they become 90 days past due, and therefore
do not reach nonaccrual status. Commercial and real estate loans which are
partially secured are written down to the collateral value and placed on
nonaccrual status on or before becoming 90 days past due. Consumer
installment loans are charged-off on or before becoming 120 days past due.
All interest accrued in the current year but unpaid at the date a loan goes
on nonaccrual status is deducted from interest income, while interest accrued
from previous years is charged against the reserve for loan losses.
The provision for loan losses for the three month period ended September
30, 1995 was $100,000 compared to $120,000 for the same period in 1994. Net
losses for the third quarter of 1995 were $7,000 compared to $86,000 for the
same period in 1994. For the nine month period ended September 30, 1995, the
provision for loan losses was $340,000 compared to $360,000 for the same
period in 1994. On an annualized basis, net charge-offs represented .024
percent of average loans at September 30, 1995 which is substantially less
than .060 percent at the end of 1994. The allowance for loan losses was
$3,476,000 or 1.45 percent of outstanding loans at September 30, 1995
compared to 1.53 percent of outstanding loans at year-end.
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicates the estimated loan losses.
Management feels that the allowance for loan losses is adequately funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure as well as amounts reclassified as in-substance
foreclosures. For the period ended September 30, 1995, other real estate
owned was $263,000 compared to $133,000 at December 31, 1994. This increase
resulted from the foreclosure of several real estate properties.
Management anticipates that the level of charge-offs for 1995 will be
below the levels of 1994. The loan loss provision is considered adequate by
management. However, changes in economic conditions in the Company's market
area could affect these levels.
<PAGE>
Management's Discussion Continued...
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 1995 was $1,032,000 compared
to $891,000 for the same period in 1994, representing an increase of $141,000
or 15.8 percent. For the nine months of 1995 noninterest income was
$2,967,000 compared to $2,629,000 for the same period in 1994, representing
an increase of $338,000 or 12.9 percent. During the first nine months of
1995, service charges and fee income increased 313,000 or 16.3 percent. This
was primarily due to the increase in NSF fees and service charges on demand
accounts during the fourth quarter of 1994.
Noninterest expense for the third quarter of 1995 was $3,846,000
compared to $3,442,000 for the same period in 1994, representing an increase
of $404,000 or 11.7 percent. For the nine months ended September 30, 1995,
noninterest expense was $10,785,000 compared to $9,933,000, an increase of
$852,000 or 8.6 percent. Having recently acquired two offices of
NationsBank, we have experienced increases in noninterest expense in the
following areas. Occupancy and furniture and equipment expense for the third
quarter of 1995 increased $87,000 or 18.2 percent when compared to the same
period in 1994. For the first nine months of 1995 occupancy and furniture
and equipment expense increased $189,000 or 14.4 percent when compared to the
same period a year earlier. Intangible asset expense for the three months
ended September 30, 1995 increased $96,000 or 118.5 percent when compared to
1994. For the first nine months of 1995 intangible asset expense increased
$90,000 or 37.5 percent when compared to the same period in 1994. Other
expenses increased $192,000 or 24.1 percent for the third quarter in 1995
compared to the same period in 1994. For the first nine months other expense
increased $348,000 or 14.9 percent compared to the same period in 1994.
Net income was up 15.8 percent for the third quarter of 1995 when
compared to the same period in 1994. For the nine months ended September 30,
1995, net income was up $449,000 or 14.8 percent compared to the same period
last year. The 1,122,000 or 9.4 percent increase in net interest income and
the $338,000 or 12.9 percent increase in noninterest income were the primary
factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date the capital needs of The Company have been met through the
retention of earnings less cash dividends. At the end of the third quarter,
1995, stockholder's equity was $38,831,000 compared to $36,181,000 at
December 31, 1994.
<PAGE>
Management's Discussion Continued...
The Company and subsidiary 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 are adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, as of December 31, 1993, Tier 1 capital must be at least 6 percent of
risk-weighted assets, while total capital must be 10 percent of risk-weighted
assets. The Tier 1 capital ratio at September 30, 1995 was 15.4 percent
compared to 16.9 percent at December 31, 1994. The capital ratio was 16.7
percent at September 30, 1995 compared to 18.1 percent at December 31, 1994.
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 5
percent, depending on the institution's capital group rating as determined by
its regulators. At September 30, 1995, First National Corporation's leverage
ratio was 8.3 percent compared to 9.6 percent at December 31, 1994. 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, extensions 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
Company 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.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiary, First
National Bank, is a party to nor is any of their property the
subject of any material or other pending legal proceedings, other
than ordinary routine proceedings incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
First National Bank recently received regulatory approval to open
an office in Beaufort County which will be located on highway 278
in Bluffton and is expected to open in the spring of 1996.
On September 27, 1995, the Company announced that it has joined
with a group of Rock Hill businessmen to organize a new National
Bank headquartered in Rock Hill. The new bank will be named The
National Bank of York County and will be a wholly owned subsidiary
of First National Corporation. The organization of the new bank
and its affiliation with the Company are subject to the approval of
federal and state regulators. The necessary applications are to be
filed in the near future and opening is expected to be in the
middle of 1996.
Item 6. Exhibits and Reports of Form 8-K:
(a) Not Applicable
(b) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934,the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: November 9, 1995 C. John Hipp, III
---------------------
C. John Hipp, III
President & CEO
Date: November 9, 1995 James C. Hunter, Jr.
---------------------
James C. Hunter, Jr.
Secretary/Treasurer
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