Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995, Commission file number 2-96043
First National Corporation
Incorporated in the State of South Carolina
I.R.S. Employer Identification No.: 57-0799315
Address: 345 John C. Calhoun Drive, S.E.
Orangeburg, South Carolina 29115
Telephone: (803) 534-2175
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock - $5.00 par value
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at February 29, 1996 was $50,308,157 based on the sale price of
$26.50 per share on that date. For purposes of the foregoing calculation only,
all directors and executive officers of the registrant have been deemed
affiliates. The number of shares of common stock outstanding as of February 29,
1996 was 2,247,636.
Documents Incorporated by Reference
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 23, 1996, are incorporated by reference into
Part III.
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Form 10-K Cross-Reference Index
Part I Page
Item 1 - Business 3
Item 2 - Properties 12
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of 12
Security Holders
Part II
Item 5 - Market for Registrant's Common Equity 12
and Related Stockholder Matters
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis 12
of Financial Condition and Results
of Operations
Item 8 - Financial Statements 12
and Supplementary Data
Item 9 - Changes in and Disagreements with 12
Accountants on Accounting
and Financial Disclosure
Part III
Item 10 - Directors and Executive Officers
of the Registrant *
Item 11 - Executive Compensation *
Item 12 - Security Ownership of Certain
Beneficial Owners and
Management *
Item 13 - Certain Relationships and
Related Transactions *
Part IV
Item 14 - Exhibits, Financial Statement 13
Schedules, and Reports on
Form 8-K
*Incorporated by reference to the Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders
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Introduction
The following discussion is provided to assist the reader in understanding
the operation and financial position of the Corporation. Information in this
review should be read in conjunction with the consolidated financial statements
and accompanying footnotes.
Part I
Item 1. Business
Description of business
First National Corporation (the "Company"), is a bank holding company
incorporated under the laws of South Carolina in 1985. The Company owns 100% of
First National Bank, which was opened in 1934. At the close of business on
December 31, 1992 First National Corporation acquired 120,000 outstanding shares
of Santee Cooper State Bank in a stock exchange transaction accounted for as a
pooling-of-interests.
In June, 1995, First National Bank completed the purchase of two branches
of another commercial bank in Colleton County, South Carolina, and opened a
branch in Beaufort County, South Carolina.
The Company is in the process of sponsoring the organization of the
National Bank of York County (In Organization) in Rock Hill, South Carolina. The
organizers of the National Bank of York County have received preliminary
approval of the bank's charter from the Office of the Comptroller of the
Currency. An application for federal deposit insurance has been filed with the
Federal Deposit Insurance Corporation and is currently pending. Applications
must also be filed by the Company with the Board of Governors of the Federal
Reserve System and the South Carolina State Board of Financial Institutions for
approval of the Company's acquisition of 100% of the stock of National Bank of
York County upon completion of its organization. These applications are expected
to be filed in the near future. The Company intends to capitalize the new bank
with proceeds of an offering of common stock. The offering will be registered
with the Securities and Exchange Commission pursuant to the Securities Act of
1933.
The Company engages in no significant operations other than the ownership
of its subsidiary.
Some of the major services which the Company provides through its banking
subsidiary include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for business, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, and use of ATM facilities. The Company
has no material concentration of deposits from any single customer or group of
customers, and no significant portion of its loans is concentrated within a
single industry or group of related industries. There are no material seasonal
factors that would have an adverse effect on the Company. The Company does not
have foreign loans.
Territory Served and Competition
First National Bank conducts its business from twenty locations in thirteen
South Carolina towns. In its markets, First National Bank encounters strong
competition from several major banks that dominate the commercial banking
industry in their service areas and in South Carolina generally. Several
competitors have substantially greater resources and higher lending limits than
First National Bank and they offer certain services for their customers that
First National Bank does not offer. In addition to commercial banks, savings
institutions and credit unions, First National Bank competes for deposits and
loans with other financial intermediaries and investment alternatives,
including, but not limited to mortgage companies, captive finance companies,
money market mutual funds, brokerage firms, governmental and corporation bonds
and other securities. Various of these nonbank competitors are not subject to
the same regulatory restrictions as the Company and First National Bank and many
have substantially greater resources than the Company.
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As a bank holding company, the Company is a legal entity separate and
distinct from its bank subsidiary. The Company coordinates the financial
resources of the consolidated enterprise and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiary
through dividends, fees for services performed and interest on advances and
loans.
Employees
The Company does not have any salaried employees. As of December 31, 1995,
First National Bank had 253 full-time equivalent employees. The Company
considers its relationship with its employees to be excellent. The employee
benefit programs the Company provides include group life, health and dental
insurance, paid vacation, sick leave, educational opportunities, stock option
plans for officers and key employees, a defined benefit pension plan, and a 401K
plan for employees.
Executive Officers
C. John Hipp, III (Age 44)
President and Chief Executive Officer
L. D. Westbury (Age 63)
Chairman
Robert R. Horger (Age 45)
Vice Chairman
James C. Hunter, Jr. (Age 53)
Secretary and Treasurer
W. Louis Griffith (Age 44)
Chief Financial Officer
Executive Officers of the Company
Mr. Hipp has served as President of the Company and First National Bank
since April 1994. From 1991 to 1994, Mr. Hipp served as President of Rock Hill
National Bank and Rock Hill National Corporation.
Mr. Westbury has served as Chairman of the Board of the Company and First
National Bank since April 1994. Mr. Westbury served as President of the Company
and First National Bank from November 1986 to March 1994, as Executive Vice
President of First National Bank from May until November 1986, and as Senior
Vice President of First National Bank from April 1975 until May 1986.
Mr. Horger was named Vice Chairman of the Company and First National Bank
in April 1994, and was named to the Company Board in April 1991. Mr. Horger is
an attorney with Horger, Barnwell and Reid.
Mr. Hunter has served as Secretary and Treasurer of the Company since May
1986 and as Executive Vice President of First National Bank since April 1993. He
served as Senior Vice President of First National Bank from May 1987 until April
1993, and Vice President of First National Bank from March 1976 until May 1987.
Mr. Griffith has served as Chief Financial Officer of the Company since
October 1995, and as Senior Vice President and Chief Financial Officer of First
National Bank since December 1994. He served as Vice President and Chief
Financial Officer of First National Bank from August until December 1994, and as
Vice President of First National Bank from March 1986 until August 1994.
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Supervision and Regulation
Bank holding companies and banks are extensively regulated under federal
and state law. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to such
statutes and regulations. Any change in applicable law or regulation may have a
material effect on the business of the Company and its subsidiaries.
Bank Holding Company Regulation
The Company is registered as a "bank holding company" with the Board of
Governors of the Federal Reserve System ("Federal Reserve"), and is subject to
supervision by the Federal Reserve under the Bank Holding Company Act ("BHC
Act"). The Company is required to file with the Federal Reserve periodic reports
and such additional information as the Federal Reserve may require pursuant to
the BHC Act. The Federal Reserve examines the Company, and may examine the
subsidiary Bank.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The Company is also registered under the bank holding company laws of South
Carolina. Accordingly, the Company is subject to regulation and supervision by
the South Carolina State Board of Financial Institutions (the "State Board").
A registered South Carolina bank holding company must provide the State
Board with information with respect to the financial condition, operations,
management and inter-company relationships of the holding company and its
subsidiaries. The State Board also may require such other information as is
necessary to keep itself informed about whether the provisions of South Carolina
law and the regulations and orders issued thereunder by the State Board have
been complied with, and the State Board may examine any bank holding company and
its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it is
unlawful without the prior approval of the State Board for any South Carolina
bank holding company (i) to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank or any other bank holding company,
(ii) to acquire all or substantially all of the assets of a bank or any other
bank holding company, or (iii) to merge or consolidate with any other bank
holding company.
As stated above, the Company is a legal entity separate and distinct from
First National Bank. Various legal limitations place restrictions on the ability
of First National Bank to lend or otherwise supply funds to the Company. The
Company and First National Bank are subject to Section 23A of the Federal
Reserve Act. Section 23A defines "covered transactions", which include
extensions of credit, and limits a bank's covered transactions with any
affiliate to 10% of such bank's capital and surplus. All covered transactions
with all affiliates cannot in the aggregate exceed 20% of a bank's capital and
surplus. All covered and exempt transactions between a bank and its affiliates
must be on terms and conditions consistent with safe and sound banking
practices, and banks and their subsidiaries are prohibited from purchasing
low-quality assets from the bank's affiliates. Finally, Section 23A requires
that all of a bank's extensions of credit to an affiliate be appropriately
secured by acceptable collateral, generally United States government or agency
securities. The Company and First National Bank also are subject to Section 23B
of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and circumstances, including credit
standards, that are substantially the same or at least as favorable to a bank
holding company, a bank or a subsidiary of either as prevailing at the time for
transactions with unaffiliated companies.
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In July 1994, South Carolina enacted legislation which effectively provides
that, after June 30, 1996, out-of-state bank holding companies may acquire other
banks or bank holding companies having offices in South Carolina upon the
approval of the State Board and compliance with certain other conditions,
including that the effect of the transaction not lessen competition and that the
laws of the state in which the out-of-state bank holding company filing the
applications has its principal place of business permit South Carolina bank
holding companies to acquire banks and bank holding companies in that state.
Although such legislation may increase takeover activity in South Carolina, the
Company does not believe that such legislation will have a material impact on
its competitive position.
However, no assurance of such fact may be given.
Congress recently enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which will increase the ability of bank holding
companies and banks to operate across state lines. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, the existing
restrictions on interstate acquisitions of banks by bank holding companies will
be repealed one year following enactment, such that the Company and any other
bank holding company located in South Carolina would be able to acquire a bank
located in any other state, and a bank holding company located outside South
Carolina could acquire any South Carolina-based bank, in either case subject to
certain deposit percentage and other restrictions. The legislation also provides
that, unless an individual state elects beforehand either (i) to accelerate the
effective date or (ii) to prohibit out-of-state banks from operating interstate
branches within its territory, on or after June 1, 1997, adequately capitalized
and managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted only
if it is expressly permitted by the laws of the host state. The authority of a
bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. The Company believes that this
legislation may result in increased takeover activity of South Carolina
financial institutions by out-of-state financial institutions. However, the
Company does not presently anticipate that such legislation will have a material
impact on its operations or future plans.
Obligations of Holding Company to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines that
a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the
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institution prior to payment of any other general or unsecured senior liability,
subordinated liability, general creditor or stockholder. This provision would
give depositors a preference over general and subordinated creditors and
stockholders in the event a receiver is appointed to distribute the assets of
the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Office of the Comptroller of the Currency
("OCC") is authorized to require payment of the deficiency by assessment upon
the bank's shareholders', pro rata, and to the extent necessary, if any such
assessment is not paid by any shareholder after three months notice, to sell the
stock of such shareholder to make good the deficiency.
Capital Adequacy
The various federal bank regulators, including the Federal Reserve and the
OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into two tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common shareholders' equity, perpetual preferred stock (subject to
certain limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for possible loan losses (subject to certain limitations), and certain
subordinated debt, "hybrid capital instruments", subordinated and perpetual debt
and intermediate term and other preferred stock ("Tier 2 Capital"). A minimum
ratio of total capital to risk- weighted assets of 8.00% is required and Tier 1
capital must be at least 50% of total capital. The Federal Reserve also has
adopted a minimum leverage ratio of Tier 1 Capital to total assets (not
risk-weighted) of 3%. The 3% Tier 1 Capital to total assets ratio constitutes
the leverage standard for bank holding companies and national banks, and will be
used in conjunction with the risk-based ratio in determining the overall capital
adequacy of banking organizations.
The Federal Reserve and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve has not advised the Company of any specific
minimum leverage ratio applicable to it. As of December 31, 1995, the Company
and First National Bank have leverage ratios of 9.1%; and 8.1% respectively, and
total risk adjusted capital ratios of 16.6%; and 15.0%, respectively.
Payment of Dividends
If a national bank's surplus fund equals the amount of its capital stock,
the directors may declare quarterly, semi-annual or annual dividends out of the
bank's net profits, after deduction of losses and bad debts. If the surplus fund
does not equal the amount of capital stock, a dividend may not be paid until
one-tenth of the bank's net profits of the preceding half year, in the case of
quarterly or semi-annual dividends, or the preceding two years, in the case of
an annual dividend, are transferred to the surplus fund.
The approval of the OCC is required if the total of all dividends declared
by a national bank in any calendar year will exceed the total of its retained
net profits of that year combined with its retained net profits of the two
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preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. OCC regulations provide that provisions for
possible credit losses cannot be added back to net income and charge-offs cannot
be deducted from net income in calculating the level of net profits available
for the payment of dividends.
The payment of dividends by the First National Bank may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the OCC, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), the OCC may require, after notice and a
hearing, that such bank cease and desist from such practice. The OCC has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve, the OCC and the FDIC have issued policy statements which provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings.
Bank Regulation
First National Bank is subject to supervision and examination by the OCC.
The OCC regulates and monitors all areas of the bank's operations, including
loans, mortgages, issuance of securities, capital adequacy, payment of
dividends, and establishment of branches. Interest and certain other charges
collected or contracted for by the Banks are also subject also to state usury
laws and certain federal laws concerning interest rates. First National Bank is
a member of the Federal Reserve System, and its deposits are insured by the FDIC
up to the maximum permitted by law.
Under present law, First National Bank currently may establish and operate
branches throughout the State of South Carolina, subject to the maintenance of
adequate capital for each branch and the receipt of OCC approval.
Insurance of Deposits
As an FDIC-insured institution, First National Bank is subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions shall be as specified in a schedule
required to be issued by the FDIC that specifies, at semi-annual intervals,
target reserve ratios designed to increase the FDIC insurance fund's reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) in 15 years. Further, the FDIC is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
States Department of the Treasury.
Effective January 1, 1996, the FDIC implemented a risk-based assessment
schedule that provides for assessments ranging from 0.00% to 0.27% of a BIF
insured institution's average assessment base. The minimum annual assessment
under the schedule is $2,000 per institution. The actual assessment to be paid
by each FDIC- insured institution is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized," "adequately capitalized" or "undercapitalized",
as such terms have been defined in applicable federal regulations adopted to
implement the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), and whether such
institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns. Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater, and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" bank is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A bank is
considered "undercapitalized" if it has (i) a total risk-based capital ratio of
less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%, or (iii) a
leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMEL rating of 1). As a result of the current provisions of federal law, the
assessment rates on deposits could increase over present levels. Based on the
current financial condition and capital levels of the Bank, the Company does not
expect that the current FDIC risk-based assessment schedule will have a material
adverse effect on the
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Bank's earnings. First National Bank's risk-based insurance assessment currently
is set at the minimum $2,000 annual assessment.
Legislation
In 1989 and again in 1991, Congress enacted comprehensive legislation
affecting the commercial banking and thrift industries: the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA") and FDICIA. FIRREA,
among other things, abolished the Federal Savings and Loan Insurance Corporation
and established two new insurance funds under the jurisdiction of the FDIC: the
Bank Insurance Fund ("BIF"), which insures most commercial banks, including
First National Bank, and the Savings Association Insurance Fund ("SAIF"), which
insures most thrift institutions.
FIRREA permitted bank holding companies to acquire savings associations
subject to appropriate regulatory approvals. The entities acquired may be
operated as separate savings associations, converted into banks or, if certain
conditions are satisfied, merged into existing bank affiliates.
FIRREA also imposed, with certain limited exceptions, a "cross-guarantee"
on the part of commonly controlled depository institutions, as discussed above
under "Obligations of Holding Company to its Subsidiary Banks."
FDICIA supplements the federal banking agencies' broad powers to take
corrective action to resolve problems of insured depository institutions,
generally authorizing earlier intervention in the affairs of a particular
institution and imposing express requirements that are tied to the institution's
level of capital. If a depository institution fails to meet regulatory capital
requirements specified in FDICIA, regulatory agencies can require submission and
funding of a capital restoration plan by the institution, place limits on its
activities, require the raising of additional capital and, ultimately, require
the appointment of a conservator or receiver for the institution. Where a
capital restoration plan is required, the regulatory agency may require a bank
holding company to guarantee as a condition of approval of the plan the lower of
5% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. If the controlling bank holding company fails
to fulfill its obligations with respect to such a plan and files (or has filed
against it) a petition under the federal Bankruptcy Code, the claim would be
entitled to a priority in such bankruptcy proceeding over third party creditors
of the bank holding company.
FDICIA required each federal banking agency, including the Federal Reserve,
to revise its risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and the
risks of non-traditional activities, as well as reflect the actual performance
and expected risk of loss on multi-family mortgages. The Federal Reserve, the
FDIC and the OCC have issued a joint rule amending the capital standards to
specify that the banking agencies will include in their evaluations of a bank's
capital adequacy an assessment of the exposure to declines in the economic value
of the bank's capital due to changes in interest rates. The agencies have also
issued for comment a proposed joint policy statement that describes the process
the banking agencies will use to measure and assess the exposure of a bank's net
economic value to changes in interest rates. The banking agencies have also
indicated that, through a subsequent rulemaking process, they intend to issue a
proposed rule that would establish an explicit capital charge for interest rate
risk based on the level of a bank's measured interest rate risk exposure.
The Federal Reserve, the FDIC, the OCC and the Office of Thrift Supervision
have also issued a joint rule amending the risk-based capital guidelines to take
account of concentration of credit risk and the risk of non-traditional
activities. The rule amends each agency's risk-based capital standards by
explicitly identifying concentration of credit risk and the risk arising from
other sources, as well as an institution's ability to manage these risks, as
important factors to be taken into account by the agency in assessing an
institution's overall capital adequacy.
FDICIA also restricts the acceptance of brokered deposits by insured
depository institutions and contains a number of consumer banking provisions,
including disclosure requirements and substantive contractual limitations with
respect to deposit accounts.
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FDICIA also required each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions and depository institution holding companies, including
operational and managerial standards, asset quality, earnings and stock
valuation standards, as well as compensation standards (but not dollar levels of
compensation). On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 amended the 1991 Banking Law to authorize the
agencies to establish safety and soundness standards by regulation or by
guideline. Accordingly, the federal banking agencies have recently issued
Interagency Guidelines Establishing Standards for Safety and Soundness, which
set forth general operational and managerial standards in the areas of internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. The Guidelines also prohibit payment of excessive compensation as
an unsafe and unsound practice. Compensation is defined as excessive if it is
unreasonable or disproportionate to the services actually performed. Bank
holding companies are not subject to the Guidelines. The Guidelines contemplate
that each federal agency will determine compliance with these standards through
the examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. The Company
does not expect the Guidelines to materially change current operations of First
National Bank.
Enforcement Policies and Actions
FIRREA significantly increased the enforcement powers of the OCC, the
Federal Reserve and the other federal depository institution regulators, and
authorizes the imposition of civil money penalties of from $5,000 per day up to
$1,000,000 per day for violations of federal banking laws and regulations.
Persons who are affiliated with depository institutions and are found to have
violated federal banking laws and regulations can be removed from any office
held in such institution and banned for life from participating in the affairs
of such an institution. The banking regulators have not hesitated to use the new
enforcement authorities provided them under FIRREA.
Community Reinvestment Act
First National Bank is subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA requires that financial institutions have
an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting the community credit needs are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. First National Bank received a rating of "outstanding" in
its most recent evaluation.
The federal banking agencies, including the OCC, have recently issued a
joint rule that changes the method of evaluating an institution's CRA
performance. The new rule evaluates institutions based on their actual
performance (rather than efforts) in meeting community credit needs. Subject to
certain exceptions, the OCC assesses the CRA performance of a bank by applying
lending, investment and service tests. The lending test evaluates a bank's
record of helping to meet the credit needs of its assessment area through its
lending activities by considering a bank's home mortgage, small business, small
farm, community development, and consumer lending. The investment test evaluates
a bank's record of helping to meet the credit needs of its assessment area
through qualified investments that benefit its assessment area or a broader
statewide or regional area that includes the bank's assessment area. The service
test evaluates a bank's record of helping to meet the credit needs of its
assessment area by analyzing both the availability and effectiveness of a bank's
systems for delivering retail banking services and the extent and innovativeness
of its community development services. The OCC assigns a rating to a bank of
"outstanding," satisfactory," "needs to improve," or "substantial noncompliance"
based on the bank's performance under the lending, investment and service tests.
To evaluate compliance with the tests, subject to certain exceptions, banks will
be required to collect and report to the OCC extensive demographic and loan
data.
For banks with total assets of less than $250 million that are affiliates
of a holding company with banking and thrift assets of less than $1 billion,
such as the Bank and Company, the OCC evaluates the bank's record of helping to
meet the credit needs of its assessment area pursuant to the following criteria:
(1) the bank's loan-to-deposit ratio, adjusted for seasonal variation and, as
appropriate, other lending-related activities, such as loan originations for
sale
10
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to the secondary markets, community development loans, or qualified investments;
(2) the percentage of loans and, as appropriate, other lending-related
activities located in the bank's assessment area; (3) the bank's record of
lending to and, as appropriate, engaging in other lending-related activities for
borrowers of different income levels and businesses and farms of different
sizes; (4) the geographic distribution of the bank's loans; and (5) the bank's
record of taking action, if warranted, in response to written complaints about
its performance in helping to meet credit needs in its assessment area. Small
banks may also elect to be assessed under the generally applicable standards of
the rule, but to do so a small bank must collect and report extensive data.
A bank may also submit a strategic plan to the OCC and be evaluated on its
performance under the plan.
Other Laws and Regulations
Interest and certain other charges collected or contracted for by First
National Bank are subject to state usury laws and certain federal laws
concerning interest rates. First National Bank's operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, CRA requiring financial institutions to meet its obligations to
provide for the total credit needs of the communities it serves, including
investing its assets in loans to low- and moderate-income borrowers, the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of First National Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve to implement that act, which govern
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines and
other electronic banking services.
From time to time, bills are pending before the United States Congress
which contain wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to prohibit banks and bank holding companies from conducting
certain types of activities, to subject banks to increased disclosure and
reporting requirements, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or to the extent to which the
business of the Company and its subsidiary may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on the Company cannot be predicted.
11
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Item 2. Properties
The Company owns no real property. However the Company has contracted to buy a
parcel of land in Rock Hill, South Carolina on which the National Bank of York
County (in Organization) is expected to be located. If and when the bank's
organization is completed, the Company intends to convey this property to the
National Bank of York County at the Company's cost.
The Bank's main office and Registrant's executive offices are located at 345
John C. Calhoun Drive, S.E., Orangeburg, South Carolina. These quarters are
owned by the Bank and afford approximately 48,000 square feet of space for
operating and administrative purposes. The Bank owns twenty-six other properties
and leases four properties, substantially all of which are used for branch
locations or housing other operational units of the Bank.
Although the properties leased and owned are generally considered adequate,
there is a continuing program of modernization, expansion, and as needs
materialize, the occasional replacement of facilities.
Item 3. Legal Proceedings
Neither Registrant nor its subsidiary 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders in the fourth quarter
of the Company's fiscal year.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information required by this item is set forth on the inside front
cover of the Company's 1995 Annual Report to Shareholders under the heading
"STOCK INFORMATION," which information is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is set forth on page 3 in the
Company's 1995 Annual Report to Shareholders under the heading "CONSOLIDATED
FINANCIAL HIGHLIGHTS," which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is set forth on pages 6 through 28 in
the Company's 1995 Annual Report to Shareholders under the heading "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," which
information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are set forth on pages 29
through 62 in the Company's 1995 Annual Report to Shareholders, which
information is incorporated herein by reference. Supplementary Financial Data
pursuant to 17 C.F.R. Section 229.302 is not required because the Registrant
does not meet the requisite tests under 17. C.F.R. 302(a)(5).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
Not applicable
12
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors of the Registrant is set forth under the
heading "ELECTION OF DIRECTORS" on pages 4 and 5 of the definitive proxy
materials of the Company filed in connection with its 1996 Annual Meeting of the
Shareholders, which information is incorporated herein by reference. Information
about executive officers is set forth under Item 1 hereof.
Item 11. Executive Compensation
The information required by this item is set forth under the heading
"EXECUTIVE COMPENSATION" on pages 7 through 13 of the definitive proxy materials
of the Company filed in connection with its 1996 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the heading
"PRINCIPAL SHAREHOLDERS" on pages 2 and 3 of the definitive proxy materials of
the Company filed in connection with its 1996 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on page 14 of the definitive
proxy materials of the Company filed in connection with its 1996 Annual Meeting
of Shareholders, which information is incorporated herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Filed:
First National Corporation and Subsidiary:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed:
Related Party Transactions
Condensed Financial Information of
Registrant
Supplementary Income Statement
Information
Selected Quarterly Financial Data
3. Exhibits
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated
by reference to exhibits filed with Registration Statement on Form
S-4, Registration No. 33-52052).
3.2 Bylaws of the Registrant, as amended.
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10.1 First National Corporation Incentive Stock Option Plan of 1992
(incorporated by reference to exhibits filed with Registration
Statement on Form S-4, Registration No. 33-52052).
10.2 First National Corporation Executive Incentive Compensation Plan
(incorporated by reference to exhibits filed with Registration
Statement on Form S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend Reinvestment Plan (incorporated by
reference to exhibits filed with Registration Statement on Form S-8,
Registration No. 33-58692).
10.4 First National Corporation Incentive Stock Option Plan of 1996
(incorporated by reference to Registrant's Definitive Proxy Statement
filed in connection with its 1996 Annual Meeting of Shareholders).
10.5 Employment Agreement between the Registrant and C. John Hipp, III,
dated May 1, 1994.
10.6 Organizational Agreement, dated as of September 27, 1995, among the
Organizers of The National Bank of York County and Registrant.
13 Portions of the 1995 Annual Report to Shareholders incorporated by
reference in Form 10-K.
21 Subsidiaries of the Registrant (incorporated by reference to exhibits
filed with Registration Statement on Form S-4, Registration No.
33-52052).
23 Consent of J. W. Hunt & Company, LLP.
27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the Fourth Quarter of 1995.
This report on Form 10-K has not been approved or disapproved by the
Securities and Exchange Commission nor has the Commission passed upon the
accuracy or adequacy of this Form 10-K. Portions of the 1995 Annual Report to
the Corporation's shareholders are not required by the Form 10-K and are not
"filed" as part of the Form 10-K. Only those sections of the Annual Report
referenced in the above index are incorporated into the Form 10-K.
14
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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 in the City of Orangeburg
and State of South Carolina, on the 14th day of March, 1996.
First National Corporation
/s/C. John Hipp, III
By
C. John Hipp, III
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on March 14th, 1996.
/s/C. John Hipp, III
C. John Hipp, III
President and Chief Executive Officer
/s/W. Louis Griffith
W. Louis Griffith
Chief Financial Officer
/s/Charles W. Clark
Charles W. Clark
Director
/s/W. B. Cox
W. B. Cox
Director
/s/C. Parker Dempsey
C. Parker Dempsey
Director
/s/Clarence F. Evans
Clarence F. Evans
Director
/s/E. Everett Gasque, Jr.
E. Everett Gasque, Jr.
Director
/s/John L. Gramling, Jr.
John L. Gramling, Jr.
Director
/s/Robert R. Horger
Robert R. Horger
Director
15
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/s/R. H. Jennings, III
R. H. Jennings, III
Director
/s/J. C. McAlhany
J. C. McAlhany
Director
/s/Dick Gregg McTeer
Dick Gregg McTeer
Director
/s/Harry M. Mims, Jr.
Harry M. Mims, Jr.
Director
/s/E. V. Mirmow, Jr.
E. V. Mirmow, Jr.
Director
/s/M. Maceo Nance, Jr.
M. Maceo Nance, Jr.
Director
/s/Anne H. Oswald
Anne H. Oswald
Director
/s/James W. Roquemore
James W. Roquemore
Director
/s/James E. Sulton, Sr.
James E. Sulton, Sr.
Director
/s/Johnny E. Ward
Johnny E. Ward
Director
/s/A. Dewall Waters
A. Dewall Waters
Director
/s/L. D. Westbury
L. D. Westbury
Director
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated by Previously filed
reference to exhibits filed with Registration Statement on Form S-4,
Registration No. 33-52052).
3.2 Bylaws of the Registrant, as amended. Attached
10.1 First National Corporation Incentive Stock Option Plan of 1992 Previously filed
(incorporated by reference to exhibits filed with
Registration Statement on Form S-4, Registration No. 33-52052).
10.2 First National Corporation Executive Incentive Compensation Plan Previously filed
(incorporated by reference to exhibits filed with Registration Statement
on Form S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend Reinvestment Plan (incorporated by Previously filed
reference to exhibits filed with Registration Statement on Form S-8,
Registration No. 33-58692).
10.4 First National Corporation Incentive Stock Option Plan of 1996 Previously filed
(incorporated by reference to Registrant's Definitive Proxy Statement
filed in connection with its 1996 Annual Meeting of Shareholders).
10.5 Employment Agreement between the Registrant and C. John Hipp, III, Attached
dated May 1, 1994.
10.6 Organizational Agreement, dated as of September 27, 1995, among the Attached
Organizers of The National Bank of York County and Registrant.
13 Portions of the 1995 Annual Report to Shareholders incorporated by Attached
reference in Form 10-K.
21 Subsidiaries of the Registrant (incorporated by reference to exhibits filed Previously filed
with Registration Statement on Form S-4, Registration No. 33-52052).
23 Consent of J. W. Hunt & Company, LLP. Attached
27 Financial Data Schedule. Attached
</TABLE>
17
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BYLAWS OF
FIRST NATIONAL CORPORATION
ARTICLE I
MEETINGS OF SHAREHOLDERS
1. Annual Meeting. The annual meeting of the shareholders shall be held on
the fourth Tuesday in April of each year at its principal office unless a
different time or place, either within or without South Carolina, is designated
by the Directors.
2. Special Meetings. Special meetings of the shareholders may be called by
the President, the Chairman of the Board of Directors, a majority of the Board
of Directors, or by the holders of not less than ten percent (10%) of all the
shares entitled to vote at such meeting. The place of such meetings shall be
designated by the directors.
3. Notice of Shareholder Meetings. Written or printed notice stating the
place, day, and hour of the meeting, and, such other notice as required by the
provisions of the South Carolina Business Corporation Act, and in the case of a
special meeting, the purpose or purposes for which the meeting is called and the
person or persons calling the meeting, shall be delivered either personally or
by mail by or at the direction of the President, Chairman of the Board of
Directors, Secretary, officer, or person calling the meeting, to each
shareholder of record entitled to vote at the meeting, not less than ten (10)
nor more than fifty (50) days before the date of the meeting. If such notice is
mailed, it shall be deemed to be delivered when deposited in the United States
mail addressed to the shareholder at the address as it appears on the stock
transfer books of the Corporation, with postage thereon prepaid. The Person
giving such notice shall certify that the notice required by this paragraph has
been given. If at any meeting Bylaws are to be altered, repealed, amended, or
adopted, notices or waivers thereof shall so state. A shareholder may waive
notice of any meeting, in writing, either before or after the meeting.
4. Quorum Requirements. Absent a provision in the Articles of Incorporation
stating otherwise, a majority of the shares entitled to vote shall constitute a
quorum for the transaction of business. A meeting may be adjourned despite the
absence of a quorum, and notice of an adjourned meeting need not be given if the
time and place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken and the adjournment is for a period of less than
thirty (30) days. If the adjournment is for thirty (30) days or more, notice of
the adjourned meeting shall be given pursuant to Article I, Section 3 of these
Bylaws. When a quorum is present at any meeting, a majority in interest of the
stock there represented shall decide any question brought before such meeting,
unless the question is the one upon which, by express provision of this
Corporation's Articles, these Bylaws or by the laws of South Carolina, a larger
or different vote is required, in which case such express provisions shall
govern the decision of such question.
5. Voting and Proxies. Every shareholder entitled to vote at a meeting may
do so either in person or by written proxy, executed by the shareholder or his
duly appointed attorney-in- fact, which proxy shall be filed with the secretary
of the meeting before being voted. Such proxy shall entitle the holders thereof
to vote at any adjournment of such meeting, but shall not be valid after the
final adjournment thereof.
6. Matters Considered at Shareholder Meetings. No matter shall be
considered or voted on at any meeting of shareholders unless such matter has
been submitted to the secretary of the corporation in writing by a record
shareholder of the corporation not less than forty-five (45) days prior to the
date of the meeting at which the matter is to be considered. The information
submitted to the secretary shall include the name and address of the shareholder
making the submission and the text of the resolution to be voted on.
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<PAGE>
7. Conduct of Meetings.
(a) Meetings of shareholders shall be presided over by the chairman of the
Board of Directors or, in his absence, by the Vice Chairman or another director
or executive officer designated by the Board of Directors. The presiding officer
shall determine all questions of order or procedure and his rulings shall be
final.
(b) The Secretary of the Corporation, with the assistance of such agents as
may be designated by the secretary, shall make all determinations of the
validity of proxies presented and ballots cast.
(c) In the event that any person or group other than the Board of Directors
hold proxies for more than ten (10) other shareholders, any vote taken with
respect to any contested matter, determined to be such by the presiding officer,
shall be taken in the following manner:
(i) Shareholders wishing to vote in person shall obtain ballots from
the secretary and cast their votes. After a period determined to
be reasonable by the presiding officer, no further voting in
person shall be permitted.
(ii) Thereafter, persons holding proxies shall obtain a ballot from the
secretary which shall be in a form to permit the votes cast with
respect to each appointment of proxy to be identified as such and
shall fill out such ballot, and return it together with the
original appointments of proxies to the Secretary. After a period
determined to be reasonable by the presiding officer, the polls
shall be closed and no further voting on the question shall be
allowed.
(iii) If the number of proxies held by persons or groups other than the
Board of Directors is high, the presiding officer may, after
consultation with the Secretary, adjourn the meeting for up to
seventy-two (72) hours, to permit the counting of the votes;
provided, however, that the presiding officer may, in his
discretion, permit other business, including the casting of other
votes, to be transacted prior to any such adjournment.
ARTICLE II
BOARD OF DIRECTORS
1. Composition of Board of Directors. The corporation shall have a Board of
Directors consisting of active directors, whose qualifications, election,
number, etc. are described and discussed in this Article II and throughout these
Bylaws. Whenever the terms "director" or "Board of Directors" or "Board" are
used herein or in other corporate documents, the terms shall include active
directors only.
2. Qualification and Election of Active Directors.
(a) Directors, other than those serving on the initial Board of Directors
of the Corporation, must be shareholders, not under twenty-five (25) years of
age and not over 72 years of age at the time of the shareholders' meeting at
which they are elected by the shareholders. These age restrictions shall not
apply to any Board member who is exempt from age restrictions for service on the
Board of First National Bank, Orangeburg, South Carolina, pursuant to the 1969
Bank shareholders' resolution. In the event that a director attains age 72
during his or her term of office, he or she shall serve only until the next
shareholders' meeting after his or her 72nd birthday, at which time his or her
successor shall be appointed to serve out the remainder of his or her term. The
terms of the initial Board of Directors elected by the shareholder(s) shall be
set so as to implement staggered terms, i.e. the terms of one-third (or as near
one-third as possible) of the directors shall be one year, the terms of
one-third shall be two years and the terms of one-third shall be three years.
Thereafter, one-third of the directors shall be elected by a majority of the
votes cast at each annual meeting of the shareholders, or by similar vote at any
special meeting called for the purpose, to serve three year terms. Each director
shall hold office until the expiration of the term for which he or
19
<PAGE>
she is elected, except as stated above, and thereafter until his or her
successor has been elected and qualified. Any vacancy occurring in the Board of
Directors, including vacancies occurring in the Board by reason of removal with
or without cause or increase in membership, shall be filled by appointment by
the remaining directors, and any director so appointed shall serve for the
unexpired term of his or her predecessor or if there is no predecessor until the
next election of the directors of that class.
(b) Nomination of Directors. The Board of Directors shall nominate, upon
recommendation of the executive committee, the Board's nominees for the Board of
Directors to the shareholders. No person shall be a nominee or be eligible to be
a director of the corporation unless that person shall have first been nominated
by a record shareholder of the corporation in writing delivered to the secretary
of the corporation not less than forty-five (45) days prior to the meeting of
shareholders at which directors are to be elected. The written nomination must
state the name of the nominee, the address of the nominee and the number of
shares of stock of the corporation beneficially owned by the nominee, as well as
the name and address of the shareholder making the nomination.
3. Number. The maximum number of active directors is fixed by the Articles
and may be altered only by amendment thereto, but shall never be less than the
number required by law. The Board of Directors may, by a vote of the majority of
the full Board, between annual meetings of the shareholders, increase the
membership of the Board up to the maximum number set out in the Articles and by
like vote appoint qualified persons to fill the vacancies created thereby.
4. Meetings. The annual meeting of the Board of Directors shall be held
immediately after the adjournment of the annual meeting of the shareholders, at
which time the officers of the Corporation shall be elected. The Board may also
designate more frequent intervals for regular meetings. Special meetings may be
called at any time by any one director or any two officers of the Corporation in
addition to those parties entitled to call such meetings under South Carolina
law.
5. Notice of Directors' Meetings. The annual and all regular Board meetings
may be held without notice. Special meetings shall be held with not less than
one hour notice of such meeting to be given to each director, which notice shall
be given on a best efforts basis by those calling the meeting. Notice may be
waived in writing before or after a meeting. If the meeting is one at which
Bylaws are to be altered, repealed, or adopted both waivers and notices must so
state. Notice of a special meeting may be called by the Chairman, the President
or any three (3) Directors. If the notice of the meeting is not given in writing
at least two (2) days prior to the meeting no action shall be taken at the
meeting unless such action is approved by the affirmative vote of a majority of
the entire Board of Directors.
6. Quorum and Vote. The presence of a majority of the directors shall
constitute a quorum for the transaction of business. A meeting may be adjourned
despite the absence of a quorum, and notice of an adjourned meeting need not be
given if the time and place to which the meeting is adjourned are fixed at the
meeting at which the adjournment is taken. The vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board, unless the vote of a greater number is required by the Articles,
these Bylaws, or by the laws of South Carolina.
7. Appointment of Chairman, Executive and Other Committees.
The Chairman of the Board of Directors of the Corporation shall also serve as an
officer of the Corporation. There shall be a standing committee of the
Corporation appointed by the Board of Directors to be known as the executive
committee consisting of the chairman of the Board, the President and up to six
(6) members of the Board of Directors. Nominations to the executive committee
shall be made to the Board by the chairman. The executive committee may appoint
senior officers to attend all meetings. Each member of the executive committee
shall serve until his successor is appointed. The Chairman shall serve as
chairman of the executive committee. The Board of Directors of the Corporation
may, by resolution adopted by a majority of its members, delegate to the
executive committee the power to exercise all authority of the Board of
Directors in the management of affairs of the corporation and property of the
corporation. The Board of Directors, by resolution adopted by a majority of its
20
<PAGE>
members, may designate such other committees with designations of authority as
it deems appropriate. Members of such committees shall be nominated by the
Chairman and appointed by the Board of Directors.
8. Powers. In addition to other powers specifically set out herein or that
apply under South Carolina or other applicable law, the Board of Directors shall
have the power to manage and administer the affairs of the Corporation and to do
and perform all lawful acts with respect to the affairs of the Corporation
except those that may be specifically reserved to the share-holders under South
Carolina or other applicable law.
9. Contracts with Interested Directors. No contract or other transaction
between this Corporation and any other corporation shall be affected by the fact
that any director of this Corporation is interested in, or is a director or
officer of, such other corporation, and any director, individually or jointly,
may be a party to, or may be interested in, any contract or transaction of this
Corporation or in which this Corporation is interested; and no contract, or
other transaction, of this Corporation with any person, firm, or corporation,
shall be affected by the fact that any director of this Corporation is a party
to, or is interested in, such contract, act, or transaction, or is in any way
connected with such person, firm, or corporation, and every person who may
become a director of this Corporation is hereby relieved from any liability that
might otherwise exist from contracting with the Corporation for the benefit of
himself or any firm, association, or corporation in which he may be in any way
interested.
10. Special Considerations by Directors. The directors of this Corporation
shall consider all factors they deem relevant in evaluating any proposed tender
offer or exchange offer for the Corporation's stock, any proposed merger or
consolidation of the Corporation with or into another Corporation and any
proposal to purchase or otherwise acquire all of the assets of the Corporation.
The directors shall evaluate whether the proposal is in the best interests of
the Corporation by considering the best interests of the shareholders and other
factors the directors determine to be relevant, including the social, legal and
economic effects on employees, customers and the communities served by the
Corporation and its subsidiary or subsidiaries. The directors shall evaluate the
consideration being offered to the shareholders in relation to the then current
market value of the Corporation, the then current market value of shares of the
Corporation in a freely negotiated transaction, and the directors' estimate of
the future value of shares of the Corporation as an independent entity.
11. Election of Directors to Subsidiaries of the Corporation.
The Board of Directors of the corporation shall elect, upon nomination by the
executive committee, Directors of all wholly owned subsidiary corporations of
the corporation.
ARTICLE III
OFFICERS
1. Number. The Corporation shall have a President, a Chairman of the Board,
one or more Vice Presidents, a Secretary, a Treasurer, and such other officers
as the Board of Directors shall from time to time deem necessary. Any two or
more offices may be held by the same person. The President of the Corporation
shall be its Chief Executive Officer and shall serve as an ex-officio member of
all committees.
2. Election and Term. The officers shall be elected by the Board at its
annual meeting. Each officer shall serve until the expiration of the term for
which he is elected, and thereafter until his successor has been elected and
qualified.
3. Duties. All officers shall have such authority and perform such duties
in the management of the Corporation as are normally incident to their offices
and as the Board of Directors may from time to time provide.
21
<PAGE>
ARTICLE IV
RESIGNATIONS, REMOVALS AND VACANCIES
1. Resignations. Any officer or director may resign at any time by giving
written notice to the Chairman of the Board of Directors, the President, or the
Secretary. Any such resignation shall take effect at the time specified therein,
or, if no time is specified, then upon its acceptance by the Board of Directors.
2. Vacancies. Newly created directorships resulting from an increase in the
number of directors, and vacancies occurring in any office or directorship for
any reason, including removal of an officer or director with or without cause,
may be filled by the vote of a majority of the directors then in office, even if
less than a quorum exists.
ARTICLE V
CAPITAL STOCK
1. Stock Certificates. Every shareholder shall be entitled to a certificate
or certificates of capital stock of the Corporation in such form as may be
prescribed by the Board of Directors. Unless otherwise decided by the Board of
Directors, such certificates shall be signed by the President or a Vice
President and the Secretary or Assistant Secretary of the Corporation.
2. Transfer of Shares. Any share or shares of stock may be
transferred on the books of the Corporation by delivery and surrender of the
properly assigned certificate, but subject to any restrictions on transfer
imposed by either the applicable securities laws or any shareholder agreement.
3. Loss of Certificates. In the case of the loss, mutilation, or
destruction of a certificate of stock, a duplicate certificate may be issued
upon such terms as the Board of Directors shall prescribe.
ARTICLE VI
ACTION BY CONSENT
Shareholders may act without a meeting on written consent, setting forth
the action so taken, signed by the holders of all outstanding shares entitled to
vote thereon or their attorneys-in-fact or proxy holders. Such consent shall be
filed with the Secretary as part of the corporate records.
Directors or any executive or other committee can act without a meeting on
action taken by a majority thereof, or by a much larger vote as the Articles or
Bylaws require, if all directors or committee members execute, before or after
the action taken, a written consent thereto and the consent is filed in the
records of the Corporation. Action which is permitted to be taken only when
authorized at a meeting of the Board or committee, can be taken without a
meeting, if before or after the action, all Board or committee members consent
thereto in writing and the consent is filed in the minute book of the Board or
committee. Such consent shall have the same effect as a vote of the Board for
all purposes.
ARTICLE VII
INDEMNIFICATION
1. Authority to Indemnify.
(a) The corporation may advance expenses to and indemnify
22
<PAGE>
the persons set forth in subsection (b) below against liability to the full
extent and in the manner permitted or required by the South Carolina Business
Corporation Act of 1988 (the Act). The words "director", "expenses" and
"liability" as used herein shall have the meanings ascribed to them in the Act.
(b) The following persons may be indemnified:
(i) any person or former director, officer, agent, or employee of the
corporation (or any corporation which was merged into or acquired by
the corporation) or
(ii) any of the foregoing who is or was serving at the request of the
corporation (or any corporation which was merged into or acquired by
the corporation) as director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, who by
reason of the fact that he is or was acting in a capacity set forth in
(i) or (ii) of this subsection (b), is made a party to any threatened,
pending or completed proceeding, whether civil, criminal,
administrative or investigative.
2. Insurance. The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or incurred by him in such capacity,
or arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability under this Article VII.
ARTICLE VIII
AMENDMENT OF BYLAWS
These bylaws may be amended, added to, or repealed either by: (1) the
affirmative vote of the holders of eighty percent (80%) of the shares entitled
to vote, or (2) a majority vote of the entire Board of Directors.
23
<PAGE>
NOTICE: THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO SECTION 15-48-10 OF
THE S.C. CODE OF LAWS 1976 (AS AMENDED).
STATE OF SOUTH CAROLINA,
EMPLOYMENT AGREEMENT
COUNTY OF ORANGEBURG.
THIS AGREEMENT, dated and effective this 21 day of March, 1994, between
First National Corporation, a corporation organized and existing under the laws
of the State of South Carolina (the "Corporation"), and C. John Hipp, III (the
"Executive").
WHEREAS, the Corporation desires to employ the Executive;
WHEREAS, Executive desires to be employed by the Corporation on the terms
and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of mutual covenants contained herein, and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties do mutually agree as follows:
1. Condition and Contingency of Agreement. This Agreement is conditioned
and contingent upon the Executive's legal right to accept employment and
specifically the terms of this Agreement with the Corporation without the same
constituting a breach of any other agreement of Executive with any other entity.
Accordingly, the obligations of the Corporation hereunder are conditioned and
contingent upon the Executive having no such obligations to another entity.
2. Employment and Term. The corporation will employ Executive, and
Executive will be employed by the corporation for a period beginning on or
before May 1, 1994, and ending April 30, 1997. After the expiration of this
Agreement the Executive, if still in the employment of the Corporation, shall
become an employee at-will; provided however, Executive shall have certain
rights of compensation upon termination after becoming an employee at-will as
described in Paragraph 8.
3. Duties. Executive shall at all times faithfully and diligently perform
his obligations under this Agreement and act in the best interests of the
Corporation and its affiliated companies. Executive's duties hereunder shall be
to act in such office or capacity as the Corporation may direct or change from
time to time; however, no change shall involve a material reduction in duties,
responsibility, or title unless written notice is provided at least thirty (30)
days before such change shall become effective, and Executive shall perform all
duties necessary or advisable in order to carry out such functions in an
efficient manner. Executive shall at all times devote his full time, best
efforts and ability, skill, and attention exclusively to the furtherance of the
business objectives and interests of the Corporation and its affiliated
companies, all to the exclusion of other employers or interests or their
products and services. Executive shall not engage in any gainful employment
other than under this Agreement during its term without the prior written
consent of the Corporation's board of Directors, provided however, that
Executive may buy or sell investments and securities for his personal account.
4. Compensation.
(a) Compensation. For services rendered by Executive hereunder, the
Corporation shall pay Executive a salary of $11,250 per month; provided, that
during his term of employment, Executive's salary shall be reviewed at least
annually by the Board or the Committee (as described in Paragraph 10), and the
Board or Committee may increase (but not decrease) the salary of Executive in
its discretion. Salary shall be payable in accordance with the customary payroll
practices of the Corporation.
24
<PAGE>
(b) Reimbursement of Expenses. The Corporation shall in accordance with
Corporation's policy pay or reimburse Executive for all reasonable travel and
other expenses incurred by Executive in performing his obligations under this
Agreement.
(c) Executive shall be entitled to such insurance, pension,
profit-sharing, bonus or other incentive programs as are or may be available
generally to senior officers of the Corporation to the extent permitted by
applicable laws or government regulations.
(d) Executive shall be entitled to reasonable time off for sick leave,
bereavement leave, jury duty and military obligations as are or may become
available to senior officers of the Corporation, and up to three (3) weeks of
vacation, or as may be provided for in the Corporation's vacation schedule,
during each year of employment during the contract period.
(e) Corporation will pay on behalf of Executive the initiation fee
required to join The Country Club of Orangeburg and dues required to maintain
such membership.
(f) Corporation will provide to Executive an automobile to be used by
Executive in performing his duties hereunder.
5. Executive's Responsibility. Executive at the beginning of employment
with the Corporation shall be named as President of First National Bank,
Orangeburg, South Carolina and will on or before January 1, 1995, be designated
by the Board of Directors as Chief Executive Officer.
6. Stock Options. Within 30 days of the beginning of Executive's
employment, Corporation will extend to Executive the option to purchase up to a
total of 5,000 shares of common stock in First National Corporation under the
terms and conditions of the First National Corporation Incentive Stock Option
Plan of 1992.
7. Termination. Employment may be terminated under any of the following
provisions:
(a) The employment of the Executive under this Agreement may be
terminated without cause or reason by the Board or Committee of the Corporation
upon written notice. Under this paragraph, the Corporation shall pay to the
Executive his then current salary, as described in Paragraph 4 (a), for the
remainder of the three year period of this Agreement ending April 30, 1997.
(b) The employment of the Executive under this Agreement may be
terminated by the Executive for whatever reason with or without cause upon
thirty (30) days written notice. In the event of such termination by the
Executive, Executive shall be entitled to no compensation or benefits of this
Agreement upon the termination of his employment.
(c) The employment of the Executive under this Agreement may be
terminated by the Board or Committee of the Corporation upon notice in writing
if the Executive has been unable to discharge the duties and obligations
hereunder by reason of illness, accident or disability for a period of six (6)
consecutive months. Under this paragraph, the Corporation will pay to the
Executive his then current salary as set forth in Paragraph 4(a) for a period of
one (1) year from the date of termination.
(d) The employment of the Executive under this Agreement may be
terminated immediately by the Board or Committee of the Corporation if the Board
or Committee finds that the Executive shall have (i) been guilty of a material
or willful breach of the terms of this Agreement, (ii) demonstrated gross
negligence, impropriety or willful misconduct in the execution of his duties, or
(iii) has been charged or convicted of a felony or other serious crime. All
future compensation and benefits, not then accrued, will automatically terminate
if Executive is terminated under this paragraph.
25
<PAGE>
(e) The employment of Executive under this Agreement shall be
automatically terminated on the date of the Executive's death. In the event of
such termination, the Corporation will pay as a death benefit to Executive's
Executor or his Estate an amount equal to the then current salary of Executive
as described in Paragraph 4(a) for one (1) year from the date of death. Such
death benefit may be payable in one lump sum or installments as determined by
the Corporation in its sole discretion taking into account any request of the
Executive or his beneficiaries.
(f) Termination Following a Sale or Merger of Corporation. If a sale or
merger of Corporation as defined herein occurs and the employment of the
Executive is terminated for any reason thereafter by either Executive or the
Corporation prior to end of the term of employment specified in Paragraph 2, the
Corporation shall continue to provide the Executive his then current salary as
specified in Paragraph 4(a) until the expiration of this contract (April 30,
1997).
A sale or merger of the Corporation means a sale or merger of 50% or more
of the shares of First National Corporation wherein First National Corporation
is not the surviving entity.
8. Termination while at-will. As set forth in Paragraph 2, the Executive
shall, if still employed by the Corporation, after three (3) years of employment
become an employee at-will; provided however, that in the event the Executive's
employment is terminated with the Corporation prior to April 30, 2004, under the
conditions set forth below, he shall be compensated as set forth below:
(a) In the event the Executive's employment is terminated following a
sale or merger as described in Paragraph 7(f), by either Executive or the
Corporation, or its successor, Executive shall be paid his then current salary
for a period of three (3) years from the date of termination or until April 30,
2004, whichever period is shorter.
(b) In the event of termination of the Executive by Board or Committee
of the Corporation for reasons other than those described in Paragraph 7(d),
employee will be paid his then current salary for a period of one (1) year from
the date of termination; provided however, Executive will receive no
compensation in the event of termination for the reasons described in Paragraph
7(d). Termination as a result of death or disability as described in Paragraphs
7(c) and 7(e) shall be compensable under this paragraph.
9. Post-Termination Obligations. All payments and benefits to Executive
under this Agreement shall be subject to Executive's compliance with the
following provisions during the term of this Agreement and for one full year
after the expiration or termination hereof:
(a) Assistance in Litigation. Executive shall, upon reasonable notice,
furnish such information and proper assistance to the Corporation as may
reasonably be required by the Corporation in connection with any litigation in
which it or any of its subsidiaries or affiliates is, or may become, a party.
(b) If termination is pursuant to Paragraphs 7(a), 7(f) 8(a) or 8(b),
the Executive is under an affirmative duty to actively seek and accept
comparable alternative employment following his termination. Any compensation
received by Executive following termination or compensation earnable with
reasonable diligence will be deducted from any further compensation due the
Executive under this Agreement. In the event Executive fails to seek comparable
alternative employment, the Corporation's obligations to pay future compensation
and for benefits continuation shall cease. In the case of termination pursuant
to Paragraph 7(c), Executive's duty to actively seek alternative employment
commences on the date the Executive is able to work.
(c) Confidential Information. Executive acknowledges that in the course
of his employment he will acquire knowledge of trade and business secrets and
other confidential data of the Corporation, its subsidiaries and any affiliated
companies. Such trade an business secrets and other confidential data may
include, but are not limited to, confidential product information, methods by
which the Corporation proposes to compete with its business
26
<PAGE>
competitors, strategic plans, confidential reports prepared by business
consultant(s) and similar information relating to the Corporation's, its
subsidiaries' or its affiliated companies' products, customers, and operations.
Executive covenants not to knowingly disclose or reveal to any unauthorized
person such confidential business secrets or other confidential data both during
the term of this Agreement and at all times following this termination.
Executive recognizes that the possible restrictions on his activities are
required for the reasonable protection of the Corporation.
(d) Covenants For Protection of the Corporation. During the term of
this Agreement, and for a period of one (1) year following termination of this
Agreement, Executive separately covenants for the benefits of the Corporation as
follows:
(i) Executive shall not, directly or indirectly, promote, participate
or engage in any activity or business which is in competition
with the business of the Corporation, or any of its subsidiaries
and affiliated companies, including but not limited to commercial
banking, lending, and other similar activities or services,
whether directly or indirectly (as a director, shareholder or
investor, partner, lessor, lessee, proprietor, principal agent,
independent contractor, representative, consultant, or
otherwise), within the existing market(s), [as defined in
Paragraph 14(e)]. Ownership by Executive of 5% or less of the
outstanding capital stock of any corporation which is actively
publicly traded will not be a violation of this covenant.
(ii) To the extent that Executive's duties have caused him to have
direct contacts with customers of the Corporation on a frequent
and recurring basis, Executive covenants not to engage in any of
the activities listed in clause (i) of this paragraph within the
existing market(s) [as defined in Paragraph 14(e)].
(iii) Executive covenants that he will not employ or assist others by
active solicitation to recruit and employ employees of the
Corporation or any subsidiaries and affiliate companies; and
(iv) Executive agrees that he will not, directly or indirectly, on
behalf of himself or any third party, make any sales contacts
with, or actively solicit business from any customer of the
Corporation or its subsidiaries and affiliate companies, for any
products or services competitive with those offered by the
Corporation or its affiliated companies within the existing
market(s) [as defined in Paragraph 14(e)].
However, the aforesaid limitations on Executive shall be null and void if
Executive is terminated after at least fifty percent (50%) stock ownership of
Corporation has been acquired by one entity or a combination of affiliated
entities (that is, a buy-out type event has occurred), as described in Paragraph
7(f).
(e) It is further understood and agreed that the Corporation's right to
require Executive to keep confidential information secret or not to compete
against the Corporation for the agreed upon period shall not be in lieu of the
Corporation's right to monetary damages in the event Executive is in breach of
any obligation contained in this Agreement, and that in the event of a breach of
this Agreement Corporation may either, with or without pursuing any action for
damages, obtain and enforce an injunction prohibiting Executive from violating
said covenants.
(f) The parties hereby agree that all restrictions are reasonable in
nature, designed to reasonably protect the Corporation's interest and do not
violate public policy.
10. Decisions by Corporation. Any powers granted to the Board hereunder may
be exercised by a committee appointed by the Board (the "Committee"), and such
Committee, if appointed, shall have general responsibility for the
administration and interpretation of this Agreement including determinations of
compensation. If the Board or the Committee shall find that any person to whom
any amount is or was payable hereunder is unable to care for his affairs because
of illness or accident, or is a minor, or has died, then the Board or the
Committee, if it so elects, may direct that any payment due him or his estate
(unless a prior claim therefore has been made by a duly appointed legal
representative) or any part thereof be paid or applied for the benefit of such
person or to or for the benefit of such
27
<PAGE>
person's spouse, children or other dependents, an institution maintaining or
having custody of such person, any other person deemed by the Board or the
Committee to be a proper recipient on behalf of such person otherwise entitled
to payment, or any of them in such manner and proportion as the Board or the
Committee may deem proper. Any such payment shall be in complete discharge of
the liability of the Corporation therefor.
11. Arbitration. Executive and Corporation agree that any claim, action, or
controversy arising out of or relating to this Agreement, or breach thereof,
shall be settled pursuant to the Uniform Arbitration as codified in Section 15-
48-10, et. seq. of the South Carolina Code of Laws 1976, as amended, and any
judgment upon an award rendered by arbitrators shall be entered as provided
therein. The agreement to arbitrate any such claim is only an agreement to have
it resolved by arbitration and should not be construed as a waiver of any legal
right, entitlement, or remedy.
12. Effect of Prior Agreements. This Agreement contains the entire
understanding between the parties with reference to the employment of the
Executive, and supersedes any prior employment agreement, understanding or
arrangement between the Executive and the corporation, its subsidiaries and
affiliates.
13. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
shall preclude the Corporation from consolidating or merging into or with, or
transferring all or substantially all of its assets to another corporation which
assumes this Agreement and all obligations and undertakings of the Corporation
hereunder. Upon such a consolidation or merger, Corporation as described herein
shall mean such other corporation, and this Agreement shall continue in full
force and effect.
14. General provisions.
(a) Non-assignability. Neither this Agreement nor any right or interest
hereunder shall be assignable by Executive, his beneficiaries, or legal
representatives without the corporation's prior written consent; provided that
nothing in this paragraph shall preclude the executors, administrators or other
legal representatives of Executive or his estate from assigning any rights
hereunder to the person or persons entitled thereto.
(b) No Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge of hypothecation or to
execution, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
(c) Binding Effect. This Agreement shall be binding upon, and inure to
the benefit of, Executive and the Corporation and their respective successors
and assigns.
(d) Notice. For purposes of this Agreement, written
notice shall be effective if personally delivered or if sent by certified mail,
return receipt requested, to Executive's last known home address or other
address as specified by Executive. Executive is under an affirmative duty to
notify the Corporation regarding subsequent changes of address. For purpose of
computing time, all time requirements under this Agreement will start on the
date mailed or if personally delivered, when delivered.
(e) Existing market. "Existing market" under this agreement shall mean
the counties in which the Corporation, its subsidiaries and affiliates have
offices or are located and doing business on the date of Executive's termination
of employment.
15. Modification and Waiver.
(a) Amendment of Agreement. This Agreement may not be modified or
amended except by an instrument in writing signed by the parties hereto.
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<PAGE>
(b) Waiver. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term and condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
16. Severability. If, for any reason, any provision of this Agreement is
held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall to the full
extent consistent with law continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provision not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
17. Governing Law. This Agreement has been executed and delivered in the
State of South Carolina, and it validity, interpretation, performance and
enforcement shall be governed by the laws of such state.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above stated.
FIRST NATIONAL CORPORATION
/s/L. D. Westbury
------------------------------
/s/ BY: L. D. Westbury
- ----------------------------
/s/C. John Hipp, III
------------------------------
BY: C. John Hipp, III
Executive
/s/
- -----------------------------
Witness
29
<PAGE>
ORGANIZATIONAL AGREEMENT
This Organizational Agreement is entered into as of the 27th day of
September, 1995 by and among the persons signing this Agreement as Organizers
(the "Organizers") and First National Corporation, a South Carolina corporation,
(the "Sponsor").
Whereas, the Organizers and the Sponsor wish to organize a national
bank in Rock Hill, South Carolina (the "Bank"); and
Whereas, the Organizers and the Sponsor wish to memorialize their
understandings with respect to the organization of the Bank.
Now, therefore, for and in consideration of the premises and the
agreements contained herein the Organizers and Sponsor agree as follows:
1. Each of the Organizers agrees to serve as an Organizer of the Bank,
and to participate in the organizational process in the manner and to the extent
required by the National Bank Act and the rules, regulations and policies of the
Office of the Comptroller of the Currency (the "OCC"). Each Organizer also
agrees that he will serve as a director of the Bank upon its organization and
will endeavor to the best of his ability to fully discharge the obligations of a
director of a national bank. Each Organizer acknowledges that he understands
that he will be required to provide certain information concerning his
background and financial standing to the OCC in connection with the Application
to Organize the Bank and agrees to promptly furnish such information as may be
required. Each Organizer further understands that continued participation as an
Organizer and, ultimately, as a director of the Bank is subject to the approval
of the OCC and agrees that, if the approval of the OCC for his participation
cannot be obtained or is delayed in a way that will substantially delay the
opening of the Bank, he will withdraw from participation as an Organizer and as
a prospective director of the Bank.
2. Each Organizer agrees that, immediately upon the commencement of an
offering of stock by the Sponsor to finance the capitalization of the Bank, he
will subscribe to and pay for no less than $50,000 worth of stock of the Sponsor
at the same price as such stock is offered to the public; provided, however,
that if the Organizer is provided with a preliminary prospectus relating to such
sale of stock and if such Organizer notifies the Company prior to the
effectiveness of the prospectus that he will not subscribe for and purchase such
stock and resigns as an Organizer and prospective director of the Bank, then
such Organizer shall be relieved of any obligation to purchase the stock.
3. The Sponsor agrees that it will bear the expense of preparing and
filing the Application to Organize a National Bank with the OCC and it will
subscribe to all of the Bank's capital stock (not to exceed $5 million).
4. The Organizers agree that, promptly after this Agreement is signed
by the Sponsor, they will meet and elect a Chairman and will designate Robert
Hill as the person to be the President of the Bank and C. John Hipp, III to be
the spokesperson for the Organizers.
5. Each Organizer agrees to promptly notify the Sponsor of any
communication he receives from the OCC or any other governmental agency
regarding the Bank.
6. With the exception of Mr. Hill, no Organizer shall receive any
compensation for his service as an Organizer or as a director of the Bank until
the Bank becomes profitable. Mr. Hill shall receive a salary and benefits from
the Sponsor which may, to the extent permitted by applicable law and regulation,
be charged to the organizational expenses of the Bank.
30
<PAGE>
7. The Organizers shall not incur any expense with respect to the Bank
without the prior written consent of the Sponsor.
8. All correspondence or other communications regarding the
organization of the Bank and the other matters contained in this Agreement shall
be directed to the appropriate party at the address set forth by such parties
named below.
9. This Agreement shall be effective as of the date it is signed by
the Sponsor.
10. The Organizers may, with the approval of the Sponsor, bring in
additional Organizers or replace Organizers who leave the group. Any such
additional or replacement Organizer shall sign this Agreement and thereby be
bound by its terms.
11. This Agreement shall be governed by the laws of the State of South
Carolina and shall inure to the benefit of and be enforceable against the
parties hereto their respective heirs, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the effective date.
ORGANIZERS:
31
<PAGE>
PORTIONS OF FIRST NATIONAL CORPORATION'S 1995 ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED BY REFERENCE ON FORM 10-K
(Information set forth on the inside front cover of the Registrant's 1995 Annual
Report to Shareholders under the heading "STOCK INFORMATION.")
STOCK INFORMATION
Common stock of First National Corporation is not listed on any exchange, nor is
there a recognized or established trading market. Management believes that the
common stock has traded for a price per share of $18.50 to $25.50 during the
past two years, giving retroactive effect to stock dividends and stock splits.
However, management has knowledge of only a limited number of trades and has no
independent means of verifying the price at which trading has occurred. There
were approximately 1,718 shareholders at January 18, 1996. Quarterly cash
dividends of $0.165, $0.165, $0.17 and $0.18 per share were paid in the first,
second, third and fourth quarters of 1995, respectively, and of $0.16 per share
in each quarter of 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Equity and Dividends" for a discussion of
certain restrictions on the payment of dividends.
<PAGE>
(Information set forth on page 3 of the Registrant's Annual Report to
Shareholders under the heading "CONSOLIDATED FINANCIAL HIGHLIGHTS")
<TABLE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
For the Year (Dollars in thousands,
except per share) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 4,640 $ 4,061 $ 3,773 $ 3,295 $ 2,933
Per share 2.07 1.82 1.69 1.48 1.32
Total assets 436,322 374,043 349,056 333,984 315,967
Cash dividends declared per share 0.68 0.64 0.60 0.56 0.55
Book value per share at year end 17.72 16.17 14.96 13.75 12.69
</TABLE>
<TABLE>
<CAPTION>
Financial Ratios 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 1.13% 1.10% 1.09% 1.00% 0.95%
Return on average equity 12.25 11.67 11.79 11.17 10.82
Dividend payout ratio 30.24 29.45 28.62 29.79 32.82
Average equity to average assets 9.25 9.44 9.20 8.94 8.78
</TABLE>
<TABLE>
<CAPTION>
December 31 Average Daily Balance
----------- ---------------------
Balance Sheet Highlights Percent Percent
(Dollars in thousands) 1995 1994 Change 1995 1994 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Loans-net of unearned income $247,883 $208,552 18.9% $227,466 $193,135 17.8%
Total earning assets 399,379 341,908 16.8% 378,476 340,269 11.2%
Total assets 436,322 374,043 16.7% 409,426 368,373 11.1%
Demand deposits 56,735 48,035 18.1% 52,611 47,069 11.8%
Total deposits 368,315 320,707 14.8% 343,723 314,286 9.4%
Total interest-bearing liabilities 337,413 287,969 17.2% 316,484 284,591 11.2%
Shareholders' equity 39,777 36,181 9.9% 37,873 34,789 8.9%
</TABLE>
All information has been retroactively restated to give effect to the merger of
Santee Cooper State Bank with and into First National Bank effective at the
close of business on December 31, 1992.
Per share data have been retroactively adjusted to give effect to a five percent
common stock dividend paid to shareholders of record on August 31, 1993, and ten
percent common stock dividends paid to shareholders of record on each of October
28, 1994 and October 31, 1995.
This information should be read in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and is qualified in
its entirety by reference to the more detailed financial statements and the
notes thereto contained elsewhere in this report.
2
<PAGE>
(Information set forth on pages 6 through 28 of the Registrant's 1995 Annual
Report to Shareholders under the heading "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of First
National Corporation and its subsidiary First National Bank. The five year
period 1991 through 1995 is discussed with particular emphasis on the years
1993, 1994 and 1995. This commentary should be reviewed in conjunction with the
financial statements and related footnotes and the other statistical information
related to First National Corporation and contained elsewhere herein, (see
"Consolidated Financial Statements of First National Corporation"). At the close
of business on December 31, 1992 Santee Cooper State Bank, a South Carolina
state-chartered bank, was merged with and into First National Bank. The
financial statements have been retroactively restated to reflect the results of
operations of the combined entities for the periods presented in the financial
statements. On January 20, 1995, the Corporation entered into a Purchase and
Assumption Agreement to acquire two branches of another commercial bank. The
excess of the purchase price over the fair value of the net tangible assets
acquired was $3,034,000. Total assets were increased by approximately
$34,000,000. The transaction was completed during the second quarter of 1995.
Summary of Operations
Earnings of First National Corporation were $4,640,000, $4,061,000 and
$3,773,000 in 1995, 1994 and 1993, respectively. Net income increased 14.3
percent in 1995 when compared to 1994 and increased 7.6 percent in 1994 when
compared to 1993. Net income per share increased to $2.07 compared to $1.82 in
1994. Per share earnings in 1993 were $1.69. The increase in net income in 1995
primarily resulted from an increase in interest income as well as an increase in
noninterest income. The increase in net income in 1994 compared to 1993 resulted
primarily from an increase in interest income as well as a decrease in the
provision for loan losses.
The per share cash dividend declared in 1995 was $0.68 compared to $0.64 in
1994 and $0.60 in 1993. In 1995 the book value per share of First National
Corporation increased $1.55 or 9.6 percent, in 1994 $1.21 or 8.1 percent, and
$1.21 in 1993 or 8.8 percent. The return on average assets in 1995 was 1.13
percent, 1.10 percent in 1994 and 1.09 percent in 1993. The return on average
shareholders' equity for 1995 was 12.25 percent and was 11.67 percent for 1994
and 11.79 percent in 1993.
Increases in both deposits and earning assets were realized during 1995
compared to 1994. Deposits at December 31, 1995 were $368,315,000, up
$47,608,000 or 14.8 percent, compared to December 31, 1994. At year-end 1994,
deposits were $320,707,000, up $14,787,000, or 4.8 percent when compared to
December 31, 1993. Average deposits in 1995 were $343,723,000, up $29,437,000 or
9.4 percent from 1994. The average deposits in 1994 were $314,286,000 compared
to $304,530,000 in 1993, an increase of $9,756,000 or 3.2 percent. Earning
assets reached $399,379,000, up $57,471,000, or 16.8 percent at December 31,
1995 when compared to year-end 1994. At year-end 1994, earning assets were
$341,908,000, up $24,067,000, or 7.6 percent from year-end 1993. Average earning
assets for 1995 were $378,476,000, an increase of $38,207,000, or 11.2 percent,
compared to 1994. In 1994 average earning assets were $340,269,000, up
$20,904,000, or 6.6 percent, compared to 1993. The increases in deposits and
earning assets resulted primarily from the acquisition of two branch offices in
Walterboro from NationsBank. This transaction added approximately $34,000,000 to
our deposit base and approximately $15,000,000 to the loan portfolio.
Interest income increased by $5,037,000, or 20.0 percent, for the year
ended December 31, 1995 when compared to December 31, 1994. This increase is a
result of loans and investments being repriced at higher levels due to the
increase in the prime lending rate and bond yields as well as a $57,471,000 or
16.8 percent increase in earning assets. For the year ended December 31, 1994,
interest income increased $1,342,000, or 5.6 percent, when compared to the same
period in 1993. This increase was due to increased volume and rates.
Interest expense increased by $3,432,000 or 37.7 percent, for the year
ended December 31, 1995 compared to the same period in 1994. For the year ended
December 31, 1994, interest expense increased $272,000 or 3.1 percent, when
compared to the same period in 1993. The 1995 increase is a direct result of a
$49,444,000 or 17.2 percent
3
<PAGE>
increase in interest-bearing liabilities as well as an increase in rates paid on
these liabilities. The increases in rates paid are in response to the overall
increase in market interest rates for the same period.
Competition
First National Corporation competes with a number of financial institutions
and other firms that engage in activities similar to banking. As an example, the
Corporation competes for deposits with savings and loan associations, credit
unions, brokerage firms and other commercial banks. First National continues to
receive high marks from bank rating services. This has contributed to deposit
growth. In its attempt to fund loans, the Corporation competes with the
industries mentioned above as well as consumer finance companies, leasing
companies and other lenders. In today's uncertain financial climate, all lenders
are searching for quality borrowers. Acquisition of acceptable grade loans
becomes more and more difficult.
Additional financial institution mergers were completed in 1995 and 1994,
creating more super regional banks. Although this reduced the number of banks
and branches, the changes resulted in intensified competition for quality funds
and loans.
Net Interest Income
Net interest income is the difference between interest income and interest
expense. Two significant elements in analyzing bank's 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 liabilities,
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 increased $1,605,000 or 10.0 percent during 1995
compared to 1994. The increase was due primarily to an increase in volume on
earning assets. Net interest income increased $1,070,000 or 7.1 percent in 1994
when compared to 1993. The increase was due primarily to increased volume of
earning assets. The average yield on earning assets increased to 8.0 percent in
1995, from 7.4 percent in 1994 and 7.5 percent in 1993. Total average earning
assets increased $38,207,000, or 11.2 percent, from 1994 to 1995, and
$20,904,000 or 6.6 percent, from 1993 to 1994. Total average interest-bearing
liabilities increased $31,893,000, or 11.2 percent, from 1994 to 1995, and
$14,315,000, or 5.3 percent, from 1993 to 1994. This relationship illustrates
that growth in earning assets was funded primarily through interest-bearing
liabilities. The total volume growth in 1995 compared to 1994 had a positive
impact on net interest income of $2,419,000, which was reduced by $814,000 due
to the decrease in rates. In 1994 compared to 1993 net interest income was
positively affected by $913,000 attributable to volume and $157,000 attributable
to rate decreases. In 1995 compared to 1994, net interest spread decreased
approximately .2 percent and net interest margin remained nearly the same. In
1994 compared to 1993, net interest spread and net interest margin remained
nearly the same.
Average noninterest-bearing funds supporting earning assets as a percentage
of earning assets changed from 13.7 percent in 1993 to 13.8 percent in 1994 and
13.9 percent in 1995.
4
<PAGE>
<TABLE>
Table 1
<CAPTION>
Volume and Rate
Variance Analysis
1995 Compared to 1994 1994 Compared to 1993
Changes Due to Increase Changes Due to Increase
(Decrease) In (Decrease) In
(Dollars in Thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
--------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (2) $3,280 $1,047 $4,327 $1,799 $(137) $1,662
Investments:
Taxable 219 265 484 (49) 44 (5)
Tax exempt (3) 224 (11) 213 20 (102) (82)
Funds sold (19) 32 13 (498) 265 (233)
----- ------ ------ ----- ----- ------
Total interest income 3,704 1,333 5,037 1,272 70 1,342
------ ------ ------ ------ ----- ------
Interest-bearing liabilities:
Deposits:
Interest bearing transaction 130 14 144 132 45 177
Saving (89) 81 (8) 60 (14) 46
Certificates of deposit 928 1,628 2,556 (75) (146) (221)
Funds purchased 316 424 740 242 28 270
------ ------ ------ ------ ----- ------
Total interest expense 1,285 2,147 3,432 359 (87) 272
------ ------ ------ ------ ----- ------
Net interest income $2,419 $(814) $1,605 $ 913 $ 157 $1,070
====== ====== ====== ====== ===== ======
</TABLE>
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
5
<PAGE>
<TABLE>
Table 2
<CAPTION>
Yields on Average Earning Assets and
Rates on Average Interest-bearing Liabilities
(Dollars in thousands) 1995
----
Average Interest Average
Balance Earned/Paid Yield/Rate
------- ----------- ----------
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income $227,466 $22,020 9.68%
Time deposits in other banks
Investment securities:
Taxable 109,864 6,017 5.48
Tax exempt (1) 32,924 1,659 5.04
Funds sold 8,222 487 5.92
-------- -------
Total earning assets 378,476 30,183 7.98
-------
Cash and other assets 34,348
Less allowance for loan losses (3,398)
Total assets $409,426
========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $76,476 1,741 2.28
Savings 73,524 2,066 2.81
Certificates of deposit 141,113 7,436 5.27
Funds purchased 25,371 1,282 5.05
-------- -------
Total interest-bearing liabilities 316,484 12,525 3.96
-------
Demand deposits 52,611
Other liabilities 2,458
Shareholders' equity 37,873
--------
Total liabilities and shareholders' equity $409,426
========
4.02%
=====
Net interest spread
Impact of interest free funds .65%
=====
Net interest margin 4.67%
=====
Net interest income $17,658
=======
</TABLE>
6
<PAGE>
<TABLE>
Table 2
<CAPTION>
1994 1993
- -------------------------------------------------------- --------------------------------------------------------
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------- ----------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$193,135 $17,693 9.16% $173,415 $16,031 9.24%
105,704 5,533 5.23 93,826 5,538 5.90
28,470 1,446 5.08 28,110 1,528 5.44
12,960 474 3.66 24,014 707 2.94
-------- ------- -------- -------
340,269 25,146 7.39 319,365 23,804 7.45
------- -------
31,202 31,298
(3,098) (2,769)
-------- --------
$368,373 $347,894
======== ========
$ 70,807 1,597 2.26 $ 64,780 1,420 2.19
75,968 2,074 2.73 73,664 2,028 2.75
120,442 4,880 4.05 122,274 5,101 4.17
17,374 542 3.12 9,558 272 2.85
-------- ------ -------- -------
284,591 9,093 3.20 270,276 8,821 3.26
------ -------
47,069 43,812
1,924 1,816
34,789 31,990
-------- --------
$368,373 $347,894
======== ========
4.19% 4.19%
=====
.53% .50%
===== =====
4.72% 4.69%
===== =====
$16,053 $14,983
======= =======
</TABLE>
(1) Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
7
<PAGE>
Investment Securities
Investment securities are the second largest category of earning assets.
These assets comprised 37.9 percent of earning assets as of December 31, 1995
and 39.0 percent at year-end 1994. Investment securities are utilized by the
Corporation 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.
The portfolio taxable income was $6,017,000 in 1995 compared with
$5,533,000 in 1994, a net increase of $484,000. Of this increase, a gain of
approximately $219,000 was attributable to the $4,160,000 average volume
increase of taxable securities. The higher income generated by the increased
volume was augmented by an increase of $265,000 resulting from a 25 basis point
increase in yield. The taxable income was $5,533,000 in 1994, compared with
$5,538,000 in 1993, a net decrease of $5,000. Of this decrease, a loss of
approximately $49,000 was attributable to the $11,878,000 average volume
increase in taxable securities. The loss generated by the decreased volume was
partially offset by an increase of $44,000, resulting from a 67 basis point
decline in yield. This is indicative of the decreases in overall interest rates
in the past years and their effect upon portfolio investments as higher-yielding
securities mature and are replaced by lower-yielding investments. The average
maturity of the taxable portfolio at December 31, 1995 for U.S. Treasury
securities was 1.6 years and for Federal Agency securities was 2.4 years. This
compares with average maturities at year-end 1994 of 1.4 years on treasuries and
2.8 on agencies and at year-end 1993 of 1.4 years on treasuries and 3.2 on
agencies, respectively.
The portfolio non-taxable investment income was $1,659,000 in 1995 compared
with $1,446,000 in 1994 and $1,528,000 in 1993, a net increase of $213,000 or
14.7 percent, and a decrease of $82,000 or 5.4 percent, respectively. Of the
increase in 1995, a gain of $224,000 was attributable to an increase in average
volume of $4,454,000 in municipal securities offset by a decrease of $11,000
resulting from a 4 basis point decrease in yield. The decrease from 1993 to 1994
was $82,000 and was attributable to the increase in volume of $20,000, offset by
a decrease of $102,000 resulting from a 36 basis point decrease in yield. The
average maturity of the non-taxable portfolio at December 31, 1995 was 2.5 years
compared to 2.8 years, and 2.6 years in 1994, and 1993, respectively. First
National Corporation continues to actively purchase bank qualified tax-free
securities to supplement the taxable portfolio sector. However, with the
negative yield adjustment due to the Tax Equity and Fiscal Responsibility Act of
1982 and the alternative minimum tax considerations, each individual purchase
continues to be closely evaluated as to its value to First National Corporation.
At December 31, 1995 the fair value of the securities portfolio totalled
$152,430,000, a .6 percent premium. The market valued the Corporation's 1994
portfolio at a 2.8 percent discount and its 1993 portfolio at a 1.5 percent
premium.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards Board in May,
1993. As required, the Corporation adopted the provisions of this statement
effective December 31, 1993, without retroactive application to prior years'
financial statements. The Corporation's management reclassified, as of December
31, 1995, the Corporation's investment securities into available-for-sale and
held-to-maturity categories based on current intent in accordance with the
criteria established by SFAS No. 115. At that date, investment securities with
an amortized cost of $55,749,000 and an estimated fair value of $55,836,000 were
classified as available-for-sale. The effect in this change in accounting
principle was to increase the carrying value of securities $87,000 and directly
increase shareholders' equity $54,000, which is net of income taxes of $33,000.
The increase, net of income tax effect, is presented in the statement of changes
in shareholders' equity as an adjustment of the balance of the separate
component of shareholders' equity required by SFAS No. 115 for the unrealized
holding gains and losses on available-for-sale securities.
On an ongoing basis, management assigns securities upon purchase into one
of the categories designated by SFAS No. 115 based on intent, taking into
consideration other factors including expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements.
There were no realized gains or losses on sales of investment securities
during 1995, 1994 or 1993.
8
<PAGE>
<TABLE>
Table 3
<CAPTION>
Book Value of Investment Securities
December 31,
(Dollars in thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 49,959 $ 49,164 $ 39,972 $ 40,220 $ 37,911
U. S. Government Agencies
and Corporations 63,600 53,914 54,345 33,324 22,910
Other Securities 475 476 371 281 281
-------- -------- -------- -------- -------
Total Taxable 114,034 103,554 94,688 73,825 61,102
-------- -------- -------- -------- -------
State, County and Municipal
Obligations 37,462 29,802 33,796 29,151 27,497
-------- -------- -------- -------- -------
Total Tax-exempt 37,462 29,802 33,796 29,151 27,497
-------- -------- -------- -------- -------
Total Investment Securities $151,496 $133,356 $128,484 $102,976 $88,599
======== ======== ======== ======== =======
</TABLE>
<TABLE>
Table 4
<CAPTION>
Maturity Distribution and Yields of Investment Securities
Due in Due After Due After Due After
December 31, 1995 1 yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value Value
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- -----
U. S. Treasury
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities $21,497 5.00% $28,462 5.90% $ % $ % $ 49,959 5.51% $ 49,150 $ 50,097
U.S. Government Agencies 10,536 4.73 46,683 5.79 6,381 5.95 63,600 5.63 63,730 63,726
and Corporations
Other Securities (1) 475 4.51 475 4.51 475 475
---- ---- -------- ---- -------- --------
Total Taxable 32,033 4.91 75,145 5.83 6,381 5.95 475 4.51 114,034 5.57 113,355 114,298
------- ----- ------- ---- ------- ----- ---- ---- -------- ---- -------- --------
State, County and
Municipal Obligations(2) 10,687 4.56 20,404 4.93 6,371 5.20 37,462 4.87 37,050 38,132
------- ----- ------- ---- ------- ----- -------- ---- -------- --------
Total $42,720 4.82% $95,549 5.64% $12,752 5.58% $475 4.51% $151,496 5.40% $150,405 $152,430
======= ==== ======= ==== ======= ==== ==== ==== ======== ==== ======== ========
Percent of Total 28% 63% 9% 100%
Cumulative % of Total 28% 91% 100% 100%
</TABLE>
(1) Federal Reserve Bank and other corporate stocks have no set maturity but
are classified in "Due after 10 years."
(2) Tax exempt yield is not presented on a tax equivalent basis.
9
<PAGE>
Loans
Loans, net of unearned income, at December 31, 1995, were $247,883,000,
which represents an increase of $39,331,000, or 18.9 percent when compared to
year-end 1994. Average loans for December 31,1995 increased 17.8 percent to
$227,466,000 from $193,135,000 for 1994.
The largest element of the loan portfolio continues to be the real estate
mortgage category. All loans secured by real estate, except real estate
construction, are placed in this category regardless of the loan purpose. The
use of real estate as security for loans is common in First National
Corporation's market area and this, along with other collateral, increases the
likelihood of repayment. The real estate mortgage category grew by 17.4 percent
to $148,853,000 at year-end and represents 60.1 percent of total loans. This is
a decrease from 60.8 percent in 1994. Commercial, financial and agricultural
loans increased to $43,108,000 from $34,476,000 the previous year. This
increased this category to 17.4 percent of the loan portfolio from 16.5 percent
in 1994. Consumer loans represent 20.2 percent of total loans compared to 20.4
percent at year-end 1994. Table 5 provides the distribution of loans for the
past five years.
The prime rate was increased three times and decreased once in 1995, and
the yield on the loan portfolio for 1995 was 9.7 percent, up from 9.2 percent
for 1994. This increase in yield and the volume growth of the loan portfolio
resulted in an interest and fee income increase of $4,327,000, or 24.5 percent,
to $22,020,000. Table 6 shows the maturity and interest sensitivity of the
commercial, financial and agricultural category and the real estate construction
category as of December 31,1995. As of this date, loans that mature in one year
or less were $98,023,000. Of the loans that mature after one year, $79,258,000,
or 61.5 percent, had fixed interest rates while $49,616,000, or 38.5 percent,
had variable rates.
The placement of loans on a nonaccrual status is dependent upon the type of
loan, collateral values and the collection activities in progress. Loans which
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become 120 days past due. 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 a
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 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. At December 31, 1995, nonaccrual loans were $845,000 compared with
$1,214,000 at year-end 1994. At December 31, 1995, loans which were 90 days or
more past due had increased by $257,000 to $354,000 as compared to year-end
1994.
During 1995, income of $39,000 on nonaccrual loans would have been recorded
if these loans had been accruing throughout 1995. No interest income on
nonaccrual loans was included in net income for 1995. First National Corporation
does not have any loans which have been restructured, any foreign loans or any
concentrations of loans which exceed 10 percent of total loans.
Table 7 provides the level of these risk elements for the past five
years.
10
<PAGE>
<TABLE>
Table 5
<CAPTION>
Distribution of Net Loans
By Type
December 31,
(Dollars in thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 43,108 $ 34,476 $ 28,169 $ 31,715 $ 34,167
Real estate - construction 5,792 4,781 3,321 1,455 2,083
Real estate - mortgage 148,853 126,751 110,113 104,021 102,664
Consumer 50,130 42,544 36,854 35,745 39,444
-------- -------- -------- -------- --------
Total $247,883 $208,552 $178,457 $172,936 $178,358
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Percent of Total
----------------
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other 17.4% 16.5% 15.8% 18.3% 19.1%
Real estate - construction 2.3 2.3 1.9 0.8 1.2
Real estate - mortgage 60.1 60.8 61.7 60.2 57.6
Consumer 20.2 20.4 20.6 20.7 22.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
Table 6
<CAPTION>
Maturity Distribution of Loans
Maturity
--------
December 31, 1995 1 Year 1 - 5 Over 5
(Dollars in thousands) or Less Years Years
------- ----- -----
<S> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 43,108 $24,220 $ 16,177 $ 2,711
Real estate - construction 5,792 3,694 2,078 20
Real estate - mortgage 148,853 53,661 83,971 11,221
Consumer 50,130 16,448 26,116 7,566
-------- ------- -------- -------
Total $247,883 $98,023 $128,342 $21,518
======== ======= ======== =======
Loans due after one year with:
Predetermined interest rates $90,913
Floating or adjustable interest rates $58,947
</TABLE>
11
<PAGE>
Asset Quality
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment, loan, or short-term
investment portfolio, is reviewed by management for credit risk. To facilitate
this review, First National Corporation has established credit policies which
include credit limits, documentation, periodic examination and follow-up. In
addition, these portfolios are examined for exposure to concentration in any one
industry, government agency, or geographic location. In examining the portfolios
at December 31, 1995 and 1994, the Corporation did not have more than ten
percent of the loan portfolio in any one industry and had no foreign loans.
Each category of earning assets has a degree of credit risk. To measure
credit risk, various techniques are utilized. Credit risk in the investment
portfolio can be measured through bond ratings published by independent
agencies. In the investment portfolio, 94.8 percent of the investments consist
of U.S. Treasury securities, U.S. Agency securities and tax-free securities
having a rating of "A" or better. The credit risk of the loan portfolio can be
measured by historical experience. The Corporation maintains its loan portfolio
in accordance with its established credit policies. Loans are reported as being
in nonaccrual status when principal or interest has been in default for a period
of 90 days or more unless the obligation is both well secured and in process of
collection. Loans which are well secured and in the process of collection are
allowed to remain on an accrual basis until they become 120 days past due. Net
loan charge-offs over the past five years have not exceeded .54 percent of net
average loans. In 1995 net loan charge-offs as a percentage of net average loans
were .15 percent compared to .17 percent in 1994.
<TABLE>
Table 7
<CAPTION>
Nonaccrual and Past Due Loans
December 31
(Dollars in thousands) 1995 1994 1993 1992 1991
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $ 354 $ 97 $ 209 $ 408 $297
Loans on a nonaccruing basis 845 1,214 983 645 678
------ ------ ------ ------ ----
Total $1,199 $1,311 $1,192 $1,053 $975
====== ====== ====== ====== ====
</TABLE>
12
<PAGE>
<TABLE>
Table 8
<CAPTION>
Summary of Loan
Loss Experience
December 31
(Dollars in thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
January 1 $ 3,194 $ 2,955 $ 2,685 $ 2,418 $ 2,099
--------- --------- --------- --------- ---------
Charge-offs during the year
Real estate - construction - - - - -
Real estate - mortgage (130) (175) (61) (215) (160)
Consumer/Credit cards (514) (378) (330) (460) (483)
Commercial (47) (80) (284) (571) (361)
--------- --------- --------- --------- ---------
Total charge-offs (691) (633) (675) (1,246) (1,004)
--------- --------- -------- --------- ---------
Recoveries during the year
Real estate - construction - - - - -
Real estate - mortgage 123 58 9 18 4
Consumer/Credit cards 143 178 140 185 119
Commercial 90 61 63 102 66
--------- --------- --------- --------- ---------
Total recoveries 356 297 212 305 189
--------- --------- --------- --------- ---------
Net charge-offs (335) (336) (463) (941) (815)
Provisions from earnings 844 575 733 1,208 1,134
--------- --------- --------- --------- ---------
Allowance for loan losses -
December 31 $ 3,703 $ 3,194 $ 2,955 $ 2,685 $ 2,418
========= ========= ========= ========= =========
Average loans - net of
unearned income $227,466 $193,135 $173,415 $173,063 $172,217
Ratio of net charge-offs
to average loans - net of
unearned income .15% .17% .27% .54% .47%
</TABLE>
13
<PAGE>
Loan Loss Provision
First National Corporation 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.
The provision for loan losses for the year ended December 31, 1995, was
$844,000, compared to $575,000 in 1994, which represents a 46.8 percent
increase. The increase in the provision for loan losses was due to several
factors. These factors include continued less favorable economic conditions and
continued strong loan growth.
At year-end 1995 the loan loss provision was $844,000 compared to $575,000
for the previous year. These additions increased the allowance for loan losses
to $3,703,000, or 1.49 percent of outstanding loans at the end of 1995, and
$3,194,000, or 1.53 percent at year-end 1994. Total charge-offs were $691,000
and $633,000, respectively in 1995 and 1994. Recoveries were $356,000 for 1995
and $297,000 for 1994. Net charge-offs were $335,000 in 1995 and $336,000 for
1994. Net charge-offs were centered in consumer loans which increased from
$200,000 in 1994 to $371,000 in 1995. Real Estate loan net charge-offs declined
by $110,000 in 1995 while consumer loan losses increased by $171,000. Net
charge-offs to average loans were .15 percent in 1995 and .17 percent in 1994.
A summary of loan loss experience is provided in Table 8 for 1991 through 1995.
Other real estate owned includes certain real estate acquired as a result
of foreclosure and deeds in lieu of foreclosure, as well as amounts reclassified
as in-substance foreclosures. For the period ended December 31, 1995, other real
estate owned was $151,000 compared to $133,000 at December 31, 1994. This slight
increase resulted from the bank taking title to certain properties during the
year while other properties were sold or written down.
Management anticipates that the level of charge-offs for 1996 will be
somewhat higher than the level experienced in 1995. The loan loss provision is
considered adequate by management. However, changes in economic conditions in
the Corporation's market area can always affect these levels.
Liquidity
Liquidity is defined as the ability of an entity to generate cash to meet
its financial obligations. For a bank liquidity means the consistent ability to
meet loan demand and deposit withdrawals. The Corporation has employed its funds
in a manner to provide liquidity in both assets and liabilities. 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. As noted in Table 4,
28.0 percent of the investment portfolio matures in one year or less. This part
of the investment portfolio consists of U.S. Treasury securities, U.S. Agency
securities and bank qualified municipal securities. Loans and other investments
are of a longer term nature and are not utilized for day-to-day bank liquidity
needs.
Increases in the Corporation's liabilities provide liquidity on a
day-to-day basis. Daily liquidity needs may be met from deposits or from the
Corporation's use of federal funds purchased, securities sold under agreement to
repurchase and other short-term borrowings at favorable interest rates. The
Corporation has an increasing reliance on borrowed funds which are primarily
cash management or "sweep" accounts that are accommodations to corporate and
governmental customers through the sale of securities sold under agreement to
repurchase arrangements. During 1995, the Corporation maintained an even higher
level of liquidity with an influx of interest sensitive deposits.
14
<PAGE>
<TABLE>
Table 9
<CAPTION>
Interest Sensitivity Analysis
After After Six Greater
Within Three Through Than One
December 31, 1995 three Through Twelve Within Year and
(Dollars in thousands) Months Six Months Months One Year Insensitive(1) Total
------ ---------- ------ -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Loans $ 105,961 $ 15,262 $ 20,147 $141,370 $106,513 $247,883
Investments 21,772 13,428 7,268 42,468 109,028 151,496
Funds
Total interest earning assets $ 127,733 $ 28,690 $ 27,415 $183,838 $215,541 $399,379
========= ========= ======== ======== ======== ========
Percent 32.0% 7.2% 6.8% 46.0% 54.0% 100.0%
========= ========= ======== ======== ======== ========
Interest-bearing deposits,
excluding CDs greater than
$100,000 $ 100,185 $ 29,175 $ 34,531 $163,891 $116,486 $280,377
CDs greater than $100,000 11,930 4,685 6,267 22,882 8,321 31,203
Short-term borrowings 25,833 25,833 25,833
--------- -------- --------
Total interest-bearing liab. 137,948 33,860 40,798 212,606 124,807(2) 337,413
Interest-free funds 61,966 61,966
-------- --------
Funds supporting interest
earning assets $ 137,948 $33,860 $ 40,798 $212,606 $186,773 $399,379
========= ========= ======== ======== ======== ========
Percent 34.5% 8.5% 10.2% 53.2% 46.8% 100.0%
========= ========= ======== ======== ======== ========
Interest sensitivity gap $ (10,215) $ (5,170) $(13,383) $(28,768) $ 28,768
Cumulative gap $ (10,215) $ (15,385) $(28,768) $(28,768)
Percent of total interest earning
assets 2.6% 3.9% 7.2% 7.2%
</TABLE>
(1) These items are considered insensitive because they are not generally
affected by fluctuations in market interest rates.
(2) Includes savings deposits of $73,207.
Table 9 discloses the cumulative gap as a percentage of assets included in
the computation of gap (total earning assets) rather than total assets.
Interest Sensitivity
Interest sensitivity analysis refers to the potential impact of interest
rate changes on net interest income. Normally this sensitivity is expressed in
interest sensitivity gap and cumulative gap. Interest sensitivity analysis
utilizes the concept of matching interest sensitive assets with interest
sensitive liabilities over a stated time period. Interest sensitivity applies to
both assets and liabilities which carry a variable rate or mature during a
stated time period. A positive interest sensitivity gap demonstrates that assets
are repriced before liabilities during the stated time period. Conversely, a
negative gap demonstrates liabilities are repriced before assets.
The objective of interest sensitivity management is to maintain stable
growth in net interest income while minimizing adverse changes. Management is
continually changing the gap position of the Corporation in response to changes
in money markets and other external factors.
In 1995, sources of funds continued to become sensitized to changes in
interest rates. Table 9 presents the interest sensitive position of the
Corporation's balance sheet at December 31, 1995. The analysis illustrates the
Corporation's interest sensitivity position at prescribed intervals. Reflected
in the table are interest sensitivity gap and cumulative gap for immediate
through one year maturities. Management attempts to particularly control gap
from zero to twelve months. The position of First National Corporation at
December 31, 1995 with regard to the cumulative gap at the 12 month time frame
is a negative gap of $28,768,000. Assuming that no other variable changed, the
potential impact to First National Corporation's net interest income before
taxes in the next year should rates on the asset and liability sides change
immediately and equally would be:
15
<PAGE>
a rise of 1% would decrease earnings by $287,680
a rise of 2% would decrease earnings by $575,360
a rise of 3% would decrease earnings by $863,040
a decline of 1% would increase earnings by $287,680
a decline of 2% would increase earnings by $575,360
a decline of 3% would increase earnings by $863,040
Table 9 reflects the balances of interest earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Scheduled payment amounts of amortizing fixed rate loans are reflected at
each scheduled payment date. Variable rate amortizing loans reflect scheduled
repayments at each scheduled payment date until the loan may be repriced
contractually and the unamortized balance is reflected at this point.
Investments are reflected at each instrument's ultimate maturity date or
pre-refunded call date. Funds sales are reflected at the immediate repricing
interval due to the overnight availability of the instruments. A portion of
interest-bearing liabilities with no contractual maturity, such as money market
deposit accounts and NOW accounts, are reflected in the immediate repricing
period due to the contractual arrangements that give First National Corporation
the ability to vary the rates paid on those deposits within a thirty-day or
shorter period. First National Corporation reflects a portion of its savings
deposits as noninterest sensitive to more accurately reflect their anticipated
repricing characteristics. Fixed rate time deposits, principally certificates of
deposit, are reflected at their contractual maturity date. Variable rate time
deposits are reflected at the earlier of their next repricing or maturity date.
Short-term borrowings (principally securities sold under repurchase agreement
secured by investment securities) are reflected in the immediate repricing
period due to the contractual arrangements which give First National Corporation
the ability to vary the rates paid on those borrowings overnight.
Deposits
The deposit base provides First National Corporation with funds for the
long-term growth of loans and investments. At December 31, 1995, when compared
to year-end 1994, total deposits were $368,315,000, up $47,608,000, or 14.8
percent. Noninterest-bearing deposits for the same period were $56,735,000, an
increase of $8,700,000, or 18.1 percent, and interest-bearing deposits were
$311,580,000, an increase of $38,908,000, or 14.3 percent when compared to
December 31, 1994. For the year ended December 31, 1995, total average deposits
increased $29,437,000, or 9.4 percent. This growth was comprised of an increase
of average interest-bearing accounts of $23,895,000, or 8.9 percent, and average
noninterest-bearing accounts of $5,542,000, or 11.8 percent. Growth in the
interest-bearing accounts was composed of an increase in interest-bearing
transaction accounts of $5,669,000, or 8.0 percent, and certificates of deposit
of $20,671,000, or 17.2 percent, and a decrease in savings accounts of
$2,444,000, or 3.2 percent.
At December 31, 1995, the ratio of average interest-bearing deposits to
total deposits decreased to 84.7 percent from 85.0 percent at year-end 1994 and
was 85.6 percent at year-end 1993. The average rate paid on interest-bearing
accounts increased to 4.0 percent from 3.2 percent at year-end 1994 and 3.3
percent in 1993.
16
<PAGE>
<TABLE>
Table 10
<CAPTION>
Maturity Distribution of CD's
of $100,000 or more December 31 1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Within three months $12,033 $12,266
After three through six months 4,685 2,765
After six through twelve months 6,267 2,267
After twelve months 8,218 8,735
------- -------
Total $31,203 $26,033
======= =======
</TABLE>
Short-Term Borrowed Funds
The distribution of First National Corporation's short-term borrowings at
the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $25,833 5.44% $15,297 4.50% $ 8,081 2.72%
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements $25,371 5.05% $17,374 3.12% $ 9,588 2.85%
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $30,196 $27,993 $12,894
</TABLE>
17
<PAGE>
Equity and Dividends
Throughout the years the strength of the shareholders' equity base has
provided stability to current operations and capital adequacy to support growth.
The Corporation's shareholder equity base was 9.1 percent of total assets as of
December 31, 1995, compared with 9.7 percent at year-end 1994, and 9.6 percent
at year-end 1993.
The Corporation has achieved a consistent record of increasing earnings
over the past years. Even though dividends have historically been increased, the
Corporation has maintained a relatively constant dividend pay-out policy. The
dividend pay-out ratio for 1995 was 30.2 percent compared to 29.5 percent in
1994 and 28.6 percent for 1993. Cash dividend payments in 1995 were $1,403,000
as compared to $1,196,000 in 1994. The retention of the remaining earnings has
provided the basis for expansion internally of loans and investments, and
acquisitions.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to the Corporation in the
form of cash dividends, loans or advances. The approval of the Office of the
Comptroller of the Currency is required to pay dividends in excess of the Bank's
net profits for the current year plus retained net profits (net profits less
dividends paid) for the preceding two years, less any required transfers to
surplus. As of December 31, 1995, $8,768,000 of the Bank's retained earnings are
available for distribution to the Corporation as dividends without prior
regulatory approval. In 1995 the Bank paid dividends to the Corporation of
$1,403,000.
The Corporation 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 will be adjusted to reflect credit risk. Under the
guidelines of the Board of Governors of the Federal Reserve System, which are
substantially similar to the Office of the Comptroller of the Currency
guidelines, as of December 31, 1995 Tier 1 capital must be at least 4 percent of
risk-weighted assets, while total capital must be 8 percent of risk-weighted
assets. The Tier 1 capital ratio for First National Corporation at December 31,
1995 was 15.3 percent compared to 16.9 percent at year-end 1994. The total
capital ratio was 16.6 at December 31, 1995 compared to 18.1 percent at year-end
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 between
3 percent and 5 percent, depending on the institution's composite rating as
determined by its regulators. At December 31, 1995, First National Corporation's
leverage ratio was 9.1 percent, compared to 9.6 percent at year-end 1994. First
National Corporation's ratios exceed the minimum standards by substantial
margins.
Noninterest Income and Expense
In today's banking environment, noninterest income provides a stable source
of revenue for the Corporation. The expansion of banking services and the use of
explicit pricing enables the Corporation to manage its fee income and price
services to more closely reflect actual costs. Income from noninterest sources
in 1995 was $4,049,000, an increase of $516,000, or 14.6 percent, compared to
1994. For the period ended December 31, 1994 income from noninterest sources was
$3,533,000, an increase of $63,000, or 1.8 percent over 1993. In the first
quarter of 1993, First National Corporation sold marketable securities assumed
in the merger with Santee Cooper State Bank. This sale increased noninterest
income for the periods reported. Service charges on transaction accounts in 1995
increased $463,000 or 17.6 percent when compared to 1994 and $186,000, or 7.6
percent, in 1994 compared to 1993. This increase was due to increased account
activity, as well as an increase in service fees and the acquisition of two
NationsBank offices in Walterboro. The deposit fee pricing structure is
continually being reviewed and updated for new services and rising costs. Other
charges, commissions and fees increased $53,000 or 5.9 percent in 1995. This
compares with a decrease of $28,000 or 3.0 percent in 1994. The increase is a
result of an increase in trust income. A $95,000 gain on sale of marketable
equity securities was realized during 1993. Noninterest expense increased
$979,000 or 7.3 percent in 1995 compared with $838,000 or 6.7 percent in 1994.
In comparison to growth in assets, the increases reflect management's continuing
efforts to control noninterest expense.
Salary and employee benefits expense was the largest component of
noninterest expense in 1995. Salaries and
18
<PAGE>
employee benefits increased 4.0 percent or $294,000 in 1995 as compared with an
8.9 percent or $608,000 increase in 1994. The number of full time equivalent
employees was 253 at December 31, 1995 as compared with 256 in 1994 and 255 in
1993. In 1994 management adopted an employee cash incentive plan covering all
employees. Cash incentives paid during 1995 under this program were $358,000.
Net occupancy expense increased 14.5 percent in 1995 compared to an
increase of 6.5 percent in 1994. The increase is attributable to higher
operating expenses including utilities, maintenance and depreciation.
Furniture and equipment expense increased 8.1 percent in 1995 compared with
a 1.6 percent decrease in 1994. The increased costs in 1995 were due to
increases in depreciation expense.
Total other expense for 1995 was $4,710,000 compared with $4,204,000 in
1994 and $3,997,000 in 1993, or increases of 12.0 percent and 5.2 percent
respectively. Included in other noninterest expense is $540,000 in 1995 for the
amortization of intangibles, principally core deposit values, under the purchase
accounting method utilized for bank acquisitions, compared with $328,000 in 1994
and $455,000 in 1993. Included in expenses for amortization of intangibles for
1995, is $231,000 attributable to the two new branches in Walterboro acquired
from NationsBank. Additionally included is $373,000 attributed to Federal
Deposit Insurance premiums, a decrease of $318,000, or 46.0 percent in 1995 as
compared to 1994 and an increase of $27,000, or 4.1 percent in 1994 as compared
to 1993. The decrease in the Federal Deposit Insurance premiums in 1995 included
a $201,000 refund as the result of the Bank Insurance Fund of FDIC reaching the
1.25 percent capitalization level for every $100 of deposits insured by the
FDIC. The remainder of the increase in other expense for 1995 is distributed
among the following expense categories: advertising, insurance and surety bond,
office and printing supplies, postage, telephone and line charges, and other
expenses.
<TABLE>
Table 11
<CAPTION>
Quarterly Results of Operations
1995 Quarters 1994 Quarters
--------------------------------- --------------------------------
(Dollars in thousands, except per share) Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $8,043 $7,872 $7,356 $6,912 $6,585 $6,404 $6,196 $5,961
Interest expense 3,424 3,332 3,063 2,706 2,449 2,302 2,193 2,149
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 4,619 4,540 4,293 4,206 4,136 4,102 4,003 3,812
Provision for loan losses 504 100 120 120 215 120 120 120
Noninterest income 1,082 1,032 942 993 904 891 834 904
Noninterest expense 3,536 3,846 3,458 3,481 3,409 3,442 3,314 3,177
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1,661 1,626 1,657 1,598 1,416 1,431 1,403 1,419
Income taxes 513 447 484 458 398 413 408 389
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,148 $1,179 $1,173 $1,140 $1,018 $1,018 $ 995 $1,030
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share $ 0.51 $ 0.53 $ 0.52 $ 0.51 $ 0.45 $ 0.46 $ 0.45 $ 0.46
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The Corporation is sponsoring the organization of a national bank in Rock
Hill, South Carolina. The organizers have filed an application with the Office
of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation, respectively, for a charter to form the National Bank of York
County and for insurance of deposits. The Corporation expects to file
applications with the Board of Governors of the Federal Reserve System and the
South Carolina State Board of Financial Institutions to acquire all of the
bank's stock upon completion of its organization, so that the newly formed bank
will be a wholly-owned subsidiary of the Corporation. National Bank of York
County (In Organization) is expected to begin operations during 1996.
The Corporation has entered into a $4,500,000 general purpose unsecured
line of credit from an unaffiliated
19
<PAGE>
bank. There have been no borrowings under this credit arrangement. The
Corporation plans to make a stock offering to capitalize the National Bank of
York County and may draw on this line to facilitate the transaction.
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measure of financial
position and results of operations in terms of historical dollars, without
consideration of changes in the relative purchasing power over time due to
inflation. Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While the effect of inflation on banks is normally not as significant as is
its influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses.
20
<PAGE>
REPORT OF MANAGEMENT
The financial statements, accompanying notes, and other financial
information in the Annual Report to Shareholders and Form 10-K were prepared by
management of First National Corporation which is responsible for the integrity
of the information given. The statements have been prepared in conformity with
generally accepted accounting principles and include amounts which are based on
management's judgment or best estimates.
The Corporation maintains a system of internal control to reasonably assure
the safeguarding of assets and proper execution of transactions according to
management's directives. The control system consists of written policies and
procedures, segregation of duties, and an extensive internal audit program.
Management is cognizant of the limitations of such controls, but feels
reasonable assurance of effectiveness is achieved without extending costs beyond
benefits derived.
Internal audit reports are prepared for the Audit Committee of the Board of
Directors and copies are made available to the independent auditors. The Audit
Committee of the Board of Directors consists solely of outside directors who
meet periodically with management, internal auditors, and the independent
auditors. The Audit Committee reviews matters relating to the audit scope,
quality of financial reporting and control, and evaluation of management's
performance of its financial reporting responsibility. Access to the Audit
Committee is available to both internal and independent auditors without
management present.
J. W. Hunt and Company, independent auditors, have audited the financial
statements and notes included in this Annual Report and Form 10-K. Their audit
was conducted in accordance with generally accepted auditing standards and their
opinion presents an objective evaluation of management's discharge of its
responsibility to fairly present the financial statements of the Corporation.
Their opinion is contained in their report on the facing page. All financial
information appearing in this Annual Report and form 10-K is consistent with
that in the audited financial statements.
First National Corporation
Orangeburg, South Carolina
January 18, 1996
21
<PAGE>
(Information set forth on pages 29 through 62 of the Registrant's 1995 Annual
Report to Shareholders)
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
the Board of Directors
First National Corporation
We have audited the consolidated balance sheets of First National Corporation
and Subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The audits include examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. The audits also include
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 Subsidiary as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 18, 1996
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
...DECEMBER 31,...
------------------
1995 1994
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks (Note 3) $ 24,144 $ 23,046
-------- --------
-------- --------
Investment securities (Note 4):
Securities held-to-maturity:
Taxable 58,198 90,045
Tax-exempt 37,462 29,802
-------- --------
Total (fair value of $96,594 in 1995 and $116,135 in 1994) 95,660 119,847
Securities available-for-sale, at fair value 55,836 13,509
-------- --------
Total investment securities 151,496 133,356
-------- --------
Loans (Note 6) 250,423 211,054
Less, unearned income (2,540) (2,502)
Less, allowance for loan losses (3,703) (3,194)
-------- --------
Loans, net 244,180 205,358
-------- --------
Premises and equipment, net (Note 7) 8,250 7,284
----- --------
Other assets (Note 8) 8,252 4,999
----- --------
Total assets $436,322 $374,043
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 56,735 $ 48,035
Interest-bearing transaction accounts 80,894 75,777
Savings 73,207 74,155
CDs of $100,000 and over 31,203 26,033
Other time 126,276 96,707
-------- ------
Total deposits 368,315 320,707
Federal funds purchased and securities
sold under agreements to repurchase 25,833 15,297
Other liabilities 2,397 1,858
-------- -----
Total liabilities 396,545 337,862
-------- -------
Shareholders' equity:
Common stock - $5 par value; authorized 5,000,000 shares; issued and
outstanding 2,244,339 shares in
1995 and 2,035,000 shares in 1994 11,222 10,175
Surplus 16,260 11,871
Retained earnings (Note 12) 12,241 14,304
Unrealized gain (loss) on securities available-
for-sale, net of applicable deferred income taxes 54 (169)
-------- ---------
Total shareholders' equity 39,777 36,181
-------- ---------
Total liabilities and shareholders' equity $436,322 $374,043
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
...YEAR ENDED DECEMBER 31,...
-----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $22,020 $17,693 $16,031
Investment securities
Taxable:
Held-to-maturity 4,384 4,959 5,538
Available-for-sale 1,633 574 -
Tax-exempt-held-to-maturity 1,659 1,446 1,528
Federal funds sold 487 474 707
------- ------- -------
Total interest income 30,183 25,146 23,804
------- ------- -------
Interest expense:
Interest-bearing transaction accounts 1,741 1,597 1,420
Savings 2,066 2,074 2,028
Certificates of deposit 7,436 4,880 5,101
Federal funds purchased and securities sold under
agreements to repurchase 1,282 542 272
------- ------- -------
Total interest expense 12,525 9,093 8,821
------- ------- -------
Net interest income:
Net interest income 17,658 16,053 14,983
Provision for loan losses (Note 6) 844 575 733
------- ------- -------
Net interest income after provision for loan losses 16,814 15,478 14,250
------- ------- -------
Non-interest income:
Service charges on deposit accounts 3,094 2,631 2,445
Other service charges and fees 906 858 799
Gain on sale of marketable equity securities - - 95
Other income 49 44 131
------- ------- -------
Total non-interest income 4,049 3,533 3,470
------- ------- -------
Non-interest expense:
Salaries and employee benefits (Note 13) 7,732 7,438 6,830
Net occupancy expense 751 656 616
Furniture and equipment expense 1,128 1,044 1,061
Other expense (Note 9) 4,710 4,204 3,997
------- ------- -------
Total non-interest expense 14,321 13,342 12,504
------- ------- -------
Earnings:
Income before income taxes 6,542 5,669 5,216
Applicable income taxes (Note 10) 1,902 1,608 1,443
------- ------- -------
Net income $ 4,640 $ 4,061 $ 3,773
======= ======= =======
Earnings per common share (Note 11):
Net income per common share
$ 2.07 $ 1.82 $ 1.69
======= ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands of
dollars, except per share data)
Unrealized
Gain (Loss)
On Securities
Available-For-
Sale, Net Of
Applicable
Common Stock Retained Deferred
Shares Amount Surplus Earnings Income Taxes Total
------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 1,760,620 $ 8,803 $ 7,346 $ 14,587 $ - $ 30,736
Net income for year
ended December 31, 1993 - - - 3,773 - 3,773
Cash dividends declared at
$.60 per share - - - (1,080) - (1,080)
Common stock dividend of 5%,
date of record August 31, 1993 87,490 437 1,167 (1,604) - -
Cash paid in lieu of fractional shares - - (2) - - (2)
Common stock issued 487 3 6 - - 9
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $9 - - - - 15 15
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1993 1,848,597 9,243 8,517 15,676 15 33,451
Net income for year ended
December 31, 1994 - - - 4,061 - 4,061
Cash dividends declared at $.64
per share - - - (1,196) - (1,196)
Common stock dividend of 10%, date
of record, October 28, 1994 184,297 921 3,316 (4,237) - -
Common stock issued 2,106 11 38 - - 49
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred income
taxes of $111 - - - - (184) (184)
--------- --------- --------- --------- -------- --------
Balance December 31, 1994 2,035,000 10,175 11,871 14,304 (169) 36,181
Net income for year ended
December 31, 1995 - - - 4,640 - 4,640
Cash dividends declared at $.68 per share - - - (1,403) - (1,403)
Common stock dividend of 10%,
date of record, October 31, 1995 203,042 1,015 4,285 (5,300) - -
Common stock issued 6,297 32 104 - - 136
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $135 - - - - 223 223
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 2,244,339 $ 11,222 $ 16,260 $ 12,241 $ 54 $ 39,777
========= ========= ========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
...YEAR ENDED DECEMBER 31,...
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,640 $ 4,061 $ 3,773
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,430 1,124 1,243
Provision for loan losses 844 575 733
Provision for deferred taxes (50) (89) (120)
Gain on sale of marketable equity securities - - (95)
(Gain) loss on sale of premises and equipment 5 (3) 1
Increase (decrease) in accrued income taxes 23 150 (237)
(Increase) decrease in interest receivable (740) (247) 19
Premium amortization and discount accretion 315 (103) 268
Increase (decrease) in interest payable 652 18 (107)
Increase in miscellaneous assets (3,355) (450) (235)
(Increase) decrease in prepaid assets 31 (25) (45)
Increase (decrease) in other liabilities (137) 86 142
------- -------- --------
Net cash provided by operating activities 3,658 5,097 5,340
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of marketable equity securities - - 95
Proceeds from sales of investment securities available-for-sale 149 - -
Proceeds from maturities of investment securities held-to-maturity 30,021 45,877 45,725
Proceeds from maturities of investment securities available-for-sale 7,265 1,316 -
Purchases of investment securities held-to-maturity (22,131) (47,536) (71,377)
Purchases of investment securities available-for-sale (33,401) (4,721) -
Decrease in time deposits in other banks - - 100
Net increase in customer loans (40,009) (30,728) (6,196)
Recoveries on loans previously charged off 343 297 212
Proceeds from sale of other real estate 188 450 548
Purchases of premises and equipment (1,865) (943) (520)
Proceeds from sale of premises and equipment 3 28 30
Decrease in funds sold - 10,900 16,875
-------- -------- --------
Net cash used in investing activities (59,437) (25,060) (14,508)
-------- ------- --------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts,
savings accounts and certificates of deposit 47,608 14,787 10,373
Net increase in federal funds purchased and 10,536 7,216 2,275
securities sold under agreements to repurchase
Common stock issuance 95 49 9
Dividends paid (1,403) (1,196) (1,080)
Cash paid in lieu of fractional shares - - (2)
Stock options exercised 41 - -
-------- ------- --------
Net cash provided by financing activities 56,877 20,856 11,575
-------- ------- --------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of dollars)
...YEAR ENDED DECEMBER 31,...
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net increase in cash and cash equivalents $ 1,098 $ 893 $ 2,407
Cash and cash equivalents at beginning of year 23,046 22,153 19,746
-------- -------- -------
Cash and cash equivalents at end of year $ 24,144 $ 23,046 $22,153
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid for
Interest $ 11,873 $ 9,075 $ 8,928
======== ======== =======
Income taxes $ 1,929 $ 1,547 $ 1,800
======== ======== =======
Supplemental disclosures of noncash investing activities:
Real estate acquired in full or partial settlement of loans $ 268 $ 123 $ 33
======== ======== =======
Transfer of securities from held-to-maturity to
available-for-sale on December 1, 1995 $ 15,948 $ - $ -
======== ======== =======
Reclassification of securities to available-for-sale
upon adoption of Statement of Financial
Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity
Securities" $ - $ - $9,995
======== ======== ======
Change in unrealized gain (loss) on securities
available-for-sale $ 358 $ (295) $ 24
======== ======== =======
Change in deferred income tax expense (benefit) on unrealized
gain (loss) on securities available-for-sale $ 135 $ (111) $ 9
======== ========= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The accounting and reporting policies of First National Corporation (the
Corporation) and subsidiary (the Bank) conform with generally accepted
accounting principles and with the prevailing practices within the banking
industry.
The Company provides general banking services in the State of South Carolina.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the First National
Corporation and its wholly-owned subsidiary, First National Bank (the Bank). All
significant intercompany balances and transactions have been eliminated in
consolidation.
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 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.
INVESTMENT SECURITIES:
Debt securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Securities available-for-sale
also include the required capital stock of the Federal Reserve Bank. Unrealized
gains and losses on securities available-for-sale are recognized as direct
increases or decreases in shareholders' equity. Cost of securities sold is
recognized using the specific identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. Unearned discount on installment loans is
recognized as income over the terms of the loans by methods which generally
approximate the interest method. Interest on other loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding. Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when 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.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. An allowance for impaired loans is 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
28
<PAGE>
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.
OTHER REAL ESTATE OWNED (OREO):
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.
PREMISES AND EQUIPMENT:
Office equipment, furnishings, and buildings are stated at cost less accumulated
depreciation computed principally on the declining-balance method over the
estimated useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the estimated useful lives of the
improvements or the terms of the related leases. Additions to premises and
equipment and major replacements are added to the accounts at cost. Maintenance
and repairs and minor replacements are charged to expense when incurred. Gains
and losses on routine dispositions are reflected in current operations.
INTANGIBLE ASSETS:
Intangible assets consist primarily of core deposit premium costs which resulted
from the acquisition of branches from other commercial banks. The excess of the
purchase price over the fair value of the net tangible assets acquired in the
transactions is included in other assets and is being amortized over the
estimated useful lives of the deposit accounts acquired on a method which
reasonably approximates the anticipated benefit stream from the accounts. (SEE
NOTE 8).
EMPLOYEE BENEFIT PLANS:
Pension Plan - The Bank has a non-contributory defined benefit pension plan
covering all employees who have attained age twenty-one and have completed one
year of eligible service. The Bank's funding policy is to contribute annually
the amount necessary to satisfy the Internal Revenue Service's funding
standards.
Profit Sharing Plan - The Bank has a profit-sharing plan, including Internal
Revenue Code Section 401(k) provisions. Electing employees are eligible to
participate after attaining age twenty-one and completing one year of eligible
service. Plan participants elect to contribute 1% to 4% of annual base
compensation as a before tax contribution. The Bank matches 50% of these
contributions. Bank contributions may be made from current or accumulated net
profits. Participants may additionally elect to contribute 1% to 6% of annual
base compensation as a before tax contribution with no employer matching
contribution.
Retiree Medical Plan - Post-retirement health and life insurance benefits are
provided to all retirees who were eligible for such benefits as employees.
During the year ended December 31, 1993, the Corporation modified the
eligibility requirements to include only those employees of the Corporation
eligible for early retirement under the pension plan on or before December 31,
1993, and former employees who are currently receiving benefits. The plan was
unfunded at December 31, 1995, and the liability for future benefits has been
recorded in the consolidated financial statements.
29
<PAGE>
LEASE COMMITMENTS:
The Bank has entered into a number of operating lease agreements for land and
buildings used in operations. The agreements expire over various terms with the
longest such term extending to the year 2002. Certain of the leases contain
renewal options. In addition, the Bank pays maintenance, property taxes and
insurance on certain of the leased properties.
CASH AND CASH EQUIVALENTS:
For the purposes of reporting cash flows, cash and cash equivalents include cash
on hand, cash items in process of collection, and amounts due from banks. Due
from bank balances are maintained in other financial institutions.
INCOME TAXES:
The Company is subject to federal and state income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
OTHER:
Certain amounts previously reported have been restated in order to conform with
current year presentation. Such reclassifications had no effect on net income.
NOTE 2 - FORMATION OF NATIONAL BANK OF YORK COUNTY:
The Corporation is sponsoring the organization of a national bank in Rock Hill,
South Carolina. The organizers have filed an application with the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation,
respectively, for a charter to form the National Bank of York County and for
insurance of deposits. The Corporation expects to file applications with the
Board of Governors of the Federal Reserve System and the South Carolina State
Board of Financial Institutions to acquire all of the bank's stock upon
completion of its organization, so that the newly formed bank will be a
wholly-owned subsidiary of the Corporation. National Bank of York County (In
Organization) is expected to begin operations during 1996.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
As a member of the Federal Reserve System, the Bank is required by regulation to
maintain an average cash reserve balance with the Federal Reserve Bank. The
average amount of such reserve balance as of December 31, 1995, was
approximately $8,872,000.
At December 31, 1995, the Bank had due from bank balances in excess of federally
insured limits in the amount of $3,527,000.
30
<PAGE>
NOTE 4 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities
held-to-maturity at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
....................................... 1995 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 34,323 $ 203 $ (65) $ 34,461
Obligations of
U. S. Government
Agencies and
Corporations 23,875 212 (86) 24,001
Obligations of states
and political
subdivisions 37,462 714 (44) 38,132
-------- ------ ----- --------
Total $ 95,660 $1,129 $(195) $ 96,594
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
....................................... 1994 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 46,911 $ 2 $ (1,399) $ 45,514
Obligations of
U. S. Government
Agencies and
Corporations 43,134 31 (2,131) 41,034
Obligations of states
and political
subdivisions 29,802 253 (468) 29,587
-------- ---------- ---------- ---------
Total $119,847 $ 286 $ (3,998) $ 116,135
======== ========== ========== =========
</TABLE>
The market values of state, county, and municipal securities are established
with the assistance of an independent pricing service. The values are based on
data which often reflect transactions of relatively small size and are not
necessarily indicative of the value of the securities when traded in large
volumes.
31
<PAGE>
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
....................................... 1995 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 15,448 $ 188 $ - $ 15,636
Obligations of
U. S. Government
Agencies and
Corporations 39,826 188 (289) 39,725
Other securities 475 - - 475
-------- ----- ------ ---------
Total $ 55,749 $ 376 $ (289) $ 55,836
======== ===== ====== =========
</TABLE>
<TABLE>
<CAPTION>
....................................... 1994 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 2,304 $ - $ (51) $ 2,253
Obligations of
U. S. Government
Agencies and
Corporations 11,000 15 (235) 10,780
Other securities 476 - - 476
-------- ------------- ------- --------
Total $ 13,780 $ 15 $ (286) $ 13,509
======== ============= ======= ========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1995 by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
32
<PAGE>
<TABLE>
<CAPTION>
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
Due in one year or less $ 36,183 $ 36,173 $ 6,314 $ 6,285
Due after one year through
five years 44,368 45,152 48,960 49,076
Due after five years through
ten years 6,469 6,606 - -
Due after ten years - - - -
-------- -------- -------- --------
Subtotal 87,020 87,931 55,274 55,361
No contractual maturity 8,640 8,663 475 475
-------- -------- -------- --------
Total $ 95,660 $ 96,594 $ 55,749 $ 55,836
======== ======== ======== ========
</TABLE>
On December 1, 1995, securities classified as held-to-maturity in the amount of
$15,948,000 were reclassified as available-for-sale. This reclassification was
in accordance with the Guide to Implementation of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, issued in November 1995.
There were no realized gains or losses on sales of investment securities during
the three year period ending December 31, 1995.
Investment securities with a book value of $55,126,000 and a market value of
$55,617,000 at December 31, 1995 were pledged to secure public deposits, trust
deposits, securities sold under agreements to repurchase, and for other purposes
as required and permitted by law.
NOTE 5 - MARKETABLE EQUITY SECURITIES:
In 1945, the Bank acquired marketable equity securities in satisfaction of a
loan. Management was unable to establish the original cost of the securities. In
the period since 1945, the carrying value of the securities had been written
down to $1. During the year ended December 31, 1993, the securities were sold
and a gain in the amount of $95,000 was realized.
33
<PAGE>
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----
(In thousands of dollars)
<S> <C> <C>
Commercial, financial and agricultural $ 43,108 $ 34,476
Real estate - construction 5,792 4,781
Real estate - mortgage 148,853 126,751
Consumer 52,670 45,046
-------- --------
Total loans - gross $250,423 $211,054
======== ========
</TABLE>
Changes in the allowance for loan losses for the three years ended December 31,
1995, were as follow:
<TABLE>
<CAPTION>
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year $ 3,194 $ 2,955 $ 2,685
Charge-offs (691) (633) (675)
Recoveries 356 297 212
------ ------- -------
Balance before provision for loan losses 2,859 2,619 2,222
Provision for loan losses 844 575 733
------- ------- -------
Balance at end of year $ 3,703 $ 3,194 $ 2,955
======= ======= =======
</TABLE>
At December 31, 1995 and 1994, the aggregate amount of loans, including those
for which impairment has been recognized, for which the accrual of interest had
been discontinued was $845,000 and $1,214,000, respectively. Interest income
which was foregone was an immaterial amount for each of the three years ended
December 31, 1995.
There were no restructured loans at December 31, 1995 and 1994.
Included in the balance sheet under the caption, "Other Assets" are certain real
properties which were acquired as a result of completed foreclosure proceedings.
Also included in the caption are amounts reclassified as in-substance
foreclosures. Other real estate totaled $151,000 and $133,000 at December 31,
1995 and 1994, respectively.
The Bank grants agribusiness, commercial, and residential loans to customers
throughout the state. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of Orangeburg County and other surrounding areas.
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.
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
34
<PAGE>
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.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued):
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, accounts
receivable financing, 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 these standards.
At December 31, 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 December 31,
1995. Interest income on impaired loans of $16,000 was recognized for cash
payments received in 1995.
NOTE 7 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consist of the following:
<TABLE>
<CAPTION>
1995 1994
----
(In thousands of dollars)
<S> <C> <C>
Land $ 1,626 $ 1,286
Buildings and leasehold improvements 7,659 7,032
Equipment and furnishings 6,104 5,746
------- --------
Total 15,389 14,064
Less, accumulated depreciation and amortization 7,139 6,780
-------- --------
Premises and equipment - net $ 8,250 $ 7,284
======== ========
</TABLE>
Depreciation expense charged to operations was $891,000, $796,000 and $751,000
in 1995, 1994, and 1993, respectively.
35
<PAGE>
NOTE 8 - INTANGIBLE ASSETS:
Core deposit premium cost in the original amount of $1,822,000, which resulted
from the purchase of two branches of another commercial bank, is being amortized
on the straight-line basis over the estimated useful lives of the deposit
accounts acquired, which range from two to fourteen years. The acquisition cost
was allocated to the assets acquired based on their fair market value.
Amortization expense, which is included in other non-interest expense, for the
years ended December 31, 1995, 1994, and 1993, was $120,000, $131,000 and
$131,000, respectively.
On July 1, 1991, the Bank completed the purchase of a branch of another
commercial bank. The excess of the purchase price over the fair value of the net
tangible assets acquired has been recorded as core deposit premium cost in the
amount of $1,124,000, and is being amortized over ten years on a method which
reasonably approximates the anticipated benefit stream from the related deposit
accounts. Amortization expense for the years ended December 31, 1995, 1994 and
1993, was $122,000, $134,000, and $145,000, respectively.
On June 16, 1995, the Bank completed the purchase of two branches of another
commercial bank. The excess of the purchase price over the fair value of the net
tangible assets acquired has been recorded as core deposit premium cost in the
amount of $3,034,000, and is being amortized over fifteen years on a method
which reasonably approximates the anticipated benefit stream from the related
deposit accounts. Amortization expense for the year ended December 31, 1995, was
$231,000.
Computer software (acquired by purchase) with an original cost of $525,000 is
being amortized on the straight-line method over thirty-six months. Amortization
expense was $66,000, $63,000, and $49,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
NOTE 9 - OTHER EXPENSES:
The following is a summary of the components of other non-interest expense for
the three years ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Office supplies $ 406 $ 316 $ 321
Advertising 371 325 261
Amortization of intangible assets 540 328 455
Federal depository insurance 373 691 664
Other 3,020 2,544 2,296
-------- -------- --------
Total $ 4,710 $ 4,204 $ 3,997
======== ======== ========
</TABLE>
36
<PAGE>
NOTE 10 - INCOME TAXES:
Income tax expense for the three years ended December 31, 1995, consists of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Current:
Federal $ 1,715 $ 1,496 $ 1,385
State 237 201 178
-------- -------- -------
Total current 1,952 1,697 1,563
Deferred (50) (89) (120)
-------- -------- -------
Total $ 1,902 $ 1,608 $ 1,443
======== ======== ========
</TABLE>
Timing differences in the recognition of revenue and expense for tax and
financial reporting purposes resulted in deferred income taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Provision for loan losses $ (183) $ (62) $ (100)
Pension cost and post-retirement benefits 79 18 (46)
Consumer loan income 38 8 (6)
Depreciation 2 (13) (5)
Other 14 (40) 37
--------- --------- --------
Total $ (50) $ (89) $ (120)
========= ========= ========
</TABLE>
37
<PAGE>
NOTE 10 - INCOME TAXES (CONTINUED):
The reasons for the difference between income tax expense and the amount
computed by applying the statutory income tax rate of 34% to pre-tax income are
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Income taxes at statutory rate on
pre-tax income $ 2,224 $ 1,927 $ 1,773
Increase (reduction) of taxes:
State income taxes, net of federal
tax benefit 194 168 155
Tax-exempt interest income (588) (507) (518)
Other 72 20 33
-------- ------- --------
Total $ 1,902 $ 1,608 $ 1,443
======== ======= ========
</TABLE>
The net deferred tax asset included in other assets in the accompanying
consolidated financial statements includes the following components:
<TABLE>
<CAPTION>
(In thousands of dollars) 1995 1994
----
<S> <C> <C>
Deferred tax assets $ 1,153 $ 1,144
Deferred tax liabilities (1,025) (931)
--------- ----------
Net deferred tax asset $ 128 $ 213
========= =========
</TABLE>
Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes
(SFAS 96) issued in December 1987, provides for the adoption of an asset and
liability approach to accounting for income taxes. In February 1992, Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109) was issued which supersedes SFAS 96. This standard retains the asset and
liability approach to accounting for income taxes, while revising the
computation of deferred tax balances. This standard was adopted during the year
ended December 31, 1993. The cumulative effect of adopting SFAS 109 as of
January 1, 1993, was not material to consolidated net income.
NOTE 11 - COMMON STOCK AND PER SHARE INFORMATION:
Earnings per share are calculated on the weighted-average number of shares
outstanding, giving retroactive effect to stock dividends and stock splits.
Grants under the incentive stock option were not material in the computation of
average shares outstanding. The number of weighted-average shares outstanding
was 2,240,081, 2,236,230 and 2,235,741 for the years ended December 31, 1995,
1994, and 1993, respectively. NOTE 11 - COMMON STOCK AND PER SHARE INFORMATION
(CONTINUED):
Dividends per share are calculated using the current equivalent of the number of
common shares outstanding at the time of the dividend based on First National
Corporation shares outstanding.
NOTE 12 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
Dividends are paid by the Corporation from its assets which are mainly provided
by dividends from the Bank.
38
<PAGE>
However, certain restrictions exist regarding the ability of the Bank to
transfer funds to the Corporation in the form of cash dividends, loans or
advances. The approval of the Office of the Comptroller of the Currency (OCC) is
required to pay dividends in excess of the Bank's net profits for the current
year plus retained net profits (net profits less dividends paid) for the
preceding two years, less any required transfers to surplus. As of December 31,
1995, $8,768,000 of the Bank's retained earnings are available for distribution
to the Corporation as dividends without prior regulatory approval.
Under Federal Reserve regulation, the Bank also is limited as to the amount it
may loan to the Corporation unless such loans are collateralized by specified
obligations. The maximum amount available for transfer from the Bank to the
Corporation in the form of loans or advances approximated $7,833,000 at December
31, 1995.
NOTE 13 - RETIREMENT PLANS:
The following sets forth the pension plan's funded status and amounts recognized
in the Company's consolidated financial statements at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
----
(In thousands of dollars)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,117 for 1995 and $2,810 for 1994 $ 3,195 $ 2,855
======== =======
Projected benefit obligation for services rendered to date $ 4,632 $ 4,259
Plan assets at fair value, primarily guaranteed interest
contracts, money market accounts and annuity contracts 4,178 3,538
-------- -------
Excess of projected benefit obligation over the plan assets (454) (721)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions 743 779
Unrecognized prior service costs 12 13
Unrecognized net asset being amortized over 16 years (193) (226)
-------- -------
Accrued pension cost included in other liabilities $ 108 $ (155)
======== =======
</TABLE>
NOTE 13 - RETIREMENT PLANS (CONTINUED):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Net pension expense included
the following expense (income)
components:
Service cost - benefits earned
during the period $ 231 $ 218 $ 184
Interest cost on projected
benefit obligation 314 276 260
Actual return on plan assets (257) (213) (216)
Net amortization and deferral (42) (50) (20)
------ ------ ------
Net periodic pension expense $ 246 $ 231 $ 208
====== ====== ======
</TABLE>
39
<PAGE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.5% and 5%, respectively, for the years ended December 31, 1995
and 1994 and 8% and 6%, respectively, for the year ended December 31, 1993. The
expected long-term rate of return on pension plan assets was 8% for each of the
three years ended December 31, 1995.
Expenses incurred and charged against operations with regard to all of the
Company's retirement plans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Pension $ 246 $ 231 $ 180
Profit sharing 89 83 125
------ ------- ------
Total $ 335 $ 314 $ 305
====== ======= ======
</TABLE>
NOTE 14 - POST-RETIREMENT BENEFITS:
During the year ended December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 106 Employers' Accounting for Post-Retirement
Benefits Other Than Pensions (SFAS 106) issued December 1990, which requires the
accrual of nonpension retirement benefits over the employees' active service
period, defined as the date of employment up to the date of the employees'
eligibility for such benefits.
The following sets forth the plan's funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands of dollars) 1995 1994
----
<S> <C> <C>
Accumulated postretirement benefit obligation $ 504 $ 649
Plan assets at fair value - -
------- -------
Funded status (504) (649)
Unrecognized net transition obligation 536 599
Unrecognized gain (147) (5)
------- -------
Accrued postretirement benefit cost
included in other liabilities $ (115) $ (55)
======== ========
</TABLE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost included the following components:
(In thousands of dollars) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost $ - $ - $ -
Interest cost 36 40 49
Net amortization and deferral 7 22 30
----------- ----------- -----------
Net periodic postretirement benefit cost $ 43 $ 62 $ 79
=========== =========== ===========
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%. For measurement purposes, a 13%
annual rate of increase in the per capita cost of covered health care benefits
was
40
<PAGE>
assumed for 1993; the rate was assumed to decrease by 1% per year to 6% at the
end of seven years. Increasing the assumed health care cost trend rates by 1
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1995 by $59,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the year then ended by $4,000.
NOTE 15 - STOCK OPTION PLAN:
The Corporation's Board of Directors has adopted an incentive stock option plan
to be administered by a Committee appointed by the Board. The plan provides that
the Committee may grant options to key management employees to purchase $5 par
value common stock of First National Corporation at a price no less than the
fair market value of the option stock at the time the option is granted.
Pursuant to this plan, 63,525 shares of the Corporation's common stock is
reserved for issuance. In September 1992, the Corporation granted options to
purchase an aggregate of 54,632 shares to certain employees. Options for 2,923
shares were exercised and no options were canceled during the current year.
Options to purchase 6,050 shares were granted during the year ended December 31,
1994. The number of shares in the stock option plan has been retroactively
restated to reflect stock dividends.
Activity in the stock option plans during 1995 and 1994, is summarized as
follows:
<TABLE>
<CAPTION>
................ 1995 ............... ............... 1994 ................
OPTION OPTION
PRICE PRICE
PER PER
SHARES SHARE SHARES SHARE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding, January 1 60,682 $14.16-17.35 54,632 $14.16
Granted - 6,050 $17.35
Exercised 2,923 $14.16 -
Canceled - -
------ ------------ ------ ------
Outstanding, December 31 57,759 60,682
====== ======
Exercisable, December 31 57,759 60,682
====== ======
Available for Grant,
December 31 63,525 63,525
====== ======
</TABLE>
The Corporation currently accounts for its stock-based compensation plans using
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). In 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123) effective for transactions entered into after December 15, 1995.
Under the provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value-based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in APB 25. SFAS 123 requires that companies electing to continue using the
intrinsic value method must make pro forma disclosures of net income and
earnings per share as if the fair-value-based method of accounting had been
applied. As the Corporation anticipates continuing to account for stock-based
compensation using the intrinsic value method, SFAS 123 will not have an impact
on the Corporation's results of operations or financial position.
NOTE 16 - LONG-TERM LEASES:
The Bank was obligated at December 31, 1995, under certain operating leases
extending to the year 2002 for land and buildings used primarily for banking
purposes. Some of the leases provide for the payment of property taxes
41
<PAGE>
and insurance and contain various renewal options. The exercise of renewal
options is, of course, dependent upon future events. Accordingly, the following
summary does not reflect possible additional payments due if renewal options are
exercised.
<TABLE>
<CAPTION>
(In thousands of dollars)
APPROXIMATE REQUIRED
YEAR ANNUAL RENTALS
---- --------------
<S> <C> <C>
1996 $ 26
1997 26
1998 26
1999 20
2000 7
Later years 12
-----
Total $ 117
=====
</TABLE>
Rental expense for operating leases for the years ended December 31, 1995, 1994,
and 1993 was $39,000, $45,000 and $42,000, respectively.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Bank is involved at times in various litigation arising out of the normal
course of business. In the opinion of the Bank's legal counsel, there is no
pending or threatened litigation of any material consequence at this time.
The Corporation has entered into a $4,500,000 unsecured line of credit from an
unaffiliated bank. There have been no borrowings under this credit arrangement.
NOTE 18 - RELATED PARTY TRANSACTIONS:
During 1995 and 1994, the Bank had loan and deposit relationships with certain
related parties; principally, directors and executive officers, their immediate
families and their business interests. All of these relationships were in the
ordinary course of business. Total loans outstanding to this group (including
immediate families and business interests) amounted to $7,342,000 at December
31, 1995, and $9,474,000 at December 31, 1994. During 1995, $13,598,000 of new
loans were made to this group. Repayments of $15,724,000 were made during the
year. Other decreases, which included loans outstanding to former officers and
directors, totaled $6,000.
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Bank is a party to financial instruments with off-balance sheet risks in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. These instruments involve, to varying degrees,
elements of credit, interest rate, or liquidity risk in excess of the amounts
recognized in the balance sheet. The contract amounts of these instruments
express the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments.
42
<PAGE>
<TABLE>
<CAPTION>
...... DECEMBER 31, ......
(In thousands of dollars) 1995 1994
---- ----
<S> <C> <C>
Financial instruments whose contract
amount represents credit risks:
Commitments to extend credit $50,441 $42,283
Standby letters of credit and
financial guarantees written $ 594 $ 354
</TABLE>
COMMITMENTS TO EXTEND CREDIT:
These are legally binding agreements to lend to a customer. 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 liquidity requirements. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit assessment of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and personal
guarantees.
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN:
These instruments are conditional commitments issued by the Bank guaranteeing
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. All standby letters
of credit outstanding at December 31, 1995, expire in 1996. The credit risk
involved in issuing a letter of credit is essentially the same as that involved
in extending loan facilities to customers. The amount of collateral obtained if
deemed necessary by the Bank is based on management's credit evaluation of the
customer.
OTHER:
In October, 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 119 (SFAS 119), Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments, effective for
fiscal years ending after December 15, 1994. This statement amends existing
requirements of SFAS 105, Disclosure of Information about Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with Concentrations of
Credit Risk to require disaggregation of information about financial instruments
with off-balance-sheet risk of accounting loss by class, business activity,
risk, or other category that is consistent with the entity's management of those
instruments. As of December 31, 1995, the Corporation holds derivative financial
instruments in the amount of $16,948,000 which have been reported on the balance
sheet. Such on-balance sheet instruments are specifically excluded from the
scope of SFAS 119.
NOTE 20 - 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:
INVESTMENT SECURITIES:
For securities held as investments, fair value equals quoted market price, if
available. If a quoted price is not available, fair value is estimated using
quoted market prices for similar securities.
LOAN RECEIVABLES:
The fair value 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.
43
<PAGE>
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.
FEDERAL FUNDS PURCHASED:
The fair value of federal funds purchased is estimated based on the current
rates offered for borrowings of the same remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness 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
guarantees and 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.
The estimated fair value of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
.......... 1995 .......... .......... 1994 ..........
CARRYING FAIR CARRYING FAIR
(In thousands of dollars) AMOUNT VALUE AMOUNT VALUE
- ------------------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 24,144 $24,144 $ 23,046 $ 23,046
Investment securities 151,496 152,430 133,356 129,644
Loans:
Loans 247,883 261,567 208,552 199,327
Less, allowance for loan losses (3,703) (3,703) (3,194) (3,100)
-------- ------- -------- -------
Net loans 244,180 257,864 205,358 196,227
Financial liabilities:
Deposits 368,315 360,128 320,707 320,272
Federal funds purchased 25,833 25,825 15,297 15,297
Unrecognized financial instruments:
Commitments to extend credit 50,441 53,225 42,283 37,422
Standby letters of credit 594 594 354 354
</TABLE>
44
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for First National
Corporation (Parent Company only) and First National Bank (Bank only):
FIRST NATIONAL CORPORATION (PARENT COMPANY ONLY):
<TABLE>
<CAPTION>
..... DECEMBER 31, .....
(In thousands of dollars) 1995 1994
----
<S> <C> <C>
Balance Sheets:
Assets:
Cash $ 112 $ 90
Investment securities 434 425
Investment in banking subsidiary 39,162 35,681
Other assets 83 5
--------- ---------
Total assets $ 39,791 $ 36,201
========= =========
..... DECEMBER 31, .....
(In thousands of dollars) 1995 1994
---- ----
Liabilities:
Other liabilities $ 14 $ 20
--------- ---------
Total liabilities 14 20
Shareholders' equity 39,777 36,181
--------- ---------
Total liabilities and shareholders' equity $ 39,791 $ 36,201
</TABLE>
<TABLE>
<CAPTION>
.....YEAR ENDED DECEMBER 31, .....
1995 1994 1993
----
(In thousands of dollars)
<S> <C> <C> <C>
Statements of Income:
Income:
Dividends from banking subsidiary $ 1,384 $ 1,183 $ 1,070
Interest and dividends 22 18 12
Gain on sale of securities - - 95
-------- ------- -------
Total income 1,406 1,201 1,177
-------- ------- -------
Expenses:
Other general expense 27 6 5
-------- ------- -------
Total expenses 27 6 5
-------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiary 1,379 1,195 1,172
Applicable income tax benefit (expense) 3 (3) (40)
Equity in undistributed earnings of subsidiary 3,258 2,869 2,641
-------- ------- -------
Net income $ 4,640 $ 4,061 $ 3,773
======== ======= =======
</TABLE>
45
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL CORPORATION (PARENT COMPANY ONLY) (CONTINUED):
Statements of Changes in Shareholders' Equity:
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
On Securities
Available-
... Common Stock ... For-Sale, Net
Retained Of Applicable
(In thousands of dollars, except per Shares Amount Surplus Earnings Income Taxes Total
------ ------ ------- -------- ------------ -----
share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 1,760,620 $ 8,803 $ 7,346 $14,587 $ - $ 30,736
Net income - 1993 - - - 3,773 - 3,773
Cash dividends declared - - - (1,080) - (1,080)
Stock dividends declared 87,490 437 1,167 (1,604) - -
Common stock issued 487 3 6 - - 9
Cash paid in lieu of fractional
shares - - (2) - - (2)
Change in unrealized gain (loss)
on securities available-for-sale, net
of applicable deferred
income taxes - - - - 15 15
--------- ------ ------ ------- --------- --------
Balance, December 31, 1993 1,848,597 9,243 8,517 15,676 15 33,451
Net income - 1994 - - - 4,061 - 4,061
Cash dividends declared - - - (1,196) - (1,196)
Stock dividends declared 184,297 921 3,316 (4,237) - -
Common stock issued 2,106 11 38 - - 49
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred
income taxes - - - - (184) (184)
---------- ------ ------ ------- ---------- ---------
Balance, December 31, 1994 2,035,000 $10,175 $11,871 $14,304 $ (169) $ 36,181
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
On Securities
Available-
... Common stock ... For-Sale, Net
(In thousands of dollars, Retained Of Applicable
except per share data) Shares Amount Surplus Earnings Income Taxes Total
- ---------------------- ------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Net income - 1995 - $ - $ - $ 4,640 $ - $ 4,640
Cash dividends declared - - - (1,403) - (1,403)
Stock dividends declared 203,042 1,015 4,285 (5,300) - -
Common stock issued 6,297 32 104 - - 136
Change in unrealized gain
(loss) on securities
available-for-sale,
net of applicable
deferred income taxes - - - - 223 223
--------- -------- -------- -------- ------------ --------
Balance, December 31, 1995 2,244,339 $ 11,222 $ 16,260 $ 12,241 $ 54 $ 39,777
========= ======== ======== ======== ============= ========
</TABLE>
46
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL CORPORATION (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
... YEAR ENDED DECEMBER 31, ...
(In thousands of dollars) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 4,640 $ 4,061 $ 3,773
Adjustments to reconcile net income
to net cash provided by operating
activities:
Discount accretion (22) (9) (10)
Gain on sale of securities - - (95)
(Increase) decrease in other assets (78) (4) 9
Increase (decrease) in other liabilities (6) - 7
Undistributed earnings of subsidiary (3,258) (2,869) (2,641)
--------- ----------- -------
Net cash provided by operating activities 1,276 1,179 1,043
--------- ----------- -------
Cash flows from investing activities:
Proceeds from sales of marketable securities 149 - 95
Proceeds from maturities of investment securities 1,265 725 1,350
Purchases of investment securities (1,401) (721) (1,760)
--------- ----------- -------
Net cash provided (used) by investing activities 13 4 (315)
--------- ----------- -------
Cash flows from financing activities:
Cash dividends paid (1,403) (1,196) (1,080)
Cash paid in lieu of fractional shares - 49 (2)
Common stock issuance 95 - 9
Stock options exercised 41 - -
--------- ----------- -------
Net cash used by financing activities (1,267) (1,147) (1,073)
--------- ----------- -------
Net increase in cash and cash equivalents 22 36 (345)
Cash and cash equivalents at beginning of year 90 54 399
--------- ----------- -------
Cash and cash equivalents at end of year $ 112 $ 90 $ 54
========= =========== =======
</TABLE>
47
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL BANK (BANK ONLY):
<TABLE>
<CAPTION>
... DECEMBER 31, ...
--------------------
(In thousands of dollars) 1995 1994
- ------------------------- ---- ----
<S> <C> <C>
Balance Sheets:
Assets:
Cash and due from banks $ 24,144 $ 23,046
Investment securities 151,062 132,931
Loans, net 244,180 205,358
Premises and equipment 8,250 7,284
Other assets 8,169 4,994
-------- --------
Total assets $435,805 $373,613
======== ========
Liabilities:
Deposits $368,427 $320,797
Funds purchased and other borrowings 25,833 15,297
Other liabilities 2,383 1,838
-------- --------
Total liabilities 396,643 337,932
Shareholder's equity 39,162 35,681
-------- --------
Total liabilities and shareholder's equity $435,805 $373,613
======== ========
</TABLE>
<TABLE>
<CAPTION>
...YEAR ENDED DECEMBER 31, ...
------------------------------
(In thousands of dollars) 1995 1994 1993
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Statements of Income:
Income:
Interest on loans $ 22,020 $ 17,693 $ 16,031
Interest on investment securities 5,995 6,961 7,054
Other interest income 2,146 474 707
Other income 4,049 3,533 3,375
-------- -------- --------
Total income 34,210 28,661 27,167
-------- -------- --------
Expenses:
Interest on deposits 11,243 8,551 8,549
Other interest expense 1,282 542 272
Salaries and employee benefits 7,732 7,438 6,830
Provision for loan losses 844 575 733
Other expense 6,562 5,898 5,669
-------- ------- -------
Total expenses 27,663 23,004 22,053
-------- ------- -------
Income before income taxes 6,547 5,657 5,114
Applicable income taxes (1,905) (1,605) 1,403
-------- -------- --------
Net income $ 4,642 $ 4,052 $ 3,711
======== ======== ========
</TABLE>
48
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL BANK (BANK ONLY) (CONTINUED):
<TABLE>
<CAPTION>
Statements of Changes in Unrealized
Shareholder's Equity: Gain (Loss) On
Securities
Available-
For-Sale,
Net Of
Applicable
... Common Stock ... Retained Deferred
(In thousands of dollars, Shares Amount Surplus Earnings Income Taxes Total
------ ------- -------- ------------ -----
except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 566,290 $ 2,831 $ 9,078 $ 18,431 $ - $ 30,340
Net income - 1993 - - - 3,711 - 3,711
Cash dividends declared - - - (1,070) - (1,070)
Change in unrealized gain on
securities available-for-sale,
net of applicable deferred
income taxes - - - - 15 15
------- ------- -------- -------- ------------ --------
Balance, December 31, 1993 566,290 2,831 9,078 21,072 15 32,996
Net income - 1994 - - - 4,052 - 4,052
Cash dividends declared - - - (1,183) - (1,183)
Change in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes - - - - (184) (184)
------- ------- -------- -------- ------------ --------
Balance, December 31, 1994 566,290 2,831 9,078 23,941 (169) 35,681
Net income - 1995 - - - 4,642 - 4,642
Cash dividends declared - - - (1,384) - (1,384)
Change in unrealized gain (loss)
on securities available-for-sale,
net of applicable deferred
income taxes - - - - 223 223
------- ------- -------- -------- ------------ --------
Balance, December 31, 1995 566,290 $ 2,831 $ 9,078 $ 27,199 $ 54 $ 39,162
======= ======== ======== ======== ============ ========
</TABLE>
49
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL BANK (BANK ONLY) (CONTINUED):
<TABLE>
<CAPTION>
... YEAR ENDED DECEMBER 31, ...
(In thousands of dollars) 1995 1994 1993
----
<S> <C> <C> <C>
Statements of Cash Flows:
Cash flows from operating activities:
Net income $ 4,642 $ 4,052 $ 3,711
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,430 1,124 1,243
Provision for loan losses 844 575 733
Provision for deferred taxes (50) (89) (120)
(Gain) loss on sale of premises and equipment 5 (3) 1
Increase (decrease) in accrued income taxes -
current 23 150 (237)
(Increase) decrease in interest receivable (740) (247) 19
Premium amortization and discount accretion 337 (94) 278
Increase (decrease) in interest payable 652 18 (107)
Increase in miscellaneous assets (3,277) (446) (244)
(Increase) decrease in prepaid assets 31 (25) (45)
Increase (decrease) in other liabilities (131) 86 135
-------- ------ -------
Net cash provided by operating activities 3,766 5,101 5,367
-------- ------- -------
Cash flows from investing activities:
Proceeds from maturities of investment securities 36,021 46,468 44,375
Purchases of investment securities (54,131) (51,536) (69,617)
Decrease in time deposits in other banks - - 100
Net increase in customer loans (40,009) (30,728) (6,196)
Recoveries on loans previously charged off 343 297 212
Proceeds from sale of other real estate 188 450 548
Purchases of premises and equipment (1,865) (943) (520)
Proceeds from sale of premises and equipment 3 28 30
Decrease in funds sold - 10,900 16,875
------- ------- -------
Net cash used in investing activities (59,450) (25,064) (14,193)
------- -------- -------
</TABLE>
50
<PAGE>
NOTE 21 - CONDENSED FINANCIAL STATEMENTS (CONTINUED):
FIRST NATIONAL BANK (BANK ONLY) (CONTINUED):
<TABLE>
<CAPTION>
(In thousands of dollars) 1995 1994 1993
----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts,
savings accounts and certificates of deposit $ 47,630 $ 14,823 $ 10,028
Net increase in federal funds purchased
and securities sold under agreements to repurchase 10,536 7,216 2,275
Dividends paid (1,384) (1,183) (1,070)
-------- -------- --------
Net cash provided by financing activities 56,782 20,856 11,233
-------- -------- --------
Net increase in cash and cash equivalents 1,098 893 2,407
Cash and cash equivalents at beginning of year 23,046 22,153 19,746
-------- -------- --------
Cash and cash equivalents at end of year $ 24,144 $ 23,046 $ 22,153
======== ======== ========
</TABLE>
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
51
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors
First National Corporation
We consent to the incorporation by reference into the Registration
Statement on Form S-8 filed by First National Corporation in connection with the
First National Corporation Dividend Reinvestment Plan (Registration No.
33-58692) of our Report dated January 18, 1996, included in First National
Corporation's 10-K for the year ended December 31, 1995.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND> FINANCIAL DATA SCHEDULE FIRST NATIONAL CORP.
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1995 and the
Consolidated Statement of Income for the Year Ended December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 24,144
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,836
<INVESTMENTS-CARRYING> 95,660
<INVESTMENTS-MARKET> 96,594
<LOANS> 247,883
<ALLOWANCE> 3,703
<TOTAL-ASSETS> 436,322
<DEPOSITS> 368,315
<SHORT-TERM> 25,833
<LIABILITIES-OTHER> 2,397
<LONG-TERM> 0
0
0
<COMMON> 11,222
<OTHER-SE> 28,555
<TOTAL-LIABILITIES-AND-EQUITY> 436,322
<INTEREST-LOAN> 22,020
<INTEREST-INVEST> 7,676
<INTEREST-OTHER> 487
<INTEREST-TOTAL> 30,183
<INTEREST-DEPOSIT> 11,243
<INTEREST-EXPENSE> 12,525
<INTEREST-INCOME-NET> 17,658
<LOAN-LOSSES> 844
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 4,710
<INCOME-PRETAX> 6,542
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,640
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 7.98
<LOANS-NON> 845
<LOANS-PAST> 354
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,826
<ALLOWANCE-OPEN> 3,194
<CHARGE-OFFS> 691
<RECOVERIES> 356
<ALLOWANCE-CLOSE> 3,703
<ALLOWANCE-DOMESTIC> 3,703
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
