FIRST NATIONAL CORPORATION
Financial Statements
(Form 10-Q)
September 30, 1996
<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended SEPTEMBER 30, 1996 Commission File Number 0-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 534-2175
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of issuer's class of
securities.
CLASS OUTSTANDING as of September 30, 1996
(Common Stock, $5 par value) 2,423,709
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Consolidated Balance Sheet -
September 30, 1996 and December 31, 1995
Consolidated Statement of Income -
Three and Nine Months Ended
September 30, 1996 and 1995
Consolidated Statement of Cash Flows -
Nine Months Ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports of Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
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PART I - FINANCIAL INFORMATION
Item l. Financial Statements
FIRST NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
9-30-96 12-31-95
ASSETS (In Thousands) (In Thousands)
Cash and due from banks $28,615 $24,144
Federal funds sold 0 0
Investment securities - Note 2
Securities held-to-maturity
Total (fair value of $71,219 in 1996
and $96,594 in 1995) 71,300 95,660
Securities available-for-sale, at fair
value 81,449 55,836
Total investment securities 152,749 151,496
Loans - Note 3 277,329 250,423
Less: Unearned income 2,883 2,540
Allowance for loan losses-Note 4 4,497 3,703
Loans, net 269,949 244,180
Premises and equipment 10,265 8,250
Intangible assets 3,113 3,489
Other real estate - Note 6 52 151
Other assets 4,920 4,612
TOTAL ASSETS $469,663 $436,322
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Consolidated Balance Sheet - Continued.......
LIABILITIES & STOCKHOLDERS' EQUITY 9-30-96 12-31-95
(In Thousands) (In Thousands)
Liabilities:
Deposits in domestic offices:
Noninterest-bearing $65,024 $56,735
Interest-bearing - Note 7 334,196 311,580
TOTAL DEPOSITS 399,220 368,315
Federal funds purchased & securities
sold under agreement to repurchase 20,939 25,833
Other liabilities 2,517 2,397
TOTAL LIABILITIES 422,676 396,545
Commitments & Contingent liabilities - Note 8
Shareholders' equity:
Common stock - $5 par value; authorized
5,000,000 shares; issued and outstanding
2,423,709 shares in 1996 and 2,244,339
shares in 1995 - Note 9 12,119 11,222
Additional paid-in capital 20,140 16,260
Retained earnings 15,185 12,241
Unrealized gain (loss) on securities
available-for-sale, net of applicable
deferred income taxes (457) 54
TOTAL SHAREHOLDERS' EQUITY 46,987 39,777
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $469,663 $436,322
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
3 Months Ended 9 Months Ended
09-30-96 09-30-95 09-30-96 09-30-95
(In Thousands) (In Thousands)
Interest income:
Interest & fees on loans $6,352 $5,741 $18,417 $16,077
Interest & dividends on investment sec.:
Taxable income 1,726 1,665 4,993 4,401
Non-taxable income 409 449 1,263 1,209
Dividends on stock 6 6 19 18
Interest on federal funds sold 116 11 444 435
Total interest income 8,609 7,872 25,136 22,140
Interest expense:
Interest on deposits 3,170 2,997 9,254 8,131
Interest on federal funds purchased &
securities sold under agreement to
repurchase 314 335 1,006 970
Total interest expense 3,484 3,332 10,260 9,101
Net interest income 5,125 4,540 14,876 13,039
Provisions for loan losses - Note 4 269 100 789 340
Net interest income after provision
for loan losses 4,856 4,440 14,087 12,699
Noninterest income:
Service charges on deposit accounts 956 784 2,954 2,233
Other service charges commissions, fees 304 231 895 695
Investment securities, gains (losses) (9) 9 (7) 11
Other operating income 9 8 25 28
Total noninterest income 1,260 1,032 3,867 2,967
Noninterest expense:
Salaries & employee benefits 2,335 1,936 6,547 5,736
Occupancy expense of bank premises-net 225 239 743 664
Furniture & equipment expense - net 344 325 954 840
Amortization expense-Intangible assets 163 177 476 330
FDIC insurance premium 0 180 0 539
Other expense 1,052 989 3,227 2,676
Total noninterest expense 4,119 3,846 11,947 10,785
Income before income taxes 1,997 1,626 6,007 4,881
Applicable income taxes 611 447 1,825 1,389
Net Income $1,386 $1,179 $4,182 $3,492
Net income per common share - Note 10 $0.61 $0.53 $1.84 $1.56
Cash dividends per common share $0.19 $0.17 $0.55 $0.50
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FIRST NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
9 Months Ended 9 Months Ended
09-30-96 09-30-95
(In Thousands) (In Thousands)
Cash flows from operating activities:
Net income $ 4,182 $ 3,492
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,156 991
Provision for loan losses 789 340
Provision for deferred taxes 0 81
Increase (decrease) in reserve for
income taxes-current (457) (127)
(Gain) loss on sale of premises
and equipment 0 (3)
(Increase) decrease in interest
receivables 7 (875)
Increase (decrease) in accumulated
premium amortization and discount
accretion - net 43 (68)
Increase (decrease) in interest
payable 121 527
(Increase) decrease in miscellaneous
assets (171) (3,076)
(Increase) decrease in prepaid
assets 226 291
Increase (decrease) in other
liabilities 454 202
Total adjustments 2,168 (1,717)
Net cash provided by operating
activities $ 6,350 $ 1,775
<PAGE>
Consolidated Statement of Cash Flows - Continued.......
9 Months Ended 9 Months Ended
09-30-96 09-30-95
(In Thousands) (In Thousands)
Cash flows from investing activities:
Proceeds from maturities of investment
securities held-to-maturity $47,533 $22,678
Purchase of investment securities
held-to-maturity (7,283) (20,583)
Proceeds from maturities of investment
securities available-for-sale 12,308 2,618
Purchase of investment securities
available-for-sale (54,678) (27,693)
Net (increase) decrease in customer
loans (26,874) (32,051)
Additions to premises and equipment (2,699) (1,713)
Proceeds from sale of premises and
equipment 0 3
Recoveries from loans previously charged
off 316 278
(Increase) decrease in funds sold 0 0
Proceeds from issuance of debt 2,000 0
Repayment of debt (2,000) 0
Net cash used in investing
activities (31,377) (56,463)
Cash flows from financing activities:
Net increase in demand deposits, NOW
accounts, savings accounts and
certificates of deposit 30,905 40,031
Purchase of treasury stock (125) 0
Sale of common stock 4,902 0
Net increase (decrease) in federal funds
purchased and securities sold under
agreement to repurchase (4,894) 13,981
Dividends paid (1,239) (1,018)
Net cash provided by financing
activities 29,549 52,994
Net increase (decrease) in cash and
cash equivalents 4,522 (1,694)
Cash and cash equivalents at beginning
of year 24,144 23,046
Cash and cash equivalents at end of
reporting period $ 28,666 $ 21,352
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FIRST NATIONAL CORPORATION
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1995.
Note 2 - Investment Securities:
The following is the amortized cost and fair value of investment
securities held-to-maturity at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
09-30-96 12-31-95
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 20,211 18 (29) 20,200 34,323 203 (65) 34,461
Obligations of
U S government
agencies & corps 17,380 60 (339) 17,101 23,875 212 (86) 24,001
Obligations of state
and political
subdivisions 33,709 406 (197) 33,918 37,462 714 (44) 38,132
Other securities 0 0 0 0 0 0 0 0
Total 71,300 484 (565) 71,219 95,660 1,129 (195) 96,594
</TABLE>
<PAGE>
Note 2 - Continued...
The following is the amortized cost and fair value of securities
available-for-sale at September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
09-30-96 12-31-95
Gross Gross Gross Gross
Amort Unreal Unreal Fair Amort Unreal Unreal Fair
Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U S Treasury
securities 23,047 2 (223) 22,826 15,448 188 0 15,636
Obligations of
U S government
agencies & corps 58,528 54 (569) 58,013 39,826 188 (289) 39,725
Other securities 610 0 0 610 475 0 0 475
Total 82,185 56 (792) 81,449 55,749 376 (289) 55,836
</TABLE>
Investment securities with an aggregate amortized cost of $54,285
on September 30, 1996 and $55,126 on December 31, 1995, were
pledged to secure public deposits and for other purposes as
required and permitted by law.
Note 3 - Loans:
The following is a summary of loans at: 9-30-96 12-31-95
Commercial, financial & agricultural 45,316 42,000
Real estate - construction 7,899 5,792
Real estate - mortgage 164,938 148,853
Consumer 58,126 52,670
All other 1,050 1,108
Total loans, gross 277,329 250,423
As of September 30, 1996, and December 31, 1995, the aggregate
dollar amount of loans to related parties; principally, directors
and executive officers, their immediate families and their business
interests, was $5,669 and $7,342 respectively. The following is an
analysis of the activity with respect to loans to related parties
for the nine months ended September 30, 1996:
Balance, beginning of period 7,342
Add:
New loans: 9,972
Deduct:
Payments 11,645
Other changes 0
Balance, end of period 5,669
<PAGE>
Note 4 - Allowance for Loan Losses:
Amount
09-30-96 12-31-95
Balance, beginning of period (year) 3,703 3,194
Add:
Recoveries 316 356
Provisions for loan losses charged
to income 789 844
Total 4,808 4,394
Deduct:
Loans charged off 311 691
Balance, end of period (year) 4,497 3,703
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan
portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and
reduced by charge-offs, net of recoveries.
For impairment recognized in accordance with Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", the entire change in present value of
expected cash flows is reported as bad debt expense in the same
manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be
reported.
Note 5 - Adoption of Statement of Financial Accounting Standards No. 114 and
No. 118:
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors
for Impairment of a Loan", and Statement of Financial Accounting
Standards No. 118 (SFAS 118), "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures". These
statements require creditors to account for impaired loans, except
for those loans that are accounted for at fair value or at the
lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate.
<PAGE>
Note 5 - Continued...
The Bank determines when loans become impaired through its normal
loan administration and review functions. Those loans identified
as substandard or doubtful as a result of the loan review process
are potentially impaired loans. A loan is impaired when, based on
current information and events, it is probable that a creditor will
be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. A loan
is not impaired during a period of delay in payment if the Company
expects to collect all amounts due, including interest accrued at
the contractual interest rate, for the period of delay.
In accordance with these standards, the Company does not apply SFAS
114 and SFAS 118 to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. These groups
include the Company's credit card, residential mortgage, overdraft
protection, home equity lines, accounts receivable financing, and
consumer installment loans.
The Company's adoption of these accounting standards did not have
a material effect on the financial condition and results of
operations of the Company.
In accordance with SFAS 114, historical information has not been
restated to reflect the application of this standard.
Note 6 - Other Real Estate:
Real estate acquired in satisfaction of a loan 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 Other Real Estate Owned ("OREO") and recorded at the
lower of the outstanding loan balance at the time of acquisition or
the estimated market value. Market value is determined on the
basis of the properties being disposed of in the normal course of
business and not on a liquidation or distress basis. Loan losses
arising from the acquisition of such properties are charged against
the allowance for loan losses. Gains or losses arising from the
sale of OREO are reflected in current operations.
Note 7 - Interest Bearing Deposits:
Certificates of deposit in excess of $100,000 totaled $34,801 and
$31,203 at September 30, 1996 and December 31, 1995 respectively.
<PAGE>
Note 8 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various
commitments and incurs certain contingent liabilities, which are
not reflected in the accompanying financial statements. The
commitments and contingent liabilities include guarantees,
commitments to extend credit and standby letters of credit. At
September 30, 1996, commitments to extend credit and standby
letters of credit aggregated $57,093. The Company does not
anticipate any material losses as a result of these transactions.
Note 9 - Common Stock
As of December 31, 1995, the common stock outstanding was
2,244,339. During the first three quarters, the Company granted
options to purchase an aggregate of 5,025 shares under the
incentive stock option plan and also issued 14,139 shares to the
dividend reinvestment plan. During the second quarter, the Company
granted and issued 5,185 shares under a restricted stock agreement
dated March 28, 1996. The Company purchased and retired 14,179
shares during the first three quarters of 1996. As a result of a
stock offering, the Company has sold and issued 169,200 shares of
First National Corporation stock during the third quarter of 1996.
The proceeds from this offering are to be used to purchase all the
common stock of the newly formed National Bank of York County. As
of September 30, 1996, the common stock outstanding was 2,423,709.
Note 10 - Earnings Per Share:
Earnings per share are calculated on the weighted-average of number
of shares of common stock outstanding, giving retroactive effect to
stock dividends and stock splits. The number of weighted-average
shares outstanding at September 30, 1996 was 2,276,348 and
2,240,081 at December 31, 1995.
Dividends per share are calculated using the current equivalent
number of common shares outstanding at the time of the dividend
based on the Company's shares outstanding.
<PAGE>
FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to financial statements contained in
this report. For further information refer to the Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
First National Corporation opened its second bank, the National Bank of
York County, on July 11, 1996 in Rock Hill, South Carolina to join its
existing bank, First National Bank, Orangeburg, South Carolina. A second
office of National Bank of York County was opened in Fort Mill, South
Carolina on September 18, 1996.
For the third quarter of 1996, First National Corporation ("The
Corporation") had consolidated net income of $1,386,000, an increase of 17.6
percent over the $1,179,000 earned in the third quarter of 1995. Earnings per
share amounted to $0.61 for the three months ended September 30, 1996, a 15.1
percent increase over the $0.53 per share earned in the third quarter of
1995. Net income for the first nine months of 1996 was $4,182,000 an
increase of 19.8 percent over the $3,492,000 earned for the same period in
1995. Earnings per share amounted to $1.84 for the nine months ended
September 30, 1996, a 17.9 percent increase over the 1.56 per share earned in
the first nine months of 1995.
NET INTEREST INCOME
For the third quarter of 1996, net interest income was $5,125,000
compared to $4,540,000 for the same period in 1995. This is an increase of
$585,000 or 12.9 percent. Net interest income for the first nine months of
1996 was $14,876,000 compared to $13,039,000 for the same period in 1995.
This represents an increase of $1,837,000 or 14.1 percent. This increase
resulted from a 14.2 percent increase in loan outstandings, net of unearned
income, when compared to the first nine months of 1995.
The yield on a major portion of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. In the
first nine months of 1995, the year to date taxable equivalent yield on
earning assets was 7.95 percent. During the same period of 1996, the yield
decreased to 7.93 percent, or a decrease of 2 basis points. The cost of the
liabilities used to support these earnings assets decreased 3 basis points
from 3.92 percent in 1995 to 3.89 percent in 1996. Interest rates paid on
interest-bearing liabilities decreased at approximately the same rate as
yields on earning assets.
<PAGE>
Management's Discussion Continued...
For the first nine months net interest margins decreased from 4.68
percent in 1995 to 4.66 percent in 1996. The impact of interest-free funds
for the same period decreased from .65 percent to .62 percent or a decrease
of 3 basis points.
The largest category of earning assets is loans. At the end of the
third quarter 1996, loans outstanding, less unearned income, were
$274,446,000 compared to $247,883,000 at December 31, 1995. This represents
an increase of $26,563,000 or 10.7 percent. For the third quarter ended
September 30, 1996, interest and fees on loans were $6,352,000 compared to
$5,741,000 for the comparable period in 1995, an increase of $611,000 or 10.6
percent. For the nine months ended September 30, 1996, interest and fees on
loans were $18,417,000 compared with $16,077,000 for the same period in 1995.
This represents an increase of $2,340,000 or 14.6 percent.
The major volume increase in the loan portfolio was in real estate-
mortgage loans. For the first nine month period ended September 30, 1996,
mortgage loans increased $16,085,000 or 10.8 percent when compared to
December 31, 1995. Of this increase $7,909,000 was secured by nonfarm
nonresidential properties and $5,734,000 was secured by 1-4 family residential
properties when compared to December 31, 1995. This increase in the loan
portfolio was brought about due to a renewed confidence in overall economic
trends as well as the opening of the National Bank of York County and the
Bluffton Branch of First National Bank. The Company has no foreign loans nor
loans for highly leveraged transactions.
For the nine months ended September 30, 1996, loans averaged
$264,067,000 and yielded 9.11 percent on a taxable equivalent basis compared
to $227,556,000 with a taxable equivalent yield of 9.36 percent or a decrease
of 25 basis points for the year ended December 31, 1995.
Investment securities are the second largest category of earning assets.
Investment securities are utilized by the Company as a vehicle for the
employment of excess funds, to provide liquidity, to fund loan demand or
deposit liquidation, and to pledge as collateral for certain deposit and
purchased funds.
At September 30, 1996, investment securities were $152,749,000 compared
to $151,496,000 at December 31, 1995. This is an increase of $1,253,000 or
.8 percent. This increase is the result of management's decision to utilize
excess funds in the investment function in an attempt to increase yields and
profitability.
For the third quarter ended September 30, 1996, investment income was
$2,141,000 compared with $2,120,000 for the comparable period in 1995, a net
increase of $21,000 or 1.0 percent. For the nine month period ended
September 30, 1996, investment income was $6,275,000 compared with $5,628,000
for the same period in 1995, a net increase of $647,000 or 11.5 percent.
Management attributes this increase in income to higher yields on investment
securities.
<PAGE>
Management's Discussion Continued...
At the end of the third quarter 1996, securities averaged $152,353,000
and yielded 5.95 percent on a taxable equivalent basis, compared to
$142,614,000 with a yield of 5.85 percent for the year ended December 31,
1995, resulting in a 10 basis point increase in yield.
As of September 30, 1996, The Company had unrealized gains in the U. S.
Treasury and agency portfolio of $134,000 and in the municipal portfolio
$406,000. Also at September 30, 1996, the Company had an unrealized loss of
$1,160,000 in the U. S. Treasury and agency portfolio and a $197,000
unrealized loss in the municipal portfolio.
At year end 1993, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" for the investment portfolio, and showed a net unrealized loss at
September 30, 1996 of approximately $736,000 on the $80,839,000 of securities
denoted as available-for-sale.
For the first nine months ended September 30, 1996, the Company had a
$7,000 realized loss due to called municipal bonds.
Although securities classified as available-for-sale may be sold from
time to tome to meet liquidity or other needs, it is not the normal activity
of the Company to trade the investment portfolio. Management has the intent
and the ability to hold securities on a long-term basis or until maturity.
During the first nine months of 1996, interest-bearing liabilities
averaged $354,419,000 and carried a rate of 3.86 percent. This compares to
an average level of $316,629,000 with a rate of 3.96 percent at December 31,
1995 or a decrease of 10 basis points. Approximately half of these
interest-bearing liabilities have fixed rates. They are expected to be
renewed at prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three month period ended September
30, 1996 was $269,000 compared to $100,000 for the same period in 1995 which
represents a 169.0 percent increase. For the nine month period ended
September 30, 1996, the provision for loan losses was $789,000 compared to
$340,000 for the same period in 1995 which represents a 132.1 percent
increase. The increase in the provision for loan losses was due to several
factors. These factors include continued strong loan growth and the funding
of the provision for loan losses for the National Bank of York County. The
allowance for loan losses was $4,497,000 or 1.64 percent of outstanding loans
at September 30, 1996 compared to 1.49 percent of outstanding loans at year-
end 1995.
<PAGE>
Management's Discussion Continued...
To determine the adequacy of the allowance for loan losses, management
performs an internal loan analysis which indicates the estimated loan losses.
Management feels that the allowance for loan losses is adequately funded.
Other real estate owned includes certain real estate acquired as a
result of foreclosure as well as amounts reclassified as in-substance
foreclosures. For the period ended September 30, 1996, other real estate
owned was $52,000 compared to $151,000 at December 31, 1995. This decrease
resulted from the sale of several real estate properties.
Management anticipates that the level of charge-offs for 1996 will be
below the levels of 1995. The loan loss allowance is considered adequate by
management. However, changes in economic conditions in the Company's market
area could affect these levels.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 1996 was $1,260,000 compared
to $1,032,000 for the same period in 1995, representing an increase of
$228,000 or 22.1 percent. For the first nine months of 1996 noninterest
income was $3,867,000 compared to $2,967,000 for the same period in 1995,
representing an increase of $900,000 or 30.3 percent. During the first nine
months of 1996, service charges and fee income increased $721,000 or 32.3
percent. This was primarily due to the increase in service fees on deposit
accounts implemented during the fourth quarter of 1995. Other service
charges, commissions and fees for the first nine months of 1996 increased
$200,000 or 28.8 percent compared to the same period in 1995. This increase
can be primarily attributed to the increase in the real estate mortgage loan
origination fee income.
Noninterest expense for the third quarter of 1996 was $4,119,000
compared to $3,846,000 for the same period in 1995, representing an increase
of $273,000 or 7.1 percent. For the nine months ended September 30, 1996,
noninterest expense was $11,947,000 compared to $10,785,000, an increase of
$1,162,000 or 10.8 percent. Salaries and employee benefits for the third
quarter ended September 30, 1996 increased $399,000 or 20.6 percent compared
to the same period in 1995. For the first nine months of 1996 salaries and
employee benefits increased $811,000 or 14.1 percent compared to the same
period in 1995. This increase in salaries and benefits can be largely
attributed to the opening of the National Bank of York County and the
Bluffton branch of First National during the third quarter of 1996.
<PAGE>
Management's Discussion Continued...
Amortization expense on intangible assets decreased $14,000 or 7.9 percent
compared to the same period in 1995. For the nine months ended September 30,
1996, amortization expense on intangible assets increased $146,000 or 44.2
percent compared to the same period in 1995. This is the direct result of
acquiring two branches from NationsBank in June 1995. Other expenses
increased $63,000 or 6.4 percent for the third quarter of 1996 compared to
the same period in 1995. For the nine months ended September 30, 1996, other
expenses increased $551,000 or 20.6 percent compared to the same period in
1995. This increase in other expenses is distributed among the following
expense categories: advertising, insurance, office and printing supplies,
postage, telephone and line charges, and other expenses.
NET INCOME
Net income was up 17.6 percent for the third quarter of 1996 when
compared to the same period in 1995. For the nine months ended September 30,
1996, net income was up 19.8 percent compared to the same period in 1995.
The $1,837,000 or 14.1 percent increase in net interest income and the
$900,000 or 30.3 percent increase in noninterest income for the nine months
ended September 30, 1996 as compared to the same period in 1995 were the
primary factors in the growth in net income.
CAPITAL RESOURCES AND LIQUIDITY
To date the capital needs of the Company have been met through the
retention of earnings less cash dividends. At the end of the third quarter,
1996, stockholder's equity was $46,987,000 compared to $39,777,000 at
December 31, 1995. The growth in 1996 includes the proceeds from the
issuance of 169,200 shares sold under a stock subscription dated July 19,
1996.
During the third quarter the Company sold 169,200 shares of $5.00 par
value common stock at a price of $27.00 per share. The proceeds from this
sale was used to payoff the $2,000,000 loan which was borrowed from a third
party financial institution and the $2,500,000 contribution of available
funds from First National Corporation used to organize the National Bank of
York County.
The Company and subsidiary are subject to certain risk-based capital
guidelines. These ratios measure the relationship of capital to a
combination of balance sheet and off balance sheet risks. The values of both
balance sheet and off balance sheet items are adjusted to reflect credit
risk. Under the guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to the Office of the Comptroller of
the Currency guidelines, as of December 31, 1995, Tier 1 capital must be at
least 4 percent of risk-weighted assets, while total capital must be 8
percent of risk-weighted assets. The Tier 1 capital ratio at September 30,
1996 was 16.1 percent compared to 15.3 percent at December 31, 1995. The
total capital ratio was 17.3 percent at September 30, 1996 compared to 16.6
percent at December 31, 1995.
<PAGE>
Management's Discussion Continued...
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 and 5 percent, depending on the institution's composite group
rating as determined by its regulators. At September 30, 1996, First
National Corporation's leverage ratio was 9.3 percent compared to 9.1 percent
at December 31, 1995. First National Corporation's ratio exceeds the minimum
standards by substantial margins.
Liquidity is the ability of The Company to meet its cash flow
requirements which arise primarily from withdrawal of deposits, extensions of
credit and payment of operating expenses. Asset liquidity is maintained by
the maturity structure of loans, investment securities and other short-term
investments. Management has policies and procedures governing the length of
time to maturity on loans and investments. Normally changes in the earning
asset mix are of a longer term nature and are not utilized for day-to-day
Corporation liquidity needs.
The Company's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from The Company's use
of federal funds purchased and securities sold under agreement to repurchase.
Additional liquidity can be secured from lines of credit extended to the
Company from its correspondent banks. Management feels that its liquidity
position is adequate.
<PAGE>
PART II - OTHER INFORMATION
Item l. Legal Proceedings:
Neither First National Corporation nor its subsidiaries, First
National Bank and National Bank of York County, is a party to nor
is any of their property the subject of any material or other
pending legal proceedings, other than ordinary routine proceedings
incidental to their business.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
Not Applicable
Item 6. Exhibits and Reports of Form 8-K:
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL CORPORATION
Date: November 6, 1996 C. John Hipp, III
-----------------------------------
President & Chief Executive Officer
Date: November 6, 1996 W. Louis Griffith
-----------------------------------
Principle Accounting Officer and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
27 Financial Data Schedule Attached
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at September 30, 1996 (Unaudited)
and the Consolidated Statement of Income (Unaudited) for the nine months ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 28,615
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,449
<INVESTMENTS-CARRYING> 71,300
<INVESTMENTS-MARKET> 71,219
<LOANS> 274,446
<ALLOWANCE> 4,497
<TOTAL-ASSETS> 469,663
<DEPOSITS> 399,220
<SHORT-TERM> 20,939
<LIABILITIES-OTHER> 2,517
<LONG-TERM> 0
0
0
<COMMON> 12,119
<OTHER-SE> 34,868
<TOTAL-LIABILITIES-AND-EQUITY> 469,663
<INTEREST-LOAN> 18,417
<INTEREST-INVEST> 6,275
<INTEREST-OTHER> 444
<INTEREST-TOTAL> 25,136
<INTEREST-DEPOSIT> 9,254
<INTEREST-EXPENSE> 10,260
<INTEREST-INCOME-NET> 14,876
<LOAN-LOSSES> 789
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 11,947
<INCOME-PRETAX> 6,007
<INCOME-PRE-EXTRAORDINARY> 4,182
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,182
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.93
<LOANS-NON> 574
<LOANS-PAST> 553
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,353
<ALLOWANCE-OPEN> 3,703
<CHARGE-OFFS> 311
<RECOVERIES> 316
<ALLOWANCE-CLOSE> 4,453
<ALLOWANCE-DOMESTIC> 4,453
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<PAGE>
</TABLE>
