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, 1996, Commission file number 000-13663
First National Corporation
Incorporated in the State of South Carolina
I.R.S. Employer Identification No.: 57-0799315
Address: 950 John C. Calhoun Drive, S.E.
Orangeburg, South Carolina 29115
Telephone: (803) 534-2175
Securities registered pursuant to Section 12(b) of the Act: Common Stock - $5.00
par value
Securities registered pursuant to Section 12 (g) of the Act: None.
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. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at February 28, 1997 was $84,995,625 based on the sale price of
$39.00 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 28,
1997 was 2,551,091.
Documents Incorporated by Reference
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 22, 1997, 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 ............................................... 11
Item 3 - Legal Proceedings ........................................ 12
Item 4 - Submission of Matters to a Vote of
Security Holders ....................................... 12
Part II
Item 5 - Market for Registrant's Common Equity
and Related Stockholder Matters ........................ 12
Item 6 - Selected Financial Data .................................. 12
Item 7 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations .......................................... 12
Item 8 - Financial Statements
and Supplementary Data ................................. 12
Item 9 - Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure ............................... 12
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
Schedules, and Reports on
Form 8-K ............................................. 13
*Incorporated by reference to the Registrant's Proxy Statement for its 1997
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 opened for business in 1934, and 100% of National
Bank of York County, which opened for business in 1996. 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. In August, 1996,
a branch was opened in Beaufort County, South Carolina.
The Company engages in no significant operations other than the ownership
of its subsidiaries.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for 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. National Bank of York County conducts its business from
two locations in two South Carolina towns. In their markets, the Banks encounter
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
the Banks and they offer certain services for their customers that the Banks do
not offer. In addition to commercial banks, savings institutions and credit
unions, the Banks compete 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 the Banks and many have substantially greater
resources than the Company.
As a bank holding company, the Company is a legal entity separate and
distinct from its bank subsidiaries. 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.
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Employees
The Company does not have any salaried employees. As of December 31, 1996,
the Banks had 281 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 of the Company
C. John Hipp, III (Age 45). 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.
L. D. Westbury (Age 64.) 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.
Robert R. Horger (Age 46). 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.
James C. Hunter, Jr. (Age 54). 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.
W. Louis Griffith (Age 45). 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.
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
Company's Bank subsidiaries.
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
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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
its subsidiary banks. Various legal limitations place restrictions on the
ability of First National Bank and National Bank of York County to lend or
otherwise supply funds to the Company. The Company and the Banks 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 the Banks 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.
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 has 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
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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. South Carolina law
was amended, effective July 1, 1996, to permit such interstate branching but not
de novo branching by an out-of-state bank. 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 ("FDICIA"), 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 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.
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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, 1996, the Company,
First National Bank and National Bank of York County had leverage ratios of
9.5%, 8.1% and 22.4% respectively, and total risk adjusted capital ratios of
17.1%, 14.8% and 33.3%, 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 for that year combined with its retained net profits for the two
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 Banks 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.
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The Banks' dividends are paid to the Company. From those dividends the
Board of Directors of the Company may elect to pay dividends to the shareholders
of the Company. Accordingly, any restriction on the ability of the Banks to pay
dividends will indirectly restrict the ability of the Company to pay dividends.
Bank Regulation
First National Bank and National Bank of York County are subject to
supervision and examination by the OCC. The OCC regulates and monitors all areas
of the banks' 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 and National Bank of York County are members of the
Federal Reserve System, and their deposits are insured by the FDIC up to the
maximum permitted by law.
Under present law, First National Bank and National Bank of York County
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 FDIC-insured institutions, First National Bank and National Bank of York
County are 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 December 11, 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 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, 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 Banks, the Company does
not expect that the current FDIC risk-based assessment schedule will have a
material adverse effect on the Banks' earnings. The Banks' risk-based insurance
assessments currently are set at 0.00% for the first half of 1997.
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
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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 a joint policy statement that provides bankers guidance on sound
practices for managing interest rate risk. The policy statement identifies the
key elements of sound interest rate risk management and describes prudent
principles and practices for each element, emphasizing the importance of
adequate oversight by a bank's board of directors and senior management and of a
comprehensive risk management process. The policy statement also outlines the
critical factors that will affect the agencies' evaluation of a bank's interest
rate risk when making a determination of capital adequacy. In adopting the
policy statement, the agencies have asserted their intention to continue to
place significant emphasis on the level of a bank's interest rate risk exposure
and the quality of its risk management process when evaluating a bank's capital
adequacy.
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.
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 issued
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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 or National Bank of York County.
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
The Banks are 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 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 are
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 Banks 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 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
10
<PAGE>
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 the Banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Banks' 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 the Banks 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 subsidiaries 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.
Item 2. Properties
The Company owns no real property. First National Bank's main office and
Registrant's executive offices are located at 950 John C. Calhoun Drive, S.E.,
Orangeburg, South Carolina. These quarters are owned by First National 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.
11
<PAGE>
National Bank of York County owns the property located at 1127 Ebenezer Road,
Rock Hill, South Carolina. National Bank of York County also leases one
property, all of which is used as a branch.
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 the Company nor any of its subsidiaries 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
A portion of the information required by this item is set forth on the
inside front cover of the Company's 1996 Annual Report to Shareholders under the
heading "STOCK INFORMATION," which information is incorporated herein by
reference.
In 1996, the Company issued 5,025 shares upon exercise of options pursuant
to the Company's stock option plan. The shares were issued to the following
persons on the dates and at the prices indicated:
Name Date Price
W. Ralph Bailey 1/9/96 $14.17
George H. McDaniel 2/20/96 $14.17
L. D. Westbury 8/15/96 $14.17
Such shares were issued without registration in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 because
of the small number of persons to whom shares were issued, such persons'
knowledge of the Company, and the fact that the issuance did not involve a
public offering.
Item 6. Selected Financial Data
The information required by this item is set forth on page 3 in the
Company's 1996 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 1996 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 61 in the Company's 1996 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
<PAGE>
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 1997 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," "INFORMATION PERTAINING TO STOCK OPTION PLANS,"
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION," "BOARD REPORT ON
EXECUTIVE OFFICER COMPENSATION," "OTHER BENEFIT PROGRAMS - DEFINED BENEFIT
PENSION PLAN," and "SHAREHOLDER PERFORMANCE GRAPH," and the related tables on
pages 6 through 14 of the definitive proxy materials of the Company filed in
connection with its 1997 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 1997 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 15 of the definitive
proxy materials of the Company filed in connection with its 1997 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
13
<PAGE>
3. Exhibits
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated by
reference to exhibits filed with the Registrant's Form 10-Q for the quarter
ended June 30, 1996).
3.2 Bylaws of the Registrant, as amended (incorporated by reference to exhibits
filed with the Registrant's Form 10-K for the year ended December 31,
1995).
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 (incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 1995).
13 Portions of the 1996 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 and Company, LLP.
27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the Fourth Quarter of 1996.
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 13th day of March, 1997.
First National Corporation
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 13th, 1997.
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/E. Everett Gasque, Jr.
E. Everett Gasque, Jr.
Director
s/John L. Gramling, Jr.
John L. Gramling, Jr.
Director
s/Robert R. Hill, Jr.
Robert R. Hill, Jr.
Director
s/Robert R. Horger
Robert R. Horger
Director
s/R. H. Jennings, III
R. H. Jennings, III
Director
s/J. C. McAlhany
J. C. McAlhany
Director
15
<PAGE>
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/Ralph W. Norman
Ralph W. Norman
Director
s/Anne H. Oswald
Anne H. Oswald
Director
s/James W. Roquemore
James W. Roquemore
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>
EXHIBIT INDEX
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated by
reference to exhibits filed with the Registrant's Form 10-Q for the quarter
ended June 30, 1996).
3.2 Bylaws of the Registrant, as amended (incorporated by reference to exhibits
filed with the Registrant's Form 10-K for the year ended December 31,
1995).
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 (incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 1995).
13 Portions of the 1996 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 and Company, LLP.
27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the Fourth Quarter of 1996.
17
Portions of Annual Report to Shareholders
Incorporated by Reference
(Information set forth on page 2 of the 1996 Annual Report to Shareholders under
the caption "Stock Information").
Common stock of First National Corporation was listed on the American Stock
Exchange on January 28, 1997. Trading on the American Stock Exchange opened at
$32.00 per share on such date, and trading prices have ranged between $32.00 and
$40.75 through March 14, 1997. Management believes that prior to listing the
common stock traded for prices ranging from $24.50 to $28.00 per share during
the past two years, giving retroactive effect to stock dividends and stock
splits. However, management had knowledge of only a limited number of trades and
had no independent means of verifying the price at which trading occurred. There
were approximately 1,950 shareholders of record at January 19, 1997. Quarterly
cash dividends of $0.18, $0.18, $0.19 and $0.19 per share were paid in the
first, second, third and fourth quarters of 1996, respectively, and quarterly
cash dividends of $0.165 per share, $0.165, $0.17 and $0.18 per share were paid
in the first, second, third and fourth quarters of 1995. 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.
(Information set forth on page 3 of 1996 Annual Report to Shareholders under the
caption "Consolidated Financial Highlights")
<TABLE>
<CAPTION>
For the Year (Dollars in thousands,
except per share) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $ 5,528 $ 4,640 $ 4,061 $ 3,773 $ 3,295
Per share 2.27 1.97 1.72 1.60 1.40
Total assets at year end 497,632 436,322 374,043 349,056 333,984
Cash dividends declared per share 0.74 0.68 0.64 0.60 0.56
Book value per share at year end 18.96 16.82 15.34 14.19 13.04
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Financial Ratios 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets 1.19% 1.13% 1.10% 1.09% 1.00%
Return on average equity 12.85 12.25 11.67 11.79 11.17
Dividend payout ratio 31.13 30.24 29.45 28.62 29.79
Average equity to average assets 9.29 9.25 9.44 9.20 8.94
</TABLE>
<TABLE>
<CAPTION>
December 31 Average Daily Balance
----------- ---------------------
Balance Sheet Highlights Percent Percent
(Dollars in thousands) 1996 1995 Change 1996 1995 Change
- ---------------------- ---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Loans-net of unearned income $293,619 $247,883 18.5% $264,701 $227,466 16.4%
Total earning assets 454,500 399,379 13.8% 427,084 378,476 12.8%
Total assets 497,632 436,322 14.1% 463,252 409,426 13.1%
Demand deposits 67,232 56,735 18.5% 60,225 52,611 14.5%
Total deposits 414,153 368,315 12.4% 387,086 343,723 12.6%
Total interest-bearing liabilities 379,468 337,413 12.5% 356,680 316,484 12.7%
Shareholders' equity 48,346 39,777 21.5% 43,015 37,873 13.6%
</TABLE>
19
<PAGE>
(Information set forth on pages 6 through 28 of the 1996 Annual Report to
Shareholders under the Caption "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 subsidiaries, First National Bank and National Bank
of York County. The five year period 1992 through 1996 is discussed with
particular emphasis on the years 1994, 1995 and 1996. This commentary should be
reviewed in conjunction with the financial statements and related footnotes and
the other statistical information related to First National Corporation
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. In 1995, the Corporation acquired
two branches of another commercial bank in Walterboro, South Carolina. 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.
In 1996, the Corporation sponsored the organization of National Bank of
York County in Rock Hill, South Carolina, and sold 170,000 shares of the
Corporation's common stock to capitalize the new bank and pay organizational and
pre-opening expenses. National Bank of York County began operations on July 11,
1996, as a wholly-owned subsidiary of the Corporation.
Forward Looking Statements
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, 'forward looking statements' for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended. First National Corporation cautions readers that
forward looking statements, including without limitation, those relating to
First National Corporation's future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in First National Corporation's reports
filed with the Securities and Exchange Commission.
Summary of Operations
Earnings of First National Corporation were $5,528,000, $4,640,000 and
$4,061,000 in 1996, 1995 and 1994, respectively. Net income increased 19.1
percent in 1996 when compared to 1995 and increased 14.3 percent in 1995 when
compared to 1994. Net income per share increased to $2.27 compared to $1.97 in
1995. Per share earnings in 1994 were $1.72. The increase in net income in 1996
primarily resulted from an increase in interest income as well as an increase in
noninterest income. The increase in net income in 1995 compared to 1994 also
resulted primarily from an increase in interest income as well as an increase in
noninterest income.
20
<PAGE>
The per share cash dividend declared in 1996 was $0.74 compared to $0.68 in
1995 and $0.64 in 1994.
The book value per share of First National Corporation increased $2.14 or
12.7 percent in 1996, $1.48 or 9.6 percent in 1995, and $1.15 or 8.1 percent in
1994. The return on average assets was 1.19 percent in 1996, 1.13 percent in
1995 and 1.10 percent in 1994. The return on average shareholders' equity was
12.85 percent for 1996 and was 12.25 percent for 1995 and 11.67 percent in 1994.
Increases in both deposits and earning assets were realized during 1996
compared to 1995. Deposits at December 31, 1996 were $414,153,000, up
$45,838,000 or 12.4 percent, compared to December 31, 1995. At year-end 1995,
deposits were $368,315,000, up $47,608,000, or 14.8 percent, compared to
December 31, 1994. Average deposits in 1996 were $387,086,000, up $43,363,000 or
12.6 percent from 1995. The average deposits in 1995 were $343,723,000 compared
to $314,286,000 in 1994, an increase of $29,437,000 or 9.4 percent. Earning
assets reached $454,500,000, up $55,121,000, or 13.8 percent at December 31,
1996 when compared to year-end 1995. At year-end 1995, earning assets were
$399,379,000, up $57,471,000, or 16.8 percent from year-end 1994. Average
earning assets for 1996 were $427,084,000, an increase of $48,608,000, or 12.8
percent, compared to 1995. In 1995 average earning assets were $378,476,000, up
$38,207,000, or 11.2 percent, compared to 1994. The increase in earning assets
in 1996 resulted primarily from banking operations at First National Bank and
National Bank of York County. The increases in earning assets in 1995 resulted
primarily from the acquisition of two branch offices in Walterboro from
NationsBank. This transaction added approximately $34,000,000 to the deposit
base and approximately $15,000,000 to the loan portfolio.
Interest income increased by $4,080,000, or 13.5 percent, for the year
ended December 31, 1996 when compared to December 31, 1995. This increase is a
result of a $55,121,000 or 13.8 percent increase in earning assets. For the year
ended December 31, 1995, interest income increased $5,037,000, or 20.0 percent,
when compared to the same period in 1994. This increase was 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% increase in
earning assets.
Interest expense increased by $1,461,000 or 11.7 percent, for the year
ended December 31, 1996 compared to the same period in 1995. For the year ended
December 31, 1995, interest expense increased $3,432,000 or 37.7 percent, when
compared to the same period in 1994. The 1996 increase is a direct result of a
$42,055,000 or 12.5 percent increase in interest-bearing liabilities just as the
1995 increase was a direct result of a $49,444,000 or 17.2 percent increase in
interest-bearing liabilities.
Competition
First National Corporation competes with a number of financial institutions
and other firms that engage in activities similar to banking. For 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 make 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 1996 and 1995,
continuing the trend toward consolidation. Although these mergers reduced the
number of banks and branches, the changes resulted in intensified competition
for quality funds and loans.
21
<PAGE>
Net Interest Income
Net interest income is the difference between interest income and interest
expense. Two significant elements in analyzing a 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 $2,619,000 or 14.8 percent during 1996
compared to 1995. The increase was due primarily to an increase in volume of
earning assets. Net interest income increased $1,605,000 or 10.0 percent in 1995
when compared to 1994. The increase was also due primarily to increased volume
of earning assets. The average yield on earning assets was 8.0 percent in 1996
and 1995 respectively and was 7.4 percent in 1994. Total average earning assets
increased $48,608,000, or 12.8 percent, from 1995 to 1996, and $38,207,000 or
11.2 percent, from 1994 to 1995. Total average interest-bearing liabilities
increased $40,196,000, or 12.7 percent, from 1995 to 1996, and $31,893,000, or
11.2 percent, from 1994 to 1995. Growth in earning assets was funded primarily
through interest-bearing liabilities. The total volume growth in 1996 compared
to 1995 had a positive impact on net interest income of $2,317,000, which was
increased by $302,000 due to rates paid on liabilities decreasing more than
yields on assets. In 1995 compared to 1994 net interest income was positively
affected by $2,204,000 attributable to volume which was partially offset by
$599,000 attributable to rate decreases. In 1996 compared to 1995, net interest
spread increased approximately .1 percent and net interest margin increased by
.1 percent. In 1995 compared to 1994, net interest spread decreased
approximately .2 percent and net interest margin remained nearly the same.
Average noninterest-bearing funds supporting earning assets as a percentage
of earning assets changed from 13.8 percent in 1994 to 13.9 percent in 1995 and
to 14.1 percent in 1996.
22
<PAGE>
Table 1
Volume and Rate
Variance Analysis
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
--------------------- ---------------------
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) .................................. $3,536 $(417) $ 3,119 $ 3,280 $ 1,047 $ 4,327
Investments:
Taxable ................................... 455 436 891 219 265 484
Tax exempt (3) ............................ 59 (50) 9 224 (11) 213
Funds sold ................................. 119 (58) 61 (213) 226 13
------ ----- ------- ------- ------- -------
Total interest income .................... 4,169 (89) 4,080 3,510 1,527 5,037
------ ----- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Interest bearing transaction .............. 139 (248) (109) 130 14 144
Saving .................................... 133 (198) (65) (68) 60 (8)
Certificates of deposit ................... 1,362 187 1,549 928 1,628 2,556
Funds purchased ............................ 198 (132) 66 316 424 740
Notes payable .............................. 20 0 20
------ ----- ------- ------- ------- -------
Total interest expense ................... 1,852 (391) 1,461 1,306 2,126 3,432
------ ----- ------- ------- ------- -------
Net interest income ...................... $2,317 $ 302 $ 2,619 $ 2,204 $ (599) $ 1,605
====== ===== ======= ======= ======= =======
</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.
23
<PAGE>
Table 2
<TABLE>
<CAPTION>
Yields on Average Earning Assets and 1996
- ------------------------------------ ----
Rates on Average Interest-bearing Liabilities
(Dollars in thousands)
Average Interest Average
Balance Earned/Paid Yield/Rate
------- ----------- ----------
Assets
<S> <C> <C> <C>
Interest earning assets:
Loans, net of unearned income ............................ $ 264,701 $25,139 9.50%
Investment securities:
Taxable ................................................. 117,822 6,908 5.86
Tax exempt (1) .......................................... 34,142 1,668 4.89
Funds sold ............................................... 10,419 548 5.26
--------- ------- ----
Total earning assets ................................... 427,084 34,263 8.02
-------
Cash and other assets ...................................... 40,356
Less allowance for loan losses ............................. (4,188)
---------
Total assets ........................................... $ 463,252
=========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts .................... $ 82,820 1,632 1.97
Savings .................................................. 77,699 2,001 2.58
Certificates of deposit .................................. 166,342 8,985 5.40
Funds purchased ............................................ 29,546 1,348 4.56
Notes payable .............................................. 273 20 7.33
--------- ------- ----
Total interest-bearing liabilities ..................... 356,680 13,986 3.92
-------
Demand deposits ............................................ 60,225
Other liabilities .......................................... 3,332
Shareholders' equity ....................................... 43,015
---------
Total liabilities and shareholders' equity ............. $ 463,252
=========
Net interest spread ........................................ 4.10%
====
Impact of interest free funds .............................. .65%
====
Net interest margin ........................................ 4.75%
====
Net interest income ........................................ $ 20,277
=========
</TABLE>
24
<PAGE>
Table 2
<TABLE>
<CAPTION>
1995 1994
---- ----
Average Interest Average Average Interest Average
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
------- ----------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
$227,466 $22,020 9.68% $193,135 $17,693 9.16%
109,864 6,017 5.48 105,704 5,533 5.23
32,924 1,659 5.04 28,470 1,446 5.08
8,222 487 5.92 12,960 474 3.66
-------- ------- -------- -------
378,476 30,183 7.98 340,269 25,146 7.39
-------- -------
34,348 31,202
(3,398) (3,098)
------- -------
$409,426 $368,373
======== ========
$ 76,476 1,741 2.28 $ 70,807 1,597 2.26
73,524 2,066 2.81 75,968 2,074 2.73
141,113 7,436 5.27 120,442 4,880 4.05
25,371 1,282 5.05 17,374 542 3.12
------ ----- -------- ------
316,484 12,525 3.96 284,591 9,093 3.20
------- -------
52,611 47,069
2,458 1,924
37,873 34,789
-------- --------
$409,426 $368,373
======== ========
4.02% 4.19%
==== ====
.65% .53%
==== ====
4.67% 4.72%
==== ====
$17,658 $16,053
======= =======
</TABLE>
(1) Tax exempt income is not presented on a tax equivalent basis in the above
analysis.
25
<PAGE>
Investment Securities
Investment securities are the second largest category of earning assets.
These assets comprised 35.4 percent of earning assets at December 31, 1996 and
37.9 percent at year-end 1995. 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 deposits and purchased funds.
The portfolio taxable income was $6,908,000 in 1996 compared with
$6,017,000 in 1995, a net increase of $891,000. Of this increase, a gain of
approximately $455,000 was attributable to the $7,958,000 average volume
increase of taxable securities. The higher income generated by the increased
volume was augmented by an increase of $436,000 resulting from a 38 basis point
increase in yield. The taxable income was $6,017,000 in 1995, compared with
$5,533,000 in 1994, an increase of $484,000. Of this increase, a gain of
approximately $219,000 was attributable to the $4,160,000 average volume
increase in taxable securities. The gain generated by the increased volume was
aided by an increase of $265,000, resulting from a 25 basis point increase in
yield. This is indicative of the increases in overall interest rates in the past
years and their effect upon portfolio investments as lower-yielding securities
mature and are replaced by higher- yielding investments. The average maturity of
the taxable portfolio at December 31, 1996 was 2.4 years compared with average
maturities at year-end 1995 of 2.1 years and at year-end 1994 of 2.3 years.
The portfolio non-taxable investment income was $1,668,000 in 1996 compared
with $1,659,000 in 1995 and $1,446,000 in 1994, a net increase of $9,000 or .5
percent, and an increase of $213,000 or 14.7 percent, respectively. Of the
increase in 1996, a gain of $59,000 was attributable to an increase in average
volume of $1,218,000 in municipal securities offset by a decrease of $50,000
resulting from a 15 basis point decrease in yield. The increase from 1994 to
1995 was $213,000 of which $224,000 was attributable to an increase in volume
which was offset by a decrease of $11,000 resulting from a 4 basis point
decrease in yield. The average maturity of the non-taxable portfolio at December
31, 1996 was 2.9 years compared to 2.5 years and 2.8 years in 1995 and 1994,
respectively. First National Corporation continues to actively purchase bank
qualified tax-free securities to supplement the taxable portfolio. However, with
the negative yield adjustment due to the Tax Equity and Fiscal Responsibility
Act of 1982 and the alternative minimum tax considerations, the value to First
National Corporation of each individual purchase continues to be closely
evaluated.
At December 31, 1996 the fair value of the securities portfolio totalled
$161,188,000, a .8 percent premium. The market valued the Corporation's 1995
portfolio at a .6 percent premium and its 1994 portfolio at a 2.8 percent
discount.
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. At December 31, 1996, investment securities with an
amortized cost of $95,765,000 and an estimated fair value of $95,684,000 were
classified as available-for-sale. The effect of adoption of this accounting
standard was to decrease the carrying value of securities $81,000 and directly
decrease shareholders' equity $50,000, net of an estimated income tax benefit of
$31,000. The decrease, 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 realized losses on sales of investment securities during 1996 of
$50,000. There were no realized gains or losses during 1995 or 1994.
26
<PAGE>
Table 3
<TABLE>
<CAPTION>
Book Value of Investment Securities
December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 37,853 $ 49,959 $ 49,164 $ 39,972 $ 40,220
U. S. Government Agencies
and Corporations 87,840 63,600 53,914 54,345 33,324
Other Securities 610 475 476 371 281
-------- -------- -------- -------- --------
Total Taxable 126,303 114,034 103,554 94,688 73,825
-------- -------- -------- -------- --------
State, County and Municipal
Obligations 34,578 37,462 29,802 33,796 29,151
-------- -------- -------- -------- --------
Total Tax-exempt 34,578 37,462 29,802 33,796 29,151
-------- -------- -------- -------- --------
Total Investment Securities $160,881 $151,496 $133,356 $128,484 $102,976
======== ======== ======== ======== ========
</TABLE>
Table 4
Maturity Distribution and Yields of Investment Securities
<TABLE>
<CAPTION>
Due in Due After Due After Due After
December 31, 1996 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
- ---------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury
Securities $14,433 5.73% $23,420 5.97% $ % $ % $ 37,853 5.88% $ 37,250 $ 37,901
U.S. Government Agencies
and Corporations 11,689 5.45 73,791 6.28 2,360 6.14 87,840 6.17 87,977 87,743
Other Securities (1) 610 5.00 610 5.00 610 610
------- ---- ------- ---- ------- ---- ---- ---- -------- ---- -------- --------
Total Taxable 26,122 5.60 97,211 6.21 2,360 6.14 610 5.00 126,303 6.08 125,837 126,254
------- ---- ------- ---- ------- ---- ---- ---- -------- ---- -------- --------
State, County
and Municipal
Obligations (2) 7,756 4.33 18,334 5.13 8,488 4.70 34,578 4.85 34,260 34,934
------- ---- ------- ---- ------- ---- ---- ---- -------- ---- -------- --------
Total $33,878 5.31% $115,545 6.04% $10,848 5.01% $610 5.00% $160,881 5.82% $160,097 $161,188
======= ==== ======== ==== ======= ==== ==== ==== ======== ==== ======== ========
Percent of Total 21% 72% 7% 100%
Cumulative % of Total 21% 93% 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.
Loans
Loans, net of unearned income, at December 31, 1996, were $293,619,000,
which represents an increase of $45,736,000, or 18.5 percent when compared to
year-end 1995. Average loans for 1996 increased 16.4 percent to $264,701,000
from $227,466,000 for 1995.
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
27
<PAGE>
collateral, increases the likelihood of repayment. The real estate mortgage
category grew by 19.9 percent to $178,544,000 at year-end and represents 60.8
percent of total loans. This is an increase from 60.1 percent in 1995.
Commercial, financial and agricultural loans increased to $46,392,000 from
$43,108,000 the previous year but were only 15.8 percent of the loan portfolio
compared to 17.4 percent at December 31, 1995. Consumer loans represented 20.1
percent of total loans compared to 20.2 percent at year-end 1995. Table 5
provides the distribution of loans for the past five years.
The prime rate decreased once in 1996, and the yield on the loan portfolio
for 1996 was 9.5 percent, down from 9.7 percent for 1995. Notwithstanding this
decrease in yield, the volume growth of the loan portfolio resulted in an
interest and fee income increase of $3,119,000, or 14.2 percent, to $25,139,000.
Table 6 shows the maturity and interest sensitivity of the commercial, financial
and agricultural category of the loan portfolio and the real estate construction
category of the loan portfolio as of December 31,1996. As of that date, loans
that mature in one year or less were $53,302,000. Of the loans that mature after
one year, $205,763,000 or 85.6 percent, had fixed interest rates while
$34,554,000, or 14.4 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, 1996, nonaccrual loans were $974,000 compared with
$845,000 at year-end 1995. At December 31, 1996, loans which were 90 days or
more past due had decreased by $134,000 to $220,000 as compared to year-end
1995.
During 1996, income of $57,000 on nonaccrual loans would have been recorded
if these loans had been accruing throughout 1996. No interest income on
nonaccrual loans was included in net income for 1996. First National Corporation
does not have any loans which have been restructured or any foreign loans.
Concentrations of credit are considered to exist when the amounts loaned to
a multiple number of borrowers engaged in similar business activities which
would cause them to be similarly impacted by general economic conditions
represents 25% of equity. As of December 31, 1996, loans to the hotel and motel
industry group exceeded this amount. Loans in this category were made to
different firms throughout the state.
Table 7 provides the level of risk elements in the loan portfolio for the
past five years.
28
<PAGE>
<TABLE>
<CAPTION>
Table 5
Distribution of Net Loans
By Type
December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 46,392 $ 43,108 $ 34,476 $ 28,169 $ 31,715
Real estate - construction 9,625 5,792 4,781 3,321 1,455
Real estate - mortgage 178,544 148,853 126,751 110,113 104,021
Consumer 59,058 50,130 42,544 36,854 35,745
-------- -------- -------- -------- --------
Total $293,619 $247,883 $208,552 $178,457 $172,936
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Percent of Total
<S> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other 15.8% 17.4% 16.5% 15.8% 18.3%
Real estate - construction 3.3 2.3 2.3 1.9 0.8
Real estate - mortgage 60.8 60.1 60.8 61.7 60.2
Consumer 20.1 20.2 20.4 20.6 20.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Table 6
Maturity Distribution of Loans
Maturity
--------
December 31, 1996 1 Year 1 - 5 Over 5
(Dollars in thousands) or Less Years Years
- ---------------------- ------- ----- -----
<S> <C> <C> <C> <C>
Commercial, financial,
agricultural and other $ 46,392 $12,571 $29,769 $4,052
Real estate - construction 9,625 7,894 1,247 484
Real estate - mortgage 178,544 24,127 89,025 65,392
Consumer 59,058 8,710 44,670 5,678
-------- ------- -------- -------
Total $293,619 $53,302 $164,711 $75,606
======== ======= ======== =======
Loans due after one year with:
Predetermined interest rates $205,763
Floating or adjustable interest rates $ 34,554
</TABLE>
29
<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, 1996 and 1995, 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, 95.7 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. Net loan charge-offs over
the past five years have not exceeded .54 percent of net average loans. In 1996
net loan charge-offs as a percentage of net average loans were .12 percent
compared to .15 percent in 1995. See "Loans" for a discussion of the Company's
charge-off and nonaccrual policies.
<TABLE>
<CAPTION>
Table 7
Nonaccrual and Past Due Loans
December 31
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $ 220 $ 354 $ 97 $ 209 $ 408
Loans on a nonaccruing basis 974 845 1,214 983 645
------ ------ ------ ------ ------
Total $1,194 $1,199 $1,311 $1,192 $1,053
====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Table 8
Summary of Loan
Loss Experience
December 31
(Dollars in thousands) 1996 1995 1994 1993 1992
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
January 1 .............................. $ 3,703 $ 3,194 $ 2,955 $ 2,685 $ 2,418
--------- --------- --------- --------- ---------
Charge-offs during the year
Real estate - construction ............. - - - - -
Real estate - mortgage ................. (35) (130) (175) (61) (215)
Consumer ............................... (584) (514) (378) (330) (460)
Commercial, financial,
agricultural and other ................ (72) (47) (80) (284) (571)
--------- --------- --------- --------- ---------
Total charge-offs ..................... (691) (691) (633) (675) (1,246)
--------- --------- --------- --------- ---------
Recoveries during the year
Real estate - construction ............. - - - - -
Real estate - mortgage ................. 151 123 58 9 18
Consumer ............................... 185 143 178 140 185
Commercial, financial,
agricultural and other ................ 38 90 61 63 102
--------- --------- --------- --------- ---------
Total recoveries ...................... 374 356 297 212 305
--------- --------- --------- --------- ---------
Net charge-offs .......................... (317) (335) (336) (463) (941)
Provisions from earnings ................. 1,319 844 575 733 1,208
--------- --------- --------- --------- ---------
Allowance for loan losses -
December 31 ............................ $ 4,705 $ 3,703 $ 3,194 $ 2,955 $ 2,685
========= ========= ========= ========= =========
Average loans - net of
unearned income ........................ $ 264,701 $ 227,466 $ 193,135 $ 173,415 $ 173,063
Ratio of net charge-offs
to average loans - net of
unearned income ........................ .12% .15% .17% .27% .54%
</TABLE>
Loan Loss Provision
First National Corporation maintains a reserve for possible loan losses
(the allowance for loan losses) at a level which management believes is
sufficient to provide for potential losses in the loan portfolio. Management
periodically evaluates the adequacy of the allowance 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, 1996, was
$1,319,000, compared to $844,000 in 1995, which represents a 56.3 percent
increase. The increase in the provision for loan losses was due to continued
strong loan growth.
The allowance for loan losses was $4,705,000, or 1.60 percent of
outstanding loans at the end of 1996, and $3,703,000, or 1.49 percent at
year-end 1995. Total charge-offs were $691,000 in 1996 and 1995, respectively.
Recoveries were $374,000 for 1996 and
31
<PAGE>
$356,000 for 1995. Net charge-offs were $317,000 in 1996 and $335,000 for 1995.
Net charge-offs were greatest in consumer loans which increased from $371,000 in
1995 to $399,000 in 1996. Real estate loan net charge-offs declined by $123,000
in 1996 while commercial loan losses increased by $77,000. Net charge-offs to
average loans were .12 percent in 1996 and .15 percent in 1995. A summary of
loan loss experience for 1992 through 1996 is provided in Table 8.
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, 1996, other real
estate owned was $63,000 compared to $151,000 at December 31, 1995. This
decrease resulted from properties being sold or written down.
Management anticipates that the level of charge-offs for 1997 will be
somewhat higher than the level experienced in 1996. Although changes in economic
conditions in the Corporation's market area can always affect this level, the
loan loss provision is considered adequate by management.
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, 21.0 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 agreements
to repurchase and other short-term borrowings at favorable interest rates. The
Corporation places an increasing reliance on borrowed funds which are primarily
cash management or "sweep" accounts that are accommodations to corporate and
governmental customers pursuant to sale of securities sold under agreement to
repurchase arrangements. During 1996, the Corporation maintained an even higher
level of liquidity with an influx of interest sensitive deposits.
32
<PAGE>
Table 9
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
After After Six Greater
Within Three Through Than One
December 31, 1996 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 ............................ $ 131,213 $ 17,603 $ 24,464 $ 173,280 $ 120,339 $293,619
Investments ...................... 20,254 7,660 13,577 41,491 119,390 160,881
Funds
--------- -------- -------- --------- --------- --------
Total interest earning assets .. $ 151,467 $ 25,263 $ 38,041 $ 214,771 $ 239,729 $454,500
========= ======== ======== ========= ========= ========
Percent ........................ 33.3% 5.6% 8.4% 47.3% 52.7% 100.0%
========= ======== ======== ========= ========= ========
Interest-bearing deposits,
excluding CDs greater than
$100,000 ....................... $ 123,283 $ 40,877 $ 39,775 $ 203,935 $ 104,370 $308,305
CDs greater than $100,000 ........ 15,096 7,603 9,852 32,551 6,065 38,616
Short-term borrowings ............ 32,547 32,547 32,547
--------- -------- -------- --------- --------- --------
Total interest-bearing liab .... 170,926 48,480 49,627 269,033 110,435(2) 379,468
Interest-free funds .............. 75,032 75,032
--------- -------- -------- --------- --------- --------
Funds supporting interest
earning assets ............... $ 170,926 $ 48,480 $ 49,627 $ 269,033 $ 185,467 $454,500
========= ======== ======== ========= ========= ========
Percent ........................ 37.6% 10.7% 10.9% 59.2% 40.8% 100.0%
========= ======== ======== ========= ========= ========
Interest sensitivity gap ......... $ (19,459) $(23,217) $(11,586) $ (54,262) $ 54,262
Cumulative gap ................... $ (19,459) $(42,676) $(54,262) $ (54,262)
Percent of total interest
earning assets ................. 4.3% 9.4% 11.9% 11.9%
</TABLE>
(1)These items are considered insensitive because they are not generally
affected by fluctuations in market interest rates.
(2)Includes savings deposits of $79,739.
Table 9 discloses the cumulative gap as a percentage of assets included
in the computation of gap (total earning assets) rather than as a percentage of
total assets.
33
<PAGE>
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.
Table 9 presents the interest sensitive position of the Corporation's
balance sheet at December 31, 1996. 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 particularly attempts to control gap from zero to twelve
months. The position of First National Corporation at December 31, 1996 with
regard to the cumulative gap at the 12 month time frame is a negative gap of
$54,262,000. 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 as follows:
a rise of 1% would decrease earnings by $542,620
a rise of 2% would decrease earnings by $1,085,240
a rise of 3% would decrease earnings by $1,627,860
a decline of 1% would increase earnings by $542,620
a decline of 2% would increase earnings by $1,085,240
a decline of 3% would increase earnings by $1,627,860
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 agreements 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.
34
<PAGE>
Deposits
The deposit base provides First National Corporation with funds for the
long-term growth of loans and investments. At December 31, 1996, when compared
to year-end 1995, total deposits were $414,153,000, up $45,838,000, or 12.4
percent. Noninterest- bearing deposits for the same period were $67,232,000, an
increase of $10,497,000, or 18.5 percent, and interest-bearing deposits were
$346,921,000, an increase of $35,341,000, or 11.3 percent when compared to
December 31, 1995. For the year ended December 31, 1996, total average deposits
increased $43,363,000, or 12.6 percent. This growth was comprised of an increase
of average interest-bearing accounts of $35,749,000, or 12.3 percent, and
average noninterest-bearing accounts of $7,614,000, or 14.5 percent. Growth in
the interest-bearing accounts was composed of an increase in interest-bearing
transaction accounts of $6,344,000, or 8.3 percent, and certificates of deposit
of $25,230,000, or 17.9 percent, and an increase in savings accounts of
$4,175,000, or 5.7 percent.
At December 31, 1996, the ratio of average interest-bearing deposits to
total deposits decreased to 84.4 percent from 84.7 percent at year-end 1995 and
was 85.0 percent at year-end 1994. The average rate paid on interest-bearing
accounts decreased to 3.9 percent from 4.0 percent at year-end 1995 and was 3.2
percent at year-end 1994.
<TABLE>
<CAPTION>
Table 10
Maturity Distribution of
CD's of $100,000 or more December 31 1996 1995
- ------------------------ ----------- ---- ----
(Dollars in thousands)
<S> <C> <C>
Within three months $15,096 $12,033
After three through six months 7,603 4,685
After six through twelve months 9,851 6,267
After twelve months 6,066 8,218
------- -------
Total $38,616 $31,203
======= =======
</TABLE>
35
<PAGE>
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,
1996 1995 1994
---- ---- ----
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 $32,547 4.69% $25,833 5.44% $15,297 4.50%
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and
other borrowings $29,819 4.59% $25,371 5.05% $17,374 3.12%
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $36,568 $30,196 $27,993
</TABLE>
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 9.7 percent of total assets as of
December 31, 1996, compared with 9.1 percent at year-end 1995, and 9.7 percent
at year-end 1994.
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 1996 was 31.1 percent compared to 30.2 percent in
1995 and 29.5 percent for 1994. Cash dividend payments in 1996 were $1,721,000
as compared to $1,403,000 in 1995. The retention of the remaining earnings has
provided the basis for expansion of loans and investments, and acquisitions.
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Banks; however, certain restrictions exist
regarding the ability of the Banks 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 Banks'
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, 1996, $6,960,000 of the Banks' retained earnings
were available for distribution to the Corporation as dividends without prior
regulatory approval. In 1996 the Banks paid dividends to the Corporation of
$4,499,000.
The Corporation and subsidiaries are subject to certain risk-based capital
guidelines. These ratios measure the relationship of capital to a combination of
balance sheet and off- balance sheet risks. The values of both balance sheet and
off-balance sheet items will be adjusted to reflect credit risk. Under the
guidelines of the Board of Governors of the
36
<PAGE>
Federal Reserve System, which are substantially similar to the Office of the
Comptroller of the Currency guidelines, as of December 31, 1996, 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, 1996 was 15.8 percent compared to 15.3 percent at
year-end 1995. The total capital ratio was 17.1 at December 31, 1996 compared to
16.6 percent at year-end 1995.
In conjunction with the risk-based capital ratio, applicable regulatory
agencies have also prescribed a leverage ratio of total capital to total assets
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, 1996, First
National Corporation's leverage ratio was 9.5 percent, compared to 9.1 percent
at year-end 1995. 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 1996 was $5,344,000, an increase of $1,295,000, or 32.0 percent, compared to
1995. For the period ended December 31, 1995 income from noninterest sources was
$4,049,000, an increase of $516,000, or 14.6 percent over 1994.
Service charges on transaction accounts in 1996 increased $894,000 or 28.9
percent when compared to 1995 and $463,000, or 17.6 percent, in 1995 compared to
1994. This increase was due to increased account activity, as well as an
increase in service fees. The deposit fee pricing structure is continually being
reviewed and updated for new services and rising costs.
Other charges, commissions and fees increased $401,000 or 42.0 percent in
1996 compared to an increase of $53,000 or 5.9 percent in 1995. The increase is
a result of an increase in secondary market origination fees, ATM surcharge
fees, trust income and mutual fund fee income.
Noninterest expense increased $2,031,000 or 14.2 percent in 1996 compared
with $979,000 or 7.3 percent in 1995.
Salary and employee benefits expense was the largest component of
noninterest expense in 1996. Salaries and employee benefits increased 16.7
percent or $1,289,000 in 1996 as compared with a 4.0 percent or $294,000
increase in 1995. The number of full time equivalent employees was 281 at
December 31, 1996 as compared with 253 in 1995 and 256 in 1994. The increase in
1996 was primarily the result of the commencement of operations by the National
Bank of York County. In 1994 management adopted an employee cash incentive plan
covering all employees. Cash incentives paid during 1996 under this program were
$574,000.
Net occupancy expense increased 2.9 percent in 1996 compared to an increase
of 14.5 percent in 1995. The increase is attributable to higher operating
expenses including utilities, maintenance and depreciation.
Furniture and equipment expense increased 26.8 percent in 1996 compared
with a 8.1 percent increase in 1995. The increased costs in 1996 were due to
increases in depreciation expense and equipment service contracts.
Total other expense for 1996 was $5,078,000 compared with $4,710,000 in
1995 and $4,204,000 in 1994, or increases of 7.8 percent and 12.0 percent
respectively. Included in other noninterest expense is $644,000 in 1996 for the
amortization of intangibles, principally core deposit values, under the purchase
accounting method utilized for bank acquisitions, compared with $540,000 in 1995
and $328,000 in 1994. Included in
37
<PAGE>
expenses for amortization of intangibles for 1996, is $375,000 attributable to
the two new branches in Walterboro acquired from NationsBank as compared to
$231,000 in 1995. Also included in other expense is $2,000 attributed to Federal
Deposit Insurance premiums, a decrease of $371,000, or 99.5 percent in 1996 as
compared to 1995 and a decrease of $318,000, or 46.0 percent in 1995 as compared
to 1994. The decrease in the Federal Deposit Insurance premiums in 1995 included
a $201,000 refund as the result of the Bank Insurance Fund of the 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 1996 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>
<CAPTION>
Table 11
Quarterly Results of Operations
1996 Quarters 1995 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 $9,127 $8,609 $8,373 $8,154 $8,043 $7,872 $7,356 $6,912
Interest expense 3,726 3,484 3,356 3,420 3,424 3,332 3,063 2,706
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 5,401 5,125 5,017 4,734 4,619 4,540 4,293 4,206
Provision for loan losses 530 269 300 220 504 100 120 120
Noninterest income 1,477 1,260 1,294 1,313 1,082 1,032 942 993
Noninterest expense 4,405 4,119 3,949 3,879 3,536 3,846 3,458 3,481
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1,943 1,997 2,062 1,948 1,661 1,626 1,657 1,598
Income taxes 597 611 663 551 513 447 484 458
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,346 $1,386 $1,399 $1,397 $1,148 $1,179 $1,173 $1,140
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share $ 0.55 $ 0.56 $ 0.58 $ 0.58 $ 0.49 $ 0.50 $ 0.50 $ 0.48
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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. Inflation also affects the bank's customers which may result in an
indirect effect on the banks' business.
38
<PAGE>
Report of Management
The financial statements, accompanying notes, and other financial
information in this Annual Report to Shareholders 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 controls 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. 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 is consistent with that in the audited financial
statements.
First National Corporation
Orangeburg, South Carolina
January 27, 1997
39
<PAGE>
(Information set forth on pages 29 through 61 of the 1996 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 Subsidiaries as of December 31, 1996 and 1995, 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, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
J. W. Hunt and Company, LLP
Columbia, South Carolina
January 27, 1997
40
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
...DECEMBER 31,...
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks (Note 3) $ 28,824 $ 24,144
--------- ---------
Investment securities (Note 4):
Securities held-to-maturity:
Taxable ............................................................... 30,619 58,198
Tax-exempt ............................................................ 34,578 37,462
--------- ---------
Total (fair value of $65,504 in 1996 and $96,594 in 1995) ........... 65,197 95,660
Securities available-for-sale, at fair value ............................ 95,684 55,836
--------- ---------
Total investment securities ......................................... 160,881 151,496
--------- ---------
Loans (Note 5) ............................................................ 296,865 250,423
Less, unearned income ................................................... (3,246) (2,540)
Less, allowance for loan losses ......................................... (4,705) (3,703)
--------- ---------
Loans, net .......................................................... 288,914 244,180
--------- ---------
Premises and equipment, net (Note 6) ...................................... 10,848 8,250
--------- ---------
Other assets (Note 7) ..................................................... 8,165 8,252
--------- ---------
Total assets ........................................................ $ 497,632 $ 436,322
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand .................................................................. $ 67,232 $ 56,735
Interest-bearing transaction accounts ................................... 85,402 80,894
Savings ................................................................. 79,739 73,207
CDs of $100,000 and over ................................................ 38,616 31,203
Other time .............................................................. 143,164 126,276
--------- ---------
Total deposits .................................................... 414,153 368,315
Federal funds purchased and securities
sold under agreements to repurchase (Note 10) ........................... 32,547 25,833
Other liabilities ......................................................... 2,586 2,397
--------- ---------
Total liabilities ................................................. 449,286 396,545
--------- ---------
Shareholders' equity:
Common stock $5 par value; authorized 5,000,000 shares;
issued and outstanding 2,550,024 shares in
1996 and 2,244,339 shares in 1995 ..................................... 12,750 11,222
Surplus ................................................................. 22,856 16,260
Retained earnings (Note 14) ............................................. 12,790 12,241
Unrealized gain (loss) on securities available-
for-sale, net of applicable deferred income taxes ..................... (50) 54
--------- ---------
Total shareholders' equity ........................................ 48,346 39,777
--------- ---------
Total liabilities and shareholders' equity ........................ $ 497,632 $ 436,322
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
41
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
...YEAR ENDED DECEMBER 31,...
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 25,139 $22,020 $17,693
Investment securities
Taxable:
Held-to-maturity 2,553 4,384 4,959
Available-for-sale 4,355 1,633 574
Tax-exempt-held-to-maturity 1,668 1,659 1,446
Federal funds sold 548 487 474
-------- ------- -------
Total interest income 34,263 30,183 25,146
-------- ------- -------
Interest expense:
Interest-bearing transaction accounts 1,632 1,741 1,597
Savings 2,001 2,066 2,074
Certificates of deposit 8,985 7,436 4,880
Federal funds purchased and securities
sold under agreements to repurchase 1,348 1,282 542
Notes payable 20 - -
-------- ------- -------
Total interest expense 13,986 12,525 9,093
-------- ------- -------
Net interest income:
Net interest income 20,277 17,658 16,053
Provision for loan losses (Note 5) 1,319 844 575
-------- ------- -------
Net interest income after provision for loan losses 18,958 16,814 15,478
-------- ------- -------
Non-interest income:
Service charges on deposit accounts 3,988 3,094 2,631
Other service charges and fees 1,314 906 858
Other income 42 49 44
-------- ------- -------
Total non-interest income 5,344 4,049 3,533
-------- ------- -------
Non-interest expense:
Salaries and employee benefits (Note 15) 9,021 7,732 7,438
Net occupancy expense 773 751 656
Furniture and equipment expense 1,430 1,128 1,044
Loss on sale of securities available-for-sale 50 - -
Other expense (Note 12) 5,078 4,710 4,204
-------- ------- -------
Total non-interest expense 16,352 14,321 13,342
-------- ------- -------
Earnings:
Income before income taxes 7,950 6,542 5,669
Applicable income taxes (Note 11) 2,422 1,902 1,608
-------- ------- -------
Net income $ 5,528 $ 4,640 $ 4,061
======== ======= =======
Earnings per common share (Note 13):
Net income per common share $ 2.27 $ 1.97 $ 1.72
======== ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
42
<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, 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
Net income for year ended
December 31, 1996 ...................... - - - 5,528 - 5,528
Cash dividends declared
at $.74 per share ...................... - - - (1,721) - (1,721)
Common stock dividend of 10%,
date of record, October 31, 1996 ....... 120,891 604 2,654 (3,258) - -
Common stock issued ..................... 184,794 924 3,942 - - 4,866
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $64 .................... - - - - (104) (104)
--------- ------- ------- -------- ----- --------
Balance, December 31, 1996 .............. 2,550,024 $12,750 $22,856 $ 12,790 $ (50) $ 48,346
========= ======= ======= ======== ===== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
43
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
...YEAR ENDED DECEMBER 31,...
1996 1995 1994
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ................................................................ $ 5,528 $ 4,640 $ 4,061
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................................... 1,674 1,430 1,124
Provision for loan losses ............................................. 1,319 844 575
Provision for deferred taxes .......................................... (379) (50) (89)
Loss on sale of securities available-for-sale ......................... 50 - -
(Gain) loss on sale of premises and equipment ......................... (6) 5 (3)
Increase (decrease) in accrued income taxes ........................... (156) 23 150
Increase in interest receivable ....................................... (140) (740) (247)
Premium amortization and discount accretion ........................... 298 315 (103)
Increase in interest payable .......................................... 157 652 18
Increase in miscellaneous assets ...................................... (89) (3,355) (450)
(Increase) decrease in prepaid assets ................................. 225 31 (25)
Increase (decrease) in other liabilities .............................. (2) (137) 86
------- ------- --------
Net cash provided by operating activities ........................... 8,479 3,658 5,097
------- ------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale ........... 2,951 149 -
Proceeds from maturities of investment securities held-to-maturity ........ 39,002 30,021 45,877
Proceeds from maturities of investment securities available-for-sale ...... 12,320 7,265 1,316
Purchases of investment securities held-to-maturity ....................... (8,865) (22,131) (47,536)
Purchases of investment securities available-for-sale ..................... (55,309) (33,401) (4,721)
Net increase in customer loans ............................................ (46,371) (40,009) (30,728)
Recoveries on loans previously charged off ................................ 318 343 297
Proceeds from sale of other real estate ................................... 70 188 450
Purchases of premises and equipment ....................................... (3,692) (1,865) (943)
Proceeds from sale of premises and equipment .............................. 80 3 28
Decrease in federal funds sold ............................................ - - 10,900
------- ------- -------
Net cash used in investing activities ............................... (59,496) (59,437) (25,060)
------- ------- -------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts,
savings accounts and certificates of deposit ............................ 45,838 47,608 14,787
Net increase in federal funds purchased and
securities sold under agreements to repurchase .......................... 6,714 10,536 7,216
Proceeds from issuance of other borrowings ................................ 2,000 - -
Repayment of other borrowings ............................................. (2,000) - -
Common stock issuance ..................................................... 4,655 95 49
Dividends paid ............................................................ (1,721) (1,403) (1,196)
Stock options exercised ................................................... 211 41 -
------- ------- -------
Net cash provided by financing activities .......................... 55,697 56,877 20,856
------- ------- -------
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of dollars)
...YEAR ENDED DECEMBER 31,...
1996 1995 1994
<S> <C> <C> <C>
Net increase in cash and cash equivalents ................................ $ 4,680 $ 1,098 $ 893
Cash and cash equivalents at beginning of year ........................... 24,144 23,046 22,153
-------- ------- ------
Cash and cash equivalents at end of year ................................. $ 28,824 $24,144 $ 23,046
======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid for
Interest ............................................................... $ 13,829 $11,873 $ 9,075
======== ======= ========
Income taxes ........................................................... $ 2,957 $ 1,929 $ 1,547
======== ======= ========
Supplemental disclosures of noncash investing activities:
Real estate acquired in full or partial settlement of loans .............. $ 28 $ 268 $ 123
======== ======= ========
Transfer of securities from held-to-maturity to
available-for-sale on December 1, 1995 ................................. $ - $15,948 $ -
======== ======= ========
Change in unrealized gain (loss) on securities
available-for-sale ..................................................... $ (168) $ 358 $ (295)
======== ======= ========
Change in deferred income tax expense (benefit) on unrealized
gain (loss) on securities available-for-sale ........................... $ (64) $ 135 $ (111)
======== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
45
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The accounting and reporting policies of First National Corporation (the
Corporation) and subsidiaries 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 subsidiaries, First National Bank (FNB) and
National Bank of York County (NBYC). 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
46
<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 7).
EMPLOYEE BENEFIT PLANS:
Pension Plan - The Corporation and its subsidiaries have 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 Company's
funding policy is to contribute annually the amount necessary to satisfy the
Internal Revenue Service's funding standards.
Profit Sharing Plan - The Corporation and its subsidiaries have 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 Company
matches 50% of these contributions. Employer 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 eligible employees which is limited to 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, 1996, and the liability for future
benefits has been recorded in the consolidated financial statements.
47
<PAGE>
LEASE COMMITMENTS:
The Corporation's subsidiaries have 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 subsidiaries pay
maintenance, property taxes and insurance on certain of the leased properties.
CASH AND CASH EQUIVALENTS:
For the purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and due from banks". These amounts 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.
ADVERTISING COSTS:
The Company expenses the cost of advertising as incurred.
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 National Bank of York County commenced business operations as a national
bank in Rock Hill, South Carolina, on July 11, 1996. The National Bank of York
County is also a full service commercial bank and its deposits are insured to
applicable limits by the Federal Deposit Insurance Corporation (FDIC). Upon
completion of its organization, 100% of the common stock of the National Bank of
York County was acquired by First National Corporation, and the bank operates as
a wholly owned subsidiary of the Corporation with its own Board of Directors and
operating policies.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
As a members of the Federal Reserve System, the Corporation's banking
subsidiaries are 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, 1996, was approximately $10,328,000.
At December 31, 1996, the Corporation and its subsidiaries had due from bank
balances in excess of federally insured limits in the amount of $3,613,000. The
risks associated with this excess is limited due to the soundness of the
financial institutions with which the funds are deposited.
48
<PAGE>
NOTE 4 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities
held-to-maturity at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
....................................... 1996 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 13,794 $ 50 $ (2) $ 13,842
Obligations of
U. S. Government
Agencies and
Corporations 16,825 70 (167) 16,728
Obligations of states
and political
subdivisions 34,578 432 (76) 34,934
--------- ------ ------- ---------
Total $ 65,197 $ 552 $ (245) $ 65,504
========= ====== ======= =========
</TABLE>
<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>
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.
49
<PAGE>
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
....................................... 1996 .......................................
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands of dollars)
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 24,094 $ 27 $ (62) $ 24,059
Obligations of
U. S. Government
Agencies and
Corporations 71,061 224 (270) 71,015
Federal Reserve Bank stock 492 - - 492
Other securities 118 - - 118
--------- ----- ------- ---------
Total $ 95,765 $ 251 $ (332) $ 95,684
========= ===== ======= =========
</TABLE>
<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
Federal Reserve Bank stock 357 - - 357
Other securities 118 - - 118
-------- ----- ------ --------
Total $ 55,749 $ 376 $ (289) $ 55,836
======== ===== ====== ========
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996 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.
50
<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 $ 19,305 $ 19,335 $ 11,921 $ 11,907
Due after one year through
five years 30,596 30,916 83,234 83,167
Due after five years through
ten years 8,488 8,513 - -
Due after ten years - - - -
--------- --------- --------- ---------
Subtotal 58,389 58,764 95,155 95,074
No contractual maturity 6,808 6,740 610 610
--------- --------- --------- ---------
Total $ 65,197 $ 65,504 $ 95,765 $ 95,684
========= ========= ========= =========
</TABLE>
On December 1, 1995, the Company reclassified securities with an amortized cost
of $15,948,000 from held-to- maturity to available-for-sale. This
reclassification was made pursuant to a reassessment of the investment
securities portfolio based on the issuance of a special report by the Financial
Accounting Standards Board "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In accordance
with the report, business entities were allowed a one time reclassification of
the investment securities portfolio between November 15, 1995 and December 31,
1995. There were no transfers of held-to-maturity securities in 1996. There were
no sales of securities held-to-maturity during 1996 or 1995.
Proceeds from the sales of available-for-sale securities totaled $2,951,000 and
$149,000 for the years ended December 31, 1996 and 1995, respectively. Gross
realized losses on sales of available-for-sale securities were $50,000 during
the year ended December 31, 1996. There were no realized gains or losses on
sales of investment securities during the years ended December 31, 1995 and
1994. The income tax benefit recognized on the realized losses was $19,000 for
the year ended December 31, 1996.
Investment securities with a book value of $65,754,000 and a market value of
$65,930,000 at December 31, 1996 were pledged to secure public deposits, trust
deposits, securities sold under agreements to repurchase, and for other purposes
as required and permitted by law.
51
<PAGE>
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands of dollars)
<S> <C> <C>
Commercial, financial and agricultural $ 46,392 $ 43,108
Real estate - construction 9,625 5,792
Real estate - mortgage 178,544 148,853
Consumer, net of unearned income 59,058 50,130
-------- --------
Total loans $293,619 $247,883
======== ========
</TABLE>
Changes in the allowance for loan losses for the three years ended December 31,
1996, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Balance at beginning of year ................................. $ 3,703 $ 3,194 $ 2,955
Charge-offs .................................................. (691) (691) (633)
Recoveries ................................................... 374 356 297
------- ------- -------
Balance before provision for loan losses ..................... 3,386 2,859 2,619
Provision for loan losses .................................... 1,319 844 575
------- ------- -------
Balance at end of year ....................................... $ 4,705 $ 3,703 $ 3,194
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the aggregate amount of loans, including those
for which impairment has been recognized, for which the accrual of interest had
been discontinued was $974,000 and $845,000, respectively. Interest income which
was foregone was an immaterial amount for each of the three years ended December
31, 1996. There were no restructured loans at December 31, 1996 and 1995.
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 $63,000 and $151,000 at December 31,
1996 and 1995, respectively.
The Corporation's banking subsidiaries grant agribusiness, commercial, and
residential loans to customers throughout the state. Although the subsidiaries
have a diversified loan portfolio, a substantial portion of their debtors'
ability to honor their contracts is dependent upon the economy of Orangeburg
County, York County, and other surrounding areas.
Effective January 1, 1995, the Company 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 Company determines when loans become impaired through its normal loan
administration and review functions. Those loans identified as substandard or
doubtful as a result of the loan review process are potentially impaired loans.
A loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to
52
<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 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 banking subsidiaries' credit
card, residential mortgage, overdraft protection, home equity lines, accounts
receivable financing, and consumer installment loans.
The 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 these standards.
There were no impaired loans at December 31, 1996. At December 31, 1995, the
Corporation's banking subsidiaries had loans amounting to approximately $290,000
that were specifically classified as impaired. The average recorded investment
in such impaired loans was $134,000 and $291,000 during 1996 and 1995,
respectively. The allowance for loan losses related to impaired loans amounted
to approximately $50,000 at December 31, 1995. Interest income on impaired loans
of $31,000 and $16,000 was recognized for cash payments received in 1996 and
1995, respectively.
Under guidelines established by the Company, concentrations of credit are
considered to exist when the amounts loaned to a multiple number of borrowers
engaged in similar business activities which would cause them to be similarly
impacted by general economic conditions represents 25% of equity. As of December
31, 1996, loans to the hotel and motel industry group exceeded this amount.
Loans in this category were made to different firms, in varied locations
throughout the state.
NOTE 6 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands of dollars)
<S> <C> <C>
Land $ 1,995 $ 1,626
Buildings and leasehold improvements 9,319 7,659
Equipment and furnishings 7,389 6,104
-------- --------
Total 18,703 15,389
Less, accumulated depreciation and amortization 7,855 7,139
-------- --------
Premises and equipment - net $ 10,848 $ 8,250
======== ========
</TABLE>
Depreciation expense charged to operations was $1,020,000, $891,000, and
$796,000 in 1996, 1995, and 1994, respectively.
NOTE 7 - 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
53
<PAGE>
acquired based on their fair market value. Amortization expense, which is
included in other non-interest expense, for the years ended December 31, 1996,
1995, and 1994, was $80,000, $120,000, and $131,000, respectively.
On July 1, 1991, FNB 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, 1996, 1995, and 1994, was
$110,000, $122,000, and $134,000, respectively.
On June 16, 1995, FNB 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, 1996 and
1995, was $375,000 and $231,000, respectively.
Computer software (acquired by purchase) with an original cost of $638,000 is
being amortized on the straight-line method over thirty-six months. Amortization
expense was $79,000, $66,000, and $63,000, for the years ended December 31,
1996, 1995, and 1994, respectively.
NOTE 8 - IMPAIRMENT OF LONG-LIVED ASSETS AND CERTAIN
IDENTIFIABLE INTANGIBLES:
In March, 1995, the Financing Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, effective for
fiscal years beginning after December 15, 1995. This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity to be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
total of the expected future cash flows expected to result from the use of the
asset and its eventual disposition is less than the carrying amount of the
assets, an impairment loss is recognized. Impairment losses resulting from the
application of this statement should be reported in the period in which the
recognition criteria are first applied and met. The initial application of SFAS
121 is to be reported as the cumulative effect of a change in accounting
principle. As of December 31, 1996, the Corporation and its banking subsidiaries
did not hold any long-lived assets or intangibles which have to be considered
impaired as a result of the application of SFAS 121.
NOTE 9 - DEPOSITS:
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000 was approximately $38,616,000 and $31,203,000 at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
(In thousands of dollars)
1997 $ 150,857
1998 22,225
1999 4,898
2000 658
2001 457
Thereafter 2,445
----------
$ 181,540
==========
54
<PAGE>
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to three days from the transaction date. Certain of
the borrowings have no defined maturity date. All securities underlying these
agreements are institution-owned securities.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1996 1995
---- ----
Average balance during the year $ 29,819 $ 25,371
Average interest rate during the year 4.59% 5.05%
Maximum month-end balance during the year $ 36,568 $ 30,196
NOTE 11 - INCOME TAXES:
Income tax expense for the three years ended December 31, 1996, consists of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Current:
Federal ........................... $ 2,507 $ 1,715 $ 1,496
State ............................. 294 237 201
------- ------- -------
Total current ............. 2,801 1,952 1,697
Deferred ............................. (379) (50) (89)
------- ------- -------
Total ..................... $ 2,422 $ 1,902 $ 1,608
======= ======= =======
</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>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Provision for loan losses ...................... $(341) $(183) $(62)
Pension cost and post-retirement benefits ...... 47 79 18
Consumer loan income ........................... 13 38 8
Depreciation ................................... 14 2 (13)
Other .......................................... (112) 14 (40)
----- ----- ----
Total ............................... $(379) $ (50) $(89)
===== ===== ====
</TABLE>
55
<PAGE>
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>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Income taxes at statutory rate on
pre-tax income .......................... $ 2,703 $ 2,224 $ 1,927
Increase (reduction) of taxes:
State income taxes, net of federal
tax benefit .......................... 236 194 168
Tax-exempt interest income .............. (606) (588) (507)
Other ................................... 89 72 20
------- ------- -------
Total ........................... $ 2,422 $ 1,902 $ 1,608
======= ======= =======
</TABLE>
The net deferred tax asset included in other assets in the accompanying
consolidated financial statements includes the following components:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands of dollars)
<S> <C> <C>
Allowance for loan losses .............................. $ 1,419 $ 1,078
Post-retirement benefits ............................... 64 53
Intangible assets ...................................... 125 20
Other real estate ...................................... - 13
Unrealized losses on investment securities
available-for-sale ................................ 31 -
Start-up expenses ...................................... 51 -
------- ------
Total deferred tax assets ............... 1,690 1,164
------- ------
Depreciation ........................................... (808) (794)
Consumer loan income ................................... (159) (146)
Bond discount accretion ................................ (84) (53)
Pension plan ........................................... (68) (10)
Unrealized gains on investment securities
available-for-sale ................................ - (33)
------- -------
Total deferred tax liabilities .......... (1,119) (1,036)
------- -------
Net deferred tax asset .................. $ 571 $ 128
======= =======
</TABLE>
56
<PAGE>
NOTE 12 - OTHER EXPENSES:
The following is a summary of the components of other non-interest expense for
the three years ended December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Office supplies $ 482 $ 406 $ 316
Advertising 432 371 325
Amortization of intangible assets 644 540 328
Federal depository insurance 2 373 691
Other 3,518 3,020 2,544
------- -------- --------
Total $ 5,078 $ 4,710 $ 4,204
======= ======== ========
</TABLE>
NOTE 13 - 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 plans represented less than 3% dilution
in the computation of average shares outstanding. The number of weighted-average
shares outstanding was 2,434,849, 2,360,972, and 2,357,121 for the years ended
December 31, 1996, 1995, and 1994, respectively.
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 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
Dividends are paid by the Corporation from its assets which are mainly provided
by dividends from the banking subsidiaries. However, certain restrictions exist
regarding the ability of the subsidiaries 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 subsidiaries' 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, 1996, $6,960,000 of FNB's retained
earnings are available for distribution to the Corporation as dividends without
prior regulatory approval.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to the Corporation unless such loans are
collateralized by specified obligations. The maximum amount available for
transfer from FNB and NBYC to the Corporation in the form of loans or advances
approximated $8,096,000 and $834,000, respectively, at December 31, 1996.
57
<PAGE>
NOTE 15 - 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, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands of dollars)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$3,508 for 1996 and $3,117 for 1995 $ 3,616 $ 3,195
======== ========
Projected benefit obligation for services rendered to date $ 5,229 $ 4,632
Plan assets at fair value, primarily guaranteed interest
contracts, money market accounts and annuity contracts 4,525 4,178
-------- --------
Excess of projected benefit obligation over the plan assets (704) (454)
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 1,131 743
Unrecognized prior service costs 13 12
Unrecognized net asset being amortized over 16 years (160) (193)
-- -------- --------
Accrued (prepaid) pension cost included in other
liabilities (assets) $ (280) $ 108
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Net pension expense included the following expense
(income) components:
Service cost - benefits earned
during the period $ 269 $ 231 $ 218
Interest cost on projected
benefit obligation 342 314 276
Actual return on plan assets (70) (257) (213)
Net amortization and deferral (281) (42) (50)
------- ------- ------
Net periodic pension expense $ 260 $ 246 $ 231
======= ======= ======
</TABLE>
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 5.0%, respectively, for each of the years ended
December 31, 1996, 1995 and 1994. The expected long-term rate of return on
pension plan assets was 8.0% for each of the three years ended December 31,
1996.
58
<PAGE>
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,
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Pension $ 260 $ 246 $ 231
Profit sharing 100 89 83
------ ------ -------
Total $ 360 $ 335 $ 314
====== ====== =======
</TABLE>
NOTE 16 - POST-RETIREMENT BENEFITS:
The following sets forth the plan's funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands of dollars)
<S> <C> <C>
Accumulated post-retirement
benefit obligation ................................ $ 503 $ 504
Plan assets at fair value .......................... - -
----- -----
Funded status ...................................... (503) (504)
Unrecognized net
transition obligation ............................. 505 536
Unrecognized gain .................................. (133) (147)
----- -----
Accrued post-retirement benefit cost
included in other liabilities ................... $(131) $(115)
===== =====
</TABLE>
Net periodic post-retirement benefit cost included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Service cost ............................... $ - $ - $ -
Interest cost .............................. 36 36 40
Net amortization and deferral .............. 7 7 22
--- --- ---
Net periodic post-retirement
benefit cost .............................. $43 $43 $62
=== === ===
</TABLE>
The weighted-average discount rate used in determining the accumulated
post-retirement 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 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 post-retirement
benefit obligation as of December 31, 1996 by $59,000 and the aggregate of the
service and interest cost components of net periodic post-retirement benefit
cost for the year then ended by $4,000.
59
<PAGE>
NOTE 17 - STOCK-BASED COMPENSATION PLANS:
The Corporation has reserved 66,701 shares of common stock for issuance to key
employees under the Incentive Stock Option Plan of 1992 and an additional 76,650
shares of common stock for issuance to key employees under the 1996 Incentive
Stock Option Plan. Options under both plans may not be exercised in whole or in
part within one year following the date of the grant of the options, and
thereafter become exercisable in 25% increments over the next four years. The
exercise price of the options may not be less than fair market value of the
common stock on the date of the grant. No options may be exercised after five
years from the date of the grant.
Activity in both stock option plans is summarized below. All information has
been retroactively restated to reflect stock dividends.
<TABLE>
<CAPTION>
................ 1996 ............... ............... 1995 ................
WEIGHTED WEIGHTED
RANGE OF AVERAGE RANGE OF AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICES PRICE SHARES PRICES PRICE
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 60,647 $13.49-16.53 $14.50 63,715 $13.49-16.53 $13.79
Granted - -
Exercised 5,276 $13.49 $13.49 3,068 $13.49 $13.49
------ ------
Outstanding, December 31 55,371 $15.87 60,647 $14.50
====== ======
Exercisable, December 31 55,371 $15.87 60,647 $14.50
====== ======
Available for Grant,
December 31 66,701 66,701
====== ======
</TABLE>
<TABLE>
<CAPTION>
................ 1996 ...............
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICE
------ ------ -----
1996 Incentive Stock Option Plan:
<S> <C> <C> <C>
Outstanding, January 1 - - -
Granted 47,250 $25.71 $25.71
Exercised - - -
------
Outstanding, December 31 47,250 $25.71
======
Exercisable, December 31 -
======
Available for Grant,
December 31 76,650
Weighted-average fair value
of options granted during
the year $ 5.50
======
</TABLE>
The Corporation has entered into a Restricted Stock Agreement with the chief
executive officer. The agreement grants to the employee 5,444 shares of
restricted common stock conditioned upon continued employment. The options vest
free
60
<PAGE>
of restrictions as follows: 25% in 1999, 25% in 2001, and 50% in 2003.
Termination of employment prior to a vesting date would terminate any interest
in non-vested shares. Prior to vesting of the shares, as long as employed as
chief executive officer, the employee will have the right to vote such shares
and to receive dividends paid with respect to such shares. All restricted shares
will fully vest in the event of change of control of the Corporation or upon the
death of the employee. The weighted average fair value of the shares granted
under this agreement is $6.34.
The fair value of the options granted and the stock issued was estimated on the
date of the grant using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 6.125%, dividend yield of
2.7%, expected life of options of 5 years, expected life of restricted stock of
7 years, and volatility of 7.85%.
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. Had compensation cost for the 1996 stock option plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS 123, the Corporation's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
.............. 1996 ...............
(In thousands of dollars, AS REPORTED PRO FORMA
except per share data) ------- ---------
<S> <C> <C>
Net income $5,528 $5,505
Earnings per share $2.27 $2.26
</TABLE>
NOTE 18 - LONG-TERM LEASES:
The Corporation's banking subsidiaries were obligated at December 31, 1996,
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 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.
(In thousands of dollars)
APPROXIMATE REQUIRED
YEAR ANNUAL RENTALS
1997 $ 53
1998 56
1999 50
2000 37
2001 19
Later years 5
-----
Total $ 220
=====
Rental expense for operating leases for the years ended December 31, 1996, 1995,
and 1994 was $32,000, $39,000, and $45,000, respectively.
61
<PAGE>
NOTE 19 - COMMITMENTS AND CONTINGENT LIABILITIES:
The Corporation and its banking subsidiaries are involved at times in various
litigation arising out of the normal course of business. In the opinion of the
Company'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. During the year, the maximum amount of borrowings under this
credit arrangement was $2,000,000. Average borrowings were $273,000 and the
average interest rate was 7.33%. There were no borrowings outstanding at
December 31, 1996.
NOTE 20 - RELATED PARTY TRANSACTIONS:
During 1996 and 1995, the Corporation's banking subsidiaries 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 $8,970,000 at December 31, 1996, and $7,342,000 at December 31,
1995. During 1996, $16,820,000 of new loans were made to this group. Repayments
of $15,217,000 were made during the year. Other changes, which included loans
outstanding to new or former officers and directors, resulted in an increase of
$25,000.
NOTE 21 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Corporation's banking subsidiaries are parties 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
banks have in particular classes of financial instruments.
The subsidiaries' 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 subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments.
<TABLE>
<CAPTION>
...... DECEMBER 31, ......
(In thousands of dollars) 1996 1995
---- ----
<S> <C> <C>
Financial instruments whose contract
amount represents credit risks:
Commitments to extend credit $49,145 $50,441
Standby letters of credit and
financial guarantees written $ 1,135 $ 594
</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 banking subsidiaries evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the subsidiaries 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.
62
<PAGE>
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN:
These instruments are conditional commitments issued by the banking subsidiaries
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, 1996, expire in 1997. 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, is based on management's credit
evaluation of the customer.
NOTE 22 - DERIVATIVE FINANCIAL INSTRUMENTS:
In accordance with established policy, the Corporation and its banking
subsidiaries hold derivative financial instruments which meet the following
criteria: (1) government agency security, (2) five years or less in maturity,
(3) readily identifiable indexes, and (4) "conservative" investment. The total
amount of the investment in structured notes, as a percentage of capital, has
been set by policy not to exceed 61 percent. The Company no longer purchases
structured notes.
The financial derivatives held by the Company as of December 31, 1996 and 1995,
consist of structured notes which meet the above criteria. The purpose of such
holdings include the ability to take advantage of enhanced basis point yield
spread and to take advantage of variable rate products to facilitate in the
management of the gap ratio. All such investments are classified as
available-for-sale and, therefore, recorded at fair value in the financial
statements. During the year ended December 31, 1996, derivative financial
instruments were sold and a loss of $50,000 reported. No gains or losses were
reported in the income statements from these holdings in 1995.
As of December 31, 1996 and 1995, the Corporation and its subsidiaries held
derivative financial instruments in the amount of $7,999,000 and $16,948,000.
NOTE 23 - 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.
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.
63
<PAGE>
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 Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
.......... 1996 .......... .......... 1995 ..........
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments ............................ $ 28,824 $ 28,824 $ 24,144 $ 24,144
Investment securities ..................... 160,881 161,188 151,496 152,430
Loans:
Loans .................................. 293,619 308,618 247,883 261,567
Less, allowance for loan
losses .............................. (4,705) (4,705) (3,703) (3,703)
-------- -------- -------- --------
Net loans ..................... 288,914 303,913 244,180 257,864
Financial liabilities:
Deposits .................................. 414,153 404,731 368,315 360,128
Federal funds purchased ................... 32,547 32,547 25,833 25,825
Unrecognized financial
instruments:
Commitments to extend
credit .............................. 49,145 51,616 50,441 53,225
Standby letters of credit .............. 1,135 1,135 594 594
</TABLE>
NOTE 24 - REGULATORY MATTERS:
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and its subsidiaries must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance-items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Corporation and its subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Corporation and its subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be
64
<PAGE>
categorized as well capitalized, the entities must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the institutions' category.
Actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
(In thousands of dollars)
To Be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk weighted assets):
Consolidated ................................ $49,479 17.10% $23,162 8.00% $28,952 10.00%
First National Bank ......................... 40,533 14.80 21,910 8.00 27,387 10.00
National Bank of York County ................ 4,166 33.30 1,001 8.00 1,251 10.00
Tier I Capital (to risk weighted assets):
Consolidated ................................ 45,846 15.80 11,585 4.00 17,377 6.00
First National Bank ......................... 37,571 13.70 10,970 4.00 16,454 6.00
National Bank of York County ................ 4,166 33.30 500 4.00 751 6.00
Tier I Capital (to average assets)
Consolidated ................................ 45,846 9.50 19,344 4.00 24,180 5.00
First National Bank ......................... 37,571 8.10 18,554 4.00 23,192 5.00
National Bank of York County ................ 4,166 22.40 744 4.00 930 5.00
As of December 31, 1995:
Total capital (to risk weighted assets):
Consolidated ................................ 42,870 16.60 20,660 8.00 25,825 10.00
First National Bank ......................... 39,108 15.00 20,858 8.00 26,072 10.00
Tier I Capital (to risk weighted assets):
Consolidated ................................ 39,639 15.30 10,363 4.00 15,545 6.00
First National Bank ......................... 35,619 13.80 10,324 4.00 15,487 6.00
Tier I Capital (to average assets)
Consolidated ................................ 39,639 9.10 17,424 4.00 21,780 5.00
First National Bank ......................... 35,619 8.10 17,590 4.00 21,987 5.00
</TABLE>
65
<PAGE>
NOTE 25 - CONDENSED FINANCIAL STATEMENTS:
Presented below are the condensed financial statements for First National
Corporation (Parent Company only):
<TABLE>
<CAPTION>
... DECEMBER 31, ..
(In thousands of dollars) 1996 1995
---- ----
<S> <C> <C>
Balance Sheets:
Assets:
Cash .................................................. $ 461 $ 112
Investment securities ................................. 3,040 434
Investment in banking subsidiaries .................... 44,649 39,162
Premises and equipment ................................ 126 -
Other assets .......................................... 83 83
------- -------
Total assets ................................... $48,359 $39,791
======= =======
Liabilities:
Other liabilities ..................................... $ 13 $ 14
------- -------
Total liabilities .............................. 13 14
Shareholders' equity .................................. 48,346 39,777
------- -------
Total liabilities and shareholders' equity ..... $48,359 $39,791
======= =======
</TABLE>
<TABLE>
<CAPTION>
..YEAR ENDED DECEMBER 31, ..
1996 1995 1994
---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C>
Statements of Income:
Income:
Dividends from banking subsidiaries ......... $4,499 $1,384 $ 1,183
Interest and dividends ...................... 51 22 18
Other income ................................ 10 - -
------ ------ ------
Total income ......................... 4,560 1,406 1,201
------ ------ ------
Expenses:
Interest expense ............................ 20 - -
Other general expense ....................... 144 27 6
------ ------ ------
Total expenses ....................... 164 27 6
------ ------ ------
Income before income taxes and equity in
undistributed earnings of subsidiaries ...... 4,396 1,379 1,195
Applicable income tax benefit (expense) ........ 41 3 (3)
Equity in undistributed earnings of
subsidiaries ................................ 1,091 3,258 2,869
------ ------ -------
Net income ........................... $5,528 $4,640 $ 4,061
====== ====== =======
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Shareholders' Equity:
(In thousands of dollars, except Unrealized
per share data) 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, 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
Net income for year ended
December 31, 1996 ................................ - - - 5,528 - 5,528
Cash dividends declared at $.74 per share ......... - - - (1,721) - (1,721)
Common stock dividend of 10%,
date of record, October 31, 1996 ................. 120,891 604 2,654 (3,258) - -
Common stock issued ............................... 184,794 924 3,942 - - 4,866
Changes in unrealized gain (loss) on
securities available-for-sale,
net of applicable deferred
income taxes of $64 .............................. - - - - (104) (104)
--------- ------- ------- -------- ----- --------
Balance, December 31, 1996 ........................ 2,550,024 $12,750 $22,856 $ 12,790 $ (50) $ 48,346
========= ======= ======= ======== ===== ========
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
... YEAR ENDED DECEMBER 31, ...
(In thousands of dollars) 1996 1995 1994
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Statements of Cash Flows:
Cash flows from operating activities:
Net income ............................................ $ 5,528 $ 4,640 $ 4,061
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ...................... 10 - -
Discount accretion ................................. (4) (22) (9)
Decrease in other assets ........................... - (78) (4)
Increase in other liabilities ...................... (1) (6) -
Undistributed earnings of subsidiary ............... (1,091) (3,258) (2,869)
------- ------- -------
Net cash provided by operating
activities ................................ 4,442 1,276 1,179
------- ------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities ............. - 149 -
Proceeds from maturities of investment
securities ............................................ 320 1,265 725
Purchases of investment securities ....................... (2,922) (1,401) (721)
Purchases of premises and equipment ...................... (136) - -
Purchase of stock of banking subsidiary .................. (4,500) - -
------- ------- -------
Net cash provided (used) by
investing activities ...................... (7,238) 13 4
------- ------- -------
Cash flows from financing activities:
Cash dividends paid ...................................... (1,721) (1,403) (1,196)
Cash paid in lieu of fractional shares ................... - - 49
Common stock issuance .................................... 4,655 95 -
Stock options exercised .................................. 211 41 -
------- ------- -------
Net cash provided (used) by
financing activities ...................... 3,145 (1,267) (1,147)
------- ------- -------
Net increase in cash and cash equivalents ................... 349 22 36
Cash and cash equivalents at beginning
of year .................................................. 112 90 54
------- ------- -------
Cash and cash equivalents at end of year .................... $ 461 $ 112 $ 90
======= ======= =======
</TABLE>
THESE NOTES ARE AN INTEGRAL PART OF THE ACCOMPANYING FINANCIAL STATEMENTS
68
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 27, 1997, included in First National
Corporation's 10-K for the year ended December 31, 1996.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 26, 1997
69
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND> FINANCIAL DATA SCHEDULE FIRST NATIONAL CORP.
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Income for the twelve months ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 28,824
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,684
<INVESTMENTS-CARRYING> 65,197
<INVESTMENTS-MARKET> 65,504
<LOANS> 293,619
<ALLOWANCE> 4,705
<TOTAL-ASSETS> 497,632
<DEPOSITS> 414,153
<SHORT-TERM> 32,547
<LIABILITIES-OTHER> 2,586
<LONG-TERM> 0
0
0
<COMMON> 12,750
<OTHER-SE> 35,596
<TOTAL-LIABILITIES-AND-EQUITY> 497,632
<INTEREST-LOAN> 25,139
<INTEREST-INVEST> 8,576
<INTEREST-OTHER> 548
<INTEREST-TOTAL> 34,263
<INTEREST-DEPOSIT> 12,618
<INTEREST-EXPENSE> 13,986
<INTEREST-INCOME-NET> 20,277
<LOAN-LOSSES> 1,319
<SECURITIES-GAINS> (50)
<EXPENSE-OTHER> 16,352
<INCOME-PRETAX> 7,950
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</TABLE>
