FIRST NATIONAL CORPORATION Financial Statements (Form 10-Q) June 30, 1996
Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended JUNE 30, 1996 Commission File Number 0-13663 FIRST NATIONAL CORPORATION (Exact name of registrant as specified in its charter) SOUTH CAROLINA 57-0799315 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 950 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (803) 534-2175 NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of issuer's class of securities. CLASS OUTSTANDING as of June 30, 1996 (Common Stock, $5 par value) 2,253,089
FIRST NATIONAL CORPORATION INDEX Part I: Financial Information Consolidated Balance Sheet - June 30, 1996 and December 31, 1995 Consolidated Statement of Income - Three and Six Months Ended June 30, 1996 and 1995 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1996 and 1995 Notes to Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Part II: Other Information Item 1 - Legal Proceedings Item 6 - Exhibits and Reports of Form 8-K
PART I - FINANCIAL INFORMATION Item l. Financial Statements FIRST NATIONAL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS 6-30-96 12-31-95 (In Thousands) (In Thousands) Cash and due from banks $24,546 $24,144 Federal funds sold 7,550 0 Investment securities - Note 2 Securities held-to-maturity (fair value of $76,152 in 1996 and $96,594 in 1995) 76,447 95,660 Securities available-for-sale, at fair value 71,027 55,836 Total investment securities 147,474 151,496 Loans - Note 3 264,231 250,423 Less: Unearned income 2,692 2,540 Allowance for loan losses-Note 4 4,295 3,703 Loans, net 257,244 244,180 Premises and equipment 9,361 8,250 Intangible assets 3,282 3,489 Other real estate - Note 6 44 151 Other assets 4,962 4,612 TOTAL ASSETS $454,463 $436,322
Consolidated Balance Sheet - Continued....... LIABILITIES & STOCKHOLDERS' EQUITY 6-30-96 12-31-95 (In Thousands) (In Thousands) Liabilities: Deposits in domestic offices: Noninterest bearing $60,156 $56,735 Interest-bearing - Note 7 315,944 311,580 TOTAL DEPOSITS 376,100 368,315 Federal funds purchased & securities sold under agreement to repurchase 32,694 25,833 Other liabilities 4,370 2,397 TOTAL LIABILITIES 413,164 396,545 Commitments & Contingent liabilities - Note 8 Shareholders' equity: Common stock - $5 par value; authorized 5,000,000 shares; issued and outstanding 2,255,361 shares in 1996 and 2,244,339 shares in 1995 - Note 9 11,277 11,222 Additional paid-in capital 16,456 16,260 Retained earnings 14,226 12,241 Unrealized gain (loss) on securities available-for-sale, net of applicable deferred income taxes (660) 54 TOTAL SHAREHOLDERS' EQUITY 41,299 39,777 TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $454,463 $436,322
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) 3 Months Ended 6 Months Ended 06-30-96 06-30-95 06-30-96 06-30-95 (In Thousands) (In Thousands) Interest income: Interest and fees on loans $6,149 $5,271 $12,065 $10,336 Interest & dividends on investment sec.: Taxable income 1,691 1,412 3,267 2,736 Non-taxable income 394 376 854 760 Dividends on stock 7 6 13 12 Interest on federal funds sold 132 291 328 424 Total Interest income 8,373 7,356 16,527 14,268 Interest expense: Interest on deposits 3,016 2,685 6,084 5,134 Interest on federal funds purchased & securities sold under agreement to repurchase 340 378 692 635 Total interest expense 3,356 3,063 6,776 5,769 Net Interest Income 5,017 4,293 9,751 8,499 Provisions for loan losses - Note 4 300 120 520 240 Net interest income after provisions for loan losses 4,717 4,173 9,231 8,259 Noninterest income: Service charges on deposit accounts 1,012 731 1,998 1,449 Other service charges commissions, fees 272 202 591 464 Gains (losses) on investment securities 2 0 2 2 Other operating income 8 9 16 20 Total noninterest income 1,294 942 2,607 1,935 Noninterest expense: Salaries & employee benefits 2,168 1,910 4,212 3,800 Occupancy expense of bank premises - net 244 207 518 425 Furniture & equipment expense - net 316 260 610 515 Amortization expense-Intangible assets 158 77 313 153 FDIC insurance premium 0 181 0 359 Other expense 1,063 823 2,175 1,687 Total noninterest expense 3,949 3,458 7,828 6,939 Income before income taxes 2,062 1,657 4,010 3,255 Applicable income taxes 663 484 1,214 942 Net Income $1,399 $1,173 $2,796 $2,313 Net income per common share - Note 10 $0.62 $0.52 $1.24 $1.03 Cash dividends per common share $0.18 $0.165 $0.36 $0.33
FIRST NATIONAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 6 Months Ended 6 Months Ended 06-30-96 06-30-95 (In Thousands) (In Thousands) Cash flows from operating activities: Net income $ 2,796 $ 2,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 737 558 Provision for loan losses 520 240 Provision for deferred taxes 0 92 Increase (decrease) in reserve for income taxes-current (266) (52) (Gain) loss on sale of premises and equipment 0 (3) (Increase) decrease in interest receivables (111) (266) Increase (decrease) in accumulated premium amortization and discount accretion - net 107 (189) Increase (decrease) in interest payable (86) 380 (Increase) decrease in miscellaneous assets (116) (3,427) (Increase) decrease in prepaid assets 314 0 Increase (decrease) in other liabilities 326 30 Total adjustments 1,425 (2,637) Net cash provided by operating activities $ 4,221 $ (324)
Consolidated Statement of Cash Flows - Continued....... 6 Months Ended 6 Months Ended 06-30-96 06-30-95 (In Thousands) (In Thousands) Cash flows from investing activities: Proceeds from maturities of investment securities held-to-maturity $39,218 $19,724 Purchase of investment securities held-to-maturity (4,180) (13,245) Proceeds from maturities of investment securities available-for-sale 9,312 999 Purchase of investment securities available-for-sale (41,588) (25,997) Net (increase) decrease in customer loans (13,860) (24,930) Additions to premises and equipment (1,535) (1,365) Proceeds from sale of premises and equipment 0 3 Recoveries from loans previously charged off 277 192 (Increase) decrease in funds sold (7,550) 0 Net cash used in investing activities (19,906) (44,619) Cash flows from financing activities: Net increase in demand deposits, NOW accounts, savings accounts and certificates of deposit 7,785 36,230 Purchase of treasury stock (61) (36) Sale of common stock 312 0 Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase 6,861 9,872 Proceeds Issuance of Debt 2,000 0 Dividends paid (811) (672) Net cash provided by financing activities 16,086 45,394 Net increase (decrease) in cash and cash equivalents 401 451 Cash and cash equivalents at beginning of year 24,144 23,046 Cash and cash equivalents at end of reporting period $24,545 $23,497
FIRST NATIONAL CORPORATION Note 1 - Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. Note 2 - Investment Securities: The following is the amortized cost and fair value of investment securities held-to-maturity at June 30, 1996 and December 31, 1995: <TABLE> <CAPTION> 06-30-96 12-31-95 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value <S> <C> <C> <C> <C> <C> <C> <C> <C> U S Treasury securities 26,244 17 (71) 26,190 34,323 203 (65) 34,461 Obligations of U S government agencies & corps 18,836 63 (416) 18,483 23,875 212 (86) 24,001 Obligations of state and political subdivisions 31,367 406 (294) 31,479 37,462 714 (44) 38,132 Other securities 0 0 0 0 0 0 0 0 Total 76,447 486 (781) 76,152 95,660 1,129 (195) 96,594 </TABLE>
Note 2 - Continued... The following is the amortized cost and fair value of securities available-for-sale at June 30, 1996 and December 31, 1995: <TABLE> <CAPTION> 06-30-96 12-31-95 Gross Gross Gross Gross Amort Unreal Unreal Fair Amort Unreal Unreal Fair Cost Gains Losses Value Cost Gains Losses Value <S> <C> <C> <C> <C> <C> <C> <C> <C> U S Treasury securities 19,164 1 (323) 18,842 15,448 188 0 15,636 Obligations of U S government agencies & corps 52,454 21 (765) 51,710 39,826 188 (289) 39,725 Other securities 475 0 0 475 475 0 0 475 Total 72,093 22 (1,088) 71,027 55,749 376 (289) 55,836 </TABLE> Investment securities with an aggregate amortized cost of $64,397 on June 30, 1996, and $55,126 on December 31, 1995, were pledged to secure public deposits and for other purposes as required and permitted by law. Note 3 - Loans: The following is a summary of loans at: 6-30-96 12-31-95 Commercial, financial & agricultural 42,117 42,000 Real Estate - construction 6,930 5,792 Real estate - mortgage 158,601 148,853 Consumer 55,166 52,670 All other 1,417 1,108 Total loans, gross 264,231 250,423 As of June 30, 1996 and December 31, 1995 the aggregate dollar amount of loans to related parties; principally, directors and executive officers, their immediate families and their business interests, was $5,669 and $7,342 respectively. The following is an analysis of the activity with respect to loans to related parties for the six months ended June 30, 1996: Balance, beginning of period 7,342 Add: New loans 9,972 Deduct: Payments 11,645 Other changes 0 Balance, end of period 5,669
Note 4 - Allowance for Loan Losses: Amount 06-30-96 12-31-95 Balance, beginning of period (year) 3,703 3,194 Add: Recoveries 277 356 Provisions for loan losses charged to income 520 844 Total 4,500 4,394 Deduct: Loans charged off 205 691 Balance, end of period (year) 4,295 3,703 The allowance for loan losses is maintained at a level which, in management's judgement is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. For impairment recognized in accordance with Statement of Financial Accounting Standards No. 114 (SFAS 114), ACCOUNTING BY CREDITORS fOR IMPAIRMENT OF A LOAN, the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Note 5 - Adoption of Statement of Financial Accounting Standards No. 114 and No. 118: Effective January 1, 1995, the 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 to the loan's effective interest rate.
Note 5 - continued... 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 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 of the Company expects to collect all amounts due, including interest accrued at the contractual interest rate, for the period of delay. In accordance with these standards, the Company does not apply SFAS 114 and SFAS 118 to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. These groups include the Company's credit card, residential mortgage, overdraft protection, home equity lines, accounts receivable financing, and consumer installment loans. The Company's adoption of these accounting standards did not have a material effect on the financial condition and results of operations of the Company. In accordance with SFAS 114, historical information has not been restated to reflect the application of this standard. Note 6 - Other Real Estate: Real estate acquired in satisfaction of a loan and in-substance foreclosures are reported in other assets. In-substance foreclosures are properties in which the borrower has little or no equity in the collateral. Properties acquired by foreclosure or deed in lieu of foreclosure and in-substance foreclosures are transferred to Other Real Estate Owned ("OREO") and recorded at the lower of the outstanding loan balance at the time of acquisition or the estimated market value. Market value is determined on the basis of the properties being disposed of in the normal course of business and not on a liquidation or distress basis. Loan losses arising from the acquisition of such properties are charged against the allowance for losses. Gains or losses arising from the sale of OREO are reflected in current operations.
Note 7 - Interest Bearing Deposits: Certificates of deposit in excess of $100,000 totaled $30,954 and $31,203 at June 30, 1996 and December 31, 1995 respectively. Note 8 - Commitments and Contingent Liabilities: In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit and standby letters of credit. At June 30, 1996, commitments to extend credit and standby letters of credit aggregated $49,257. The Company does not anticipate any material losses as a result of these transactions. Note 9 - Common Stock: As of December 31, 1995, the common stock outstanding was 2,244,339. During the first two quarters, the Company granted options to purchase an aggregate of 3,525 shares under the incentive stock option plan and also issued 9,324 shares to the dividend reinvestment plan. During the second quarter, the Company granted and issued 5,185 shares under a restricted stock agreement dated March 28, 1996. The Company purchased and retired 7,012 shares during the first two quarters of 1996. As of June 30, 1996, the common stock outstanding was 2,255,361. Note 10 - Earnings Per Share: Earnings per share are calculated on the weighted-average of number of shares of common stock outstanding, giving retroactive effect to stock dividends and stock splits. The number of weighted-average shares outstanding at June 30, 1996 was 2,250,549 and 2,240,081 at December 31, 1995. Dividends per share are calculated using the current equivalent of number of common shares outstanding at the time of the dividend based on the Company's shares outstanding.
FIRST NATIONAL CORPORATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion relates to financial statements contained in this report. For further information refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. For the second quarter of 1996, First National Corporation ("the Corporation") had consolidated net income of $1,399,000, an increase of 19.3 percent over the $1,173,000 earned in the second quarter of 1995. Earnings per share amounted to $0.62 for the three months ended June 30, 1996, a 19.2 percent increase over the $0.52 per share earned in the second quarter of 1995. Net income for the first six months of 1996 was $2,796,000, an increase of 20.9 percent over the $2,313,000 earned for the same period in 1995. Earnings per share amounted to $1.24 for the six months ended June 30, 1996, a 20.4 percent increase over the $1.03 per share earned in the first six months of 1995. NET INTEREST INCOME For the second quarter of 1996, net interest income was $5,017,000 compared to $4,293,000 for the same period in 1995. This is an increase of $724,000 or 16.9 percent. Net interest income for the first six months of 1996 was $9,751,000 compared to $8,499,000 for the same period in 1995. This represents an increase of $1,252,000 or 14.7 percent. This increase resulted from a 12.1 percent increase in loan outstandings, net of unearned income, when compared to the first six months of 1995. The yield on a major portion of the Company's earning assets adjusts simultaneously with changes in the general level of interest rates. In the first six months of 1995, the year to date taxable equivalent yield on earning assets was 7.97 percent. During the same period of 1996, the yield decreased to 7.93 percent, or a decrease of 4 basis points. The cost of the liabilities used to support these earning assets increased 1 basis point from 3.88 percent in 1995 to 3.89 percent in 1996. Interest rates paid on interest-bearing liabilities increased more rapidly than yields on earning assets due to the Company's negative asset/liability position. For the first six months net interest margins decreased form 4.75 percent in 1995 to 4.66 percent in 1996. The impact of interest-free funds for the same period decreased from .66 percent to .62 percent or a decrease of 4 basis points.
Management's Discussion Continued... The largest category of earning assets is loans. At the end of the second quarter 1996, loans outstanding, less unearned income, were $261,539,000 compared to $247,883,000 at December 31, 1995. This represents an increase of $13,656,000 or 5.5 percent. For the second quarter ended June 30, 1996, interest and fees on loans were $6,149,000 compared to $5,271,000 for the comparable period in 1995, an increase of $878,000 or 16.7 percent. For the six months ended June 30, 1996, interest and fees on loans were $12,065,000 compared with $10,336,000 for the same period in 1995. This represents an increase of $1,729,000 or 16.7 percent. The major volume increase in the loan portfolio was in real estate- mortgage loans. For the first six month period ended June 30, 1996, mortgage loans increased $9,748,000 or 6.5 percent when compared to December 31, 1995. Of this increase $4,578,000 was secured by nonfarm nonresidential properties and $3,236,000 was secured by 1-4 family residential properties when compared to December 31, 1995. This increase in the loan portfolio was brought about due to a renewed confidence in overall economic trends as well as favorable mortgage interest rates. The Company has no foreign loans nor loans for highly leveraged transactions. For the six months ended June 30, 1996, loans averaged $254,313,000 and yielded 9.17 percent on a taxable equivalent basis compared to $227,556,000 with a taxable equivalent yield of 9.36 percent or a decrease of 19 basis points for the year ended December 31, 1995. Investment securities are the second largest category of earning assets. Investment securities are utilized by the Company as a vehicle for the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for certain deposit and purchased funds. At June 30, 1996, investment securities were $147,474,000 compared to $151,496,000 at December 31, 1995. This is a decrease of $4,022,000 or 2.7 percent. Funds generated in the reduction of the investment portfolio were used to fund the Company's loan growth. For the second quarter ended June 30, 1996, investment income was $2,092,000 compared with $1,794,000 for the comparable period in 1995, a net increase of $289,000 or 16.6 percent. For the six month period ended June 30, 1996, investment income was $4,134,000 compared with $3,508,000 for the same period in 1995, a net increase of $626,000 or 17.8 percent. Management attributes this increase in income to higher yields on investment securities. At the end of the second quarter 1996, securities averaged $149,397,000 and yielded 5.94 percent on a taxable equivalent basis, compared to $142,614,000 with a yield of 5.85 percent for the year ended December 31, 1995, resulting in a 9 basis point increase in yield.
Management's Discussion Continued... As of June 30, 1996, the Company had unrealized gains in the U.S. Treasury and agency portfolio of $102,000 and in the municipal portfolio $406,000. Also at June 30, 1996, the Company had an unrealized loss of $1,575,000 in the U. S. Treasury and agency portfolio and a $294,000 unrealized loss in the municipal portfolio. At year end 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debit and Equity Securities" for the investment portfolio, and showed a net unrealized loss at June 30, 1996 of approximately $1,066,000 on the $70,552,000 of securities denoted as available-for-sale. For the first six months ended June 30, 1996, the Company had a $2,000 realized gain due to called municipal bonds. Although securities classified as available-for-sale may be sold from time to time to meet liquidity or other needs, it is not the normal activity of the Company to trade the investment portfolio. Management has the intent and the ability to hold securities on a long-term basis or until maturity. During the first six months of 1996, interest-bearing liabilities averaged $350,025,000 and carried an average rate of 3.89 percent. This compares to an average level of $316,629,000 with a rate of 3.96 percent at December 31, 1995 or a decrease of 7 basis points. Approximately half of these interest-bearing liabilities have fixed rates. They are expected to be renewed at prevailing market rates as they mature. PROVISION FOR LOAN LOSSES The provision for loan losses for the three month period ended June 30, 1996 was $300,000 compared to $120,000 for the same period in 1995 which represents a 150.0 percent increase. For the six month period ended June 30, 1996, the provision for loan loss was $520,000 compared to $240,000 for the same period in 1995 which represents a 116.7 percent increase. The increase in the provision for loan losses was due to several factors. These factors include continued strong loan growth. The allowance for loan losses was $4,295,000 or 1.64 percent of outstanding loans at June 30, 1996 compared to 1.49 percent of outstanding loans at year-end 1995. To determine the adequacy of the allowance for loan losses, management performs an internal loan analysis which indicated the estimated loan losses. Management feels that the allowance for loan losses is adequately funded. Other real estate owned includes certain real estate acquired as a result of foreclosure as well as amounts reclassified as in-substance foreclosures. For the period ended June 30, 1996, other real estate owned was $44,000 compared to $151,000 at December 31, 1995. This increase resulted from the sale of several real estate properties.
Management's Discussion Continued... Management anticipates that the level of charge-offs for 1996 will be near or below the levels of 1995. The loan loss allowance is considered adequate by management. However, changes in economic conditions in the Company's market area could affect these levels. NONINTEREST INCOME AND EXPENSE Noninterest income for the second quarter of 1996 was $1,294,000 compared to $942,000 for the same period in 1995, representing an increase of $352,000 or 37.4 percent. For the first six months of 1996 noninterest income was $2,607,000 compared to $1,935,000 for the same period in 1995, representing an increase of $672,000 or 34.7 percent. During the first six months of 1996, service charges and fee income increased $549,000 or 37.9 percent. This was primarily due to the increase in service fees on deposit accounts implemented during the fourth quarter of 1995. Other service charges, commissions and fees for the first six months of 1996 increased $127,000 or 27.4 percent compared to the same period in 1995. This increase can be primarily attributed to the increase in the real estate mortgage loan origination fee income. Noninterest expense for the second quarter of 1996 was $3,949,000 compared to $3,458,000 for the same period in 1995, representing an increase of $491,000 or 14.2 percent. For the six months ended June 30, 1996, noninterest expense was $7,828,000 compared to $6,939,000, an increase of $889,000 or 12.8 percent. Salaries and employee benefits for the second quarter ended June 30, 1996 increased $258,000 or 13.5 percent compared to the same period in 1995. For the first six months of 1996 salaries and employee benefits increased $412,000 or 10.8 percent compared to the same period in 1995. Amortization expense on intangible assets increased $81,000 or 105.2 percent compared to the same period in 1995. For the six months ended June 30, 1996, amortization expense on intangible assets increased $160,000 or 104.5 percent compared to the same period in 1995. This is the direct result of acquiring two branches from NationsBank in June 1995. Other expenses increased $240,000 or 29.2 percent for the second quarter of 1996 compared to the same period in 1995. For the six months ended June 30, 1996, other expenses increased $488,000 or 28.9 percent compared to the same period in 1995. This increase in other expenses is distributed among the following expense categories: advertising, insurance, office and printing supplies, postage, telephone and line charges, and other expenses. NET INCOME Net income was up 19.3 percent for the second quarter of 1996 when compared to the same period in 1995. For the six months ended June 30, 1996, net income was up 20.9 percent compared to the same period in 1995. The $1,252,000 or 14.7 percent increase in net interest income and the $672,000 or 34.7 percent increase in noninterest income for the six months ended June 30, 1996 as compared to the same period in 1995 were the primary factors in the growth in net income.
Management's Discussion Continued... CAPITAL RESOURCES AND LIQUIDITY To date, the capital needs of the Company have been met through the retention of earnings less cash dividends. At the end of the second quarter, 1996, stockholder's equity was $41,299,000 compared to $39,777,000 at December 31, 1995. In connection with its sponsorship of the organization of the National Bank of York County, the Company borrowed $2,000,000 from a third party financial institution and $2,500,000 provided by First National Corporation from available funds. The Company is offering for sale up to 170,000 shares of $5.00 par value common stock at a price of $27.00 per share. Proceeds from this offering will by used first to reimburse First National Corporation for expenses of this offering, second to repay as much as possible of the borrowed funds, third to reimburse First National Corporation as much as possible of its $2,500,000 of contributed funds, and finally, for general corporate purposes of First National Corporation. The Company and subsidiary are subject to certain risk-based capital guidelines. These ratios measure the relationship of capital to a combination of balance sheet and off balance sheet risks. The values of both balance sheet and off balance sheet items will be adjusted to reflect credit risk. Under the guidelines of the Board of Governors of the Federal Reserve System, which are substantially similar to the Office of the Comptroller of the Currency guidelines, as of December 31, 1995, Tier 1 capital must be at least 4 percent of risk-weighted assets, while total capital must be 8 percent of risk-weighted assets. The Tier 1 capital ratio at June 30, 1996 was 15.1 percent compared to 15.3 percent at December 31, 1995. The total capital ratio was 16.4 percent at June 30, 1996 compared to 16.6 percent at December 31, 1995. In conjunction with the risk-based capital ratio, applicable regulatory agencies have also prescribed a leverage capital ratio in evaluating capital strength and adequacy. The minimum leverage ratio required for banks is between 3 percent and 5 percent, depending on the institution's composite rating as determined by its regulators. At June 30, 1996, First National Corporation's leverage ratio was 9.2 percent, compared to 9.1 percent at December 31, 1995. First National Corporation's ratio exceeds the minimum standards by substantial margins. Liquidity is the ability of the Company to meet its cash flow requirements which arise primarily from withdrawal of deposits, extension of credit and payment of operating expenses. Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally changes in the earning asset mix are of a longer term nature and are not utilized for day-to-day Corporation liquidity needs.
Management's Discussion Continued... The Company's liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from the Company's use of federal funds purchased and securities sold under agreement to repurchase. Additional liquidity can be secured from lines of credit extended to the Company from its correspondent banks. Management feels that its liquidity position is adequate.
PART II - OTHER INFORMATION Item l. Legal Proceedings: Neither First National Corporation nor its subsidiary, First National Bank, is a party to nor is any of their property the subject of any material or other pending legal proceedings, other than ordinary routine proceedings incidental to their business. Item 2. Changes in Securities: Not Applicable Item 3. Defaults Upon Senior Securities: Not Applicable Item 4. Submission of Matters to a Vote of Security Holders: Not Applicable Item 5. Other Information: Not Applicable Item 6. Exhibits and Reports of Form 8-K: (a) Exhibit 3 - Articles of Incorporation (b) Exhibit 27 - Financial Data Schedule (c) Reports on Form 8-K: None
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST NATIONAL CORPORATION Date: AUGUST 14, 1996 C. JOHN HIPP, III President & Chief Executive Officer Date: AUGUST 14, 1996 W. LOUIS GRIFFITH Principal Accounting Officer and Chief Financial Officer
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT 3 Articles of Incorporation Attached 27 Financial Data Schedule Attached