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