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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995, Commission file number 2-96043
First National Corporation
Incorporated in the State of South Carolina
I.R.S. Employer Identification No.: 57-0799315
Address: 345 John C. Calhoun Drive, S.E.
Orangeburg, South Carolina 29115
Telephone: (803) 534-2175
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock - $5.00 par value
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates at February 29, 1996 was $50,308,157 based on the sale price of
$26.50 per share on that date. For purposes of the foregoing calculation only,
all directors and executive officers of the registrant have been deemed
affiliates. The number of shares of common stock outstanding as of February 29,
1996 was 2,247,636.
Documents Incorporated by Reference
Portions of the Proxy Statement of the Registrant for the Annual Meeting of
Shareholders to be held on April 23, 1996, are incorporated by reference into
Part III.
Form 10-K Cross-Reference Index
Part I Page
Item 1 - Business 3
Item 2 - Properties 12
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of 12
Security Holders
Part II
Item 5 - Market for Registrant's Common Equity 12
and Related Stockholder Matters
Item 6 - Selected Financial Data 12
Item 7 - Management's Discussion and Analysis 12
of Financial Condition and Results
of Operations
Item 8 - Financial Statements 12
and Supplementary Data
Item 9 - Changes in and Disagreements with 12
Accountants on Accounting
and Financial Disclosure
Part III
Item 10 - Directors and Executive Officers
of the Registrant *
Item 11 - Executive Compensation *
Item 12 - Security Ownership of Certain
Beneficial Owners and
Management *
Item 13 - Certain Relationships and
Related Transactions *
Part IV
Item 14 - Exhibits, Financial Statement 13
Schedules, and Reports on
Form 8-K
*Incorporated by reference to the Registrant's Proxy Statement for its 1996
Annual Meeting of Shareholders
2
Introduction
The following discussion is provided to assist the reader in understanding
the operation and financial position of the Corporation. Information in this
review should be read in conjunction with the consolidated financial statements
and accompanying footnotes.
Part I
Item 1. Business
Description of business
First National Corporation (the "Company"), is a bank holding company
incorporated under the laws of South Carolina in 1985. The Company owns 100% of
First National Bank, which was opened in 1934. At the close of business on
December 31, 1992 First National Corporation acquired 120,000 outstanding shares
of Santee Cooper State Bank in a stock exchange transaction accounted for as a
pooling-of-interests.
In June, 1995, First National Bank completed the purchase of two branches
of another commercial bank in Colleton County, South Carolina, and opened a
branch in Beaufort County, South Carolina.
The Company is in the process of sponsoring the organization of the
National Bank of York County (In Organization) in Rock Hill, South Carolina. The
organizers of the National Bank of York County have received preliminary
approval of the bank's charter from the Office of the Comptroller of the
Currency. An application for federal deposit insurance has been filed with the
Federal Deposit Insurance Corporation and is currently pending. Applications
must also be filed by the Company with the Board of Governors of the Federal
Reserve System and the South Carolina State Board of Financial Institutions for
approval of the Company's acquisition of 100% of the stock of National Bank of
York County upon completion of its organization. These applications are expected
to be filed in the near future. The Company intends to capitalize the new bank
with proceeds of an offering of common stock. The offering will be registered
with the Securities and Exchange Commission pursuant to the Securities Act of
1933.
The Company engages in no significant operations other than the ownership
of its subsidiary.
Some of the major services which the Company provides through its banking
subsidiary include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for business, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, and use of ATM facilities. The Company
has no material concentration of deposits from any single customer or group of
customers, and no significant portion of its loans is concentrated within a
single industry or group of related industries. There are no material seasonal
factors that would have an adverse effect on the Company. The Company does not
have foreign loans.
Territory Served and Competition
First National Bank conducts its business from twenty locations in thirteen
South Carolina towns. In its markets, First National Bank encounters strong
competition from several major banks that dominate the commercial banking
industry in their service areas and in South Carolina generally. Several
competitors have substantially greater resources and higher lending limits than
First National Bank and they offer certain services for their customers that
First National Bank does not offer. In addition to commercial banks, savings
institutions and credit unions, First National Bank competes for deposits and
loans with other financial intermediaries and investment alternatives,
including, but not limited to mortgage companies, captive finance companies,
money market mutual funds, brokerage firms, governmental and corporation bonds
and other securities. Various of these nonbank competitors are not subject to
the same regulatory restrictions as the Company and First National Bank and many
have substantially greater resources than the Company.
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As a bank holding company, the Company is a legal entity separate and
distinct from its bank subsidiary. The Company coordinates the financial
resources of the consolidated enterprise and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiary
through dividends, fees for services performed and interest on advances and
loans.
Employees
The Company does not have any salaried employees. As of December 31, 1995,
First National Bank had 253 full-time equivalent employees. The Company
considers its relationship with its employees to be excellent. The employee
benefit programs the Company provides include group life, health and dental
insurance, paid vacation, sick leave, educational opportunities, stock option
plans for officers and key employees, a defined benefit pension plan, and a 401K
plan for employees.
Executive Officers
C. John Hipp, III (Age 44)
President and Chief Executive Officer
L. D. Westbury (Age 63)
Chairman
Robert R. Horger (Age 45)
Vice Chairman
James C. Hunter, Jr. (Age 53)
Secretary and Treasurer
W. Louis Griffith (Age 44)
Chief Financial Officer
Executive Officers of the Company
Mr. Hipp has served as President of the Company and First National Bank
since April 1994. From 1991 to 1994, Mr. Hipp served as President of Rock Hill
National Bank and Rock Hill National Corporation.
Mr. Westbury has served as Chairman of the Board of the Company and First
National Bank since April 1994. Mr. Westbury served as President of the Company
and First National Bank from November 1986 to March 1994, as Executive Vice
President of First National Bank from May until November 1986, and as Senior
Vice President of First National Bank from April 1975 until May 1986.
Mr. Horger was named Vice Chairman of the Company and First National Bank
in April 1994, and was named to the Company Board in April 1991. Mr. Horger is
an attorney with Horger, Barnwell and Reid.
Mr. Hunter has served as Secretary and Treasurer of the Company since May
1986 and as Executive Vice President of First National Bank since April 1993. He
served as Senior Vice President of First National Bank from May 1987 until April
1993, and Vice President of First National Bank from March 1976 until May 1987.
Mr. Griffith has served as Chief Financial Officer of the Company since
October 1995, and as Senior Vice President and Chief Financial Officer of First
National Bank since December 1994. He served as Vice President and Chief
Financial Officer of First National Bank from August until December 1994, and as
Vice President of First National Bank from March 1986 until August 1994.
4
Supervision and Regulation
Bank holding companies and banks are extensively regulated under federal
and state law. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to such
statutes and regulations. Any change in applicable law or regulation may have a
material effect on the business of the Company and its subsidiaries.
Bank Holding Company Regulation
The Company is registered as a "bank holding company" with the Board of
Governors of the Federal Reserve System ("Federal Reserve"), and is subject to
supervision by the Federal Reserve under the Bank Holding Company Act ("BHC
Act"). The Company is required to file with the Federal Reserve periodic reports
and such additional information as the Federal Reserve may require pursuant to
the BHC Act. The Federal Reserve examines the Company, and may examine the
subsidiary Bank.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The Company is also registered under the bank holding company laws of South
Carolina. Accordingly, the Company is subject to regulation and supervision by
the South Carolina State Board of Financial Institutions (the "State Board").
A registered South Carolina bank holding company must provide the State
Board with information with respect to the financial condition, operations,
management and inter-company relationships of the holding company and its
subsidiaries. The State Board also may require such other information as is
necessary to keep itself informed about whether the provisions of South Carolina
law and the regulations and orders issued thereunder by the State Board have
been complied with, and the State Board may examine any bank holding company and
its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it is
unlawful without the prior approval of the State Board for any South Carolina
bank holding company (i) to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank or any other bank holding company,
(ii) to acquire all or substantially all of the assets of a bank or any other
bank holding company, or (iii) to merge or consolidate with any other bank
holding company.
As stated above, the Company is a legal entity separate and distinct from
First National Bank. Various legal limitations place restrictions on the ability
of First National Bank to lend or otherwise supply funds to the Company. The
Company and First National Bank are subject to Section 23A of the Federal
Reserve Act. Section 23A defines "covered transactions", which include
extensions of credit, and limits a bank's covered transactions with any
affiliate to 10% of such bank's capital and surplus. All covered transactions
with all affiliates cannot in the aggregate exceed 20% of a bank's capital and
surplus. All covered and exempt transactions between a bank and its affiliates
must be on terms and conditions consistent with safe and sound banking
practices, and banks and their subsidiaries are prohibited from purchasing
low-quality assets from the bank's affiliates. Finally, Section 23A requires
that all of a bank's extensions of credit to an affiliate be appropriately
secured by acceptable collateral, generally United States government or agency
securities. The Company and First National Bank also are subject to Section 23B
of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and circumstances, including credit
standards, that are substantially the same or at least as favorable to a bank
holding company, a bank or a subsidiary of either as prevailing at the time for
transactions with unaffiliated companies.
5
In July 1994, South Carolina enacted legislation which effectively provides
that, after June 30, 1996, out-of-state bank holding companies may acquire other
banks or bank holding companies having offices in South Carolina upon the
approval of the State Board and compliance with certain other conditions,
including that the effect of the transaction not lessen competition and that the
laws of the state in which the out-of-state bank holding company filing the
applications has its principal place of business permit South Carolina bank
holding companies to acquire banks and bank holding companies in that state.
Although such legislation may increase takeover activity in South Carolina, the
Company does not believe that such legislation will have a material impact on
its competitive position.
However, no assurance of such fact may be given.
Congress recently enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994, which will increase the ability of bank holding
companies and banks to operate across state lines. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, the existing
restrictions on interstate acquisitions of banks by bank holding companies will
be repealed one year following enactment, such that the Company and any other
bank holding company located in South Carolina would be able to acquire a bank
located in any other state, and a bank holding company located outside South
Carolina could acquire any South Carolina-based bank, in either case subject to
certain deposit percentage and other restrictions. The legislation also provides
that, unless an individual state elects beforehand either (i) to accelerate the
effective date or (ii) to prohibit out-of-state banks from operating interstate
branches within its territory, on or after June 1, 1997, adequately capitalized
and managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted only
if it is expressly permitted by the laws of the host state. The authority of a
bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. The Company believes that this
legislation may result in increased takeover activity of South Carolina
financial institutions by out-of-state financial institutions. However, the
Company does not presently anticipate that such legislation will have a material
impact on its operations or future plans.
Obligations of Holding Company to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines that
a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the
6
institution prior to payment of any other general or unsecured senior liability,
subordinated liability, general creditor or stockholder. This provision would
give depositors a preference over general and subordinated creditors and
stockholders in the event a receiver is appointed to distribute the assets of
the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Office of the Comptroller of the Currency
("OCC") is authorized to require payment of the deficiency by assessment upon
the bank's shareholders', pro rata, and to the extent necessary, if any such
assessment is not paid by any shareholder after three months notice, to sell the
stock of such shareholder to make good the deficiency.
Capital Adequacy
The various federal bank regulators, including the Federal Reserve and the
OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into two tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common shareholders' equity, perpetual preferred stock (subject to
certain limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for possible loan losses (subject to certain limitations), and certain
subordinated debt, "hybrid capital instruments", subordinated and perpetual debt
and intermediate term and other preferred stock ("Tier 2 Capital"). A minimum
ratio of total capital to risk- weighted assets of 8.00% is required and Tier 1
capital must be at least 50% of total capital. The Federal Reserve also has
adopted a minimum leverage ratio of Tier 1 Capital to total assets (not
risk-weighted) of 3%. The 3% Tier 1 Capital to total assets ratio constitutes
the leverage standard for bank holding companies and national banks, and will be
used in conjunction with the risk-based ratio in determining the overall capital
adequacy of banking organizations.
The Federal Reserve and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve has not advised the Company of any specific
minimum leverage ratio applicable to it. As of December 31, 1995, the Company
and First National Bank have leverage ratios of 9.1%; and 8.1% respectively, and
total risk adjusted capital ratios of 16.6%; and 15.0%, respectively.
Payment of Dividends
If a national bank's surplus fund equals the amount of its capital stock,
the directors may declare quarterly, semi-annual or annual dividends out of the
bank's net profits, after deduction of losses and bad debts. If the surplus fund
does not equal the amount of capital stock, a dividend may not be paid until
one-tenth of the bank's net profits of the preceding half year, in the case of
quarterly or semi-annual dividends, or the preceding two years, in the case of
an annual dividend, are transferred to the surplus fund.
The approval of the OCC is required if the total of all dividends declared
by a national bank in any calendar year will exceed the total of its retained
net profits of that year combined with its retained net profits of the two
7
preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. OCC regulations provide that provisions for
possible credit losses cannot be added back to net income and charge-offs cannot
be deducted from net income in calculating the level of net profits available
for the payment of dividends.
The payment of dividends by the First National Bank may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the OCC, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), the OCC may require, after notice and a
hearing, that such bank cease and desist from such practice. The OCC has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve, the OCC and the FDIC have issued policy statements which provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings.
Bank Regulation
First National Bank is subject to supervision and examination by the OCC.
The OCC regulates and monitors all areas of the bank's operations, including
loans, mortgages, issuance of securities, capital adequacy, payment of
dividends, and establishment of branches. Interest and certain other charges
collected or contracted for by the Banks are also subject also to state usury
laws and certain federal laws concerning interest rates. First National Bank is
a member of the Federal Reserve System, and its deposits are insured by the FDIC
up to the maximum permitted by law.
Under present law, First National Bank currently may establish and operate
branches throughout the State of South Carolina, subject to the maintenance of
adequate capital for each branch and the receipt of OCC approval.
Insurance of Deposits
As an FDIC-insured institution, First National Bank is subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions shall be as specified in a schedule
required to be issued by the FDIC that specifies, at semi-annual intervals,
target reserve ratios designed to increase the FDIC insurance fund's reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) in 15 years. Further, the FDIC is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
States Department of the Treasury.
Effective January 1, 1996, the FDIC implemented a risk-based assessment
schedule that provides for assessments ranging from 0.00% to 0.27% of a BIF
insured institution's average assessment base. The minimum annual assessment
under the schedule is $2,000 per institution. The actual assessment to be paid
by each FDIC- insured institution is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized," "adequately capitalized" or "undercapitalized",
as such terms have been defined in applicable federal regulations adopted to
implement the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), and whether such
institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns. Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater, and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" bank is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A bank is
considered "undercapitalized" if it has (i) a total risk-based capital ratio of
less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%, or (iii) a
leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMEL rating of 1). As a result of the current provisions of federal law, the
assessment rates on deposits could increase over present levels. Based on the
current financial condition and capital levels of the Bank, the Company does not
expect that the current FDIC risk-based assessment schedule will have a material
adverse effect on the
8
Bank's earnings. First National Bank's risk-based insurance assessment currently
is set at the minimum $2,000 annual assessment.
Legislation
In 1989 and again in 1991, Congress enacted comprehensive legislation
affecting the commercial banking and thrift industries: the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA") and FDICIA. FIRREA,
among other things, abolished the Federal Savings and Loan Insurance Corporation
and established two new insurance funds under the jurisdiction of the FDIC: the
Bank Insurance Fund ("BIF"), which insures most commercial banks, including
First National Bank, and the Savings Association Insurance Fund ("SAIF"), which
insures most thrift institutions.
FIRREA permitted bank holding companies to acquire savings associations
subject to appropriate regulatory approvals. The entities acquired may be
operated as separate savings associations, converted into banks or, if certain
conditions are satisfied, merged into existing bank affiliates.
FIRREA also imposed, with certain limited exceptions, a "cross-guarantee"
on the part of commonly controlled depository institutions, as discussed above
under "Obligations of Holding Company to its Subsidiary Banks."
FDICIA supplements the federal banking agencies' broad powers to take
corrective action to resolve problems of insured depository institutions,
generally authorizing earlier intervention in the affairs of a particular
institution and imposing express requirements that are tied to the institution's
level of capital. If a depository institution fails to meet regulatory capital
requirements specified in FDICIA, regulatory agencies can require submission and
funding of a capital restoration plan by the institution, place limits on its
activities, require the raising of additional capital and, ultimately, require
the appointment of a conservator or receiver for the institution. Where a
capital restoration plan is required, the regulatory agency may require a bank
holding company to guarantee as a condition of approval of the plan the lower of
5% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. If the controlling bank holding company fails
to fulfill its obligations with respect to such a plan and files (or has filed
against it) a petition under the federal Bankruptcy Code, the claim would be
entitled to a priority in such bankruptcy proceeding over third party creditors
of the bank holding company.
FDICIA required each federal banking agency, including the Federal Reserve,
to revise its risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and the
risks of non-traditional activities, as well as reflect the actual performance
and expected risk of loss on multi-family mortgages. The Federal Reserve, the
FDIC and the OCC have issued a joint rule amending the capital standards to
specify that the banking agencies will include in their evaluations of a bank's
capital adequacy an assessment of the exposure to declines in the economic value
of the bank's capital due to changes in interest rates. The agencies have also
issued for comment a proposed joint policy statement that describes the process
the banking agencies will use to measure and assess the exposure of a bank's net
economic value to changes in interest rates. The banking agencies have also
indicated that, through a subsequent rulemaking process, they intend to issue a
proposed rule that would establish an explicit capital charge for interest rate
risk based on the level of a bank's measured interest rate risk exposure.
The Federal Reserve, the FDIC, the OCC and the Office of Thrift Supervision
have also issued a joint rule amending the risk-based capital guidelines to take
account of concentration of credit risk and the risk of non-traditional
activities. The rule amends each agency's risk-based capital standards by
explicitly identifying concentration of credit risk and the risk arising from
other sources, as well as an institution's ability to manage these risks, as
important factors to be taken into account by the agency in assessing an
institution's overall capital adequacy.
FDICIA also restricts the acceptance of brokered deposits by insured
depository institutions and contains a number of consumer banking provisions,
including disclosure requirements and substantive contractual limitations with
respect to deposit accounts.
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FDICIA also required each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions and depository institution holding companies, including
operational and managerial standards, asset quality, earnings and stock
valuation standards, as well as compensation standards (but not dollar levels of
compensation). On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 amended the 1991 Banking Law to authorize the
agencies to establish safety and soundness standards by regulation or by
guideline. Accordingly, the federal banking agencies have recently issued
Interagency Guidelines Establishing Standards for Safety and Soundness, which
set forth general operational and managerial standards in the areas of internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. The Guidelines also prohibit payment of excessive compensation as
an unsafe and unsound practice. Compensation is defined as excessive if it is
unreasonable or disproportionate to the services actually performed. Bank
holding companies are not subject to the Guidelines. The Guidelines contemplate
that each federal agency will determine compliance with these standards through
the examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. The Company
does not expect the Guidelines to materially change current operations of First
National Bank.
Enforcement Policies and Actions
FIRREA significantly increased the enforcement powers of the OCC, the
Federal Reserve and the other federal depository institution regulators, and
authorizes the imposition of civil money penalties of from $5,000 per day up to
$1,000,000 per day for violations of federal banking laws and regulations.
Persons who are affiliated with depository institutions and are found to have
violated federal banking laws and regulations can be removed from any office
held in such institution and banned for life from participating in the affairs
of such an institution. The banking regulators have not hesitated to use the new
enforcement authorities provided them under FIRREA.
Community Reinvestment Act
First National Bank is subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA requires that financial institutions have
an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting the community credit needs are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. First National Bank received a rating of "outstanding" in
its most recent evaluation.
The federal banking agencies, including the OCC, have recently issued a
joint rule that changes the method of evaluating an institution's CRA
performance. The new rule evaluates institutions based on their actual
performance (rather than efforts) in meeting community credit needs. Subject to
certain exceptions, the OCC assesses the CRA performance of a bank by applying
lending, investment and service tests. The lending test evaluates a bank's
record of helping to meet the credit needs of its assessment area through its
lending activities by considering a bank's home mortgage, small business, small
farm, community development, and consumer lending. The investment test evaluates
a bank's record of helping to meet the credit needs of its assessment area
through qualified investments that benefit its assessment area or a broader
statewide or regional area that includes the bank's assessment area. The service
test evaluates a bank's record of helping to meet the credit needs of its
assessment area by analyzing both the availability and effectiveness of a bank's
systems for delivering retail banking services and the extent and innovativeness
of its community development services. The OCC assigns a rating to a bank of
"outstanding," satisfactory," "needs to improve," or "substantial noncompliance"
based on the bank's performance under the lending, investment and service tests.
To evaluate compliance with the tests, subject to certain exceptions, banks will
be required to collect and report to the OCC extensive demographic and loan
data.
For banks with total assets of less than $250 million that are affiliates
of a holding company with banking and thrift assets of less than $1 billion,
such as the Bank and Company, the OCC evaluates the bank's record of helping to
meet the credit needs of its assessment area pursuant to the following criteria:
(1) the bank's loan-to-deposit ratio, adjusted for seasonal variation and, as
appropriate, other lending-related activities, such as loan originations for
sale
10
to the secondary markets, community development loans, or qualified investments;
(2) the percentage of loans and, as appropriate, other lending-related
activities located in the bank's assessment area; (3) the bank's record of
lending to and, as appropriate, engaging in other lending-related activities for
borrowers of different income levels and businesses and farms of different
sizes; (4) the geographic distribution of the bank's loans; and (5) the bank's
record of taking action, if warranted, in response to written complaints about
its performance in helping to meet credit needs in its assessment area. Small
banks may also elect to be assessed under the generally applicable standards of
the rule, but to do so a small bank must collect and report extensive data.
A bank may also submit a strategic plan to the OCC and be evaluated on its
performance under the plan.
Other Laws and Regulations
Interest and certain other charges collected or contracted for by First
National Bank are subject to state usury laws and certain federal laws
concerning interest rates. First National Bank's operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, CRA requiring financial institutions to meet its obligations to
provide for the total credit needs of the communities it serves, including
investing its assets in loans to low- and moderate-income borrowers, the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of First National Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve to implement that act, which govern
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines and
other electronic banking services.
From time to time, bills are pending before the United States Congress
which contain wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to prohibit banks and bank holding companies from conducting
certain types of activities, to subject banks to increased disclosure and
reporting requirements, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or to the extent to which the
business of the Company and its subsidiary may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on the Company cannot be predicted.
11
Item 2. Properties
The Company owns no real property. However the Company has contracted to buy a
parcel of land in Rock Hill, South Carolina on which the National Bank of York
County (in Organization) is expected to be located. If and when the bank's
organization is completed, the Company intends to convey this property to the
National Bank of York County at the Company's cost.
The Bank's main office and Registrant's executive offices are located at 345
John C. Calhoun Drive, S.E., Orangeburg, South Carolina. These quarters are
owned by the Bank and afford approximately 48,000 square feet of space for
operating and administrative purposes. The Bank owns twenty-six other properties
and leases four properties, substantially all of which are used for branch
locations or housing other operational units of the Bank.
Although the properties leased and owned are generally considered adequate,
there is a continuing program of modernization, expansion, and as needs
materialize, the occasional replacement of facilities.
Item 3. Legal Proceedings
Neither Registrant nor its subsidiary is a party to, nor is any of their
property the subject of, any material or other pending legal proceedings, other
than ordinary routine proceedings incidental to their business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders in the fourth quarter
of the Company's fiscal year.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information required by this item is set forth on the inside front
cover of the Company's 1995 Annual Report to Shareholders under the heading
"STOCK INFORMATION," which information is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is set forth on page 3 in the
Company's 1995 Annual Report to Shareholders under the heading "CONSOLIDATED
FINANCIAL HIGHLIGHTS," which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is set forth on pages 6 through 28 in
the Company's 1995 Annual Report to Shareholders under the heading "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," which
information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are set forth on pages 29
through 62 in the Company's 1995 Annual Report to Shareholders, which
information is incorporated herein by reference. Supplementary Financial Data
pursuant to 17 C.F.R. Section 229.302 is not required because the Registrant
does not meet the requisite tests under 17. C.F.R. 302(a)(5).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
Not applicable
12
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors of the Registrant is set forth under the
heading "ELECTION OF DIRECTORS" on pages 4 and 5 of the definitive proxy
materials of the Company filed in connection with its 1996 Annual Meeting of the
Shareholders, which information is incorporated herein by reference. Information
about executive officers is set forth under Item 1 hereof.
Item 11. Executive Compensation
The information required by this item is set forth under the heading
"EXECUTIVE COMPENSATION" on pages 7 through 13 of the definitive proxy materials
of the Company filed in connection with its 1996 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the heading
"PRINCIPAL SHAREHOLDERS" on pages 2 and 3 of the definitive proxy materials of
the Company filed in connection with its 1996 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on page 14 of the definitive
proxy materials of the Company filed in connection with its 1996 Annual Meeting
of Shareholders, which information is incorporated herein by reference.
PART IV
Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K
(a) 1. Financial Statements Filed:
First National Corporation and Subsidiary:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed:
Related Party Transactions
Condensed Financial Information of
Registrant
Supplementary Income Statement
Information
Selected Quarterly Financial Data
3. Exhibits
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated
by reference to exhibits filed with Registration Statement on Form
S-4, Registration No. 33-52052).
3.2 Bylaws of the Registrant, as amended.
13
10.1 First National Corporation Incentive Stock Option Plan of 1992
(incorporated by reference to exhibits filed with Registration
Statement on Form S-4, Registration No. 33-52052).
10.2 First National Corporation Executive Incentive Compensation Plan
(incorporated by reference to exhibits filed with Registration
Statement on Form S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend Reinvestment Plan (incorporated by
reference to exhibits filed with Registration Statement on Form S-8,
Registration No. 33-58692).
10.4 First National Corporation Incentive Stock Option Plan of 1996
(incorporated by reference to Registrant's Definitive Proxy Statement
filed in connection with its 1996 Annual Meeting of Shareholders).
10.5 Employment Agreement between the Registrant and C. John Hipp, III,
dated May 1, 1994.
10.6 Organizational Agreement, dated as of September 27, 1995, among the
Organizers of The National Bank of York County and Registrant.
13 Portions of the 1995 Annual Report to Shareholders incorporated by
reference in Form 10-K.
21 Subsidiaries of the Registrant (incorporated by reference to exhibits
filed with Registration Statement on Form S-4, Registration No.
33-52052).
23 Consent of J. W. Hunt & Company, LLP.
27 Financial Data Schedule.
(b) No reports were filed on Form 8-K during the Fourth Quarter of 1995.
This report on Form 10-K has not been approved or disapproved by the
Securities and Exchange Commission nor has the Commission passed upon the
accuracy or adequacy of this Form 10-K. Portions of the 1995 Annual Report to
the Corporation's shareholders are not required by the Form 10-K and are not
"filed" as part of the Form 10-K. Only those sections of the Annual Report
referenced in the above index are incorporated into the Form 10-K.
14
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Orangeburg
and State of South Carolina, on the 14th day of March, 1996.
First National Corporation
/s/C. John Hipp, III
By
C. John Hipp, III
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on March 14th, 1996.
/s/C. John Hipp, III
C. John Hipp, III
President and Chief Executive Officer
/s/W. Louis Griffith
W. Louis Griffith
Chief Financial Officer
/s/Charles W. Clark
Charles W. Clark
Director
/s/W. B. Cox
W. B. Cox
Director
/s/C. Parker Dempsey
C. Parker Dempsey
Director
/s/Clarence F. Evans
Clarence F. Evans
Director
/s/E. Everett Gasque, Jr.
E. Everett Gasque, Jr.
Director
/s/John L. Gramling, Jr.
John L. Gramling, Jr.
Director
/s/Robert R. Horger
Robert R. Horger
Director
15
/s/R. H. Jennings, III
R. H. Jennings, III
Director
/s/J. C. McAlhany
J. C. McAlhany
Director
/s/Dick Gregg McTeer
Dick Gregg McTeer
Director
/s/Harry M. Mims, Jr.
Harry M. Mims, Jr.
Director
/s/E. V. Mirmow, Jr.
E. V. Mirmow, Jr.
Director
/s/M. Maceo Nance, Jr.
M. Maceo Nance, Jr.
Director
/s/Anne H. Oswald
Anne H. Oswald
Director
/s/James W. Roquemore
James W. Roquemore
Director
/s/James E. Sulton, Sr.
James E. Sulton, Sr.
Director
/s/Johnny E. Ward
Johnny E. Ward
Director
/s/A. Dewall Waters
A. Dewall Waters
Director
/s/L. D. Westbury
L. D. Westbury
Director
16
EXHIBIT INDEX
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation of the Registrant, as amended (incorporated by Previously filed
reference to exhibits filed with Registration Statement on Form S-4,
Registration No. 33-52052).
3.2 Bylaws of the Registrant, as amended. Attached
10.1 First National Corporation Incentive Stock Option Plan of 1992 Previously filed
(incorporated by reference to exhibits filed with
Registration Statement on Form S-4, Registration No. 33-52052).
10.2 First National Corporation Executive Incentive Compensation Plan Previously filed
(incorporated by reference to exhibits filed with Registration Statement
on Form S-4, Registration No. 33-52052).
10.3 First National Corporation Dividend Reinvestment Plan (incorporated by Previously filed
reference to exhibits filed with Registration Statement on Form S-8,
Registration No. 33-58692).
10.4 First National Corporation Incentive Stock Option Plan of 1996 Previously filed
(incorporated by reference to Registrant's Definitive Proxy Statement
filed in connection with its 1996 Annual Meeting of Shareholders).
10.5 Employment Agreement between the Registrant and C. John Hipp, III, Attached
dated May 1, 1994.
10.6 Organizational Agreement, dated as of September 27, 1995, among the Attached
Organizers of The National Bank of York County and Registrant.
13 Portions of the 1995 Annual Report to Shareholders incorporated by Attached
reference in Form 10-K.
21 Subsidiaries of the Registrant (incorporated by reference to exhibits filed Previously filed
with Registration Statement on Form S-4, Registration No. 33-52052).
23 Consent of J. W. Hunt & Company, LLP. Attached
27 Financial Data Schedule. Attached
17