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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20529
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002 Commission File Number 9-13663
FIRST NATIONAL CORPORATION
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(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.)
905 JOHN C. CALHOUN DRIVE, SE, ORANGEBURG, SC 29115
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (803) 534-2175
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, that the registrant was required to
file such report) 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, 2002
Common Stock, $2.50 par value 6,970,426
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FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk -
Reference is made to Management's Discussion and Analysis
of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001
Part II: Other Information
Item 1 - Legal Proceedings
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands of dollars, except par value)
6/30/2002 12/31/2001
(Unaudited) (Note 1)
------------ ------------
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 29,730 $ 40,126
Interest-bearing deposits 32 49
Federal funds sold and securities purchased
under agreements to resell 2,850 1,000
Money market funds 11,000 --
------------ ------------
Total cash and cash equivalents 43,612 41,175
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Investment securities:
Held-to-maturity (fair value of $34,857 in 2002
and $35,662 in 2001) 33,614 35,014
Available-for-sale 159,985 154,919
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Total investment securities 193,599 189,933
------------ ------------
Loans held for sale 8,059 20,784
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Loans 795,200 750,372
Less, unearned income (1,866) (2,292)
Less, allowance for loan losses (10,166) (9,818)
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Loans, net 783,168 738,262
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Premises and equipment, net 23,847 19,537
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Other assets 16,663 15,056
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Total assets $ 1,068,948 $ 1,024,747
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 145,938 $ 129,698
Interest-bearing 703,405 681,825
------------ ------------
Total deposits 849,343 811,523
Federal funds purchased and securities sold under
agreements to repurchase 66,720 66,617
Notes payable 49,500 49,500
Other liabilities 4,947 4,042
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Total liabilities 970,510 931,682
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Shareholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
6,970,426 and 6,964,878 shares 17,426 17,412
Surplus 46,208 46,016
Retained earnings 33,104 28,485
Accumulated other comprehensive income 1,700 1,152
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Total shareholders' equity 98,438 93,065
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Total liabilities and shareholders' equity $ 1,068,948 $ 1,024,747
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Dollars in thousands)
ACCUMULATED
COMMON STOCK OTHER
------------------------ RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 7,026,901 $ 17,567 $ 47,488 $ 20,228 $ (347) $ 84,936
----------
Comprehensive income:
Net income -- -- -- 6,175 -- 6,175
Change in net unrealized gain (loss) on
securities available-for-sale, net of
tax effects -- -- -- -- 1,082 1,082
----------
Total comprehensive income 7,257
----------
Cash dividends declared at $.28 per share -- -- -- (1,967) -- (1,967)
Exercise stock options 76,230 191 701 -- -- 892
Repurchase common stock (72,500) (181) (1,062) -- -- (1,243)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2001 7,030,631 17,577 47,127 24,436 735 89,875
========== ========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 2001 6,964,878 $ 17,412 $ 46,016 $ 28,485 $ 1,152 $ 93,065
----------
Comprehensive income:
Net income -- -- -- 6,779 -- 6,779
Change in net unrealized gain (loss) on
securities available-for-sale, net of
tax effects -- -- -- -- 548 548
----------
Total comprehensive income 7,327
----------
Cash dividends declared at $.31 per share -- -- -- (2,160) -- (2,160)
Exercise stock options 950 2 13 -- -- 16
Issue restricted stock awards 17,000 43 413 -- -- 455
Repurchase common stock (12,402) (31) (234) -- -- (265)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2002 6,970,426 $ 17,426 $ 46,208 $ 33,104 $ 1,700 98,438
========== ========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(In thousands of dollars, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
6/30/02 6/30/01 6/30/02 6/30/01
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Interest income:
Loans, including fees $ 14,243 $ 16,032 $ 28,362 $ 32,336
Investment securities:
Taxable 1,878 2,200 3,890 4,423
Tax-exempt 414 398 834 821
Money market funds 159 -- 252 --
Federal funds sold and securities purchased
under agreements to resell 38 104 83 170
Interest-bearing deposits 35 1 36 3
---------- ---------- ---------- ----------
Total interest income 16,767 18,735 33,457 37,753
---------- ---------- ---------- ----------
Interest expense:
Deposits 3,769 6,928 7,932 14,253
Federal funds purchased and securities sold
under agreements to repurchase 238 668 464 1,574
Long-term debt 622 385 1,235 842
---------- ---------- ---------- ----------
Total interest expense 4,629 7,981 9,631 16,669
---------- ---------- ---------- ----------
Net interest income:
Net interest income 12,138 10,754 23,826 21,084
Provision for loan losses 644 404 1,135 696
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 11,494 10,350 22,691 20,388
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 2,616 1,830 5,025 3,605
Other service charges and fees 1,488 1,463 3,230 2,672
Gain on sale of securities available-for-sale -- 569 -- 570
---------- ---------- ---------- ----------
Total noninterest income 4,104 3,862 8,255 6,847
Noninterest expense:
Salaries and employee benefits 5,979 4,837 11,547 9,399
Net occupancy expense 574 482 1,145 989
Furniture and equipment expense 946 926 1,944 1,809
Amortization of intangibles 60 197 114 393
Other expense 2,966 3,021 6,016 5,195
---------- ---------- ---------- ----------
Total noninterest expense 10,525 9,463 20,766 17,785
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Earnings:
Income before provision for income taxes 5,073 4,749 10,180 9,450
Provision for income taxes 1,670 1,650 3,401 3,275
---------- ---------- ---------- ----------
Net income $ 3,403 $ 3,099 $ 6,779 $ 6,175
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Comprehensive income $ 4,812 $ 3,122 $ 7,327 $ 7,257
========== ========== ========== ==========
Earnings per share:
Basic $ 0.49 $ 0.44 $ 0.97 $ 0.88
========== ========== ========== ==========
Diluted $ 0.49 $ 0.44 $ 0.97 $ 0.88
========== ========== ========== ==========
Cash dividends per common share $ 0.16 $ 0.14 $ 0.31 $ 0.28
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(In thousands of dollars)
SIX MONTHS ENDED
--------------------------
6/30/02 6/30/01
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,779 $ 6,175
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 725 719
Provision for loan losses 1,135 696
Deferred income taxes (336) (640)
Gain on sale of securities available-for-sale -- (570)
Net amortization of investment securities 328 26
Originations of loans held for sale (84,084) (78,952)
Proceeds from sale of loans held for sale 96,804 83,588
Net change in:
Miscellaneous other assets (1,633) (4,121)
Miscellaneous other liabilities 929 3,076
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Net cash provided by operating activities 20,647 9,997
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale -- 15,189
Proceeds from maturities of investment securities held-to-maturity 2,436 3,075
Proceeds from maturities of investment securities available-for-sale 136,390 38,656
Purchases of securities held-to-maturity (1,072) --
Purchases of investment securities available-for-sale (140,865) (51,276)
Net increase in customer loans (46,157) (16,632)
Recoveries of loans previously charged off 122 129
Purchases of premises and equipment (5,034) (2,382)
---------- ----------
Net cash used by investing activities (54,180) (13,241)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts and
certificates of deposit 37,819 47,639
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 105 (3,179)
Notes payable proceeds -- 29,500
Repayment of notes payable -- (36,050)
Common stock issued 455 --
Repurchase of common stock (265) (1,243)
Dividends paid (2,160) (1,966)
Stock options exercised 16 891
---------- ----------
Net cash provided by financing activities 35,970 35,592
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,437 32,348
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,175 32,001
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,612 $ 64,349
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Certain prior period information has been reclassified to conform
to the current period presentation. Operating results for the six months ended
June 30, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
The condensed consolidated balance sheet at December 31, 2001, has been derived
from the audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The information contained in the consolidated financial statements and
accompanying footnotes included in the Corporation's annual report on Form 10-K
for the year ended December 31, 2001 should be referenced when reading these
unaudited condensed consolidated financial statements.
Note 2 - Recent Accounting Pronouncements:
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 addresses financial
accounting and reporting for business combinations and supersedes Accounting
Principles Board ("APB") Opinion No. 16, BUSINESS COMBINATIONS, and SFAS No. 38,
ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF PURCHASED ENTERPRISES. This
Statement eliminates the use of the pooling-of-interest method of accounting for
business combinations, requiring future business combinations to be accounted
for using the purchase method of accounting. This Statement also requires that
intangible assets that meet certain criteria be recognized as assets apart from
goodwill. The provisions of this Statement apply to all business combinations
initiated after June 30, 2001. This Statement also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. Although, SFAS No. 141 will impact the
accounting for any future business combinations, it had no effect on the
Corporation's financial position or results of operations for the six months
ended June 30, 2002.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB No. 17, INTANGIBLE ASSETS. It
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. With the
adoption of this Statement, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair value based test. The
Corporation has determined that as a result of the adoption of SFAS 142 on
January 1, 2002, it had $2,363,000 of goodwill that will no longer be amortized.
Based on its transitional impairment tests,
management does not anticipate that any material impairment losses will be
recorded in 2002. Due to the adoption of SFAS No. 142, the amortization of
intangible assets is expected to be reduced by approximately $221,000 for 2002.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS. SFAS No. 143 requires that an entity recognize the fair value of a
liability for an asset retirement obligation in the period in which a reasonable
estimate of fair value can be made. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002, with early adoption permitted. The Corporation
does not expect the adoption of this standard to have a significant impact on
its financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. This Statement replaces SFAS No. 141 and
provisions of APB Opinion No. 30 for the disposal of segments of a business.
SFAS No. 144 requires that one accounting model be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations to include more disposal
transactions. The Corporation adopted SFAS No. 144 effective January 1, 2002.
Adoption of this Statement did not have a significant impact on the financial
position or results of operations of the Corporation.
Note 3 - Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the
weighted-average shares of common stock outstanding during each period. Diluted
earnings per share is based on the weighted-average shares of common stock
outstanding during each period plus the maximum dilutive effect of common stock
issuable upon exercise of stock options. The weighted average number of shares
and equivalents are determined after giving retroactive effect to stock
dividends and stock splits. Weighted-average shares outstanding used in
calculating earnings per share for the three and six months ended June 30, 2002
and 2001 are as follows:
3 MONTHS ENDED 6 MONTHS ENDED
------------------------- -------------------------
06/30/02 06/30/01 06/30/02 06/30/01
---------- ---------- ---------- ----------
Basic 6,964,703 7,002,773 6,961,017 7,010,957
Diluted 7,012,855 7,012,009 6,996,412 7,018,862
Dividends per share are calculated using the current equivalent of number of
common shares outstanding at the time of the dividend based on the Corporation's
shares outstanding.
Note 4 - Commitments and Contingent Liabilities:
In the normal course of business, the Corporation 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, 2002, commitments to extend credit and standby letters of credit
totaled $201,632,000. The Corporation does not anticipate any material losses as
a result of these transactions.
Note 5 - Intangible Assets:
Intangible assets consist primarily of goodwill and core deposit premium costs
which resulted from the acquisition of branches from other commercial banks.
Core deposit premium costs represent the value of long-term deposit
relationships acquired in these transactions. Goodwill represents the excess of
the purchase price over the sum of the fair values of the tangible and
identifiable intangible assets acquired less the fair value of the liabilities
assumed. Core deposit premium costs are being amortized over an estimated useful
life of fifteen years.
The gross carrying amounts and accumulated amortization of core deposit premium
costs are as follows:
6/30/02 12/31/01
----------- -----------
Gross carrying amount $ 5,538,000 $ 5,538,000
Accumulated amortization (3,310,000) (3,200,000)
Estimated amortization expense for core deposit premium costs for each of the
next five years is as follows:
Year ending December 31:
2002 $ 400,000
2003 353,000
2004 317,000
2005 281,000
2006 245,000
The following table presents actual results for the three and six months ended
June 30, 2002, and adjusted net income and adjusted earnings per share for the
three and six months ended June 30, 2001, assuming the nonamortization
provisions of SFAS No. 142 were effective January 1, 2001:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
6/30/02 6/30/01 6/30/02 6/30/01
--------- --------- --------- ---------
Reported net income $ 3,403 $ 3,099 $ 6,779 $ 6,175
Add back:
Goodwill amortization -- 60 -- 120
--------- --------- --------- ---------
Adjusted net income $ 3,403 $ 3,159 $ 6,779 $ 6,295
========= ========= ========= =========
Basic earnings per share:
Reported net income $ 0.49 $ 0.44 $ 0.97 $ 0.88
Add back:
Goodwill amortization -- 0.01 -- 0.02
--------- --------- --------- ---------
Adjusted net income $ 0.49 $ 0.45 $ 0.97 $ 0.90
========= ========= ========= =========
Diluted earnings per share:
Reported net income $ 0.49 $ 0.44 $ 0.97 $ 0.88
Add back:
Goodwill amortization -- 0.01 -- 0.02
--------- --------- --------- ---------
Adjusted net income $ 0.49 $ 0.45 $ 0.97 $ 0.90
========= ========= ========= =========
Note 6 - Employee Benefit Plans:
During the second quarter of 2002, the Corporation entered into Restricted Stock
Agreements with six of its executive officers. The agreements grant to the
officers 17,000 shares of restricted common stock conditioned upon continued
employment. The shares vest free of restrictions as follows: 25% in 2005, 25% in
2007 and 50% in 2009. Termination of employment prior to a vesting date would
terminate any interest in non-vested shares. Prior to vesting of the shares, the
officers have the right to vote such shares and to receive dividends paid with
respect to such shares. All restricted shares will vest in the event of a change
of control of the Corporation or upon the death of an officer. The fair value of
the shares granted under these agreements was $27.79 per share at the date of
the grant.
The Corporation has registered 300,000 shares of common stock in connection with
the establishment of an Employee Stock Purchase Plan. The Plan, which is
effective for the seven year period commencing July 1, 2002, is available to all
employees who have attained age 21 and completed one year of service. The price
at which common stock may be purchased for each quarterly option period is the
lessor of 85 percent of the fair market value of the common stock on the date of
grant of the option period, or 85 percent of the fair market value of the common
stock on the exercise date of the option period.
FIRST NATIONAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the 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, 2001.
First National Corporation (the "Corporation") is a bank holding company
incorporated under the laws of South Carolina in 1985. The Corporation owns 100
percent of South Carolina Bank and Trust, National Association, a national bank
which opened for business in 1932, 100 percent of South Carolina Bank and Trust
of the Piedmont, National Association, a national bank which opened for business
in 1996, 100 percent of South Carolina Bank and Trust, National Association, a
national bank which opened for business in 1998, and 100 percent of CreditSouth
Financial Services Corporation, an upscale financial services company which
opened for business in 1998. The Corporation engages in no significant
operations other than the ownership of its subsidiaries.
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, forward looking statements for
purposes of the safe harbor provided by Section 21E of the Securities and
Exchange Act of 1934, as amended. First National Corporation cautions readers
that forward looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from forecasted results.
Such risks and uncertainties, include, among others, the following
possibilities: (1) Credit risk associated with an obligor's failure to meet the
terms of any contract with the bank or otherwise fail to perform as agreed; (2)
Interest risk involving the effect of a change in interest rates on both the
bank's earnings and the market value of the portfolio equity; (3) Liquidity risk
affecting the bank's ability to meet its obligations when they come due; (4)
Price risk focusing on changes in market factors that may affect the value of
traded instruments in mark-to-market portfolios; (5) Transaction risk arising
from problems with service or product delivery; (6) Compliance risk involving
risk to earnings or capital resulting from violations of or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards; (7)
Strategic risk resulting from adverse business decisions or improper
implementation of business decisions; and (8) Reputation risk that adversely
effects earnings or capital arising from negative public opinion.
Some of the major services which the Corporation provided through its
banking subsidiaries include checking, NOW accounts, savings and other deposits
of various types, investment products such as annuities and mutual funds, loans
for businesses, 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 Corporation has no
material concentration of deposits from any single customer or group of
customers, and no significant portion of its loan portfolio is concentrated
within a single industry or group of related industries. There are no material
seasonal factors that would have a material adverse effect on the Corporation.
The Corporation does not have foreign loans or deposits.
For the second quarter of 2002, the Corporation had consolidated net income
of $3,403,000, an increase of 9.8 percent over the $3,099,000 earned in the
second quarter of 2001. Diluted
earnings per share were $0.49 for the three months ended June 30, 2002, a 11.4
percent increase over the $0.44 per share earned in the second quarter of 2001.
Net income for the first six months of 2002 was $6,779,000, an increase of 9.8
percent over the $6,175,000 earned for the same period in 2001. Diluted earnings
per share amounted to $0.97 for the six months ended June 30, 2002, a 10.2
percent over the $0.88 per share earned in the first six months of 2001.
NET INTEREST INCOME
For the second quarter of 2002, net interest income was $12,138,000, an
increase of $1,384,000, or 12.9 percent, over $10,754,000 for the same period in
2001. Net interest income for the first six months of 2001 was $23,826,000, an
increase of $2,742,000, or 13.0 percent, compared with $21,084,000 for the same
period a year earlier. This increase was largely the result of significantly
lower rates paid on interest-bearing liabilities in the first half of 2002, as
compared with the similar period of 2001.
The yield on a major portion of the Corporation's earning assets adjusts
simultaneously, but to varying degrees of magnitude, with changes in the general
level of interest rates. For the first six months of 2002, the taxable
equivalent yield on earning assets was 6.73 percent, as compared with 7.42
percent during the same period in 2001, a decrease of 69 basis points. The cost
of interest-bearing liabilities used to fund most of these assets decreased 191
basis points from 4.26 percent in 2001 to 2.35 percent in 2002. Comparing the
first six months of 2001 to the same period in 2002, interest rates paid on
interest-bearing liabilities decreased more rapidly than yields on earning
assets. For the first six months of 2002 and 2001, the net interest margin
increased from 4.52 percent to 4.79 percent. The positive impact of
interest-free funds decreased from 0.68 percent to 0.41 percent from the first
half of 2001 to the same period in 2002.
Loans comprise the largest category of earning assets. As of June 30, 2002,
loans outstanding, net of unearned income, were $793,334,000, compared with
$748,080,000 at December 31, 2001. This represents an increase of $45,254,000 or
6.0 percent, with the most noticeable growth in the commercial, residential
mortgage and consumer installment loan categories. For the second quarter ended
June 30, 2002, interest and fees on loans were $14,243,000, compared to
$16,032,000 for the comparable period in 2001, a decrease of $1,789,000, or 11.2
percent. Further reflecting the lower interest rate environment in the current
year, for the six months ended June 30, 2002, interest and fees on loans were
$28,362,000, compared with $32,336,000 for the same period in the previous year,
a decrease of $3,974,000, or 12.3 percent.
For the six months ended June 30, 2002, loans averaged $764,248,000 and
decreased in yield by 109 basis points to 7.42 percent on a taxable equivalent
basis, compared to $742,558,000 with a taxable equivalent yield of 8.51 for the
year ended December 31, 2001.
Investment securities are the second largest category of earning assets.
Investment securities are utilized by the Corporation as a vehicle for the
employment of excess funds, to provide liquidity, to fund loan demand or deposit
liquidation, and to pledge as collateral for certain deposits and purchased
funds. At June 30, 2002, investment securities were $193,599,000, compared to
$189,933,000 at December 31, 2001. The composition of the portfolio remained
relatively consistent during the first six months of 2002, with a bias toward
shorter maturities in the continuing low rate environment. The portfolio at the
end of the first quarter of 2002 included $39,982,000 of short-term investments
in government agency securities.
For the quarter ended June 30, 2002, interest earned on investment
securities was $2,292,000, compared with $2,598,000 for the comparable period in
2001, a decrease of $306,000, or 11.8
percent. For the six month period ended June 30, 2002, investment income was
$4,724,000, compared with $5,244,000 for the same period in 2001. This decrease
of $520,000, or 9.9 percent, was the result of significantly lower yields in
2002.
For the second quarter of 2002, investment securities averaged $186,221,000
and yielded 5.07 percent on a taxable equivalent basis, compared to an average
of $181,326,000 and yield of 5.90 percent for the year ended December 31, 2001.
In the second quarter of 2001, the Corporation recognized a $569,000 gain
on sale of securities as compared to none in the second quarter of 2002. The
results were similar comparing the first six months of the two years. Most of
the 2001 result was attributable to a $546,000 gain realized on the sale of
equity shares of an ATM network exchange company. As of June 30, 2002, the
Corporation had unrealized gains of $1,243,000 and $2,637,000, respectively, in
the held-to-maturity and available-for-sale securities portfolio segments.
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
Corporation to trade the investment securities portfolio. While management has
the ability and generally holds these assets on a long-term basis or until
maturity, the short-term investments noted above may be converted at an earlier
point, depending on changes in interest rates and alternative investment options
As of June 30, 2002, the Corporation held $11,000,000 in money market funds.
These short-term investments averaged $35,924,000 for the first six months of
2002 and earned $252,000. There were no similar holdings during the first half
of 2001.
During the first six months of 2002, the balance in interest-bearing
liabilities averaged $820,057,000 with an average rate of 2.35 percent. This
compares to an average balance of $794,798,000 and rate of 3.77 percent for the
year ended December 31, 2001, a decrease of 142 basis points. At June 30, 2002,
approximately 51 percent of interest-bearing liabilities had fixed rates and
were expected to renew at prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 2002 was
$644,000, compared with $404,000 for the same period in 2001, an increase of
59.4 percent. For the six months ended June 30, 2002, the provision was
$1,135,000, compared to $696,000 for the year-earlier period, an increase of
63.1 percent. The allowance for loan losses was $10,166,000, or 1.28 percent of
outstanding loans, at June 30, 2002 and $9,818,000, or 1.31 percent of
outstanding loans at December 31, 2001.
Management determines the adequacy of the allowance for loan losses by
utilizing its internal risk rating system, credit reviews and regulatory agency
examinations to assess the quality of the loan portfolio and identify problem
loans. The allowance is currently considered to be adequate.
While the economic outlook for the remainder of the year is uncertain,
management anticipates that the level of charge offs will be similar to that
experienced in 2001 with expansion into the Greenville area and further growth
within existing South Carolina markets.
Other real estate owned includes certain real estate acquired as a result
of foreclosure. The balances in other real estate owned were $794,000 at June
30, 2002 and $798,000 at the end of 2001.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the second quarter of 2002 was $4,104,000, compared
with $3,862,000 for the same period in 2001, an increase of $242,000, or 6.3
percent. For the first six months of 2002, noninterest income was $8,255,000,
compared with $6,847,000 for the same period in 2001, an increase of $1,408,000,
or 20.6 percent. The increase was primarily related to increases in other
service charges and fees, including secondary market origination fees.
Noninterest expense for the second quarter of 2002 was $10,525,000, an
increase of $1,089,000, or 11.5 percent, from $9,436,000 for the same period in
the previous year. For the six months ended June 30, 2002, noninterest expense
increased $2,980,000, or 16.8 percent, to $20,765,000 from $17,785,000 in the
year-earlier period. Salaries and employee benefits increased $1,142,000, or
23.6 percent, to $5,979,000 from the second quarter of 2001 to the second
quarter of 2002. Comparing the six months periods, salaries and employee
benefits increased $2,148,000, or 22.9 percent, to $11,547,000 in 2002. Other
expense was $2,967,000 in the second quarter of 2002, a decrease of $251,000, or
7.8 percent, compared with $3,218,000 for the second quarter of 2001. For the
first six months of 2002, other expense was $6,015,000, an increase of $427,000,
or 7.6 percent, from the same period a year earlier.
Contributing to expense increases during the first half of 2002 were a
number of corporate initiatives, including entry into the Greenville market with
a new branch opening on June 24; the opening of two permanent branch facilities,
replacing older or temporary facilities; creation of a correspondent banking
unit headquartered in Columbia; and a corporate branding campaign associated
with the previously announced name changes of the Corporation's subsidiary
banks. The latter endeavor was effective May 28 as each bank adopted "South
Carolina Bank and Trust" as part of its title. Salaries and employee benefits
increased as both management and staff level positions were added to complement
and support these initiatives and as a result of increased commissions paid on
higher mortgage loan originations.
NET INCOME
Net income was $3,403,000 for the second quarter of 2002, an increase of
$304,000, or 9.8 percent, when compared with $3,099,000 in the first quarter of
2001. For the six months ended June 30, 2002, net income was up $604,000, or 9.8
percent, to $6,779,000, compared with $6,175,000 in the first six months of
2001. The $2,742,000, or 13.0 percent, increase in net interest income and the
$1,408,000, or 20.6 percent, increase in noninterest income were the main
contributors to the growth in net income from 2001 to 2002 for the first six
month periods.
CAPITAL RESOURCES AND LIQUIDITY
The ongoing capital requirements of the Corporation have been met through
retained earnings, less the payment of cash dividends. As of June 30, 2002,
shareholders' equity was $98,438,000, an increase of $5,373,000, or 5.8 percent,
over $93,065,000 at December 31, 2001.
The Corporation and its subsidiaries are subject to certain risk-base
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 promulgated by the Board of Governors of the Federal
Reserve System, which are substantially similar to those of the Comptroller of
the Currency, Tier 1 capital must be at least 4 percent of risk-weighted assets,
while total capital must be at least 8 percent of
risk-weighted assets. The Corporation's Tier 1 risk-weighted asset capital ratio
at June 30, 2002 was 12.27 percent, compared to 12.32 percent at December 31,
2001. The total risk-weighted asset capital ratio was 13.52 at the end of the
second quarter of 2002, compared with 13.57 at the end of 2001.
In conjunction with the risk-based ratios, the regulatory agencies have
also prescribed a leverage capital ratio for assessing capital adequacy. The
minimum leverage ratio required for banks is between 3 and 5 percent, depending
on the institution's composite rating as determined by its regulators. As of
June 30, 2002, the Corporation's leverage ratio was 8.73 percent, compared to
8.39 percent at December 31, 2001. The Corporation's capital ratios currently
well exceed the minimum standards.
Liquidity is the ability of the Corporation to generate sufficient cash to
meet its financial obligations which arise primarily from the 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 corporate liquidity needs.
The Corporation's liabilities provide liquidity on a day-to-day basis.
Daily liquidity needs are met from deposit levels or from the Corporation's use
of Federal funds purchased and securities sold under agreements to repurchase.
Additional liquidity can be secured from lines of credit extended to the
Corporation from its correspondent banks. Management believes that its liquidity
position is adequate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Neither First National Corporation nor its subsidiaries is a party to
nor is any of their property subject to any material or other pending legal
proceedings, other than in the ordinary routine proceedings incident to their
business.
Item 2. Change in Securities:
Not applicable.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
The 2002 Annual Meeting of Shareholders of the Corporation was held on
April 23, 2002. At the meeting, shareholders of the Corporation elected all the
individuals nominated by the Corporation to serve on the Board of Directors in
the class of directors whose term expires at the 2005 Annual Meeting of
Shareholders. In addition, the shareholders of the Corporation approved the
First National Corporation 2002 Employee Stock Purchase Plan and ratified the
appointment of J. W. Hunt and Company, LLP as independent accountants for the
year ending December 31, 2002. Votes cast by the shareholders of the Corporation
at the meeting were as follows:
================================================================================
NOMINEES FOR DIRECTOR SHARES VOTED IN FAVOR SHARES WITHHELD BROKER NON-VOTES
- ----------------------- --------------------- --------------- ----------------
Luther J. Battiste, III 4,816,667 37,251 -
- ----------------------- --------------------- --------------- ----------------
Robert R. Hill, Jr. 4,834,655 19,263 -
- ----------------------- --------------------- --------------- ----------------
Ralph W. Norman 4,835,135 18,783 -
- ----------------------- --------------------- --------------- ----------------
Anne H. Oswald 4,835,135 18,783 -
- ----------------------- --------------------- --------------- ----------------
Samuel A. Rodgers 4,835,135 18,783 -
- ----------------------- --------------------- --------------- ----------------
A. Dewall Waters 4,834,990 18,928 -
================================================================================
================================================================================
APPROVAL OF FIRST NATIONAL CORPORATION 2002 EMPLOYEE STOCK PURCHASE PLAN
- ----------------------- --------------------- --------------- ----------------
SHARES VOTED SHARES SHARES BROKER
IN FAVOR VOTED AGAINST ABSTAINING NON-VOTES
- ----------------------- --------------------- --------------- ----------------
4,744,395 169,565 69,069 -
================================================================================
================================================================================
RATIFICATION OF J. W. HUNT AND COMPANY, LLP
- ----------------------- --------------------- --------------- ----------------
SHARES VOTED SHARES SHARES BROKER
IN FAVOR VOTED AGAINST ABSTAINING NON-VOTES
- ----------------------- --------------------- --------------- ----------------
4,948,917 4,650 29,462 -
================================================================================
In addition the following individuals continue to serve as directors of
the Company until the Company's Annual Shareholders' Meeting in the year
indicated:
Term Expiring In
----------------
Colden R. Battey, Jr. 2003
Charles W. Clark 2003
M. Oswald Fogle 2003
Dwight W. Frierson 2003
Richard L. Gray 2003
C. John Hipp, III 2003
Thomas E. Suggs 2003
John L. Gramling, Jr. 2004
Robert R. Horger 2004
Harry M. Mims, Jr. 2004
James W. Roquemore 2004
John W. Williamson, III 2004
Cathy Cox Yeadon 2004
Item 5. Other Information:
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) The following is a list of exhibits to this report:
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and Exhibits 3.1 and
3.2 to the Current Report on Form 8-K filed on May 23, 1997.)
3.2 Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1995).
10.1 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Robert R. Hill, Jr. (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.2 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Thomas S. Camp (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.3 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and John C. Pollok (incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.4 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Richard C. Mathis (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.5 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and A. Loran Adams (incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.6 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Joseph A. Burns (incorporated by
reference to Exhibit 4.6 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.7 First National Corporation 2002 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 (File No. 333-90014)).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Executive Officer of the Registrant.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Financial Officer of the Registrant.
(b) No reports on Form 8-K were filed during the quarter.
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, 2002 /s/ C. JOHN HIPP, III
------------------------
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: August 14, 2002 /s/ RICHARD C. MATHIS
------------------------
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- -----------------------
3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and Exhibits 3.1 and
3.2 to the Current Report on Form 8-K filed on May 23, 1997.)
3.2 Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1995).
10.1 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Robert R. Hill, Jr. (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.2 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Thomas S. Camp (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.3 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and John C. Pollok (incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.4 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Richard C. Mathis (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.5 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and A. Loran Adams (incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 (File No.
333-86922)).
10.6 Restricted Stock Agreement, effective as of January 17, 2002,
between the Registrant and Joseph A. Burns (incorporated by
reference to Exhibit 4.6 to the Registration Statement on Form S-8
(File No. 333-86922)).
10.7 First National Corporation 2002 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 (File No. 333-90014)).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Executive Officer of the Registrant.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed
by the Chief Financial Officer of the Registrant.