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UNITED STATES OF AMERICA
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 September 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
- --------------------------------------------- ----------
(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 September 30, 2002
Common Stock, $2.50 par value 6,975,254
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FIRST NATIONAL CORPORATION
INDEX
PART I: FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Nine Months Ended September 30, 2002 and 2001
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001
Notes to 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
Item 4 - Controls and Procedures
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands of dollars, except par value)
9/30/2002 12/31/2001
ASSETS (Unaudited) (Note 1)
------ ------------ ------------
Cash and cash equivalents:
Cash and due from banks $ 44,025 $ 40,126
Interest-bearing deposits 82 49
Federal funds sold and securities purchased
under agreements to resell 6,400 1,000
Money market funds 11,000 --
------------ ------------
Total cash and cash equivalents 61,507 41,175
------------ ------------
Investment securities:
Held-to-maturity (fair value of $36,845 in 2002
and $35,662 in 2001) 33,416 35,014
Available-for-sale 138,139 154,919
------------ ------------
Total investment securities 171,555 189,933
------------ ------------
Loans held for sale 18,774 20,784
------------ ------------
Loans 841,863 750,372
Less, unearned income (1,628) (2,292)
Less, allowance for loan losses (10,626) (9,818)
------------ ------------
Loans, net 829,609 738,262
------------ ------------
Premises and equipment, net 26,766 19,537
------------ ------------
Other assets 16,909 15,056
------------ ------------
Total assets $ 1,125,120 $ 1,024,747
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 147,544 $ 129,698
Interest-bearing 743,155 681,825
------------ ------------
Total deposits 890,699 811,523
Federal funds purchased and securities
sold under agreements to repurchase 78,625 66,617
Notes payable 49,500 49,500
Other liabilities 5,424 4,042
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Total liabilities 1,024,248 931,682
------------ ------------
Shareholders' equity:
Common stock - $2.50 par value; authorized
40,000,000 shares; issued and outstanding
6,975,254 and 6,964,878 shares 17,438 17,412
Surplus 46,293 46,016
Retained earnings 35,243 28,485
Accumulated other comprehensive income 1,898 1,152
------------ ------------
Total shareholders' equity 100,872 93,065
------------ ------------
Total liabilities and shareholders' equity $ 1,125,120 $ 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
NINE MONTHS ENDED SEPTEMBER 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 -- -- -- 9,266 -- 9,266
Change in net unrealized gain (loss)
on securities available-for-sale,
net of tax effects -- -- -- -- 2,144 2,144
----------
Total comprehensive income 11,410
----------
Cash dividends declared at $.42 per share -- -- -- (2,950) -- (2,950)
Exercise stock options 76,230 191 700 -- -- 891
Repurchase of common stock (93,800) (235) (1,433) -- -- (1,668)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2001 7,009,331 17,523 46,755 26,544 1,797 92,619
========== ========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 2001 6,964,878 $ 17,412 $ 46,016 $ 28,485 $ 1,152 $ 93,065
----------
Comprehensive income:
Net income -- -- -- 10,034 -- 10,034
Change in net unrealized gain (loss)
on securities available-for-sale,
net of tax effects -- -- -- -- 746 746
----------
Total comprehensive income 10,780
----------
Cash dividends declared at $.47 per share -- -- -- (3,276) -- (3,276)
Exercise stock options 4,300 11 67 -- -- 78
Employee stock purchases 1,478 4 31 35
Restricted stock awards 17,000 42 413 -- -- 455
Repurchase of common stock (12,402) (31) (234) -- -- (265)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2002 6,975,254 17,438 46,293 35,243 1,898 100,872
========== ========== ========== ========== ========== ==========
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 NINE MONTHS ENDED
------------------------- -------------------------
9/30/2002 9/30/2001 9/30/2002 9/30/2001
---------- ---------- ---------- ----------
Interest income:
Loans, including fees $ 14,965 $ 15,846 $ 43,204 $ 48,182
Investment securities:
Taxable 1,895 2,305 5,786 6,731
Tax-exempt 414 392 1,249 1,213
Money market funds 81 11 333 11
Federal funds sold and securities purchased
under agreements to resell 53 306 94 476
Interest-bearing deposits 11 5 43 5
---------- ---------- ---------- ----------
Total interest income 17,419 18,865 50,709 56,618
---------- ---------- ---------- ----------
Interest expense:
Deposits 3,849 6,207 11,777 20,460
Federal funds purchased and securities
sold under agreements to repurchase 272 561 695 2,135
Long-term debt 750 638 1,863 1,480
---------- ---------- ---------- ----------
Total interest expense 4,871 7,406 14,335 24,075
---------- ---------- ---------- ----------
Net interest income:
Net interest income 12,548 11,459 36,373 32,543
Provision for loan losses 884 693 2,019 1,389
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,664 10,766 34,355 31,154
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 2,827 1,802 7,851 5,407
Other service charges and fees 1,500 1,370 4,731 4,042
Gain on sale of securities available-for-sale -- -- -- 570
---------- ---------- ---------- ----------
Total noninterest income 4,327 3,172 12,582 10,019
---------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 6,203 5,119 17,750 14,518
Net occupancy expense 616 529 1,761 1,518
Furniture and equipment expense 1,057 911 3,001 2,720
Amortization of intangibles 57 597 172 597
Other expense 3,343 2,048 9,358 7,636
---------- ---------- ---------- ----------
Total noninterest expense 11,276 9,204 32,042 26,989
---------- ---------- ---------- ----------
Earnings:
Income before provision for income taxes 4,715 4,734 14,895 14,184
Provision for income taxes 1,460 1,643 4,861 4,918
---------- ---------- ---------- ----------
Net income $ 3,255 $ 3,091 $ 10,034 $ 9,266
========== ========== ========== ==========
Comprehensive income $ 3,453 $ 4,153 $ 10,780 $ 11,410
========== ========== ========== ==========
Earnings per share:
Basic $ 0.47 $ 0.44 $ 1.44 $ 1.32
========== ========== ========== ==========
Diluted $ 0.46 $ 0.44 $ 1.43 $ 1.32
========== ========== ========== ==========
Cash dividends per common share $ 0.16 $ 0.14 $ 0.47 $ 0.42
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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
-----------------------------------------------
(Unaudited)
(In thousands of dollars)
NINE MONTHS ENDED
--------------------------
9/30/02 9/30/01
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,034 $ 9,266
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,085 1,078
Provision for loan losses 2,019 1,389
Deferred income taxes (316) (1,310)
Gain on sale of securities available-for-sale -- (570)
Net amortization of investment securities 582 41
Originations of loans held for sale (102,365) (150,363)
Proceeds from sale of loans held for sale 104,369 146,103
Net change in:
Miscellaneous other assets (1,877) (3,940)
Miscellaneous other liabilities 1,405 3,006
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Net cash provided by operating activities 14,936 4,700
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 47,000 15,189
Proceeds from maturities of investment securities held-to-maturity 2,619 3,300
Proceeds from maturities of investment securities available-for-sale 129,240 112,462
Purchases of securities held-to-maturity (1,072) 100
Purchases of investment securities available-for-sale (158,928) (161,097)
Net increase in customer loans (93,583) (14,238)
Recoveries of loans previously charged off 223 197
Purchases of premises and equipment (8,314) (2,621)
---------- ----------
Net cash used by investing activities (82,815) (46,708)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts and
certificates of deposit 79,174 71,485
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 12,009 10,618
Proceeds from issuance of debt -- 29,500
Repayment of debt -- (36,050)
Common stock issued 490 --
Repurchase of common stock (265) (1,667)
Dividends paid (3,275) (2,950)
Stock options exercised 78 891
---------- ----------
Net cash provided by financing activities 88,211 71,827
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,332 29,819
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,175 32,001
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 61,507 $ 61,820
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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 nine months ended
September 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 nine months
ended September 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
Note 2 - Recent Accounting Pronouncements (Continued):
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 six months ended September 30, 2002 and
2001 are as follows:
3 MONTHS ENDED 9 MONTHS ENDED
------------------------ ------------------------
9/30/02 09/30/01 9/30/02 9/30/01
--------- --------- --------- ---------
Basic 6,972,924 7,024,392 6,965,030 7,015,485
Diluted 7,035,551 7,039,536 7,013,930 7,026,165
Note 3 - Earnings Per Share (Continued):
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 September 30, 2002, commitments to extend credit and standby letters of
credit totaled $214,159,000. 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:
9/30/02 12/31/01
----------- -----------
Gross carrying amount $ 5,538,000 $ 5,538,000
Accumulated amortization (3,365,000) (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
Note 5 - Intangible Assets (Continued):
The following table presents actual results for the nine months ended September
30, 2002, and adjusted net income and adjusted earnings per share for the nine
months ended September 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 Nine Months Ended
--------------------- ---------------------
9/30/02 9/30/01 9/30/02 9/30/01
-------- -------- -------- --------
Reported net income $ 3,255 $ 3,091 $ 10,034 $ 9,266
Add back:
Goodwill amortization -- 60 -- 180
-------- -------- -------- --------
Adjusted net income $ 3,255 $ 3,151 $ 10,034 $ 9,446
======== ======== ======== ========
Basic earnings per share:
Reported net income $ 0.47 $ 0.44 $ 1.44 $ 1.32
Add back:
Goodwill amortization -- 0.01 -- 0.02
-------- -------- -------- --------
Adjusted net income $ 0.47 $ 0.45 $ 1.44 $ 1.34
======== ======== ======== ========
Diluted earnings per share:
Reported net income $ 0.46 $ 0.44 $ 1.43 $ 1.32
Add back:
Goodwill amortization -- 0.01 -- 0.02
-------- -------- -------- --------
Adjusted net income $ 0.46 $ 0.45 $ 1.43 $ 1.34
======== ======== ======== ========
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 total 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 in 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 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 third quarter of 2002, the Corporation had consolidated net income of
$3,255,000, an increase of 5.3 percent over the $3,091,000 earned in the third
quarter of 2001. Diluted earnings per share were $0.46 for the nine months ended
September 30, 2002, a 4.5 percent increase over the $0.44 per share earned in
the third quarter of 2001. Net income for the first nine months of 2002 was
$10,034,000, an increase of 8.3 percent over the $9,266,000 earned for the same
period in 2001. Diluted earnings per share amounted to $1.43 for the nine months
ended September 30, 2002, a 8.3 percent increase over the $1.32 per share earned
in the first nine months of 2001.
NET INTEREST INCOME
For the third quarter of 2002, net interest income was $12,548,000, an increase
of $1,089,000, or 9.5 percent, over $11,459,000 for the same period in 2001. Net
interest income for the first nine months of 2001 was $36,374,000, an increase
of $3,831,000, or 11.8 percent, compared with $32,543,000 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 nine months 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 nine months of 2002, the taxable
equivalent yield on earning assets was 6.71 percent, as compared with 7.45
percent during the same period in 2001, a decrease of 74 basis points. The cost
of interest-bearing liabilities used to fund most of these assets decreased 173
basis points from 4.03 percent in 2001 to 2.30 percent in 2002. Thus, comparing
the first nine months of 2002 and 2001, interest rates paid on interest-bearing
liabilities decreased more rapidly than yields on earning assets. Consequently,
for the first nine months of 2001 and 2002, the net interest margin increased
from 4.60 percent to 4.81 percent. In the same nine-month comparisons, the
positive impact of interest-free funds decreased from 0.59 percent to 0.40
percent.
Loans comprise the largest category of earning assets. As of September 30, 2002,
loans outstanding, net of unearned income, were $859,009,000, compared with
$768,864,000 at December 31, 2001. This represents an increase of $90,145,000 or
11.7 percent, with the most noticeable growth in the commercial, residential
mortgage and consumer installment loan categories. For the third quarter ended
September 30, 2002, interest and fees on loans were $14,965,000, compared with
$15,846,000 for the comparable period in 2001, a decrease of $881,000, or 5.6
percent. Further reflecting the lower interest rate environment in the current
year, for the nine months ended September 30, 2002, interest and fees on loans
were $43,205,000, compared with $48,182,000 for the same period in the previous
year, a decrease of $4,977,000, or 10.3 percent.
For the nine months ended September 30, 2002, loans averaged $783,995,000 and
decreased in yield by 116 basis points to 7.35 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 September 30, 2002, investment securities were $171,555,000, compared
to $189,933,000 at December 31, 2001. The composition of the portfolio remained
relatively consistent during the first nine months of 2002, with a bias toward
shorter maturities in the continuing low rate environment. The portfolio at the
end of the third quarter of 2002 included $32,129,000 of short-term investments
in government agency securities.
For the quarter ended September 30, 2002, interest earned on investment
securities was $2,309,000, compared with $2,697,000 for the comparable period in
2001, a decrease of $388,000, or 14.4 percent. For the nine-month period ended
September 30, 2002, income was $7,035,000, compared with $7,944,000 for the same
period in 2001. This decrease of $909,000, or 11.4 percent, was the result of
significantly lower yields in 2002 and a cautious bias toward shorter-term
securities.
For the first nine months of 2002, investment securities averaged $186,796,000
and yielded 5.21 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.
There were no gains or losses on sale of securities during the third quarter of
2002 and none in the third quarter of the previous year. The first nine months
of 2001 reflect a $546,000 gain realized on the sale of equity shares of an ATM
network exchange company during the second quarter. There were no gains or
losses recognized in the first nine months of 2002. As of September 30, 2002,
the Corporation had unrealized gains of $2,095,000 and $3,672,000, 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 September 30, 2002, the Corporation held $11,000,000 in money market
funds. These short-term investments averaged $25,181,000 for the first nine
months of 2002 and earned $333,000. During the first nine months of 2001, money
market funds averaged $476,000 and earned $11,000.
During the first nine months of 2002, the balance in interest-bearing
liabilities averaged $830,784,000 with an average rate of 2.30 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 147 basis points. At September 30,
2002, approximately 43 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 September 30, 2002 was
$884,000, compared with $693,000 for the same period in 2001, an increase of
27.6 percent. For the nine months ended September 30, 2002, the provision was
$2,019,000, compared to $1,389,000 for the year-earlier period, an increase of
45.4 percent. The provision has been increased in 2002 to accommodate loan
growth and the level of charge-offs. The allowance for loan losses was
$10,626,000, or 1.24 percent, of outstanding loans, at September 30, 2002 and
$9,818,000, or 1.31 percent, of outstanding loans at December 31, 2001. The
current allowance provides 2.51 times coverage of period end nonperforming
loans, which totaled $4,230,000, or 0.49 percent, of period end loans. The
allowance for loan losses also provides approximately six times coverage of
third quarter annualized net charge-offs. Net charge-offs for the third quarter
and year-to-date in 2002 totaled $423,000 and $1,210,000, or an annualized 0.21
percent of average loans, net of unearned income, for both the quarter and first
nine months. In the prior year, net charge offs were $555,000, or 0.30 percent,
of average loans for the third quarter and $840,000, or 0.15 percent, of average
loans for the first three quarters.
With continued economic uncertainty, management anticipates that charge offs in
the near term will continue at percentage of loan levels reasonably similar to
the 2002 experience.
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.
Other real estate owned includes certain real estate acquired as a result of
foreclosure. The balances in other real estate owned were $1,225,000 at
September 30, 2002 and $798,000 at the end of 2001.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 2002 was $4,327,000, compared with
$3,172,000 for the same period in 2001, an increase of $1,155,000, or 36.4
percent. For the first nine months of 2002, noninterest income was $12,582,000,
compared with $10,019,000 for the same period in 2001, an increase of
$2,563,000, or 25.6 percent. The increases in 2002 were primarily attributable
to increases in secondary market mortgage fee income of 21 percent, or $366,000,
and deposit account service charge increases of 45 percent, or $2,444,000.
Noninterest expense for the third quarter of 2002 was $11,276,000, an increase
of $2,072,000, or 22.5 percent, from $9,204,000 for the same period in the
previous year. For the nine months ended September 30, 2002, noninterest expense
increased $5,053,000, or 18.7 percent, to $32,042,000 from $26,989,000 in the
year-earlier period. Salaries and employee benefits increased $1,084,000, or
21.2 percent, to $6,203,000 from the third quarter of 2001 to the third quarter
of 2002. Comparing the nine month periods, salaries and employee benefits
increased $3,232,000, or 22.3 percent, to $17,750,000 in 2002. Other expense was
$3,343,000 in the third quarter of 2002, an increase of $1,295,000, or 63.2
percent, from the third quarter of 2001. For the first nine months of 2002,
other expense was $9,358,000, an increase of $1,722,000, or 22.6 percent, from
the same period a year earlier.
Contributing to expense increases during the first three quarters of 2002 were a
number of corporate initiatives, including entry into the Greenville, South
Carolina market with a new branch opening in June; 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 in May 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 $3,255,000 for the third quarter of 2002, an increase of
$164,000, or 5.3 percent, compared with $3,091,000 in the third quarter of 2001.
For the nine months ended September 30, 2002, net income was up $768,000, or 8.3
percent, to $10,034,000, compared with $9,266,000 in the first nine months of
2001. Comparing the first three quarters of 2001 and 2002, the $3,832,000, or
11.8 percent, increase in net interest income and the $2,563,000, or 25.6
percent, increase in noninterest income were the main contributors to the growth
in net income.
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 September 30, 2002,
shareholders' equity was $100,872,000, an increase of $7,807,000, or 8.4
percent, over $93,065,000 at December 31, 2001.
The Corporation and its subsidiaries are subject to certain risk-based capital
guidelines. Certain 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 September 30, 2002 was 11.73
percent, compared to 12.32 percent at December 31, 2001. The total risk-weighted
asset capital ratio was 12.98 at the end of the third 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 September
30, 2002, the Corporation's leverage ratio was 8.69 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.
Item 4. CONTROLS AND PROCEDURES
Within ninety days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Management necessarily applied its judgment in the process of reviewing
these controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives. Based upon this
evaluation, the Company's President and Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them as to material information
relating to the Company, including its consolidated subsidiaries, required to be
included in the Company's Exchange Act filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
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:
Not applicable.
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: November 13, 2002 /s/ C. JOHN HIPP, III
-------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 13, 2002 /s/ RICHARD C. MATHIS
-------------------------------------
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
CERTIFICATION
I, C. John Hipp, III certify that:
1. I have reviewed this quarterly report on Form 10-Q of First National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ C. John Hipp, III
- -----------------------
Chief Executive Officer
Date: November 13, 2002
CERTIFICATION
I, Richard C. Mathis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First National
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Richard C. Mathis
- ------------------------
Chief Financial Officer
Date: November 13, 2002
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.