UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20529
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
Commission File Number: 9-13663
FIRST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
520 GERVAIS STREET, COLUMBIA, SOUTH CAROLINA 29201
(Address of principal executive offices) (Zip code)
(803) 277-2175
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes ( X ) No ( )
Indicate the number of shares outstanding of each of issuer's class of
securities:
Class Outstanding as of March 31, 2003
Common Stock, $2.50 par value 7,678,934
FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Three Months Ended
March 31, 2003 and 2002
Condensed Consolidated Statements of Income -
Three Months Ended
March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows -
Three Months Ended
March 31, 2003 and 2002
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, 2002
Item 4 - Controls and Procedures
Part II: Other Information
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
(In thousands of dollars, except par value)
03/31/03 12/31/2002
(Unaudited) (Note 1)
-----------------------------
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $36,296 $40,479
Interest-bearing deposits with banks 30 35
Federal funds sold and securities
purchased under agreements to resell 12,350 -
Money market funds 25,500 -
-----------------------------
Total cash and cash equivalents 74,176 40,514
-----------------------------
Investment securities:
Held-to-maturity (fair value of $34,207 in 2003
and $35,044 in 2002) 32,337 33,211
Available-for-sale 132,393 131,740
-----------------------------
Total investment securities 164,730 164,951
-----------------------------
Loans held for sale 31,393 39,141
-----------------------------
Loans 882,583 864,815
Less, unearned income (1,200) (1,393)
Less, allowance for loan losses (11,233) (11,065)
-----------------------------
Loans, net 870,150 852,357
-----------------------------
Premises and equipment, net 30,984 28,186
-----------------------------
Other assets 21,508 19,799
-----------------------------
Total assets $1,192,941 $1,144,948
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $177,207 $146,104
Interest-bearing 764,198 752,059
-----------------------------
Total deposits 941,405 898,163
Federal funds purchased and securities
sold under agreements to repurchase 90,044 88,616
Notes payable 49,500 49,500
Other liabilities 6,344 5,173
-----------------------------
Total liabilities 1,087,293 1,041,452
-----------------------------
Shareholders' equity:
Common stock - $2.50 par value; authorized 40,000,000 shares;
issued and outstanding 7,678,934 and 6,952,976 shares 19,197 19,183
Surplus 62,527 62,423
Retained earnings 22,264 20,071
Accumulated other comprehensive income 1,660 1,819
-----------------------------
Total shareholders' equity 105,648 103,496
-----------------------------
Total liabilities and shareholders' equity $1,192,941 $1,144,948
=============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
------------------------------------------
(Unaudited)
(Dollars in thousands)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
----------------------
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
-------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 6,964,878 $17,412 $46,016 $28,485 $1,152 $93,065
--------------
Comprehensive income:
Net income - - - 3,376 - 3,376
Change in net unrealized gain (loss) on
securities available-for-sale, net of tax
effects - - - - (861) (861)
--------------
Total comprehensive income 2,515
--------------
Cash dividends declared at $.15 per share - - - (1,044) - (1,044)
Exercised stock options 500 1 8 - - 9
Repurchase of common stock (12,402) (31) (234) - - (265)
-------------------------------------------------------------------------
BALANCE, MARCH 31, 2002 6,952,976 $17,382 $45,790 $30,817 $291 $94,280
=========================================================================
BALANCE, DECEMBER 31, 2002 7,673,339 19,183 62,423 20,071 1,819 103,496
--------------
Comprehensive income:
Net income - - 3,421 - 3,421
Change in net unrealized gain (loss) on
securities
available-for-sale, net of tax effects - - - (159) (159)
--------------
Total comprehensive income 3,262
--------------
Cash dividends declared at $.16 per share - - (1,228) - (1,228)
--------------
Exercised stock options 1,348 3 19 - - 22
--------------
Employee stock purchases 2,247 6 41 - - 47
--------------
Restricted stock awards 2,000 5 44 - - 49
--------------
Repurchase of common stock - - - - - -
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BALANCE, MARCH 31, 2003 7,678,934 $19,197 $62,527 $22,264 $1,660 $105,648
=========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended
------------------------------
3/31/2003 3/31/2002
------------------------------
Interest income:
Loans, including fees $14,632 $14,119
Investment securities:
Taxable 1,329 2,012
Tax-exempt 368 421
Federal funds sold and securities
purchased under agreements to resell 55 45
Money market funds 36 93
------------------------------
Total interest income 16,420 16,690
------------------------------
Interest expense:
Deposits 3,289 4,163
Federal funds purchased and securities
sold under agreements to repurchase 169 227
Long-term debt 615 612
------------------------------
Total interest expense 4,073 5,002
------------------------------
Net interest income:
Net interest income 12,347 11,688
Provision for loan losses 839 491
------------------------------
Net interest income after provision for loan losses 11,508 11,197
------------------------------
Noninterest income:
Service charges on deposit accounts 2,867 2,409
Other service charges and fees 2,467 1,742
------------------------------
Total noninterest income 5,334 4,151
------------------------------
Noninterest expense:
Salaries and employee benefits 6,710 5,569
Net occupancy expense 660 572
Furniture and equipment expense 1,021 997
Other expense 3,238 3,103
------------------------------
Total noninterest expense 11,629 10,241
------------------------------
Earnings:
Income before provision for income taxes 5,213 5,107
Provision for income taxes 1,792 1,731
------------------------------
Net income $3,421 $3,376
==============================
Earnings per share:
Basic $0.446 $0.441
==============================
Diluted $0.442 $0.439
==============================
Cash dividends per common share $0.160 $0.136
==============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(In thousands of dollars)
Three Months Ended
------------------------
3/31/2003 3/31/2002
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,421 $3,376
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 526 339
Provision for loan losses 823 491
Net amortization of investment securities 214 197
Originations of loans held for sale (96,624) (46,935)
Proceeds from sale of loans held for sale 104,372 56,604
Net change in:
Miscellaneous other assets (1,721) (1,098)
Miscellaneous other liabilities 1,171 2,953
------------------------
Net cash provided by operating activities 12,182 15,927
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale - 5,000
Proceeds from maturities of investment securities held to
maturity 857 1,921
Proceeds from maturities of investment securities available-for-
sale 36,659 30,352
Purchases of investment securities available-for-sale (37,749) (27,055)
Purchases of investment securities held-to maturity - (811)
Net (increase) decrease in customer loans (18,744) 2,333
Recoveries of loans previously charged off 128 41
Purchases of premises and equipment (3,230) (2,129)
------------------------
Net cash provided (used) by investing activities (22,079) 9,652
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 43,241 23,815
Net increase in federal funds purchased
and securities sold under agreements to repurchase 1,428 12,062
Common stock issuance 118 9
Common stock repurchase - (265)
Dividends paid (1,228) (1,044)
------------------------
Net cash provided by financing activities 43,559 34,577
------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $33,662 $60,156
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,514 41,175
------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $74,176 $101,331
========================
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 three months ended
March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
The condensed consolidated balance sheet at December 31, 2002, 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 Company's annual report on Form 10-K for
the year ended December 31, 2002 should be referenced when reading these
unaudited condensed consolidated financial statements.
Note 2 - Recent Accounting Pronouncements:
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, which amends SFAS No.
123, Accounting for Stock-Based Compensation. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company continues to account for stock-based compensation under the guidance
of Accounting Principles Board ("APB") Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations. (See NOTE 5)
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS 133 for
certain decisions made by the FASB as part of the Derivatives Implementation
Group process. SFAS 149 also amends SFAS 133 to incorporate clarifications of
the definition of a derivative. The amendments set forth in SFAS 149 require
that contracts with comparable characteristics be accounted for similarly. SFAS
also amends certain other existing pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, except as stated below,
and for hedging relationships designated after June 30, 2003. In addition,
except as stated below, all provisions of SFAS 149 should be applied
prospectively. The provisions of SFAS 149 that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15,
2003, should continue to be applied in accordance with their respective
effective dates. In addition, certain provisions relating to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. Management is currently evaluating what impact the adoption
of SFAS 149 will have on the Company's financial position and results of
operations.
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 months ended March 31, 2003 and
2002 are as follows:
3/31/2003 3/31/2002
--------- ---------
Basic 7,673,581 7,653,020
Diluted 7,732,209 7,683,461
Dividends per share are calculated using the current equivalent number of common
shares outstanding at the time of the dividend based on the Company's shares
outstanding.
Note 4 - Commitments and Contingent Liabilities:
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities, which are not reflected in the
accompanying financial statements. The commitments and contingent liabilities
include guarantees, commitments to extend credit and standby letters of credit.
At March 31, 2003, commitments to extend credit and standby letters of credit
totaled $ 256,959,000. The Company does not anticipate any material losses as a
result of these transactions.
Note 5 - Stock-Based Compensation:
During 1999 and 1996, Company adopted stock option plans under which incentive
and nonqualified stock options may be granted periodically to key employees and
non-employee directors. With the exception of options granted to directors under
the 1999 plan, which may be exercised at any time prior to expiration, options
granted under the plans may not be exercised in whole or in part within one year
following the date of the grant, and thereafter become exercisable in 25%
increments over the next four years. No stock-based employee compensation cost
is, or is expected to be, reflected in net income, as all options granted under
the plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. Had stock-based employee compensation costs
of the Company's stock option plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method
prescribed by SFAS 123, as amended by SFAS 148, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (per share data has been restated to reflect all stock dividends as of
March 31, 2003):
Three Months Ended
-------------------------
(In thousands of dollars, except per share data) 3/31/2003 3/31/2002
--------- ---------
Net income, as reported $ 3,421 $ 3,376
Less, total stock-based employee compensation expense
determined under fair value based method, net of related
tax effects 57 35
-------- -------
Pro forma net income $ 3,364 $ 3,341
======== =======
Earnings per share:
Basic - as reported $ 0.45 $ 0.44
Basic - pro forma $ 0.44 $ 0.44
Diluted - as reported $ 0.44 $ 0.44
Diluted - pro forma $ 0.44 $ 0.43
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
Three Months Ended
------------------
3/31/2003 3/31/2002
--------- ---------
Dividend yield 2.55% 2.63%
Expected life 10 years 10 years
Expected volatility 30.0% 30.0%
Risk-free interest rate 3.82% 3.82%
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 Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in First
National Corporation's Annual Report on Form 10-K for the year ended December
31, 2002.
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 risk factors 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 rate risk
involving the effect of a change in interest rates on both the bank's earnings
and the market value of 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 affects earnings or
capital arising from negative public opinion.
First National Corporation (the "Company") is a bank holding company
incorporated under the laws of South Carolina in 1985. The Company 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 of the Pee Dee, National
Association, a national bank which opened for business in 1998, and 100 percent
of CreditSouth Financial Services Corporation, a consumer finance company which
opened for business in 1998. In December 2002, South Carolina Bank and Trust,
National Association, acquired the majority of the consumer loan portfolio and
related assets of CreditSouth Financial Services Corporation and assumed the
continuing lending activities of that entity. Thereafter, CreditSouth Financial
Services Corporation discontinued its lending business and focused on servicing
its retained portfolio of loans that were delinquent at the time of the
acquisition. During the first quarter of 2003, the Company announced plans to
merge South Carolina Bank and Trust of the Pee Dee, N.A. with South Carolina
Bank and Trust, N.A. This transaction is expected to occur early in the third
quarter of 2003. The Company engages in no significant operations other than the
ownership of its subsidiaries.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and time deposits of
various types, alternative 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, correspondent banking services, and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers, and no significant portion of its
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 Company. The Company does not have foreign loans or
deposits.
For the first quarter of 2003, the Company had consolidated net income of
$3,421,000, an increase of 1.3 percent over the $3,376,000 earned in the first
quarter of 2002. Diluted earnings per share were $0.44 for the first quarters of
2002 and 2003. Annualized returns on average assets and average shareholders'
equity for the three months ended March 31, 2003 were 1.20 percent and 13.23
percent, respectively, compared to 1.32 percent and 14.49 percent, respectively,
for the first quarter of 2002.
NET INTEREST INCOME
For the first quarter of 2003, net interest income was $12,347,000, an
increase of $659,000, or 5.6 percent, over $11,688,000 for the same period in
2002. This increase was largely the result of significantly lower rates paid on
interest-bearing liabilities in the first three months of 2003, as compared with
the first quarter of 2002.
The yield on a major portion of the Company's earning assets adjusts
simultaneously, but to varying degrees of magnitude, with changes in the general
level of interest rates. Comparing the first three months of 2003 and 2002,
yields on earning assets declined more rapidly than interest rates paid on
interest-bearing liabilities. For the three months ended March 31, 2003, the
yield on earning assets was 5.74 percent, as compared with 6.82 percent during
the same period in 2002, a decrease of 108 basis points. For the same
comparative periods, the cost of interest-bearing liabilities used to support
these assets decreased 66 basis points from 2.47 percent in 2002 to 1.81 percent
in 2003. The taxable equivalent net interest margin decreased 23 basis points
from 4.94 percent in the first quarter of 2002 to 4.71 percent for the first
quarter of 2003. The ability of depository institutions to sustain current net
interest margin levels will likely continue to be influenced by the low interest
rate environment, economic conditions and international events.
Loans comprise the Company's largest category of earning assets. As of March
31, 2003, loans outstanding, net of unearned income, were $881,383,000, compared
with $863,422,000 at December 31, 2002. This represents an increase of
$17,961,000 or 2.1 percent, with significant growth in commercial real estate,
commercial, residential mortgage, and home equity loan categories. For the
quarter ended March 31, 2003, interest and fees on loans were $14,632,000,
compared with $14,119,000 for the comparable period in 2002, an increase of
$513,000, or 3.6 percent. This increase was the result of strong loan demand,
offsetting sharply lower interest rates.
For the three months ended March 31, 2003, loans averaged $899,614,000 and
decreased in yield by 93 basis points to 6.51 percent on a taxable equivalent
basis, compared to $758,600,000 with a taxable equivalent yield of 7.44 for the
same period in 2002.
Investment securities are the second largest category of earning assets.
Investment securities are utilized by the Company as a vehicle for the
employment of excess funds, to provide liquidity, to fund loan demand or deposit
liquidation, and to pledge as collateral for certain deposits and purchased
funds. At March 31, 2003, investment securities were $164,730,000, compared to
$164,951,000 at December 31, 2002. The composition of the portfolio remained
relatively consistent during the first three months of 2003, with a continued
bias toward shorter maturities in the continuing low rate environment. The
portfolio at the end of the first quarter of 2003 included $36,454,000 of
short-term investments in U.S. government agency securities.
For the quarter ended March 31, 2003, interest earned on investment
securities was $1,697,000, compared with $2,433,000 for the comparable period in
2002. This decrease of $829,000, or 32.8 percent was mainly the result of
significantly lower yields in 2003 and a cautious bias toward shorter-term
securities. For the first three months of 2003, investment securities averaged
$163,171,000 with a yield of 4.11 percent on a taxable equivalent basis,
compared to an average of $187,676,000 and yield of 5.19 percent for the first
quarter of 2002.
There were no gains or losses on sales of securities during the first
quarters of 2003 and 2002. As of March 31, 2003, the Company had unrealized
gains of $1,870,000 and $2,523,000, 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
Company to trade this segment of 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
opportunities.
As of March 31, 2003, the Company held $25,500,000 in money market funds,
compared with $44,000,000 one year earlier. These short-term investments
averaged $12,234,000 for the first three months of 2003 and earned $36,000.
During the first three months of 2002, money market funds averaged $21,228,000,
earning $93,000.
During the first three months of 2003, interest-bearing liabilities averaged
$898,671,000 with an average rate of 1.81 percent. This compares to an average
balance of $809,773,000 and rate of 2.47 percent for same period in 2002,
reflecting a decrease of 66 basis points. At March 31, 2003, approximately 44
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 March 31, 2003 was
$839,000, compared with $491,000 for the first quarter of 2002, an increase of
70.9 percent. The provision has increased to accommodate significant loan growth
and a higher level of charge-offs. The allowance for loan losses was
$11,233,000, or 1.27 percent, of loans, net of unearned income, at March 31,
2003 and $11,065,000, or 1.28 percent, of outstanding loans at December 31,
2002. The current allowance provides 1.96 times coverage of period end
nonperforming loans, which totaled $5,722,000, or 0.65 percent, of period end
loans. The allowance for loan losses also provides approximately four times
coverage of first quarter annualized net charge-offs. Net charge-offs for the
first quarter were $671,000, or an annualized 0.30 percent of average loans, net
of unearned income. In the prior year, net charge offs were $508,000, or an
annualized 0.27 percent, of first quarter average loans.
As the U.S. and South Carolina economies continue to show mixed signs of
strength and weakness, management anticipates that charge offs in 2003 will
continue at levels similar to those experienced in recent periods.
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 and property not intended for bank use. As of March 31, 2003, other
real estate owned was $495,000, compared with $657,000 at the end of the first
quarter of 2002.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the first quarter of 2003 was $5,334,000, compared
with $4,151,000 for the same period in 2002, an increase of $1,183,000, or 28.5
percent. The 2003 results were attributable to increases in service charges on
deposit accounts of $458,000, or 19.0 percent and other service charges and fees
of $725,000, or 41.6 percent. In the latter category, secondary market mortgage
fee income was the main contributor, increasing 60.7 percent, from $899,000 in
the first quarter of 2002 to $1,445,000 in the first three months of 2003.
Noninterest expense for the first quarter of 2003 was $11,629,000, an
increase of $1,388,000, or 13.6 percent, from $10,241,000 for the same period in
the previous year. Salaries and employee benefits increased $1,141,000, or 20.5
percent, to $6,710,000 from the first quarter of 2002 to the first quarter of
2003. In year-to-year first quarter comparisons, net occupancy expense rose 15.4
percent, from $572,000 in 2002 to $660,000 in 2003. Other expense was $3,238,000
in the first quarter of 2003, an increase of $135,000, or 4.4 percent, from the
first quarter of 2002. Contributing to these increases were higher staffing
levels in support of the Company's growth and expansion into new markets;
planned higher levels of salaries and benefits; and incentive payments
associated with both increased staffing levels and sharply higher loan
production, especially originations of consumer mortgage loans. Additional
expenses were incurred in the first quarter of 2003 in connection with the
January relocation of the Company's corporate headquarters to a new four-story
office facility in downtown Columbia. Also during the quarter, South Carolina
Bank and Trust of the Piedmont, National Association, opened a new full-service
banking facility on East Main Street in Rock Hill.
NET INCOME
Net income was $3,421,000 for the first quarter of 2003, an increase of
$45,000, or 1.3 percent, compared with $3,376,000 in the first quarter of 2002.
As discussed above, the 28.5 percent increase in noninterest income was the main
earnings contributor. Together with a 5.64 percent increase in net interest
income, these positive earnings components offset a 13.6 percent increase in
noninterest expense.
CAPITAL RESOURCES AND LIQUIDITY
The ongoing capital requirements of the Company have been met through
retained earnings, less the payment of cash dividends. As of March 31, 2003,
shareholders' equity was $105,648,000, an increase of $2,152,000, or 2.1
percent, from $103,496,000 at December 31, 2002.
The Company 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 March 31, 2003 was 11.52 percent,
compared to 11.67 percent at December 31, 2002. The total risk-weighted asset
capital ratio was 11.52 at the end of the first quarter of 2003, compared with
11.67 at the end of 2002.
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. The Company's
leverage ratio was 8.70 percent as of March 31, 2003 and as of December 31,
2002. The Corporation's capital ratios currently well exceed the minimum
standards.
Liquidity is the ability of the Company 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 Company's liabilities provide liquidity on a day-to-day basis. Daily
liquidity needs are met from deposit levels or from the Company's use of federal
funds purchased and securities sold under agreements to repurchase. Additional
liquidity can be secured from lines of credit extended to the Company 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
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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 Employment Agreement between the Registrant and C. John Hipp, III,
effective as July 30, 1999.
10.2 Employment Agreement between the Registrant and Robert R. Hill, Jr.,
effective as of September 30, 1999.
10.3 Employment Agreement between the Registrant and Thomas S. Camp,
effective as of November 10, 1998.
10.4 Employment Agreement Amendment between the Registrant and Thomas S.
Camp, effective as of December 5, 2001.
10.5 Employment Agreement between the Registrant and John C. Pollok,
effective as of October 23, 2002.
10.6 Employment Agreement between the Registrant and Richard C. Mathis,
effective as of October 23, 2002.
10.7 Employment Agreement between the Registrant and Joe E. Burns,
effective as of October 23, 2002.
10.8 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and C. John Hipp, III, effective as of January
1, 2003.
10.9 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Robert R. Hill, Jr., effective as of
January 1, 2003.
10.10 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Thomas S. Camp, effective as of January 1,
2003.
10.11 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and John C. Pollok, effective as of January 1,
2003.
10.12 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Richard C. Mathis, effective as of January
1, 2003.
10.13 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust and Joe E. Burns, effective as of January 1, 2003.
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) Reports on Form 8-K:
Current Report on Form 8-K, Items 7 and 9, dated April 18, 2003 and filed
April 18, 2003.
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: May 14, 2003 /s/ C. JOHN HIPP, III
---------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 14, 2003 /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: May 14, 2003
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: May 14, 2003
Exhibit Index
Exhibit No. Description of Exhibit
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10.1 Employment Agreement between the Registrant and C. John Hipp, III,
effective as of July 30, 1999.
10.2 Employment Agreement between the Registrant and Robert R. Hill, Jr.,
effective as of September 30, 1999.
10.3 Employment Agreement between the Registrant and Thomas S. Camp,
effective as of November 10, 1998.
10.4 Employment Agreement Amendment between the Registrant and Thomas S.
Camp, effective as of December 5, 2001.
10.5 Employment Agreement between the Registrant and John C. Pollok,
effective as of October 23, 2002.
10.6 Employment Agreement between the Registrant and Richard C. Mathis,
effective as of October 23, 2002.
10.7 Employment Agreement between the Registrant and Joe E. Burns,
effective as of October 23, 2002.
10.8 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and C. John Hipp, III, effective as of January
1, 2003.
10.9 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Robert R. Hill, Jr., effective as of
January 1, 2003.
10.10 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Thomas S. Camp, effective as of January 1,
2003.
10.11 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and John C. Pollok, effective as of January 1,
2003.
10.12 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust, N.A. and Richard C. Mathis, effective as of January
1, 2003.
10.13 Supplemental Executive Retirement Agreement between South Carolina
Bank and Trust and Joe E. Burns, effective as of January 1, 2003.
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.