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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 June 30, 2003
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 reports) 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 classes
of common stock:
Class Outstanding as of June 30, 2003
Common Stock, $2.50 par value 7,681,616
FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Six Months Ended
June 30, 2003 and 2002
Condensed Consolidated Statements of Income -
Three and Six Months Ended
June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows -
Six Months Ended
June 30, 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 4 - Submission of Matters to a Vote of Security Holders
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)
06/30/03 12/31/2002
(Unaudited) (Note 1)
-------------------------------------
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 44,676 $ 40,479
Interest-bearing deposits with banks 4,535 35
Federal funds sold and securities
purchased under agreements to resell 1,200 -
-------------------------------------
Total cash and cash equivalents 50,411 40,514
-------------------------------------
Investment securities:
Held-to-maturity (fair value of $32,339 in 2003
and $34,857 in 2002) 30,294 33,211
Available-for-sale 153,159 131,740
-------------------------------------
Total investment securities 183,453 164,951
-------------------------------------
Loans held for sale 53,934 39,141
-------------------------------------
Loans 900,132 864,815
Less, unearned income (1,061) (1,393)
Less, allowance for loan losses (11,112) (11,065)
-------------------------------------
Loans, net 887,959 852,357
-------------------------------------
Premises and equipment, net 31,932 28,186
-------------------------------------
Other assets 21,555 19,799
-------------------------------------
Total assets $ 1,229,244 $ 1,144,948
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 196,855 $ 146,104
Interest-bearing 789,073 752,059
-------------------------------------
Total deposits 985,928 898,163
Federal funds purchased and securities
sold under agreements to repurchase 81,333 88,616
Notes payable 49,500 49,500
Other liabilities 4,412 5,173
-------------------------------------
Total liabilities 1,121,173 1,041,452
-------------------------------------
Shareholders' equity:
Common stock - $2.50 par value; authorized 40,000,000 shares;
issued and outstanding 7,681,616 and 7,673,339 shares 19,204 19,183
Surplus 62,576 62,423
Retained earnings 24,847 20,071
Accumulated other comprehensive income 1,444 1,819
-------------------------------------
Total shareholders' equity 108,071 103,496
-------------------------------------
Total liabilities and shareholders' equity $ 1,229,244 $ 1,144,948
=====================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Dollars in thousands)
ACCUMULATED
COMMON STOCK OTHER
------------- 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 - - - 6,779 - 6,779
Change in net unrealized gain
(loss) on securities
available-for-sale,
net of tax effects - - - - 548 548
--------
Total comprehensive income 7,327
--------
Cash dividends
declared at $.31 per share - - - (2,160) - (2,160)
--------
Exercise stock options 950 2 13 - - 15
--------
Restricted stock awards 17,000 43 413 - - 456
--------
Repurchase of common stock (12,402) (31) (234) - - (265)
-----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 6,970,426 $ 17,426 $ 46,208 $ 33,104 $ 1,700 $ 98,438
=========================================================================================
BALANCE, DECEMBER 31, 2002 7,673,339 19,183 62,423 20,071 1,819 103,496
--------
Comprehensive income:
Net income - - 7,232 - 7,232
Change in net unrealized
gain (loss) on securities
available-for-sale,
net of tax effects - - - (375) (375)
--------
Total comprehensive income 6,857
--------
Cash dividends
declared at $.32 per share - - (2,456) - (2,456)
--------
Exercise stock options 1,348 3 19 - - 22
--------
Employee stock purchases 4,929 13 90 - - 103
--------
Restricted stock awards 2,000 5 44 - - 49
-----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 7,681,616 $ 19,204 $ 62,576 $ 24,847 $ 1,444 $ 108,071
=========================================================================================
THE ACCOMPANYING NOTE ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
6/30/2003 6/30/2002 6/30/2003 6/30/2002
--------- --------- --------- ---------
Interest income:
Loans, including fees $ 14,843 $ 14,243 $ 29,475 $ 28,362
Investment securities:
Taxable 1,266 1,878 2,595 3,890
Tax-exempt 351 414 719 834
Federal funds sold and securities
purchased under agreements to resell 18 38 73 83
Money market funds 22 159 58 252
Deposits with banks 36 35 36 36
------------------------------ ----------------------------
Total interest income 16,536 16,767 32,956 33,457
------------------------------ ----------------------------
Interest expense:
Deposits 3,223 3,769 6,512 7,932
Federal funds purchased and securities
sold under agreements to repurchase 142 238 311 464
Long-term debt 621 622 1,236 1,235
------------------------------ ----------------------------
Total interest expense 3,986 4,629 8,059 9,631
------------------------------ ----------------------------
Net interest income:
Net interest income 12,550 12,138 24,897 23,826
Provision for loan losses 230 644 1,069 1,135
------------------------------ ----------------------------
Net interest income after provision for loan losses 12,320 11,494 23,828 22,691
------------------------------ ----------------------------
Noninterest income:
Service charges on deposit accounts 2,812 2,616 5,679 5,025
Other service charges and fees 2,827 1,488 5,294 3,230
Gain on sale of securities available-for-sale - - - -
------------------------------ ----------------------------
Total noninterest income 5,639 4,104 10,973 8,255
------------------------------ ----------------------------
Noninterest expense:
Salaries and employee benefits 7,144 5,979 13,854 11,547
Net occupancy expense 687 574 1,347 1,145
Furniture and equipment expense 1,093 946 2,114 1,944
Other expense 3,272 3,026 6,510 6,130
------------------------------ ----------------------------
Total noninterest expense 12,196 10,525 23,825 20,766
------------------------------ ----------------------------
Earnings:
Income before provision for income taxes 5,763 5,073 10,976 10,180
Provision for income taxes 1,952 1,670 3,744 3,401
------------------------------ ----------------------------
Net income $ 3,811 $ 3,403 $ 7,232 $ 6,779
============================== ============================
Comprehensive income $ 3,595 $ 4,812 $ 6,857 $ 7,327
============================== ============================
Earnings per share:
Basic $ 0.496 $ 0.444 $ 0.942 $ 0.885
============================== ============================
Diluted $ 0.491 $ 0.441 $ 0.934 $ 0.881
============================== ============================
Cash dividends per common share $ 0.160 $ 0.146 $ 0.320 $ 0.282
============================== ============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Six Months Ended
------------------------
6/30/2003 6/30/2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,232 $ 6,779
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,075 725
Provision for loan losses 1,069 1,135
Gain on sale of premises and equipment (5) -
Net amortization of investment securities 517 328
Originations of loans held for sale (243,479) (84,084)
Proceeds from sale of loans held for sale 228,685 96,804
Net change in:
Miscellaneous other assets (1,723) (1,969)
Miscellaneous other liabilities (761) 929
-------------------------------
Net cash provided (used) by operating activities (7,390) 20,647
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 2,891 2,436
Proceeds from maturities of investment securities available-for-sale 59,762 136,390
Purchases of investment securities available-for-sale (82,269) (140,865)
Purchases of investment securities held-to maturity - (1,072)
Net (increase) decrease in customer loans (37,125) (46,157)
Recoveries of loans previously charged off 455 122
Purchases of premises and equipment (4,648) (5,034)
Proceeds from sale of premises and equipment 21 -
-------------------------------
Net cash provided (used) by investing activities (60,913) (54,180)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 87,765 37,819
Net increase in federal funds purchased
and securities sold under agreements to repurchase (7,284) 105
Common stock issuance 153 455
Common stock repurchase - (265)
Dividends paid (2,456) (2,160)
Stock options exercised 22 16
-------------------------------
Net cash provided by financing activities 78,200 35,970
-------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 9,897 $ 2,437
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,514 41,175
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,411 $ 43,612
===============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain prior period information has been reclassified to conform
to the current period presentation. Operating results for the six months ended
June 30, 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. SFAS 149 is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS 150 is not expected to have a material impact on the Company's
consolidated financial statements.
Note 3 - Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the
weighted-average shares of common stock outstanding during each period. Diluted
earnings per share is based on the weighted-average shares of common stock
outstanding during each period plus the maximum dilutive effect of common stock
issuable upon exercise of stock options. The weighted average number of shares
and equivalents are determined after giving retroactive effect to stock
dividends and stock splits. Weighted-average shares outstanding used in
calculating earnings per share for the three and six months ended June 30, 2003
and 2002 are as follows:
3 Months Ended 6 Months Ended
-------------- --------------
6/30/2003 6/30/2002 6/30/2003 6/30/2002
--------- --------- --------- ---------
Basic 7,678,963 7,661,173 7,676,287 7,657,119
Diluted 7,755,277 7,714,140 7,743,526 7,696,054
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 June 30, 2003, commitments to extend credit and standby letters of credit
totaled $254,660,000. 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
June 30, 2003):
Three Months Ended Six Months Ended
(In thousands of dollars, except per share data) 6/30/2003 6/30/2002 6/30/2003 6/30/2002
--------- --------- --------- ---------
Net income, as reported $ 3,811 $ 3,403 $ 7,232 $ 6,779
Less, total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects 57 35 112 69
Pro forma net income $ 3,754 $ 3,368 $ 7,120 $ 6,710
======= ======= ======= =======
Earnings per share:
Basic - as reported $ 0.50 $ 0.44 $ 0.94 $ 0.89
======= ======= ======= =======
Basic - pro forma $ 0.49 $ 0.44 $ 0.93 $ 0.87
======= ======= ======= =======
Diluted - as reported $ 0.49 $ 0.44 $ 0.93 $ 0.88
======= ======= ======= =======
Diluted - pro forma $ 0.48 $ 0.44 $ 0.92 $ 0.87
======= ======= ======= =======
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:
Six Months Ended
6/30/2003 6/30/2002
--------- ---------
Dividend yield 2.55% 2.63%
Expected life 10 years 10 years
Expected volatility 30.0% 30.0%
Risk-free interest rate 3.35% to 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 the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in the 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 (the "Company")
cautions readers that forward-looking statements are estimates reflecting the
best judgement of the Company's senior management or directors based on current
information, and 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.
First National Corporation 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, and 100 percent of South Carolina Bank and Trust of the Piedmont,
National Association, a national bank which opened for business in 1996. In July
2003, the Company completed the merger of South Carolina Bank and Trust of the
Pee Dee, National Association, with its lead bank, South Carolina Bank and
Trust, National Association. 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 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 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 second quarter of 2003, the Company had consolidated net income of
$3,811,000, an increase of 12.0 percent over the $3,403,000 earned in the second
quarter of 2002. Diluted earnings per share were $0.50 for the three months
ended June 30, 2002, a 13.6 percent increase over the $0.44 per share earned in
the second quarter of 2002. Net income for the first six months of 2003 was
$7,232,000, an increase of 6.7 percent over the $6,779,000 earned for the same
period in 2002. Diluted earnings per share amounted to $0.94 for the six months
ended June 30, 2003, a 5.6 percent increase over the $0.89 per share earned in
the first half of 2002.
NET INTEREST INCOME
For the second quarter of 2003, non-taxable equivalent net interest income
was $12,550,000, an increase of $412,000, or 3.4 percent, over $12,138,000 for
the same period in 2002. For the first six months of 2003, non-taxable
equivalent net interest income was $24,897,000, an increase of $1,071,000, or
4.5 percent, compared with $23,826,000 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 six months of 2003, as compared with
the same period in 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. The environment of historically low interest rates has
continued to pressure the net interest margins of depository institutions. For
the first six months of 2003, the Company's non-taxable equivalent yield on
interest earning assets was 5.99 percent, as compared with 6.79 percent during
the same period in 2002, a decrease of 80 basis points. The cost of
interest-bearing liabilities used to fund most of these assets decreased 58
basis points from 2.37 percent in 2002 to 1.79 percent in 2003. Thus, comparing
the first six months of 2003 and 2002, the yield on interest earning assets
declined more rapidly than interest rates paid on interest-bearing liabilities.
Consequently, for the first six months of 2003 and 2002, the net interest margin
decreased from 4.83 percent to 4.52 percent.
Loans comprise the largest category of earning assets. As of June 30, 2003,
loans, net of unearned income and excluding mortgage loans held for sale, were
$899,071,000, compared with $863,422,000 at December 31, 2002. This increase of
$35,649,000, or 4.13 percent, was most noticeable in the commercial real estate
and residential mortgage loan categories. Mortgage loans held for sale increased
by $14,793,000, or 37.8 percent, from $39,141,000 at December 31, 2002 to
$53,934,000 at June 30, 2003, reflecting strong residential building and
refinancing activities. For the second quarter of 2003, interest and fees on
loans, including mortgage loans held for sale, were $14,843,000, compared with
$14,243,000 for the comparable period in 2002, an increase of $600,000, or 4.2
percent. Higher loan volumes have tempered the affects of declining interest
rates during the first half of 2003. For the first six months of the year,
interest and fees on loans were $29,475,000, compared with $28,362,000 for the
same period in 2002, an increase of $1,113,000, or 3.9 percent. For the six
months ended June 30, 2003, loans, including mortgage loans held for sale,
averaged $921,921,000 and decreased in yield by 81 basis points to 6.39 percent
on a non-taxable equivalent basis, compared to $806,801,000 and a yield of 7.20
percent for the year ended December 31, 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 June 30, 2003, investment securities were $183,453,000, compared to
$164,951,000 at December 31, 2002. The composition of the portfolio remained
relatively consistent during the first six months of 2003, with a bias toward
shorter maturities in the continuing low rate environment. At the end of the
second quarter of 2003, the portfolio included $31,495,000 of short-term
government agency securities, an increase of $9,557,000, or 43.5 percent, from
$21,941,000 invested at December 31, 2002.
For the quarter ended June 30, 2003, interest earned on investment
securities was $1,617,000, compared with $2,292,000 for the comparable period in
2002, a decrease of $675,000, or 29.5 percent. For the six months ended June 30,
2003, interest income was $3,314,000, compared with $4,724,000 for the same
period in 2002. This decrease of $1,410,000, or 29.9 percent, was the result of
significantly lower yields in 2003 and a cautious bias toward shorter-term
securities.
For the first six months of 2003, investment securities averaged
$170,249,000 with a non-taxable equivalent yield of 3.96 percent, compared to an
average of $205,430,000 and yield of 4.48 percent for the year ended December
31, 2002.
There were no gains or losses on sale of securities during the first six
months of 2003 and none in the first half of the previous year. As of June 30,
2003, the Company had unrealized gains of $1,834,000 and $2,890,000,
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
The Company has from time to time invested on a short-term basis in
government agency-backed money market funds. There were no such investments
outstanding at either December 31, 2002 or June 30, 2003. For the first six
months of 2003, interest income of $58,000 was earned on average money market
fund balances of $9,843,000. For the same period in 2002, interest income of
$252,000 was earned on average balances of $28,616,000.
During the first six months of 2003, the average balance of
interest-bearing liabilities was $910,185,000, a $67,966,000, or 8.1 percent,
increase over the twelve-month average of $842,219,000 in 2002. Interest expense
of $8,059,000 was incurred on an average rate of 1.79 percent for the first six
months of 2003, compared with expense of $18,748,000 and an average rate of 2.23
percent for the full year 2002. At June 30, 2003, approximately 48 percent of
interest-bearing liabilities had fixed rates and were expected to renew at
prevailing market rates as they mature.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 2003 was
$230,000, compared with $644,000 for the same period in 2002, a decrease of 64.3
percent. For the six months ended June 30, 2003, the provision was $1,069,000,
compared to $1,135,000 for the same period in 2002, a decrease of 5.8 percent.
The provision is intended to accommodate loan growth and the level of
charge-offs. The allowance for loan losses was $11,112,000, or 1.24 percent, of
outstanding loans at June 30, 2003 and $11,065,000, or 1.28 percent, of
outstanding loans at December 31, 2002. The allowance at June 30, 2003 provided
2.13 times coverage of nonperforming loans, which totaled $5,211,000, or 0.58
percent, of period end loans. The allowance for loan losses also provides
approximately eight times coverage of second quarter annualized net charge-offs.
In 2003, net charge-offs for the second quarter and year-to-date were $367,000
and $1,038,000, respectively. This represents an annualized 0.16 percent of
average loans, net of unearned income, for the quarter and 0.24 percent for the
first six months. In the prior year, net charge offs were $295,000, or 0.15
percent, of average loans for the second quarter and $803,000, or 0.11 percent,
of average loans for the first six months.
With continued economic uncertainty, management anticipates that charge
offs in the near term will continue at percentage of loan levels reasonably
similar to the experience of the first half of 2003.
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 real estate acquired as a result of
foreclosure. The balance in other real estate owned was $670,000 at June 30,
2003 and $1,051,000 at the December 31, 2002.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the second quarter of 2003 was $5,639,000, compared
with $4,104,000 for the same period in 2002, an increase of $1,535,000, or 37.4
percent. For the first six months of 2003, noninterest income was $10,973,000,
compared with $8,255,000 for the same period in 2002, an increase of $2,718,000,
or 32.9 percent. In the six-month comparisons, these increases have been mainly
attributable to increases in secondary market mortgage fee income and in
service charges on deposit accounts. Secondary market mortgage fees increased by
$1,783,000, or 118.8 percent, reflecting strong residential loan production.
Service charges on deposit accounts increased by $654,000, or 13.0 percent, in
line the 13.4 percent increase in total average deposits.
Noninterest expense for the second quarter of 2003 was $12,196,000, an
increase of $1,671,000, or 15.9 percent, from $10,525,000 for the same period in
2002. For the six months ended June 30, 2003, noninterest expense increased
$3,059,000, or 14.7 percent, to $23,825,000 from $20,766,000 in the first half
of 2002. Salaries and employee benefits increased $1,165,000, or 19.5 percent,
to $7,144,000 from the second quarter of 2002 to the same period in 2003.
Comparing the six-month periods, salaries and employee benefits increased
$2,307,000, or 20.0 percent, to $13,854,000 in 2003. Other expense was
$3,272,000 in the second quarter of 2003, an increase of $246,000, or 8.1
percent, from the second quarter of 2002. For the first six months of 2003,
other expense was $6,510,000, an increase of $380,000, or 6.2 percent, from the
same period a year earlier.
Contributing to expense increases during the first half of 2003 were higher
staffing levels in support of the Company's continued growth and entry into new
markets; planned salary and incentive increases; higher benefit costs associated
with additional employees and increases in group insurance premiums and pension
plan costs; and increased commissions paid to loan originators, based on sharply
higher loan production levels. Additional expenses were incurred in early 2003
with the completion of the Company's headquarters facility in Columbia, South
Carolina, and the relocation of both the corporate offices and the main branch
of the Midlands Region of South Carolina Bank and Trust, N.A. Also during the
first half of 2003, South Carolina Bank and Trust of the Piedmont, N.A., opened
a new full-service banking facility on East Main Street in Rock Hill, South
Carolina.
NET INCOME
Net income was $3,811,000 for the second quarter of 2003, an increase of
$408,000, or 12.0 percent, compared with $3,403,000 in the second quarter of
2002. For the six months ended June 30, 2003, net income was up $453,000, or 6.7
percent, to $7,232,000, compared with $6,779,000 in the first half of 2002.
Comparing the first two quarters of 2003 and 2002, the $2,718,000, or 32.9
percent, increase in noninterest income was the main driver of earnings growth.
Net interest income contributed with an increase of $1,071,000, or 4.5 percent.
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 June 30, 2003,
shareholders' equity was $108,071,000, an increase of $4,575,000, or 4.4
percent, over $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 Company's Tier 1
risk-weighted asset capital ratio at June 30, 2003 was 11.65 percent, compared
to 11.67 percent at December 31, 2002. The total risk-weighted asset capital
ratio was 12.89 at the end of the second quarter of 2003, compared with 12.92 at
the year-end 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. As of
June 30, 2003, the Company's leverage ratio was 8.55 percent, compared to 8.70
percent at December 31, 2002. The Company'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 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
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 as
of the end of the period covered by this report. 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 were effective as of the end of the
period covered by this report. There were no changes in the Company's internal
controls over financial reporting that occurred during the Company's most recent
fiscal quarter that materially affected, or are reasonably likely to materially
affect, the Company's control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Neither First National Corporation nor its subsidiaries is a party to nor
is any of their property subject to any material or other pending legal
proceedings, other than in the ordinary routine proceedings incident to their
business.
Item 2. Change in Securities:
Not applicable.
Item 3. Defaults Upon Senior Securities: .
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
The 2003 Annual Meeting of Shareholders of the Company was held on
April 22, 2003. At the meeting, shareholders of the Company elected all the
individuals nominated by the Company to serve on the Board of Directors in the
class of directors whose term expires at the 2006 Annual Meeting of
Shareholders. In addition, the shareholders of the Company approved an amendment
to the Articles of Incorporation of the Company to change the name of the
Company to SCBT Financial Corporation and ratified the appointment of J.W. Hunt
and Company, LLP as independent accountants for the year ending December 31,
2003. Votes cast by the shareholders of the Company at the meeting were as
follows:
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
--------------------- --------------------- --------------- ----------------
Colden Battey, Jr. 5,808,836 332,720 -
Charles W. Clark 6,064,518 77,038 -
M. Oswald Fogle 6,047,431 94,125 -
Dwight W. Frierson 5,771,429 370,127 -
C. John Hipp, III 5,886,364 255,192 -
Thomas E. Suggs 5,875,456 266,100 -
Approval to Change the Name of the Company to SCBT Financial Corporation
- -------------------------------------------------------------------------------
Shares Voted in Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- --------------------- -------------------- ----------------- ----------------
5,852,649 173,520 115,387 -
Ratification of J.W. Hunt and Company, LLP
- -------------------------------------------------------------------------------
Shares Voted in Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- --------------------- -------------------- ----------------- ----------------
6,076,756 42,014 22,786 -
In addition, the following individuals continue to serve as directors of
the Company until the Company's Annual Shareholders' Meeting in the year
indicated:
Term Expiring In
----------------
John L. Gramling, Jr. 2004
Robert R. Horger 2004
Harry H. Mims, Jr. 2004
James W. Roquemore 2004
John W. Williamson, III 2004
Cathy Cox Yeadon 2004
Luther J. Battiste, III 2005
Robert R. Hill, Jr. 2005
Ralph W. Norman 2005
Anne H. Oswald 2005
Samuel A. Rodgers 2005
A. Dewall Waters 2005
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).
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K:
Current Report on Form 8-K, Items 7 and 9, dated July 17, 2003 and filed
July 17, 2003. Current Report on Form 8-K, Item 9, dated August 6, 2003 and
filed August 6, 2003. Current Report on Form 8-K, Item 9, dated August 7,
2003 and filed August 7, 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: August 14, 2003 /s/ C. John Hipp, III
---------------------
President and
Chief Executive Officer
Date: August 14, 2003 /s/ Richard C. Mathis
---------------------
Executive Vice President and
Chief Financial Officer
Exhibit Index
Exhibit No. Description of Exhibit
- ----------- ----------------------
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Section 1350 Certifications.