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 September 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 September 30, 2003
Common Stock, $2.50 par value 7,686,107
FIRST NATIONAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Changes
In Shareholders' Equity -
Nine Months Ended
September 30, 2003 and 2002
Condensed Consolidated Statements of Income -
Three and Nine Months Ended
September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended
September 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)
9/30/03 12/31/2002
(Unaudited) (Note 1)
---------------------------------------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 37,587 $ 40,479
Interest-bearing deposits with banks 27 35
Federal funds sold and securities
purchased under agreements to resell - -
---------------------------------------
Total cash and cash equivalents 37,614 40,514
---------------------------------------
Investment securities:
Held-to-maturity (fair value of $31,573 in 2003
and $34,857 in 2002) 29,973 33,211
Available-for-sale 132,219 131,740
---------------------------------------
Total investment securities 162,192 164,951
---------------------------------------
Loans held for sale 35,924 39,141
---------------------------------------
Loans 914,295 864,815
Less, unearned income (914) (1,393)
Less, allowance for loan losses (11,473) (11,065)
---------------------------------------
Loans, net 901,908 852,357
---------------------------------------
Premises and equipment, net 32,010 28,186
---------------------------------------
Other assets 24,673 19,799
---------------------------------------
Total assets $ 1,194,321 $ 1,144,948
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 184,760 $ 146,104
Interest-bearing 748,752 752,059
---------------------------------------
Total deposits 933,512 898,163
Federal funds purchased and securities
sold under agreements to repurchase 95,916 88,616
Notes payable 49,500 49,500
Other liabilities 5,545 5,173
---------------------------------------
Total liabilities 1,084,473 1,041,452
---------------------------------------
Shareholders' equity:
Common stock - $2.50 par value; authorized 40,000,000 shares;
issued and outstanding 7,686,107 and 7,673,339 shares 19,215 19,183
Surplus 62,639 62,423
Retained earnings 27,426 20,071
Accumulated other comprehensive income 568 1,819
---------------------------------------
Total shareholders' equity 109,848 103,496
---------------------------------------
Total liabilities and shareholders' equity $ 1,194,321 $ 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
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
(Dollars in thousands)
ACCUMULATED
COMMON STOCK RETAINED 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 - - - 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
=========================================================================================
BALANCE, DECEMBER 31, 2002 7,673,339 $ 19,183 $ 62,423 $ 20,071 $ 1,819 $ 103,496
---------------
Comprehensive income:
Net income - - - 11,118 - 11,118
Change in net unrealized
gain (loss) on securities
available-for-sale, net
of tax effects - - - - (1,251) (1,251)
---------------
Total comprehensive income 9,867
---------------
Cash dividends declared at $.49 per share - - - (3,763) - (3,763)
---------------
Exercise stock options 5,173 13 78 - - 91
---------------
Employee stock purchases 7,695 19 142 - - 161
---------------
Restricted stock awards 2,000 5 44 - - 49
---------------
Repurchase of common stock (2,100) (5) (48) - - (53)
-----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 7,686,107 $ 19,215 $ 62,639 $ 27,426 $ 568 $ 109,848
=========================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
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
--------------------- --------------------
9/30/2003 9/30/2002 9/30/2003 9/30/2002
--------- --------- --------- ---------
Interest income:
Loans, including fees $ 14,867 $ 14,721 $ 44,342 $ 43,083
Investment securities:
Taxable 1,189 1,895 3,784 5,786
Tax-exempt 335 414 1,054 1,249
Money market funds - 81 58 333
Federal funds sold and securities
purchased under agreements to resell 15 73 88 98
Deposits with banks 5 11 41 43
---------------------------------------------------------
Total interest income 16,411 17,195 49,367 50,592
---------------------------------------------------------
Interest expense:
Deposits 2,703 3,670 9,215 11,782
Federal funds purchased and securities
sold under agreements to repurchase 155 272 466 695
Notes payable 653 750 1,889 1,863
---------------------------------------------------------
Total interest expense 3,511 4,692 11,570 14,340
---------------------------------------------------------
Net interest income:
Net interest income 12,900 12,503 37,797 36,252
Provision for loan losses 831 884 1,900 2,019
---------------------------------------------------------
Net interest income after provision for loan losses 12,069 11,619 35,897 34,233
---------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 2,974 2,827 8,653 7,973
Other service charges and fees 3,458 1,545 8,752 4,731
---------------------------------------------------------
Total noninterest income 6,432 4,372 17,405 12,704
---------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 7,428 6,203 21,282 17,750
Net occupancy expense 764 616 2,111 1,761
Furniture and equipment expense 1,188 1,057 3,302 3,001
Other expense 3,448 3,400 9,958 9,530
---------------------------------------------------------
Total noninterest expense 12,828 11,276 36,653 32,042
---------------------------------------------------------
Earnings:
Income before provision for income taxes 5,673 4,715 16,649 14,895
Provision for income taxes 1,787 1,460 5,531 4,861
---------------------------------------------------------
Net income $ 3,886 $ 3,255 $ 11,118 $ 10,034
=========================================================
Comprehensive income $ 3,010 $ 3,453 $ 9,867 $ 10,780
=========================================================
Earnings per share:
Basic $ 0.506 $ 0.424 $ 1.448 $ 1.310
=========================================================
Diluted $ 0.500 $ 0.421 $ 1.435 $ 1.301
=========================================================
Cash dividends per common share $ 0.17 $ 0.16 $ 0.49 $ 0.47
=========================================================
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)
Nine Months Ended
9/30/2003 9/30/2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,118 $ 10,034
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,888 1,085
Provision for loan losses 1,900 2,019
Gain on sale of premises and equipment (5) -
Net amortization of investment securities 931 582
Originations of loans held for sale (408,141) (102,365)
Proceeds from sale of loans held for sale 411,359 104,369
Net change in:
Miscellaneous other assets (4,543) (2,193)
Miscellaneous other liabilities 372 1,405
-----------------------------
Net cash provided by operating activities 14,879 14,936
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale - -
Proceeds from maturities of investment securities held to maturity 3,671 2,619
Proceeds from maturities of investment securities available-for-sale 91,661 176,240
Purchases of investment securities available-for-sale (95,047) (158,928)
Purchases of investment securities held-to maturity (475) (1,072)
Net increase in customer loans (51,989) (93,583)
Recoveries of loans previously charged off 539 223
Purchases of premises and equipment (5,293) (8,314)
Proceeds from sale of premises and equipment 21 -
-----------------------------
Net cash used by investing activities (56,912) (82,815)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 35,349 79,174
Net increase in federal funds purchased
and securities sold under agreements to repurchase 7,299 12,009
Federal Home Loan Bank advances 44,000 -
Repayment of Federal Home Loan Bank advances (44,000) -
Common stock issuance 210 490
Common stock repurchase (53) (265)
Dividends paid (3,763) (3,275)
Stock options exercised 91 78
-----------------------------
Net cash provided by financing activities 39,133 88,211
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,900) 20,332
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 40,514 41,175
-----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,614 $ 61,507
=============================
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
September 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 nine months ended September 30,
2003 and 2002 are as follows:
3 Months Ended 9 Months Ended
9/30/03 9/30/02 9/30/03 9/30/02
-------- ------- -------- -------
Basic 7,682,611 7,670,216 7,678,418 7,661,533
Diluted 7,764,910 7,739,106 7,750,205 7,715,323
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 September 30, 2003, commitments to extend credit and standby
letters of credit totaled $247,206,000. The Company does not anticipate any
material losses as a result of these transactions.
Note 5 - Stock-Based Compensation:
During 1999 and 1996, the 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 September 30, 2003):
Three Months Ended Nine Months Ended
(In thousands of dollars, except per share data) 9/30/2003 9/30/2002 9/30/2003 9/30/2002
--------- --------- --------- ---------
Net income, as reported $ 3,886 $ 3,255 $ 11,118 $ 10,034
Less, total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects 56 18 168 87
----------------------------- -----------------------------
Pro forma net income $ 3,830 $ 3,237 $ 10,950 $ 9,947
============================= =============================
Earnings per share:
Basic - as reported $ 0.51 $ 0.42 $ 1.45 $ 1.31
============================= =============================
Basic - pro forma $ 0.50 $ 0.42 $ 1.43 $ 1.30
============================= =============================
Diluted - as reported $ 0.50 $ 0.42 $ 1.43 $ 1.30
============================= =============================
Diluted - pro forma $ 0.49 $ 0.42 $ 1.41 $ 1.29
============================= =============================
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:
Nine Months Ended
-------------------
9/30/2003 9/30/2002
--------- ---------
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. In October 2003, the Company announced a
preliminary agreement to acquire another institution's bank branch in Denmark,
South Carolina. Pending regulatory approvals, the purchase is expected to occur
in the first quarter of 2004 and provide South Carolina Bank and Trust, N.A.
with an enhanced presence in that market. 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 third quarter of 2003, the Company had consolidated net income of
$3,886,000, an increase of 19.4 percent over the $3,255,000 earned in the third
quarter of 2002. Diluted earnings per share were $0.50 for the three months
ended September 30, 2003, a 19.1 percent increase over the $0.42 per share
earned in the third quarter of 2002. Net income for the first nine months of
2003 was $11,118,000, an increase of 10.8 percent over the $10,034,000 earned
for the same period in 2002. Diluted earnings per share were $1.43 for the nine
months ended September 30, 2003, a 10.0 percent increase over the $1.30 per
share earned during the first nine months of 2002.
NET INTEREST INCOME
For the third quarter of 2003, net interest income was $12,900,000, an
increase of $397,000, or 3.2 percent, over $12,503,000 for the same period in
2002. For the first nine months of 2003, net interest income was $37,797,000, an
increase of $1,545,000, or 4.3 percent, compared with $36,252,000 for the same
period a year earlier. This increase was largely the result of significantly
lower rates paid on higher average levels of interest-bearing liabilities in the
first nine 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 prolonged low interest rate environment has
continued to pressure the net interest margins of depository institutions. For
the first nine months of 2003, the Company's non-taxable equivalent yield on
interest earning assets was 5.86 percent, as compared with 6.71 percent during
the same period in 2002, a decrease of 85 basis points. The cost of
interest-bearing liabilities used to fund most of these assets decreased 62
basis points from 2.31 percent in 2002 to 1.69 percent in 2003. Thus, comparing
the first nine months of 2003 and 2002, the yield on interest earning assets
declined more rapidly than interest rates paid on interest-bearing liabilities.
Consequently, during the first nine-month periods of 2003 and 2002, the net
interest margin, on a taxable equivalent basis, decreased from 4.90 percent to
4.57 percent.
Loans comprise the largest category of earning assets. As of September 30,
2003, loans, net of unearned income and excluding mortgage loans held for sale,
were $913,381,000, compared with $863,422,000 at December 31, 2002. This
increase of $49,959,000, or 5.8 percent, was most noticeable in the commercial
real estate and residential mortgage loan categories. Mortgage loans held for
sale decreased by $3,217,000, or 8.2 percent, from $39,141,000 at December 31,
2002 to $35,924,000 at September 30, 2003, reflecting some upward long-term rate
movement during the second and third quarters of 2003. For the third quarter of
2003, interest and fees on portfolio loans and interest on mortgage loans held
for sale, were $14,867,000, compared with $14,721,000 for the comparable period
in 2002, an increase of $146,000, or 1.0 percent. For the first nine months of
the year, interest and fees on portfolio loans and interest on mortgage loans
held for sale were $44,342,000, compared with $43,083,000 for the same period in
2002, an increase of $1,259,000, or 2.9 percent. Higher loan volumes offset the
effects of declining interest rates during the first three quarters of 2003.
During this period, loans, including mortgage loans held for sale, averaged
$943,204,000 and decreased in yield by 93 basis points to 6.27 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, the second largest category of earning assets, 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 September 30, 2003,
investment securities were $162,192,000, compared to $164,951,000 at December
31, 2002. The composition of the portfolio remained relatively consistent during
the first nine months of 2003, with a bias toward shorter maturities in the
continuing low rate environment. At the end of the third quarter of 2003, the
portfolio included $20,060,000 of short-term government agency securities, a
decrease of $1,881,000, or 8.6 percent, from $21,941,000 invested at December
31, 2002.
For the quarter ended September 30, 2003, interest earned on investment
securities was $1,524,000, compared with $2,309,000 for the comparable period in
2002, a decrease of $785,000, or 34.0 percent. For the nine months ended
September 30, 2003, interest income was $4,838,000, compared with $7,035,000 for
the same period in 2002. This decrease of $2,197,000, or 31.2 percent, was the
result of significantly lower yields in 2003 and a cautious bias toward
shorter-term securities.
For the first nine months of 2003, investment securities averaged
$170,220,000 with a non-taxable equivalent yield of 3.91 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 sales of securities during the first nine
months of 2003 or 2002. As of September 30, 2003, the Company had unrealized
gains of $1,600,000 and $460,000, 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 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 September 30, 2003. For the first
nine months of 2003, interest income of $58,000 was earned on average money
market fund balances of $6,526,000. For the same period in 2002, interest income
of $333,000 was earned on average balances of $25,181,000.
During the first nine months of 2003, the average balance of
interest-bearing liabilities was $917,877,000, a $75,658,000, or 9.0 percent,
increase over the twelve-month average of $842,219,000 in 2002. Interest expense
of $11,570,000 was incurred on an average rate of 1.69 percent for the first
nine months of 2003, compared with expense of $18,748,000 and an average rate of
2.23 percent for the full year 2002. At September 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 September 30, 2003
was $831,000, compared with $884,000 for the same period in 2002, a decrease of
6.0 percent. For the nine months ended September 30, 2003, the provision was
$1,900,000, compared to $2,019,000 for the
same period in 2002, a decrease of 5.9 percent. The provision is intended to
accommodate loan growth and the level of charge-offs. The allowance for loan
losses was $11,473,000, or 1.26 percent, of outstanding loans at September 30,
2003 and $11,065,000, or 1.28 percent, of outstanding loans at December 31,
2002. The allowance at September 30, 2003 provided 2.0 times coverage of
nonperforming loans, which totaled $5,724,000, or 0.63 percent, of period end
loans. The allowance for loan losses also provides approximately 6.2 times
coverage of third quarter annualized net charge-offs. In 2003, net charge-offs
for the third quarter and year-to-date were $470,000 and $1,492,000,
respectively. This represents an annualized 0.21 percent of average loans, net
of unearned income, for the quarter and 0.22 percent for the first nine months.
In the prior year, net charge offs were $424,000, or 0.21 percent, of average
loans for the third quarter and $1,227,000, or 0.21 percent, of average loans
for the first nine months.
While some recent statistics have been encouraging, there remains much
uncertainty as to the timing or strength of an economic upturn. In this climate,
management anticipates that charge offs in the near term will continue at
percentage of loan levels reasonably similar to the experience thus far in 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 $1,540,000 at September
30, 2003 and $1,051,000 at the December 31, 2002.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 2003 was $6,432,000, compared
with $4,372,000 for the same period in 2002, an increase of $2,060,000, or 47.1
percent. For the first nine months of 2003, noninterest income was $17,405,000,
compared with $12,704,000 for the same period in 2002, an increase of
$4,701,000, or 37.0 percent. In the nine-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 $3,360,000, or 156.4 percent, reflecting strong residential loan
production. Service charges on deposit accounts increased by $800,000, or 10.2
percent, in line with the 11.1 percent increase in average total deposits in the
comparative nine-month periods.
Noninterest expense for the third quarter of 2003 was $12,828,000, an
increase of $1,552,000, or 13.8 percent, from $11,276,000 for the same period in
2002. For the nine months ended September 30, 2003, noninterest expense
increased $4,611,000, or 14.4 percent, to $36,653,000 from $32,042,000 in the
first nine months of 2002. Salaries and employee benefits increased $1,225,000,
or 19.8 percent, to $7,428,000 from the third quarter of 2002 to the same period
in 2003. Comparing nine-month periods, salaries and employee benefits increased
$3,532,000, or 19.9 percent, to $21,282,000 in 2003. Other expense was
$3,448,000 in the third quarter of 2003, an increase of $48,000, or 1.4 percent,
from the third quarter of 2002. For the first nine months of 2003, other expense
was $9,958,000, an increase of $428,000, or 4.5 percent, from the same period a
year earlier.
Expense increases during the first nine months of 2003 were attributable to
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 $3,886,000 for the third quarter of 2003, an increase of
$631,000, or 19.4 percent, compared with $3,255,000 in the third quarter of
2002. For the first three quarters of 2003, net income was $11,118,000, an
increase of $1,084,000, or 10.8 percent, compared with $10,034,000 in the
previous year. In nine-month comparisons, the $4,823,000, or 38.3 percent,
increase in noninterest income was the main driver of earnings growth. Net
interest income contributed with an increase of $1,423,000, or 3.9 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 September 30, 2003,
shareholders' equity was $109,848,000, an increase of $6,352,000, or 6.1
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 ratios at September 30, 2003 and December 31, 2002
were 11.68 and 11.67, respectively. The total risk-weighted asset capital ratios
were 12.94 at the end of the third quarter of 2003 and 12.92 at December 31,
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 September
30, 2003, the Company's leverage ratio was 8.59 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:
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).
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, Item 12, dated July 17, 2003 and furnished to
the Securities and Exchange Commission on July 17, 2003.
Current Report on Form 8-K, Item 9, dated August 6. 2003 and furnished to
the Securities and Exchange Commission on August 6, 2003.
Current Report on Form 8-K, Item 9, dated August 7, 2003 and furnished to
the Securities and Exchange Commission on August 7, 2003.
Current Report on Form 8-K, Item 9, dated August 21, 2003 and furnished to
the Securities and Exchange Commission on August 21, 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: November 13, 2003 /s/ C. John Hipp, III
---------------------
President and
Chief Executive Officer
Date: November 13, 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.