U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-23976
FIRST NATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1232965
------------------------------------ ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
112 WEST KING STREET, STRASBURG, VIRGINIA 22657
-----------------------------------------------
(Address of Principal Executive Offices)
540-465-9121
------------
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Indicate by check 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 ___.
As of AUGUST 11, 2003, the number of outstanding shares of registrant's common
stock, par value $2.50 per share was: 1,462,062.
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
(In thousands of dollars except per share data)
(Unaudited) (Audited)
June 30, December 31,
ASSETS: 2003 2002
--------------------- ----------------------
Cash and due from banks $ 14,844 $ 14,920
Federal funds sold 11,789 2,791
Securities available-for-sale, at fair value 53,245 54,485
Loans held for sale - 1,348
Loans, net of allowance for loan
losses of $2,369 and $2,162 225,380 210,440
Bank premises and equipment, net 10,180 8,424
Accrued interest receivable 1,351 1,403
Other assets 2,954 2,125
-------------------------------------------
Total assets $ 319,743 $ 295,936
===========================================
LIABILITIES:
Deposits
Non-interest bearing demand deposits $ 51,971 $ 36,581
Savings and interest bearing demand deposits 109,313 107,119
Time deposits 104,160 99,312
-------------------------------------------
Total deposits 265,444 243,012
Long-term debt 26,580 26,605
Trust preferred capital notes 3,000 --
Accrued expenses and other liabilities 2,052 2,065
-------------------------------------------
Total liabilities 297,076 271,682
STOCKHOLDERS' EQUITY:
Common stock; par value $2.50 and $5.00 per share; authorized $ 3,655 $ 3,950
4,000,000 and 2,000,000 shares; issued and outstanding
1,462,062 shares June 30, 2003 and outstanding 790,031 shares
December 31, 2002, respectively
Surplus 1,465 1,465
Retained earnings 16,486 17,659
Accumulated other comprehensive income
1,061 1,180
Total stockholders' equity 22,667 24,254
-------------------------------------------
Total liabilities and stockholders' equity $ 319,743 $ 295,936
===========================================
Notes to consolidated financial statements are an integral part of these
statements.
2
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
(In thousands of dollars except per share data)
(Unaudited)
Three Months Ended
June 30,
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 3,903 $ 3,533
Interest on federal funds sold 10 26
Interest on deposits in banks 8 7
Interest and dividends on securities available
for sale:
Taxable 469 547
Nontaxable 89 77
--------- ---------
Total interest and dividend income 4,479 4,190
INTEREST EXPENSE:
Interest on deposits 1,341 1,502
Interest on federal funds purchased 1 -
Interest on long-term debt 411 410
Total interest expense 1,753 1,912
--------- ---------
Total non-interest income 2,726 2,278
Provision for loan losses 172 90
--------- ---------
Net interest income after
provision for loan losses 2,554 2,188
--------- ---------
NONINTEREST INCOME:
Service charges and other fees 580 250
Gains on sale of securities - 44
Gains on sale of loans 133 32
Other 199 187
--------- ---------
Total non-interest income 912 513
NONINTEREST EXPENSES:
Salaries and employee benefits 1,175 816
Occupancy expense 123 121
Equipment expense 183 146
Advertising 84 96
Professional fees 73 24
Other operating
expense 636 506
--------- ---------
Total non-interest expenses 2,274 1,709
--------- ---------
Income before income taxes 1,192 992
Provision for income taxes 400 316
--------- ---------
NET INCOME $792 $ 676
========= =========
EARNINGS PER COMMON SHARE,
basic and diluted * 0.54 0.43
========= =========
CASH DIVIDENDS PER COMMON SHARE* 0.19 0.17
Average common shares outstanding ========= =========
basic and diluted * 1,462,062 1,580,062
========= =========
Notes to consolidated financial statements are an integral part of these
statements.
*Restated to give retroactive effect of the two-for-one stock split declared on
April 16, 2003 and payable as of May 30, 2003.
3
FIRST NATIONAL CORPORATION
Consolidated Statements of Income
(In thousands of dollars except per share data)
(Unaudited)
Six Months Ended
June 30,
2003 2002
---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 7,602 $ 7,032
Interest on federal funds sold 25 62
Interest on deposits in banks 18 14
Interest and dividends on securities available
for sale:
Taxable 973 1,007
Nontaxable 161 154
--------- ---------
Total interest and dividend income 8,779 8,269
INTEREST EXPENSE:
Interest on deposits 2,710 2,936
Interest on federal funds purchased 1 -
Interest on long-term debt 817 840
Total interest expense 3,528 3,776
Net interest income 5,251 4,493
Provision for loan losses 330 180
--------- ---------
Net interest income after
provision for loan losses 4,921 4,313
NONINTEREST INCOME:
Service charges and other fees 1,107 491
Gains on sale of securities 16 114
Gains on sale of loans 213 69
Other 381 358
--------- ---------
Total non-interest income 1,717 1,032
NONINTEREST EXPENSES:
Salaries and employee benefits 2,205 1,609
Occupancy expense 251 235
Equipment expense 362 280
Advertising 157 160
Professional fees 145 65
Other operating expense 1,219 980
--------- ---------
Total non-interest expenses 4,339 3,329
--------- ---------
Income before income taxes 2,299 2,016
Provision for income taxes 763 638
--------- ---------
NET INCOME $1,536 $1,378
========= =========
EARNINGS PER COMMON SHARE,
basic and diluted * $1.03 $0.87
========= =========
CASH DIVIDENDS PER COMMON SHARE* $0.37 $0.34
========= =========
Average common shares outstanding
basic and diluted * 1,497,918 1,580,062
========= =========
Notes to consolidated financial statements are an integral part of these
statements.
*Restated to give retroactive effect of the two-for-one stock split declared on
April 16, 2003 and payable as of May 30, 2003.
4
FIRST NATIONAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 2003 and 2002
(In thousands of dollars)
(Unaudited)
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
----------- ------------ ----------- -------------------- --------------- ------------
Balance, December 31, 2001 $3,950 $ 1,465 $ 15,770 $ 415 $21,600
Comprehensive Income:
Net income -- -- 1,378 $1,378 1,378
Other comprehensive income, net of tax
Unrealized holding gains on
securities available-for-sale arising
during the period (net of tax of $257) 499
Reclassification on adjustment (net of tax (75)
of $39)
Other comprehensive income -- -- -- 424 424 424
(net of tax of $218)
Total comprehensive income $1,802
======
Cash dividends paid $.34 -- -- (537) -- (537)
--- ---- ------ ------- -------- ----- -------
Balance, June 30, 2002 $3,950 $ 1,465 $ 16,611 $ 839 $ 22,865
====== ======= ======== ===== ========
Accumulated
Common Retained Other Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
----------- ------------ ----------- -------------------- --------------- ------------
Balance, December 31, 2002 $ 3,950 $ 1,465 $ 17,659 $1,180 $ 24,254
Comprehensive income:
Net income -- -- 1,536 $ 1,536 1,536
Other comprehensive loss net of tax,
unrealized (loss) arising during the
period (net of tax, $57) (108)
Reclassification adjustment (net of tax, $5) (11)
----
Other comprehensive loss (net of
tax, $62) -- -- (119) (119) (119)
-----
Total comprehensive income $1,417
======
Acquisition of 118,000 shares of common stock (295) (2,154) (2,449)
Cash dividends paid $.38 -- -- (555) -- (555)
------ ------ ------- ------- --------
Balance, June 30, 2003 $3,655 $1,465 $16,486 $ 1,061 $ 22,667
====== ====== ======= ======= ========
Notes to consolidated financial statements are an integral part of these
statements
6
22
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
Six Months Ended
June 30,
--------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,536 $ 1,378
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 286 205
Origination of loans available for sale (14,436) (6,010)
Proceeds from loans available for sale 15,997 6,788
Provision for loan losses 330 180
(Gain) on sale of securities available-for-sale (16) (114)
Accretion of security discounts (17) (7)
(Gain) on sale of loans (213) (69)
Amortization of security premiums, net 282 139
Changes in other assets and other liabilities:
(Increase) decrease in accrued interest receivable 52 (70)
(Increase) in other assets (303) (205)
Increase in accrued expenses and other liabilities 48 153
-------- --------
Net cash provided by operating activities $ 3,546 $ 2,368
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $(15,270) $ (9,281)
Purchase of securities available-for-sale (11,570) (17,574)
Proceeds from sales of securities available-for-sale 1,081 5,352
Proceeds from calls, maturities, and principal payments on
securities available-for-sale 10,773 4,636
(Increase) in federal funds sold (8,998) (215)
Purchase of bank premises and equipment (2,041) (1,191)
-------- --------
Net cash (used in) investing activities $(26,025) $(18,273)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits $ 17,584 $ 17,748
Net increase in time deposits 4,848 5,906
Net (decrease) in long-term debt (25) (2,076)
Proceeds from issuance of trust preferred capital notes 3,000 --
Cash dividends paid (555) (537)
Acquisition of common stock (2,449) --
-------- --------
Net cash provided by financing activities $ 22,403 $ 21,041
-------- --------
Net increase (decrease) in cash and cash equivalents (76) $ 5,136
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD 14,920 6,754
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 14,844 $ 11,890
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 3,574 $ 3,800
======== ========
Cash payments for income taxes $ 690 $ 578
======== ========
INVESTING AND FINANCING
-------- --------
Unrealized gain (loss) on securities available for sale $ (181) $ 642
======== ========
Notes to consolidated financial statements are an integral part of these
statements.
7
FIRST NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements of First
National Corporation and its subsidiaries (the Company) have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information. All significant
intercompany balances and transactions have been eliminated. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments and reclassifications consisting of a
normal and recurring nature considered necessary to present fairly the
financial positions as of June 30, 2003 and December 31, 2002, the results
of operations for the three and six months ended June 30, 2003 and 2002,
and statements of cash flows and changes in stockholders' equity for the
six months ended June 30, 2003 and 2002.
Operating results for the six month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
2. Investment Securities
Amortized cost and carrying amount (estimated market value) of securities
available-for-sale are summarized as follows:
June 30, 2003
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market Value
Cost Gains Losses
---------------- ---------------- -------------- --------------
(in thousands of dollars)
Obligations of U.S. government corporations
and agencies $ 43,633 $ 1,158 $ -- $ 44,791
Obligations of state/political subdivisions 6,417 379 -- 6,796
Corporate securities 3 71 -- 74
Other securities 1,584 -- -- 1,584
---------------- ---------------- -------------- --------------
$ 51,637 $ 1,608 $ -- $ 53,245
================ ================ ============== ==============
8
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Securities available-for-sale at December 31, 2002 consist of the
following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ------------- --------------- -------------
(in thousands of dollars)
Obligations of U.S. government
Corporations and agencies $ 44,419 $ 1,423 $ -- $ 45,902
Obligations of states/political subdivisions 6,002 235 -- 6,237
Corporate securities 4 71 -- 75
Other securities 2,271 -- -- 2,271
-------------- ------------- --------------- -------------
$ 52,696 $ 1,789 $ -- $ 54,485
============== ============= =============== =============
3. Loans
Major classifications of loans are summarized as follows:
June 30, 2003 December 31, 2002
-------------------------------------------------
(in thousands of dollars)
Commercial $ 30,805 $ 28,606
Real estate -1-4 family residential 67,243 58,705
Real estate -secured by farmland 2,124 2,112
Real estate -non-farm, non-residential 76,446 67,680
Real estate -construction 15,395 12,172
Consumer 35,736 43,327
------------------------- -----------------------
Total loans 227,749 212,602
Less allowance for loan losses (2,369) (2,162)
------------------------- -----------------------
Loans, net $ 225,380 $ 210,440
========================= =======================
9
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
4. Capital Requirements
A comparison of the capital of the Company and its wholly-owned subsidiary,
First Bank (the "Bank"), as of June 30, 2003 with the minimum regulatory
guidelines is as follows:
Minimum Minimum to be
Actual Guidelines "Well-Capitalized"
------ ---------- ------------------
Total Risk-Based Capital:
Company 11.42% 8.00% --
Bank 11.32% 8.00% 10.00%
Tier 1 Risk-Based Capital:
Company 10.40% 4.00% --
Bank 10.32% 4.00% 6.00%
Leverage Ratio:
Company 7.97% 4.00% --
Bank 7.86% 4.00% 5.00%
5. Trust Preferred Capital Notes
On March 11, 2003, First National (VA) Statutory Trust I (the "Trust"), a
wholly-owned subsidiary of the Company, was formed for the purpose of
issuing redeemable capital securities. On March 26, 2003, $3 million of
trust preferred securities were issued through a pooled underwriting. The
securities have a LIBOR-indexed floating rate of interest. The interest
rate at June 30, 2003 was 4.16%. The securities have a mandatory
redemption date of March 26, 2033, and are subject to varying call
provisions beginning March 26, 2008. The principal asset of the Trust is
$3 million of the Company's junior subordinated debt securities with
maturities and interest rates like the capital securities.
The Trust preferred securities may be included in Tier I capital for
regulatory capital adequacy purposes as long as their amount does not
exceed 25% of Tier I capital, including total trust preferred securities.
The portion of the trust preferred securities not considered as Tier I
capital, if any, may be included in Tier 2 capital. The total amount ($3
million) of trust preferred securities issued by the Trust can be included
in the Company's Tier I capital.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
This management's discussion and analysis and other portions of this report,
contain forward-looking statements within the meaning of the Securities and
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. In some cases,
forward-looking statements can be identified by use of words such as "may,"
"will," "anticipates," "believes," "expects," "plans," "estimates," "potential,"
"continue," "should," and similar words or phrases. These statements are based
upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policy, competitive factors,
and other conditions which by their nature, are not susceptible to accurate
forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the
forward-looking statements are based, actual future operations and results in
the future may differ materially from those indicated herein. Readers are
cautioned against placing undue reliance on any such forward-looking statements.
The Company does undertake to update any forward-looking statements to reflect
occurrences or events that may not have been anticipated as of the date of such
statements.
General
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of First National Corporation and
its subsidiaries (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this report. The Company is the parent bank holding company for
First Bank (the "Bank"), a Virginia state chartered bank that offers a full
range of banking services through nine branch offices, principally to
individuals and small to medium-size businesses in the Northern Shenandoah
Valley area, including the counties of Shenandoah, Frederick and Warren.
Critical Accounting Policies
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial
information contained within our statements is, to a significant extent,
financial information that is based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the
losses that may be sustained in our loan portfolio. The allowance is based on
two basic principles of accounting: (i) Statement of Financial Accounting
Standards (SFAS) No. 5 "Accounting for Contingencies," which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires
that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has two basic components: the specific allowance
and the formula allowance. Both of these components is determined based upon
estimates that can and do change when the actual events occur.
The specific allowance is used to individually allocate an allowance for larger
balance, non-homogeneous loans. The specific allowance uses various techniques
to arrive at an estimate of loss. First, analysis of
11
the borrower's overall financial condition, resources and payment record; the
prospects for support from financial guarantors; and the fair market value of
collateral are used to estimate the probability and severity of inherent losses.
Additionally, historical default rates and loss severities, internal risk
ratings, industry and market conditions and trends, and other environmental
factors are considered. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
The formula allowance is used for estimating the loss on pools of
smaller-balance, homogeneous loans; including residential mortgage loans,
installment loans, other consumer loans, as well as outstanding loan
commitments. Also, a formula allowance is used for the remaining pool of larger
balance, non-homogeneous loans which were not allocated a specific allowance
upon their review. The formula allowance begins with estimates of probable
losses inherent in the homogeneous portfolio based upon various statistical
analyses. These include analysis of historical delinquency and loss experience,
together with analyses that reflect current economic trends and conditions. The
formula allowance uses a historical loss view as an indicator of future losses.
As a result, even though this history is regularly updated with the most recent
loss information, it could differ from the loss incurred in the future.
Results of Operations
Total assets increased $23.8 million, or 8.0%, from $295.9 million at December
31, 2002 to $319.7 million at June 30, 2003 as total deposits grew $22.4
million, or 9.2%, from $243.0 million to $265.4 million. The deposit growth
funded an increase in loans of $14.9 million and an increase of $9.0 million in
federal funds sold.
Deposit growth occurred primarily from demand deposits, which increased $15.4
million or 42.1%, from $36.6 million at December 31, 2002 to $52.0 million at
June 30, 2003. Other deposit categories also increased, with savings and
interest bearing demand deposits increasing $2.2 million, or 2.1%, from $107.1
million to $109.3 million. Time deposits rose $4.8 million or 4.9% over the
prior period.
For the six months ended June 30, 2003 net income of $1.5 million reflected an
increase of 11.5% compared to $1.4 million for the six months ended June 30,
2002 as net interest income increased $758 thousand, or 16.9%, non-interest
income rose $685 thousand, or 66.4%, and non-interest expense was up $1.0
million, or 30.3%. Provisions for loan losses for the six-month period increased
over the prior year by $150 thousand. Earnings per share of $1.03 were up $0.16,
or 18.4% from $.87 for the comparable period in 2002. The Company's annualized
return on average assets and return on average equity were 1.02% and 13.50% for
the current six month period compared to 1.09% and 12.50% for the six months
ended June 30, 2002.
Stockholders' equity decreased $1.6 million from $24.2 million at December 31,
2002 to $22.7 million at June 30, 2003 on earnings of $1.5 million, a decrease
in accumulated other comprehensive income of $119 thousand, while paying cash
dividends of $555 thousand. On February 26, 2003 the corporation repurchased
118,000 shares (as restated for a two for one stock split) of outstanding common
stock at a cost of $2.4 million.
Net Interest Income
Net interest income increased $758 thousand, or 16.9%, from $4.5 million for the
six months ended June 30, 2002 to $5.3 million for the six-month period ended
June 30, 2003. Total average earning assets outstanding grew from $243.1 million
as of June 30, 2002 to $282.9 million as of June 30, 2003, and the net interest
spread increased from 3.19% in 2002 to. 3.32% in 2003. The net interest margin
on earning assets increased from 3.80% for the six months ended June 30, 2002 to
3.82% for the six month period ended June 30, 2003. As interest-bearing
liabilities repriced faster than earning assets during a declining interest rate
environment, the Company's yield on earning assets dropped 61 basis points from
6.94% for the six months ended June 30, 2002 to 6.33% for the six months ended
June 30, 2003, while the average rate paid on interest bearing liabilities
decreased 74 basis points from 3.75% to 3.01%; as a result the net interest
spread increased 13 basis points. The following table shows the average balance
sheet, interest rate spread and net interest margin for the six months ended
June 30, 2003 and 2002.
12
FIRST NATIONAL CORPORATION
AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
Six Months Ended June 30,
2003 2002
---- ----
(000) (000)
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(3) Balance Expense Rate(3)
------- ------- ------- ------- ------- -------
ASSETS
Balances at correspondent banks - interest $1,480 $18 2.50% $1,452 $14 1.98%
bearing
Securities:
Taxable 46,710 973 4.20% 39,459 1,007 5.15%
Tax-exempt (1) 6,505 244 7.56% 6,450 234 7.31%
----- --- ----- ---
Total Securities 53,215 1,217 4.61% 45,909 1,241 5.45%
Loans: (2)
Taxable 221,889 7,560 6.87% 187,345 7,005 7.54%
Tax-exempt (1) 1,747 64 7.36% 1,002 40 7.95%
----- -- ----- --
Total Loans 223,636 7,624 6.87% 188,347 7,045 7.54%
Federal funds sold 4,541 25 1.12% 7,370 62 1.69%
----- -- ----- --
Total earning assets 282,872 8,884 6.33% 243,077 8,362 6.94%
Less: allowance for loan losses (2,278) (2,030)
Total non-earning assets 21,722 14,720
------ ------
Total Assets $302,316 $255,768
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
Checking $54,262 $553 2.06% $22,713 $189 1.68%
Money market savings 9,197 43 0.93% 7,543 63 1.69%
Regular savings 44,344 54 0.25% 56,944 554 1.96%
Time deposits:
Less than $100,000 67,445 1,384 4.14% 60,167 1,513 5.07%
$100,000 and more 34,759 676 3.92% 28,424 617 4.38%
------ --- ------ ---
Total interest bearing deposits 210,007 2,710 2.60% 175,791 2,936 3.37%
Federal funds purchased 97 1 1.79% 3 2.17%
Long-term debt 26,594 817 6.20% 27,366 840 6.19%
------ --- ------ ---
Total interest bearing liabilities 236,698 3,528 3.01% 203,160 3,776 3.75%
Non-interest bearing liabilities:
Demand deposits 40,416 28,402
Other liabilities 2,252 1,980
----- -----
Total liabilities 279,366 233,542
Stockholders' equity 22,950 22,226
------ ------
Total liabilities and stockholders' equity $302,316 $255,768
======== ========
Net interest income $5,355 $4,586
====== ======
Interest rate spread 3.32% 3.19%
Interest expense as a percent of average
earning assets
2.52% 3.13%
Net interest margin 3.82% 3.80%
(1) Income and yields are reported on a taxable-equivalent basis assuming a
federal tax rate of 34% in 2003 and 2002.
(2) Loans placed on a nonaccrual status are reflected in the balances.
(3) Annualized
13
Allowance for Loan Losses / Provision for Loan Loss Expense
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses reflective of the
risks in the loan portfolio. For the six months ended June 30, 2003 charge-offs
totaled $143 thousand compared to $130 thousand for the same period ended June
30, 2002. The provision for loan loss expense in the first six months of 2003
and 2002 was $330 thousand and $180 thousand, respectively. The total allowance
for loan losses of $2.4 million at June 30, 2003 increased 9.6% from $2.2
million at December 31, 2002, and increased 16.1%, from $2.0 million at June 30,
2002. The increases in the total allowance for loan losses are reflective of
charge-off activity, identified problem loans and the growth in loans as net
loans outstanding increased $14.9 million, or 7.1%, from $210.4 million at
December 31, 2002 to $225.4 million at June 30, 2003 and increased $31.3
million, or 16.2%, from $194.0 million at June 30, 2002. Identified problem
loans increased from $3.9 million at June 30, 2002 to $7.7 million as of June
30, 2003.
Management feels that the allowance for loan losses is adequate. There can be no
assurance, however, that additional provisions for loan losses will not be
required in the future, including as a result of changes in the economic
assumptions underlying management's estimates and judgments, adverse
developments in the economy, on a national basis or in the Company's market
area, or changes in the circumstances of particular borrowers.
The Company generates a monthly analysis of the allowance for loan losses, with
the objective of quantifying portfolio risk into a dollar figure of inherent
losses. In addition, internal loan reviews are performed on a regular basis. The
determination of the allowance for loan losses is based on applying qualitative
and quantitative factors to each category of loans along with any specific
allowance for impaired and adversely classified loans within the particular
category. The resulting sum is then combined to arrive at a total allowance for
all categories. The Company assigns acceptable ranges of allowance factors to
each loan category for consideration of the qualitative factors. The total
allowance required changes as the various types and categories of loans change
as a percentage of total loans and as specific allowances are required due to an
increase in impaired and adversely classified loans.
The following schedule summarizes the changes in the allowance for loan losses:
Six Months Six Months Twelve Months
Ended Ended Ended
June 30, 2003 June 30, 2002 December 31, 2002
----------------------------------------------------------------------------
(in thousands of dollars)
Allowance, at beginning of period $ 2,162 $1,976 $1,976
Provision charged against income 330 180 405
Recoveries 20 14 31
Losses charged to reserve (143) (130) (250)
----- ----- ----
Net (charge-offs) recoveries (123) (116) (219)
----- ---- -----
Allowance, at end of period $ 2,369 $2,040 $2,162
======= ======= ======
Ratio of annualized net charge-offs during the
period to average loans outstanding
for the period: .11% .12% .22%
Risk Elements and Non-performing Assets
Non-performing assets consist of non-accrual loans, impaired loans, restructured
loans, and other real estate owned (foreclosed properties). The total
non-performing assets and loans that are 90 days or more
14
past due and still accruing interest at June 30, 2003, did not change from the
$1.4 million at December 31, 2002; however, they increased $783 thousand, or
123%, from $637 thousand at June 30, 2002.
Loans are placed in non-accrual status when in the opinion of management the
collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans. A loan remains on
non-accrual status until the loan is current as to both principal and interest
or the borrower demonstrates the ability to pay and remain current, or both.
The ratio of non-performing assets and loans past due 90 days and still accruing
to total assets decreased from 0.67% at December 31, 2002 to 0.63% at June 30,
2003, and increased from 0.33% at June 30, 2002. This ratio is expected to
remain at its low level relative to the Company's peers; however it may increase
from its current level. This expectation is based on identified problem loans on
June 30, 2003. As of June 30, 2003, there were $7.7 million of loans for which
management has identified risk factors which could impair repayment in
accordance with their terms, compared to $3.1 million at December 31, 2002.
These loans are mostly for commercial business purposes, are currently
performing and generally are well-secured.
Non-performing assets consist of the following:
June 30, 2003 June 30, 2002 December 31, 2002
--------------------------------------------------------------------------
(In Thousands of Dollars)
Non-accrual loans $ 588 $ 109 $ 166
Impaired loans 116 37 26
--- -- --
Total non-performing assets 704 146 192
Loans past due 90 days and still
Accruing 716 491 1,231
--- --- -----
Total non-performing assets and
loans past due 90 days and
still accruing $1,420 $ 637 $ 1,423
====== ===== =======
As a percentage of net loans 0.63% 0.33% 0.67%
As a percentage of total assets 0.44% 0.23% 0.48%
Non-Interest Income
Non-interest income increased $685 thousand, or 66.4%, from $1.0 million for the
six months ended June 30, 2002 to $1.7 million for the same period ended June
30, 2003. Service charges and other fees grew $616 thousand, or 125.5%, from
$491 thousand for the six months ended June 30, 2002 to $1.1 million for the
current six month period due to overall growth in deposit accounts and the
installation of an overdraft privilege program.
Non-Interest Expense
For the six months ended June 30, 2003, non-interest expense increased $1.0
million, or 30.3%, compared to the same period in 2002.
Salaries and employee benefits have increased $596 thousand for the six-month
period ended June 30, 2003, primarily as a result of additional employees. Other
operating expense increases of $239 thousand for the six months ended June 30
were up 24.4% due mostly to higher costs associated with the increased number of
deposit accounts. As a percentage of total revenue sources (tax equivalent) net
interest and
15
non-interest income) non-interest expense increased from 59.3% for the six
months ended June 30, 2002 to 61.3% for the same period in 2003.
Provision for Income Taxes
The Company's income tax provisions are adjusted for non-deductible expenses and
non-taxable interest after applying the U.S. federal income tax rate of 34%.
Provision for income taxes totaled $763 thousand and $638 thousand for the six
months ended June 30, 2003 and 2002, respectively.
Capital
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, and changing competitive conditions
and economic forces. The adequacy of the Company's capital is reviewed by
management on an ongoing basis. Management seeks to maintain a capital structure
that will assure an adequate level of capital to support anticipated asset
growth and to absorb potential losses.
The capital position of the Bank continues to meet regulatory requirements. The
primary indicators relied on by bank regulators in measuring the capital
position are the Tier 1 risk-based capital, total risk-based capital, and
leverage ratios. Tier 1 capital consists of common stockholders' equity less
goodwill. Total risk-based capital consists of Tier 1 capital and the allowance
for loan losses. Risk-based capital ratios are calculated with reference to
risk-weighted assets. The leverage ratio compares Tier 1 capital to total
average assets for the most recent quarter end. The Bank's Tier 1 risk-based
capital ratio was 10.32% at June 30, 2003, compared to 10.35% at December 31,
2002. The total risk-based capital ratio was 11.32% at June 30, 2003, compared
to 11.33% at December 31, 2002. The Bank's leverage ratio was 7.86% at June 30,
2003 compared to 7.81% at December 31, 2002. Based on these ratios, the Bank is
considered "well capitalized" under regulatory prompt corrective action
guidelines. The Company's Tier 1 risk-based capital ratio, total risk-based
capital ratio, and leverage ratio was 10.40%, 11.42% and 7.97%, respectively, at
June 30, 2003.
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts(collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003 and is not expected to have an
impact on the Company's consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement 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.
This Statement 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, except for mandatory redeemable
financial instruments of nonpublic entities. Adoption of the Statement did not
result in an impact on the Company's consolidated financial statements.
Repurchase of Common Stock
On February 25, 2003 the corporation purchased and retired 118,000 (as restated
for two for one split) shares of outstanding common stock of the corporation.
This purchase was approved by the Board of Directors at the February 19, 2003
meeting of the board.
16
Stock Split
On April 16, 2003 the Board of Directors of First National Corporation declared
a two for one stock split of the corporation's common stock, including
authorized and unissued shares. Both 2003 and 2002 financial statements have
been restated to reflect the stock split. The stock split was payable on May 30,
2003 to shareholders of record April 30, 2003. After the stock split was
completed, the corporation had 4 million shares of common stock authorized and
1,462,062 shares outstanding at a par value of $2.50 per share.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report. Based on that evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There were no significant changes in our internal controls or in
other factors that could materially affect, or are reasonably likely to
materially affect, these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
Reconciliation of Non-GAAP Measures
The net interest margin and efficiency ratios are presented on a fully
taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the
tax-favored status of income from certain loans and investments. Management
believes this measure to be the preferred industry measurement of net interest
income and provides a relevant comparison between taxable and non-taxable
investments. The efficiency ratio is measured by dividing noninterest expenses
by the sum of net interest income on a FTE basis and non-interest income.
Management excludes gains and losses from sales of investment securities when
computing the efficiency ratio because of the uncertainty as to timing and
amount of gain or loss to be recognized.
For the 6 Months Ended For the 3 Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in
thousands)
Net interest income $ 5,251 $ 4,493 $ 2,726 $ 2,278
Taxable-equivalent adjustment 104 93 57 46
Net interest income--taxable $ 5,355 $ 4,586 $ 2,783 $ 2,324
equivalent
Efficiency ratio 61.49 % 60.48 % 61.79 % 61.17 %
Impact of excluding securities 0.14 1.22 0.00 0.94
gains and losses
Adjusted efficiency ratio 61.35 % 59.26 % 61.79 % 60.23 %
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 2003 neither the Company nor the Bank was a party to any
legal proceedings other than routine litigation that is incidental to its
business.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
a) The Bank held its annual shareholders meeting on April 1, 2003.
b) The following Directors were elected:
Douglas C. Arthur Charles E. Maddox Jr.
Noel M. Borden John K. Marlow
Byron A. Brill W. Allen Nicholls
Elizabeth H. Cottrell Henry L. Shirkey
James A. Davis Alson H. Smith, Jr.
Christopher E. French Harry S. Smith
James R. Wilkins, III
c) The following matters were voted on during the annual shareholders meeting:
Votes were cast in the election of Directors as follows:
FOR WITHHELD
--- --------
Douglas C. Arthur 602,568 11,720
Noel M. Borden 600,492 13,796
Byron A. Brill 602,148 12,140
Elizabeth H. Cottrell 602,566 11,722
James A. Davis 597,901 16,387
Christopher E. French 602,223 12,065
Charles E. Maddox, Jr 600,861 13,427
John K. Marlow 602,555 11,733
W. Allen Nicholls 602,568 11,720
Henry L. Shirkey 601,777 12,511
Alson H. Smith,Jr 602,197 12,091
Harry S. Smith 602,568 11,720
James R. Wilkins, III 602,148 12,140
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) 31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
(b) Form 8-K
The Company filed a Current Report of Form 8-K with the Securities and
Exchange Commission on April 30, 2003. The Form 8-K reported items 5, 7
and 12 (under item 9) and attached as exhibits and incoporated by
reference two press releases, one of which announced a two-for-one stock
split, and the other the Company's financial results for the quarter
ended March 31, 2003.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2003 BY /s/ Harry S. Smith
--------------------------------------------
Harry S. Smith, President & CEO
Date: August 12, 2003 BY /s/ Stephen C. Pettit
--------------------------------------------
Stephen C. Pettit, Senior Vice President
& Chief Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.