UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
[ ] Transition Report Under Section 13 or 15(d)
of the Exchange Act
For the transition period from ____________ to _____________
Commission file number: 0-23976
FIRST NATIONAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Virginia (State or Other Jurisdiction of Incorporation or Organization) | 54-1232965 (I.R.S. Employer Identification No.) |
112 West King Street Strasburg, Virginia (Address of Principal Executive Offices) | 22657 (Zip Code) |
(540) 465-9121
(Issuer’s telephone number)
Check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 Exchange Act). Yes ___ No X
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
1,462,062 shares of Common Stock, par value
$2.50 per share, outstanding as of November 7, 2003.
PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
FIRST NATIONAL CORPORATION
Consolidated Balance Sheets
(In thousands of dollars except per share data)
ASSETS: | (Unaudited) September 30, 2003 | (Audited) December 31, 2002 |
Cash and due from banks | $ 11,220 | $ 14,920 |
Federal funds sold | 2,502 | 2,791 |
Securities available-for-sale, at fair value | 60,852 | 54,485 |
Loans held for sale | 995 | 1,348 |
Loans, net of allowance for loan losses of $2,494 and $2,162 | 228,061 | 210,440 |
Bank premises and equipment, net | 11,036 | 8,424 |
Accrued interest receivable | 1,265 | 1,403 |
Other assets | 3,197 | 2,125 |
Total assets | $ 319,128 | $ 295,936 |
LIABILITIES: | ||
Deposits Non-interest bearing demand deposits | $ 54,305 | $ 36,581 |
Savings and interest bearing demand deposits | 110,965 | 107,119 |
Time deposits | 99,725 | 99,312 |
Total deposits | 264,995 | 243,012 |
| ||
Long-term debt | 26,568 | 26,605 |
Company obligated mandatorily redeemable capital Securities | 3,000 | -- |
Accrued expenses and other liabilities | 1,780 | 2,065 |
Total liabilities | 296,343 | 271,682 |
STOCKHOLDERS’ EQUITY: | ||
Common stock; par value $2.50 and $5.00 per share; | 3,655 | 3,950 |
Surplus | 1,465 | 1,465 |
Retained earnings | 17,073 | 17,659 |
Accumulated other comprehensive income, net | 592 | 1,180 |
Total stockholders’ equity | 22,785 | 24,254 |
Total liabilities and stockholders’ equity | $ 319,128 | $ 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 September 30, 2003 2002 | Nine Months Ended September 30, 2003 2002 | |||
INTEREST AND DIVIDEND INCOME: Interest and fees on loans | $ 3,894 | $ 3,694 | $ 11,496 | $ 10,726 |
Interest on federal funds sold Interest on deposits in banks Interest and dividends on securities available for sale: Taxable | 13 8 470 | 11 19 632 | 38 26 1,443 | 73 33 1,639 |
Nontaxable | 85 | 76 | 246 | 230 |
Total interest and dividend income | 4,470 | 4,432 | 13,249 | 12,701 |
INTEREST EXPENSE: Interest on deposits Interest on federal funds purchased | 1,186 1 | 1,615 3 | 3,896 2 | 4,551 3 |
Interest on trust preferred capital notes | 31 | -- | 67 | -- |
Interest on long-term debt | 415 | 417 | 1,232 | 1,257 |
Total interest expense | 1,633 | 2,035 | 5,197 | 5,811 |
Net interest income | 2,837 | 2,397 | 8,052 | 6,890 |
Provision for loan losses | 188 | 105 | 518 | 285 |
Net interest income after provision for loan losses | 2,649 | 2,292 | 7,534 | 6,605 |
NONINTEREST INCOME: Service charges and other fees | 593 | 285 | 1,700 | 776 |
Gains on sale of securities | -- | 10 | 16 | 124 |
Gains on sale of loans | 137 | -- | 350 | 87 |
Other | 217 | 215 | 598 | 555 |
Total noninterest income | 947 | 510 | 2,664 | 1,542 |
NONINTEREST EXPENSES: Salaries and employee benefits | 1,226 | 889 | 3,431 | 2,498 |
Occupancy expense | 126 | 116 | 377 | 351 |
Equipment expense Advertising expense | 211 92 | 159 98 | 573 249 | 439 258 |
Professional fees | 86 | 63 | 231 | 128 |
Other operating expense | 648 | 457 | 1,831 | 1,437 |
Total noninterest expenses | 2,389 | 1,782 | 6,692 | 5,111 |
Income before income taxes | 1,207 | 1,020 | 3,506 | 3,036 |
Provision for income taxes | 342 | 319 | 1,105 | 957 |
NET INCOME | $ 865 | $ 701 | $ 2,401 | $ 2,079 |
EARNINGS PER COMMON SHARE, basic and diluted* | $ 0.59 | $ 0.44 | $ 1.62 | $ 1.32 |
CASH DIVIDENDS PER COMMON SHARE* | $ 0.19 | $ 0.17 | $ 0.56 | $ 0.51 |
Average common shares outstanding | ||||
basic and diluted* | 1,462,062 | 1,580,062 | 1,485,835 | 1,580,062 |
Notes to consolidated financial statements are an integral part of these statements.
*Restated for two-for-one stock split declared April 16, 2003.
3
FIRST NATIONAL CORPORATION
Consolidated Statements of Changes in Stockholders’ Equity
For the nine months ended September 30, 2003 and 2002
(In thousands of dollars)
(Unaudited)
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Comprehensive Income | Total | |
Balance, December 31, 2001 | $3,950 | $ 1,465 | $ 15,770 | $415 | $21,600 | |
Comprehensive Income: | ||||||
Net income | -- | -- | 2,079 | -- | $2,079 | 2,079 |
Other comprehensive income, net of tax, unrealized gains on securities available- for-sale arising during the period (net of tax of $482) | -- | -- | -- | -- | 865 | -- |
Reclassification adjustment (net of tax, $1) | (82) | |||||
Other comprehensive income (net of tax of $483) | -- | -- | -- | 783 | 783 | 783 |
Total comprehensive income | $2,862 | |||||
Cash dividends paid $.51 per share | -- | -- | (806) | -- | (806) | |
Balance, September 30, 2002 | $3,950 | $1,465 | $17,043 | $ 1,198 | $ 23,656 | |
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Comprehensive Income | Total | |
Balance, December 31, 2002 | $ 3,950 | $ 1,465 | $ 17,659 | $ 1,180 | $ 24,254 | |
Comprehensive income: | ||||||
Net income | -- | -- | 2,401 | -- | $2,401 | $2,401 |
Other comprehensive loss net of tax, unrealized (losses) arising during the period (net of tax, $297) |
|
|
| (577) |
| |
Reclassification adjustment (net of tax, $5) | (11) | |||||
Other comprehensive loss (net of tax, $302) | -- | -- | -- | (588) | (588) | (588) |
Total comprehensive income | $1,813 | |||||
Acquisition of 118,000 shares of common stock | (295) | (2,154) | (2,449) | |||
Cash dividends paid $.57 per share | -- | -- | (833) | -- | (833) | |
Balance, September 30, 2003 | $3,655 | $1,465 | $17,073 | $ 592 | $ 22,785 |
Notes to consolidated financial statements are an integral part of these statements
4
FIRST NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
Nine Months Ended September 30, | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | 2003 | 2002 |
Net income | $ 2,401 | $ 2,079 |
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization | 441 | 330 |
Origination of loans available for sale | (26,046) | (7,332) |
Proceeds from loans available for sale | 26,749 | 8.223 |
Provision for loan losses | 518 | 285 |
(Gain) on sale of securities available-for-sale | (16) | (124) |
Accretion of security discounts | (22) | (11) |
(Gain) on sale of loans | (350) | (87) |
Amortization of security premiums, net | 453 | 232 |
Changes in other assets and other liabilities: | ||
Decrease in accrued interest receivable | 138 | 10 |
(Increase) in other assets | (547) | (387) |
Increase in accrued expenses and other liabilities | 19 | 55 |
Net cash provided by operating activities | $ 3,738 | $ 3,273 |
CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) in loans | $ (18,138) | $ (24,196) |
Purchase of securities available-for-sale | (25,762) | (28,849) |
Proceeds from sales of securities available-for-sale | 1,081 | 6,813 |
Proceeds from calls, maturities, and principal payments on securities available-for-sale | 16,480 | 7,368 |
Decrease in federal funds sold | 289 | 3,708 |
Purchase of bank premises and equipment | (3,052) | (3,114) |
Net cash (used in) investing activities | $ (29,102) | $ (38,270) |
CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand and savings deposits | $ 21,570 | $ 33,375 |
Net increase in time deposits | 413 | 5,768 |
Net (decrease) in long-term debt | (37) | (2,089) |
Proceeds from issuance of trust preferred capital notes | 3,000 | -- |
Cash dividends paid | (833) | (807) |
Acquisition of common stock | (2,449) | -- |
Net cash provided by financing activities | $ 21,664 | $ 36,607 |
Net increase (decrease) in cash and cash equivalents | $ (3,700) | $ 1,610 |
CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD | 14,920 | 6,754 |
CASH AND CASH EQUIVALENTS – END OF PERIOD | $ 11,220 | $ 8,364 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||
Cash payments for interest | $ 5,295 | $ 5,887 |
Cash payments for income taxes | $ 1,139 | $ 924 |
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES | ||
Unrealized gain (loss) on securities available for sale | $ (892) | $ 1,185 |
Notes to consolidated financial statements are an integral part of these statements.
5
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 September 30, 2003 and December 31, 2002, the results of operations for the three and nine months ended September 30, 2003 and 2002, and statements of cash flows and changes in stockholders’ equity for the nine months ended September 30, 2003 and 2002.
Operating results for the nine month period ended September 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:
September 30, 2003 | ||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |
(In Thousands of Dollars) | ||||
Obligations of U.S. Agency and mortgage- | $ 49,844 | $ 676 | $ -- | $ 50,520 |
Obligations of state/political subdivisions | 8,524 | 165 | -- | 8,689 |
Corporate securities | 3 | 56 | -- | 59 |
Other securities | 1,584 | -- | -- | 1,584 |
|
| |||
$ 59,955 | $ 897 | $ -- | $ 60,852 | |
6
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Securities available-for-sale at December 31, 2002 consist of the following: | ||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |
(In Thousands of Dollars) | ||||
Obligations of U.S. Agency and mortgage- | $ 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:
September 30, 2003 | December 31, 2002 | |
(In Thousands of Dollars) | ||
Commercial | $ 29,238 | $ 28,606 |
Real estate –1-4 family residential | 67,210 | 58,705 |
Real estate –secured by farmland | 2,539 | 2,112 |
Real estate –non-farm, non-residential | 77,852 | 67,680 |
Real estate –construction | 19,310 | 12,172 |
Consumer | 34,406 | 43,327 |
Total loans | 230,555 | 212,602 |
Less allowance for loan losses | (2,494) | (2,162) |
Loans, net | $ 228,061 | $ 210,440 |
7
FIRST NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
4. Capital Requirements
A comparison of the Company’s and its wholly-owned subsidiary’s, First Bank (the “Bank”), capital as of September 30, 2003 with the minimum regulatory guidelines is as follows:
Actual | Minimum Guidelines | Minimum to be “Well-Capitalized” | |
Total Risk-Based Capital: Company | 11.33% | 8.00% | -- |
Bank | 11.22% | 8.00% | 10.00% |
Tier 1 Risk-Based Capital: | |||
Company | 10.29% | 4.00% | -- |
Bank | 10.20% | 4.00% | 6.00% |
Leverage Ratio: Company | 7.96% | 4.00% | -- |
Bank | 7.82% | 4.00% | 5.00% |
5.
Company Obligated Mandatorily Redeemable Capital Securities
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 September 30, 2003 was 4.29%. 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.
Under present regulations, 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. As of September 30, 2003, the total amount ($3 million) of trust preferred securities issued by the Trust can be included in the Company's Tier I capital.
8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
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 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 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 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 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
9
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 $23.2 million, or 7.8%, from $295.9 million at December 31, 2002 to $319.1 million at September 30, 2003 as total deposits grew $22.0 million, or 9.1%, from $243.0 million to $265.0 million. The deposit growth primarily funded an increase in loans of $17.6 million and an increase of $6.4 million in securities available for sale.
Deposit growth occurred primarily from demand deposits, which increased $17.7 million or 48.5%, from $36.6 million at December 31, 2002 to $54.3 million at September 30, 2003. Other deposit categories also increased, with savings and interest bearing demand deposits increasing $3.9 million, or 3.6%, from $107.1 million to $111.0 million.
For the nine months ended September 30, 2003 net income of $2.4 million reflected an increase of 15.5% compared to $2.1 million for the nine months ended September 30, 2002 as net interest income increased $1.2 million, or 16.9%, noninterest income rose $1.1 million, or 72.8%, and noninterest expense was up $1.6 million, or 30.9%. Provisions for loan losses for the nine-month period increased over the prior year by $233 thousand. Earnings per share of $1.62 were up $0.30, or 22.7%, for the nine months ended September 30, 2003, from $1.32 for the comparable period in 2002. The Company’s annualized return on average assets and return on average equity were 1.04% and 14.04% for the current nine month period compared to 1.05% and 12.26% for the nine months ended September 30, 2002.
Stockholders’ equity decreased $1.5 million from $24.3 million at December 31, 2002 to $22.8 million at September 30, 2003 on earnings of $2.4 million, a decrease in accumulated other comprehensive income of $588.4 thousand, while paying cash dividends of $833.4 thousand. On February 26, 2003 the Company repurchased 118,000 shares (as restated for two for one split) of outstanding common stock at a cost of $2.4 million.
Net Interest Income
Net interest income increased $1.2 million, or 16.9%, from $6.9 million for the nine months ended September 30, 2002 to $8.1 million for the nine-month period ended September 30, 2003. Total average earning assets outstanding grew from $250.7 million as of September 30, 2002 to $286.7 million as of September 30, 2003, and the net interest spread increased from 3.15% in 2002 to 3.36% in 2003. The net interest margin on earning assets increased from 3.74% for the nine months ended September 30, 2002 to 3.83% for the nine month period ended September 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 58 basis points from 6.83% for the nine months ended September 30, 2002 to 6.25% for the nine months ended September 30, 2003, while the average rate paid on interest bearing liabilities decreased 79 basis points from 3.68% to 2.89%. As a result the net interest spread increased 21 basis points. The following table shows the average balance sheet, interest rate spread and net interest margin for the nine months ended September 30, 2003 and 2002.
10
FIRST NATIONAL CORPORATION
AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
Nine Months Ended September 30,
2003 | 2002 | |||||||||
(In Thousands of Dollars) | ||||||||||
Annual | Annual | |||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||
Balance | Expense | Rate(3) | Balance | Expense | Rate(3) | |||||
ASSETS | ||||||||||
Balances at correspondent banks - interest bearing | $1,474 | $26 | 2.34% | $1,398 | $32 | 3.10% | ||||
Securities: | ||||||||||
Taxable | 47,972 | 1,443 | 4.02% | 43,376 | 1,639 | 5.04% | ||||
Tax-exempt (1) | 6,860 | 373 | 7.26% | 6,384 | 349 | 7.29% | ||||
Total Securities | 54,832 | 1,816 | 4.43% | 49,760 | 1,988 | 5.33% | ||||
Loans: (2) | ||||||||||
Taxable | 223,529 | 11,421 | 6.83% | 192,496 | 10,676 | 7.39% | ||||
Tax-exempt (1) | 2,141 | 113 | 7.05% | 1,231 | 76 | 8.25% | ||||
Total Loans | 225,670 | 11,534 | 6.83% | 193,727 | 10,752 | 7.40% | ||||
Federal funds sold | 4,774 | 38 | 1.07% | 5,768 | 74 | 1.70% | ||||
Total earning assets | 286,750 | 13,414 | 6.25% | 250,653 | 12,846 | 6.83% | ||||
Less: allowance for loan losses | (2,329) | (2,047) | ||||||||
Total non-earning assets | 24,479 | 16,407 | ||||||||
Total Assets | $308,900 | $265,013 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Interest bearing deposits: | ||||||||||
Checking | $54,909 | $784 | 1.91% | $29,864 | $445 | 1.99% | ||||
Money market savings | 9,633 | 58 | 0.81% | 7,681 | 92 | 1.60% | ||||
Regular savings | 44,156 | 72 | 0.22% | 54,597 | 765 | 1.87% | ||||
Time deposits: | ||||||||||
Less than $100,000 | 67,470 | 1,984 | 3.93% | 62,207 | 2,297 | 4.92% | ||||
$100,000 and more | 35,182 | 998 | 3.79% | 29,139 | 952 | 4.36% | ||||
Total interest bearing deposits | 211,350 | 3,896 | 2.46% | 183,488 | 4,551 | 3.31% | ||||
Federal funds purchased | 168 | 2 | 1.66% | 184 | 3 | 2.18% | ||||
Trust Pref. Sec. – Capital Notes | 2,077 | 67 | 4.34% | -- | -- | -- | ||||
Long-term debt | 26,587 | 1,232 | 6.20% | 27,115 | 1,257 | 6.18% | ||||
Total interest bearing liabilities | 240,182 | 5,197 | 2.89% | 210,787 | 5,811 | 3.68% | ||||
Non-interest bearing liabilities: | ||||||||||
Demand deposits | 43,690 | 29,551 | ||||||||
Other liabilities | 2,163 | 2,058 | ||||||||
Total liabilities | 286,035 | 242,396 | ||||||||
Stockholders' equity | 22,865 | 22,617 | ||||||||
Total liabilities and stockholders' equity | $308,900 | $265,013 | ||||||||
Net interest income | $8,217 | $7,035 | ||||||||
Interest rate spread | 3.36% | 3.15% | ||||||||
Interest expense as a percent of average earning assets | 2.42% |
3.09% | ||||||||
Net interest margin | 3.83% | 3.74% | ||||||||
(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
11
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 nine months ended September 30, 2003, charge-offs totaled $219 thousand compared to $175 thousand for the same period ended September 30, 2002. The provision for loan loss expense in the first nine months of 2003 and 2002 was $518 thousand and $285 thousand respectively. The total allowance for loan losses of $2.5 million at September 30, 2003 increased 15.4% from $2.2 million at December 31, 2002, and increased 17.8%, from $2.1 million at September 30, 2002. The increases\ in the total allowance for loan losses are reflective of charge-off activity, identified problem loans and growth in the loan portfolio as loans net of the allowance for loan losses increased $17.6 million, or 8.4%, from $210.4 million at December 31, 2002 to $228.0 million at September 30, 2003 and increased $19.3 million, or 9.2%, from $208.8 million at September 30, 2002. Identified problem loans increased from $3.3 million at September 30, 2002 to $9.4 million as of September 30, 2003.
Management has determined 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:
Nine Months | Nine Months | Twelve Months | |
Ended | Ended | Ended | |
September 30, 2003 | September 30, 2002 | December 31, 2002 | |
(In Thousands of Dollars) | |||
Allowance, at beginning of period | $ 2,162 | $1,976 | $1,976 |
Provision charged against income | 518 | 285 | 405 |
Recoveries | 33 | 31 | 31 |
Losses charged to reserve | (219) | (175) | (250) |
|
|
| |
Net (charge-offs) recoveries | (186) | (144) | (219) |
Allowance, at end of period | $ 2,494 | $2,117 | $2,162 |
Ratio of annualized net charge-offs during | .11% | .10% | .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 past due and still accruing interest at September 30, 2003, were $895 thousand, a decrease of $693
12
thousand from $1.6 million at December 31, 2002, and a decrease of $17 thousand from $912 thousand at September 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 0.48% at December 31, 2002 to 0.28% at September 30, 2003, and decreased from 0.32% at September 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 September 30, 2003, totaling $9.4 million 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:
September 30, 2003 | September 30, 2002 | December 31, 2002 | |
(In Thousands of Dollars) | |||
Non-accrual loans | $ 379 | $ 81 | $ 166 |
Impaired loans | 69 | 48 | 26 |
Total non-performing assets | 448 | 129 | 192 |
Loans past due 90 days and still Accruing | 447 | 783 | 1,397 |
Total non-performing assets and loans past due 90 days and still accruing | $ 895 | $ 912 | $1,589 |
As a percentage of net loans | 0.39% | 0.44% | 0.67% |
As a percentage of total assets | 0.28% | 0.32% | 0.48% |
Noninterest Income
Noninterest income increased $1.1 million, or 72.8%, from $1.5 million for the nine months ended September 30, 2002 to $2.7 million for the same period ended September 30, 2003. Service charges and other fees grew $925 thousand, or 119.2%, from $776 thousand for the nine months ended September 30, 2002 to $1.7 million for the current nine month period due to the overall growth in deposit accounts and the installation of an overdraft privilege program. Gains on sale of loans increased $263 thousand from $87 thousand at September 30, 2002 compared to $350 thousand at September 30, 2003.
Noninterest Expense
For the nine months ended September 30, 2003, noninterest expenses increased $1.6 million, or 30.9%, compared to the same period in 2002.
Salaries and employee benefits have increased $933 thousand for the nine-month period ended September 30, 2003, primarily as a result of additional employees. These employees include branch employees and loan officers to support our growth and expansion within our market area. Other operating expenses increased $394 thousand, or 27.4% from September 30, 2002 to 2003, due mostly to higher costs associated with the increased number of deposit accounts. As a percentage of total revenue sources (tax equivalent net interest income and noninterest income) noninterest expense increased from 59.6% for the nine months ended September 30, 2002 to 61.5% for the same period in 2003.
13
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 $1.1 million and $957 thousand for the nine months ended September 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 10.20% at September 30, 2003, compared to 10.35% at December 31, 2002. The total risk-based capital ratio was 11.22% at September 30, 2003, compared to 11.33% at December 31, 2002. The Bank’s leverage ratio was 7.82% at September 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 10.29%, 11.33% and 7.96%, respectively, at September 30, 2003.
Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor’s obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a material impact on the Company’s consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporation’s consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity’s activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46; however, the adoption of this Interpretation is not expected to have a material impact on the Company’s consolidated financial statements.
14
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 Company purchased and retired 118,000 (as restated for two for one split) shares of outstanding common stock of the Company. This purchase was approved by the Board of Directors at the February 19, 2003 meeting of the board.
Stock Split
On April 16, 2003 the board of directors of the Company declared a two for one stock split of the Company'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 Company 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 September 30, 2003 for this quarterly report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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.
15
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
As of September 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
None
Item 3.
Default upon Senior Securities
None
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information
None
Item 6.
Exhibits and Reports on Form 8-K
a) Exhibits
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
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) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K with the Securities and Exchange Commission on July 31, 2003. The Form 8-K reported items 7 and 12 and attached as an exhibit and incorporated by reference a press release that reported the Company’s financial results for the quarter ended June 30, 2003.
16
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: November 7, 2003
BY
/s/ Harry S. Smith
Harry S. Smith, President & CEO
Date: November 7, 2003
BY
/s/ Stephen C. Pettit
Stephen C. Pettit, Senior Vice President
& Chief Financial Officer
EXHIBIT INDEX
Exhibit No.
Description
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
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.