UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------
or
[] 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: 33-14252
FIRST NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 62-1306172
- --------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Cedar Street, Ronceverte, West Virginia 24970
- --------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(304) 647-4500
(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 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
----------- ----------
The number of shares outstanding of the issuer's classes of common stock as of
August 1, 2002:
Common Stock, $1 par value -- 981,780 shares
THIS REPORT CONTAINS 23 PAGES
18
FIRST NATIONAL BANKSHARES CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2002
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Shareholders' Equity -
Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities none
Item 3. Defaults upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
June 30, Dec. 31,
2002 2001 (1)
---------------- ---------------
ASSETS
Cash and due from banks $ 2,632 $ 3,570
Interest-bearing deposits with other banks 114 2,139
Federal funds sold 1,307 13
Securities available for sale 21,601 11,161
Securities held to maturity (estimated fair value
of $5,124 and $7,291, respectively) 5,017 7,166
Loans, less allowance for loan losses of $1,003 and
$837, respectively 107,009 102,801
Premises and equipment, net 2,873 2,456
Accrued interest receivable 769 711
Other real estate owned, net of valuation allowance
of $262,000 at June 30, 2002 534 796
Other assets 741 506
---------------- ---------------
Total assets $ 142,597 $ 131,319
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 16,107 $ 15,536
Interest-bearing 110,275 99,084
---------------- ---------------
Total deposits 126,382 114,620
Short-term borrowings 2,887 3,401
Other liabilities 882 1,034
Long-term borrowings 434 442
---------------- ---------------
Total liabilities 130,585 119,497
---------------- ---------------
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 981,780 shares, respectively 982 982
Capital surplus 1,188 1,188
Retained earnings 9,763 9,640
Accumulated other comprehensive income 79 12
---------------- ---------------
Total shareholders' equity 12,012 11,822
---------------- ---------------
Total liabilities and shareholders' equity $ 142,597 $ 131,319
================ ===============
(1) Extracted from December 31, 2001 audited financial statements.
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ -------------
Interest income
Interest and fees on loans $ 1,910 $ 1,983 $ 3,846 $ 3,970
Interest and dividends on securities:
Taxable 205 270 355 507
Tax-exempt 44 39 88 78
Interest on Federal funds sold and interest-bearing deposits 26 94 45 126
------------ ------------ ------------- ----------
Total interest income 2,185 2,386 4,334 4,681
------------ ------------ ------------ -------------
Interest expense
Deposits 738 1,029 1,480 2,056
Short-term borrowings 14 109 31 186
Long-term borrowings 7 7 13 14
------------ ------------ ------------- ----------
Total interest expense 759 1,145 1,524 2,256
------------ ------------ ------------ -------------
Net interest income 1,426 1,241 2,810 2,425
Provision for loan losses 104 40 209 70
Net interest income after provision for loan losses 1,322 1,201 2,601 2,355
------------ ------------ ------------ -------------
Noninterest income
Service fees 118 122 225 203
Secondary market loan fees 91 36 154 46
Securities gains 3 - 3 -
Other income 32 26 52 50
------------ ------------ ------------- ----------
Total noninterest income 244 184 434 299
------------ ------------ ------------ -------------
Noninterest expense
Salaries and employee benefits 559 446 1,119 877
Net occupancy expense 83 76 167 145
Equipment rental, depreciation and maintenance 107 88 210 154
Data processing 90 71 185 144
Advertising 25 21 63 46
Professional and legal 32 43 65 69
Mailing and postage 29 21 57 42
Directors' fees and shareholder expenses 30 27 68 58
Stationery and supplies 34 25 75 56
Loss on foreclosed real estate 262 - 262 -
Other operating expenses 121 118 241 235
------------ ------------ ------------ ----------
Total noninterest expense 1,372 936 2,512 1,826
------------ ------------ ------------ -------------
Income before income taxes 194 449 523 828
Income tax expense 50 144 154 265
------------ ------------ ------------ -------------
Net income $ 144 $ 305 $ 369 $ 563
============ ============ ============ =============
Basic earnings per common share $ 0.15 $ 0.31 $ 0.38 $ 0.58
============ ============ ============ =============
Diluted earnings per common share $ 0.15 $ 0.31 $ 0.37 $ 0.57
============ ============ ============ =============
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------- --------------------------
$ 11,884 $ 11,161 $ 11,822 $ 10,986
Balance, beginning of period
Comprehensive income
Net income 144 305 369 563
Other comprehensive income, net of deferred
income taxes of $65 and $6 for the three- month periods,
respectively and $43 and $34 for the six- month periods,
respectively:
Net unrealized gains on securities 102 8 67 51
-------------------------- --------------------------
Total comprehensive income 246 313 436 614
-------------------------- --------------------------
Cash dividends declared
(118) (117) (246) (243)
Issued 2,500 shares of common stock pursuant to
exercise of stock options - 40 - 40
-------------------------- --------------------------
Balance, end of period $ 12,012 $ 11,397 $ 12,012 $ 11,397
========================== ==========================
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
---------------- ---------------
Net income $ 369 $ 563
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 161 119
Loss on disposal of premises and equipment 3 1
Security gains on premium calls of securities held to maturity (3) -
Provision for loan losses 209 70
Increase in valuation allowance on other real estate owned 262 -
Deferred income tax benefit (152) (23)
Net amortization (accretion) of security premiums and discounts 20 (82)
(Increase) decrease in accrued interest receivable (58) 145
(Increase) decrease in other assets (127) 24
(Decrease) increase in other liabilities (5) 243
---------------- ---------------
Net cash provided by operating activities 679 1,060
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held to maturity 3,043 103,815
Proceeds from maturities and calls of securities available for sale 6,263 12,000
Purchases of securities held to maturity (881) (105,038)
Purchases of securities available for sale (16,623) (13,665)
Net increase in loans (4,417) (5,841)
Purchases of premises and equipment (580) (218)
Proceeds from sale of bank premises and equipment - 5
Lease payments collected on other real estate owned - 10
---------------- ---------------
Net cash used in investing activities (13,195) (8,932)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW and savings accounts 10,901 6,987
Net increase in time deposits 861 3,041
Proceeds from sale of common stock pursuant to stock option exercise - 40
Net (decrease) increase in short-term borrowings (514) 2,569
Principal payments on long-term borrowings (8) (8)
Dividends paid (393) (408)
---------------- ---------------
Net cash provided by financing activities 10,847 12,221
---------------- ---------------
(1,669)
(Decrease) increase in cash and cash equivalents 4,349
Cash and cash equivalents:
Beginning 5,722 2,053
---------------- ---------------
Ending $ 4,053 $ 6,402
================ ===============
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accounting and reporting policies of First National Bankshares
Corporation, (the "Company" or "First National"), and its wholly owned
subsidiaries, First National Bank and FNB Insurance, LLC, conform to
accounting principles generally accepted in the United States and to
general policies within the financial services industry. The
preparation of such financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The condensed consolidated statements include the accounts of the
Company and its wholly owned subsidiaries, First National Bank and FNB
Insurance, LLC. All significant intercompany balances and transactions
have been eliminated. The information contained in the condensed
consolidated financial statements is unaudited. In the opinion of
management, all adjustments for a fair presentation of the results of
the interim periods have been made. All such adjustments were of a
normal, recurring nature. The results of operations for the six months
ended June 30, 2002 are not necessarily indicative of the results to
be expected for the full year. The condensed consolidated financial
statements and notes included herein should be read in conjunction
with the Company's 2001 audited financial statements and Form 10-K.
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 2002 and December 31, 2001 are summarized as
follows (in thousands):
June 30, 2002
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ----------------- ----------------- ----------------
Available for Sale
Taxable:
U.S. Government agencies and corporations $ 20,946 $ 130 $ - $ 21,076
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 444 - - 444
Other equities 22 - - 22
---------------- ----------------- ----------------- ----------------
Total taxable 21,469 130 - 21,599
Tax-exempt:
Federal Reserve Bank stock 2 - - 2
---------------- ----------------- ----------------- ----------------
Total Securities Available for Sale $ 21,471 $ 130 $ - $ 21,601
================ ================= ================= ================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ----------------- ----------------- ----------------
Held to maturity:
Taxable:
U.S. Government agencies and corporations $ 1,000 $ 31 $ - $ 1,031
State and political subdivisions 455 19 - 474
---------------- ----------------- ----------------- ----------------
Total taxable 1,455 50 - 1,505
Tax-exempt:
State and political subdivisions 3,562 76 19 3,619
---------------- ----------------- ----------------- ----------------
Total securities held to maturity $ 5,017 $ 126 $ 19 $ 5,124
================ ================= ================= ================
December 31, 2001
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ----------------- ---------------- ----------------
Available for Sale
Taxable:
U.S. Government agencies and corporations $ 10,414 $ 62 $ 42 $ 10,434
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 646 - - 646
Other equities 22 - - 22
---------------- ----------------- ---------------- ----------------
Total taxable 11,139 62 42 11,159
Tax-exempt:
Federal Reserve Bank stock 2 - - 2
---------------- ----------------- ---------------- ----------------
Total Securities Available for Sale $ 11,141 $ 62 $ 42 $ 11,161
================ ================= ================ ================
Held to maturity:
Taxable:
U.S. Government agencies and corporations $ 2,985 $ 42 $ - $ 3,027
State and political subdivisions 470 14 - 484
---------------- ----------------- ---------------- ----------------
Total taxable 3,455 56 - 3,511
Tax-exempt:
State and political subdivisions 3,711 70 1 3,780
---------------- ----------------- ---------------- ----------------
Total securities held to maturity $ 7,166 $ 126 $ 1 $ 7,291
================ ================= ================ ================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of the Company's
securities at June 30, 2002 are summarized as follows (in thousands):
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ----------------- ---------------- ----------------
Due within 1 year $ 370 $ 377 $ 4,383 $ 4,402
Due after 1 but within 5 years 3,076 3,174 16,563 16,674
Due after 5 but within 10 years 487 473 - -
Due after 10 years 1,084 1,100 - -
Equity securities - - 525 525
---------------- ----------------- ---------------- ----------------
$ 5,017 $ 5,124 $ 21,471 $ 21,601
================ ================= ================ ================
The Company's Federal Reserve Bank stock and Federal Home Loan Bank
stock are equity securities that are included in securities available
for sale in the accompanying condensed consolidated financial
statements. Such securities do not have a stated maturity date, and
are carried at cost, since they may only be sold back to the
respective issuer or another member at par value.
Note 3. Loans
Total loans are summarized as follows (in thousands):
June 30, Dec. 31,
2002 2001
------------------ ------------------
Commercial, financial and agricultural $ 46,377 $ 42,541
Real estate - construction 947 1,163
Real estate - mortgage 44,110 44,399
Installment loans to individuals 14,374 13,236
Other 2,204 2,299
------------------ ------------------
Total loans 108,012 103,638
Less allowance for loan losses 1,003 837
------------------ ------------------
Loans, net $ 107,009 $ 102,801
================== ==================
Note 4. Allowance for Credit Losses
An analysis of the allowance for loan losses is presented below (in thousands)
for the six-month periods ended June 30, 2002 and 2001:
Dec. 31,
2002 2001 2001
------------------ ------------------ ------------------
Balance, beginning of period $ 837 $ 619 $ 619
Loans charged off 54 17 56
Recoveries 11 9 17
------------------ ------------------ ------------------
Net losses 43 8 39
------------------ ------------------ ------------------
Provision for loan losses 209 70 257
------------------ ------------------ ------------------
Balance, end of period $ 1,003 $ 681 $ 837
================== ================== ==================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company's total recorded investment in impaired loans at June 30,
2002 approximated $208,000, for which the related allowance for credit
losses determined in accordance with generally accepted accounting
principles in the United States approximated $8,000. All impaired
loans at June 30, 2002 were collateral dependent, and accordingly, the
fair value of the loan's collateral was used to measure the impairment
of each loan.
Note 5. Commitments and Contingencies
In the ordinary course of business, the Company's subsidiary bank is
party to financial instruments with off-balance sheet risk. These
financial instruments include standby letters of credit and
commitments to extend credit. The unused portions of existing lines of
credit at June 30, 2002 and December 31, 2001, and the contractual
amount of commitments to lend are as follows, in thousands of dollars:
June 30, Dec. 31,
2002 2001
------------- --------------
Total loan commitments $ 14,858 $ 15,372
============= ==============
Management is not aware of any commitments or contingencies that may
reasonably be expected to have a material impact on liquidity or
capital resources. The Company continues to be involved in various
legal actions and contractual matters arising in the normal course of
business.
Note 6. Earnings per share
Diluted earnings per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments. For purposes of
computing basic earnings per share, weighted average shares
outstanding were 981,780 and 974,940 for the quarters ended June 30,
2002 and 2001 and 981,780 and 973,113 for the six months ended June
30, 2002 and 2001. The dilutive effect of stock options approximated
3,121 shares and 5,928 shares for the quarters ended June 30, 2002 and
2001 and 3,121 shares and 6,646 shares for the six months ended June
30, 2002 and 2001.
Note 7. Other Real Estate Owned
On July 20, 2002, the Company entered into an agreement to sell the
commercial property it held as other real estate owned on June 30,
2002. The property, which has a carrying amount of $796,000, was sold
for $534,000, net of selling expenses. As a result of the sale, the
Company charged earnings for $262,000 in the second quarter of 2002 in
order to establish a valuation allowance against the carrying amount
of the asset and to reduce the asset to its revised estimated net
realizable value. The net impact on earnings after income taxes
approximated $160,000. Pending various pre-closing proceedings,
including the buyer securing third party financing, the transaction is
expected to close in August 2002.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis focused on significant
changes in the financial condition and results of operations of First
National Bankshares Corporation (the "Company" or "Bankshares"), and
its wholly owned subsidiaries, First National Bank and FNB Insurance,
LLC, for the periods indicated. This discussion and analysis should be
read in conjunction with the Company's 2001 consolidated financial
statements and notes included in its Annual Report to Shareholders and
Form 10-K.
The Private Securities Litigation Act of 1995 indicates that the
disclosure of forward-looking information is desirable for investors
and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. This Quarterly
Report on Form 10-Q contains forward-looking statements that involve
risk and uncertainty. In order to comply with the terms of the safe
harbor, the corporation notes that a variety of factors could cause
the Company's actual results and experience to differ materially from
the anticipated results or other expectations expressed in those
forward-looking statements.
EARNINGS SUMMARY
The Company reported net income of $144,000 for the three months ended
June 30, 2002 compared to net income of $305,000 for the quarter ended
June 30, 2001, a decrease of 52.8%. For the six-month period ended
June 30, 2002, the Company's net income of $369,000 decreased $194,000
from the $563,000 reported for the same period of 2001, a decrease of
34.4%. An increase in net interest income and noninterest income was
mitigated by an increase in the provision for loan losses, a charge to
earnings due to the write-down of other real estate owned to its
estimated net realizable value, and higher operating costs following
the opening of a de novo branch in Covington, Virginia.
Basic earnings per common share was $0.15 the quarter ended June 30,
2002 compared with $0.31 in 2001. For the six-month period ended June
30, 2002, basic earnings per common share totaled $0.38 compared with
$0.58 for the same period of 2001. An analysis of the major components
of the statement of income and expense on a per share basis is
presented below for the three month and for the six-month periods
ended June 30, 2002 and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---------------------------------------------------------------------------------------
Interest income $ 2.23 $ 2.44$ (0.21)$ 4.41 $ 4.80 $ (0.39)
Interest expense 0.77 1.17 (0.40) 1.55 2.31 (0.76)
---------------------------------------------------------------------------------------
Net interest income 1.46 1.27 0.19 2.86 2.49 0.37
Provision for loan losses 0.11 0.04 0.07 0.21 0.07 0.14
---------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1.35 1.23 0.12 2.65 2.42 0.23
---------------------------------------------------------------------------------------
Noninterest income 0.25 0.19 0.06 0.44 0.30 0.14
Noninterest expense 1.40 0.96 0.44 2.56 1.87 0.69
---------------------------------------------------------------------------------------
Income before income taxes 0.20 0.46 (0.26) 0.53 0.85 (0.32)
Income tax expense 0.05 0.15 (0.10) 0.15 0.27 (0.12)
---------------------------------------------------------------------------------------
Net income $ 0.15 $ 0.31 $ (0.16) $ 0.38 $ 0.58 $ (0.20)
=======================================================================================
The Company's annualized return on average assets (ROA) for the second
quarter of 2002 was 0.41% compared to 0.98% for the second quarter of
2001. This compares with an ROA of 0.53% and 0.90% for the six-month
periods ended June 30, 2002 and 2001, respectively. Annualized return
on average shareholders' equity (ROE) was 4.8% for the second quarter
of 2002 compared to 10.8% in the second quarter of 2001, while year to
date ROE was 6.2% and 10.0% as of June 30, 2002 and 2001,
respectively.
NET INTEREST INCOME
The most significant component of the Company's net earnings is net
interest income, which represents the excess of interest income earned
on earning assets over the interest expense paid for sources of funds.
Net interest income is affected by changes in volume resulting from
growth and changes in the balance sheet's composition, as well as by
fluctuations in market interest rates and maturities of sources and
uses of funds.
For purposes of this discussion, net interest income is presented on a
fully tax-equivalent basis to enhance the comparability of the
performance of tax-exempt to fully taxable earning assets. For the
six-month periods ended June 30, 2002 and 2001, the tax-equivalent
adjustment was $45,000 and $40,000, respectively.
For the six months ended June 30, 2002, the Company's net interest
income outperformed the prior year's net interest income by $390,000,
which equates to a 15.8% improvement. As shown in Table II, growth in
the Company's interest-bearing assets and liabilities had a
significant impact on net interest income. Volume variances from the
prior year equated to a net improvement in net interest income of
$443,000, or 18.0% of prior year's net interest income. The difference
in net interest income due to a change in interest rates was marginal,
negatively impacting net interest income by $53,000.
The Company's net yield on interest-earning assets improved to 4.36%
in 2002 as compared to 2001's 4.14%, nearly a quarter point
difference. Despite a decline in the interest rate environment, the
Company achieved a higher net interest margin due to the growth in
loans, the Company's highest yielding asset, relative to other
interest-bearing assets. At June 30, 2002, average loans comprised
80.8% of total interest-earning assets compared to 2001's 76.6%.
Improving or even maintaining the Company's net interest margin will
be a challenge for the remainder of the year. Slower loan demand
coupled with continued deposit growth will likely result in growth of
lower-yielding assets, such as overnight investments and securities,
therefore decreasing the net interest margin. In addition, the Company
faces a fair amount of prepayment risk in its loan and securities
portfolio due to the lower interest rate environment. In order to
combat this trend, the Company will likely be less aggressive on its
deposit pricing with the exception of the Covington market.
Further analysis of the Company's yields on interest-earning assets
and interest-bearing liabilities and changes in net interest income as
a result of changes in average volume and interest rates are presented
in Tables I and II.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges to earnings necessary
to maintain an adequate allowance for probable loan losses.
Management's determination of the appropriate level of the allowance
is based upon an ongoing analysis of credit quality and loss potential
in the loan portfolio, actual loan loss experience relative to the
size and characteristics of the loan portfolio, change in the
composition and risk characteristics of the loan portfolio and the
anticipated influence of national and local economic conditions. The
adequacy of the allowance for loan losses is reviewed quarterly and
adjustments are made as considered necessary.
During the second quarter of 2002, the Bank made a $104,000 provision
for loan losses compared to $40,000 during the second quarter of 2001.
For the six months ended June 30, 2002 and 2001, respectively, the
provision for loan losses was $209,000 and $70,000. For additional
discussion of these factors and the related allowance for loan losses
account, refer to the Loan and Related Risk Elements section of this
discussion.
NONINTEREST INCOME
Noninterest income includes revenues from all sources other than
interest income and yield related loan fees. For the second quarter,
noninterest income increased $60,000 over the second quarter of 2001,
a 32.6% increase. Similarly, noninterest income for the six-month
period ended June 30, 2002 totaled $434,000, an increase of $135,000
or 45.2% from the $299,000 recorded during the same period of 2001. As
a percentage of average assets, annualized noninterest income was
0.62% and 0.48% for the six-month periods ended June 31, 2002 and
2001, respectively.
The improvement in the quarter and year to date noninterest income
totals is attributed to the Company's secondary market loan program. A
favorable interest rate environment coupled with the allocation of
additional resources to the program relative to the prior year,
consisting principally of two full-time staff responsible for
marketing the program has led to a $55,000 and $108,000 improvement in
the quarter and year-to-date totals, respectively. Given that leading
economists are not projecting a significant rise in interest rates
over the next twelve months, management expects to further capitalize
on its secondary market loan activity for the balance of the year.
NONINTEREST EXPENSE
Noninterest expense includes overhead costs that are not related to
interest expense or to losses from loans or securities. As of June 30,
2002, the Company's noninterest expense totaled $2,512,000, an
increase of $686,000, or 37.6%, over total noninterest expense
incurred for the six months ended June 30, 2001. On a
quarter-to-quarter basis, other noninterest expense increased to
$436,000, or 46.6%, for the second quarter of 2002. Expressed as a
percentage of average assets, annualized noninterest expense was 3.6%
and 2.9% for the six months ended June 30, 2002 and 2001,
respectively.
================================================================================
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
Average Interest Yield/ Average Interest Yield/
Balance (1) Rate Balance (1) Rate
-------------------------------- ----------------------------------
INTEREST EARNING ASSETS
Loans, net of unearned income $ 105,903 $ 3,846 7.26% $ 91,294 $3,970 8.70%
Securities:
Taxable 16,962 355 4.19% 18,595 507 5.45%
Tax-exempt (1) 3,745 133 7.12% 3,267 118 7.23%
-------------------------------- ----------------------------------
Total securities 20,707 488 4.72% 21,862 625 5.72%
-------------------------------- ----------------------------------
Federal funds sold and interest-bearing deposits 4,435 45 2.03% 5,969 126 4.22%
-------------------------------- -----------------------------------
Total interest earning assets 131,045 4,379 6.68% 119,125 4,721 7.93%
-------------------------------- -----------------------------------
NONINTEREST EARNING ASSETS
Cash and due from banks 3,925 2,625
Bank premises and equipment 2,771 1,575
Other assets 2,184 2,357
Allowance for loan losses (918) (651)
------------- -------------
Total assets $ 139,007 $ 125,031
============= =============
INTEREST-BEARING LIABILITIES
Demand deposits $ 17,962 64 0.71% $ 15,017 139 1.85%
Savings deposits 53,937 706 2.62% 39,243 809 4.12%
Certificates of deposit 34,427 710 4.12% 38,937 1,108 5.69%
------------ ------------------ ------------ ---------- --------
Total interest-bearing deposits 106,326 1,480 2.78% 93,197 2,056 4.41%
-------------------------------- -------------- --------- ---------
Short-term borrowings 3,811 31 1.63% 7,152 187 5.23%
Long-term borrowings 437 13 5.95% 454 13 5.73%
------------- ------------------ ------------ ----------- ---------
Total other interest-bearing liabilities 4,248 44 2.07% 7,606 200 5.26%
-------------------------------- -------------- ---------- ---------
Total interest-bearing liabilities 110,574 1,524 2.76% 100,803 2,256 4.48%
-------------------------------- --------------- ---------- ---------
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 15,503 11,883
Other liabilities 972 1,043
Shareholders' equity 11,958 11,302
------------- -------------
Total liabilities and shareholders' $ 139,007 $ 125,031
equity ============= =============
NET INTEREST EARNINGS $ 2,855 $ 2,465
============ ============
NET YIELD ON INTEREST EARNING ASSETS 4.36% 4.14%
======== ========
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for 2002
and 2001.
(2) - For purposes of these computations, nonaccrual loans are included in the
amounts of average loans outstanding. Included in interest are loan fees of
$72,000 and $49,000 for 2002 and 2001, respectively.
================================================================================
================================================================================
TABLE II
CHANGES IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
(In thousands of dollars)
Six Months Ended
June 30, 2002 versus June 30, 2001
Increase (Decrease)
Due to Changes In :
Volume (1) Rate (1) Total
----------------- ---------------- ------------
INTEREST EARNING ASSETS
Loans $ 584 $ (708) (124)
Securities:
Taxable (42) (110) (152)
Tax-exempt (2) 17 (2) 15
----------------- ---------------- ------------
Total securities (25) (112) (137)
----------------- ---------------- ------------
Federal funds sold and interest-bearing deposits (27) (54) (81)
Total interest earning assets 532 (874) (342)
----------------- ---------------- ------------
INTEREST-BEARING LIABILITIES
Demand deposits 23 (98) (75)
Savings deposits 247 (350) (103)
Certificates of deposit (118) (280) (398)
Short-term borrowings (63) (93) (156)
Long-term borrowings - - -
----------------- ---------------- ------------
Total interest-bearing liabilities 89 (821) (732)
----------------- ---------------- ------------
NET INTEREST EARNINGS $ 443 $ (53) 390
================= ================ ============
(1) - The change in interest due to both rate and volume has been allocated
between the factors in proportion to the relationship of the absolute dollar
amounts of the change in each. (2) - Calculated on a fully tax-equivalent basis
using the rate of 34%.
================================================================================
The increase in both the quarter and year to date expenses from the
prior year is due in part to the incremental operating expenses
associated with the new Covington branch. Nearly all-major expense
line items reported in the Consolidated Statements of Income in Item 1
are up from the prior year due to the de novo branch. Direct operating
expenses attributed to the new location totaled $135,000 and $244,000,
respectively for the quarter and six months ended June 30, 2002.
Salaries and employee benefits account for the majority of the
incremental expenses (51.6%), which is derived from the six full-time
staff employed by the branch. A portion of the expenses incurred
during the first six months are nonrecurring and therefore are not
necessarily indicative of the future ongoing expense of the branch.
As more fully discussed in Note 7 of the Consolidated Financial
Statements included in Item 1, the Company has entered into an
agreement to sell the property held as other real estate owned at June
30, 2002, which has a carrying amount of $796,000. As a result of the
pending sale, the Company charged earnings for $262,000 ($160,000
after tax) in the second quarter to reduce the asset to its revised
net realizable value.
INCOME TAXES
The Company's income tax expense, which includes both federal and
state income taxes, totaled $154,000 for the six-month period ended
June 30, 2002 compared to $265,000 for same period of 2001. The
effective tax rate approximated 25.8% and 32.1% for the three-months
ended June 30, 2002 and 2001 and 29.4% and 32.0% for the six-months
ended June 30, 2002 and 2001. The reduction in the effective tax rates
for 2002 is due to the company's increase in tax exempt income relative
to its decrease in income before taxes.
CHANGES IN FINANCIAL CONDITION
The Company's total assets were $142,597,000 at June 30, 2002,
compared to $131,319,000 at December 31, 2001, representing an
increase of $11,278,000 or 8.6%. Average total assets were
$139,007,000 during the six month period ended June 30, 2002. Details
concerning changes in the Company's major balance sheet items and
changes in financial condition follow.
Securities and Federal Funds Sold
At June 30, 2002, the Company's securities position totaled
$26,618,000, an increase of $8,291,000 or 45.2%. During the first six
months of 2002, the incremental deposit growth has outpaced the
incremental loan growth by nearly 3 to 1. As a result, additional
funds were available for investing in the security portfolio, relative
to other interest-bearing assets. The ratio of securities designated
as Available for Sale ("AFS") versus Held to Maturity ("HTM")
continues to shift towards AFS. With this designation, the Company can
more adequately meet its liquidity demands, should the need arise.
Future designations of HTM will likely be limited to the purchase of
small blocks of municipal securities. A more detailed discussion of
the securities portfolio may be found in Note 2 of the condensed
consolidated financial statements found in Item I.
It is the Bank's philosophy to minimize its involvement in the
overnight funds market, however due to liquidity reasons (i.e.
fluctuations in loan and deposit balances), the bank may buy or sell
funds on an overnight basis. On average, its position in the overnight
market in 2002 has been $4,435,000 (this figure includes
interest-bearing deposits with other banks) compared to $5,969,000 in
the prior year.
Loan Portfolio and Asset Quality
At June 30, 2002, gross loans totaled $108,012,000, an increase of
4.2% from December 31, 2001, while on average, gross loans totaled
$105,903,000 during the first six months of 2002. Over the first six
months of 2002, loan demand has been markedly slower as compared to
the prior year. Based upon the current annualized growth rate, loan
growth in 2002 is approximately one-half of 2001's growth rate.
Although interest rates are at their lowest in recent history, current
economic conditions and uncertainty have curbed loan demand. Loan
growth has been buoyed in part by the continued migration of customers
from competitors due to operating style differences highlighted
following their entry into the primary market area (Greenbrier County,
WV) via acquisition, although this impact has been less of a factor in
2002 than in 2001. Additionally, loan growth has been supplemented in
part by loans originated by the Covington branch. Of the Company's
$4,374,000 growth in loans during the first six months of 2002,
Covington contributed $3,600,000 or 82.3% of the growth. Management
expects the current trend in loan growth to continue for the balance
of the year with the majority of the growth coming from the Covington
market as new relationships are forged and its market position
matures. See Note 3 of the condensed consolidated financial statements
for further information on the loan portfolio.
The allowance for loan losses was $1,003,000 at June 30, 2002 compared
to $837,000 at December 31, 2001. Expressed as a percentage of loans,
the allowance for loan losses was 0.93% and 0.81% at June 30, 2002 and
December 31, 2001, respectively. The allowance for loan losses is
maintained at a level considered adequate to provide for losses that
can be reasonably estimated. On a quarterly basis, management performs
a comprehensive evaluation of the adequacy of the allowance that
encompasses evaluating problem credits and their potential loss, if
any. In addition, management considers historical loan loss
experience, new loan volume, portfolio composition, levels of
nonperforming and past due loans and current and anticipated economic
conditions in evaluating the adequacy of the allowance for loan
losses. In management's opinion, the allowance for loan losses is
adequate to absorb the current estimated risk of loss in the existing
portfolio. See Note 4 of the condensed consolidated financial
statements for an analysis of the activity in the Company's allowance
for loan losses for the six-month periods ended June 30, 2002 and
2001, and for the year ended December 31, 2001. A summary of the
Company's past due loans and nonperforming assets is provided in the
following table:
SUMMARY OF PAST DUE LOANS AND NONPERFORMING ASSETS
(in thousands of dollars)
June 30, June 30, Dec. 31,
2002 2001 2001
--------------- -------------- ---------------
Loans past due 90 or more days still accruing $ - $ - $ -
=============== ============== ===============
Nonperforming assets:
Nonaccrual loans $ 242 $ 333 $ 294
Other real estate owned 534 1,003 796
--------------- -------------- ---------------
Total nonperforming assets $ 776 $ 1,336 $ 1,090
=============== ============== ===============
Nonperforming assets as a % of total assets 0.54% 1.04% 0.83%
=============== ============== ===============
See further discussion of the Company's nonaccrual loans at Note 4 of the
Consolidated Financial Statements included in Item 1.
Deposits and Other Funding Sources
Total deposits at June 30, 2002 increased $11,762,000 or 10.3% from December 31,
2001. On average, deposits totaled $121,829,000 during the six months ended June
30, 2002, which is a 6.3% increase over the 2001 year-end deposit balance. The
following table summarizes the quarter-end and average deposit mix for June 30,
2002 as compared to December 31, 2001:
Avg. YTD % Increase
Balance Since Dec. 31, 2001
-----------------------------
June 30, June 30, June 30, Avg. YTD
2002 2002 2002 Balance
--------------- ------------- -------------------------------
Demand deposits $ 34,870 $ 33,465 11.4% 6.9%
Savings 56,673 53,937 14.9% 9.3%
Certificates of deposit 34,839 34,427 2.5% 1.3%
--------------- ---------------
Total deposits $ 126,382 $ 121,829 10.3% 6.3%
=============== ===============
The opening of the Covington branch had a significant impact on the
Company's deposit growth. This location was responsible for $6,517,000
or 55.4% of the total growth experienced in the first six months of
2002. The deposit mix at the new location is similar to the
consolidated mix shown in the above table. Deposit growth from the
Company's other locations has slowed following a rapid increase over
an 18-month period. Competition for deposits remains acute in
Greenbrier County, West Virginia where the majority of the growth was
previously experienced. Overall, Management remains confident that
further penetration into the Covington market will augment slower
deposit growth in the Company's other markets.
Over the past year and coinciding with the fall in interest rates,
there has been a distinct trend for depositor preference in
short-term, liquid deposits, which yield a competitive return. This
preference has led to significant growth in the Company's savings
balance relative to other deposit products. As illustrated above,
savings deposits have grown 14.9% since December 31, 2001. This trend
is likely to continue should interest rates remain at their low levels
and should equity markets continue to be highly volatile.
The Company's use of short-term borrowings during the six-months ended
June 30, 2002 consisted entirely of repurchase agreements entered into
with various customers and on average did not materially differ from
the December 31, 2001 balance.
LIQUIDITY
Liquidity is a measure of the Company's ability to ensure the
availability of adequate funds to meet loan commitments and deposit
withdrawals, as well as to provide for other Company transactional
requirements. Liquidity is provided primarily by funds invested in
cash and due from banks, Federal funds sold and interest-bearing
deposits, which totaled $4,053,000 at June 30, 2002 versus $5,722,000
at December 31, 2001. The Company's liquidity is further enhanced by
the availability of $4,753,000 (amortized cost) in debt securities
maturing within the succeeding one year. Also, the Company has
classified additional debt securities with an estimated fair value at
June 30, 2002 of $16,674,000 as available for sale in the event of
unforeseen need for liquidity. Additionally, the Company has
approximately $48,000,000 in available lines of credit with various
correspondent banks should the need arise.
Management's Asset/Liability Committee (ALCO) meets on a regular basis
to review the Company's sources and uses of funds for the succeeding
(30), (60) and (90) day time frames. In addition, projected balance
sheets for the succeeding (12) month time frame are prepared and
reviewed in order to ensure that liquidity is within policy
guidelines, and if not, appropriate strategies are formulated,
implemented and measured for effectiveness in order to bring liquidity
risk within acceptable levels as defined by policy. Management is not
aware of any trends, commitments, events or uncertainties that have
resulted in or are reasonably likely to result in a material change in
the Company's liquidity.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of the
Company. Through management of its capital resources, the Company
seeks to provide an attractive financial return to its shareholders
while retaining sufficient capital to support future growth. Total
shareholders' equity at June 30, 2002 was $12,012,000 compared to
$11,822,000 at December 31, 2001, an increase of $190,000. A
reconciliation of the increase is reported in the Condensed
Consolidated Statement of Shareholders' Equity included in Item I.
Average total shareholders' equity expressed as a percentage of
average total assets was approximately 8.6% at June 30, 2002 compared
to December 31, 2001's level of 9.0%. Cash dividends totaling
$246,000, or $0.25 per share were declared during the first half of
2002, which is the same dividend rate declared in 2001. These payout
levels represented approximately 66.7% and 43.2% of the Company's
year-to-date earnings for the six-month periods ended June 30, 2002
and 2001, respectively. The company has a dividend policy whereby the
dividend payout level may not exceed 40% of the company's annual net
income. Accordingly, future declarations may be limited to the amounts
that would be available under the policy directive.
The Company has experienced rapid growth over the past two years, and
accordingly, the Company's leverage ratio (equity to assets) has
decreased. Although the Company continues to report capital ratios
well above minimum guidelines as discussed in the following section,
it has become prudent for the Company to manage the dividend growth
rate in order to preserve capital for future internal asset growth and
to build a capital position that will allow the Company to react in a
timely manner to external growth opportunities should they present
themselves. Therefore, future dividend declarations are expected to be
maintained at the same level as the prior year.
REGULATORY RESTRICTIONS ON CAPITAL AND DIVIDENDS
The primary source of funds for the dividends paid by First National
Bankshares Corporation is dividends received from its subsidiary bank.
Dividends paid by the subsidiary bank are subject to restrictions by
banking regulations. The most restrictive provision requires approval
by the regulatory agency if dividends declared in any year exceed the
year's net income, as defined, plus the net retained profits of the
two preceding years. Management does not anticipate any such
restrictions on its dividends in 2002.
Quantitative measures established by regulation to ensure capital
adequacy require the subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier capital (as defined) to average assets (as defined).
Management believes, as of June 30, 2002, that the subsidiary bank
meets all capital adequacy requirements to which it is subject, as
evidenced by the following table:
RISK-BASED CAPITAL RATIOS
June 30, 2002
Actual Minimum
Requirement
--------------------------
Tier 1 risk-based capital ratio 11.02% 4.00%
Total risk-based capital ratio 12.02% 8.00%
Leverage ratio 7.78% 3.00%
Improved operating results and a consistent dividend program, coupled with an
effective management of credit and interest rate risk will be the key elements
towards the Company continuing to maintain its present strong capital position
in the future.
ITEM 3.
QUANTITATIVE AND QUALITATTIVE
DISCLOSURES ABOUT MARKET RISK
The following table represents the results of the Company's interest
sensitivity simulation analysis as of June 30, 2002 and December 31,
2001. Key assumptions in the preparation of the table include changes
in market conditions including interest rates, loan volumes, and
pricing; deposit sensitivity; customer preferences; and capital plans.
To attempt to quantify the potential change in net interest income,
given a change in interest rates, various interest rate scenarios are
applied to projected balances, maturities and repricing opportunities.
The resulting change in net interest income reflects the level of
sensitivity that net interest income has in relation to changing
interest rates.
Annualized Hypothetical %
Change in Net Interest Income
June 30, Dec. 31,
Interest rate scenario 2002 2001
----------------- -----------------
Up 300 basis points -14.7 -12.9
Up 100 basis points -5.3 -4.8
Down 100 basis points 7.1 4.8
Down 300 basis points 13.7 9.8
As reported above, a sharp increase or decrease in interest rates would have a
significant impact on the Company's earnings. Modest changes in the interest
rate environment would not have as dramatic an impact.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings are presently pending in which the Bank is a
named party. These proceedings involve routine litigation incidental
to the Bank's business. In Management's opinion, based upon advice of
counsel, the resolution of such proceedings will not have a material
impact on the Bank's financial position.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item. 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of First National Bankshares
Corporation was held on April 25, 2002. A total of 744,720 shares, or
75.9% of outstanding shares, were voted with 719,825 represented by
proxy and 24,895 represented in person. At this meeting, the following
business was transacted:
a) The following nominees were elected to serve as Company
directors for a three-year term expiring in the year 2005.
For Withheld
----------------------
Nominees selected by the Board of Directors
Michael G. Campbell 744,720 -
Richard E. Ford 739,370 5,350
Ronald. B. Snyder 740,120 4,600
Nominees from the Floor
None
b) The 1996 First National Bankshares Corporation Incentive Stock
Option Plan was amended so as to increase the number of shares
issuable under the plan from 48,125 to 98,125 with 637,313
shares voting for this amendment, 60,241 shares voting against
the amendment, 9,850 shares abstaining and 37,316 nonvoters.
c) Ernst & Young LLP of Charleston, WV was approved by the
shareholders as the Company's independent auditing firm with
716,416 shares voting for the appointment, 21,047 shares
voting against the motion and 7,257 shares abstaining.
d) No other matters were voted upon by the shareholders at this
meeting.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) All exhibits included with this filing follow the signature
page.
Exhibit 11, Computation of Per Share Earnings, is
filed herewith.
Exhibit 99.1, Certification of Chief Executive Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
Exhibit 99.2, Certification of Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
b). The Company did not file any Form 8-K, Current Reports during the
quarter ended June 30, 2002.
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.
FIRST NATIONAL BANKSHARES CORPORATION
By
/s/L. Thomas Bulla
-----------------------------------------------
L. Thomas Bulla
President and Chief Executive Officer
By
/s/Charles A. Henthorn
-----------------------------------------------
Charles A. Henthorn
Secretary/Treasurer, First National
Bankshares Corporation
Chief Operating Officer, First National Bank
By
/s/Matthew L. Burns
------------------------------------------------
Matthew L. Burns
Chief Financial Officer, First National Bank
Date: August 14, 2002
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Earnings Per Share
Basic Earnings per Share is calculated based upon the Company's net income
after income taxes, divided by the weighted average number of shares
outstanding during the fiscal period.
Diluted Earnings Per Share is calculated based upon the Company's net
income after income taxes, divided by the weighted average number of shares
outstanding during the period plus the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to increase the
income per common share from continuing operations.
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First National Bankshares Corporation
("First National") on Form 10-Q for the period ending June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, L. Thomas Bulla, President and Chief Executive Officer of First National,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of First National.
By
/s/L. Thomas Bulla
-----------------------------------------------
L. Thomas Bulla
President and Chief Executive Officer
Date: August 14, 2002
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First National Bankshares Corporation
("First National") on Form 10-Q for the period ending June 30, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Matthew L. Burns, Chief Financial Officer of First National, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of First National.
By
/s/Matthew L. Burns
------------------------------------
Matthew L. Burns
Chief Financial Officer, First National Bank
Date: August 14, 2002