-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R64spP5x6eRha6KAt2SqWTvBUGVZwaaPRC1kK3pjMB0T3UBHArDrKDLF8mCU/RyC o1lec2ztBs2JwqD5zxt9uA== 0000814178-00-000004.txt : 20000329 0000814178-00-000004.hdr.sgml : 20000329 ACCESSION NUMBER: 0000814178-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST NATIONAL BANKSHARES CORP CENTRAL INDEX KEY: 0000814178 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 621306172 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-14252 FILM NUMBER: 581267 BUSINESS ADDRESS: STREET 1: ONE CEDAR ST STREET 2: P O BOX 457 CITY: RONCEVERTE STATE: WV ZIP: 24970 BUSINESS PHONE: 3046474500 MAIL ADDRESS: STREET 1: P O BOX 457 STREET 2: ONE CEDAR STREET CITY: RONCEVERTE STATE: WV ZIP: 24970 10-K 1 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999 ---------------------- OR [ ] TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------------------ Commission file number 33-14252 ------------- FIRST NATIONAL BANKSHARES CORPORATION ---------------------------------------------- (Exact name of registrant as specified in its chart West Virginia 62-1306172 - ---------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Cedar Street, Ronceverte, West Virginia 24970 - -------------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (304) 647-4500 ------------------- Securities registered pursuant to Sec. 12(b) of the Act- None --------- Securities registered pursuant to Sec. 12(g) of the Act- None --------- Securities issued pursuant to a registrant statement which became effective under the Securities Act of 1933- Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Not subject to Section 16(a) requirements. As of March 1, 2000, the aggregate market value of the outstanding voting common stock held by nonaffiliates of the registrant was $15,432,240. This value is based on the price at which said stock was actually sold in a transaction reported to management which took place on or about March 1, 2000, (management believes $16.00 was paid per share), since its stock is not extensively traded, listed on any exchange, or quoted by NASDAQ. The total number of shares of the registrant's common stock outstanding as of March 1, 2000 was 964,515 . ----------- Documents Incorporated by Reference: Part of Form 10-K into which Document the document is incorporated - --------- -----------------------------
Articles of Incorporation, from September 30, 1999 Form 10-Q Part IV, Item 14 By-Laws, from September 30, 1999 Form 10-Q Part IV, Item 14 Material Employment Contract, from December 31, 1994 Report 10-K Part IV, Item 14 Material Lease Contract, from March 31, 1997 Form 10-Q Part IV, Item 14 S-8 Registration Statement, from July 31, 1997 Form S-8 Part IV, Item 14 Specimen Copy of Incentive Stock Option Plan Agreement, from December 31, 1996 Report 10-K Part IV, Item 14 THIS REPORT CONTAINS 65 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 57 . ---- ----
1 FIRST NATIONAL BANKSHARES CORPORATION Form 10-K Table of Contents
Page PART I Item 1 - Business.........................................................................................3-5 Item 2 - Properties.........................................................................................6 Item 3 - Legal Proceedings..................................................................................6 Item 4 - Submission of Matters to a Vote of Security Holders................................................6 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters..............................................................................7 Item 6 - Selected Financial Data............................................................................8 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation............................................................9-22 Item 8 - Financial Statements and Supplementary Data....................................................22-49 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................................................50 PART III Item 10 - Directors and Executive Officers of the Registrant............................................51-53 Item 11 - Executive Compensation........................................................................53-55 Item 12 - Security Ownership of Certain Beneficial Owners and Management..................................................................................55-56 Item 13 - Certain Relationships and Related Transactions...................................................56 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements...........................................................................57 Signatures.................................................................................................58
2 PART I ITEM 1 - BUSINESS Organizational History First National Bankshares Corporation (referred to in this report as the "Company") is a West Virginia corporation. It was organized on January 28, 1986, and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Company has one wholly-owned subsidiary, a national banking association known as First National Bank (the "Bank"). The Bank was originally organized and chartered in 1888, but was reorganized after the Great Depression and now operates under a charter dated 1933. Pursuant to a plan of reorganization, the Bank became a wholly-owned subsidiary of the Company on August 3, 1987. The Company's business activities are conducted through the Bank, as the Bank presently accounts for substantially all of the Company's assets, revenues and earnings. General The Bank is a federally insured depository institution offering a wide variety of services that are typical of full service community banks from its main office located in Ronceverte and from its branch offices in Lewisburg and Charleston, West Virginia. In February of 1997, the Bank relocated its Lewisburg branch from its previously leased facility to a new bank-owned facility approximately one mile north of the leased location. The Bank accepts deposits primarily from customers located within its primary market area. The Bank offers both its individual and business customers assorted deposit products with various maturities and interest rates, including non- interest bearing and interest-bearing demand deposits, savings deposits, certificates of deposit, club accounts and individual retirement accounts. The Bank offers automated teller machines (ATM's) which allow customers to make deposits, withdraw cash, and transfer funds. In addition, the Bank offers automated telephone banking, whereby customers can use a touch-tone telephone to access account information and transfer funds between accounts. In January 2000 the Bank signed an agreement with an on-line banking service provider. In cooperation with the Bank's data processor, the on-line banking service will allow customers to access their loan and deposit accounts via the Internet. The basic service will allow customers to review account activity and transfer funds among their accounts. A bill pay service will also be available for those customers wishing to pay bills electronically. A monthly service fee will be charged customers who sign up for the service. Management expects the service to be available in July 2000. The Bank offers a full spectrum of lending services to its customers, including commercial loans and lines of credit, residential real estate loans, consumer installment loans and other personal loans. Loan terms, including interest rates, loan to value ratios, and maturities are tailored as much as possible to meet the needs of the borrower. Commercial loans are generally secured by various collateral, including commercial real estate, accounts receivable and business machinery and equipment. Residential real estate loans consist primarily of mortgages on the borrower's personal residence, and are typically secured by a first lien on the subject property. Consumer and personal loans are generally secured, often by first liens on automobiles, consumer goods or depository accounts. A special effort is made to keep loan products as flexible as possible within the guidelines of prudent banking practices in terms of interest rate risk and credit risk. Bank lending personnel adhere to established lending limits and authorities based on each individual's lending expertise and experience. The Bank does not currently participate in any indirect lending programs. The Bank's participation in lease financing is immaterial. When considering loan requests, the primary factors taken into consideration by the Bank are the cash flow and financial condition of the borrower, the value of the underlying collateral, if any, and the character and integrity of the borrower. These factors are evaluated in a number of ways including an analysis of financial statements, credit reviews and visits to the borrower's place of business. The Bank also offers a broad range of fiduciary services through its Trust Department, including the administration of trusts and decedents' estates and other personal and corporate fiduciary services. Personal fiduciary services include the settlement of estates, administration of various trusts, agency or custodial accounts, investment management and guardian services. Market Area The Bank's primary market area includes the cities of Ronceverte and Lewisburg and surrounding Greenbrier County, plus Charleston and surrounding Kanawha County. Greenbrier County is predominately rural and comprised of moderate income households. Major employment in the area includes agriculture, tourism, health care, education and light 3 manufacturing. Unemployment rates in the Greenbrier county area often exceed the state average, with 1999's average (seasonally adjusted) unemployment rate being 8.0% versus a West Virginia state-wide average of 6.6%. (All unemployment data have been taken from the West Virginia State Bureau of Employment Programs world-wide-web page.) The Charleston branch is located in Kanawha County, West Virginia. This area is home of the state capital and is the largest metropolitan area in West Virginia. Primary employment is related to various professional service industries, health care, state government, and the chemical industry. The Charleston area typically has unemployment rates far below the state average, with Kanawha County's 1999 YTD unemployment rate being only 4.6%. The Charleston MSA is much more insulated from economic downturns than the Greenbrier County area. Competition The banking and financial services business are highly competitive, especially in the Bank's market area. The Bank's principal competitors in Greenbrier County include four other commercial banks, each of which are owned by statewide or regional bank holding companies. As of December 31, 1999, management estimates that the Bank had deposits representing an estimated 20% of total deposits and loans representing an estimated 15% of total loans of all commercial banks servicing its market area. In addition, the Bank also competes for loans, deposits and trust accounts with other regional banks, credit unions, savings and loan associations, consumer finance companies, insurance companies and direct lending agencies affiliated with Federal and state governments. The Charleston area is serviced by the state's four largest banking organizations, as well as several small independent banks. Currently, the Company's market share is estimated to be less than 1% for both deposits and loans. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. The Bank generates new business primarily through newspaper and radio advertising, referrals and direct-calling efforts. Referrals for new business come from Company directors, present customers of the Bank and professionals such as attorneys and accountants. See further discussion of competition in the following section under GRAMM-LEACH-BLILEY FINANCIAL MODERNIZATION ACT. Supervision and Regulation The Company is subject to regulation under the Bank Holding Company Act of 1956, as amended ("the Act"). The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank. The Act further restricts bank holding company non-banking activities to those which are determined by the Federal Reserve Board to be closely related to banking and a proper incident thereto. The Bank is a national banking association chartered under the laws of the United States. As such, the operations of the Bank are subject to the regulations of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation ("the FDIC") and West Virginia law. The Bank is also subject to periodic examination by the Comptroller of the Currency. Capital Standards - The Federal Reserve Board and the OCC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet, such as assets, and transactions that are recorded as off-balance sheet items, such as letters of credit and recourse arrangements. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred 4 stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. Failure to meet applicable capital guidelines could subject the Company to a variety of enforcement remedies available to the federal regulatory authorities, including limitations on the ability to pay dividends or the issuance of a directive to increase capital, and termination of deposit insurance by the FDIC. Regulatory capital ratios of the Bank are set forth in Note 14 to the Consolidated Financial Statements which are included in Item 8 of this filing. Federal Deposit Insurance Corporation Improvement Act of 1991 - In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Corporation Act and made revisions to several other banking statutes. FDICIA establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution's capital category. Among other things, FDICIA authorizes regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly-under-capitalized and critically-under-capitalized. By regulation, an institution is "well-capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk- based capital ratio of 6% or greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The Company's banking subsidiary was a "well-capitalized" institution as of December 31, 1999. Another requirement of FDICIA is that federal banking agencies must prescribe regulations relating to various operational areas of banks and bank holding companies. These include standards for internal audit systems, loan documentation, information systems, internal controls, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, and such other standards as the agency deems appropriate. Community Reinvestment Act - The Bank is subject to the provisions of the Community Reinvestment Act ("CRA") which requires banks to assess and help meet the credit needs of the community in which the bank operates. The OCC examines the Bank to determine its level of compliance with CRA. The OCC and the Federal Reserve Board are required to consider the level of CRA compliance when regulatory applications are reviewed. In its most recent CRA examination, the Company's banking subsidiary was given an "outstanding" CRA rating. Reigle-Neal Interstate Banking Bill - In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the "Bill"). This Bill permitted certain interstate banking activities through a holding company structure, effective September 30, 1995. It permits interstate branching by merger effective June 1, 1997, unless states "opt-out" before that date. In March 1996, West Virginia adopted changes to its banking laws so as to permit interstate banking and branching to the fullest extent permitted by the Bill. The Bill will also permit consolidation of banking institutions across state lines and perhaps de novo entry. One result of the Bill could be increased competitiveness, due to the realization of economies of scale and/or de novo market entrants, where permitted. Deposit Acquisition Limitation - Under West Virginia law, an acquisition or merger is not permitted if the resulting depository institution or its holding company would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of the total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking for good causes shown. Monetary Policies - The monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of banks and bank holding companies. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and the Bank cannot be predicted. Gramm-Leach-Bliley Financial Services Modernization Act - Enacted on November 12, 1999, the Act repeals two provisions of the Glass-Steagall Act that have separated banking, insurance, and securities activities for the latter two- thirds of this century. The law creates a new financial services structure, the financial holding company, under the Bank Holding Company Act. Financial companies will be able to engage in any activity that is deemed "financial in nature." Therefore, banks will be able to affiliate with securities firms and insurance companies within the same financial holding 5 company and, through that structure, bring a broad array of financial products to the marketplace, including traditional banking products, investment products, insurance, and mutual funds. Under the new law, it can be expected that the larger banks will merge with brokerage and insurance companies and make further inroads into local markets. Technology has broken down the geographic boundaries around a bank's territory and has made it easier for larger banks with significant resources to build market share. To combat this, management plans to "reinvent" itself by looking into offering other lines of business, such as insurance. Although the new law clearly creates healthy competition, it also creates new opportunities for the Company. Employees At December 31, 1999, the Bank employed 38 full-time and 1 part-time employees. The Company has no employees who are not also employees of the Bank. Such employees are not represented by any collective bargaining unit, and management believes its employee relations are good. Statistical Information The disclosures required by Industry Guide 3 - Statistical Disclosure by Bank Holding Companies are included in "Item 6 - Selected Financial Data" on page 8 and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 to 22 of this report. ITEM 2 - PROPERTIES The Bank owns its principal office at One Cedar Street in Ronceverte, West Virginia. The building, which approximates 7,700 square feet in size, is fully used by the Bank in its operations. It also owns an adjacent drive-in banking facility that provides drive-in services, as well as customer parking for the principal office of the Bank. The Lewisburg branch is located on U.S. 219, approximately two miles north of the Lewisburg city limits. The facility, which approximates 2,100 square feet, was constructed in 1997 following the expiration of a lease arrangement on a similar facility in Lewisburg, which the Bank occupied from 1986 to January 1997. The Charleston branch is located in Laidley Tower, a multi-story office building in downtown Charleston, WV. Effective May 1, 1996, the Company entered into a 10-year noncancellable lease agreement to occupy approximately 4,532 square feet of the building. Additional information related to this lease can be found in Note 12 of the Notes to Consolidated Financial Statements which is included in Item 8 of this filing. The Bank's properties and leased facilities are considered well suited for its current needs. Both the main office located in Ronceverte, WV, and the branch location in Lewisburg, WV, have full-service banking available, including drive-in banking services. Space at both locations is ample, and no significant modifications are required at either location. The branch facility in Charleston is also a full-service branch offering the same services as the other locations, except it offers no drive-in banking services. ITEM 3 - LEGAL PROCEEDINGS The Company is involved in a human rights complaint, whereby a former employee has alleged discrimination against the Company. A trial date of July 2000 is expected. At this time, management cannot reasonably estimate the outcome of the case, nor can it estimate a range of possible loss, if any. Should a loss transpire, losses will most likely be mitigated through the Company's liability insurance. There are no other material legal proceedings, other than routine litigation incidental to normal business operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the security holders of the Company, through the solicitation of proxies or otherwise, during the fourth quarter of 1999. 6 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 1, 2000, the Company's common stock was held by approximately 485 stockholders of record. There is no active or organized trading market for the common stock of the Company. The stock of the Company is traded on a limited basis in privately negotiated transactions. At present, there is no market maker for the Company's common stock. Accordingly, bid and ask prices are not available for the stock of the Company and the prices shown below may not be indicative of prices which would prevail if the stock were more actively traded. While management occasionally knows of the actual price paid for its common stock in a transaction, management is not aware of prices paid in most, and sometimes all, sales of the Company stock since such transactions are privately negotiated. However, in some of these transactions, individuals have called the Company and asked for a value for its common stock. In response to such inquiries, the Company provides the individual with the book value of its common stock as of the end of the most recent quarter, as well as the most recent price per share paid in transactions reported to management. Stock trades during 1999 that were reported to management took place at $15.00 to $16.00 per share, with the most recent reported transactions having a per share price of $16.00. Since trades reported to management are infrequent, and private trades may be conducted which are not reported to management, no representations can be made regarding the fair value. Accordingly, the following high and low prices are the book values of a share of the Company's common stock at the beginning and end of each of the quarters as shown below. - -------------------------------------------------------------------------------- Book Value Book Value 1999 1998 ----------------------------- ------------------ High Low High Low First Quarter $ 10.16 $ 10.15 $ 9.86 $ 9.81 Second Quarter 10.25 10.22 9.88 9.71 Third Quarter 10.36 10.33 9.93 9.81 Fourth Quarter 10.55 10.42 10.11 10.02 - -------------------------------------------------------------------------------- A summary of dividends per share declared during 1999 and 1998 follows: - -------------------------------------------------------------------------------- 1999 1998 -------- -------- First Quarter $ 0.09 $ 0.08 Second Quarter 0.09 0.08 Third Quarter 0.09 0.08 Fourth Quarter 0.15 0.09 - -------------------------------------------------------------------------------- The Company plans to continue the pattern of declaring quarterly dividends in the future at a rate consistent with its historical payout ratios. Payment of dividends by the Company is dependent upon payments to it from the subsidiary bank. The ability of the subsidiary bank to pay dividends is subject to certain limitations under banking regulations. These limitations are discussed in Note 14 of the Notes to Consolidated Financial Statements, which are included in Item 8 of this filing. 7
ITEM 6. - SELECTED FINANCIAL DATA (Dollars in thousands, except per share data and ratios) 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- SUMMARY OF OPERATIONS Interest income $ 7,707 $ 7,564 $ 7,041 $ 6,166 $ 5,688 Interest expense 3,390 3,372 3,077 2,393 2,115 Net interest income 4,317 4,192 3,964 3,773 3,573 Provision for loan losses 100 449 31 -- - Non-interest income 455 445 422 433 415 Non-interest expense 3,175 3,167 3,087 3,140 2,920 Income before income taxes 1,497 1,021 1,268 1,066 1,068 Income before cumulative effect of change in accounting principle 1,002 724 792 736 767 Net income 1,002 724 792 736 767 PER SHARE DATA Income before cumulative effect of change in accounting principle $ 1.04 $ 0.75 $ 0.82 $ 0.76 $ 0.80 Net income: Basic 1.04 0.75 0.82 0.76 0.80 Diluted 1.03 0.75 0.82 0.76 0.80 Cash dividends declared 0.42 0.33 0.32 0.28 0.24 Book value per share 10.52 10.11 9.69 9.19 8.74 AVERAGE BALANCE SHEET SUMMARY Loans, net of unearned discount and reserve $ 69,835 $ 68,696 $ 63,620 $ 48,037 $ 41,853 Securities 23,460 17,375 18,646 23,341 27,321 Deposits 88,821 78,949 75,149 69,838 66,367 Long-term Debt 3,439 5,494 3,862 - - Shareholders' equity 9,941 9,543 9,239 8,672 8,223 Total assets 104,591 96,442 90,824 79,985 75,351 AT YEAR END Loans, net of unearned discount and reserve $ 74,264 $ 68,671 $ 69,108 $ 52,800 $ 45,773 Securities 22,876 17,866 17,311 22,617 24,015 Deposits 89,132 81,221 78,336 73,316 66,166 Long-term Debt 473 5,488 5,500 - - Shareholders' equity 10,151 9,747 9,325 8,841 8,415 Total assets 104,829 98,353 95,430 83,668 75,455 SELECTED RATIOS Return on average assets 0.96% 0.75% 0.87% 0.92% 1.02% Return on average equity 10.08 7.59 8.57 8.49 9.33 Average equity to average assets 9.50 9.90 10.17 10.84 10.91 Dividend payout ratio 40.38 43.64 38.92 36.35 30.12 8
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The following is a discussion and analysis focused on significant changes in the financial condition and results of operations of the Company for the applicable periods covered by the consolidated financial statements appearing in Item 8 of this report. The statements contained in this discussion may include forward-looking statements based on management's current expectations, and actual results may differ materially. This discussion and analysis should be read in conjunction with such financial statements and the accompanying notes thereto. Certain amounts in this discussion, as previously presented, have been reclassified for prior years to conform to current year classifications. Amounts and percentages have been rounded for purposes of discussion. First National Bankshares Corporation (the "Company"), incorporated under the laws of the State of West Virginia in 1986, is a one bank holding company headquartered in Ronceverte, West Virginia. The Company owns 100% of the outstanding common stock of First National Bank ("the Bank"), which comprises substantially all of the Company's assets and liabilities, and from which the Company presently derives all of its earnings. Earnings Summary The Company reported net income of $1,002,000 for 1999, representing an increase of $278,000 or 38.4% over the $724,000 reported for 1998. The increase in 1999 earnings was largely attributable to a $349,000 decrease in the provision for loan losses over 1998's level. The increase in earnings was further aided by a $125,000 increase in net interest income. The various factors significantly influencing results of operations are included in the following discussion. On a per share basis, net income was $1.04 in 1999, $0.75 in 1998, and $0.82 in 1997. An analysis of the changes in earnings per share by major statement of income component is presented in the following table: - -------------------------------------------------------------------------------- 1999 1998 vs. vs. 1998 1997 ---------- -------- Basic earnings per common share, prior year $ 0.75 $ 0.82 Increase (decrease) from changes in: Net interest income 0.13 0.24 Provision for loan losses 0.36 (0.43) Other income 0.01 0.03 Other expenses (0.01) (0.08) Income taxes (0.20) 0.17 ---------- ---------- Basic earnings per common share $ 1.04 $ 0.75 ========= ========== - -------------------------------------------------------------------------------- Return on average assets (ROA), a measure of how effectively the Company utilizes its assets to produce net income, was 0.96% for 1999, compared to 0.75% for 1998 and 0.87% for 1997. Return on average equity (ROE), which measures earnings performance relative to the total amount of equity capital invested in the Company, was 10.08% in 1999, 7.59% in 1998, and 8.57% in 1997. 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 loans, securities and other interest earning assets over interest expense on deposits and borrowings. Net interest income is influenced by changes in volume resulting from growth and alteration of the balance sheet's composition, as well as by fluctuations in market interest rates and maturities of sources and uses of funds. Net interest income is presented and discussed in this section on a fully Federal tax-equivalent basis to enhance the comparability of the performance of tax-exempt securities to other fully taxable earning assets. For the years ended 1999, 1998, and 1997, tax-equivalent adjustments of $84,000, $91,000 and $102,000, respectively, are included in interest income, and were computed assuming a tax rate of 34.0% in all periods. 9 1999 Versus 1998 The Company's net interest income on a fully tax-equivalent basis totaled $4,401,000 for the year ended December 31, 1999 compared to $4,283,000 for the same period of 1998, representing an increase of $118,000 or 2.76%. As illustrated in Table I, the Company's net yield on interest earning assets decreased from 4.69% in 1998 to 4.45% in 1999. The yield on interest earing assets declined from 8.39% in 1998 to 7.88% in 1999. A lower interest rate environment, coupled with repricing loan, security and overnight investment portfolios led to the fifty-one basis point decline. The yield on the Company's loan portfolio declined thirty-nine basis points from 1998 to yield 8.73% for the year ended 1999. As a tool to manage interest rate risk, a majority of the Company's loan portfolio is written with variable or floating interest rate features, whereby loan interest rates are repriced at specified time intervals based upon a predetermined index rate. An overall decline in the index-rates, such as the prime rate, at or near year end 1998 had a significant impact on the loan portfolio yield in 1999. As illustrated in Table II, the decline in the loan portfolio yield equated to a $271,000 decline in interest income. For all interest earning assets, the decline in the interest rate environment equated to a decrease in interest income of $333,000. The decline in the interest rate environment had a similar impact on the Company's interest bearing liabilities, where the weighted average rate dropped thirty-one basis points to 4.15% for the year ended 1999. The decrease in rates paid on the Company's deposit products and short-term borrowings equated to interest expense savings of $128,000 in 1999. As illustrated in Table I, the rate on long-term borrowings increased from 6.61% in 1998 to 7.50% in 1999. Included in interest expense on long-term borrowings was an interest penalty of approximately $32,000 paid to the FHLB for the early retirement of its $5,000,000 balloon note, which had a fixed rate of 6.68%. Because of the rise in interest rates in July 1999, it became advantageous for the Company to retire the debt with excess funds from overnight investments. Since the retirement of the debt, the Company has recouped the cost of the interest penalty via interest savings, and in total, will save approximately $22,000, pretax. As discussed above, the volume and composition of interest-bearing assets and liabilities will impact interest income. As shown in Table II, volume variances among the interest earning assets increased interest income $469,000, which more than negated the impact of the lower interest rate environment discussed above. Volume variances among the interest-bearing liabilities equated to additional interest expense of $102,000, and nearly negated the interest savings from the decreased rate environment discussed above. The volume increase in savings deposits had the most significant impact on the Company's interest expense, where the volume increase equated to an increase in interest expense of $251,000. The volume increase is primarily related to a single savings deposit product that offers a tiered interest rate that is tied to the prime rate as published in the Wall Street Journal. In 1999, the savings product grew approximately $11,109,000 from its outstanding balance at December 31, 1998, with the bulk of the growth being paid at the maximum tiered rate. A portion of the growth has been funded through depositors shifting money from certificates of deposit (as they mature) and other lower yielding demand deposit accounts. Management expects the growth trend to continue in 2000 with similar impacts on interest expense. 1998 Versus 1997 As detailed in Table II, growth in the Company's interest earning assets led to an increase in interest income of approximately $503,000 over 1997's level. The majority of the increase came from loan growth, where growth in the average volume of outstanding loans equated to an increase in interest income of approximately $529,000. This increase was mitigated by a similar increase in interest expense due to growth in the Company's interest-bearing liabilities. The most significant items were the growth in savings deposits and the growth in long-term borrowings. See below for further discussion of the savings growth. The growth in long-term borrowings and the related interest expense is due to the debt being outstanding for all of 1998 compared to nine months of 1997. See the LONG-TERM BORROWINGS section below for further discussion of this funding source. In contrast to the 1999 versus 1998 discussion above, changes in the interest rate environment did not have a significant impact on 1998's net interest income. As presented in Table II, the change in the interest rate environment equated to a decrease in net interest income of $23,000. The largest impact was experienced in the savings products, where the weighted average interest rate increased from 3.46% in 1997 to 4.20% in 1998 (See Table I). This increase is the result of growth in a particular savings product that pays a higher interest rate on the depositors' average available balance, relative to the lower interest rate savings products offered by the Company, such as passbook savings accounts. The higher interest rate on this product, coupled with the volume growth, increased the Company's interest expense $236,000 over 1997's expense. 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. 10
TABLE I AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (Dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- --------- -------- ------- --------- -------- -------- -------- ------- INTEREST EARNING ASSETS Loans, net of unearned discount (1) $ 70,540 $ 6,158 8.73% $69,420 $ 6,328 9.12% $ 63,620 $ 5,811 9.13% Securities: Taxable 19,946 1,149 5.76 13,712 819 5.97 14,527 841 5.79 Tax-exempt (2) 3,514 248 7.06 3,663 267 7.29 4,119 303 7.36 --------- --------- ------- --------- -------- ------- ------- ------- ------- Total securities 23,460 1,397 5.95 17,375 1,086 6.25 18,646 1,144 6.13 --------- --------- ------- -------- -------- ------- ------- ------ ------ Interest-bearing deposits with othe banks 1,558 75 4.81 - - - - - - Federal funds sold 3,353 161 4.80 4,474 241 5.39 3,447 190 5.51 ---------- ---------- -------- -------- -------- ------- -------- ------ ------- Total interest earnings assets 98,911 7,791 7.88 91,269 7,655 8.39 85,713 7,145 8.33 ----------- ---------- -------- ------- -------- ------- -------- ------ ------- NON INTEREST EARNING ASSETS Cash and due from banks 2,586 2,305 2,554 Bank premises and equipment 1,753 1,980 2,092 Other assets 2,046 1,612 1,104 Allowance for loan losses (705) (724) (639) ----------- ---------- ---------- Total assets $ 104,591 $ 96,442 $ 90,824 =========== ========== ========= INTEREST-BEARING LIABILITIES Demand deposits $ 16,562 $ 392 2.37 $12,445 310 2.49 $ 12,953 344 2.66 Savings deposits 32,338 1,335 4.13 26,266 1,104 4.20 22,108 868 3.46 Time deposits 27,861 1,350 4.84 29,892 1,536 5.14 29,992 1,543 5.14 ---------- --------- ------- ------- ------ -------- -------- --------- --------- Total interest bearing deposits 76,761 3,077 4.01 68,603 2,950 4.30 65,053 2,755 4.24 Short-term borrowings 1,508 55 3.65 1,574 59 3.75 1,552 63 4.06 Long-term borrowings 3,439 258 7.50 5,494 363 6.61 3,862 259 6.71 --------- --------- ------ ------- ------ ------ ----- -------- --------- Total interest bearing liabilities 81,708 3,390 4.15 75,671 3,372 4.46 70,467 3,077 4.37 NON INTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 12,060 10,346 10,096 Other liabilities 882 882 1,022 Shareholders' equity 9,941 9,543 9,239 ----------- ---------- ---------- Total liabilities and shareholders' equity $ 104,591 $ 96,442 $ 90,824 =========== ========== ========== NET INTEREST EARNINGS $ 4,401 $ 4,283 $ 4,068 =========== =========== ========== NET YIELD ON INTEREST EARNING ASSETS 4.45% 4.69% 4.75% ======== ======== ======= (1) - For purposes of this table, nonaccruing loans are included in average loan balances. Loan fees are also included in interest income. (2) - Computed on a fully Federal tax-equivalent basis using the rate of 34% for all years. 11
TABLE II CHANGE IN INTEREST INCOME AND EXPENSE DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1) (Dollars in thousands) 1999 vs. 1998 1998 vs 1997 ---------------------------------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: Volume Rate Total Volume Rate Total INTEREST EARNING ASSETS Loans $ 101 $ (271) $ (170) $ 529 $ (12) $ 517 Securities: Taxable 359 (30) 329 (48) 26 (22) Tax-exempt (2) (10) (8) (18) (33) (3) (36) ----------- ---------- ----------- ---------- ---------- ---------- Total securities 349 (38) 311 (81) 23 (58) ----------- ---------- ----------- ---------- ---------- ---------- Interest bearing deposits with other banks 75 - 75 - - - Federal funds sold (56) (24) (80) 55 (4) (51) ----------- ---------- ----------- ---------- ---------- ---------- Total interest earning assets 469 (333) 136 503 7 510 ----------- ---------- ----------- ---------- ---------- --------- Interest-bearing LIABILITIES Demand deposits 98 (16) 82 (13) (21) (34) Savings deposits 251 (20) 231 172 64 236 Time deposits (101) (85) (186) (5) (2) (7) Short-term borrowings 3 (7) (4) 2 (7) (5) Long-term borrowings (149) 44 (105) 108 (4) 104 ----------- ---------- ----------- --------- ---------- --------- Total interest-bearing liabilities 102 (84) 18 264 30 294 ----------- ---------- ----------- ---------- ---------- --------- NET INTEREST EARNINGS $ 367 $ (249) $ 118 $ 239 $ (23) $ 216 =========== ========== =========== ========== ========== ========= (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 assuming a fully tax-equivalent basis using the rate of 34%. - -------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses The provision for loan losses represents charges to earnings necessary to maintain the allowance for loan losses at a level which is considered adequate in relation to the estimated risk inherent in the loan portfolio. Management considers various factors in determining the amount of the provision for loan losses including overall loan quality, changes in the mix and size of the loan portfolio, previous loss experience and general economic conditions. During 1999, the Company made a provision for loan losses of $100,000. This compares to a provision for loan losses of $449,000 and $31,000 made in 1998 and 1997, respectively. During 1998, an increased provision was necessary due to a significant charge-off on a commercial real estate loan, as well as an increase in the specific allocation for a previously reserved credit. 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. Non-interest Income Non-interest income includes revenues from all sources other than interest income and yield related loan fees. Non- interest income totaled $455,000, $445,000, and $422,000 for the years ended December 31, 1999, 1998, and 1997, or 5.57%, 5.56%, and 5.65% of total income, respectively. 1999's non-interest income of $455,000 was up 2.2% and 7.8% from December 31, 1998 and 1997 levels, respectively. The following table (in thousands) details the components of non-interest income earned by the Company in 1999, 1998, and 1997, as well as the percentage increase (decrease) in each over the prior year. 12
1999 1998 1997 ---------------------------------------------------------------- Percent Percent Amount Change Amount Change Amount Trust department income $ 62 (27.9)% $ 86 32.3 % $ 65 Service fees and commissions 300 21.0 248 (4.6) 260 Securities gains (losses), net (1) - - - - Other 94 (15.3) 111 14.4 97 ----- --------- ------ -------- ------- Total $ 455 2.2% $ 445 5.5% $ 422 ========= ======== ======= ======== ======== - -------------------------------------------------------------------------------------------------------------------
1999 Versus 1998 Trust income decreased $24,000 in 1999 compared to 1998 and was nearly equal to 1997's income level of $65,000. During 1999, a single large estate, which had been administered by the Bank's trust department throughout 1998, was partially settled in July 1999 and was later fully settled by year end. Therefore, on average, total assets administered by the Bank's trust department was less in 1999 versus 1998; leading to the decrease in fee income. Management anticipates trust income to be comparable to 1999's level in 2000. Service fees and commissions increased $52,000, or 21.0% to $300,000 in 1999. The increase is the result of the Company implementing a new fee schedule on certain demand deposit accounts. Management will continue to seek new ways of increasing the Company's fee income in the future through new product offerings and the restructuring of existing products. Other income decreased $17,000 from 1998 and was nearly equal to 1997's level of $97,000. Included in 1998's amount were gains totaling $23,000 realized on the sale of repossessed property. Although the Company engages in the foreclosure and sale of such property during the ordinary course of business, such gains or losses realized from time to time are unusual and are not expected to be a significant source of income in the future. 1998 Versus 1997 Trust income was $21,000 greater in 1998 compared to 1997. As discussed above, the increase was due to the Company administering a single large estate during 1998. Service fees and commissions decreased by $12,000, or 4.6% to $248,000 in 1998. The Company did not experience comparable levels of overdrafts, etc. in 1998 compared to 1997, therefore, the decrease occurred. Deposit customers have become very attuned to service charges assessed on deposit accounts. As a result, they are keeping larger account balances on hand in order to avoid fees and/or overdraft charges. As such, a general decline in service fee income resulted. Other income increased $31,000 from 1997. As discussed above, the increase in 1998 was due to gains totaling $23,000 realized on the sale of repossessed property. Non-interest Expense Non-interest expense comprises overhead costs which are not related to interest expense or to losses from loans or securities. The following table itemizes the primary components of non-interest expense for 1999, 1998 and 1997, and the percentage increase (decrease) in each over the prior year. A discussion of the material changes among the years presented also follows the table (in thousands). - -------------------------------------------------------------------------------
1999 1998 1997 ------------------------------------------------------------------------ Percent Percent Amount Change Amount Change Amount Salaries and employee benefits $ 1,603 4.0 % $ 1,542 (5.9)% $ 1,639 Net occupancy expense 270 (4.6) 283 1.1 280 Equipment rental, depreciation and maintenance 280 (4.8) 294 16.7 252 Federal deposit insurance premiums 13 44.4 9 28.6 7 Data processing 183 (6.2) 195 46.6 133 Advertising 67 3.1 65 (15.6) 77 Professional & legal 97 (39.8) 161 56.3 103 Mailing and postage 74 (2.6) 76 0.0 76 Directors' fees and shareholders' expense 108 8.0 100 (2.0) 102 Stationery and supplies 80 12.7 71 (25.3) 95 Other 400 7.8 371 14.9 323 ----------- ---------- ----------- ----------- -------- Total $ 3,175 0.3 % $ 3,167 2.6 % $ 3,087 ============= =========== ============= =========== ============= - -------------------------------------------------------------------------------------------------------------------
13 1999 Versus 1998 Salaries and employee benefits represent the Company's largest non-interest cost, comprising approximately 50.5% of total non-interest expense in 1999 and 48.7% in 1998. Salaries and employee benefits increased $61,000, or 4.0%, from 1998. The increase was due in part to the Company reinstating the executive incentive plan in 1999, which was previously suspended in 1998. Under the plan in 1999, approximately $104,000 was expensed compared to $0 in 1998. The increase from the above plan was mitigated by a decrease in salaries expense of approximately $18,000. The decrease in salaries was due to the Company having less full-time equivalent staff employed in 1999 compared to 1998. The decrease in staff was a result of retirements and voluntary resignations. At year end, the Company was fully staffed and future savings of this nature are not expected to occur in 2000. Net occupancy expense decreased $13,000, or 4.6%, from 1998's total. The decrease is the result of a lower depreciation charge in 1999 versus 1998, as several fixed assets have become fully depreciated. Equipment rental, depreciation and maintenance expense decreased $14,000, or 4.8%, from 1998. In response to the Company's Year 2000 readiness, the Company incurred approximately $17,000 more in noncapital expenditures for the replacement and remediation of various information and non-information systems in 1998 versus 1999. Data processing totaled $183,000 for the year ended 1999, which is $12,000 less than the amount incurred in 1998. The Company incurred Year 2000 testing charges of $30,000 in 1998 which accounted for a portion of the decrease. No such expenditures were incurred in 1999. The decrease was mitigated by a general increase in the fees assessed by the Company's data processor. Professional and legal expense decreased $64,000 from the $161,000 reported in 1998. In 1998, the bank incurred approximately $56,000 in non-recurring legal and professional fees associated with its unsuccessful merger negotiations with a bank holding company. In addition, 1998 was marked by various time-consuming legal and foreclosure proceedings against two loan customers. Although the Company was involved in similar proceedings in 1999, all of which were incurred in the normal course of business, none were of the magnitude of the items incurred in 1998. Director's fees and shareholder expense increased $8,000, or 8.0%, from 1998 to total $108,000 for the year ended 1999. Additional director's fees and shareholder expense were incurred in 1999 due to the following: (1) the Company outsourced its stock transfer duties to a third party vendor, (2) a special shareholder meeting was held in September 1999 whereby the Articles of Incorporation and Bylaws of the Company were amended, (3) additional expenditures were incurred with the 5 for 1 stock split, and (4) the Board of Directors increased the number of board members to twelve and appointed two new directors in September 1999. With the changes above, the Company expects its Year 2000 expense to increase over 1999's, namely due to the addition of the stock transfer agent (this expense was borne by the Company in the past) and the additional directors. Stationery and supplies expense totaled $80,000 in 1999 compared to $71,000 in 1998, an increase of 12.7%. The increase was namely due to the company stockpiling supplies and forms at year end in the event of Year 2000 interruptions. Included in this line item are noncapital purchases of various office software products. In 1999, the Company upgraded a number of these products in order for them to be Year 2000 compliant. For 2000, management expects stationery and supplies expense to be more in line with the expense incurred in 1998. 1998 Versus 1997 Salaries and employee benefits decreased $97,000 in 1998, or 5.9%, from 1997's level. The decrease was due in part to the Company having approximately three fewer full-time equivalent staff employed in 1998 compared to 1997. The decrease in staff was a result of retirements and voluntary resignations. This decrease was further aided by the temporary suspension of the executive incentive plan in 1998, whereas $75,000 was incurred under the plan in 1997. The aforementioned items were mitigated by normal merit raises for the existing staff and a general increase in the cost of benefit programs offered to all employees of the Company. Equipment rental, depreciation and maintenance expense increased $42,000 or 16.7% over 1997's total. In response to the Company's Year 2000 readiness, the Company upgraded several computers and related equipment in 1998 by entering into an operating lease arrangement with a supplier. Although the lease payments would have nearly offset the depreciation on the equipment had it been purchased, the bulk of the computer equipment replaced was fully depreciated. Therefore, the lease payments added to the expense incurred in 1998. Overall, depreciation expense was higher in 1998 due to a full year's depreciation on 1997's acquisitions. A large amount of property, plant and equipment was acquired in 1997 due to equipping the new branch in Lewisburg. Data processing expense increased $62,000 or 46.6% from 1997. As discussed above, the Company incurred approximately $30,000 in 1998 due to expenses for testing its data processing function for Year 2000 compliancy. The remaining increase over 1997 is due to the significant growth in the number of loan and deposit accounts processed. The growth in the number of accounts over the past two years has been stimulated by the addition of the Charleston branch and new deposit products. 14 Legal and professional fees increased $58,000 or 56.3% from 1997. During 1998, the Company incurred approximately $56,000 in legal and professional fees associated with its unsuccessful merger discussions with a bank holding company. No further legal and professional fees associated with the aforementioned merger discussions will be incurred as the Company terminated the merger negotiations. Income Taxes The Company's income tax expense, which includes both Federal and state income taxes, totaled $495,000 or 33.1% of pretax income in 1999, compared to $297,000 or 29.1% in 1998, and $476,000 or 37.5% in 1997. For financial reporting purposes, income tax expense does not equal the Federal statutory income tax rate of 34% when applied to pretax income, primarily because of State income taxes and interest income derived from tax-exempt securities. Additional details relative to the Company's income taxes are included in Note 9 to the accompanying consolidated financial statements. Changes in Financial Position Total assets increased $6,476,000 or 6.58% to $104,829,000 at year end 1999 compared to $98,353,000 at year end 1998. Average total assets also increased, up 8.45% from $96,442,000 during 1998 to $104,591,000 during 1999. TABLE I presents the Company's average balance sheet composition for the years ended 1999, 1998 and 1997. A discussion of the significant fluctuations in components of the Company's balance sheet follows. Securities The Company's security portfolio consisted of available or sale and held to maturity securities. Securities classified as available for sale are carried at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of deferred income taxes, while held to maturity securities are carried at amortized cost. The Company does not hold any securities for trading purposes. At year end 1999, approximately 50% of the securities (based on amortized cost) were classified as available for sale. This compares to 51% in 1998. As a general rule, the Company classifies all new security purchases as available for sale as this portfolio adds to the Company's flexibility in meeting liquidity needs, should they arise. The total securities portfolio increased $5,010,000 or 28.04% to $22,876,000 at December 31, 1999, compared to December 31, 1998. Similarly, average total securities increased from $17,375,000 during 1998 to $23,460,000 during 1999, an increase of 35.02%. As discussed in more detail in the Deposits section below, a significant increase in deposits aided the Company's increase in its security portfolio by providing excess funds. Management opted to invest in short-term U.S. Government bonds and agencies to maximize its yield without compromising liquidity. At year end 1999, the Company had an unrealized loss on securities classified as available for sale of approximately $333,000. This compares to an unrealized loss of approximately $11,000 in 1998. The increase in the unrealized loss over 1998's level is a function of the weighted average yield and maturity of the available for sale portfolio, relative to market interest rates available on similar issues with similar maturity intervals at year end. In general, the rise in the market interest rates over the second half of 1999 had a negative impact on the portfolio's valuation. Although the held to maturity security portfolio is carried at amortized cost, the change in the interest rate environment discussed above had a similar impact on the portfolio's market value, where the market value at December 31, 1999 was approximately $360,000 less than the amortized cost. Management believes that the declines in the market values of the security portfolios are temporary, therefore, no impairment loss is considered at this time. Details as to the amortized cost and estimated fair values of the Company's securities by type are presented in Note 3 of the Notes to Consolidated Financial Statements, included in Item 8 of this filing. At December 31, 1999, the Company did not own securities of any one issuer, other than the U.S. Government or its agencies, that exceeded ten percent (10.0%) of shareholders' equity. The distribution of non-equity securities together with the weighted average yields by maturity at December 31, 1999 are summarized in TABLE III. 15 - --------------------------------------------------------------------------------
TABLE III SECURITY MATURITY ANALYSIS (2) (At amortized cost, dollars in thousands) After One After Five Within but within but within After One Year Five Years Ten Years Ten Years Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) ------- --------- ---------- --------- --------- ------------- ------ -------- Securities Held to Maturity U.S. Government agencies and corporations $ 1,000 5.21% $ 7,000 5.95% $ - - % $ - - % State and political subdivisions 514 4.34 2,237 4.92 269 4.50 500 5.72 --------- ---------- --------- ------- Total $ 1,514 4.91 $ 9,237 5.70 $ 269 4.50 $ 500 5.72 ========= =========== ========= ======= Securities Available for Sale U.S. Government agencies and corporations $ 2,978 5.49 $ 7,999 5.85 $ - - $ - - ========= ========== ========= ======= (1) -- Weighted average yield presented without adjustment to a tax equivalent basis. (2) - Excludes equity securities, such as Federal Reserve Bank and Federal Home Loan Bank stock. - -------------------------------------------------------------------------------------------------------------------
Loans During 1999, loans, net of unearned income, increased $5,590,000, or 8.05%, to $75,027,000 from $69,437,000 at year end 1998. Average loans outstanding, net of unearned income, increased from $69,420,000 in 1998 to $70,540,000 in 1999, or 1.61%. A summary of the Company's year end loan balances by type, as well as an analysis of the increase (decrease) in such balances from December 31, 1998 to December 31, 1999, is summarized in the following table. - --------------------------------------------------------------------------------
Percent Percent of Increase Total Loans 1999 (Decrease) 1999 1998 --------------------------------------------------------------------------- Commercial, financial and agricultural $ 30,877 16.2 % $ 26,581 41.2% 38.3% Real estate - construction 1,451 51.8 956 1.9 1.4 Real estate - mortgage 31,395 (0.8) 31,646 41.8 45.5 Installment 9,079 7.0 8,482 12.1 12.2 Other 2,225 25.6 1,772 3.0 2.6 -------------- ------------ ------- ------ $ 75,027 8.1 $ 69,437 100.0 100.0 Less: Unearned Discount - - ------------------ --------------- TOTAL LOANS $ 75,027 8.1 $ 69,437 ================== =============== - -------------------------------------------------------------------------------------------------------------------
Real estate mortgage loans, the Company's largest loan portfolio, decreased 251,000, or 0.8% from 1998. During 1999, the Company found it difficult to grow the real estate portfolio given customer demand for fixed rate mortgages. In order to manage its interest rate risk, the Company does not offer fixed rate mortgages; it only offers variable rate mortgages. In response to the demand for fixed rate mortgages, the Company began accepting applications for a mortgage broker in 1998. In return, the Company receives a commission on each mortgage accepted by the mortgage broker. Management expects growth in this portfolio in 2000, however, the growth is not expected to be significant. The commercial, financial and agricultural portfolio experienced the largest dollar increase of the all the loan portfolios, where the portfolio grew $4,296,000 in 1999, or 16.2%. The Company has been very successful in its solicitation efforts, particularly in the contiguous market areas. Through its personal business relationships and referrals, management expects future growth in high quality commercial loans to continue to grow. 16 A summary of loan maturities by loan type as of December 31, 1999 is included in Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Allowance for Loan Losses and Risk Elements The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company's management, on a quarterly basis, performs a comprehensive loan evaluation which encompasses the identification of all potential problem credits, which are included on an internally generated watch list. The identification of loans for inclusion on the watch list is facilitated through the use of various sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part of regulatory agency loan reviews and reviews of new loans representative of current lending practices within the Bank. Once this list is reviewed to ensure it is complete, detail reviews of specific loans for collectibility, performance and collateral protection are performed. A grade is assigned to the individual loans reviewed utilizing internal grading criteria, which is somewhat similar to the criteria utilized by the Bank's primary regulatory agency. Based on the results of these reviews, specific reserves for potential losses are identified. 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. As more fully explained in Notes 1 and 5 of the Notes to Consolidated Financial Statements included in Item 8 of this filing, certain impaired loans are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loans' collateral if the loan is collateral dependent. At December 31, 1999, the Company had no loans classified as impaired compared to $318,000 at December 31, 1998. Of the loans classified as impaired at December 31, 1998, approximately $263,000 in principal was collected on the notes in 1999, with the remaining uncollected balance charged-off during the year. The Company's average balance of impaired loans was $282,000 for 1999 versus $333,000 in 1998. At December 31, 1999 and 1998, the allowance for loans losses of $764,000 and $766,000 represented 1.02% and 1.10% of gross loans, respectively, and was considered adequate to cover inherent losses in the subsidiary bank's loan portfolio as of the respective evaluation date. The Company maintains an allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated. The Company performs a quarterly evaluation of the loan portfolio to determine its adequacy. The evaluation is based on assessments of specifically identified loans, loss experience factors, current and anticipated economic conditions and other factors to identify and estimate inherent losses from homogeneous pools of loans. The allocated portion of the subsidiary bank's allowance for loan losses is established on a loan-by-loan and pool-by-pool basis. The unallocated portion is for inherent losses that may exist as of the evaluation date, but which have not been specifically identified by the processes used to establish the allocated portion due to inherent imprecision in the objective process of identification. The unallocated portion is subjective and requires judgment based on various qualitative factors in the loan portfolio and the market in which the Company operates. At December 31, 1999 and 1998, respectively, the unallocated portion of the allowance approximated $280,000 and $95,000 or 36.6% and 12.4% of the total allowance, respectively. The unallocated amount at December 31, 1999 and 1998 has been considered necessary primarily considering that historical loss factors used in the Bank's methodology to calculate the allocated portion of the allowance do not yet reflect the additional risk factors which may be inherent in the portfolio due to loan growth over the past three years. In addition, certain subjective factors, such as unemployment and the rate of bankruptcies claimed in the Company's primary lending area, typically will increase the loss factors as the Company's loan portfolio is more susceptible in the event of economic downturns. The current economic expansion may have hidden or delayed those losses typically seen in the Company's historical loss factors. Management believes that the current allowance is sufficient to cover any potential losses in the current loan portfolio. An allocation of the allowance for loan losses to specific loan categories is presented in TABLE IV. 17 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TABLE IV ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------- Percent Percent Percent of Total of Total of Total Amount Loans Amount Loans Amount Loans Commercial, financial, and agricultural $ 189 41.2% $ 380 38.3% $ 310 42.1% Real estate - construction 1 1.9 1 1.4 - 5.4 Real estate - mortgage 171 41.8 111 45.6 93 41.5 Installment 122 12.1 178 12.2 101 9.1 Other 1 3.0 1 2.5 - 1.9 Unallocated 280 - 95 - 132 - ----------- -------- ----------- --------- ----------- ----- $ 764 100.0% $ 766 100.0% $ 636 100.0% =========== ========= =========== ========= =========== ======== - -------------------------------------------------------------------------------------------------------------------
The Bank was in a net loss position (more money was charged-off than was recovered from previously charged-off loans) during 1999. Loan charge-offs, net of recoveries, for 1999 were $102,000 compared to $319,000 and $49,000 in 1998 and 1997, respectively. Expressed as a percentage of average loans outstanding during 1999, 1998 and 1997, net loan charge-offs were 0.14%, 0.46% and 0.08%, respectively. In May 1998, the Company recognized a significant charge-off on a commercial loan ($273,000). The Company foreclosed on the collateral securing the note which was valued at $875,000. As a result of the charge-off and its on-going evaluation of its allowance for loan losses, a provision of $449,000 in 1998 was deemed necessary to restore the allowance for loan losses to a level considered appropriate by management. This provision compares to $100,000 in 1999. See Note 5 of the Notes to the Consolidated Financial Statements for an analysis of the activity in the Company's allowance for loan losses in 1999, 1998 and 1997. The following presents a summary of the Company's nonperforming assets and accruing loans past due 90 days or more at December 31, 1999, 1998 and 1997. - --------------------------------------------------------------------------------
(in thousands) December 31, 1999 1998 1997 --------- ----------- ----- Nonperforming assets: Nonaccrual loans $ - $ 318 $ 1,733 Other real estate owned 883 875 22 Restructured loans - - - ----- ------- ------- $ 883 $ 1,193 $ 1,755 ========= =========== ======== Accruing loans past due 90 days or more $ - $ - $ - ========= =========== ======== - -------------------------------------------------------------------------------------------------------------------
The Company places into nonaccrual status those loans which the full collection of principal and interest are unlikely or which are past due 90 or more days, unless the loans are adequately secured and in the process of collection. If interest on nonaccrual loans had been accrued, such income would have approximated $13,000, $34,000 and $112,000 in 1999, 1998 and 1997, respectively. As more fully discussed in Note 17 of the Consolidated Financial Statements include in Item 8 of this filing, other real estate owned consists of commercial property foreclosed upon in May 1998. The property is currently leased pursuant to a three year operating lease. All expenses of carrying and operating the property are borne by the lessee. All lease payments are being applied against the other real estate owned balance in a cost recovery manner. Deposits Total deposits increased 9.7% to $89,132,000 as of December 31, 1999, from $81,221,000 at December 31, 1998. Similarly, average total deposits increased from $78,949,000 as of December 31, 1998 to $88,822,000 at December 31, 1999, or 12.5%. 18 The Company's demand deposits increased $2,268,000, or 9.4%, from its 1998 year end balance. On average, demand deposits increased $5,831,000, or 25.6%, over 1998's average balance. The growth in deposits has come from two new demand deposit relationships obtained in May 1999. Together, these new relationships have maintained average account balances in excess of $6,497,000 since they were opened. Because the accounts are transactional in nature, and due to liquidity reasons, much of the growth has been invested short-term government bonds and overnight investments as discussed above. The Company continues to experience deposit growth in its savings products where total savings deposits stood at $37,400,00 at December 31, 1999, which is $9,635,000 over 1998's year end balance. On average, total savings was $32,338,000 for 1999 versus $26,266,000 for 1998. The majority of the growth has been in a particular savings product which offers a tiered interest rate that is competitive with area financial institutions and brokerage firms. The savings growth has been mitigated by a net redemption in certificate of deposits of approximately $3,992,000 since year end 1998, with much of the redemptions being shifted to the savings product previously mentioned. See the NET INTEREST INCOME section of this analysis for a discussion of the impact on the Company's interest expense. Details relative to the maturities of and interest expense on time certificates of deposit of $100,000 or more are presented in Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Short-term borrowings The Company's short-term borrowings consist of securities sold under agreements to repurchase ("repurchase agreements") and Federal funds purchased. At December 31, 1999, short-term borrowings totaled $4,113,000 compared to $951,000 at December 31, 1998. The increase is predominantly due to a large repurchase agreement ($2,300,000) entered into at year end 1999. For more information on short-term borrowings refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Long-term borrowings As discussed in detail in the Net Interest Income section above, the Company prepaid its $5,000,000 balloon note with the FHLB in August 1999. See Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this filing for further discussion of this item. The Company's only remaining long-term borrowing arrangement consists of a real estate project benefitting low-income residents that was funded in part through the FHLB's Community Investment Program ("CIP"). This program allows matched funding of qualifying projects at rates significantly below the market rates for similar non-CIP funds. In December of 1997, the Company obtained a $500,000 five-year advance as part of the CIP program. This advance is on a matched amortization with the underlying note and will amortize in accordance with standard loan terms. At December 31, 1999, the outstanding balance on the note was $473,000. For more information on this FHLB debt, refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Liquidity and Interest Rate Risk Management Liquidity reflects The Company's ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other Company transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks, interest-bearing deposits with other banks and Federal funds sold, which measured $3,764,000 at December 31, 1999. The Company also has available various lines of credit with correspondent financial institutions of more than $40,000,000. The Company's liquidity position is monitored continuously to ensure that day-to-day as well as anticipated funding needs are met. Liquidity is considered to be more than adequate. Further enhancing the Company's liquidity is the availability of approximately $3,978,000 (at amortized cost) in securities maturing within one year. Also, the Company has additional securities with maturities greater than one year with an estimated fair value totaling $7,679,000 classified as available for sale in response to an unforeseen need for liquidity. 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 to the Company's liquidity. Interest rate risk represents the volatility in earnings and market values of interest earning assets and interest-bearing liabilities resulting from changes in market rates. The Company seeks to minimize interest rate risk through asset/liability management. The Company's principal asset/liability management strategy is gap management. Gap is the measure of the difference between the volume of repricing interest earning assets and interest-bearing liabilities during given time periods. When the volume of repricing interest earning assets exceeds the volume of repricing interest-bearing liabilities, the gap is positive -- a condition which usually is favorable during a rising rate environment. The opposite case, a negative gap, generally is favorable during a falling rate environment. When the interest rate sensitivity gap is near zero, the impact of interest rate risk is limited, for at this point changes in net interest income are minimal regardless of whether interest rates are rising or falling. An analysis of the Company's current gap position is presented in TABLE VI. 19 - --------------------------------------------------------------------------------
TABLE VI INTEREST RATE SENSITIVITY GAPS December 31, 1999 (Dollars in thousands) Repricing (1) 0-90 91-180 181-365 After Days Days Days 1 Year Total ----------- ----------- ----------- ----------- -------- INTEREST EARNING ASSETS Loans, net of unearned discount $ 24,875$ 3,441 $ 7,839 $ 38,872 $ 75,027 Securities (at amortized cost) 2,978 - 1,514 18,005 22,497 Interest bearing deposits with other banks 17 - - - 17 Federal funds sold 30 - - - 30 ----------- ----------- ----------- ----------- ----------- Total interest earning assets 27,900 3,441 9,353 56,877 97,571 ------------- ----------- ----------- ------------ ------------ Interest-bearing LIABILITIES Demand deposits $ 15,549 $ - $ - $ - $ 15,549 Savings deposits 37,400 - - - 37,400 Time deposits 10,362 5,095 3,393 6,592 25,442 Short-term borrowings 1,256 2,425 432 - 4,113 Long-term borrowings 4 4 8 457 473 ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities 64,571 7,524 3,833 7,049 82,977 ----------- ----------- ----------- ----------- ----------- Contractual interest sensitivity gap (36,671) (4,083) 5,520 49,828 14,594 Adjustment (2) 26,130 (26,130) - - - ---------- ------------ ----------- ----------- ------- Adjusted interest sensitivity gap $ (10,541) $ (30,213) $ 5,520 $ 49,828 $ 14,594 =========== ============ =========== =========== =========== Cumulative adjusted interest sensitivity gap $ (10,541) $ (40,754) $ (35,234) $ 14,594 =========== ============ ============ =========== Cumulative adjusted gap as a percent of total earning assets (10.80%) (41.77%) (36.11%) 14.96% Cumulative adjusted rate-sensitivity ratio 0.73 0.43 0.54 1.18 This table includes various assumptions by management of maturities and repayment patterns. (1) - Contractual repricing, not contractual maturities, is used in this table unless otherwise noted. No prepayment assumptions were assumed. (2) - Adjustment to approximate the actual repricing of interest-bearing demand deposits and savings accounts are based upon historical experience. - -------------------------------------------------------------------------------
The preceding table reflects the Bank's cumulative one year net interest sensitivity position, or gap, as 0.54. Thus, the Bank is in a negative gap position within a one year time frame. This indicates that a significant increase in interest rates within a short time frame during 2000 could have a significant negative impact on the Bank's net interest income in 2000. However, interest rates on approximately 65% of the Bank's interest-bearing liabilities may be changed by management at any time based on their terms. Since management believes that repricing of interest-bearing deposits in an increasing interest rate environment will generally lag behind the repricing of interest-bearing assets, the Bank's interest rate risk within one year is at an acceptable level. The information presented in the table above represents a static view of the Bank's gap position as of December 31, 1999, and as such, does not consider variables such as future loan and deposit volumes, mixes and interest rates. The Company seeks to maintain its adjusted interest sensitivity gap within 12 months to a relatively small balance, positive or negative, regardless of anticipated upward or down movements in interest rates in an effort to limit the effects of interest rate risk on Company net interest income. 20 Capital Resources Maintenance of a strong capital position is a continuing goal of the Company's management. 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 December 31, 1999 was $10,151,000 compared to $9,747,000 at December 31, 1998, representing an increase of 4.14%. A reconciliation of the increase is reported in the Consolidated Statement of Shareholders' Equity found in Item 8 of this filing. Average total shareholders' equity expressed as a percentage of average total assets decreased from 9.90% to 9.50% at December 31, 1999. The decrease is explained by the increase in average assets of approximately $8,149,000 from 1998. The Company's subsidiary bank is subject to minimum regulatory risk-based capital guidelines, as more fully described in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Such guidelines provide for relative weighting of both on and off-balance sheet items (such as loan commitments and standby letters of credit) based on their perceived degree of risk. At December 31, 1999, the Company continues to exceed each of the regulatory risk-based capital requirements as shown in the following table. - --------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS Minimum Actual Requirement Total risk-based capital ratio 15.28% 8.00% Tier 1 risk-based capital ratio 14.23% 4.00% Leverage ratio 9.71% 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. Additional information related to regulatory restrictions on capital and dividends are disclosed in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Stock Option Plan Since 1996, the Company has had an incentive stock option plan to provide a method whereby key employees of the Company and its subsidiaries who are responsible for the management, growth and protection of the business, and who are making substantial contributions to the success and profitability of the business, may be encouraged to acquire a stock ownership in the Company, thus providing a proprietary interest in the business. For more information regarding this plan, please refer to Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Year 2000 Issues The Company's critical information and non-information systems encountered only minimal problems with the century date change or rollover from the year 1999 to the year 2000. The Company is not aware of any system failures of its vendors, customers, or other third parties that would have a significant impact on the Company's financial condition or ability to operate. The Company believes it has taken the necessary steps to be Year 2000 compliant, however, there may be unforeseen external or internal issues which could impact the Company's status in the future. Total capital and non-capital outlays of approximately $300,000 were incurred from 1997 through 1999 to address the Year 2000 concerns. This figure does not include internal costs, namely payroll, as the Company did not separately track these figures, however, they were believed to be immaterial to the total project cost. Impact of Inflation and Effects of Changing Prices The results of operations and financial position of the Company have been presented based on historical cost, unadjusted for the effects of inflation, except for the recording of unrealized gains and losses on securities available for sale. Inflation could significantly impact the value of the Company's interest rate sensitive assets and liabilities and the cost of non-interest expenses, such as salaries, benefits and other operating expenses. As a financial intermediary, the Company holds a high percentage of interest rate sensitive assets and liabilities. Consequently, the estimated fair value of a significant portion of the Company's assets and liabilities re-price more frequently than those of non-banking entities. It is the Company's policy to have a majority of its loan portfolio re-price within five years by using variable and balloon payment credit terms in order to reduce the impact of significant changes in interest rates on its longer-term assets. Further, the Company's policies attempt to structure its mix of financial instruments and manage its interest rate sensitivity gap in order to minimize the potential adverse effects of inflation or 21 other market forces on its net interest income, earnings and capital. A comparison of the carrying value of the Company's financial instruments to their estimated fair value as of December 31, 1999 is disclosed in Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Indirectly, management of the money supply by the Federal Reserve to control the rate of inflation has an impact on the earnings of the Company. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The independent auditor's report and consolidated financial statements of the Company and its subsidiary appear herein. The Company is not subject to the requirements for disclosure of supplemental quarterly financial data. 22 (ARNETT & FOSTER, P.L.L.C. LETTERHEAD) INDEPENDENT AUDITOR'S REPORT To the Board of Directors First National Bankshares Corporation and subsidiary Ronceverte, West Virginia We have audited the accompanying consolidated balance sheets of First National Bankshares Corporation and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First National Bankshares Corporation and subsidiary as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia February 4, 2000 23
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 ASSETS 1999 1998 ---------------- ------------ Cash and due from banks $ 3,716,511 $ 2,336,519 Interest bearing deposits with other banks 17,492 - Federal funds sold 30,000 5,679,000 Securities held to maturity (estimated fair value 1999 $11,160,273; 1998 $8,804,710) 11,519,992 8,739,119 Securities available for sale 11,356,470 9,126,633 Loans, less allowance for loan losses of $763,523 and $765,542, respectively 74,263,640 68,671,231 Bank premises and equipment, net 1,695,335 1,848,072 Accrued interest receivable 726,868 602,291 Other real estate acquired in settlement of loans 883,496 875,000 Other assets 619,042 475,324 ---------------- ------- Total assets $ 104,828,846 $ 98,353,189 ================ = ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 10,740,459 $ 12,123,521 Interest bearing 78,391,385 69,097,806 ---------- --------------- Total deposits 89,131,844 81,221,327 Short-term borrowings 4,112,579 950,734 Other liabilities 960,467 946,572 Long-term borrowings 473,288 5,487,598 ---------------- --------------- Total liabilities 94,678,178 88,606,231 ---------------- --------------- Commitments and Contingencies Shareholders' Equity Common stock, $1.00 par value, authorized 10,000,000 shares, issued 964,515 shares 964,515 964,515 Capital surplus 1,019,053 1,019,053 Retained earnings 8,370,344 7,769,966 Accumulated other comprehensive income (203,244) (6,576) ----------------- --------------- Total shareholders' equity 10,150,668 9,746,958 ---------------- --------- Total liabilities and shareholders' equity $ 104,828,846 $ 98,353,189 ================ ===============
See Notes to Consolidated Financial Statements 24
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For The Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- ---------------- ------------ Interest income: Interest and fees on loans $ 6,158,358 $ 6,328,051 $ 5,811,096 Interest and dividends on securities: Taxable 1,148,635 819,543 841,331 Tax-exempt 163,536 175,715 199,095 Interest on interest bearing deposits with other banks 75,068 - - Interest on Federal funds sold 160,981 240,544 189,937 ------- ---------------- --------------- Total interest income 7,706,578 7,563,853 7,041,459 --------------- ---------------- --------------- Interest expense: Deposits 3,076,961 2,949,576 2,755,866 Short-term borrowings 55,147 59,283 61,561 Long-term borrowings 257,596 362,940 259,697 --------------- ---------------- --------------- Total interest expense 3,389,704 3,371,799 3,077,124 --------------- ---------------- --------------- Net interest income 4,316,874 4,192,054 3,964,335 Provision for loan losses 100,000 448,940 31,000 --------------- ---------------- --------------- Net interest income after provision for loan losses 4,216,874 3,743,114 3,933,335 --------------- ---------------- --------------- Other income (expense): Trust department income 61,407 86,168 64,835 Service fees 300,226 248,286 259,662 Securities gains (losses), net (517) - - Other 93,594 110,626 97,188 --------------- ---------------- --------------- Total other income 454,710 445,080 421,685 --------------- ---------------- --------------- Other expenses: Salaries and employee benefits 1,603,221 1,541,833 1,639,359 Net occupancy expense 269,737 283,345 279,780 Equipment rentals, depreciation and maintenance 279,937 293,666 252,391 Federal deposit insurance premiums 12,512 9,227 6,890 Data processing 183,192 195,237 132,681 Advertising 67,339 64,446 76,692 Professional and legal 96,862 161,010 103,032 Mailing and postage 74,440 75,979 76,244 Directors' fees and shareholders' expenses 107,860 100,386 102,417 Stationery and supplies 80,316 70,479 94,533 Other 400,009 371,318 322,519 --------------- ---------------- --------------- Total other expenses 3,175,425 3,166,926 3,086,538 --------------- ---------------- --------------- Income before income tax expense 1,496,159 1,021,268 1,268,482 Income tax expense 494,543 297,124 476,660 --------------- ---------------- --------------- Net income $ 1,001,616 $ 724,144 $ 791,822 =============== ================ =============== Basic earnings per common share $ 1.04 $ 0.75 $ 0.82 ================ ================= ================ Diluted earnings per common share $ 1.03 $ 0.75 $ 0.82 ================ ================= ================ See Notes to Consolidated Financial Statements
25
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- ---------------- ------------ Net income $ 1,001,616 $ 724,144 $ 791,822 --------------- ---------------- --------------- Other comprehensive income: Gross unrealized gains/(losses) arising during the period (322,407) (11,492) 589 Adjustments for income tax (expense)/ benefit 125,739 4,476 (224) --------------- ---------------- --------------- (196,668) (7,016) 365 --------------- ---------------- --------------- Other comprehensive income, net of tax (196,668) (7,016) 365 --------------- ---------------- --------------- Comprehensive income $ 804,948 $ 717,128 $ 792,187 =============== ================ ===============
See Notes to Consolidated Financial Statements 26
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 Accumulated Total Other Share- Common Capital Retained Comprehensive holders' Stock Surplus Earnings Income Equity Balance, December 31, 1996 $ 962,500 $ 1,000,000 $ 6,878,037 $ 75 $ 8,840,612 Net income - - 791,822 - 791,822 Cash dividends declared on common stock ($0.32 per share) - - (308,000) - (308,000) Change in net unrealized gain (loss) on securities - - - 365 365 -------------- ------------- ------------- ---------------- ------------- Balance, December 31, 1997 962,500 1,000,000 7,361,859 440 9,324,799 Net income - - 724,144 - 724,144 Cash dividends declared on common stock ($0.33 per share) - - (316,037) - (316,037) Issued 2015 shares of common stock pursuant to exercise of stock option 2,015 19,053 - - 21,068 Change in net unrealized gain (loss) on securities - - - (7,016) (7,016) -------------- ------------- ------------- ---------------- ------------- Balance, December 31, 1998 964,515 1,019,053 7,769,966 (6,576) 9,746,958 Net income - - 1,001,616 - 1,001,616 Cash dividends declared on common stock ($0.42 per share) - - (401,238) - (401,238) Change in net unrealized gain (loss) on securities - - - (196,668) (196,668) -------------- ------------- ------------- ---------------- ------------- Balance, December 31, 1999 $ 964,515 $ 1,019,053 $ 8,370,344 $ (203,244) $ 10,150,668 ============== ============= ============= ================ =============
See Notes to Consolidated Financial Statement 27
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- --------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,001,616 $ 724,144 $ 791,822 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 233,179 263,089 227,785 Provision for loan losses 100,000 448,940 31,000 Deferred income taxes (benefit) 8,314 (118,984) 33,179 Securities (gains) losses, net 517 - - (Gain) loss on sale of other assets - (23,288) - Provision for valuation allowance of other real estate owned - 1,500 - (Gain) loss on disposal of bank premises and equipment (5,331) 800 (5,222 ) Amortization of securities premiums and (accretion of discounts), net (180,938) (69,097) (35,474) (Increase) decrease in accrued interest receivable (124,577) 57,816 (1,528) (Increase) decrease in other assets (26,293) (19) (18,715) Increase (decrease) in other liabilities (45,905) 42 (80,071) --------------- --------------- --------------- Net cash provided by operating activities 960,582 1,284,943 942,776 --------------- --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits with other banks (17,492) - - Proceeds from maturities and calls of securities held to maturity 5,980,516 8,575,000 9,735,000 Proceeds from maturities and calls of securities available for sale 9,499,035 6,000,000 2,000,000 Purchases of securities held to maturity (8,721,753) (5,000,938) (3,200,608) Purchases of securities available for sale (11,910,494) (10,071,287) (3,191,950) Principal payments received on (loans made to) customers, net (5,720,409) (897,037) (16,341,550) Purchases of bank premises and equipment (95,111) (40,342) (337,906) Proceeds from sale of bank premises and equipment 20,000 1,300 7,085 Proceeds from sales of other assets - 56,238 - Proceeds from lease payments on other real estate owned 19,504 - - --------------- --------------- ---------------- Net cash provided by (used in) investing activities (10,946,204) (1,377,066) (11,329,929) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposit, NOW and savings accounts 11,902,587 4,414,555 1,675,456 Proceeds from sales of (payments for matured) time deposits, net (3,992,070) (1,528,976) 3,343,839 Net increase (decrease) in short-term borrowings 3,161,845 (379,662) 837,923 Proceeds from long-term borrowings - - 5,500,000 Principal payments on long-term borrowings (5,014,310) (12,402) - Proceeds from sale of common stock pursuant to stock option exercise - 21,068 - Dividends paid (341,438) (308,160) (308,000) ---------------- --------------- --------------- Net cash provided by (used in) financing activities 5,716,614 2,206,423 11,049,218 --------------- --------------- --------------- (Continued) 28 CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 --------------- --------------- ----------- Increase (decrease) in cash and cash equivalents (4,269,008) 2,114,300 662,065 Cash and cash equivalents: Beginning 8,015,519 5,901,219 5,239,154 --------------- --------------- --------------- Ending $ 3,746,511 $ 8,015,519 $ 5,901,219 =============== =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest $ 3,461,886 $ 3,334,559 $ 3,113,927 =============== =============== =============== Income taxes $ 491,429 $ 497,945 $ 361,969 =============== =============== =============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Other real estate acquired in settlement of loans $ 28,000 $ 885,000 $ 2,450 =============== =============== =============== Dividends declared and unpaid $ 144,677 $ 84,877 $ 77,000 =============== =============== ===============
See Notes to Consolidated Financial Statements 29 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Nature of business: First National Bankshares Corporation (the "Company") is a one bank holding company which was incorporated on January 28, 1986. The wholly owned subsidiary, First National Bank is a commercial bank with operations in Greenbrier and Kanawha Counties of West Virginia. The Bank provides retail and commercial loans and deposit and trust services primarily to customers located in Greenbrier, Kanawha and surrounding counties. Basis of financial statement presentation: The accounting and reporting policies of First National Bankshares Corporation and subsidiary conform to generally accepted accounting principles and to general practices within the banking industry. Principles of consolidation: The accompanying consolidated financial statements include the accounts of First National Bankshares Corporation, and its wholly-owned subsidiary, First National Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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. Presentation of cash flows: For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, Federal funds sold and amounts due from banks (including cash items in process of clearing). Cash flows from demand deposits, NOW accounts and savings accounts are reported net since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net. Securities: Debt and equity securities are classified as "held to maturity", "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date. Securities held to maturity - Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. Securities available for sale - Securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity. Trading securities - There are no securities classified as "trading" in the accompanying consolidated financial statements. Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method. Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Unearned interest on discounted loans is amortized to income over the life of the loans, using methods which approximate the interest method. For all other loans, interest is accrued daily on the outstanding balances. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The subsidiary bank makes continuous credit reviews of the loan portfolio and considers current economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance for loan losses. Loans are charged against the allowance for loan losses when management believes collectibility is unlikely. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in conditions. A loan is impaired when, based on current information and events, it is probable that the subsidiary bank will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used. Generally, after management's evaluation, loans are placed on non-accrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non- accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method. Certain loan fees and direct loan costs are recognized as income or expense when incurred. Whereas, generally accepted accounting principles require that such fees and costs be deferred and amortized as adjustments of the related loan's yield over the contractual life of the loan. The subsidiary bank's method of recognition of loan fees and direct loan costs produces results which are not materially different from those that would be recognized had Statement Number 91 of the Financial Accounting Standards Board been adopted. Bank premises and equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for bank premises and equipment over the estimated useful lives of the assets. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment are capitalized. Other real estate: Other real estate consists of real estate held for resale which was acquired through foreclosure on loans secured by such real estate. At the time of acquisition, these properties are recorded at fair value with any write-down being charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Expenses incurred in connection with operating these properties are insignificant and are charged to operating expenses. Gains and losses on the sale of these properties are credited or charged to operating income in the year of the transactions. Sales of these properties which are financed by the subsidiary bank and meet the criteria of covered transactions remain classified as other real estate until such time as principal payments have been received to warrant classification as a real estate loan. Income taxes: The consolidated provision for income taxes includes Federal and state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common Stock Split: On September 24, 1999, the Company enacted a 5 for 1 stock split. The par value was reduced from $5.00 per share to $1.00 per share and 771,612 incremental shares were issued to shareholders of record. All prior period per share data for the years presented have been restated for comparability. Basic earnings per share: Basic earnings per common share are computed based upon the weighted average shares outstanding. The weighted average number of shares outstanding was 964,515 for the year ended December 31, 1999 and 963,565 and 962,500 for the years ended December 31, 1998 and 1997, respectively. The Company is required to present basic and diluted per share amounts. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is to reduce the loss or increase the income per common share from continuing operations. Basic and diluted earnings per share are calculated as follows:
For the Year Ended 1999 Income Shares Per (Numer- (Denom- Share ator) inator) Amount Basic EPS Income available to common shareholders $ 1,001,616 964,515 $ 1.04 ============= Effect of Dilutive Securities Stock options - 5,484 ------------- ------------- Diluted EPS Income available to common shareholders $ 1,001,616 969,999 $ 1.03 ============= ============= ============= For the Year Ended 1998 Basic EPS Income available to common shareholders $ 724,144 963,565 $ 0.75 ============= Effect of Dilutive Securities Stock options - 4,589 ------------- ------------- Diluted EPS Income available to common shareholders $ 724,144 968,154 $ 0.75 ============= ============= ============= For the Year Ended 1997 Basic EPS Income available to common shareholders $ 791,822 962,500 $ 0.82 ============= Effect of Dilutive Securities Stock options - 1,607 ------------- ------------- Diluted EPS Income available to common shareholders $ 791,822 964,107 $ 0.82 ============= ============= =============
Profit sharing and 401(k) plans: The subsidiary bank sponsored a profit-sharing plan through September 30, 1997. The subsidiary bank also sponsors a 401(k) plan which covers substantially all employees. Bank contributions to the plans are charged to expense. Postretirement benefit plans: The subsidiary bank provides certain healthcare and life insurance benefits for all retired employees that meet certain eligibility requirements. The plans are contributory with retiree contributions and are unfunded. The subsidiary bank's share of the estimated costs that will be paid after retirement is being accrued by charges to expense over the employees' active service periods to the dates they are fully eligible for benefits. Trust Department: Assets held in an agency or fiduciary capacity by the subsidiary bank's Trust Department are not assets of the subsidiary bank and are not included in the accompanying consolidated balance sheets. Trust Department income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than on the accrual basis does not have a material effect on net income. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reclassifications: Certain accounts in the consolidated financial statements for 1998 and 1997, as previously presented, have been reclassified to conform to current year classifications. Emerging accounting standards: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Bank expects to adopt the new Statement effective January 1, 2000. The Statement will require the Bank to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, change in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Since the Company has not utilized derivatives in the past, management does not anticipate that the adoption of the new Statement will have a significant effect on the Bank's earnings or financial position. Note 2. Cash Concentrations At December 31, 1998, the subsidiary bank had a cash concentration totaling $5,720,337, respectively, with a correspondent bank consisting of a due from bank account balance and Federal funds sold. At December 31, 1999, no such concentration existed. Deposits with correspondent banks are generally unsecured and have limited insurance under current banking insurance regulations. Note 3. Securities The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 1999 and 1998, are summarized as follows:
1999 Carrying Value (Estimated Amortized Unrealized Fair ------------------------------- Cost Gains Losses Value) -------------- --------- -------------- ---------- Available for sale Taxable: U.S. Government agencies and corporations $ 10,977,168 $ - $ 332,704 $10,644,464 Federal Reserve Bank stock 56,650 - - 56,650 Federal Home Loan Bank stock 646,100 - - 646,100 Other equities 7,489 - 483 7,006 -------------- ------------- -------------- ------------- Total taxable 11,687,407 - 333,187 11,354,220 -------------- ------------- -------------- ------------- Tax-exempt: Federal Reserve Bank stock 2,250 - - 2,250 -------------- ------------- -------------- ------------- Total $ 11,689,657 $ - $ 333,187 $ 11,356,470 ============== ============= ============== =============
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Carrying Value Estimated ( Amortized Unrealized Fair -------------------------------- Cost) Gains Losses Value Held to maturity Taxable: U.S. Government agencies and corporations $ 8,000,000 $ - $ 196,367 $ 7,803,633 State and political subdivisions 500,000 - 172,170 327,830 -------------- ------------- -------------- ------------- Total taxable 8,500,000 - 368,537 8,131,463 -------------- ------------- -------------- ------------- Tax-exempt: State and political subdivisions 3,019,992 21,266 12,448 3,028,810 -------------- ------------- -------------- ------------- Total $ 11,519,992 $ 21,266 $ 380,985 $ 11,160,273 ============== ============= ============== ============= 1998 Carrying Value (Estimated Amortized Unrealized Fair --------------------------------- Cost Gains Losses Value) -------------- ------------- -------------- ----------- Available for sale Taxable: U.S. Government agencies and corporations $ 8,495,645 $ 15,886 $ 26,183 $ 8,485,348 Federal Reserve Bank stock 56,650 - - 56,650 Federal Home Loan Bank stock 573,600 - - 573,600 Other equities 9,268 - 483 8,785 -------------- ------------- -------------- ------------- Total taxable 9,135,163 15,886 26,666 9,124,383 -------------- ------------- -------------- ------------- Tax-exempt: Federal Reserve Bank stock 2,250 - - 2,250 -------------- ------------- -------------- ------------- Total $ 9,137,413 $ 15,886 $ 26,666 $ 9,126,633 ============== ============= ============== ============= Carrying Value Estimated ( Amortized Unrealized Fair Cost) Gains Losses Value ------------ --------------------- ----------------- Held to maturity Taxable: U.S. Government agencies and corporations $ 5,228,839 $ 3,662 $ 23,145 $ 5,209,356 -------------- ------------- -------------- ------------- Tax-exempt: State and political subdivisions 3,510,280 85,074 - 3,595,354 -------------- ------------- -------------- ------------- Total $ 8,739,119 $ 88,736 $ 23,145 $ 8,804,710 ============== ============= ============== ============= Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities which are included in securities available for sale in the accompanying consolidated financial statements. Such securities are carried at cost, since they may only be sold back to the respective issuer or another member at par value.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The maturities, amortized cost and estimated fair values of securities at December 31, 1999, are summarized as follows: Held to Maturity Available for Sale Carrying Carrying Value Value Estimated (Estimated (Amortized Fair Amortized Fair Cost) Value Cost Value) -------------- ------------- -------------- ----------- Due in one year or less $ 1,513,887 $1,501,194 $ 2,978,044 $ 2,964,980 Due from one to five years 9,237,276 9,067,751 7,999,124 7,679,484 Due from five to ten years 268,829 263,498 - - Due after ten years 500,000 327,830 - - Equity securities - - 712,489 712,006 -------------- ------------- -------------- ------------- Total $ 11,519,992 $ 11,160,273 $ 11,689,657 $ 11,356,470 ============== ============= ============== ============= The proceeds from sales, calls and maturities of securities and principal payments received on mortgage-backed obligations and the related gross gains and losses realized are as follows: Proceeds From Gross Realized Years Ended Calls and Principal December 31, Sales Maturities Payments Gains Losses 1999 Securities held to maturity $ 997,255 $ 4,983,261 $ - $ - $ 258 Securities available for sale 997,256 8,501,779 - - 259 ------------- ------------- ----------- ----------- ----------- $ 1,994,511 $ 13,485,040 $ - $ - $ 517 ============= ============= =========== =========== =========== 1998 Securities held to maturity $ - $ 8,575,000 $ - $ - $ - Securities available for sale - 6,000,000 - - - ------------- ------------- ----------- ----------- ----- $ - $ 14,575,000 $ - $ - $ - ============= ============= =========== =========== ===== 1997 Securities held to maturity $ - $ 9,735,000 $ - $ - $ - Securities available for sale - 2,000,000 - - - ------------- ------------- ----------- ----------- ----- $ - $ 11,735,000 $ - $ - $ - ============= ============= =========== =========== ===== At December 31, 1999 and 1998, securities with amortized costs of $8,500,000 and $5,727,682, respectively, with estimated fair values of $8,292,873 and $5,729,806, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Loans Loans are summarized as follows: 1999 1998 --------------- ------------ Commercial, financial and agricultural $ 30,877,073 $ 26,581,333 Real estate - construction 1,451,024 956,042 Real estate - mortgage 31,395,269 31,645,727 Installment 9,079,335 8,481,967 Other 2,224,462 1,772,031 --------------- --------------- Total loans 75,027,163 69,437,100 Less unearned income - 327 --------------- --------------- Total loans net of unearned income 75,027,163 69,436,773 Less allowance for loan losses 763,523 765,542 --------------- --------------- Loans, net $ 74,263,640 $ 68,671,231 =============== ===============
Included in the net balance of loans are non-accrual loans amounting to $0 and $317,873 at December 31, 1999 and 1998, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $12,785, $33,670 and $112,444 for the years ended December 31, 1999, 1998 and 1997, respectively.
The following represents contractual maturities of loans at December 31, 1999: After 1 But Within 1 Year Within 5 Years After 5 Years --------------- -------------- -------------- Commercial, financial and agricultural $ 9,540,487 $ 15,712,703 $ 5,623,883 Real estate - construction 607,123 843,901 - Real estate - mortgage 5,291,900 3,062,691 23,040,678 Installment 4,232,475 4,344,760 502,100 Other 1,314,109 25,557 884,796 ---------------- --------------- --------------- Total $ 20,986,094 $ 23,989,612 $ 30,051,457 ================ =============== =============== Loans due after one year with: Variable rates $ 18,722,758 Fixed rates 35,318,311 ---------------- Total $ 54,041,069 ================
Concentrations of credit risk: The subsidiary bank grants commercial, residential and consumer loans to customers primarily located in Greenbrier and Kanawha Counties of West Virginia. Loans to related parties: The subsidiary bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party: 1999 1998 -------------- ---------- Balance, beginning $ 811,541 $ 764,878 Additions 1,501,572 307,680 Amounts collected (637,657) (261,017) --------------- ------------- Balance, ending $ 1,675,456 $ 811,541 ============== =============
Note 5. Allowance for loan losses An analysis of the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997, is as follows: 1999 1998 1997 ------------- -------------- ----------- Balance, beginning of year $ 765,542 $ 635,555 $ 653,954 Losses: Commercial, financial and agricultural 203,708 - - Real estate - mortgage 3,576 23,529 - Real estate - construction - 272,451 - Installment 83,244 68,470 108,645 ------------- -------------- ------------- Total 290,528 364,450 108,645 ------------- -------------- ------------- Recoveries: Commercial, financial and agricultural 138,156 - - Real estate - mortgage - - - Real estate - construction - - - Installment 50,353 45,497 59,246 ------------- -------------- ------------- Total 188,509 45,497 59,246 ------------- -------------- ------------- Net (recoveries) losses 102,019 318,953 49,399 Provision for loan losses 100,000 448,940 31,000 ------------- -------------- ------------- Balance, end of year $ 763,523 $ 765,542 $ 635,555 ============= ============== =============
The Company's total recorded investment in impaired loans at December 31, 1999 and 1998, approximated $0 and $317,873, respectively, for which the related allowance for loan losses determined in accordance with generally accepted accounting principles approximated $0 and $250,000, respectively. The Company's average investment in such loans approximated $282,436 and $333,316 for the years ended December 31, 1999 and 1998, respectively. All impaired loans at December 31, 1999 and 1998, were collateral dependent, and accordingly, the fair value of the loan's collateral was used to measure the impairment of each loan. For purposes of evaluating impairment, the Company considers groups of smaller-balance, homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the subsidiary bank's typical residential mortgage loan amount (currently those in excess of $100,000); small balance commercial loans (currently those less than $50,000); and installment loans to individuals, exclusive of those loans in excess of $50,000. For the years ended December 31, 1999 and 1998, the Company recognized $23,046 and $0 in interest income on impaired loans. 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Bank Premises and Equipment The major categories of Bank premises and equipment and accumulated depreciation at December 31, 1999 and 1998, are summarized as follows: 1999 1998 --------------- ------------ Land $ 298,361 $ 298,361 Building and improvements 1,581,298 1,581,298 Furniture and equipment 2,035,482 2,007,860 --------------- --------------- 3,915,141 3,887,519 Less accumulated depreciation 2,219,806 2,039,447 --------------- --------------- Bank premises and equipment, net $ 1,695,335 $ 1,848,072 =============== =============== Depreciation expense for the years ended December 31, 1999, 1998 and 1997 totaled $233,179, $263,089 and $227,785, respectively. Note 7. Deposits The following is a summary of interest bearing deposits by type as of December 31, 1999 and 1998: 1999 1998 --------------- ------------ Interest bearing demand deposits $ 15,548,733 $ 11,898,145 Savings deposits 37,400,255 27,765,194 Certificates of deposit 25,442,397 29,434,467 --------------- --------------- Total $ 78,391,385 $ 69,097,806 =============== =============== Time certificates of deposit in denominations of $100,000 or more totaled $4,182,682 and $6,116,458 at December 31, 1999 and 1998, respectively. Interest paid on time certificates of deposit in denominations of $100,000 or more was $265,258, $276,856 and $272,837 for the years ended December 31, 1999, 1998 and 1997, respectively. The following is a summary of the maturity distribution of certificates of deposit in denominations of $100,000 or more as of December 31, 1999: Amount Percent Three months or less $ 1,703,863 40.7% Three through six months 1,212,961 29.0% Six through twelve months 348,214 8.3% Over twelve months 917,644 22.0% --------------- ------------- Total $ 4,182,682 100.0% =============== ============= A summary of the maturities of time deposits as of December 31, 1999, follows: Year Amount 2000 $ 18,849,374 2001 4,128,418 2002 1,086,335 2003 256,163 2004 1,122,107 --------------- $ 25,442,397 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Bank has and expects to have in the future, banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management's opinion, these deposits and transactions were on the same terms as those for comparable deposits and transactions with nonrelated parties. Aggregate deposit transactions with related parties for the year ended December 31, 1999 and 1998 were $2,089,145 and $3,161,312. Note 8. Other Borrowings Short-term borrowings: During 1999 and 1998, the Company's short-term borrowings consisted of securities sold under agreements to repurchase (repurchase agreements) and Federal funds purchased from other financial institutions. Interest paid on these borrowings are based upon either fixed or variable rates as determined upon origination. Interest is calculated and credited to the customer's account on a scheduled basis. Minimum deposit balance requirements are established on a case-by-case basis. The securities underlying these agreements are under the subsidiary bank's control and secure the total outstanding daily balances.
The following information is provided relative to these obligations: 1999 1998 Repurchase Federal Funds Repurchase Federal Funds Agreements Purchased Agreements Purchased Outstanding at year end $ 4,112,579 $ - $ 950,734 $ - Weighted average interest rate at December 31 4.63% 0.00% 2.97% - Max. amount outstanding at any month end $ 4,112,579 $ 4,874,500 $ 2,111,650 Average daily amount outstanding $ 1,198,981 $ 252,003 $ 1,573,575 - Weighted average interest rate 3.41% 5.68% 3.76% -
Long-term borrowings: The Company's long term borrowings consist of various advances from the Federal Home Loan Bank (or "FHLB"). Of these borrowings, a $500,000 advance, with a fixed interest rate of 5.86%, was obtained on December 23, 1997 to fund a commercial loan for a local business. Monthly payments of $3,542, including principal and interest, began on January 23, 1998, with a balloon payment due on December 23, 2002. At December 31, 1999, the outstanding balance totaled $473,288. A summary of the maturities of this borrowing for the next five years is as follows: $15,171 in 2000; $16,084 in 2001; and $442,033 in 2002. The advance is secured by Federal Home Loan Bank of Pittsburgh stock, qualifying first mortgage loans, certain non-mortgage loans and all investments not otherwise pledged. A $5,000,000 balloon note, with a fixed interest rate of 6.68%, was scheduled to mature on March 23, 2000. This note, with an outstanding principal balance of $5,000,000 at December 31, 1998 was paid in full on August 5, 1999. Included in interest expense for the year ended 1999 is a prepayment interest penalty of approximately $32,000 assessed by the lender. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Income Taxes The components of applicable income tax expense (benefit) for the years ended December 31, 1999, 1998 and 1997, are as follows: 1999 1998 1997 ------------- -------------- ---------- Current: Federal $ 414,085 $ 344,848 $ 370,981 State 72,144 71,260 72,500 ------------- -------------- ------------- 486,229 416,108 443,481 Deferred (Federal and State) 8,314 (118,984) 33,179 ------------- -------------- ------------- Total $ 494,543 $ 297,124 $ 476,660 ============= ============== ============= A reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997 ------------------------- ------------------------ ------------------ Amount Percent Amount Percent Amount Percent Computed tax at applicable statutory rate $ 508,694 34.0 $ 347,231 34.0 $ 431,284 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest (71,062) (4.7) (77,173) (7.6) (69,984) (5.5) State income taxes, net of Federal income tax benefit 48,319 3.2 47,031 4.6 48,933 3.9 Disallowed interest 11,482 0.8 9,257 0.9 9,469 0.7 Other, net (2,890) (0.2) (29,222) (2.9) 56,958 4.5 ----------- ------- ----------- --------- ----------- --------- Applicable income taxes $ 494,543 33.1 $ 297,124 29.0 $ 476,660 37.6 =========== ======= =========== ========= =========== ====
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities as of December 31, 1999 and 1998, are as follows:
1999 1998 -------------- ---------- Deferred tax assets: Allowance for loan losses $ 191,652 $ 192,440 Employee benefits 170,755 164,245 Contingency accruals 5,265 15,308 Book and tax basis differences - Other real estate owned 7,607 - Net unrealized loss on securities 129,943 4,204 -------------- ------------- Total 505,222 376,197 -------------- ------------- Deferred tax liabilities: Depreciation 31,481 32,213 Accretion on securities 21,040 8,708 -------------- ------------- Total 52,521 40,921 -------------- ------------- Net deferred tax assets $ 452,701 $ 335,276 ============== = ======= 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Employee Benefits 401(k) Plan: The subsidiary bank sponsors a 401(k) defined contribution plan covering substantially all employees. Participants are eligible to contribute up to 10% of their annual compensation to the Plan. For the year ended December 31, 1997, the Bank matched participant contributions in an equal amount up to 3.5% of each participant's annual compensation. Beginning January 1, 1998, the Bank matches up to 5% of each participant's annual compensation. In addition, the Bank is also eligible to make discretionary contributions to the Plan. Profit-Sharing Plan: The subsidiary bank sponsored a noncontributory defined contribution profit-sharing plan covering substantially all employees through October 1, 1997. Effective October 1, 1997, the profit sharing plan was terminated. Contributions to the Plan, prior to October 1, 1997, were at the discretion of the Board of Directors. The Bank's contributions to the above Plans for the years ended December 31, 1999, 1998 and 1997, totaled $48,556, $49,435 and $47,014, respectively. Postretirement Benefit Plans: The subsidiary bank sponsors a postretirement medical plan and a postretirement life insurance plan for all retired employees that meet certain eligibility requirements. Effective January 1, 1999, participation in the plan was closed to all new employees hired after that date. Both plans are contributory with retiree contributions that are adjustable based on various factors, some of which are discretionary. The plans are unfunded. Details regarding the retiree medical plan and the retiree life insurance plan are as follows:
Retiree Retiree Medical Plan Life Insurance Plan Total -------------------------------- ----------------------------------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------------------------------- ----------------------------------------------------------- Change in accumulated postretirement benefit obligation Accumulated postretirement benefit obligation at beginning of year $ 374,954 $305,375 $ 248,486 $ 106,188 $ 110,927 $ 97,723 $ 481,142 $ 416,302 $ 346,209 Service cost 7,643 6,155 6,627 2,929 2,443 2,619 10,572 8,598 9,246 est cost 23,979 20,175 16,847 6,779 7,334 6,493 30,758 27,509 23,340 Actuarial (gain)/loss (10,579) 62,181 44,430 10,527 (8,760) 8,589 (52) 53,421 53,019 Benefits paid (16,849) (18,932) (11,015) (8,035) (5,756) (4,497) (24,884) (24,688) (15,512) --------- -------- --------- --------- --------- ---------- --------- --------- --------- Accumulated postretirement benefit obligation at end of year $ 379,148 $374,954 $ 305,375 $ 118,388 $ 106,188 $ 110,927 $ 497,536 $ 481,142 $416,302 ========= ======== ========= ========= ========= ========= ========= ========= ========
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Retiree Retiree Medical Plan Life Insurance Plan Total ------------------------------ ------------------------------- ----------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 --------- ----------- --------- --------- --------- --------- ------------ --------- Change in plan assets Fair value of plan assets at beginning of year $ - $ - $ - $ - $ - $ - $ - $ - $ - Employer contribution 16,849 18,932 11,015 8,035 5,756 4,497 24,884 24,688 15,512 Benefits paid (16,849) (18,932) (11,015) (8,035) (5,756) (4,497) (24,884) (24,688) (15,512) --------- ---------- --------- -------- --------- -------- -------- -------- -------- Fair value of plan assets at end of year $ - $ - $ - $ - $ - $ - $ - $ - $ - ========= ========== ========= ======== ========= ======== ======== ======== ======== Funded status $(379,148) $(374,954) $(305,375) (118,388) $(106,188) $(110,927)(497,536)$(481,142)$(416,302) Unrecognized net actuarial (gain)/loss 50,558 62,800 619 10,102 (425) 8,335 60,660 62,375 8,954 --------- ---------- --------- --------- ------- --------- ------- --------- --------- Accrued postretirement benefit cost $(328,590) $(312,154) $(304,756) $(108,286) $(106,613) $(102,592)$(436,876)$(418,767)$(407,348) ========= =========== ======== ========= ======== ========= ======== ========= ======== Weighted-average assumptions as of December 31 Discount rate 7.25% 6.75% 7.00% 7.25% 6.75% 7.00 - - - Components of net periodic postretirement benefit cost: Service cost $ 7,643 $ 6,155 $ 6,627 $ 2,929 $ 2,443 $2,619 $ 10,572 $ 8,598 $ 9,246 Interest cost 23,979 20,175 16,847 6,779 7,334 6,493 30,758 27,509 23,340 Amortization of net actuarial (gain)/loss 1,663 - (1,414) - - - 1,663 - (1,414) --------- ----------- --------- --------- --------- --------- --------- --------- --------- Net periodic postretirement benefit $ 33,285 $ 26,330 $ 22,060 $ 9,708 $ 9,777 $ 9,112 $ 42,993 $ 36,107 $ 31,172 ========= =========== ========= ========= ========= ========= ========= ========= ========
For measurement purposes, a 7% annual rate of increase in per capita healthcare costs of covered benefits was assumed for the first 3 years, 6% for the next 3 years (6% for the next 5 years for 1998 and 1997, respectively), 5 1/2% for the next 3 years, (5 1/2 % for the next 5 years for 1998 and 1997, respectively) and 5% thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one- percentage-point change in assumed health care cost trend rates would have the following effects:
1 Percent 1 Percent Point Increase Point Decrease Increase (decrease) service and interest cost components $ 1,315 $ (1,176) ================== ==================== (Increase) decrease accumulated postretirement benefit obligation $ (18,144) $ 16,215 ================== ==================== 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Stock Option Plan The Company has an incentive stock option plan for key employees of the Bank as identified by the stock option committee. Grants under the plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement 123), the reported net income and earnings per share would have been reduced to the proforma amounts shown below: 1999 1998 1997 ------------- -------------- ---------- Net income: As reported $ 1,001,616 $ 724,144 $ 791,822 Proforma $ 967,420 $ 712,983 $ 770,623 Basic earnings per share: As reported $ 1.04 $ 0.75 $ 0.82 Proforma $ 1.00 $ 0.74 $ 0.80 Diluted earnings per share: As reported $ 1.03 $ 0.75 $ 0.82 Proforma $ 1.00 $ 0.74 $ 0.80
The significant provisions of the Plan include authorization of the stock option committee to grant up to 48,125 shares of common stock between April 25, 1996 and April 25, 2006, with the right to adjust the number of shares available for the plan at its discretion. Each option fully vests after six months from the grant date and must be exercised within 5 years. The fair value of each grant is estimated at the grant date using the minimum value method with the following weighted-average assumptions for grants in 1999 and 1997: dividend rate of 2%; risk free interest rate of 5.85% and 5.37%, respectively and expected life of 5 years. No options were granted in 1998. A summary of the status of the plan at December 31, 1999, 1998 and 1997 and changes during the year ended is as follows:
1999 1998 1997 ------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Fixed Options Outstanding at beginning of year 18,015 $ 10.43 23,280 $ 10.43 16,000 $10.00 Granted 14,000 15.00 - 8,280 11.20 Exercised - - (2,015) 10.46 - - Forfeited - - (3,250) 10.37 (1,000) (10.00) ----------- ----------- ----------- Outstanding at end of year 32,015 12.43 18,015 10.43 23,280 10.43 =========== =========== =========== Exercisable at end of year 32,015 12.43 18,015 10.43 15,000 10.00 =========== =========== =========== Fair value per option of options granted during the year $ 2.44 $ - $ 1.62 ============ =========== ============
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1999, the options outstanding under the stock option plan have exercise prices ranging from $10.00 to $15.00 and a weighted average remaining contractual life of 3.18 years. Note 12. Lease Obligation The subsidiary bank leases the Charleston branch office space under an operating lease with an initial term of ten years commencing on May 1, 1996. The lease provides for two successive options for five year renewals. Total minimum lease payments of $101,970 were charged to expense for each of the years ended December 31, 1999, 1998 and 1997, respectively. In addition, adjustments may be charged or credited to the minimum amount for changes in the Company's portion of the common area maintenance. Total future minimum lease payments under the lease are as follows:
Year Ending December 31, Amount ------------ ------ 2000 $ 101,970 2001 101,970 2002 101,970 2003 101,970 Thereafter 251,260 ------------- $ 659,140
Note 13. Commitments and Contingencies Reserve Requirements: The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank. At December 31, 1999, the reserve balance was $645,000. The subsidiary bank does not earn interest on this balance. Commitment to Purchase The subsidiary bank committed to purchase a security with a par value of $600,000 before the balance sheet date that did not settle until after December 31, 1999. Year 2000 Compliant The Company has evaluated the impact of the Year 2000 issue and is not aware of any system failures or any problems encountered by vendors, customers, or other third parties that would have a significant impact on the Company's financial condition. The Company believes it has taken the necessary steps to be Year 2000 compliant, however, there may be unforeseen external or internal issues which could impact the Company's status in the future. Financial instruments with off-balance sheet risk: The subsidiary bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1999 and 1998, the subsidiary bank's financial instruments with off-balance sheet risk are as follows: Financial instruments whose contract Contract Amount amounts represent credit risk 1999 1998 ----------------------------------------- --------------- ----------- Commitments to extend credit $ 13,903,030 $11,508,148 =============== ===========
The subsidiary bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Bank management evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate. Litigation: The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements. Employment Agreement: The Company has an employment agreement with its chief executive officer. This agreement contains change in control provisions that would entitle the officer to receive, under certain circumstances, twice his annual compensation in the event there is a change in control in the Company (as defined) and a termination of his employment. The maximum contingent liability under this agreement approximates $397,752 at December 31, 1999. Note 14. 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. During 2000, the net retained profits available for distribution to First National Bankshares Corporation as dividends without regulatory approval approximate $1,008,531 plus net retained profits, as defined, for the interim periods through the date of declaration. The subsidiary bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary bank must meet specific capital guidelines that involve quantitative measures of the subsidiary bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiary bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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 December 31, 1999, that the subsidiary bank meets all capital adequacy requirements to which it is subject. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The most recent notification from the Office of the Comptroller of the Currency categorized the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the subsidiary bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. The subsidiary bank's actual capital amounts and ratios are presented in the following table (in thousands):
To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1999: Total Capital $ 11,091 15.28% $ 5,808 8.0% $ 7,260 10.0% (to Risk Weighted Assets) Tier I Capital 10,328 14.23% 2,904 4.0% 4,355 6.0% (to Risk Weighted Assets) Tier I Capital 10,328 9.71% 3,191 3.0% 5,318 5.0% (to Average Assets) As of December 31, 1998: Total Capital $ 10,493 15.77% $ 5,323 8.0% $ 6,654 10.0% (to Risk Weighted Assets) Tier I Capital 9,728 14.62% 2,662 4.0% 3,992 6.0% (to Risk Weighted Assets) Tier I Capital 9,728 9.94% 2,936 3.0% 4,893 5.0% (to Average Assets)
Note 15. Fair Value of Financial Instruments The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments. Cash and due from banks and interest bearing deposits with other banks: The carrying values of these amounts approximate their estimated fair value. Federal funds sold: The carrying values of Federal funds sold approximate their estimated fair values. Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accrued interest receivable: The carrying values of accrued interest receivable approximate their estimated fair value. Deposits: The estimated fair values of demand deposits (i.e. non interest bearing checking, NOW, money market and savings accounts) and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed. Short-term borrowings: The carrying values of short-term borrowings approximate their estimated fair values. Accrued interest payable: The carrying values of accrued interest payable approximate their estimated fair value. Off-balance sheet instruments: The fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below. The carrying values and estimated fair values of the Company's financial instruments are summarized below:
December 31, 1999 December 31, 1998 --------------------------------- -------------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value Financial assets: Cash and due from banks $ 3,716,511 $ 3,716,511 $ 2,336,519 $ 2,336,519 Interest bearing deposits with other Banks 17,492 17,492 - - Federal funds sold 30,000 30,000 5,679,000 5,679,000 Securities held to maturity 11,519,992 11,160,273 8,739,119 8,804,710 Securities available for sale 11,689,657 11,356,470 9,126,633 9,126,633 Loans 74,263,640 72,281,189 68,671,231 69,020,644 Accrued interest receivable 726,868 726,868 602,291 602,291 --------------- --------------- ---------------- --------------- $ 101,964,160 $ 99,288,803 $ 95,154,793 $ 95,569,797 =============== =============== ================ ============ Financial liabilities: Deposits $ 89,131,844 $ 89,959,520 $ 81,221,327 $ 81,324,234 Short-term borrowings 4,112,579 4,112,253 950,734 950,734 Accrued interest payable 159,554 159,554 200,046 200,044 Long-term borrowings 473,288 473,288 5,487,598 5,487,598 --------------- --------------- ---------------- -------------- $ 93,877,265 $ 94,704,615 $ 87,859,705 $ 87,962,610 =============== =============== ================ ===============
Note 16. Condensed Financial Statements of Parent Company The investment of the Company in its wholly-owned subsidiary is presented on the equity method of accounting. Information relative to the Company's balance sheets at December 31, 1999 and 1998, and the related statements of income and cash flows for the years ended December 31, 1999, 1998 and 1997, are presented as follows: 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets Assets 1999 1998 ------ ------------- ---------- Cash $ 25,105 $ 25,105 Investment in bank subsidiary, eliminated in consolidation 10,124,524 9,720,814 Other assets 145,716 85,916 ------------- -------------- Total assets $ 10,295,345 $ 9,831,835 ============= ============== Liabilities and shareholders' equity Liabilities Dividends payable $ 144,677 $ 84,877 ------------- -------------- Shareholders' equity Common stock, $1.00 par value, authorized 10,000,000 shares, issued 964,515 shares 964,515 964,515 Capital surplus 1,019,053 1,019,053 Retained earnings (consisting of undivided profits of subsidiary not yet distributed) 8,370,344 7,769,966 Accumulated other comprehensive income (203,244) (6,576) ------------- ------------- Total shareholders' equity 10,150,668 9,746,958 ---------------------------- Total liabilities and shareholders' equity $ 10,295,345 $ 9,831,835 ============= ============= Statements of Income 1999 1998 1997 -------------------- ------------- ------------- ---------- Income - dividends from bank subsidiary $ 401,238 $ 316,037 $ 308,000 Expenses - operating - 77 49 ------------- ------------- ----------- Income before income taxes and undistributed income 401,238 315,960 307,951 Applicable income tax expense (benefit) - (30) (19) ------------- ------------- ------------ Income before undistributed income 401,238 315,990 307,970 Equity in undistributed income in bank subsidiary 600,378 408,154 483,852 ------------- ------------- ----------- Net income $ 1,001,616 $ 724,144 $ 791,822 ============= ============= ========== Statements of Cash Flows 1999 1998 1997 ------------------------ ------------- ------------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,001,616 $ 724,144 $ 791,822 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (600,378) (408,154) (483,852) (Increase) decrease in other assets (59,800) (7,907) (19) ------------- ------------- ----------- Net cash provided by operating activities 341,438 308,083 307,951 ------------- ------------- ---------- 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock pursuant to exercise of stock option - 21,068 - Dividends paid to shareholders (341,438) (308,160) (308,000) ------------- ------------- ----------- Net cash (used in) financing activities (341,438) (287,092) (308,000) ------------- ------------- ----------- Increase (decrease) in cash - 20,991 (49) Cash: Beginning 25,105 4,114 4,163 ------------- ------------- -------------- Ending $ 25,105 $ 25,105 $ 4,114 ============= ============= ============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Dividends declared and unpaid $ 144,677 $ 84,877 $ 77,000 ============= ============= ===============
First National Bankshares Corporation accounts for its investment in its bank subsidiary by the equity method. During the years ended December 31, 1999, 1998 and 1997, changes were as follows: Number of shares owned at December 31, 1999 - 38,500 Percent to total shares at December 31, 1999 - 100% Balance at December 31, 1996 $ 8,835,459 Add (deduct): Equity in net income 791,852 Dividends declared (308,000) Change in net unrealized gain (loss) on securities 365 ------------------ Balance at December 31, 1997 9,319,676 Add (deduct): Equity in net income 724,191 Dividends declared (316,037) Change in net unrealized gain (loss) on securities (7,016) ---------------- Balance at December 31, 1998 9,720,814 Add (deduct): Equity in net income 1,001,616 Dividends declared (401,238) Change in net unrealized gain (loss) on securities (196,668) -------------- Balance at December 31, 1999 $10,124,524 ==============
Note 17. Other Real Estate Acquired in Settlement of Loans In 1999 the Company entered into an agreement to lease the commercial property it held in other real estate at December 31, 1998. The terms of the lease call for the lessee to make monthly payments for three years as follows: Months 1 - 3 $ - Months 4 - 6 2,500 Months 7 - 36 3,500 The lessee has an option to purchase the property at any time during the lease term at a price equal to the book value of the property at December 31, 1998, $875,000, reduced by the amount of lease payments made under the lease agreement, up to a maximum of $100,000. For the year ended 1999, $19,504 was received under the agreement, all of which was accounted for as a cost recovery. 49 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 50 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The Board of Directors of the Company may consist of not less than five (5) nor more than twenty-five (25) shareholders in accordance with the Company's Articles of Incorporation. The number of directors within such minimum and maximum limits shall be determined from time to time by resolution of a majority of the full Board of Directors, subject to limitations outlined in the Company's By-laws. Currently the Board of Directors may not increase the number of directors to a number which exceeds by more than two the number of directors last elected by the shareholders. The number of directors may also be fixed by a resolution of the shareholders at any annual or special meeting. No shareholder may be elected as director after attaining the age seventy (70), unless the shareholder was also a member of the Board of Directors on May 5, 1987. In September 1999, the Board of Directors resolved to increase (and fix) the number of directors from 10 to 12, after which, two new directors were appointed by the Board (Directors Garten and Campbell). In December 1999, Director J.R. Dawkins passed away, leaving one vacancy on the board of directors. Mr. Dawkins' term of office was to expire in 2000 and no person was appointed in the interim to fill the vacancy. No discussions as to a replacement for Mr. Dawkins have been held. Additional information about the directors, including their principal occupation and age, is set forth in the following table:
- ------------------------------------------------------------------------------------------------------------------- Name, Positions and Year First Year Offices Held (Other Became a Term Than Director) Principal Occupation Director of With the Company or Employment for of the Office and the Bank the Past Five Years Age Company Expires - ------------------------------------------------------------------------------------------------------------------- L. Thomas Bulla President & CEO of 60 1993 2001 President & CEO of the First National Bankshares Company and the Bank, Corp. and First National Risk Management Cmt., Bank (1993 - present); Trust Cmt. Director, President & CEO of Bank One, West Virginia Charleston, NA (1985-1993) Michael G. Campbell Investor 51 1999 2002 Audit & Compliance Cmt. Oil & Gas Executive Owner, Renick Farm David A. Carson President - Carson Associates 48 1998 2000 Risk Management Cmt. Audit & Compliance Cmt. J. R. Dawkins Deceased - 1999 Audit & Compliance Cmt. Richard E. Ford Attorney at Law 72 1987 2002 Risk Management Cmt. Partner - The Ford Trust Cmt. Law Firm Incentive Stock Option Cmt. Personnel & Comp. Cmt. Walter Bennett Fuller Retired Banker 76 1986 2000 Vice Chairman of the Board, Audit & Compliance Cmt. Incentive Stock Option Cmt. - ------------------------------------------------------------------------------------------------------------------- (Table continued on next page) 51 - ------------------------------------------------------------------------------------------------------------------- Name, Positions and Year First Year Offices Held (Other Became a Term Than Director) Principal Occupation Director of With the Company or Employment for of the Office and the Bank the Past Five Years Age Company Expires - ------------------------------------------------------------------------------------------------------------------- G. Thomas Garten President - Alleghany Motor 48 1999 2000 Audit & Compliance Cmt. Owner - Greenway's Real Estate & Auction Co. William D. Goodwin Attorney at Law, 56 1986 2001 Risk Management Cmt. Owner/Broker, Coldwell Trust Cmt. Banker Stuart & Watts Real Personnel & Compensation Cmt. Estate, Inc. Lucie T. Refsland, Ed.D. Associate Professor of 63 1995 2001 Risk Management Cmt. Mathematics (1993 - present) Trust Cmt. Greenbrier Community College Center of Bluefield State College William R. Satterfield, Jr. Owner - Greenbrier 55 1986 2001 Risk Management Cmt. Insurance Agency Personnel & Compensation Cmt. Richard L. Skaggs Retired 77 1986 2000 Audit & Compliance Cmt. Incentive Stock Option Cmt. Ronald B. Snyder President, R.B.S., Inc. 60 1988 2002 Chairman of Board (construction company) Audit & Compliance Cmt. Risk Management Cmt. Incentive Stock Option Cmt. Personnel & Compensation Cmt. - -------------------------------------------------------------------------------------------------------------------
The directors of the Company are divided into three (3) classes; and as a result, the shareholders elect approximately one-third of the directors of the Company each year. Directors Carson, Fuller and Skaggs whose terms expire in 2000, have been nominated to stand for re-election at the 2000 annual meeting of the Company's stockholders to serve a 3- year term which will expire in 2003. Director Garten, who was appointed by the Board of Directors in September 1999 to serve in the Class of 2000, will stand for election at the 2000 annual meeting to serve a 3-year term which will expire in 2003. Director Campbell, who was appointed by the Board of Directors in September 1999 to serve in the Class of 2002, will stand for election at the 2000 annual meeting to serve a 2-year term which will expire in 2002. The Directors of the Company do not receive any fees or compensation for services as directors thereof. All of the directors of the Company, however, are also directors of the Bank, and as such, receive $200.00 for each Board meeting, and $50.00 for each Board Committee meeting attended, plus $200.00 per month. No Board Committee fees are paid to directors who are also salaried officers of the Bank. 52 Executive Officers The current executive officers of the Company and the Bank and information about these officers is set forth on the following table.
- ------------------------------------------------------------------------------------------------------------------- Name Age Offices Held During Last Five Years - ------------------------------------------------------------------------------------------------------------------- L. Thomas Bulla 60 President & CEO of the Company and the Bank (1993 to present); President and CEO of Bank One, West Virginia, Charleston, NA (1985 - 1993) Charles A. Henthorn 40 Secretary/Treasurer of the Company (1999 to present); Executive Vice President of the Company (1996 to 1999); Executive Vice President of the Bank (1996 to present); Secretary to the Board of Directors (1998 to present); Senior Vice President of the Bank (1994 to 1996); Vice President and Senior Commercial Lender of Bank One, West Virginia, Charleston, NA (1991 - 1994); National Bank Examiner with the Office of the Comptroller of the Currency (1983 - 1991) Darrell G. Echols 63 Vice President of the Company (1987 to present); Senior Vice President and Loan Officer of the Bank (1970 to present) Victoria W. Ballengee 43 Vice President of the Company (1999 to present); Senior Vice President and Director of Private Banking of the Bank (1996 to present); Vice President and WV Market Manager, Banc One Mortgage Corporation (1994 to 1996); Regional Finance Director, Banc One, West Virginia, Charleston, NA (1993 to 1994 Matthew L. Burns 30 Chief Financial Officer of the Bank (1998 to present); Certified Public Accountant (1992 to 1998) - -------------------------------------------------------------------------------------------------------------------
The executive officers of the Company listed above shall continue in office until the 2000 organizational meeting of the directors of the Company. It is expected that the current officers will be re-elected to the offices they now hold. Compliance with Section 16(a) of the Exchange Act The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not have any class of securities registered pursuant to Section 12 of the Exchange Act, the provisions of Section 16 thereof are not applicable to the Company's directors, officers and shareholders. ITEM 11 - EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the compensation paid to the chief executive officer, the only executive officer whose compensation exceeds $100,000, for the years 1999, 1998 and 1997: - --------------------------------------------------------------------------------
Long-Term Other Compensation Annual Compensation Compen- Securities Under- Name and Salary Bonus sation lying Options Principal Position Year ($) ($) $ (1) (#) (2) - ------------------------------------------------------------------------------------------------------------------- L. Thomas Bulla 1999 $150,000 $30,000 $18,575 3,250 President & CEO of the 1998 $150,000 - $19,964 - Company and the Bank 1997 $150,000 $20,250 $22,767 2,000 FOOTNOTES: (1) These amounts are for director fees, premiums paid for term life insurance, employer matching 401(k) contributions, and personal use of company-owned vehicle.
53 (2) Represent shares granted under the Company's Incentive Stock Option Plan. The options fully vest six months after the grant date and expire five years after grant date. The following table details stock option grants to the chief executive officer for the year 1999:
STOCK OPTION GRANTS IN 1999 Potential Realizable Number of Value (3) at Assumed Securities Annual Rates of Stock Underlying % of Total Exercise Price Appreciation for Name and Options Options Price Expiration Option Term Principal Position Granted (1) Granted ($/Sh) Date 5% ($) (2) 10% ($) (2) - ---------------------------------------------------------------------------------------------------------- L. Thomas Bulla 3,250 23.2% $15.00 11/25/04 $13,455 $29,770
FOOTNOTES: (1) The options were granted under the Company's Incentive Stock Option Plan. The options fully vest six months after the grant date. Under the plan, the options carry an exercise price equal to the fair market value of the stock at the date of the grant. The options cannot be transferred and all unexercised options expire five years after the grant date. The options granted to the above executive officer represents approximately 0.34% of the common stock outstanding on March 1, 2000. (2) The potential realizable value of the options, if any, granted in 1999 to the executive officer was calculated by multiplying those options by the excess of (a) the assumed fair market value of the common stock on the date of the grant (May 25, 1999) if the fair market value of the common stock were to increase 5% or 10% in each year of the option's five year term over (b) the exercise price shown. This calculation does not take into account any taxes or other expenses which might by owed. The assumed fair market value at a 5% assumed annual appreciation rate over the five year term is $19.14 and such value at a 10% assumed annual appreciation rate over that term is $24.16. The 5% and 10% appreciation rates are set forth in the Securities and Exchange Commission rules and no representation is made that the common stock will appreciate at these assumed rates or at all. The following table details the aggregated option exercises in 1999 and 1999 year end option values:
AGGREGATED OPTION EXERCISES IN 1999 AND 1999 YEAR END OPTION VALUES Shares Number of Securities Value of Unexercised In-The- Acquired on Underlying Unexercised Money (2) Options at end of Name and Exercise Value Options at end of 1999 (#) 1999 ($)(3) Principal Position (# of sh) Realized (1) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------------------ L. Thomas Bulla $0 $0 8,450 0 $135,200 $0 FOOTNOTES: (1) The "value realized" represents the difference between the exercise price of the option shares and the market price of the option shares on the date the option was exercised. The value realized was determined without considering any taxes which may have been owed. (2) "In-The-Money" options are options whose exercise price was less than the fair market value of common stock at December 31, 1999. (3) Assumes a stock price of $16.00 per share, which is the believed market price per share reported to management by purchasers of the Company's common stock on or about December 31, 1999. - -------------------------------------------------------------------------------------------------------------------
54 Employment Agreement The Company has an employment agreement with its chief executive officer. This agreement contains change in control provisions that would entitle the officer to receive, under certain circumstances, twice his annual compensation in the event there is a change in control in the Company (as defined therein) resulting in termination of his employment or voluntary resignation. The maximum contingent liability under this agreement approximated $398,000 at December 31, 1999. Benefit Plans The Company's executive incentive plan is discretionary and is based upon several factors, including the overall financial performance of the Company and individual performance factors, among others. The plan is directed by the Compensation Committee of the Board of Directors and currently covers those employees classified as executive officers of the Company or its subsidiary bank. At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to approve an incentive stock option plan. The purpose of the plan is to provide a method whereby key employees of the Company and its subsidiaries who are responsible for the management, growth, and protection of the business, and who are making substantial contributions to the success and profitability of the business, may be encouraged to acquire a stock ownership in the Company, thus creating a proprietary interest in the business and providing them with greater incentive to continue in the service of and to promote the interest of the Company and its stockholders. The plan is directed by the Incentive Stock Option Committee, which is comprised of certain board members, who at their discretion grant shares to employees covered by the plan. For more information regarding the stock option plan, please refer to Note 11 of the Consolidated Financial Statements included in Item 8 of this filing. Information related to the Company's 401(k) and profit-sharing plans is summarized in Note 10 of the Consolidated Financial Statements included in Item 8 of this filing. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are no shareholders, known to the Company, who beneficially own more than 5.0% of the Company's common stock, the only class of stock outstanding, as of March 1, 2000. The following table sets forth information as of March 1, 2000, regarding the amount and nature of the beneficial ownership of common stock of the Company held by each of the directors of the Company and by all of the directors and executive officers of the Company and the Bank as a group.
- ------------------------------------------------------------------------------------------------------------------- Shares Owned Percent of Name Beneficially Class - ------------------------------------------------------------------------------------------------------------------- L. Thomas Bulla 40,550 (1) 4.17% David A. Carson 4,315 (2) 0.45% Michael G. Campbell 3,750 (3) 0.39% Richard E. Ford 20,530 (4) 2.13% Walter Bennett Fuller 9,500 (5) 0.98% G. Thomas Garten 1,925 (6) 0.20% William D. Goodwin 7,975 (7) 0.83% Lucie T. Refsland, Ed.D. 2,325 (8) 0.24% William R. Satterfield, Jr. 7,545 (9) 0.78% Richard L. Skaggs 2,795 (10) 0.29% Ronald B. Snyder 18,905 (11) 1.96% All Directors and Executive Officers of the Company as a Group (13 persons) 150,140 (12) 15.19% - ------------------------------------------------------------------------------------------------------------------- FOOTNOTES (1) Mr. Bulla has sole voting and investment authority for 19,350 shares and shared voting and investment authority for 12,750 shares. Included in Mr. Bulla's beneficial ownership are 8,450 fully-vested and exercisable stock options. (2) Mr. Carson has sole voting and investment authority for 700 shares and shared voting and investment authority for 2,845. Included in Mr. Carson's beneficial ownership are 770 shares held by his spouse. (3) Mr. Campbell has sole voting and investment authority for 3,750 shares. (4) Mr. Ford has sole voting and investment authority for 8,230 shares and shared voting and investment authority for 10,075 shares. Included in Mr. Ford's beneficial ownership are 2,225 shares held by his spouse. 55 (5) Mr. Fuller has sole voting and investment authority for 9,500 shares. (6) Mr. Garten has sole voting and investment authority for 1,925 shares. Included in Mr. Garten's beneficial ownership are 1,000 shares held by family members. (7) Mr. Goodwin has sole voting and investment authority for 4,725 shares and shared voting and investment authority for 3,250 shares. (8) Ms. Refsland has sole voting and investment authority for 2,275 shares. Included in Ms. Refsland's beneficial ownership are 50 shares held by her spouse. (9) Mr. Satterfield has sole voting and investment authority for 5,545 shares. Included in Mr. Satterfield's beneficial ownership are 2,000 shares held by his spouse. (10) Mr. Skaggs has sole voting and investment authority for 1,625 shares and shared voting and investment authority for 1,170 shares. (11) Mr. Snyder has sole voting and investment authority for 1,625 shares and shared voting and investment authority for 12,780 shares. Included in Mr. Snyder's beneficial ownership are 4,500 held by a corporation in which he has a controlling interest. (12) Beneficial ownership includes sole and investment authority of 23,975 shares held by Mr. Henthorn and Mr. Echols, including 10,300 fully vested stock options.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of business the Company's subsidiary, the Bank, as in the past, has had banking transactions with the directors and executive officers of the Company and the Bank, members of their immediate families, corporations and other entities in which such directors and officers were executive officers or had, directly or indirectly, beneficial ownership of 10% or more in any class of equity securities, and trusts in which they have a substantial beneficial interest or for which they serve as a fiduciary. Management of the Company is of the opinion that any outstanding extensions of credit to such persons were made in the ordinary course of the business of the Bank on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. See Note 4 of the Consolidated Financial Statements included in Item 8 of this filing for additional information related to loans granted to related parties. On occasion, certain Directors of the Company who are professionals in the fields of law and insurance (Directors Ford, Goodwin and Satterfield) have provided, and are expected to continue to provide, incidental legal and insurance services on behalf of the Company and/or its subsidiary bank. It is believed that the payments of these services do not individually, or in the aggregate, exceed 5% of the respective Directors' total revenue. 56 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page(s) in Form 10-K ( a ) (1)Financial Statements The following consolidated financial statements and accountant's report appear on pages 23 through 45 of this Form 10-K Report of independent auditors..................................................................................23 Consolidated balance sheets at December 31, 1999 and 1998.......................................................24 Consolidated statements of income for the years ended December 31, 1999, 1998, and 1997............................................................................25 Consolidated statements of comprehensive income for the years ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Consolidated statements of shareholders' equity for the years ended December 31, 1999, 1998, and 1997........................................................27 Consolidated statements of cash flows for the years ended December 31, 1999, 1998, and 1997.......................................................................28 - 29 Notes to the consolidated financial statements.............................................................30 - 49 ( a ) (2)Financial Statement Schedules All other schedules for which provision is made in the applicable regulations of the Commission have been omitted as the schedules are not required under the related instructions, or are not applicable, or the information required thereby is set forth in the financial statements or the notes thereto ( a ) (3)Exhibits required to be filed by Item 601 of Regulation S-K and 14( c ) of Form 10-K See index to exhibits........................................................................................60 ( b ) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the quarter ended December 31, 1999. ( c ) Exhibits See Item 14(a)(3), above ( d ) Financial Statement Schedules See Item 14(a)(2), above 57
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) /s/ L. Thomas Bulla 03/28/00 ----------------------------------------------------- L. Thomas Bulla President, Chief Executive Officer & Director (Principal Executive Officer) /s/ Charles A. Henthorn 03/28/00 ----------------------------------------------------- Charles A. Henthorn Executive Vice President and Secretary To the Board of Directors /s/ Matthew L. Burns, CPA 03/28/00 ----------------------------------------------------- Matthew L. Burns, CPA Chief Financial Officer, First National Bank (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ David A. Carson 03/28/00 /s/ Lucie T. Refsland 03/28/00 - --------------------------------------------------- --------------------------------------------------------- David A. Carson, Director Lucie T. Refsland, Director /s/ Michael G. Campbell 03/28/00 /s/ William R. Satterfield Jr. 03/28/00 - --------------------------------------------------- --------------------------------------------------------- Michael G. Campbell, Director William R. Satterfield, Jr., Director /s/ Richard E. Ford 03/28/00 /s/ Richard L. Skaggs 03/28/00 - --------------------------------------------------- ---------------------------------------------------------- Richard E. Ford, Director Richard L. Skaggs, Director /s/ Bennett Fuller 03/28/00 /s/ Ronald B. Snyder 03/28/00 - ---------------------------------------------------- ---------------------------------------------------------- Bennett Fuller, Director Ronald B. Snyder, Director /s/ G. Thomas Garten 03/28/00 - ---------------------------------------------------- G. Thomas Garten, Director /s/ William D. Goodwin 03/28/00 - ---------------------------------------------------- William D. Goodwin, Director 58
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT The Company has not yet sent an annual report and proxy materials to its stockholders. Such report and material shall be sent to its stockholders subsequent to the filing of this Form 10-K, and copies thereof shall be furnished to the Commission upon request. 59 INDEX TO EXHIBITS
PAGE NUMBER(S) IN FORM 10-K, OR EXHIBIT PRIOR FILING NUMBER DESCRIPTION REFERENCE (3)I Articles of Incorporation of Registrant...............................................................( a ) (3)ii By-laws of Registrant.................................................................................( a ) (10) Material Contracts A Agreement dated October 14, 1993, between L. Thomas Bulla and First National Bank.....................................................................( a ) B Summary of Lease terms for Charleston branch facility............................................( b ) C Form S-8 Registration Statement under the Securities Act of 1933.................................( c ) D Specimen Copy of Incentive Stock Option Plan Agreement...........................................( d ) (11) Calculation of Basic and Diluted Computation of Earnings per Share.......................................61 (21) Subsidiary of Registrant.................................................................................62 (23) Consents of experts and counsel Consent of Independent Auditors.....................................................................63 (27) Financial Data Schedule.............................................................................64 - 65 - -------------------------------------------------------------------------------------------------------------------
( a ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-Q Quarterly Report dated September 30, 1999 filed with the Securities and Exchange Commission on or about November 10, 1999. ( b ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-Q Quarterly Report dated September 30, 1999 filed with the Securities and Exchange Commission on or about November 10, 1999. ( c ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form S-8 dated July 31, 1996, filed with the Securities and Exchange Commission on or about July 31, 1996. ( d ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-K Annual Report dated December 31, 1996, and filed with the Securities and Exchange Commission on or about March 29, 1997. 60 EXHIBIT (11) BASIC AND DILUTED COMPUTATION OF EARNINGS PER SHARE - -------------------------------------------------------------------------------- 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. 61 EXHIBIT (21) SUBSIDIARY OF THE REGISTRANT - -------------------------------------------------------------------------------- The following is the subsidiary of the registrant. Such subsidiary is incorporated in the State of West Virginia. FIRST NATIONAL BANK, a national banking association organized under the laws of the United States of America. 62 EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- (ARNETT & FOSTER, P.L.L.C. LETTERHEAD) CONSENT OF INDEPENDENT AUDITORS Securities and Exchange Commission Washington, D.C. We hereby consent to the inclusion in this Annual Report on Form 10-K of our report, dated February 4, 2000, on our audit of the consolidated financial statements of First National Bankshares Corporation as of December 31, 1999 and 1998, appearing in Part II, Item 8 of the 1999 Form 10-K of First National Bankshares Corporation. ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia March 28, 2000 63 EX-27 2 FDS -
9 0000814178 First National Bankshares Corporation 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1.0000 3,717 17 30 0 11,356 11,520 11,160 74,264 764 104,829 89,132 4,113 960 473 0 0 965 9,186 104,829 6,158 1,312 236 7,707 3,077 3,389 4,317 100 (1) 3,175 1,496 1,002 0 0 1,002 1.04 1.03 4.45 0 0 0 0 766 291 189 764 764 0 280
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