-----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, NxS1mY3+TOdoNHt10Vo9Yk5yMNdfqMbjeavA3OldB7rCFZSeoxCMnQShKrjQ+w4H Ee9Aw2TSPXHtuh7XIuW75g== 0000814178-96-000002.txt : 19960613 0000814178-96-000002.hdr.sgml : 19960613 ACCESSION NUMBER: 0000814178-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST NATIONAL BANKSHARES CORP CENTRAL INDEX KEY: 0000814178 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 621306172 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-14252 FILM NUMBER: 96538874 BUSINESS ADDRESS: STREET 1: ONE CEDAR ST CITY: RONCEVERTE STATE: WV ZIP: 24970 BUSINESS PHONE: 3046474500 MAIL ADDRESS: STREET 2: ONE CEDAR STREET CITY: RONCEVERTE STATE: WV ZIP: 24970 10-K 1 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, 1995 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 charter) 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 $5.00 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 February 28, 1996, the aggregate market value of the outstanding voting common stock held by nonaffiliates of the registrant, computed by reference to the price at which said stock was actually sold in a transaction known to management which took place on or about February 23, 1996, (management believes $50 was paid per share) was $8,140,850. This price was determined from this transaction known to management of the registrant 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 February 28, 1996, was 192,500 . THIS REPORT CONTAINS 57 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 54 . FIRST NATIONAL BANKSHARES CORPORATION Form 10-K Table of Contents Page PART I Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . . .3 Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . . .4 Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . . . . . .5 Item 4 - Submission of Matters to a Vote of Security Holders. . . .5 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . .. . . . .5 Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . . .7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . 8 - 18 Item 8 - Financial Statements and Supplementary Data. . . . .19 - 43 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . 44 PART III Item 10 - Directors and Executive Officers of the Registrant.45 - 47 Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . 48 Item 12 - Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . 49 Item 13 - Certain Relationships and Related Transactions. . . . . 50 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements. . . . . . . . . . . . . . . . . . 51 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 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 which until January 1996 was known as The First National Bank in Ronceverte, when the name was changed to 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 office in Lewisburg. The Bank received approval from the Office of the Comptroller of the Currency in January, 1996, to open a branch facility in Charleston, West Virginia. It anticipates opening the facility by early summer of 1996. Concurrent with the application for a Charleston branch, the Bank withdrew its previous application for a Huntington, West Virginia branch, which had been approved in January of 1995. 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 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. 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 testamentary and inter vivos 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. This area is predominately rural and comprised of moderate income households. Major employment in the area includes agriculture, tourism, health care, education and light manufacturing. Unemployment rates in the area often exceed the national and West Virginia averages. Competition The banking and financial services business is highly competitive, especially in the Bank's market area. The Bank's principal competitors include four other commercial banks, each of which are owned by statewide or regional bank holding companies. As of December 31, 1995, the Bank had deposits representing an estimated 22.4% of total deposits and loans representing an estimated 20.5% of total loans of all five 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 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. 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, and restricts interstate banking activities. On September 29, 1994, the Act was amended by The Interstate Banking and Branch Efficiency Act of 1994 which authorized interstate bank acquisition anywhere in the country, effective one year after the date of enactment and interstate branching by acquisition and consolidation, effective June 1, 1997 in those states that have not opted out by that date. The impact of this amendment on the Company cannot be measured at this time. The Act further restricts bank holding company nonbanking 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. The Federal Deposit Insurance Corporation Improvement Act of 1991 covers a wide expanse of banking regulatory issues. The FDIC Improvement Act deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform, including requiring the FDIC to establish a risk-based premium assessment system, and with a number of other regulatory and supervisory matters. 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. Employees At December 31, 1995, the Bank employed 34 full-time and 2 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 7 and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 8 to 18 of this report, and are incorporated herein by reference. ITEM 2 - PROPERTIES The Bank owns its principal office at One Cedar Street in Ronceverte, West Virginia. The building 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 Bank's branch on Route 219 North in Lewisburg, West Virginia, is leased. The lease on the Bank's Lewisburg branch commenced April 1, 1986, and ran for a 10-year term, expiring in March of 1996. In January of 1996, Bank Management and the Board of Directors opted to regegotiate the lease in an attempt to reduce the annual cost to the Bank, as well as to evaluate other branch options. Negotiations did not result in a mutually satisfactory agreement, and the Board of Directors voted not to renew the current lease, but to commence with the purchase of land and the construction of a new branch location. In late February of 1996, the Bank signed an agreement to purchase roughly 2 acres of land on Route 219, approximately 1 mile north of the current branch location. The purchase price was set at $190,000. This agreement is subject to O.C.C. approval, as well as all other typical environmental and legal factors associated with a real property transaction. The lease on the existing branch is being continued on a month-to-month basis. Management does not anticipate that this action will have any significant impact on its financial position. The Bank's properties 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 proposed branch facility will also be a full-service branch offering the same services as the current locations. As noted previously, the Bank has obtained permission to locate a new branch in the downtown area of Charleston, WV. This facility is to be leased; however, lease negotiations are still in process. ITEM 3 - LEGAL PROCEEDINGS The Company and the Bank are not currently involved in any material legal proceedings, other than routine litigation incidental to their business, which involve them or any of their properties. 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 1995. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock was first issued on August 3, 1987, as a result of the consummation of the transaction by which First National Bankshares Corporation became a one-bank holding company owning all of the outstanding stock of the Bank. As a result of the issuance of the Company's stock, the stockholders of the Bank became the stockholders of the Company's receiving 5 shares of the Company's common stock for each share of the common stock of the Bank held by them. As of February 28, 1996, the Company's common stock was held by approximately 466 stockholders of record. Substantially all funds for payment of dividends to shareholders is derived from dividends paid by the subsidiary Bank to the Company. Dividends paid by the Bank are subject to the regulatory restrictions summarized in Note 12 to the financial statements. 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, the prices shown below may not be indicative of prices which would prevail if the stock were more actively traded. Bid and ask prices are not available for the stock of the Company. 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; and the Company's management believes that trades of its common stock have taken place at or near its book value. Based upon such information, management believes that the following high and low prices, which are the book values of a share of the Company's common stock at the beginning and end of each of the quarters shown below, represent amounts which may have been paid for the common stock of the Company during the periods indicated: 1995 1994 High Low High Low First Quarter $39.70 $38.90 $40.73 $40.16 Second Quarter 41.87 40.24 40.73 39.91 Third Quarter 42.48 41.83 39.91 39.86 Fourth Quarter 43.72 43.03 39.86 37.94
The Company traditionally paid dividends on a semi-annual basis. However, beginning in September of 1994, the Company's Board of Directors voted to begin a practice of declaring quarterly dividends. A summary of dividends per share declared during 1995 and 1994 follows: 1995 1994 First Quarter .30 .00 Second Quarter .30 .30 Third Quarter .30 .30 Fourth Quarter .30 .40
The Company plans to continue the pattern of declaring quarterly dividends in the future at a rate consistent with its historical payout ratios. ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios) 1995 1994 1993 1992 1991 SUMMARY OF OPERATIONS Interest income $ 5,688 $ 5,599 5,926 6,460 7,215 Interest expense 2,115 2,089 2,359 2,887 3,844 Net interest income 3,573 3,510 3,568 3,573 3,371 Provision for loan losses 0 123 459 460 402 Non-interest income 415 419 366 375 363 Non-interest expense 2,920 3,100 2,815 2,814 2,552 Income before income taxes 1,068 706 659 674 780 Income before cumulative effect of change in accounting principle 767 542 498 491 589 Net income 767 542 298 491 589 PER SHARE DATA Income before cumulative effect of change in accounting principle $3.98 $ 2.82 $ 2.59 $2.55 $3.06 Net income 3.98 2.82 1.55 2.55 3.06 Cash dividends declared 1.20 1.00 0.90 0.90 0.90 AVERAGE BALANCE SHEET SUMMARY Loans, net $41,853 40,954 44,532 43,652 41,838 Securities 27,321 31,722 28,261 25,401 20,645 Deposits 66,367 72,082 72,584 71,442 69,542 Shareholders' equity 8,223 7,779 7,616 7,314 6,849 Total assets 75,351 80,274 80,615 79,216 76,858 AT YEAR END Loans, net $45,773 38,766 45,240 44,199 42,849 Securities 24,015 30,802 29,518 26,443 24,311 Deposits 66,166 69,685 73,543 72,941 70,890 Shareholders' equity 8,415 7,311 7,487 7,362 7,045 Total assets 75,455 77,738 81,615 80,560 78,286 SELECTED RATIOS Return on average assets (1) 1.02% 0.68% 0.62% 0.62% 0.77% Return on average equity (1) 9.33 6.97 6.54 6.70 8.60 Average equity to average assets 10.91 9.69 9.45 9.23 8.91 Dividend payout ratio (1) 30.12 35.52 34.76 35.32 29.39 (1) - Before cumulative effect of change in accounting principle 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 elsewhere in this report. This discussion and analysis should be read in conjunction with such financial statements and the accompanying notes thereto. 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 $767,000 for 1995, representing an increase of $225,000 or 41.5% over the $542,000 reported for 1994. This increase in 1995 earnings was primarily attributable to a $123,000 reduction in the provision for loan losses, a $62,000 increase in net interest income, and a $180,000 decrease in non-interest expense. The Company's 1994 earnings were also significantly improved over 1993's earnings before the cumulative effect of change in accounting principle, due to lower loan loss provisions and increased non-interest income. On a per share basis, net income before the cumulative effect of the change in accounting principle was $3.98 in 1995, $2.82 in 1994, and $2.59 in 1993. An analysis of the changes in earnings per share by major statement of income component is presented in the following table:
1995 1994 vs. vs. 1994 1993 Earning per common share, prior year (1) $ 2.82 $2.59 Increase (decrease) from changes in: Net interest income .33 (0.30) Provision for loan losses .64 .74 Other income (.03) 0.28 Other expenses .94 (1.48) Income taxes (.72) (0.01) Earning per common share (1) $3.98 2.82 (1) -- Before cumulative effect of change in accounting principle Return on average assets (ROA), a measure of how effectively the Company utilizes its assets to produce net income, was 1.02% for 1995, compared to .68% for 1994 and .62% for 1993 (before cumulative effect of accounting change). Return on average equity (ROE), which measures earnings performance relative to the total amount of equity capital invested in the Company, was 9.33% in 1995, 6.97% in 1994, and 6.54% in 1993 (before cumulative effect of accounting change). The improvement in both of these ratios is due to the improved earnings noted above. 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. 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 1995, 1994, and 1993, tax-equivalent adjustments of $121,000, $121,000, and $103,000, respectively, are included in interest income, and were computed assuming a tax rate of 34% in all periods. For the year 1995, the Company's net interest income, as adjusted, increased $63,000 or 1.8% to $3,694,000 as compared to $3,631,000 and $3,670,000 in 1994 and 1993, respectively. Correspondingly, the Company's net interest margin increased to 5.16% in 1995 compared with 4.78% in 1994 and 4.82% in 1993. An increase in loan demand resulted in funds being invested in higher-yielding loans during 1995 instead of lower yielding securities and fed funds. Further analysis of the Company's yields on interest earning assets and interest bearing liabilities and changes in net interest income as a result of changes in average volume and interest rates are presented in TABLES I and II. Provision for Loan Losses The provision for loan losses represents charges to earnings necessary to maintain 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. The provision for loan losses totalled $0.00 in 1995, $123,000 for in 1994, and $459,000 in 1993. The reduction in the provision for 1995 reflects management's general strengthening of the Company's loan underwriting standards, a reduction in the level of past due loans and an overall decline in net charge-offs. See the ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS section which follows for further discussion. TABLE I AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (Dollars in thousands)
1995 1994 1993 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate INTEREST EARNING ASSETS Loans, net of unearned discount (1) $42,632 $4,018 9.42% $ 41,882 $ 3,679 8.78% $ 45,367 $ 4,177 9.21% Securities: Taxable 22,494 1,337 5.94% 27,169 1,585 5.83 25,044 1,475 5.89 Tax-exempt (2) 4,827 355 7.35 4,553 355 7.80 3,217 302 9.39 Total securities 27,321 1,692 6.19 31,722 1,940 6.12 28,261 1,777 6.29 Federal funds sold 1,635 99 6.05 2,365 101 4.27 2,483 75 3.02 Total interest earnings assets 71,588 5,809 8.11 75,969 5,720 7.53 76,111 6,029 7.92 NON INTEREST EARNING ASSETS Cash and due from banks 2,227 2,799 3,074 Bank premises and equipment 1,071 1,089 1,119 Other assets 1,224 1,345 1,146 Allowance for loan losses (759) (928) (835) Total assets $75,351 $ 80,274 $ 80,615 INTEREST BEARING LIABILITIES Demand deposits $ 13,298 354 2.66 $12,077 327 2.71 $ 11,596 351 3.03 Savings deposits 20,075 703 3.50 24,801 781 3.15 24,276 894 3.68 Time deposits 23,744 1,058 4.45 26,053 981 3.77 28,266 1,114 3.94 Total interest bearing liabilities 57,117 2,115 3.70 62,931 2,089 3.32 64,138 2,359 3.68 NON INTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 9,250 9,151 8,446 Other liabilities 569 413 415 Shareholders' equity 8,415 7,779 7,616 Total liabilities and shareholders' equity $75,351 $ 80,274 $ 80,615 NET INTEREST EARNINGS $3,694 $3,631 $3,670 NET YIELD ON INTEREST EARNING ASSETS 5.16% 4.78% 4.82% (1) - For purposes of this table, nonaccruing loans are included in average loan balances. Also, loan fees which are insignificant, are included in interest income. (2) - Computed on a fully Federal tax-equivalent basis using the rate of 34% for all years. TABLE II CHANGE IN INTEREST INCOME AND EXPENSE DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1) (Dollars in thousands)
1995 vs. 1994 1994 vs 1993 Increase(Decrease) Increase (Decrease) Due to Change in: Due to Change in: Volume Rate Total Volume Rate Total INTEREST EARNING ASSETS Loans $ 67 $272 $ 339 $ (312) $(186) $(498) Securities: Taxable (277) 29 (248) 124 (14) 110 Tax-exempt (2) 21 (21) 0 110 (57) 53 Total securities (256) 8 (248) 234 (71) 163 Federal funds sold (37) 34 (3) (4) 30 26 Total interest earning assets (226) 314 88 (82) (227) (309) INTEREST BEARING LIABILITIES Demand deposits 33 (6) 27 14 (38) (24) Savings deposits (159) 81 (78) 19 (132) (113) Time deposits (92) 168 76 (85) (48) (133) Total interest bearing liabilities (218) 243 25 (52) (218) (270) NET INTEREST EARNINGS $ (8) $ 71 $ 63 (30) $ (9) (39) (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%. Non-interest Income Non-interest income includes revenues from all sources other than interest income and yield related loan fees. For the year 1995, non-interest income was $415,000, down 0.9% from $419,000 in 1994, but greatly increased over 1993's level of $366,000. The following table details the components of non-interest income earned by the Company in 1995, 1994, and 1993, as well as the percentage increase (decrease) in each over the prior year.
1995 1994 1993 Percent Percent Amount Change Amount Change Amount Trust department income $139,000 78.2% $ 78,000 200.0% $ 26,000 Service fees and commissions 209,000 (5.4) 221,000 (16.6) 265,000 Other 67,000 44.2 120,000 60.0 75,000 415,000 1.0 $419,000 14.5 $ 366,000
The increase in trust department income in 1995 and 1994 resulted primarily from fees realized from the administration of a large estate, and while the Company seeks to attract new trust business, estates and other trust services tend to fluctuate, and trust revenues may again fall to historical levels in the future. Service charges and commissions in 1995 declined due to lower insurance commissions derived principally from sales of credit life insurance to installment loan customers and reflects the weak demand for new installment loans during the same period. Other non-interest income declined to a historic level of $67,000 during 1995. The increase in 1994 was primarily attributable to the collection of $39,000 in insurance proceeds from a key man life insurance policy during the year which was a one-time, non-recurring item. 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 1995, 1994 and 1993, and the percentage increase (decrease) in each over the prior year. 1995 1994 1993 Percent Percent Amount Change Amount Change Amount Salaries and employee benefits $1,470,000 (0.4%) $1,476,000 8.1% $1,365,000 Net occupancy expense 213,000 8.7 196,000 15.3 170,000 Equipment rental, depreciation and maintenance 207,000 (9.2) 28,000 20.0 190,000 Federal deposit insurance premiums 80,000 (56.6) 184,000 0.6 183,000 Data processing 176,000 (6.4) 188,000 (6.5 ) 201,000 Other 774,000 (6.5) 828,000 17.2 706,000 $ 2,920,000 (5.8) $3,100,000 10.1 2,815,000
Salaries and employee benefits represent the Company's largest non-interest cost, comprising approximately 50.3% of total non-interest expense in 1995. The slight decrease in salaries and employee benefits in 1995 compared to 1994 is due primarily to a reduction in the total number of employees. However, the overall reduction was offset by normal merit salary increases for existing staff and by the Company's hiring of a Credit Administration Officer, which was a newly established position. Increased occupancy and equipment costs realized in 1995 is a result of the performance of certain building maintenance and upgrade projects and from the additional depreciation expense on computers and other equipment acquired during the latter part of the previous year. Federal Deposit insurance premiums fell dramatically in 1995, falling by $104,000 to $80,000. This was due to a general reduction in FDIC assessment premiums realized throughout the banking industry. 1994's other non-interest expenses was much higher than 1995's level, primarily due to a one-time, non-recurring consulting expense realized during 1994. Income Taxes The Company's income tax expense, which includes both Federal and State income taxes, totalled $301,000 or 28.2% of pre-tax income in 1995, compared to $164,000 or 23.2% in 1994, and $161,000 or 24.4% in 1993. For financial reporting purposes, income tax expense does not equal the Federal statutory income tax rate of 34% when applied to pre- tax income, primarily because of State income taxes and interest income derived from tax-exempt securities. The increase in the Company's effective tax rate is attributable to a disproportionate increase in taxable income (primarily from loan growth and decreased expense levels) in comparison to non-taxable income. There was no increase in tax-exempt income for the Company during 1995, therefore tax-exempt interest income represented a much smaller percentage of the company's profit before taxes. Additional details relative to the Company's income taxes are included in Note 8 to the accompanying consolidated financial statements. Changes in Financial Position Company total assets declined $2,283,000 or 2.9% to $75,455,000 at year end 1995 compared to $77,738,000 at year end 1994. This decline in total assets resulted from a decline in total deposits of $3,519,000 or 5.1%. Average Company total assets also fell, declining 6.1% from $80,274,000 during 1994 to $75,351,000 during 1995. TABLE I presents the Company's average balance sheet composition for the years ended 1995, 1994 and 1993. Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). In conjunction with the adoption of SFAS No. 115, the Company elected to classify a substantial portion of its securities portfolio as available for sale to permit sufficient flexibility in regard to the Company's asset/liability management program. 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. During 1995, concurrent with the adoption of the Special Report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" issued by the Financial Accounting Standards Board, the Bank reassessed the classifications of its securities and transferred securities with amortized cost of $6,496,000 and estimated fair value of $6,488,000 from the available for sale category to the held to maturity category. In the opinion of management, this transaction did not have a significant effect on the Company's financial statements. The securities portfolio decreased $6,787,000 or 22.0% from year end 1994 to year end 1995. Average total securities decreased from $31,722,000 during 1994 to $27,321,000 during 1995, or 13.9%. As previously discussed, these decreases resulted from increased loan demand and the corresponding shift in funds from securities to higher-yielding loans. This movement of funds from securities to loans was a gradual process occurring as various securities reached their scheduled maturity dates. No securities were sold to fund loan growth or meet other liquidity needs. At year end 1995, the Company had an unrealized gain on securities classified as available for sale of $43,000, net of applicable deferred income taxes. This represents a $568,000 increase over 1994's net unrealized loss of ($525,000), net of applicable deferred income taxes. This increase is due to the period's overall decline in interest rates and the corresponding increase in the market value of the Company's security portfolio. Details as to the amortized cost and estimated fair values of the Company's securities by type are presented in Note 3 of the accompanying consolidated financial statements. At December 31, 1995, the Company did not own securities of any one issuer, other than the U.S. Government or its agencies, that exceeded ten percent of shareholders' equity. The distribution of securities together with the weighted average yields by maturity at December 31, 1995 are summarized in TABLE III. TABLE III SECURITY MATURITY ANALYSIS (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. Treasury securities $ 2,000 5.42% $ 1,001 5.50% $ - - % $ - - % U.S. Government agencies and corporations - - 5,496 5.33 - - - - Corporate debt securities - - 500 5.12 - - - - State and political subdivisions 385 3.80 840 4.57 3,292 4.84 - - Total $ 2,385 5.16 $7,837 5.26 $3,292 4.84 $- - Securities Available for Sale U.S. Treasury securities $ - - % $ 969 5.97% $ - - %$ - - % U.S. Government agencies and corporations 6,022 5.26 3,149 6.50 - - - - Other - - - - - - 291 6.20 Total $ 6,022 5.26 4,118 6.38 $ - - $ 291 6.20 (1) -- Weighted average yield presented without adjustment to a tax equivalent basis. Loans Loans, net of unearned income increased $6,798,000, or 17.2%, to $46,477,000 during 1995. Average loans outstanding, net of unearned income, increased from $41,882,000 in 1994 to $42,632,000 in 1995, or 1.8%. A summary of the Company's year-end loan balances by type, as well as an analysis of the decline in such balances from December 31, 1994 to December 31, 1995, is summarized in the following table.
Percent Increase 1995 (Decrease) 1994 Commercial, financial and agricultural $ 13,135,000 43.8% $9,132,000 Real estate - construction 2,020,000 206.1 660,000 Real estate - mortgage 23,430,000 10.8 21,144,000 Installment and other 7,832,000 (9.8) 8,683,000 $ 46,417,000 17.2% $39,619,000
The increase in loans is primarily attributable to overall growth in the commercial loan portfolio, as the Bank makes a more concentrated effort to obtain commercial business. Additionally, the Bank increased its mortgage loan portfolio through the purchase of several large-dollar mortgages from a mortgage broker. These loans are all conforming loans and meet the Bank's typical underwriting criteria. Installment loans have decreased by approximately 9.8%. This is due largely to a decreased demand for personal and consumer loans in the Bank's primary market. A summary of loan maturities by loan type as of December 31, 1995 is included in Note 4 of the accompanying consolidated financial statements. Allowance for Loan Losses and Risk Elements As more fully explained in Notes 1 and 5 of the financial statements, the Company adopted Statements of Financial Accounting Standards Nos. 114 and 118 (SFAS Nos. 114 and 118) "Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure", respectively. Under SFAS Nos. 114 and 118, 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. The adoption of SFAS Nos. 114 and 118 did not significantly impact the Company's financial position or results or operations during 1995. 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 non-performing and past due loans and current and anticipated economic conditions in evaluating the adequacy of the allowance for loan losses. At December 31, 1995, the allowance for loan losses was $643,000 or 1.39% of total loans (net of unearned income) compared to $853,000 or 2.15% at December 31, 1994. Loan charge-offs, net of recoveries, for 1995 were $209,000 compared to $271,000 and $234,000 in 1994 and 1993, respectively. Expressed as a percentage of average loans outstanding during 1995, 1994 and 1993, net loan charge-offs were 0.49%, 0.65% and 0.52%, respectively. See Note 5 to the consolidated financial statements for an analysis of the activity in the Company's allowance for loan losses in 1995, 1994 and 1993. An allocation of the allowance for loan losses to specific loan categories is presented in TABLE IV. TABLE IV ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands)
1995 1994 1993 Percent Percent Percent of Total of Total of Total Amount Loans Amount Loans Amount Loans Commercial, financial, and agricultural $ 245 28.3% $ 472 23.1% $ 200 9.1% Real estate - construction - 4.3 - 1.7 2 1.0 Real estate - mortgage 136 50.5 258 53.3 135 67.8 Installment 101 13.5 123 18.6 496 22.0 Other - 3.4 - 3.3 - 0.1 Unallocated 161 - - - 164 - $ 643 100.0% $ 853 100.0% $1,001 100.0%
The following presents a summary of the Company's non-performing assets and accruing loans past due 90 days or more at December 31, 1995, 1994 and 1993. (in thousands) December 31, 1995 1994 1993 Non-performing assets: Nonaccrual loans $ 375 $ 933 $ 934 Other real estate owned 10 - 48 Restructured loans - - - $ 385 $ 933 $ 982 Accruing loans past due 90 days or more $ - $ - $ 1
If interest on nonaccrual loans had been accrued, such income would have approximated $41,000, $72,000 and $17,000 in 1995, 1994 and 1993, respectively. Interest income recognized on nonaccrual loans and included in Company interest income is not material. 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. Any potential problem credits which are not nonaccruing loans or are not accruing loans past due 90 or more days do not represent or result from trends of uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, nor do they represent material credits about which management is aware of any information which would cause the borrowers to not comply with the loan repayment terms. Deposits Total deposits decreased to $66,166,000, or 5.1% at December 31, 1995, from $69,685,000 at December 31, 1994. Average total deposits declined from $72,082,000 during 1994 to $66,367,000 during 1995, a decline of 7.9%. These reductions were primarily the result of a $1,597,000 or 11.3% decline in the balance of N.O.W. and money market accounts from year end 1994 to year end 1995, as well as a decline in savings accounts of 9.6%, or $2,035,000. These declines were somewhat expected due to the Bank's strategy of holding the rates paid on these deposit products relatively stable during the year. The decision to hold these rates steady reflects a number of considerations including the availability of liquid funds and actions by competitors. Non-interest bearing demand deposits also declined for the year, falling by $518,000 or 5.6% from the previous year. All other categories of deposits at year end 1995 remained relatively stable in comparison to their respective balances at year end 1994. 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 accompanying consolidated financial statements. 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 and Federal funds sold, which measured $3,614,000 at December 31, 1995 or 33.6% less than the $5,441,000 total at December 31, 1994. This decline in liquidity was due to an increase in loan demand and the corresponding shift of funds from Fed Funds sold into the more profitable loan category. Despite this decrease, liquidity remains more than adequate. The Company's liquidity position is monitored continuously to ensure that day-to-day as well as anticipated funding needs are met. Further enhancing the Company's liquidity is the availability as of December 31, 1995 of $8,407,000 (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 totalling $10,501,000 and 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. On a contractual repricing basis, the Company is negatively gapped by $22,221,000 over the less than six month time frame. Included within this time period are $31,763,000 in interest bearing demand deposits and savings accounts which on a contractual basis are subject to immediate repricing. However, based on historical experience, the repricing of these deposit balances tends to lag, at a minimum, six months behind changes in market interest rates. For this reason, TABLE VI reflects an adjustment to compensate for the time lag in the repricing of these deposits. After this adjustment, the table reflects a positive gap in the less than six month time frame of $9,542,000. The Company seeks to maintain its adjusted interest sensitivity gap within the less than six month category 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. TABLE VI INTEREST RATE SENSITIVITY GAPS December 31, 1995 (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 $18,199 $2,938 $5,585 $19,695 $ 46,417 Securities (at amortized cost) 2,071 1,500 4,529 15,915 24,015 Federal funds sold 893 - - - 893 Total interest earning assets 21,163 4,438 10,114 35,610 71,325 INTEREST BEARING LIABILITIES Demand deposits $12,579 $ - $- $ - $ 12,579 Savings deposits 19,186 - - - 19,186 Time deposits 8,628 7,431 2,616 7,035 25,710 Total interest bearing liabilities 40,391 7,431 2,616 7,035 57,475 Contractual interest sensitivity gap (19,228) (2,993) 7,498 28,575 13,850 Adjustment (2) 31,763 - (31,763) - - Adjusted interest sensitivity gap $ 12,535 $(2,993)$(24,265) 28,575 $ 13,850 Cumulative adjusted interest sensitivity gap $ 12,535 $(9,542)$(14,723) 3,852 Cumulative adjusted gap as a percent of total earning assets 17.6% (13.4%) (20.6%) 19.4% (1) - Contractual repricing used unless otherwise noted. (2) - Adjustment to approximate the actual repricing of interest bearing demand deposits and savings accounts based upon historical experience. 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, 1995 was $8,415,000 compared to $7,311,000 at December 31, 1994, representing an increase of 15.1%. With this increase, which is largely attributable to an increase of $569,000 in the Bank's net unrealized gain recorded on securities classified as available for sale (See SECURITIES section for further discussion), total shareholders' equity expressed as a percentage of total assets increased from 9.4% at December 31, 1994 to 11.2% at December 31, 1995. As a Bank Holding Company, the Company is subject to the Federal Reserve Board's risk-based capital guidelines. 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, 1995, 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 Tier 1 risk-based capital ratio 16.2% 4.0% Total risk-based capital ratio 18.2% 8.0% Leverage ratio 11.1% 3.0%
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. Impact of Inflation The consolidated financial statements and related data included in this report were prepared in accordance with generally accepted accounting principles, which require the Company's financial position and results of operations to be measured in terms of historical dollars. Consequently, the relative value of money generally is not considered. Substantially all of the Company's assets and liabilities are monetary in nature and, as a result, interest rates and competition in the market area tend to have a more significant impact on the Company's performance than the effects of inflation. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The independent auditor's report and consolidated financial statements of the Company and its subsidiary appear herein. 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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. 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. The consolidated financial statements of First National Bankshares Corporation and subsidiary for the year ended December 31, 1993, were audited by other auditors whose report, dated January 6, 1994 (except for certain information in such financial statements as to which the date is March 21, 1995), expressed an unqualified opinion on those statements. 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 provides a reasonable basis for our opinion. In our opinion, the 1995 and 1994 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, 1995 and 1994, and the results of their operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. As more fully described in Notes 3 and 9 to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits in 1993 and securities in 1994 to comply with the requirements of new accounting pronouncements. ARNETT & FOSTER Charleston, West Virginia February 2, 1996 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994
ASSETS 1995 1994 Cash and due from banks $ 2,720,887 $3,720,620 Federal funds sold 893,000 1,720,000 Securities held to maturity (estimated fair value 1995 $13,609,276; 1994 $7,157,729) 13,514,482 7,521,406 Securities available for sale 10,500,880 23,280,715 Loans, less allowance for loan losses of $643,439 and $852,862, respectively 45,773,252 38,766,072 Bank premises and equipment, net 999,187 1,035,218 Accrued interest receivable 706,746 796,083 Other assets 346,482 897,676 Total assets $75,454,916 $77,737,790 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 8,690,907 9,208,674 Interest bearing 57,475,281 60,476,672 Total deposits 66,166,188 69,685,346 Other liabilities 873,324 741,436 Total liabilities 67,039,512 70,426,782 Commitments and Contingencies Shareholders' Equity Common stock, $5.00 par value, authorized 500,000 shares, issued 192,500 shares 962,500 962,500 Capital surplus 1,000,000 1,000,000 Retained earnings 6,409,585 5,873,771 Net unrealized gain (loss) on securities 43,319 (525,263) Total shareholders' equity 8,415,404 7,311,008 Total liabilities and shareholders' equity $75,454,916 $77,737,790
See Notes to Consolidated Financial Statements FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For The Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 Interest income: Interest and fees on loans $4,018,204 $3,678,920 $4,176,798 Interest and dividends on securities: Taxable 1,336,509 1,585,325 1,474,946 Tax-exempt 234,415 234,347 198,969 Interest on Federal funds sold 98,910 100,834 75,001 Total interest income 5,688,038 5,599,426 5,925,714 Interest expense on deposits 2,115,406 2,089,199 2,358,903 Net interest income 3,572,632 3,510,227 3,566,811 Provision for loan losses - 123,000 459,000 Net interest income after provision for loan losses 3,572,632 3,387,227 3,107,811 Other income (expense): Trust department income 139,312 78,389 26,250 Service fees 209,190 220,843 264,570 Securities gains (losses), net 990 (391) 2,529 Other 65,720 120,262 73,143 Total other income 415,212 419,103 366,492 Other expenses: Salaries and employee benefits 1,469,823 1,476,669 1,365,357 Net occupancy expense 212,465 196,272 170,030 Equipment rentals, depreciation and maintenance 207,008 227,930 189,918 Federal deposit insurance premiums 80,310 183,697 182,986 Data processing 176,041 187,665 200,615 Advertising 90,721 84,428 72,999 Professional and legal 132,394 286,006 142,914 Mailing and postage 65,634 70,214 79,418 Stationery and supplies 58,716 79,632 76,490 Other 426,810 307,867 333,876 Total other expenses 2,919,922 3,100,380 2,814,603 Income before income tax expense and cumulative effect of change in accounting principle 1,067,922 705,950 659,700 Income tax expense 301,108 163,961 161,351 Income before cumulative effect of change in accounting principle 766,814 541,989 498,349 Cumulative effect of change in accounting for postretirement benefits - - (200,359) Net income $766,814 $541,989 $297,990 (Continued) FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME - Continued For The Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 Earnings per common share before cumulative effect of change in accounting principle $ 3.98 $ 2.82 $ 2.59 Cumulative effect of change in accounting for postretirement benefits - - (1.04) Earnings per common share $ 3.98 $ 2.82 $ 1.55 Average common shares outstanding 192,500 192,500 192,500
See Notes to Consolidated Financial Statements FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1995, 1994 and 1993
Net Unrealized Total Gain Share- Common Capital Retained (Loss) on holders' Stock Surplus Earnings Securities Equity Balance, December 31, 1992 962,500 1,000,000 5,399,542 - 7,362,042 Net income - - 297,990 - 297,990 Cash dividends declared on common stock ($.90 per share) - - (173,250) - (173,250) Balance, December 31, 1993 962,500 1,000,000 5,524,282 - 7,486,782 Net income - - 541,989 - 541,989 Cash dividends declared on common stock ($1.00 per share) - - (192,500) - (192,500) Net unrealized gain (loss) on securities upon adoption of SFAS No. 115 - - - 311,567 311,567 Change in net unrealized gain (loss) on securities - - - (836,830)(836,830) Balance, December 31, 1994 962,500 1,000,000 5,873,771 (525,263) 7,311,008 Net income - - 766,814 - 766,814 Cash dividends declared on common stock ($1.20 per share) - - (231,000) - (231,000) Change in net unrealized gain (loss) on securities - - - 568,582 568,582 Balance, December 31, 1995 $ 962,500 $1,000,000 $ 6,409,585 $43,319 $8,415,404
See Notes to Consolidated Financial Statements FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net income $766,814 541,989 $ 297,990 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of change in accounting principle - - 200,359 Depreciation 151,529 147,377 129,551 Provision for loan losses - 123,000 459,000 Deferred income taxes (benefit) 72,875 41,383 (136,264) Securities (gains) losses, net (990) 391 (2,529) (Gain) loss on sale of other assets - - 17,107 (Gain) loss on disposal of bank premises and equipment 4,166 - - Amortization of securities premiums and (accretion of discounts), net (5,659) 57,450 60,136 (Increase) decrease in accrued interest receivable 89,337 23,978 4,820 (Increase) decrease in other assets 197,916 (164,989) (29,535) Increase (decrease) in other liabilities 48,935 79,203 4,953 Net cash provided by operating activities 1,324,923 849,782 1,005,588 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity 2,497,865 716,250 6,256,588 Proceeds from maturities and calls of securities available for sale 7,359,233 6,000,000 - Proceeds from sales of securities available for sale - 1,000,000 - Proceeds from sales of securities - - 257,522 Principal payments received on securities held to maturity - 83,529 94,478 Purchases of securities held to maturity (1,953,302) (3,513,445) (9,741,724) Purchases of securities available for sale (232,200) (6,436,016) - Principal payments received on (loans made to) customers, net (7,007,180) 6,350,364 (1,499,996) Purchases of Bank premises and equipment (119,664) (92,619) (125,968) Proceeds from sales of other assets 73,000 45,500 - Net cash provided by (used in) investing activities 617,752 4,153,563 (4,759,100) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposit, NOW and savings accounts (4,150,169) (2,057,415) 4,075,159 Proceeds from sales of (payments for matured) time deposits, net 631,011 (1,799,752) (3,473,319) Dividends paid (250,250) (115,500) (173,250) Net cash provided by (used in) financing activities (3,769,408) (3,972,667) 428,590
(Continued) FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993 Increase (decrease) in cash and cash equivalents $(1,826,733) $1,030,678 (3,324,922) Cash and cash equivalents: Beginning 5,440,620 4,409,942 7,734,864 Ending $3,613,887 $5,440,620 $4,409,942 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest on deposits $2,093,711 $2,056,556 $2,415,308 Income taxes $ 83,090 $326,673 $318,717 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Other real estate acquired in settlement of loans $ - $ 500 $ 47,749 Dividends declared and unpaid $ 57,750 $ 77,000 $ -
See Notes to Consolidated Financial Statements FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies 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. 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. The following is a summary of the Company's more significant accounting policies. 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. 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: Securities are classified as "held to maturity", "available for sale" or "trading." 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 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. 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. 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. In 1995, the Bank adopted Statements of Financial Accounting Standards Nos. 114 and 118 (SFAS Nos. 114 and 118) "Accounting by Creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure," respectively. Under SFAS Nos. 114 and 118, a loan is impaired when, based on current information and events, it is probable that the 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. The implementation of the requirements of SFAS Nos. 114 and 118 did not have a significant impact on the accompanying financial statements. 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, Statement Number 91 of the Financial Accounting Standards Board requires 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 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 primarily 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 the lower of cost or appraised market value with any writedown being charged to the allowance for loan losses. Expenses incurred in connection with operating these properties are charged to operating expenses. Gains and losses on the sales of these properties are credited or charged to operating income in the year of the transactions. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Earnings per share: Earnings per common share are computed based upon the weighted average shares outstanding. The weighted average number of shares outstanding was 192,500, for each of the years ended December 31, 1995, 1994, and 1993. Profit sharing and 401(k) plans: The subsidiary bank sponsors a profit-sharing plan and a 401(k) plan which cover substantially all employees. Bank contributions to the plans are charged to expense. (See Note 9) 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. (See Note 9) 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. Reclassifications: Certain accounts in the consolidated financial statements for 1994 and 1993, as previously presented, have been reclassified to conform to current year classifications. Note 2. Cash Concentrations At December 31, 1995, the subsidiary bank had a concentration totalling $1,507,384 with Nationsbank, which consisted of a due from bank balance and Federal funds sold. At December 31, 1994, the subsidiary bank had concentrations totalling $1,034,527 and $1,251,557 with Crestar Bank and Nationsbank, respectively. Deposits with correspondent banks are generally unsecured, have limited insurance under current banking insurance regulations and may be limited by bank regulations if the correspondent bank does not meet certain capital levels. Note 3. Securities Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). In connection with the adoption of SFAS No. 115, certain securities totaling $24,706,684 (at amortized cost) were classified as available for sale. Accordingly, shareholders' equity at January 1, 1994, was increased $311,567, net of income taxes of $190,960, to reflect the net unrealized holding gains of such securities. The adoption of SFAS No. 115 had no impact on the accompanying statements of income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1995, concurrent with the adoption of the Special Report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" issued by the Financial Accounting Standards Board, the subsidiary bank reassessed the classifications of its securities and transferred securities with an amortized cost of $6,496,223 and estimated fair value of $6,488,454 from the available for sale category to the held to maturity category. This transfer did not have a significant impact on the accompanying financial statements. The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 1995 and 1994, are summarized as follows:
1995 Carrying Value Estimated (Amortized Unrealized Fair Cost) Gains Losses Value Held to maturity Taxable: U.S. Treasury securities $3,000,783 $ 12,185 $ - $3,012,968 U.S. Government agencies and corporations 5,496,523 32,637 9,680 5,519,480 Corporate debt securities 500,000 - 5,800 494,200 Total taxable 8,997,306 44,822 15,480 9,026,648 Tax-exempt: State and political subdivisions 4,517,176 74,882 9,430 4,582,628 Total $13,514,482 $ 119,704 $ 24,910 $13,609,276
1995 Carrying Value (Estimated Amortized Unrealized Fair Cost Gains Losses Value) Available for sale Taxable: U.S. Treasury securities $969,357 $ 25,329 $ - $ 994,686 U.S. Government agencies and corporations 9,170,332 52,325 7,563 9,215,094 Federal Reserve Bank stock 56,650 - - 56,650 Federal Home Loan Bank stock 232,200 - - 232,200 Total taxable 10,428,539 77,654 7,563 10,498,630 Tax-exempt: Federal Reserve Bank stock 2,250 - - 2,250 Total $10,430,789 $77,654 $7,563 $10,500,880
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1994 Carrying Value Estimated (Amortized Unrealized Fair Cost) Gains Losses Value Held to maturity Taxable: U.S. Treasury securities $1,000,000 $ - $ 20,938 $ 979,062 U.S. Government agencies and corporations 1,001,681 - 28,556 973,125 Corporate debt securities 500,000 - 51,350 448,650 Total taxable 2,501,681 - 100,844 2,400,837 Tax-exempt: State and political subdivisions 5,019,725 7,781 270,614 4,756,892 Total $7,521,406 $ 7,781 $371,458 $7,157,729
1994 Carrying Value (Estimated Amortized Unrealized Fair Cost Gains Losses Value) Available for Sale Taxable: U.S. Treasury securities $3,960,583 $ 2,281 $ 145,052 $3,817,812 U.S. Government agencies and corporations 20,069,329 2,222 667,548 19,404,003 Federal Reserve Bank stock 56,650 - - 56,650 Total taxable 24,086,562 4,503 812,600 23,278,465 Tax-exempt: Federal Reserve Bank stock 2,250 - - 2,250 Total $24,088,812 $ 4,503 $812,600 $ 23,280,715
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The maturities, amortized cost and estimated fair values of securities at December 31, 1995, are summarized as follows:
Held to maturity Available for sale Carrying Carrying Value Value (Estimated (Amortized Fair Amortized Fair Cost) Value Cost Value) Due in one year or less $2,384,854 $2,388,392 $6,022,062 $6,044,953 Due from one to five years 7,837,452 7,866,453 4,117,627 4,164,827 Due from five to ten years 3,292,176 3,354,431 - - Equity securities - - 291,100 291,100 Total $13,514,482 $13,609,276 $10,430,789 $10,500,880
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:
For the Proceeds From Gross Realized Year Ended Calls and Principal December 31, Sales Maturities Payments Gains Losses 1995 Securities held to maturity $ - $2,497,865 $ - $ - $ - Securities avail- able for sale - 7,359,223 - 990 - $ - $9,857,088 $ - $ 990 $ - 1994 Securities held to maturity $ - $ 716,250 $ 83,529 $ - $ 437 Securities available for sale 1,000,000 6,000,000 - 46 - $1,000,000 $6,716,250 $ 83,529 $ 46 $ 437 1993 $ 257,522 $6,256,588 $ 94,478 $2,529 $ - At December 31, 1995 and 1994, securities carried at $1,000,000 and $1,500,207, respectively, with estimated fair values of $1,006,900 and $1,496,269, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Loans Loans are summarized as follows:
1995 1994 Commercial, financial and agricultural $13,134,525 $9,131,592 Real estate - construction 2,019,845 659,790 Real estate - mortgage 23,430,089 21,144,382 Installment 6,522,299 7,620,566 Other 1,570,863 1,320,111 Total loans 46,677,621 39,876,441 Less unearned income 260,930 257,507 Total loans net of unearned income 46,416,691 39,618,934 Less allowance for loan losses 643,439 852,862 Loans, net $45,773,252 $38,766,072
Included in the net balance of loans are non-accrual loans amounting to $375,048 and $933,245 at December 31, 1995 and 1994, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $40,652, $71,560 and $16,943 for the years ended December 31, 1995, 1994 and 1993, respectively. The following represents loan maturities at December 31, 1995: After 1 But Within 1 Year Within 5 Years After 5 Years Commercial, financial and agricultural $ 8,689,415 $2,963,712 $ 1,481,398 Real estate - construction 1,941,692 78,153 - Real estate - mortgage 10,204,894 8,500,642 4,724,553 Installment 1,809,899 2,979,350 1,733,050 Other 1,546,355 24,508 - Total $24,192,255 $14,546,365 $ 7,939,001 Loans due after one year with: Variable rates $ 6,658,206 Fixed rates 15,827,160 Total $22,485,366 Concentrations of credit risk: The subsidiary bank grants commercial, residential and consumer loans to customers primarily located in Greenbrier County, West Virginia. As of December 31, 1995 and 1994, the Bank had direct extensions of credit to medical professionals totaling approximately $2,163,122 and $2,487,073, respectively. The security for these loans generally consists of mortgages on personal residences and medical office buildings and liens on medical practice equipment and receivables. The Bank evaluates the credit worthiness of each such customer on a case-by-case basis and the amount of collateral it obtains is based upon management's credit evaluation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party:
1995 1994 Balance, beginning $ 776,860 $ 811,867 Additions 208,563 330,798 Amounts collected (207,663) (365,805) Balance, ending $ 777,760 $ 776,860 Note 5. Allowance for loan losses and New Accounting Pronouncement An analysis of the allowance for loan losses for the years ended December 31, 1995, 1994 and 1993, is as follows:
1995 1994 1993 Balance, beginning of year $852,862 $1,000,803 $ 775,982 Losses: Commercial, financial and agricultural 90,348 22,772 196,904 Real estate - mortgage 75,000 3,249 23,009 Installment 215,885 400,576 81,290 Total 381,233 426,597 301,203 Recoveries: Commercial, financial and agricultural 3,250 5,683 288 Real estate - mortgage 2,470 1,000 5,021 Installment 166,090 148,973 61,715 Total 171,810 155,656 67,024 Net losses 209,423 270,941 234,179 Provision for loan losses - 123,000 459,000 Balance, end of year $643,439 $852,862 $1,000,803 As explained in Note 1, the Bank adopted SFAS Nos. 114 and 118 in 1995. The Company's total recorded investment in impaired loans at December 31, 1995, approximated $292,161, for which the related allowance for loan losses determined in accordance with SFAS Nos. 114 and 118 approximated $125,000. The Company's average investment in such loans approximated $483,780 for the year ended December 31, 1995. All impaired loans at December 31, 1995, were collateral dependent, and accordingly, the fair value of the loan's collateral was used to measure the impairment of each. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For purposes of SFAS Nos. 114 and 118, the Bank considers groups of smaller-balance, homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the 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 year ended December 31, 1995, the Company recognized approximately $2,237 in interest income on impaired loans. Using a cash-basis method of accounting, the Bank would have recognized approximately the same amount of interest income on such loans. Note 6. Bank Premises and Equipment The major categories of Bank premises and equipment and accumulated depreciation at December 31, 1995 and 1994, are summarized as follows:
1995 1994 Land $ 108,298 $ 108,298 Building and improvements 1,127,603 1,114,484 Furniture and equipment 1,496,851 1,677,860 2,732,752 2,900,642 Less accumulated depreciation 1,733,565 1,865,424 Bank premises and equipment, net $ 999,187 $1,035,218 Depreciation expense for the years ended December 31, 1995, 1994 and 1993 totaled $151,529, $147,377 and $129,551, respectively. Note 7. Deposits The following is a summary of interest bearing deposits by type as of December 31, 1995 and 1994:
1995 1994 Interest bearing demand deposits $12,579,368 $14,176,730 Savings deposits 19,185,594 21,220,634 Certificates of deposit 25,710,319 25,079,308 Total $57,475,281 $60,476,672 Time certificates of deposit in denominations of $100,000 or more totaled $2,151,222 and $1,866,648 at December 31, 1995 and 1994, respectively. Interest paid on time certificates of deposit in denominations of $100,000 or more was $89,256, $72,418, and $78,702 for the years ended December 31, 1995, 1994 and 1993, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of the maturity distribution of certificates of deposit in denominations of $100,000 or more as of December 31, 1995:
Amount Percent Three months or less $ 365,541 16.99% Three through six months 569,661 26.48% Six through twelve months 200,000 9.30% Over twelve months 1,016,020 47.23% Total $2,151,222 100.00% Note 8. Income Taxes During 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The cumulative effect of adopting SFAS No. 109 did not have a material effect on net income in 1993. The components of applicable income tax expense (benefit) for the years ended December 31, 1995, 1994 and 1993, are as follows:
1995 1994 1993 Current: Federal $198,444 $104,093 $ 263,888 State 29,789 18,485 33,727 228,233 122,578 297,615 Deferred (Federal and State) 72,875 41,383 (136,264) Total $301,108 $163,961 $ 161,351 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, 1995, 1994 and 1993, is as follows:
1995 1994 1993 Amount Percent Amount Percent Amount Percent Computed tax at applicable statutory rate $ 363,094 34.0 $240,023 34.0 $ 224,228 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest (79,701) (7.5) (79,678) (11.2) (67,649) (10.3) State income taxes, net of Federal income tax benefit 19,657 1.8 12,349 1.7 22,260 3.4 Life insurance benefits - - (13,100) (1.9) - - Other, net (1,942) (.1) 4,367 .6 (17,488) (2.7) Applicable income taxes $ 301,108 28.2 $163,961 23.2 $ 161,351 24.4 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities as of December 31, 1995 and 1994, are as follows: 1995 1994 Deferred tax assets: Allowance for loan losses $141,106 $ 220,687 Employee benefits 142,503 136,416 Accruals - 9,301 Net unrealized loss on securities - 282,834 283,609 649,238 Deferred tax liabilities: Depreciation 12,600 23,557 Accretion on securities 5,722 4,686 Net unrealized gain on securities 26,775 - 45,097 28,243 Net deferred tax assets $238,512 $ 620,995 The income tax expense (benefit) on realized securities gains (losses) was $376, ($149), and $961, for the years ended December 31, 1995, 1994 and 1993, respectively. Note 9. Employee Benefits Profit-Sharing Plan: The subsidiary bank sponsors a noncontributory defined contribution profit-sharing plan covering substantially all employees. Contributions to the Plan are at the discretion of the Board of Directors. 401(k) Plan: The subsidiary bank also 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. The Bank matches participant contributions in an amount equal up to 3.5% of each participant's annual compensation. In addition, the Bank is also eligible to make discretionary contributions to the Plan. The Bank's contributions to the above Plans for the years ended December 31, 1995, 1994 and 1993, totaled $117,500, $75,259 and $106,899, respectively. Postretirement Benefit Plans: The subsidiary bank sponsors a postretirement healthcare plan and a postretirement life insurance plan for all retired employees that meet certain eligibility requirements. Both plans are contributory with retiree contributions that are adjustable based on various factors, some of which are discretionary. The plans are unfunded. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" (SFAS No. 106) to account for its share of the costs of those benefits. In conjunction therewith, the Company charged 1993 net income $200,359 ($1.04 per common share), representing the cumulative effect, net of applicable income taxes of $122,800, of fully accruing the $323,159 unfunded accumulated postretirement benefit obligation existing at January 1, 1993. The change in accounting had the additional effect of reducing 1993 income before the cumulative effect of the change in accounting principle by $11,727, or $0.06 per common share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net postretirement benefit cost included the following components for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 Health Life Health Life Health Life Care Insurance Care Insurance Care Insurance Plan Plan Plan Plan Plan Plan Service cost-benefits attributable to service during the year $ 4,887 $ 1,905 $6,225 $ 2,454 $4,161 $ 1,578 Interest on accumulated postretirement benefit obligation 18,359 6,229 19,355 7,138 18,593 6,321 Amortization of (gain) loss (490) - 331 694 - - Net postretirement benefit cost $ 22,756 $ 8,134 $25,911 $10,28 $ 22,754 $ 7,899 The following tables set forth the plans' funded status reconciled with the obligations recognized in the accompanying consolidated balance sheets at December 31, 1995 and 1994
1995 1994 Health Life Health Life Care Insurance Care Insurance Plan Plan Total Plan Plan Total Accumulated postretirement benefit obligation: Retirees $(117,153) $(44,197) $(161,350) $(134,632) $(43,900)$(178,532) Active participants fully eligible for benefits (49,559) (19,053) (68,612) (33,131) (12,427) (45,558) Other active participants (76,375) (29,587) (105,962) (69,651) (26,502) (96,153) (243,087) (92,837) (335,924) (237,414) (82,829) (320,243) Plan assets - - - - - - Accumulated postretirement benefit obligation in excess of plan assets (243,087) (92,837) (335,924) (237,414) (82,829) (320,243) Unrecognized net (gain) loss (39,303) (1,703) (41,006) (30,932) (7,814) (38,746) Accrued postretirement benefit cost $(282,390) $(94,540) $(376,930)$(268,346) $(90,643)$(358,989)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average discount rates used in estimating the accumulated postretirement benefit obligations of the health care plan and the life insurance plan at December 31, 1995 and 1994, were 7% and 8%, respectively. For measurement purposes, a 7% annual rate of increase in per capita healthcare costs of covered benefits was assumed through 1999, 6% for the next 5 years, 5 1/2% for the next 5 years, and 5% thereafter. If assumed healthcare cost trend rates were increased by 1 percentage point in each year, the accumulated postretirement benefit obligation at December 31, 1995, would be increased by $10,430 and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1995, would be increased by $938. Note 10. Lease Obligation The subsidiary bank leases its branch facility in Lewisburg, West Virginia under an operating lease with an initial term of ten years, commencing April 1, 1986. The lease provides for two successive options for five-year renewals. Total lease payments of $90,446 were charged to expense for each of the years ended December 31, 1995, 1994 and 1993. Total future minimum lease payments under the lease are as follows: Year Ending December 31, Amount 1996 $22,611 The lessor of the branch facility is an entity owned by two directors of the Company and subsidiary bank. Note 11. Commitments and Contingencies Financial instrument 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. Financial instruments whose contract Contract Amount amounts represent credit risk 1995 1994 Commitments to extend credit $8,560,726 $5,005,431 Standby letters of credit - 570,672 Total $8,560,726 $5,576,103
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Bank 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. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans. These letters of credit are generally uncollateralized. 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 $275,000 at December 31, 1995. Note 12. Regulatory Restrictions on Capital and Dividends The subsidiary bank is required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by banking regulations. A comparison of the subsidiary bank's capital as of December 31, 1995, with the minimum requirements for an adequately capitalized bank is presented below: Minimum Actual Requirements Tier 1 Risk-based Capital 16.19% 4.0% Total Risk-based Capital 18.16% 8.0% Leverage Ratio 11.11% 3.0% 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 1996, the net retained profits available for dis- tribution to First National Bankshares Corporation as dividends without regulatory approval are approximately $890,000, plus net retained profits, as defined, for the interim periods through the date of declaration. Note 13. Fair Value of Financial Instruments The following summarizes the methods and significant assumptions used by the Bank in estimating its fair value disclosures for financial instruments. Cash and due from banks: The carrying values of cash and due from banks approximate their estimated fair value. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Deposits: The estimated fair values of demand deposits (i.e. noninterest bearing checking, NOW, Super 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. Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of 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 and standby letters of credit 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 Bank's financial instruments are summarized below:
December 31, 1995 Estimated Carrying Fair Value Value Financial assets: Cash and due from banks $2,720,887 $2,720,887 Federal funds sold 893,000 893,000 Securities available for sale 10,500,880 10,500,880 Securities held to maturity 13,514,482 13,609,276 Loans 45,773,252 45,680,242 $73,402,501 $73,404,285 Financial liabilities: Deposits $66,166,188 $66,202,397 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14. Condensed Financial Statements of Parent Company The investment of the Corporation in its wholly-owned subsidiary is presented on the equity method of accounting. Information relative to the Corporation's balance sheets at December 31, 1995 and 1994, and the related statements of income and cash flows for the years ended December 31, 1995, 1994 and 1993, are presented as follows:
Balance Sheets Assets 1995 1994 Cash $ 4,833 $4,635 Investment in bank subsidiary, eliminated in consolidation 8,409,837 7,304,242 Other assets 58,484 79,131 Total assets $8,473,154 $ 7,388,008 Liabilities and shareholders' equity Liabilities Dividends payable $ 57,750 $77,000 Shareholders' equity Common stock, $5.00 par value, authorized 500,000 shares, issued 192,500 shares 962,500 962,500 Capital surplus 1,000,000 1,000,000 Retained earnings (consisting of undivided profits of subsidiary not yet distributed) 6,409,585 5,873,771 Net unrealized gain (loss) on securities 43,319 (525,263) Total shareholders' equity 8,415,404 7,311,008 Total liabilities and shareholders' equity $8,473,154 $7,388,008 Statements of Income 1995 1994 1993 Income - dividends from bank subsidiary $ 231,000 $ 192,500 $ 173,250 Expenses - operating 1,932 5,607 13,226 Income before income taxes and undistributed income 229,068 186,893 160,024 Applicable income tax expense (benefit) (733) (2,131) (4,860) Income before undistributed income 229,801 189,024 164,884 Equity in undistributed income in bank subsidiary 537,013 352,965 133,106 Net income $766,814 $541,989 $ 297,990 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net income $766,814 $541,989 $297,990 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (537,013) (352,965) (133,106) (Increase) decrease in other assets 20,647 (74,271) 49 Net cash provided by operating activities 250,448 114,753 164,933 CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders (250,250) (115,500) (173,250) Net cash (used in) financing activities (250,250) (115,500) (173,250) Increase (decrease) in cash 198 (747) (8,317) Cash: Beginning 4,635 5,382 13,699 Ending $ 4,833 $ 4,635 $5,382 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Dividends declared and unpaid $ 57,750 $ 77,000 $- First National Bankshares Corporation accounts for its investment in its bank subsidiary by the equity method. During the years ended December 31, 1995, 1994 and 1993, changes were as follows: Number of shares owned at December 31, 1995 - 38,500 Percent to total shares at December 31, 1995 - 100% Balance at December 31, 1992 $7,343,434 Add (deduct): Equity in net income 306,356 Dividends declared (173,250) Balance at December 31, 1993 7,476,540 Add (deduct): Equity in net income 545,465 Dividends declared (192,500) Net unrealized gain (loss) on securities (525,263) Balance at December 31, 1994 7,304,242 Add (deduct): Equity in net income 768,013 Dividends declared (231,000) Change in net unrealized gain (loss) on securities 568,582 Balance at December 31, 1995 $ 8,409,837
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The number of directors of the Company is fixed at 11. Each director of the Company is also a director of the Bank. 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
S. Elwood Bare Pharmacist; Owner/President 69 1986 1996 Chairman of the Board, of P.A. George & Co., Member of Asset/Liability, Inc. (drug store) Audit & Compliance, and Trust Committees of the Bank L. Thomas Bulla President & CEO of 56 1993 1998 President & CEO First National Bankshares Corp. of the Company and First National Bank (1993- Member of Asset/ present); Director, President Liability and & CEO of Bank One, West Virginia Trust Committees Charleston, NA (1985-1993) of the Bank J. R. Dawkins Cattle Dealer; Farm 78 1986 1997 Member of Audit & Operator Compliance Committee of the Bank Richard E. Ford Attorney at Law 68 1987 1996 Member of Audit & Partner - Haynes, Ford Compliance and Trust & Rowe Committees of the Bank Walter Bennett Fuller Retired Banker 72 1986 1997 Vice Chairman of the Board, Member of Asset/Liability, Audit & Compliance, and Trust Committees of the Bank William D. Goodwin Attorney at Law, 52 1986 1998 Member of Asset/Liability Owner/Broker, Coldwell and Trust Committees of Banker Stuart & Watts Real the Bank Estate, Inc. (Table continued on next page) 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 Houston B. Moore, M.D. Retired Physician; Farm 68 1986 1997 Member of Asset/Liability Operator and Cattle Dealer Committee of the Bank Lucie T. Refsland, Ed.D. Interim Director (1995) Member of Trust and Associate Professor 59 1995 1998 Committee of the Bank Mathematics (1993 - present) Greenbrier Community College William R. Satterfield Owner - Greenbrier 51 1986 1998 Member of Asset/Liability Insurance Agency and Audit & Compliance Committees of the Bank Richard L. Skaggs Partner - Park Grove 73 1986 1997 Member of Audit & Farms (farm feed and Compliance Committee supply) of the Bank Ronald B. Snyder President, R.B.S., Inc. 56 1988 1996 Member of Asset/Liability (construction company) Committee of the Bank The directors of the Company serve staggered 3 year terms. Directors Bare, Ford, and Snyder whose terms expire in 1996, have been nominated to stand for re-election at the 1996 annual meeting of the Company's stockholders to serve a 3 year term which will expire in 1999. On March 16, 1996, Director Houston B. Moore, M.D., died after a long illness. As provided for in the Company's bylaws, the Board of Directors will appoint a new director to fulfill Dr. Moore's unexpired term. 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 56 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 36 Executive Vice President of the Bank (1996 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 59 Vice President of the Company (1987 to present); Senior Vice President and Loan Officer of the Bank (1970 to present) Keith E. Morgan 58 Secretary-Treasurer of the Company (1987 to present); Senior Vice President, Cashier, Trust Officer and Secretary to the Board of the Bank (1970 to present) William D. Sturgill 48 Vice President and Operations Officer of the Bank (1972 to present) The executive officers of the Company listed above shall continue in office until the 1996 organizational meeting of the directors of the Company. It is expected that, for 1996, the current officers will be re-elected to the offices they now hold. The executive officers of the Bank listed above shall continue in office until the 1997 organizational meeting of its directors; and it is expected that these persons will be reelected 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 for the years 1995, 1994 and 1993:
All Other Name and Salary Bonus Compensation Principal Position Year ($) ($) ($) L. Thomas Bulla (1) 1995 137,500 25,000 24,287 (3) President & CEO of the Company and the Bank 1994 125,000 -0- 9,498 William M. Dickson (2)1993 99,155 400 9,393 President of the Company and the Bank FOOTNOTES: (1) Mr. Bulla was appointed President and CEO year-end 1993. (2) Mr. Dickson retired effective year-end 1993. (3) The amount shown under the "All Other Compensation" column above for 1995 is the total of the following: (i) directors fees of $6,800, (ii) the amount of premiums paid by the Bank for term life insurance for Mr. Bulla's benefit of $1,356, (iii) 401-K Plan contribution of $5,714, (iv) Profit Sharing Supplemental Retirement Plan contribution of $10,417. 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 salary in the event there is a change in control in the Company (as defined therein) and a termination of his employment. The maximum contingent liability under this agreement approximates $275,000 at December 31, 1995. 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, 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. On March 26, 1996, the Board of Directors voted to submit an incentive stock option by the stockholders at the scheduled annual meeting. 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. Accordingly, the Company will from time to time during the effective period of the plan, grant to the employees selected in the manner provided in the plan options to purchase shares of the common stock of the Company subject to certain conditions specified in the plan. The maximum number of shares eligible under this plan is 5.0% of the current outstanding common shares, or 9,625 shares of the Company's common stock. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are no shareholders, known to the Company, who beneficially own more than 5% of the Company's common stock, the only class of stock outstanding, as of February 28, 1996. The following table sets forth information as of February 28, 1996, 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 S. Elwood Bare 1,125 (1) .58% L. Thomas Bulla 6,150 (2) 3.19% John R. Dawkins 4,665 (3) 2.42% Richard E. Ford 2,927 (4) 1.52% Walter Bennett Fuller 1,875 (5) .97% William D. Goodwin 1,570 (6) .82% Houston B. Moore, M.D. 895 (7) .46% Lucie T. Refsland, Ed.D. 203 (8) .11% William R. Satterfield, Jr. 1,325 (9) .69% Richard L. Skaggs 525 (10) .27% Ronald B. Snyder 3,248 (11) 1.69% All Directors and Executive Officers of the Company & Bank as a Group (14 persons) 29,683 15.43% FOOTNOTES (1) Mr. Bare has sole voting and investment authority for 950 shares and shared voting and investment authority for 175 shares. (2) Mr. Bulla has sole voting and investment authority for 3,600 shares and shared voting and investment authority for 2,550 shares. (3) Mr. Dawkins has sole voting and investment authority for 4,165 shares and shared voting and investment authority for 500 shares. (4) Mr. Ford has sole voting and investment authority for 1,612 shares and shared voting and investment authority for 1,315 shares. (5) Mr. Fuller has sole voting and investment authority for 1,875 shares. (6) Mr. Goodwin has sole voting and investment authority for 920 shares and shared voting and investment authority for 650 shares. (7) Dr. Moore has sole voting and investment authority for 400 shares and shared voting and investment authority for 495 shares. (8) Ms. Refsland has sole voting and investment authority for 203 shares and shared voting and investment authority for -0- shares. (9) Mr. Satterfield has sole voting and investment authority for 1,075 shares and shared voting and investment authority for 250 shares. (10) Mr. Skaggs has sole voting and investment authority for 200 shares and shared voting and investment authority for 325 shares. (11) Mr. Snyder has sole voting and investment authority for 200 shares and shared voting and investment authority for 3,048 shares. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of business since January 1, 1995, 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 Financial Statements for additional information. The Bank leases its branch banking facility on Route 219 North in Lewisburg, West Virginia, from Company Directors Goodwin and Satterfield. The lease term began April 1, 1986, and runs for a period of 10 years, expiring in March of 1996. The Bank has the right to renew the lease for 2 additional successive 5 year periods. The annual rental during the initial 10 year term is $90,446. In 1995, the Bank paid the lessors rent in the amount of $90,446. In January of 1996, Bank Management and the Board of Directors opted to regegotiate the lease in an attempt to reduce the annual cost to the Bank, as well as to evaluate other branch options. Negotiations did not result in a mutually satisfactory agreement, and the Board of Directors voted not to renew the current lease, but to commence with the purchase of land and the construction of a new branch location. The lease is to be continued on a month-to-month basis until a new location is constructed. 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 20 through 43 of this Form 10-K Report of independent auditors . . . . . . . . . . . . . . . . . . . 20 Consolidated balance sheets at December 31, 1995 and 1994. . . . . . 21 Consolidated statements of income for the years ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . . . . . . . . .22-23 Consolidated statements of shareholders' equity for the years ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . 24 Consolidated statements of cash flows for the years ended December 31, 1995, 1994, and 1993. . . . . . . . . . . . . . . .25-26 Notes to the consolidated financial statements . . . . . . . . . .27-43 (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 inapplicable, 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. . . . . . . . . . . . . . . . . . . . . . . 54 (b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the quarter ended December 31, 1995. (c) Exhibits See Item 14(a)(3), above (d) Financial Statement Schedules See Item 14(a)(2), above 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) By: /s/ L. Thomas Bulla 03/12/96 L. Thomas Bulla President, Chief Executive Officer and Director (Principal Executive 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/ Bennett Fuller 03/12/96 /s/ William R.Satterfield Jr. 03/12/96 Bennett Fuller, Director William R.Satterfield, Jr., Director /s/ Ronald B. Snyder 03/12/96 /s/ Richard E. Ford 03/12/96 Ronald B. Snyder, Director Richard E. Ford, Director /s/ William D. Goodwin 03/12/96 William D. Goodwin, Director H. B. Moore, M.D., Director /s/ S. Elwood Bare 03/12/96 /s/ Richard L.Skaggs 03/12/96 S. Elwood Bare, Director Richard L.Skaggs, Director /s/ Lucie T. Refsland, Ph.D. 03/12/96 John R. Dawkins, Director Lucie T. Refsland, Ph.D., Director /s/ L. Thomas Bulla 03/12/96 /s/ Keith E. Morgan 03/12/96 L. Thomas Bulla, President, Chief Keith E. Morgan, Secretary & Treasurer Executive Officer and Director Principal Financial and Accounting Officer) (Principal Executive Officer)
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 when they are sent to the stockholders. INDEX TO EXHIBITS PRIOR FILING EXHIBIT REFERENCE NUMBER DESCRIPTION OR PAGE (3)i Articles of Incorporation of Registrant. . . . . . . . (a) (3)ii By-laws of Registrant. . . . . . . . . . . . . . . . . (a) (10) Material Contract Agreement dated October 14, 1993, between L. Thomas Bulla and First National Bank. . . . . . . . . . . . . . . . (a) (21) Subsidiary of Registrant . . . . . . . . . . . . . . . .55 (23) Consents of experts and counsel Consent of Independent Auditors. . . . . . . . . . . . .56 Consent of Persinger & Company, L.L.C. . . . . . . . . .57 (a) Attached to and incorporated by reference from First National Bankshares Corporation's Form 10-K Annual Report dated December 31, 1994, and filed March 28, 1995, with the Securities and Exchange Commission. 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. 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 2, 1996, on our audit of the consolidated financial statements of First National Bankshares Corporation as of December 31, 1995 and 1994, and for the two years in the period ended December 31, 1995, appearing in thie 1995 Annual Report to Shareholders of First National Bankshares Corporation. ARNETT & FOSTER /s/ Charleston, West Virginia March 25, 1996 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DISTRICT OF COLUMBIA We hereby consent to the use in this Annual Report on Form 10-K of our report, dated January 6, 1994, except for notes 15 and 17, as to which the date is March 21, 1995, relating to the consolidated statements of income, shareholders' equity and cash flows of First National Bankshares Corporation for the year ended December 31, 1993. PERSINGER & COMPANY, L.L.C. /s/ Covington, Virginia March 22, 1996 EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 12-MOS 12-31-95 12-31-95 2,721 0 893 0 10,501 13,514 13,609 45,773 643 75,455 66,166 0 873 0 963 0 0 0 75,455 4,018 1,571 99 5,688 2,115 2,115 3,573 0 0 2,920 1,068 1,068 0 0 767 3.98 0 5.16 375 0 0 0 853 381 172 643 0 0 0
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