-----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, HhqNvhGKbhOid1LzvGFYG1bHMJ7/5jd15PlW8YOQd6Qvznew1XrOF4H7hKy8MaP/ HPSQHklvkNH1TLknL5wO/Q== 0000814178-97-000002.txt : 19970329 0000814178-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000814178-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST NATIONAL BANKSHARES CORP CENTRAL INDEX KEY: 0000814178 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 621306172 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-14252 FILM NUMBER: 97567402 BUSINESS ADDRESS: STREET 1: ONE CEDAR ST STREET 2: P O BOX 457 CITY: RONCEVERTE STATE: WV ZIP: 24970 BUSINESS PHONE: 3046474500 MAIL ADDRESS: STREET 1: P O BOX 457 STREET 2: ONE CEDAR STREET CITY: RONCEVERTE STATE: WV ZIP: 24970 10-K 1 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, 1996 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 14, 1997, (management believes $50.00 was paid per share) was $8,100,450. 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, 1997, was 192,500. Documents Incorporated by Reference Part of Form 10-K into which Document the document is incorporated Articles of Incorporation, from 12/31/94 10-K Part IV, Item 14 By-Laws, from 12/31/94 Report 10-K Part IV, Item 14 Material Employment Contract, from 12/31/94 Report 10-K Part IV, Item 14 Material Lease Contract, from 03/31/96 Form 10-Q Part IV, Item 14 S-8 Statement, from 07/31/96 Form S-8 Part IV, Item 14 THIS REPORT CONTAINS 65 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 57 . ---- ---- 1 FIRST NATIONAL BANKSHARES CORPORATION Form 10-K Table of Contents Page PART I Item 1 - Business 3 Item 2 - Properties 5 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 8-20 Item 8 - Financial Statements and Supplementary Data 20-46 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47 PART III Item 10 - Directors and Executive Officers of the Registrant 48-50 Item 11 - Executive Compensation 51 Item 12 - Security Ownership of Certain Beneficial Owners and Management 52 Item 13 - Certain Relationships and Related Transactions 53 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements 54 Signatures 55 2 PART I ITEM 1 - BUSINESS Organizational History First National Bankshares Corporation (referred to in this report as "the Company") is a West Virginia corporation. It was organized on January 28, 1986, and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Company has one wholly-owned subsidiary, a national banking association which was known as The First National Bank in Ronceverte, until January, 1996, 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 offices in Lewisburg and Charleston, West Virginia. The Bank received approval from the Office of the Comptroller of the Currency in January, 1996, to open the branch facility in Charleston, West Virginia, which was officially opened in mid-July, 1996. Concurrent with the application for the 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. The new branch location in the city of Charleston is located in Kanawha County, West Virginia. This area is home of the state capital and is the largest metropolitan area in West Virginia. Primary employment is related to various professional service industries, health care, state government, and the chemical industry. The Charleston area typically 3 has unemployment rates far below the state average and is much more insulated from economic downturns than the Greenbrier County area. Competition The banking and financial services business is highly competitive, especially in the Bank's market area. The Bank's principal competitors in Greenbrier County include four other commercial banks, each of which are owned by statewide or regional bank holding companies. As of December 31, 1996, management estimates that the Bank had deposits representing an estimated 15% of total deposits and loans representing an estimated 14% 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. It is too early to estimate the impact of competition on the new Charleston branch. The Charleston area is serviced by the state's four largest banking organizations, as well as several small independent banks. Currently, the Company's market share is estimated to be less than 1% for both deposits and loans. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers' needs. The Bank generates new business primarily through newspaper and radio advertising, referrals and direct-calling efforts. Referrals for new business come from Company directors, present customers of the Bank and professionals such as attorneys and accountants. 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, 1996, the Bank employed 38 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 20 of this report, and are incorporated herein by reference. 4 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. During 1996, as in prior years, the Bank's branch on Route 219 North in Lewisburg, West Virginia, was 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 renegotiate 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 Company completed construction of a new branch facility and commenced operations on January 27, 1997. The new branch facility is located on U.S. Route 219, approximately 1 mile north of the previous branch location, and is expected to be fully used in the Bank's operations. Management does not anticipate that this action will have any significant impact on its financial position. The new Charleston branch is located in Laidley Tower, a 16-story high-rise office building in downtown Charleston, WV. Effective May 1, 1996, the Company entered into a 10-year non-cancelable lease agreement to occupy approximately 4,532 square feet of the building. Additional information related to this lease can be found in Note 12 of the Notes to Consolidated Financial Statements which is included in Item 8 of this filing. The Bank's properties and leased facilities are considered well suited for its current needs. Both the main office located in Ronceverte, WV, and the branch location in Lewisburg, WV, have full-service banking available, including drive-in banking services. Space at both locations is ample, and no significant modifications are required at either location. The new branch facility in Charleston is also a full-service branch offering the same services as the current locations, except it offers no drive-in banking services. In January, 1996, the main office of the Bank realized damage due to flood waters which necessitated significant remodeling of the first floor. This damage was covered by adequate flood insurance. However, management decided to increase the construction to include not only the replacement of flood damaged items, but also the overall remodeling of the first floor. Substantially all remodeling to the main office was completed by December 31, 1996. 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 1996. 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 December 31, 1996, the Company's common stock was held by approximately 442 stockholders of record. There is no active or organized trading market for the common stock of the Company. The stock of the Company is traded on a limited basis in privately negotiated transactions. At present, there is no market maker for the Company's common stock. Accordingly, 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 5 negotiated. However, in some of these transactions, individuals have called the Company and asked for a value for its common stock. In response to such inquiries, the Company provides the individual with the book value of its common stock as of the end of the most recent quarter, as well as the most recent price per share paid in transactions known to management. Stock trades during 1996 that were known to management took place at $50.00 to $50.30 per share, with the majority of known transactions having a per share price of $50.00. This is substantially unchanged from prices known for 1995 transactions. The following high and low prices are the book values of a share of the Company's common stock at the beginning and end of each of the quarters shown below. These may represent amounts which may have been paid for the common stock of the Company during the periods indicated, however management makes no representations concerning trades that were conducted privately. - ------------------------------------------------------------------------------- 1996 1995 ----------------------------------------------- High Low High Low First Quarter $ 44.16 $ 44.04 $ 39.70 $ 38.90 Second Quarter 45.02 44.64 41.87 40.24 Third Quarter 45.42 45.28 42.48 41.83 Fourth Quarter 45.93 45.84 43.72 43.03 - ------------------------------------------------------------------------------ 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 1996 and 1995 follows: - ------------------------------------------------------------------------------- 1996 1995 ------- ------- First Quarter $ .33 $ .30 Second Quarter .33 .30 Third Quarter .33 .30 Fourth Quarter .40 .30 - ------------------------------------------------------------------------------- The Company plans to continue the pattern of declaring quarterly dividends in the future at a rate consistent with its historical payout ratios. Payment of dividends by the Company is dependent upon payments to it from the subsidiary bank. The ability of the subsidiary bank to pay dividends is subject to certain limitations. These limitations are discussed in Note 14 of the Notes to Consolidated Financial Statements, which are included in Item 8 of this filing. 6 ITEM 6. - SELECTED FINANCIAL DATA (Dollars in thousands, except per share data and ratios) 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- SUMMARY OF OPERATIONS Interest income ................ $ 6,166 $ 5,688 $ 5,599 $ 5,926 $ 6,460 Interest expense ............... 2,393 2,115 2,089 2,359 2,887 Net interest income ............ 3,773 3,573 3,510 3,568 3,573 Provision for loan losses ...... 0 0 123 459 460 Non-interest income ............ 433 415 419 366 375 Non-interest expense ........... 3,140 2,920 3,100 2,815 2,814 Income before income taxes ..... 1,066 1,068 706 659 674 Income before cumulative effect of change in accounting principle . 736 767 542 498 491 Net income ..................... 736 767 542 298 491 PER SHARE DATA Income before cumulative effect of change in accounting principle . $ 3.82 $ 3.98 $ 2.82 $ 2.59 $ 2.55 Net income ..................... 3.82 3.98 2.82 1.55 2.55 Cash dividends declared ........ 1.39 1.20 1.00 0.90 0.90 Book value per share ........... 45.93 43.72 37.98 39.56 38.24 AVERAGE BALANCE SHEET SUMMARY Loans, net of unearned discount and reserve ........... $48,037 $41,853 $40,954 $44,532 $43,652 Securities ..................... 23,341 27,321 31,722 28,261 25,401 Deposits ....................... 69,838 66,367 72,082 72,584 71,442 Shareholders' equity ........... 8,672 8,223 7,779 7,616 7,314 Total assets ................... 79,985 75,351 80,274 80,615 79,216 AT YEAR END Loans, net of unearned discount and reserve ........... $52,800 $45,773 $38,766 $45,240 $44,199 Securities ..................... 22,617 24,015 30,802 29,518 26,443 Deposits ....................... 73,316 66,166 69,685 73,543 72,941 Shareholders' equity ........... 8,841 8,415 7,311 7,487 7,362 Total assets ................... 83,668 75,455 77,738 81,615 80,560 SELECTED RATIOS Return on average assets (1) ... 0.92% 1.02% 0.68% 0.62% 0.62% Return on average equity (1) ... 8.49 9.33 6.97 6.54 6.70 Average equity to average assets 10.84 10.91 9.69 9.45 9.23 Dividend payout ratio (1) ...... 36.35 30.12 35.52 34.76 35.32 (1) - Before cumulative effect of change in accounting principle during 1993. 7 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. The statements contained in this discussion may include forward-looking statements based on management's current expectations, and actual results may differ materially. This discussion and analysis should be read in conjunction with such financial statements and the accompanying notes thereto. 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 $736,000 for 1996, representing an decrease of $31,000 or 4.0% over the $767,000 reported for 1995. This decrease in 1996 earnings was largely attributable to a $158,000 increase in salaries and employee benefits, and a $29,000 increase in income taxes. The Company's 1996 and 1995 earnings were both significantly improved over 1994's earnings due to lower loan loss provisions and FDIC assessments, and the continuing increases in the Company's net interest income. On a per share basis, net income was $3.82 in 1996, $3.98 in 1995, and $2.82 in 1994. An analysis of the changes in earnings per share by major statement of income component is presented in the following table: - ------------------------------------------------------------------------------- 1996 1995 vs. vs. 1995 1994 Earning per common share, prior year $ 3.98 $ 2.82 Increase (decrease) from changes in: Net interest income 1.04 .33 Provision for loan losses .00 .64 Other income .09 (.03) Other expenses (1.14) .94 Income taxes (.15) (.72) --------- --------- Earning per common share $ 3.82 $ 3.98 ======== ======== - ------------------------------------------------------------------------------- Return on average assets (ROA), a measure of how effectively the Company utilizes its assets to produce net income, was 0.92% for 1996, compared to 1.02% for 1995 and 0.68% for 1994. Return on average equity (ROE), which measures earnings performance relative to the total amount of equity capital invested in the Company, was 8.49% in 1996, 9.33% in 1995, and 6.97% in 1994. The decrease in both of these ratios is due to the lower 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 1996, 1995, and 1994, tax-equivalent adjustments of $109,000, $121,000, and $121,000, respectively, are included in interest income, and were computed assuming a tax rate of 34% in all periods. For the year 1996, the Company's net interest income, as adjusted, increased $188,000 or 5.09% to $3,882,000 as compared to $3,694,000 and $3,631,000 in 1995 and 1994, respectively. This increase was attributable to overall growth in the loan portfolio which is the Bank's highest-yielding earning asset. The Company's net interest margin 8 remained consistent with the previous year at 5.15% in 1996 compared with 5.16% in 1995 and 4.78% in 1994. 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. No provision for loan losses was considered necessary during 1996 and 1995, while a provision of $123,000 was considered necessary in 1994. The reduction in the provision for 1996 and 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 of this discussion for additional information related to the adequacy of the provision for loan losses. 9 TABLE I AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (Dollars in thousands) 1996 1995 ------------------------ ------------------- Average Yld/ Average Yld/ Balance Int. Rate Balance Int Rate INTEREST EARNING ASSETS Loans, net of unearned discount (1) $48,037 $4,667 9.72% $42,632 $4,018 9.42% Securities: Taxable 18,855 1,072 5.69 22,494 1,337 5.94 Tax-exempt (2) 4,486 321 7.16 4,827 355 7.35 --------- ------ ----- ------- ----- ---- Total securities 23,341 1,393 5.97 27,321 1,692 6.19 --------- ------ ----- ------- ----- ----- Federal funds sold 4,049 215 5.31 1,635 99 6.05 ------- ------ ----- ------- ------ ----- Total interest earnings assets 75,427 6,275 8.32 71,588 5,809 8.11 --------- ------- NON INTEREST EARNING ASSETS Cash and due from banks 2,475 2,227 Bank premises and equipment 1,499 1,071 Other assets 1,194 1,224 Allowance for loan losses (610) (759) --------- ------- Total assets $ 79,985 $75,351 ========= ======= INTEREST BEARING LIABILITIES Demand deposits $ 13,449 360 2.67 $13,298 354 2.66 Savings deposits 20,419 727 3.56 20,075 703 3.50 Time deposits 26,325 1,293 4.91 23,744 1,058 4.45 --------- ------ ---- -------- ----- ----- Total interest bearing deposits 60,193 2,380 3.95 57,117 2,115 3.70 Repurchase Agreements 320 13 4.17 0 0 0.00 --------- ------ ---- -------- ----- ----- Total interest bearing liab. 60,513 2,393 3.95 57,117 2,115 3.70 NON INTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 9,645 9,250 Other liabilities 1,155 569 Shareholders' equity 8,672 8,415 --------- ------- Total liabilities and shareholders' equity $ 79,985 $ 75,351 ========= ======== NET INTEREST EARNINGS $3,882 $3,694 ====== ====== NET YIELD ON INTEREST EARNING ASSETS 5.15% 5.16% ===== ===== (CONTINUED ON NEXT PAGE.) (1)-For purposes of this table, nonaccruing loans are included in average loan balances. Loan fees are also included in interest income. (2)-Computed on a Federal tax-equivalent basis using the rate of 34% for all years. 10 TABLE I - CONTINUED AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS (Dollars in thousands) 1995 1994 --------------------------------------------- Average Yld/ Average Yld/ Balance Int Rate Balance Int Rate INTEREST EARNING ASSETS Loans, net of unearned discount (1) $42,632 $4,018 9.42% $41,882 $3,679 8.78% Securities: Taxable 22,494 1,337 5.94 27,169 1,585 5.83 Tax-exempt (2) 4,827 355 7.35 4,553 355 7.80 --------- ----- ----- ----- ----- ---- Total securities 27,321 1,692 6.19 31,722 1,940 6.12 --------- ----- ------ ------ ----- ---- Federal funds sold 1,635 99 6.05 2,365 101 4.27 --------- ------ ---- ------ ------ ---- Total interest earnings assets 71,588 5,809 8.11 75,969 5,720 7.53 -------- ------ NON INTEREST EARNING ASSETS Cash and due from banks 2,227 2,799 Bank premises and equipment 1,071 1,089 Other assets 1,224 1,345 Allowance for loan losses (759) (928) --------- -------- Total assets $ 75,351 $80,274 ========= ======== INTEREST BEARING LIABILITIES Demand deposits $ 13,298 354 2.66 $12,077 327 2.71 Savings deposits 20,075 703 3.50 24,801 781 3.15 Time deposits 23,744 1,058 4.45 26,053 981 3.77 --------- ------ ----- ------- ------ ---- Total interest bearing deposits 57,117 2,115 3.70 62,934 2,089 3.32 Repurchase Agreements 0 0 0.00 0 0 0.00 --------- ------ ---- ------- ------ ---- Total interest bearing liab. 57,117 2,115 3.70 62,931 2,089 3.32 NON INTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 9,250 9,151 Other liabilities 569 413 Shareholders' equity 8,415 7,779 --------- ------ Total liabilities and shareholders' equity $ 75,351 $80,274 ========= ======== NET INTEREST EARNINGS $3,694 $3,631 ====== ====== NET YIELD ON INTEREST EARNING ASSETS 5.16% 4.78% ===== ===== (1) - For purposes of this table, nonaccruing loans are included in average loan balances. Loan fees are also included in interest income. (2) - Computed on a Federal tax-equivalent basis using the rate of 34% for all years. - ------------------------------------------------------------------------------- 11 - ------------------------------------------------------------------------------- TABLE II CHANGE IN INTEREST INCOME AND EXPENSE DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1) (Dollars in thousands) 1996 vs. 1995 1995 vs 1994 ------------------------ -------------------------- Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: Volume Rate Total Volume Rate Total INTEREST EARNING ASSETS Loans ................... $ 522 $ 127 $ 649 $ 67 $ 272 $ 339 Securities: Taxable ................. (209) (56) (265) (277) 29 (248) Tax-exempt (2) .......... (25) (9) (34) 21 (21) 0 ----- ----- ----- ----- ----- ----- Total securities ........ (234) (65) (299) (256) 8 (248) ----- ----- ----- ----- ----- ----- Federal funds sold ...... 128 (12) 116 (37) 34 (3) ----- ----- ----- ----- ----- ----- Total interest earning asset 416 50 466 (226) 314 88 ----- ----- ----- ----- ----- ----- INTEREST BEARING LIABILITIES Demand deposits ......... 4 2 6 33 (6) 27 Savings deposits ........ 12 12 24 (159) 81 (78) Time deposits ........... 120 115 235 (92) 168 76 Repurchase Agreements ... 13 0 13 0 0 0 ----- ----- ----- ----- ----- ----- Total interest bearing liabilities ............. 149 129 278 (218) 243 25 ----- ----- ----- ----- ----- ----- NET INTEREST EARNINGS ... $ 267 $ (79) $ 188 $ (8) $ 71 $ 63 ===== ===== ===== ===== ===== ===== (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%. - ------------------------------------------------------------------------------- 11 Non-interest Income Non-interest income includes revenues from all sources other than interest income and yield related loan fees. Noninterest income totaled $433,000, $415,000, and $419,000 for the years ended December 31, 1996, 1995, and 1994, or 6.56%, 6.80%, and 6.96% of total income, respectively. For the year 1996, non-interest income was $433,000, up 4.3% from $415,000 in 1995, and also increased over 1994's level of $419,000. The following table details the components of non-interest income earned by the Company in 1996, 1995, and 1994, as well as the percentage increase (decrease) in each over the prior year. - ------------------------------------------------------------------------------- 1996 1995 1994 ------------------ ----------------- ---------- Percent Percent Amount Change Amount Change Amount Trust department income ...... $ 66,000 (52.5%) $139,000 78.2% $ 78,000 Service fees and commissions . 251,000 20.1 209,000 5.4) 221,000 Securities Gains (Losses), Net 1,000 0.0 1,000 -- -- Other ........................ 115,000 74.2 66,000 (45.0) 120,000 -------- ---- --------- ---- -------- $433,000 4.3% $415,000 (1.0%) $419,000 ======== ==== ======= ==== ======== - -------------------------------------------------------------------------------- The decrease in trust department income in 1996 resulted primarily from the loss of non-recurring fees which were realized in 1995 from the administration of a large estate. While the Company seeks to attract new trust business, estates and other trust services tend to fluctuate, and trust revenues are expected to remain at current levels during 1997. Service charges and commissions increased by $42,000, or 20.1% to $251,000 in 1996 due to a concentrated effort by the Bank to increase its fee income on deposit products and other services. Other non-interest income also increased, reaching $115,000 during 1996 versus $66,000 for the year ended December 31, 1995. Total other non-interest income has fluctuated between 1994 to 1996 primarily due to non-recurring items. Other income increased $49,000, or 74.2%, in 1996 primarily due to a $58,000 gain recognized from insurance proceeds received as a result of flood damage to the Bank's main banking facility. Also, other non-interest income decreased $54,000 or 45.0% in 1995 primarily due to the recognition of a $39,000 gain on proceeds received under a key-man life insurance policy during 1994. 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 1996, 1995 and 1994, and the percentage increase (decrease) in each over the prior year. - -------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------------------- Percent Percent Amount Change Amount Change Amount Salaries and employee benefits $1,628,000 10.7% $1,470,000 (0.5%) $1,477,000 Net occupancy expense ........ 292,000 19.7 244,000 10.9 220,000 Equipment rental, depreciation and maintenance ........... 216,000 4.3 207,000 (9.2) 228,000 Federal deposit ins. premiums 3,000 (96.3) 80,000 (56.5) 184,000 Data processing .............. 160,000 (9.1) 176,000 (6.4) 188,000 Advertising .................. 77,000 (15.4) 91,000 (8.3) 84,000 Professional & Legal ......... 111,000 (15.9) 132,000 (53.8) 286,000 Mailing and Postage .......... 81,000 22.7 66,000 (5.7) 70,000 Directors' fees and shareholders' expense .... 92,000 15.0 80,000 66.7 48,000 Stationary & Supplies ........ 97,000 64.4 59,000 (25.3) 79,000 Other ........................ 383,000 21.6 315,000 33.5 236,000 ---------- ---- ----------- ---- ---------- $3,140,000 7.5% $2,920,000 (5.8) $3,100,000 ========== ==== ========== ==== ========== - -------------------------------------------------------------------------------- Non-interest expense increased $220,000, or 7.5%, compared to 1995, primarily due to an increase in salaries and employee benefits of $158,000. Salaries and employee benefits represent the Company's largest non-interest cost, comprising approximately 51.8% of total non-interest expense in 1996. The increase in salaries and employee benefits 12 in 1996 compared to 1995 is due primarily to the addition of four new positions at the new Charleston branch office, as well as normal merit increases for the existing staff. The four new branch employees were on the Bank's payroll for approximately the last six months of 1996. Increased occupancy and equipment costs realized in 1996 is a result of the performance of certain building maintenance and upgrade projects, from the additional depreciation expense on furnishings, computers and other equipment acquired in connection with the new Charleston office and the additional lease expense for the new Charleston office. Total new occupancy expenses associated with the Charleston office in 1996 which were not present in previous years include lease expense of $54,000 and additional depreciation expense of $24,000. Federal Deposit insurance premiums fell dramatically in both 1996, falling by $77,000 to $3,000. This was due to a general reduction in FDIC assessment premiums realized throughout the banking industry. Stationary and supplies expense was 64.4% higher in 1996 versus 1995 due largely to the new Charleston branch office. Significant promotional material was printed, as was new letterhead, envelopes, business cards and related stationary items for the new office. Additionally, the Company ordered new stationary for the existing offices with an updated corporate logo due to the change in the Bank's name during the first quarter of 1996. The 15.4% decrease in advertising expense in 1996 versus 1995, and the corresponding 15.0% increase in directors' fees and shareholders' expense is due to the internal reclassification of the cost of annual reports and quarterly shareholder mailings from advertising expense to shareholders' expense. 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, totaled $330,000 or 30.9% of pre-tax income in 1996, compared to $301,000 or 28.2% in 1995, and $164,000 or 23.2% in 1994. 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 1996, 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 9 to the accompanying consolidated financial statements. Changes in Financial Position Total assets increased $8,213,000 or 10.9% to $83,668,000 at year end 1996 compared to $75,455,000 at year end 1995. This increase in total assets resulted from an increase in total deposits of $7,150,000 or 10.8%, which was primarily invested in loans due to an increase in overall loan demand. Average Company total assets also increased, up 6.2% from $75,351,000 during 1995 to $79,985,000 during 1996. TABLE I presents the Company's average balance sheet composition for the years ended 1996, 1995 and 1994. Net premises and equipment, the Company's most substantial non-earning asset, increased by $999,000 to $1,965,000 at year-end 1996 compared to year-end 1995. This is attributable to the additional fixed assets acquired in connection with the new Charleston branch facility, as well as the new branch facility located in Lewisburg, WV. Additional fixed asset increases are due to the additional equipment and building repairs associated with the aforementioned flood damage to the main bank location. Securities The Company has classified a 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. The Company does not hold any securities for trading purposes. A large number of securities matured during 1996 in both the available-for-sale and held-to-maturity categories, and substantially all new securities purchased during 13 1996 were classified as held-to-maturity due to the relatively short maturities of the securities purchased. Management does not believe that this change in the securities portfolio composition has any material impact on financial performance. To offset the anticipated loan demand and to provide for adequate liquidity, management intends to classify the majority of any new securities purchased as available-for-sale. The total securities portfolio decreased $1,398,000 or 5.8% to $22,617,000 at December 31, 1996, compared to December 31, 1995. Additionally, average total securities decreased from $27,321,000 during 1995 to $23,341,000 during 1996, or 14.6%. This decrease resulted management's shift in funds from securities to higher-yielding loans due to increased loan demand. 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 1996, the Company had an unrealized gain on securities classified as available for sale of $0, net of applicable deferred income taxes. This represents a $43,000 decrease over 1995's net unrealized gain of $43,000, net of applicable deferred income taxes. Details as to the amortized cost and estimated fair values of the Company's securities by type are presented in Note 3 of the Notes to Consolidated Financial Statements, included in Item 8 of this filing. At December 31, 1996, 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 non-equity securities together with the weighted average yields by maturity at December 31, 1996 are summarized in TABLE III. 14 - ------------------------------------------------------------------------------- TABLE III SECURITY MATURITY ANALYSIS (2) (At amortized cost, dollars in thousands) After One After Five Within but within but within After One Year Five Years Ten Years Ten Years Amt Yld(1) Amt Yld(1) Amt Yld(1) Amt Yld(1) ------------ ----------- ---------- ---------- Securities Held to Maturity U.S. Treasury securities $2,507 5.59% $ 500 5.57% $ - - % $ - - % U.S. Government agencies and corporations 6,967 5.38 4,232 5.65 - - - - Corporate debt securities - - 500 5.13 - - - - State and political subdivisions 235 3.90 605 4.35 3,290 4.79 - - ------ ---- ------ ---- ----- ---- ---- ---- Total $ 9,709 5.40 $5,837 5.46 $3,290 4.79 $ - - ====== ==== ====== ==== ====== ==== ==== ==== Securities Available for Sale U.S. Treasury securities $ - - % $980 5.97% $ - -% $ - - % U.S. Government agencies and corporations 1,001 5.95 1,500 6.11 - - - - Other - - - - - - - - ------ ---- ------ ---- ----- ---- ---- ---- Total $ 1,001 5.95 $2,480 6.05 $ - - $ - - ====== ==== ====== ==== ===== ==== ==== ==== (1) -- Weighted average yield presented without adjustment to a tax equivalent basis. (2) - Excludes Federal Reserve Bank and Federal Home Loan Bank stock which are considered equity securities. - -------------------------------------------------------------------------------- Loans Loans, net of unearned income, increased $7,037,000, or 15.2%, to $53,454,000 during 1996. Average loans outstanding, net of unearned income, increased from $42,632,000 in 1995 to $48,037,000 in 1996, or 12.7%. A summary of the Company's year-end loan balances by type, as well as an analysis of the increase (decrease) in such balances from December 31, 1995 to December 31, 1996, is summarized in the following table. - ------------------------------------------------------------------------------- Percent Increase 1996 (Decrease) 1995 -------------------------------- Commercial, financial and agricultural $19,579,000 49.1% $13,135,000 Real estate - construction ........... 2,396,000 18.6 2,020,000 Real estate - mortgage ............... 24,031,000 2.6 23,430,000 Installment and other ................ 7,553,000 (6.7) 8,093,000 ----------- ---- ----------- $53,559,000 14.7 $46,678,000 LESS: Unearned Discount .......... 105,000 (59.8) 261,000 ----------- ---- ----------- NET LOANS ............................ $53,454,000 15.2% $46,417,000 =========== ==== =========== - ------------------------------------------------------------------------------- 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 loan portfolio by approximately $5,055,000, primarily in commercial loans and residential mortgages, as a direct result of its move into the Charleston market. Installment loans have decreased by approximately 6.7% since year-end 1995. This is due largely to a decreased demand for personal and consumer loans in the Bank's primary Greenbrier County market. A summary of loan maturities by loan type as of December 31, 1996 is included in Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. 15 Allowance for Loan Losses and Risk Elements The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company's management, on a quarterly basis, performs a comprehensive loan evaluation which encompasses the identification of all potential problem credits, which are included on an internally generated watch list. The identification of loans for inclusion on the watch list is facilitated through the use of various sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part of regulatory agency loan reviews and reviews of new loans representative of current lending practices within the Bank. Once this list is reviewed to ensure it is complete, detail reviews of specific loans for collectibility, performance and collateral protection are performed. A grade is assigned to the individual loans reviewed utilizing internal grading criteria, which is somewhat similar to the criteria utilized by the Bank's primary regulatory agency. Based on the results of these reviews, specific reserves for potential losses are identified. In addition, management considers historical loan loss experience, new loan volume, portfolio composition, levels of non-performing and past due loans and current and anticipated economic conditions in evaluating the adequacy of the allowance for loan losses. As more fully explained in Notes 1 and 5 of the Notes to Consolidated Financial Statements included in Item 8 of this filing, certain impaired loans are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loans' collateral if the loan is collateral dependent. There has been no significant change in the amount of loans considered impaired under the provision of SFAS No. 114, as amended. At December 31, 1996, the allowance for loan losses was $654,000 or 1.22% of total loans (net of unearned income) compared to $643,000 or 1.39% at December 31, 1995. The Bank was in a net recovery position (more money was recovered from previously charged-off loans than was lost on newly charged-off loans) during 1996, resulting in an increase in the allowance for loan losses. Loan charge-offs, net of recoveries, for 1996 were ($11,000) compared to $209,000 and $271,000 in 1995 and 1994, respectively. Expressed as a percentage of average loans outstanding during 1996, 1995 and 1994, net loan charge-offs were (0.02%), 0.49% and 0.65%, respectively. See Note 5 to the consolidated financial statements for an analysis of the activity in the Company's allowance for loan losses in 1996, 1995 and 1994. Despite an overall increase in loan volume since 1994, the year-end 1996 allowance is $199,000 less than 1994's year-end balance. This is due primarily to specific reserve allocations to several problem credits in 1994 that have since been charged-off or paid-off. Management believes that the current allowance is sufficient to cover any potential losses in the current loan portfolio. The increase in the Company's unallocated reserve is due to a significant decline in the three-year average charge-off history for commercial loans, which is directly related to increased quality in the loan portfolio. 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) 1996 1995 1994 ------------------------------------------------- Pct Pct Pct of Tot of Tot of Tot Amnt Loans Amt Loans Amt Loans Commercial, financial, and agricultural $ 136 36.6% $ 245 28.1% $ 472 23.1% Real estate - construction -- 4.5 -- 4.3 -- 1.7 Real estate - mortgage 102 45.0 136 50.2 258 53.3 Installment 103 11.5 101 14.0 123 18.6 Other -- 2.4 -- 3.4 -- 3.3 Unallocated 313 -- 161 -- -- -- ------------------------------------------ $ 654 100.0% $ 643 100.0% $ 853 100.0% ========================================== - ------------------------------------------------------------------------------- The following presents a summary of the Company's non-performing assets and accruing loans past due 90 days or more at December 31, 1996, 1995 and 1994. 16 - ------------------------------------------------------------------------------- (in thousands) December 31, 1996 1995 1994 -------------------------- Non-performing assets: Nonaccrual loans $ 161 $ 375 $ 933 Other real estate owned 22 10 - Restructured loans - - - --------------------------- $ 183 $ 385 $ 933 =========================== Accruing loans past due 90 days or more $ - $ - $ - =========================== - ------------------------------------------------------------------------------ The Company places into nonaccrual status those loans which the full collection of principal and interest are unlikely or which are past due 90 or more days, unless the loans are adequately secured and in the process of collection. If interest on nonaccrual loans had been accrued, such income would have approximated $15,000, $41,000 and $72,000 in 1996, 1995 and 1994, respectively. Interest income recognized on nonaccrual loans and included in Company interest income is not material. Deposits Total deposits increased by 10.8% to $73,316,000 at December 31, 1996, from $66,166,000 at December 31, 1995. Average total deposits increased from $66,367,000 during 1995 to $69,838,000 during 1996, an increase of 5.2%. This increase is primarily the result of an increase in time deposits (CD's) from year end 1995 to year end 1996, as well as smaller increases in savings accounts, NOW accounts and Money Market demand accounts. Non-interest bearing deposits also increased slightly. The increase in interest-bearing deposits, primarily certificates of deposit, was an intention of management in order to provide funds for anticipated loan demand. Two certificate of deposit promotions were offered during 1996 to increase the Bank's fixed-term deposit base. The increase in savings deposits is largely due to a new savings deposit product that offers tiered yields based upon deposit balances. Deposits of approximately $1,534,000 are directly related to the operation of the new Charleston branch. Details relative to the maturities of and interest expense on time certificates of deposit of $100,000 or more are presented in Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Securities Sold under Agreements to Repurchase As more fully discussed in Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this filing, during 1996 the Bank became involved in repurchase agreements with three of its commercial customers. Interest paid on these borrowings is tied to the Federal Funds rate, depending on the outstanding deposit balances. Total interest paid under these arrangements was not material during 1996. 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 $5,239,000 at December 31, 1996 or 44.9% more than the $3,614,000 total at December 31, 1995. This increase in liquidity was due to the increase in deposits. Liquidity is considered to be 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, 1996 of $10,710,000 (at amortized cost) in securities maturing within one year. Also, the Company has additional securities with maturities greater than one year with an estimated fair value totaling $2,476,000 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. - -------------------------------------------------------------------------------- 17 TABLE VI INTEREST RATE SENSITIVITY GAPS December 31, 1996 (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 $22,$25 3,608 $4,487 $23,134 $53,454 Securities (at amortized cost) 2,500 1,735 6,500 11,882 22,617 Federal funds sold 2,663 - - - 2,663 ------- ----- ------ -------- ------- Total interest earning assets 27,388 5,343 10,987 35,016 78,734 -------- ----- ------- -------- ------- INTEREST BEARING LIABILITIES Demand deposits $13,586 $ - $ - $ - $13,586 Savings deposits 21,899 - - - 21,899 Time deposits 9,588 5,071 6,143 6,818 27,620 Repurchase Agreements 492 - - - 492 ------- ----- ------ --------- ------- Total interest bearing liabilities 45,565 5,071 6,143 6,818 63,597 ------- ----- ------ --------- ------- Contractual interest sensitivity gap (18,177) 272 4,844 28,198 15,137 Adjustment (2) 35,485 (35,485) - - - -------- -------- ------ -------- ------ Adjusted interest sensitivity gap $ 17,308 $(35,213) $4,844 $28,198 $15,137 ======== ========= ====== ========= ====== Cumulative adjusted interest sensitivity gap $ 17,308 $(17,905) $(13,061) $15,137 ======== ========= ========= ======= Cumulative adjusted gap as a percent of total earning assets 21.98% (22.74%) (16.59%) 19.23% Cumulative adjusted rate-sensitivity ratio 2.72 0.65 0.77 1.24 This table includes various assumptions by management of maturities and repayment patterns. (1) - Contractual repricing, not contractual maturities, is used in this table unless otherwise noted. No pre- payment assumptions were assumed. (2) - Adjustment to approximate the actual repricing of interest bearing demand deposits and savings accounts are based upon historical experience. - -------------------------------------------------------------------------------- The preceding table reflects the Bank's cumulative one year net interest sensitivity position, or gap, as 0.77. Thus, the Bank is in a negative gap position within a one year time frame. This indicates that a significant increase in interest rates within a short time frame during 1997 could have a significant negative impact on the Bank's net interest income in 1997. However, interest rates on approximately 55% of the Bank's interest-bearing deposits may be changed by management at any time based on their terms. Since management believes that repricing of interest bearing deposits in an increasing interest rate environment will generally lag behind the repricing of interest bearing assets, the Bank's interest rate risk within one year is at an acceptable level. The information presented in the table above represents a static view of the Bank's gap position as of December 31, 1996, and as such, does not consider variables such as future loan and deposit volumes, mixes and interest rates. The Company seeks to maintain its adjusted interest sensitivity gap within 12 months to a relatively small balance, positive or negative, regardless of anticipated upward or down movements in interest rates in an effort to limit the effects of interest rate risk on Company net interest income. 18 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, 1996 was $8,841,000 compared to $8,415,000 at December 31, 1995, representing an increase of 5.1%. Despite this increase, total shareholders' equity expressed as a percentage of total assets decreased from 11.2% at December 31, 1995 to 10.6% at December 31, 1996 due to higher dividend payout and the rapid asset growth in 1996. The Company's subsidiary bank is subject to minimum regulatory risk-based capital guidelines, as more fully described in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Such guidelines provide for relative weighting of both on and off-balance sheet items (such as loan commitments and standby letters of credit) based on their perceived degree of risk. At December 31, 1996, 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 16.98% 4.00% Total risk-based capital ratio 18.23% 8.00% Leverage ratio 10.56% 3.00% - ------------------------------------------------------------------------------ Improved operating results and a consistent dividend program, coupled with an effective management of credit and interest rate risk will be the key elements towards the Company continuing to maintain its present strong capital position in the future. Additional information related to regulatory restrictions on capital and dividends is disclosed in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Stock Option Plan At the Company's regularly scheduled 1996 stockholders' meeting on April 25, 1996, the shareholders voted to approve an incentive stock option plan. The purpose of the plan is to provide a method whereby key employees of the Company and its subsidiaries who are responsible for the management, growth and protection of the business, and who are making substantial contributions to the success and profitability of the business, may be encouraged to acquire a stock ownership in the Company, thus providing a proprietary interest in the business. For more information regarding this plan, please refer to Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Impact of Inflation and Effects of Changing Prices The results of operations and financial position of the Company have been presented based on historical cost, unadjusted for the effects of inflation, except for the recording of unrealized gains and losses on securities available for sale. Inflation could significantly impact the value of the Company's interest rate sensitive assets and liabilities and the cost of noninterest expenses, such as salaries, benefits and other operating expenses. As a financial intermediary, the Company holds a high percentage of interest rate sensitive assets and liabilities. Consequently, the estimated fair value of a significant portion of the Company's assets and liabilities reprice more frequently than those of non-banking entities. It is the Company's policy to have a majority of its loan portfolio reprice within five years by using variable and balloon payment credit terms in order to reduce the impact of significant changes in interest rates on its longer-term assets. Further, the Company's policies attempt to structure its mix of financial instruments and manage its interest rate sensitivity gap in order to minimize the potential adverse effects of inflation or other market forces on its net interest income, earnings and capital. A comparison of the carrying value of the Company's financial instruments to their estimated fair value as of December 31, 1996 is disclosed in Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Indirectly, management of the money supply by the Federal Reserve to control the rate of inflation has an impact on the earnings of the Company. 19 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The independent auditor's report and consolidated financial statements of the Company and its subsidiary appear herein. The Company is not subject to the requirements for disclosure of supplemental quarterly financial data. 20 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 1996, 1995, and 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First National Bankshares Corporation and subsidiary as of December 31, 1996 and 1995, and the results of their operations and cash flows for the years ended December 31, 1996, 1995, and 1994, in conformity with generally accepted accounting principles. ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia January 31, 1997 21 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 ASSETS 1996 1995 ------------------------ Cash and due from banks $ 2,576,154 $ 2,720,887 Federal funds sold 2,663,000 893,000 Securities held to maturity (estimated fair value 1996 $18,850,067; 1995 $13,609,276) 18,835,775 13,514,482 Securities available for sale 3,781,525 10,500,880 Loans, less allowance for loan losses of $653,954 and $643,439, respectively 52,800,034 45,773,252 Bank premises and equipment, net 1,964,661 999,187 Accrued interest receivable 658,579 706,746 Other assets 388,534 346,482 ----------- ----------- Total assets $83,668,262 $75,454,916 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $10,211,415 $ 8,690,907 Interest bearing 63,105,038 57,475,281 ----------- ----------- Total deposits 73,316,453 66,166,188 Securities sold under agreements to repurchase 492,473 -- Other liabilities 1,018,724 873,324 ----------- ----------- Total liabilities 74,827,650 67,039,512 ----------- ----------- 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 6,878,037 6,409,585 Net unrealized gain (loss) on securities 75 43,319 ---------- ---------- Total shareholders' equity 8,840,612 8,415,404 ----------- ----------- Total liabilities and shareholders' equity $83,668,262 $75,454,916 =========== =========== See Notes to Consolidated Financial Statements 22 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For The Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 ------------------------------- Interest income: Interest and fees on loans .................... $4,666,820 $4,018,204 $3,678,920 Interest and dividends on securities: Taxable ................................... 1,072,369 1,336,509 1,585,325 Tax-exempt ................................ 211,876 234,415 234,347 Interest on Federal funds sold ................ 214,946 98,910 100,834 ---------- --------------------- Total interest income .................. 6,166,011 5,688,038 5,599,426 ---------- --------------------- Interest expense: Deposits ...................................... 2,379,774 2,115,406 2,089,199 Securities sold under agreement to repurchase . 13,356 -- -- ------------------------------- Total interest expense ................. 2,393,130 2,115,406 2,089,199 ---------- ---------- ---------- Net interest income .................... 3,772,881 3,572,632 3,510,227 Provision for loan losses ..................... -- -- 123,000 -------------------------------- Net interest income after provision for loan losses ........................ 3,772,881 3,572,632 3,387,227 ---------- ---------- ---------- Other income (expense): Trust department income ....................... 65,757 139,312 78,389 Service fees .................................. 251,251 209,190 220,843 Securities gains (losses), net ................ 972 990 (391) Other ......................................... 115,135 65,720 120,262 ---------- ---------- ---------- Total other income ..................... 433,115 415,212 419,103 ---------- ---------- ---------- Other expenses: Salaries and employee benefits ................ 1,628,041 1,469,823 1,476,669 Net occupancy expense ......................... 292,250 244,032 219,934 Equipment rentals, depreciation and maintenance 216,373 207,008 227,930 Federal deposit insurance premiums ............ 3,265 80,310 183,697 Data processing ............................... 159,983 176,041 187,665 Advertising ................................... 76,991 90,721 84,428 Professional and legal ........................ 111,382 132,394 286,006 Mailing and postage ........................... 80,642 65,634 70,214 Directors' fees and shareholders' expenses .... 91,449 79,600 48,350 Stationery and supplies ....................... 97,002 58,716 79,632 Other ......................................... 382,365 315,643 235,855 ---------- ---------- ---------- Total other expenses ................... 3,139,743 2,919,922 3,100,380 ---------- ---------- ---------- Income before income tax expense .............. 1,066,253 1,067,922 705,950 Income tax expense ........................ 330,226 301,108 163,961 ---------- ---------- ---------- Net income ......................... $ 736,027 $ 766,814 $ 541,989 ========== ========== ========== Earnings per common share ................. $ 3.82 $ 3.98 $ 2.82 ========== ========== ========== Average common shares outstanding ......... 192,500 192,500 192,500 ========== ========== ========== See Notes to Consolidated Financial Statements 23 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1996, 1995 and 1994 Net Unrlzd Total Gain Share- Common Capital Retained (Loss)on holders Stock Surplus Earnings Secrts Equity 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 Net income - - 736,027 - 736,027 Cash dividends declared on common stock ($1.39 per share) - - (267,575) - (267,575) Change in net unrealized gain (loss) on securities - - - (43,244) (43,244) --------------------------------------------------- Balance, December 31, 1996 $ 962,500 $1,000,000 $6,878,037 $75 $8,840,612 =================================================== See Notes to Consolidated Financial Statements 24 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 --------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................. $ 736,027 $ 766,814 $ 541,989 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation ................................ 172,046 151,529 147,377 Provision for loan losses ................... -- -- 123,000 Deferred income taxes (benefit) ............. 20,020 72,875 41,383 Securities (gains) losses, net .............. (972) (990) 391 (Gain) loss on sale of other assets ......... 16,000 -- -- (Gain) loss on disposal of bank premises and equipment ............................... 26,202 4,166 -- Amortization of securities premiums and (accretion of discounts), net ............... (166,673) (5,659) 57,450 (Increase) decrease in accrued int rec ...... 48,167 89,337 23,978 (Increase) decrease in other assets ......... (3,634) 197,916 (164,989) Increase (decrease) in other liabilities .... 126,150 48,935 79,203 --------- ---------- ---------- Net cash provided by operating activities ........................ 973,333 1,324,923 849,782 --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity ................ 11,656,739 2,497,865 716,250 Proceeds from maturities and calls of securities available for sale ............... 7,639,238 7,359,233 6,000,000 Proceeds from sales of securities available for sale .......................... -- -- 1,000,000 Principal payments received on securities held to maturity ................. -- -- 83,529 Purchases of securities held to maturity ....(16,790,439)(1,953,302) (3,513,445) Purchases of securities available for sale .. (1,009,800) (232,200) (6,436,016) Principal payments received on (loans made to) customers, net ...........(7,112,188) (7,007,180) 6,350,364 Purchases of bank premises and equipment ....(1,175,222) (119,664) (92,619) Proceeds from sale of bank premises and equipment ...................... 11,500 -- -- Proceeds from sales of other assets ......... 37,693 73,000 45,500 ---------- ---------- ---------- Net cash provided by (used in) investing activities ........................(6,742,479) 617,752 4,153,563 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposit, NOW and savings accounts ........... 5,240,980 (4,150,169) (2,057,415) Proceeds from sales of (payments for matured) time deposits, net ................. 1,909,285 631,011 (1,799,752) Net increase (decrease) in securities sold under agreements to repurchase ......... 492,473 -- -- Dividends paid .............................. (248,325) (250,250) (115,500) ---------- ---------- ---------- Net cash provided by (used in) financing activities ........................ 7,394,413 (3,769,408) (3,972,667) ---------- ---------- ---------- 25 (Continued) 26 FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 --------- --------- ---- Increase (decrease) in cash and cash equivalents .................... 1,625,267 (1,826,733) 1,030,678 Cash and cash equivalents: Beginning ........................... 3,613,887 5,440,620 4,409,942 ---------- ----------- ---------- Ending .............................. $5,239,154 $ 3,613,887 $5,440,620 ========== =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest ............................ $2,320,987 $ 2,093,711 $2,056,556 ========== =========== ========== Income taxes ........................ $ 365,409 $ 83,090 $ 326,673 ========== =========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Other real estate acquired in settlement of loans ................. $ 85,406 $ -- $ 500 ========== =========== ========== Dividends declared and unpaid ....... $ 77,000 $ 57,750 $ 77,000 ========== =========== ========== See Notes to Consolidated Financial Statements 27 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 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, The First National Bank (formerly The First National Bank in Ronceverte). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation of cash flows: For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, Federal funds sold and amounts due from banks (including cash items in process of clearing). Cash flows from demand deposits, NOW accounts and savings accounts are reported net since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net. Securities: Debt and equity securities are classified as "held to maturity", "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date. Securities held to maturity - Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. Securities available for sale - Securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity. Trading securities - There are no securities classified as "trading" in the accompanying consolidated financial statements. Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method. Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. 28 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. A loan is impaired when, based on current information and events, it is probable that the subsidiary bank will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used. Generally, after management's evaluation, loans are placed on non-accrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non-accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method. Certain loan fees and direct loan costs are recognized as income or expense when incurred. Whereas, generally accepted accounting principles require that such fees and costs be deferred and amortized as adjustments of the related loan's yield over the contractual life of the loan. The subsidiary bank's method of recognition of loan fees and direct loan costs produces results which are not materially different from those that would be recognized had Statement Number 91 of the Financial Accounting Standards Board been adopted. Bank premises and equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for bank premises and equipment over the estimated useful lives of the assets. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment are capitalized. Other real estate: Other real estate consists of real estate held for resale which was acquired through foreclosure on loans secured by such real estate. At the time of acquisition, these properties are recorded at fair value with any write-down being charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Expenses incurred in connection with operating these properties are insignificant and are charged to operating expenses. Gains and losses on the sale of these properties are credited or charged to operating income in the year of the transactions. Sales of these properties which are financed by the subsidiary bank and meet the criteria of covered transactions remain classified as other real estate until such time as principal payments have been received to warrant classification as a real estate loan. 29 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 enact 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, 1996, 1995 and 1994. Profit sharing and 401(k) plans: The subsidiary bank sponsors a profit-sharing and 401(k) plan which covers substantially all employees. Bank contributions to the plans are charged to expense. Postretirement benefit plans: The subsidiary bank provides certain health care and life insurance benefits for all retired employees that meet certain eligibility requirements. The plans are contributory with retiree contributions and are unfunded. The subsidiary bank's share of the estimated costs that will be paid after retirement is being accrued by charges to expense over the employees' active service periods to the dates they are fully eligible for benefits. Trust Department: Assets held in an agency or fiduciary capacity by the subsidiary bank's Trust Department are not assets of the subsidiary bank and are not included in the accompanying consolidated balance sheets. Trust Department income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than on the accrual basis does not have a material effect on net income. Reclassifications: Certain accounts in the consolidated financial statements for 1995 and 1994, as previously presented, have been\ reclassified to conform to current year classifications. Note 2. Cash Concentrations At December 31, 1996, the subsidiary bank had a concentration totaling $3,425,545 and $1,507,630, respectively, with Nationsbank consisting of a due from bank account balance and Federal funds sold. Deposits with correspondent banks are generally unsecured and have limited insurance under current banking insurance regulations. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3. Securities During 1995, 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. The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 1996 and 1995, are summarized as follows: Value (Estimated Amortized Unrealized Fair Cost Gains Losses Value) Available for sale Taxable: U.S. Treasury securities $ .......... 979,860 $ 2,328 $ 0 $ 982,188 U.S. Government agencies and corporations .................... 2,500,643 5,294 7,500 2,498,437 Federal Reserve Bank stock .......... 56,650 0 0 56,650 Federal Home Loan Bank stock ............................... 242,000 0 0 242,000 ------------------------------------- Total taxable ....................... 3,779,153 7,622 7,500 3,779,275 ------------------------------------- Tax-exempt: Federal Reserve Bank stock ............................... 2,250 0 0 2,250 ------------------------------------- Total ............................... $ 3,781,403 $7,622 $7,500 $3,781,525 ------------------------------------- Carrying Value Estimated Amortized Unrealized Fair Cost Gains Losses Value Held to maturity Taxable: U.S. Treasury securities $ .......... 3,002,858 $ 2,553 $ 410 $ 3,005,001 U.S. Government agencies and corporations .................... 11,203,343 19,479 30,510 11,192,312 Corporate debt securities ........... 500,000 0 7,255 492,745 -------------------------------------- Total taxable ....................... 14,706,201 22,032 38,175 14,690,058 -------------------------------------- Tax-exempt: State and political subdivisions ........................ 4,129,574 44,872 14,437 4,160,009 -------------------------------------- Total ............................... $18,835,775 $66,904 $52,612 $18,850,067 -------------------------------------- 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1995 Carrying Value (Estimated Amortized Unrealized Fair Cost Gains Losses Value) Available for Sale Taxable: U.S. Treasury securities $ .......... 969,357 $ 25,329 $ 0 $ 994,686 U.S. Government agencies and corporations .................... 9,170,332 52,325 7,563 9,215,094 Federal Reserve Bank stock ............................... 56,650 0 0 56,650 Federal Home Loan Bank stock .......................... 232,200 0 0 232,200 ----------- -------- ------- ----------- Total taxable ....................... 10,428,539 77,654 7,563 10,498,630 ----------- -------- ------- ----------- Tax-exempt: Federal Reserve Bank stock ............................... 2,250 0 0 2,250 ----------- -------- ------- ----------- Total ............................... $10,430,789 $ 77,654 $ 7,563 $10,500,880 =========== ======== ======= =========== Carrying Value Estimated (Amortized Unrealized Fair Cost Gains Losses Value Held to maturity Taxable: U.S. Treasury securities $ .......... 3,000,783 $ 12,185 $ 0 $ 3,012,968 U.S. Government agencies and corporations .................... 5,496,523 32,637 9,680 5,519,480 Corporate debt securities ........... 500,000 0 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 =========== ======== ======= =========== 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities which are included in securities available for sale in the accompanying consolidated financial statements. Such securities are carried at cost, since they may only be sold back to the respective Federal Home Loan Bank or Federal Reserve Bank at par value. The maturities, amortized cost and estimated fair values of securities at December 31, 1996, are summarized as follows: Value Estimated (Estimated (Amortized Fair Amortized Fair Cost) Value Cost Value) Due in one year or less .. $ 9,709,178 $ 9,713,778 $1,000,643 $1,005,000 Due from one to five years 5,837,022 5,818,272 2,479,860 2,475,625 Due from five to ten years 3,289,575 3,318,017 -- -- Equity securities ........ -- -- 300,900 300,900 --------------------------------------------- Total ................ $18,835,775 $18,850,067 $3,781,403 $3,781,525 =========== =========== ========== ========== The proceeds from sales, calls and maturities of securities and principal payments received on mortgage-backed obligations and the related gross gains and losses realized are as follows: Proceeds From Gross Realized Years Ended Calls and Principal December 31, Sales Maturities Payments Gains Losses 1996 Securities held to maturity $ 0 $ 11,656,739 $ 0 $ 972 $ 0 Securities available for sale 0 7,639,238 0 0 0 ------ ----------- ------- ------ ----- $ 0 $ 19,295,977 $ 0 $ 972 $ 0 ====== ========== ====== ======= ===== 1995 Securities held to maturity $ 0 $ 2,497,865 $ 0 $ 0 $ 0 Securities available for sale 0 7,359,233 0 990 0 -------- ---------- ------ -------- ------ $ 0 $ 9,857,098 $ 0 $ 990 $ 0 ======== =========== ======= ======== ===== 1994 Securities held to maturity $ 0 $ 716,250 $ 83,529 $ 0 $ 437 Securities available for sale 1,000,000 6,000,000 0 46 0 ------------ ----------- ------- --------- ----- $1,000,000 $ 6,716,250 $ 83,529 $ 46 $ 437 ========= ========== ======== ======== ======= 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1996 and 1995, securities carried at $1,500,000 and $1,000,000, respectively, with estimated fair values of $1,504,195 and $1,006,900, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law. Note 4. Loans Loans are summarized as follows: 1996 1995 ---------- ----------- Commercial, financial and agricultural $19,578,393 $13,134,525 Real estate - construction ........... 2,395,611 2,019,845 Real estate - mortgage ............... 24,031,283 23,430,089 Installment .......................... 6,254,129 6,522,299 Other ................................ 1,299,839 1,570,863 ----------- ----------- Total loans ...................... 53,559,255 46,677,621 Less unearned income .................... 105,267 260,930 ----------- ----------- Total loans net of unearned income 53,453,988 46,416,691 Less allowance for loan losses 653,954 643,439 ----------- ----------- Loans, net ....................... $52,800,034 $45,773,252 =========== =========== Included in the net balance of loans are non-accrual loans amounting to $160,631 and $375,048 at December 31, 1996 and 1995, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $15,357, $40,652 and $71,560 for the years ended December 31, 1996, 1995 and 1994, respectively. The following represents contractual loan maturities at December 31, 1996: After 1 But After W/in 1 Year W/in 5 Years 5 Years ----------- ----------- ----------- Commercial, financial and agricultural ......... $ 7,063,712 $ 8,300,689 $ 4,213,992 Real estate - construction 1,546,509 849,102 -- Real estate - mortgage ... 4,611,250 7,277,325 12,142,708 Installment .............. 1,397,930 4,491,206 364,993 Other .................... 1,299,839 -- -- ----------- ----------- ----------- Total ............ $15,919,240 $20,918,322 $16,721,693 =========== =========== =========== Loans due after one year with: Variable rates $20,918,322 Fixed rates .. 16,721,693 ----------- Total .... $37,640,015 =========== Concentrations of credit risk: The subsidiary bank grants commercial, residential and consumer loans to customers primarily located in Greenbrier and Kanawha Counties of West Virginia. As of December 31, 1996 and 1995, the Bank had direct extensions of credit to medical professionals totaling approximately $2,100,000 and $2,200,000, 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 obtained is based upon management's credit evaluation. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1996 and 1995, the Bank had direct extensions of credit to individuals who are employees of a railroad transportation and holding company totaling approximately $2,800,000 and $3,000,000, respectively. These loans consisted of residential real estate mortgages generally secured by liens on the property. The Bank evaluates the credit worthiness of each such customer on a case-by-case 34 basis. Loans to related parties: The subsidiary bank has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party: 1996 1995 --------- -------- Balance, beginning ........... $ 777,760 $ 776,860 Additions ................. 291,019 208,563 Amounts collected ......... (548,999) (207,663) --------- --------- Balance, ending .............. $ 519,780 $ 777,760 ========= ========= Note 5. Allowance for loan losses An analysis of the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994, is as follows: 1996 1995 1994 --------- -------- --------- Balance, beginning of year .... ................. $ 643,439 $852,862 $1,000,803 Losses: Commercial, financial and agricultural .... ... -- 90,348 22,772 Real estate - mortgage ...................... 43,208 75,000 3,249 Installment ................................. 74,226 215,885 400,576 --------- -------- ---------- Total ..................................... 117,434 381,233 426,597 --------- -------- ---------- Recoveries: Commercial, financial and agricultural ....... -- 3,250 5,683 Real estate - mortgage ....................... 28,395 2,470 1,000 Installment .................................. 99,554 166,090 148,973 --------- -------- ---------- Total ..................................... 127,949 171,810 155,656 --------- -------- ---------- Net (recoveries) losses ...................... (10,515) 209,423 270,941 Provision for loan losses .................... -- -- 123,000 ---------- Balance, end of year .............................$ 653,954 $643,439 $ 852,862 ========= ======== ========== The Company's total recorded investment in impaired loans at December 31, 1996 and 1995, approximated $135,682 and $292,161, respectively, for which the related allowance for loan losses determined in accordance with generally accepted accounting principles approximated $25,000 and $125,000, respectively. The Company's average investment in such loans approximated $152,050 and $483,780 for the years ended December 31, 1996 and 1995, respectively. All impaired loans at December 31, 1996 and 1995, were collateral dependent, and accordingly, the fair value of the loan's collateral was used to measure the impairment of each loan. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For purposes of evaluating impairment, the Company considers groups of smaller-balance, homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the subsidiary bank's typical residential mortgage loan amount (currently those in excess of $100,000); small balance commercial loans (currently those less than $50,000); and installment loans to individuals, exclusive 35 of those loans in excess of $50,000. For the years ended December 31, 1996 and 1995, the Company recognized $0 and $2,237, respectively, in interest income on impaired loans. Using a cash-basis method of accounting, the Company 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, 1996 and 1995, are summarized as follows: 1996 1995 --------- -------- Land ..................................... $ 298,361 $ 108,298 Building and improvements ................ 1,135,114 1,127,603 Furniture and equipment .................. 1,815,561 1,496,851 Construction-in-progress ................. 382,876 -- ------------ ------------ 3,631,912 2,732,752 Less accumulated depreciation ............ 1,667,251 1,733,565 ------------ ------------ Bank premises and equipment, net ......... $ 1,964,661 $ 999,187 ============ ============ Depreciation expense for the years ended December 31, 1996, 1995 and 1994 totaled $172,046, $151,529 and $147,377, respectively. The subsidiary bank opened its new branch facility in Greenbrier County in January 1997. This new facility replaced the leased branch facility located in Lewisburg, West Virginia. The cost of the new facility is included in construction-in-progress in the above schedule. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7. Deposits The following is a summary of interest bearing deposits by type as of December 31, 1996 and 1995: 1996 1995 --------------------------- Interest bearing demand deposits ......... $ 13,586,411 $ 12,579,368 Savings deposits ......................... 21,899,023 19,185,594 Certificates of deposit .................. 27,619,604 25,710,319 ------------ ------------ Total ................................. $ 63,105,038 $ 57,475,281 ============ ============ Time certificates of deposit in denominations of $100,000 or more totaled $3,745,734 and $2,151,222 at December 31, 1996 and 1995, respectively. Interest paid on time certificates of deposit in denominations of $100,000 or more was $147,907, $89,256, and $72,418 for the years ended December 31, 1996, 1995 and 1994, respectively. The following is a summary of the maturity distribution of certificates of deposit in denominations of $100,000 or more as of December 31, 1996: Amount Percent ----------- ----------- Three months or less .............. $ 1,053,803 28% Three through six months .......... 229,132 6% Six through twelve months ......... 853,914 23% Over twelve months ................ 1,608,885 43% ----------- ----------- Total .......................... $ 3,745,734 100% =========== =========== A summary of the maturities of time deposits as of December 31, 1996, follows: Year Amount 1997 $20,802,163 1998 4,407,559 1999 2,228,803 2000 181,079 ----------- $27,619,604 Note 8. Securities Sold Under Agreements to Repurchase The subsidiary bank's securities sold under agreements to repurchase (Repurchase Agreement) involve three customers. The interest rate paid on these borrowings is tied to the Federal funds rate and dependent upon the outstanding deposit balance. Interest is calculated and credited to the customer's account on a daily basis. Minimum deposit balance requirements are established on a case-by-case basis. The repurchase agreements do not have a specified maturity date as either party reserves the right to terminate the agreement. The securities underlying these agreements are under the subsidiary bank's control and secure the total outstanding daily balances. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following information is provided relative to these obligations: Outstanding at year end $ 492,473 Weighted average interest rate at December 31 4.42% Maximum amount outstanding at any month end 1,037,275 Average daily amount outstanding 320,098 Weighted average interest rate 4.17% Note 9. Income Taxes The components of applicable income tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994, are as follows: 1996 1995 1994 -------- -------- --------- Current: Federal ........................ $ 264,755 $ 198,444 $ 104,093 State .......................... 45,451 29,789 18,485 ----------- ----------- ----------- 310,206 228,233 122,578 Deferred (Federal and State) ...... 20,020 72,875 41,383 ----------- ----------- ----------- Total .......................... $ 330,226 $ 301,108 $ 163,961 =========== =========== =========== 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: 1996 1995 1994 ----------------------------------------------- Amount Pct Amount Pct Amount Pct Computed tax at applicable statutory rate ............... $ 362,526 34.0$ 363,094 34.0$ 240,023 34.0 Increase (decrease) in taxes resulting from: Tax-exempt interest .......... (72,038) (6.8 (79,701) (7.5 (79,678) State income taxes, net of Federal income tax benefit .................. 29,998 2.8 19,657 1.8 12,349 1.7 Other, net ................... 9,740 1.0 (1,942) (.1 (8,733)(1.3) --------- ---- --------- ---- --------- ---- Applicable income taxes ........................ $ 330,226 31.0$ 301,108 28.2$ 163,961 23.2 ========= ==== ========= ==== ========= ==== 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. 38 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, 1996 and 1995, are as follows: 1996 1995 Deferred tax assets: Allowance for loan losses ............. $ 139,659 $ 141,106 Employee benefits ..................... 150,439 142,503 Accruals .............................. 7,650 -- ----------- ----------- 297,748 283,609 Deferred tax liabilities: Depreciation .......................... 15,038 12,600 Accretion on securities ............... 22,187 5,722 Deferred gain on involuntary conversion 15,256 -- Net unrealized gain on securities ..... 47 26,775 ----------- ----------- 52,528 45,097 Net deferred tax assets ............... $ 245,220 $ 238,512 =========== =========== Note 10. 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, 1996, 1995 and 1994, totaled $105,922, $117,500 and $75,259, respectively. Postretirement Benefit Plans: The subsidiary bank sponsors a postretirement health care 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. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net postretirement benefit cost included the following components for the years ended December 31, 1996, 1995 and 1994: 1996 1995 1994 ----------------------------------------------- Health Life Health Life Health Life Care Ins Care Ins Care Ins Plan Plan Plan Plan Plan Plan Service cost-benefits attributable to service during the year ................ $ 5,742 $2,274 $ 4,887 $1,905 $ 6,225 $ 2,454 Interest on accumulated postretirement benefit obligation ...... 16,454 6,151 18,359 6,229 19,355 7,138 Amortization of (gain) loss .................... (1,041) -- (490) -- 331 694 ------------------------------------------------- Net postretirement benefit cost ............ $ 21,155 $8,425 $ 22,756 $8,134 $25,911 10,286 ================================================= The following tables set forth the plans' funded status reconciled with the obligations recognized in the accompanying consolidated balance sheets at December 31, 1996 and 1995: Health Life Health Life Care Ins Care Ins Plan Plan Total Plan Plan Total -------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees ..............(106,753) (42,969) (149,722) (117,153) (44,197) (161,350) Active participants fully eligible for benefits .......... (53,444) (20,504) (73,948) (49,559) (19,053) (68,612) Other active participants .......... (88,289) (34,250) (122,539) (76,375) (29,587) (105,962) -------------------------------------------------------- (248,486) (97,723) (346,209) (243,087) (92,837) (335,924) Plan assets ........... -- -- -- -- -- -- -------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets ...........(248,486) (97,723) (346,209) (243,087) (92,837) (335,924) Unrecognized net (gain) loss .................. (45,225) (254) (45,479) (39,303) (1,703) (41,006) -------------------------------------------------------- Accrued postretirement benefit cost .........$(293,711)$(97,977)$(391,688)$(282,390)$(94,540) (376,930) ========================================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average discount rates used in estimating the accumulated postretirement benefit obligations 40 of the health care plan and the life insurance plan at December 31, 1996 and 1995, were 7%. For measurement purposes, a 7% annual rate of increase in per capita health care 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 health care cost trend rates were increased by 1 percentage point in each year, the accumulated postretirement benefit obligation at December 31, 1996, would decrease by $4,297 and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1996, would increase by $730. Note 11. Stock Option Plan In April 1996, the shareholders approved a stock option plan for key employees of the Company or of the Bank as identified by the stock option committee. Grants under the plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement 123), the reported net income and earnings per share would have been reduced to the proforma amounts shown below: 1996 Net income: As reported $ 736,027 Proforma $ 736,027 Primary earnings per share: As reported $ 3.82 Proforma $ 3.82 Fully diluted earnings per share: As reported $ 3.82 Proforma $ 3.82 The significant provisions of the Plan include authorization to the stock option committee to grant up to 9,625 shares of common stock between April 25, 1996 and April 25, 2006, with the right to adjust the number of shares available for the plan at its discretion. On October 31, 1996, 3,200 shares were granted to certain key employees and must be exercised within 5 years. Each option fully vests after six months from the grant date. The fair value of each grant is estimated at the grant date using the minimum value method with the following weighted-average assumptions for grants in 1996: dividend rate of 2%; risk free interest rate of 6.25% and expected life of 5 years. A summary of the status of the plan at December 31, 1996, and changes during the year ended is as follows: 1996 Exercise Shares Price Fixed Options Outstanding at beginning of year - $ - Granted 3,200 50.00 Exercised - - Forfeited - - --------- ------- Outstanding at end of year 3,200 50.00 ========= ======= Exercisable at end of year - - Fair value per option of options granted during the year $ 8.89 ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Lease Obligation 41 The subsidiary bank leased its branch facility in Lewisburg, West Virginia under an operating lease with a term of ten years, commencing on April 1, 1986. Total lease payments of $90,446 were charged to expense for each of the three years ended December 31, 1996, 1995 and 1994. The lessor of the branch facility is an entity owned by two directors of the Company and subsidiary bank. This lease was terminated effective January 31, 1997, when the subsidiary bank completed construction of its new branch facility in Greenbrier County. The subsidiary bank opened a new branch in Charleston, West Virginia during 1996. The bank leases the office space under an operating lease with an initial term of ten years commencing on May 1, 1996. The lease provides for two successive options for five year renewals. Total lease payments of $54,650 were charged to expense for the year ended December 31, 1996. Total future minimum lease payments under the lease are as follows: Year Ending December 31, Amount ------------ ------ 1997 $ 101,970 1998 101,970 1999 101,970 2000 101,970 2001 101,970 Thereafter 455,200 ------- $ 965,050 Note 13. Commitments and Contingencies Reserve Requirements: The subsidiary bank is required to maintain a reserve balance with the Federal Reserve Bank. At December 31, 1996, the reserve balance was $625,000. The subsidiary bank does not earn interest on this balance. Financial instruments with off-balance sheet risk: The subsidiary bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. At December 31, 1996 and 1995, the subsidiary bank's financial instruments with off-balance sheet risk are as follows: Financial instruments whose contract Contract Amount amounts represent credit risk 1996 1995 -------------------------------------- ------- ------- Commitments to extend credit $8,328,000 $8,560,726 ========== ========== The subsidiary bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 42 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. Bank management evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate. Litigation: The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements. Employment Agreement: The Company has an employment agreement with its chief executive officer. This agreement contains change in control provisions that would entitle the officer to receive, under certain circumstances, twice his annual compensation in the event there is a change in control in the Company (as defined) and a termination of his employment. The maximum contingent liability under this agreement approximates $300,000 at December 31, 1996. Note 14. Regulatory Restrictions on Capital and Dividends The primary source of funds for the dividends paid by First National Bankshares Corporation is dividends received from its subsidiary bank. Dividends paid by the subsidiary bank are subject to restrictions by banking regulations. The most restrictive provision requires approval by the regulatory agency if dividends declared in any year exceed the year's net income, as defined, plus the net retained profits of the two preceding years. During 1997, the net retained profits available for distribution to First National Bankshares Corporation as dividends without regulatory approval are approximately $1,006,000, plus net retained profits, as defined, for the interim periods through the date of declaration. The subsidiary bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary bank must meet specific capital guidelines that involve quantitative measures of the subsidiary bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiary bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the subsidiary bank meets all capital adequacy requirements to which it is subject. The most recent notification from the Office of the Comptroller of the Currency categorized the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the subsidiary bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The subsidiary bank's actual capital amounts and ratios are presented in the following table (in thousands): To Be Well Capitalized For Capital Under Prompt Corrective Actual Adeq. Purp. Action Provisions Amt Ratio Amt Ratio Amt Ratio As of December ------------- ------------ ------------- 31, 1996: Total Capital ............. $9,487 18.23% $4,164 8.0% $5,205 10.0% (to Risk Weighted Assets) Tier I Capital ............ 8,836 16.98% 2,082 4.0% 3,123 6.0% (to Risk Weighted Assets) Tier I Capital ............ 8,836 10.56% 2,510 3.0% 4,184 5.0% (to Average Assets) As of December 31, 1995: Total Capital ............. 8,986 18.16% 3,959 8.0% 4,949 10.0% (to Risk Weighted Assets) Tier I Capital ............ 8,367 16.19% 2,067 4.0% 3,101 6.0% (to Risk Weighted Assets) Tier I Capital ............ 8,367 11.11% 2,259 3.0% 3,765 5.0% (to Average Assets) Note 15. Fair Value of Financial Instruments The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments. Cash and due from banks: The carrying values of cash and due from banks approximate their estimated fair value. Federal funds sold: The carrying values of Federal funds sold approximate their estimated fair values. Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accrued interest receivable: The carrying values of accrued interest receivable approximate their estimated fair value. Deposits: The estimated fair values of demand deposits (i.e. non interest bearing checking, NOW, 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. Short-term borrowings: The carrying values of short-term borrowings approximate their estimated fair values. Accrued interest payable: The carrying values of accrued interest payable approximate their estimated fair value. Off-balance sheet instruments: The fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counter parties. The amounts of fees currently charged on commitments are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below. The carrying values and estimated fair values of the Company's financial instruments are summarized below: December 31, 1996 December 31, 1995 ------------------------ ---------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value Financial assets: Cash and due from banks ...... $ 2,576,154 $ 2,576,154 $ 2,720,887 $ 2,720,887 Federal funds sold ........... 2,663,000 2,663,000 893,000 893,000 Securities held to maturity .. 18,835,775 18,850,067 13,514,482 13,609,276 Securities available for sale 3,781,525 3,781,525 10,500,880 10,500,880 Loans ........................ 52,800,034 52,208,012 45,773,252 45,680,242 Accrued interest receivable .. 658,579 658,579 706,746 706,746 ----------- ----------- ----------- ------------ $81,315,067 $80,737,337 $73,402,501 $74,404,285 ================================================ Financial liabilities: Deposits ..................... $73,316,453 $73,359,556 $66,166,188 $66,202,397 Short-term borrowings ........ 492,473 492,473 -- -- Accrued interest payable ..... 230,356 230,356 158,213 158,213 ----------- ----------- ----------- ------------ $74,039,282 $74,082,385 $66,324,401 $66,360,610 ================================================ 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16. 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, 1996 and 1995, and the related statements of income and cash flows for the years ended December 31, 1996, 1995 and 1994, are presented as follows: Balance Sheets Assets 1996 1995 ------ --------- --------- Cash $ 4,163 $ 4,833 Investment in bank subsidiary, eliminated in consolidation 8,835,459 8,409,837 Other assets 77,990 58,484 ------ ------ Total assets $8,917,612 $ 8,473,154 ========= ========= Liabilities and shareholders' equity Liabilities Dividends payable $ 77,000 $ 57,750 ------ ------ 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) 6,878,037 6,409,585 Net unrealized gain (loss) on securities 75 43,319 Total shareholders' equity 8,840,612 8,415,404 ----------- ----------- Total liabilities and shareholders' equity $8,917,612 $ 8,473,154 ========= ========= Statements of Income 1996 1995 1994 - -------------------- --------- -------- -------- Income - dividends from bank subsidiary $ 267,575 $231,000 $192,500 Expenses - operating 670 1,932 5,607 ------------------------------ Income before income taxes and undistributed income 266,905 229,068 186,893 Applicable income tax expense (benefit) (256) (733) (2,131) ------------------------------ Income before undistributed income 267,161 229,801 189,024 Equity in undistributed income in bank subsidiary 468,866 537,013 352,965 ------------------------------ Net income $ 736,027 $766,814 $541,989 ============================== 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statements of Cash Flows 1996 1995 1994 -------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................. $ 736,027 $ 766,814 $ 541,989 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary .................................. (468,866) (537,013) (352,965) (Increase) decrease in other assets ......... (19,506) 20,647 (74,271) -------------------------------- Net cash provided by operating activities ... 247,655 250,448 114,753 -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders .............. (248,325) (250,250) (115,500) -------------------------------- Net cash (used in) financing activities ..... (248,325) (250,250) (115,500) -------------------------------- Increase (decrease) in cash ................. (670) 198 (747) Cash: Beginning ................................... 4,833 4,635 5,382 -------------------------------- Ending ...................................... $ 4,163 $ 4,833 $ 4,635 ================================ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Dividends declared and unpaid ............... $ 77,000 $ 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, 1996, 1995 and 1994, changes were as follows: Number of shares owned at December 31, 1996 - 38,500 Percent to total shares at December 31, 1996 - 100% 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) Net unrealized gain (loss) on securities ......... 568,582 ----------- Balance at December 31, 1995 ............................ 8,409,837 Add (deduct): Equity in net income ............................. 736,441 Dividends declared ............................... (267,575) Change in net unrealized gain (loss) on securities (43,244) ----------- Balance at December 31, 1996 ............................ $ 8,835,459 =========== 47 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The Board of Directors of the Company may consist of not less than five (5) nor more than twenty-five (25) shareholders in accordance with the Company's Articles of Incorporation. The number of directors within such minimum and maximum limits shall be determined from time to time by resolution of a majority of the full Board of Directors, subject to limitations outlined in the Company's By-laws. Currently the Board of Directors may not increase the number of directors to a number which exceeds by more than two the number of directors last elected by the shareholders. The number of directors may also be fixed by a resolution of the shareholders at any annual or special meeting. No shareholder may be elected as director after attaining the age seventy (70), unless the shareholder was a member of the Board of Directors on May 5, 1987. Due to the Death of Director Moore during March, 1996, the number of directors fixed by the Board of Directors was reduced from 11 to 10. No decisions have yet been made regarding the replacement for Dr. Moore. 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 Retired Pharmacist 70 1986 1999 Chairman of the Board, Member of Asset/Liability, Audit & Compliance, and Trust Committees of the Bank L. Thomas Bulla President & CEO of 57 1993 1998 President & CEO of the First National Bankshares Company and the Bank; Corp. and First National Member of Asset/Liability Bank (1993 - present); and Trust Committees of Director, President & CEO the Bank of Bank One, West Virginia, Charleston, NA (1985-1993) J. R. Dawkins Cattle Dealer; Farm 79 1986 1997 Member of Audit & Compliance Operator Committee of the Bank Richard E. Ford Attorney at Law 69 1987 1999 Member of Audit & Partner - The Ford Compliance and Trust Law Firm Committees of the Bank Walter Bennett Fuller Retired Banker 73 1986 1997 Vice Chairman of the Board, Member of Asset/Liability, Audit & Compliance, and Trust Committees of the Bank - -------------------------------------------------------------------------------- (Table continued on next page) ------------------------------------------------------------------------------- 49 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 - -------------------------------------------------------------------------------- William D. Goodwin Attorney at Law, 53 1986 1998 Member of Asset/Liability Owner/Broker, Coldwell and Trust Committees of Banker Stuart & Watts Real the Bank Estate, Inc. Houston B. Moore, M.D. SEE NOTE BELOW Member of Asset/Liability Committee of the Bank Lucie T. Refsland, Ed.D. Interim Director (1996) and 60 1996 1998 Member of Trust Associate Professor of Committee of the Bank Mathematics (1993 - present) Greenbrier Community College William R. Satterfield, Jr. Owner - Greenbrier 52 1986 1998 Member of Asset/Liability Insurance Agency and Audit & Compliance Committees of the Bank Richard L. Skaggs Partner - Park Grove 74 1986 1997 Member of Audit & Farms (farm feed and Compliance Committee supply) of the Bank Ronald B. Snyder President, R.B.S., Inc. 57 1988 1999 Member of Asset/Liability (construction company) Committee of the Bank NOTE: During 1996, Director Houston B. Moore, M.D., died after a long illness. Dr. Moore's term of office was to expire in 1997 and no person was appointed in the interim to fill the vacancy. No discussions as to a replacement for Dr. Moore have been held. - -------------------------------------------------------------------------------- The directors of the Company are divided into three (3) classes; and as a result, the shareholders elect approximately one-third of the directors of the Company each year. Directors Dawkins, Fuller, and Skaggs whose terms expire in 1997, have been nominated to stand for re-election at the 1997 annual meeting of the Company's stockholders to serve a 3 year term which will expire in 2000. 50 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 57 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 37 Executive Vice President of the Company and 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 60 Vice President of the Company (1987 to present); Senior Vice President and Loan Officer of the Bank (1970 to present) Keith E. Morgan 59 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) - ------------------------------------------------------------------------------- The executive officers of the Company listed above shall continue in office until the 1997 organizational meeting of the directors of the Company. It is expected that, for 1997, 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 re-elected to the offices they now hold. Compliance with Section 16(a) of the Exchange Act The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not have any class of securities registered pursuant to Section 12 of the Exchange Act, the provisions of Section 16 thereof are not applicable to the Company's directors, officers and shareholders. 51 ITEM 11 - EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the compensation paid to the chief executive officer for the years 1996, 1995 and 1994: - -------------------------------------------------------------------------------- Stock All Other Name and Salary Bonus Options Compensation Principal Position Year ($) ($) (1) ($) (2) - -------------------------------------------------------------------------------- L. Thomas Bulla ...... 1996 150,000 25,000 5,690 28,100 President & CEO of the Company and the Bank . 1995 137,500 25,000 -- 24,287 1994 125,000 -0- -- 9,498 FOOTNOTES: (1) The amount shown under the "Stock Options" column represents stock options for 640 shares, or 20.0% of the 3,200 total options awarded in 1996. The term of the options is for a period of five years, expiring on October 31, 2001. As of 12/31/96 none of the options had been exercised, and none are exercisable until April 30, 1997. Number of Securities Underlying Value of Unexercised Unexercised Options Options at FY-End at FY-End Shares Value Exercisable/ Exercisable/ Name Acquired Realized Unexercisable Unexercisable L. Thomas Bulla 640 $0 0 / 640 $0 / $5,690 President & CEO of the Company and the Bank (2) The amount shown under the "All Other Compensation" column above for 1996 is the total of the following: (i) directors fees of $6,250, (ii) the amount of premiums paid by the Bank for term life insurance for Mr. Bulla's benefit of $3,742, (iii) 401-K Plan contribution of $6,226, (iv) Profit Sharing Supplemental Retirement Plan contribution of $8,992 (v) personal use of company-owned vehicle of $2,890. - ------------------------------------------------------------------------------- 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) resulting in termination of his employment or voluntary resignation. The maximum contingent liability under this agreement approximated $300,000 at December 31, 1996. 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. The Company's bonus plan is discretionary and is based upon several factors, including the overall financial performance of the Company and individual performance factors, among others. The bonus plan is directed by the Compensation Committee of the Board of Directors and currently covers those classified a Executive Officers of the Company and its subsidiary bank. At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to approve an incentive stock option plan. The purpose of the plan is to provide a method whereby key employees of the Company and its subsidiaries who are responsible for the management, growth, and protection of the business, and who are making substantial 52 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. The total amount of shares granted under this plan during 1996 was 3,200 shares, or 1.66% of the current outstanding common shares. No single person received more than 640 shares, or 0.33%. For more information regarding the stock option plan, please refer to Note 11 of the Consolidated Financial Statements included in Item 8 of this filing. Information related to the Company's 401(k) and profit-sharing plans is summarized in Note 10 of the Consolidated Financial Statements included in Item 8 of this filing. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There are no shareholders, known to the Company, who beneficially own more than 5% of the Company's common stock, the only class of stock outstanding, as of December 31, 1996. The following table sets forth information as of December 31, 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 ...................... 1,150 (1) 0.59% L. Thomas Bulla ..................... 6,420 (2) 3.33% John R. Dawkins ..................... 4,665 (3) 2.42% Richard E. Ford ..................... 3,527 (4) 1.83% Walter Bennett Fuller ............... 2,000 (5) 1.04% William D. Goodwin .................. 1,570 (6) 0.81% Lucie T. Refsland, Ed.D ............. 203 (7) 0.11% William R. Satterfield, Jr .......... 1,475 (8) 0.77% Richard L. Skaggs ................... 525 (9) 0.27% Ronald B. Snyder .................... 3,373 1.75% All Directors and Executive Officers of the Company & Bank as a Group (18 persons) ...... 30,491 15.84% ------- ------- FOOTNOTES (1) Mr. Bare has sole voting and investment authority for 975 shares and shared voting and investment authority for 175 shares. (2) Mr. Bulla has sole voting and investment authority for 3,870 shares and shared voting and investment authority for 2,550 shares. (3) Mr. Dawkins has sole voting and investment authority for 4,665 shares. (4) Mr. Ford has sole voting and investment authority for 1,612 shares and shared voting and investment authority for 1,915 shares. (5) Mr. Fuller has sole voting and investment authority for 1,900 shares and shared voting and investment authority for 100 shares. (6) Mr. Goodwin has sole voting and investment authority for 920 shares and shared voting and investment authority for 650 shares. (7) Ms. Refsland has sole voting and investment authority for 203 shares. (8) Mr. Satterfield has sole voting and investment authority for 1,075 shares and shared voting and investment authority for 400 shares. (9) Mr. Skaggs has sole voting and investment authority for 200 shares and shared voting and investment authority for 325 shares. 53 (10) Mr. Snyder has sole voting and investment authority for 325 shares and shared voting and investment authority for 3,048 shares. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the ordinary course of business the Company's subsidiary, the Bank, as in the past, has had banking transactions with the directors and executive officers of the Company and the Bank, members of their immediate families, corporations and other entities in which such directors and officers were executive officers or had, directly or indirectly, beneficial ownership of 10% or more in any class of equity securities, and trusts in which they have a substantial beneficial interest or for which they serve as a fiduciary. Management of the Company is of the opinion that any outstanding extensions of credit to such persons were made in the ordinary course of the business of the Bank on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. See Note 4 of the Consolidated Financial Statements included in Item 8 of this filing for additional information related to loans granted to related parties. The Bank previously leased 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 ran for a period of 10 years, expiring in March of 1996. In January of 1996, Bank Management and the Board of Directors attempted to renegotiate the lease to reduce the annual cost to the Bank. Negotiations did not result in a mutually satisfactory agreement, and the Board of Directors voted not to renew the existing lease, but to commence with the purchase of land and the construction of a new branch location. The lease was continued on a month-to-month basis through January, 1997, when construction of the new Bank-owned branch location was completed. The annual rental during the initial 10 year term was $90,446. In 1996, the Bank paid the lessors rent in the amount of $90,446. On occasion, certain Directors of the Company who are professionals in the fields of law and insurance have provided, and are expected to continue to provide, incidental legal and insurance services on behalf of the Company and/or its subsidiary bank. These services do not individually, or in the aggregate, exceed 10% of equity. 54 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 19 through 44 of this Form 10-K Report of independent auditors..........................................21 Consolidated balance sheets at December 31, 1996 and 1995...............22 Consolidated statements of income for the years ended December 31, 1996, 1995, and 1994.....................................23 Consolidated statements of shareholders' equity for the years ended December 31, 1996, 1995, and 1994.................24 Consolidated statements of cash flows for the years ended December 31, 1996, 1995, and 1994..................................25-26 Notes to the consolidated financial statements.......................27-46 (a) (2) Financial Statement Schedules All other schedules for which provision is made in the applicable regulations of the Commission have been omitted as the schedules are not required under the related instructions, or are not applicable, or the information required thereby is set forth in the financial statements or the notes thereto (a) (3) Exhibits required to be filed by Item 601 of Regulation S-K and 14(c) of Form 10-K See index to exhibits...............................................57 (b) Reports on Form 8-K No reports on Form 8-K have been filed by the registrant during the quarter ended December 31, 1996. (c) Exhibits See Item 14(a)(3), above (d) Financial Statement Schedules See Item 14(a)(2), above 55 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 03/25/97 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/ Lucie T. Refsland 03/25/97 - ------------------------------------ -------------------------------------- S. Elwood Bare, Director Lucie T. Refsland, Director /s/ William R. Satterfield Jr.03/25/97 - ------------------------------------ -------------------------------------- John R. Dawkins, Director William R. Satterfield, Jr., Director /s/ Richard E. Ford 03/25/97 /s/ Richard L. Skaggs 03/25/97 - ------------------------------------ -------------------------------------- Richard E. Ford, Director Richard L. Skaggs, Director /s/ Bennett Fuller 03/25/97 /s/ Ronald B. Snyder 03/25/97 - ------------------------------------ -------------------------------------- Bennett Fuller, Director Ronald B. Snyder, Director /s/ William D. Goodwin 03/25/97 - ------------------------------------ William D. Goodwin, Director /s/ L. Thomas Bulla 03/25/97 /s/ Keith E. Morgan 03/25/97 - ------------------------------------ -------------------------------------- L. Thomas Bulla, President, Chief Keith E. Morgan, Secretary & Treasurer Executive Officer and Director (Principal Executive Officer) /s/ Jack D. Whitt 03/25/97 - ------------------------------------ Jack D. Whitt, Chief Financial Officer, First National Bank (Principal Financial and Accounting Officer) 56 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. 57 INDEX TO EXHIBITS PAGE NUMBER(S) IN FORM 10-K, OR EXHIBIT PRIOR FILING NUMBER DESCRIPTION REFERENCE (3)i Articles of Incorporation of Registrant......................( a ) (3)ii By-laws of Registrant........................................( a ) (10) Material Contracts A Agreement dated October 14, 1993, between L. Thomas Bulla and First National Bank..................................( a ) B Summary of Lease terms for Charleston branch facility... ( b ) C Form S-8 Registration Statement under the Securities Act of 1933................................( c ) D Specimen Copy of 1996 Incentive Stock Option Plan Agreement........................................58-60 (11) Calculation of Primary and Fully Diluted Computation of Earnings per Share....................................61 (21) Subsidiary of Registrant........................................62 (23) Consents of experts and counsel Consent of Independent Auditors.............................63 (27) Financial Data Schedule......................................64-65 - ------------------------------------------------------------------------------- (a) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-K Annual Report dated December 31, 1994, and filed with the Securities and Exchange Commission on or about March 28, 1995. (b) Incorporated by reference to exhibits to from First National Bankshares Corporation's Form 10-Q Quarterly Report dated March 31, 1996, filed with the Securities and Exchange Commission on or about May 3, 1996. (c) Incorporated by reference to exhibits to First National Bankshares Corporation's Form S-8 dated July 31, 1996, filed with the Securities and Exchange Commission on or about July 31, 1996. 58 EXHIBIT (10D) - MATERIAL CONTRACTS - Specimen Copy of Option Agreement - ------------------------------------------------------------------------------- THE FIRST NATIONAL BANKSHARES CORPORATION 1996 INCENTIVE STOCK OPTION PLAN OPTION AGREEMENT OPTION AGREEMENT made this ______ day of _______________, 19_____, between The First National Bankshares Corporation, (the "Company"), and ________________________ ________________________, an employee of the Company or one or more of its subsidiaries (the "Employee"). The Company desires, by affording the Employee an opportunity to purchase its common shares, of the par value of $5 per share, hereinafter called the Common Shares, as hereinafter provided, to carry out the purpose of The First National Bankshares Corporation 1996 Incentive Stock Option Plan, which has been approved by its shareholders. Now, thereafter, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of option. The Company hereby irrevocably grants to the Employee the right and option, hereinafter called the Option, to purchase all or any part of an aggregate of ______ Common Shares (such number being subject to adjustment as provided in paragraph 7 hereof) on the terms and conditions herein set forth. 2. Purchase price. The purchase price of the Common Shares covered by the Option shall be $_________ per share flat or ex-dividend. 3. Term of option. The term of the Option shall be for a period of _____ years (not to exceed five years in the case of a person owning more than 10% of the Company's voting power, or ten years otherwise) from the date hereof, subject to earlier termination as provided in paragraph 6 hereof. The Option may be exercised within the above limitations, at any time or from time to time, as to any part of or all the shares covered thereby; provided, however, that the Option shall not be exercisable prior to the expiration of _____ year(s) (at least one-half) from the date hereof. Notwithstanding the time period set forth in the preceding sentence, the option shall become immediately exercisable with respect to the total number of shares: (i) in the event of a sale of substantially all of the assets of the Company; (ii) in the event 50% or more of the capital stock is acquired by any person or entity outside the Company; or (iii) in the event the Company undergoes any reorganization, merger, consolidation or other transaction following which the Company's then current shareholders own less than 50% of the Company's then voting power. The purchase price of the shares as to which the Option shall be exercised shall be paid in full in cash at the time of exercise. Except as provided in paragraph 6 hereof, the option may not be exercised at any time unless the Employee shall have been in the continuous employ of the Company and/or of one or more of its subsidiaries, from the date hereof to the date of the exercise of the Option. The holder of the Option shall not have any of the rights of a shareholder with respect to the shares covered by the Option except to the extent that one or more certificates for such shares shall be delivered to him upon the due exercise of the Option. The Option may not be exercised unless at the date of exercise a registration statement on Form S-8 under the Securities Act of 1933, as amended, relating to the shares covered by the Option shall be in effect. The Company will endeavor to obtain prior to the time when the option would otherwise be exercisable the registration of the shares covered by the option under the Act, as amended. 4. Nontransferability. The option shall not be transferable otherwise than by will or the laws of descent and distribution, and the Option may be exercised, during the lifetime of the Employee, only by him. More particularly (but without limiting the generality of the forgoing), the Option may not be assigned, transferred (except as provided above), pledged, or hypothecated in any way, shall not be assignable by operation of law, and shall not be subject to execution, attachment, or similar process. Any attempted assignment, transfer, pledge, hypothecation, or other disposition of the Option contrary to the provisions hereof, and the levy of any execution, attachment, or similar process upon the Option, shall be null and void and without effect. 59 5. Employment. The granting of the Option nor its exercise shall not be construed as granting to the grantee any right with respect to continuance of employment by the Company or a subsidiary. Except as may otherwise be limited by a written agreement between the Company or a subsidiary and the grantee, the right of the Company or a subsidiary to terminate at will the grantee's employment with it at any time (whether by dismissal, discharge, retirement or otherwise) is specifically reserved by the Company as the employer or on behalf of the employer (whichever the case may be) and acknowledged by the grantee. 6. Termination of option. (a) The option and all rights hereunder with respect thereto, to the extent such rights shall not have been exercised, shall terminate and become null and void after the expiration of its term as set forth in paragraph 3 (the "Option Term"), or in the case of Employee's termination of employment at such earlier time as set forth in (b) below. (b) Upon the occurrence of the Employee ceasing for any reason to be employed by the Company or subsidiary (such occurrence being a "termination of the Employee's employment"), the option, to the extent not previously exercised, shall terminate and become null and void immediately upon such termination of the Employee's employment, except in a case where the termination of an Employee's employment is by reason of retirement, disability or death. Upon the termination of the Employee's employment by reason of retirement (as defined below), disability or death, the option may be exercised during the following periods, but only to the extent that the option was outstanding and exercisable on such date of retirement, disability or death: (i) the one year period following the date of such termination of Employee's employment in the case of disability (within the meaning of Section 22 (e) (3) of the Internal Revenue Code of 1986), (ii) the six month period following the date of issuance of letters testamentary or letters of administration to the executor or administrator of a deceased Employee, in the case of the Employee's death during his employment by the Company or a subsidiary, but not later than one year after the Employee's death, and (iii) the three month period following the date of such termination in the case of retirement on or after attainment of age 65 years, or in the case of disability other than described in (i) above. In no event, however, shall any such period extend beyond the Option Term. (c ) In the event of the death of the Employee, the option may be exercised by the Employee's legal representative(s), but only to the extent that the Option would otherwise have been exercisable by the Employee. (d) The transfer of the Employee's employment between Company and any subsidiary shall not be deemed to be a termination of Employee's employment. (e) Notwithstanding any other provisions set forth herein or in the Plan, if the Employee (i) commits any act of malfeasance or wrongdoing affecting Company or any subsidiary, (iii) breaches any covenant not to compete or employment contract, with Company or any subsidiary or (iii) engages in conduct that would warrant the Employee's discharge for cause (excluding general dissatisfaction with the performance of the Employee's duties, but including any act of disloyalty or any conduct clearly tending to bring discredit upon Company or any subsidiary), any unexercised portion of the Option shall immediately terminate and be void. 7. Changes in capital structure. If all or any portion of the Option shall be exercised subsequent to any share dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, separation, reorganization, or liquidation occurring after the date hereof, as a result of which shares of any class shall be issued in respect of outstanding Common Shares or Common Shares shall be changed into the same or a different number of shares of the same or another class or classes, the person or persons so exercising the option shall receive, for the aggregate price paid upon such exercise, the aggregate number and class of shares which, if Common Shares (as authorized at the date hereof ) had been purchased at the date hereof for the same aggregate price ( on the basis of the price per share set forth in paragraph 2 hereof ) and had not been disposed of, such person or persons would be holding, at the time of such exercise, as a result of such purchase and all such share dividends, split-ups, recapitalization, mergers, consolidations, combinations or exchanges of shares, separations, reorganizations, or liquidations; provided, however, that no fractional share shall be issued upon any such exercise, and the aggregate price paid shall be appropriately reduced on account of any fractional share not issued. 8. Limitation. The Employee shall not exercise any one or more Options hereunder if and to the extent that the Employee would thereby be entitled to purchase Common Shares in any one calender year the value of which, determined at the time of the grant of the Option or Options, would exceed $100,000; provided, however, that such 60 exercise shall nonetheless be permitted if and to the extent that the right to first exercise said options shall have accumulated over a number of years rather than having first occurred in the year of exercise. 9. Method of exercising option. Subject to the terms and conditions of this Option Agreement, the Option may be exercised by written notice to the Company, at its Stock Transfer Department, which is now located at the office of the Company, One Cedar Street, Ronceverte, West Virginia. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person or persons so exercising the Option. Such notice shall either: (a) be accompanied by payment of the full purchase price of such shares, in which event the Company shall deliver a certificate or certificates representing such shares as soon as practicable after the notice shall be received; or (b) fix a date ( not less than five nor more than ten business days from the date such notice shall be received by the Company) for the payment of the full purchase price of such shares at the Stock Transfer Department, against delivery of a certificate or certificates representing such shares. Payment of such price shall, in either case, be made by check payable to the order of the Company. The certificate or certificates for the shares as to which the Option shall have been so exercised shall be registered in the name of the person or persons so exercising the Option (or, if the Option shall be exercised by the Employee and if the Employee shall so request in the notice exercising the Option, shall be registered in the name of the Employee and another person jointly, with right of survivorship) and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option shall be exercised, pursuant to paragraph 6 (c) hereof, by any person or persons other than the Employee, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. All shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and nonassessable. 10. General. The Company shall at all times during the term of the Option reserve and keep available such number of Common Shares as will be sufficient to satisfy the requirements of this Option Agreement, shall pay all original issue and transfer taxes with respect to the issue and transfer of shares pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use its best efforts to comply with all laws and regulations which, in the opinion of counsel for the Company, shall be applicable thereto. 11. Subsidiary. As used herein, the term "subsidiary" shall mean any present or future corporation which would be a "subsidiary corporation" of the Company, as that term is defined in Section 424 of the Internal Revenue Code of 1986. In witness whereof the Company has caused this Option Agreement to be duly executed by a member of the Incentive Stock Option Committee duly authorized, and the Employee has hereunto set his hand and seal, all of the day and year first above written. Attest: THE FIRST NATIONAL BANKSHARES CORPORATION ______________________ By_______________________________________________ ----------------------------------------------- Employee Signature 61 EXHIBIT (11) PRIMARY AND FULLY DILUTED COMPUTATION OF EARNINGS PER SHARE - ------------------------------------------------------------------------------- Primary Earnings Per Share Primary Earnings per Share is calculated based upon the Company's net income after income taxes, divided by the weighted average number of shares outstanding during the fiscal period. Fully Diluted Earnings Per Share Fully Diluted Earnings Per Share is calculated based upon the Company's net income after income taxes, divided by the weighted average number of shares outstanding during the period plus all exercisable stock options outstanding but not yet exercised at the end of the period. 62 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. 63 EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS - ------------------------------------------------------------------------------- (ARNETT & FOSTER, P.L.L.C. LETTERHEAD) CONSENT OF INDEPENDENT AUDITORS Securities and Exchange Commission Washington, D.C. We hereby consent to the inclusion in this Annual Report on Form 10-K of our report dated January 31, 1997, on our audit of the consolidated financial statements of First National Bankshares Corporation as of December 31, 1996 and 1995, and for the three years in the period ended December 31, 1996, appearing in Part II, Item 8 of the 1996 Form 10-K of First National Bankshares Corporation. /s/ ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia March 24, 1997 64 EXHIBIT (27) FINANCIAL DATA SCHEDULE - ------------------------------------------------------------------------------- DATE: 12/31/96 [TYPE] EX-27 [DESCRIPTION] FDS -- [TEXT] [ARTICLE] 9 [CIK] [NAME] First National Bankshares Corporation [MULTIPLIER] 1,000 [CURRENCY] U.S. DOLLARS [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-START] JAN-01-1996 [PERIOD-END] DEC-31-1996 [EXCHANGE-RATE] 1.00000 [CASH] 2576 [INT-BEARING-DEPOSITS] 63105 [FED-FUNDS-SOLD] 2663 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 3781 [INVESTMENTS-CARRYING] 18836 [INVESTMENTS-MARKET] 18850 [LOANS] 52800 [ALLOWANCE] 654 [TOTAL-ASSETS] 83668 [DEPOSITS] 73316 [SHORT-TERM] 492 [LIABILITIES-OTHER] 1019 [LONG-TERM] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 963 [OTHER-SE] 7878 [TOTAL-LIABILITIES-AND-EQUITY] 83668 [INTEREST-LOAN] 4667 [INTEREST-INVEST] 1284 [INTEREST-OTHER] 215 [INTEREST-TOTAL] 6166 [INTEREST-DEPOSIT] 2380 [INTEREST-EXPENSE] 2393 [INTEREST-INCOME-NET] 3773 [LOAN-LOSSES] 0 [SECURITIES-GAINS] 1 [EXPENSE-OTHER] 3140 [INCOME-PRETAX] 1066 [INCOME-PRE-EXTRAORDINARY] 1066 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 736 [EPS-PRIMARY] 3.82 [EPS-DILUTED] 3.82 [YIELD-ACTUAL] 8.32 [LOANS-NON] 161 [LOANS-PAST] 0 [LOANS-TROUBLED] 0 [ALLOWANCE-OPEN] 643 [CHARGE-OFFS] 117 [RECOVERIES] 128 [ALLOWANCE-CLOSE] 654 [ALLOWANCE-DOMESTIC] 654 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 0
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