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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
FORM 10-K
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[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31,1999
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) or the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 0-11671
FIRST CENTURY BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
West Virginia 55-0628089
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Federal Street, Bluefield, WV 24701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 325-8181
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
First Century Bankshares, Inc.: $1.25 Par Value - Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 2000 was $21,895,331 and the number of shares
outstanding of the registrant's common stock was 2,000,000
.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the fiscal year ended
December 31, 1999 are incorporated by reference into Part II.
Portions of the proxy statement for the annual shareholders meeting to be
held April 18, 2000, are incorporated by reference into Part III.
Total number of pages, including cover page and exhibits - 65
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FIRST CENTURY BANKSHARES, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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<CAPTION>
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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
<CAPTION>
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................ 5
ITEM 6. SELECTED FINANCIAL DATA............................ 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 6
<CAPTION>
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 6
ITEM 11. EXECUTIVE COMPENSATION.............................. 7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................... 7
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 7
<CAPTION>
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K............................. 7 - 8
SIGNATURES.................................................... 9 - 10
</TABLE>
2
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PART I
ITEM 1. BUSINESS
FIRST CENTURY BANKSHARES, INC.
First Century Bankshares, Inc. ("Corporation" or "Registrant"), formerly
Pocahontas Bankshares Corporation, was organized under the laws of West Virginia
in 1983 at the direction of the Board of Directors of The First National Bank
of Bluefield ("Bluefield"). On March 1, 1984, the effective date of the
corporate reorganization, the shareholders of Bluefield became the shareholders
of the Corporation, and Bluefield became a wholly-owned subsidiary of the
Corporation. On March 11, 1988, the Registrant acquired control of the Bank of
Oceana, Oceana, WV ("Oceana"). On May 24, 1991, the Registrant formed First
Century Bank, Roanoke, Virginia. During 1993, the main office of First Century
Bank was redesignated to Wytheville, Virginia. Effective November 28, 1994, the
merger of Bank of Oceana into The First National Bank of Bluefield was completed
and the name of the resulting entity was changed to First Century Bank, National
Association ("FCBNA"), with its main office in Bluefield, West Virginia.
Effective May 7, 1999, First Century Bank was merged into FCBNA. Substantially,
all of the operations of the Corporation are carried on through FCBNA which is
the Registrant's only subsidiary. The officers and directors of the
Corporation, who are also officers and directors of FCBNA, receive their entire
compensation from FCBNA. The Corporation's executive offices are located at 500
Federal Street, Bluefield, West Virginia.
The Registrant's principal business and major source of revenue is, and is
expected to remain, commercial banking. The Registrant currently derives
substantially all its revenues from dividends paid by the subsidiary bank. The
earnings, asset growth and current capital position of the subsidiary influence
dividend payments by FCBNA. In addition, various regulatory agencies control
the payment of dividends. For additional information regarding the payment of
dividends, see Note 16 of the Notes to the Consolidated Financial Statements in
the Registrant's 1999 Annual Report to the Stockholders attached as Exhibit 13
to this report.
FIRST CENTURY BANK, N.A.
First Century Bank, N.A., a national banking association, was organized and
chartered in 1891 as The First National Bank of Bluefield, under the laws of the
State of West Virginia and the National Bank Act. FCBNA offers customary
banking services, including commercial, real estate, installment, and other
loans; interest-bearing and non-interest bearing transaction accounts, savings
and time deposit accounts including certificates and other deposit accounts,
featuring various maturities and market rates; Individual Retirement Accounts;
Visa and MasterCard services under an arrangement with a correspondent bank;
safe deposit facilities; personal and corporate trust services; and various cash
management services.
During the second quarter of 1999, FCBNA completed the acquisition of the
Hinton, West Virginia branch of City National Bank of West Virginia, Charleston,
West Virginia. This banking office had approximately $60 million in deposits
and was a natural market extension for the bank.
In addition to the main office, FCBNA currently operates nine additional
branches in Mercer, Summers and Wyoming counties in southern West Virginia and
Tazewell and Wythe Counties in southwestern Virginia. As of December 31, 1999,
FCBNA had 161 full-time employees and 14 part-time employees. FCBNA is not a
party to any collective bargaining agreements, and, in the opinion of
management, enjoys satisfactory relations with its employees.
COMPETITION
Vigorous and intense competition exists in all areas where the Registrant and
its subsidiary are engaged in business, generally from other banks located in
southern West Virginia and southwestern Virginia. However, this competition is
not only limited to other commercial banks. The subsidiary banks also compete
for certain lines of business with savings and loan associations, mortgage
companies, credit unions, consumer finance companies, leasing companies,
insurance companies, mutual funds and brokerage firms. Significant competition
also exists from state-wide and nation-wide bank holding companies located in
West Virginia and Virginia, which have offices in the communities the Registrant
serves. These institutions are larger in terms of capital, resources and
personnel. This requires that the Registrant place a high emphasis on quality
service, with a significant amount of personal attention, in order to
effectively compete with these larger institutions. Management feels that this
competitive environment will continue in the markets in which the Registrant
currently operates.
3
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FUTURE ACQUISITIONS AND EXPANSION
The Registrant may from time to time consider expansion of its banking
operations through acquisition of or formation of other banks and/or bank
related businesses. In addition to traditional banking products and services,
with the passage of the Graham-Leach-Bliley Financial Modernization Act, the
registrant will evaluate the potential of offering new financial services
allowed under the Act.
SUPERVISION AND REGULATION
The Corporation is under the jurisdiction of the United States Securities and
Exchange Commission and the State of West Virginia's Secretary of State with
respect to matters relating to the offer and sale of its securities and matters
relating to reporting to such commissions and to its shareholders.
The Corporation is a registered holding company under the Bank Holding
Company Act of 1956, as amended, and is regulated by the Federal Reserve. As a
bank holding company, the Corporation is required to file with the Federal
Reserve an Annual Report and such additional information as the Federal Reserve
may require pursuant to the Bank Holding Company Act. The Federal Reserve may
also conduct examinations of the Corporation and each subsidiary. The Bank
Holding Company Act requires every bank holding company to obtain prior approval
from the Federal Reserve before acquiring direct or indirect ownership or
control of more than five percent of the voting shares of any bank which is not
already majority owned or controlled by that bank holding company. Pursuant to
West Virginia law, the Corporation is authorized to acquire ownership or control
of additional banks in the state of West Virginia, provided, this does not
result in control of more than twenty percent (20%) of the total deposits of all
depository institutions in the state of West Virginia. Acquisition of such
additional banks would require approval from the Federal Reserve and the
Commissioner of Banking of the State of West Virginia.
The Bank Holding Company Act further provides that the Federal Reserve will
not approve any acquisition, merger or consolidation (a) which would result in a
monopoly, (b) which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States, (c) the effect of which may be to substantially lessen
competition or to tend to create a monopoly in any section of the country or (d)
which in any other manner would be in restraint of trade, unless the anti-
competitive effects of the proposed transaction are clearly outweighed by the
public interest in the probable effect of the transaction meeting the
convenience and needs of the community to be served.
In addition to having the right to acquire ownership and control of other
banks, the Corporation is authorized to acquire ownership and control of non-
banking companies, provided the activities of such companies are so closely
related to banking or managing or controlling banks that the Federal Reserve
considers such activities to be proper to the operation and control of banks.
Regulation Y, promulgated by the Federal Reserve, sets forth those activities
which are regarded as closely related to banking or managing or controlling
banks and thus are permissible activities for bank holding companies, subject to
the approval by the Federal Reserve in individual cases.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Bank Holding Company Act on any extension of credit
to the bank holding company or any of its subsidiaries, on investment in the
stock or other securities thereof, and on the taking of such stock or securities
for loans to any borrower. Further, under Section 106 of the 1970 amendments to
the Bank Holding Company Act and the regulations of the Federal Reserve, a bank
holding company through its banking subsidiaries is prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or
provision of any property or services. The Federal Reserve possesses cease and
desist powers over bank holding companies and their non-bank subsidiaries if
their actions are unsafe or unsound practices or violations of law.
FCBNA operates as a national banking association subject to examination by
the Office of the Comptroller of the Currency (the "Comptroller"). The
Comptroller regulates all areas of a national bank's operations, both commercial
and trust, including loans, deposits, mergers, branches and payments of
dividends.
4
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FCBNA, by means of its national charter, is also a member of the Federal
Reserve System, and as such, is affected by the monetary policies of the Federal
Reserve System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. The instruments of monetary policy
employed by the Federal Reserve include open market operations in U. S.
Government securities, changes in the reserve requirement for member banks, and
changes in the discount rate for member bank borrowings.
In view of the changing conditions in the national economy and the money
markets, as well as, the effect of actions by monetary and fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand of the business and
earnings of the Corporation or its subsidiaries.
FCBNA is also insured and regulated by the Federal Deposit Insurance
Corporation (the "FDIC"). The major function of the FDIC with respect to
insured member banks is to pay depositors to the extent provided by law in the
event an insured bank is closed without adequately providing for payment of the
claims of the depositors.
STATISTICAL DISCLOSURE
The statistical and other financial data disclosures required pursuant to
Guide 3 of the Preparation and Filing of Reports and Registration Statements
under the Securities Exchange Act of 1934 are contained within Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing on pages 3 through 17 of the accompanying 1999 Annual Report to
Stockholders, incorporated herein by reference in this Form 10-K annual report
as Exhibit 13.
ITEM 2. PROPERTIES
The executive offices of the Registrant are located at 500 Federal Street,
Bluefield, West Virginia. There are ten properties owned or leased by the
subsidiary banks consisting of modern single purpose facilities that house all
the amenities to comfortably conduct the full range of financial services
provided by the Registrant and its subsidiaries. Eight of these offices are
owned and two are leased.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor any of its subsidiaries are presently involved in
any material legal proceedings other than ordinary routine litigation incidental
to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for a vote during the fourth
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No established public market presently exists for the common stock of the
Registrant. Management does not expect that a more active trading market will
develop in the near future for the common stock of the Registrant.
Page 15 of the 1999 Annual Report to Stockholders (incorporated herein by
reference) describes further the information for market, stockholders, and
dividends. The payment of dividends is subject to the restrictions described in
Note 16 of the Notes to Consolidated Financial Statements. The Board of
Directors evaluates the dividend payment on the Registrant's common stock after
the conclusion of each calendar quarter.
5
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required by this item is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 17 of the Registrant's 1999 Annual Report to Stockholders
(Exhibit 13), incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 3 through 17 of the accompanying 1999 Annual
Report to Stockholders is incorporated by reference in this Form 10-K annual
report as Exhibit 13. Management's discussion and analysis should be read in
conjunction with the related financial statements and notes thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and report of independent accountants for
the years ended December 31, 1999, 1998, and 1997, which are included in the
Corporation's 1999 Annual Report to Stockholders (Exhibit 13), are incorporated
herein by reference:
The report of independent accountants on page 41 of the Registrant's 1999
Annual Report to Stockholders reflects an unqualified opinion on the 1999 and
1998 consolidated statements of financial condition and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1999, issued by PricewaterhouseCoopers, LLP, Charlotte, North Carolina, the
Registrant's independent accountant for those years.
Reference to
1999 Annual Report
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Consolidated Statements of Financial Condition Page 18
Consolidated Statements of Income
and Comprehensive Income Page 19
Consolidated Statements of Cash Flows Page 20
Consolidated Statements of Changes
in Stockholders' Equity Page 21
Notes to Consolidated Financial
Statements Pages 22 through 40
Report of Independent Accountants Page 41
The supplementary financial information required by this item is set forth in
Note 17 of "Notes to Consolidated Financial Statements" on Page 39 of the
Corporation's 1999 Annual Report to Stockholders (Exhibit 13), incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the independent accountants on
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors and executive officers of the
Registrant has been omitted in accordance with General Instruction G since
Registrant has filed its definitive proxy statement with the Commission on or
about March 27, 2000 (which is not later than 120 days after December 31, 1999,
the close of the fiscal year of Registrant): and such information is
incorporated herein by reference to such proxy statement.
6
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ITEM 11. EXECUTIVE COMPENSATION
Management remuneration has been omitted in accordance with General
Instruction G since Registrant has filed its definitive proxy statement with the
Commission on or about March 27, 2000, (which is not later than 120 days after
December 31, 1999, the close of the fiscal year of Registrant): and such
information is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management has been
omitted in accordance with General Instruction G since Registrant has filed its
definitive proxy statement with the Commission on or about March 27, 2000,
(which is not later than 120 days after December 31, 1999, the close of the
fiscal year of Registrant): and such information is incorporated herein by
reference to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions has been omitted in accordance
with General Instruction G since Registrant has filed its definitive proxy
statement with the commission on or about March 27, 2000, (which is not later
than 120 days after December 31, 1999, the close of the fiscal year of
Registrant): and is incorporated herein by reference to such proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 on Page 6 of this document for a listing of all Financial
Statements, Accountants' Report, and Supplementary Data.
2. Financial Statement Schedules.
All schedules are omitted, as the required information is inapplicable
or the information is presented in the Consolidated Financial
Statements or related notes.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the fourth quarter of 1999.
(c) Exhibits
3. Articles of incorporation and bylaws.
Articles of amendment to articles of incorporation and restated articles
of incorporation changing the name of the Corporation from Pocahontas
Bankshares Corporation to First Century Bankshares, Inc. (Bylaws were
previously filed in a Registration Statement on Form S-14, Registration
No. 2-85126, and are incorporated herein by reference.)
10. Material Contracts
a. Sample agreement pertaining to a split-dollar life insurance
arrangement between FCBNA and Messrs. Wilkinson, Satterfield, Kennett
and Albert.
11. Statement regarding computation of per share earnings.
(These statements are included in the notes to the consolidated financial
statements which are incorporated herein by reference.)
13. Annual report to security holders.
7
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22. Subsidiaries of the registrant.
(This disclosure is included in the notes to the consolidated financial
statements which are incorporated herein by reference.)
27. Financial Data Schedule
8
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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.
(Registrant) First Century Bankshares, Inc.
BY: /s/ J. Ronald Hypes
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J. Ronald Hypes, Treasurer
(Principal Accounting & Financial Officer)
DATE: March 23, 2000
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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.
BY: /s/ B. L. Jackson Date: March 21, 2000
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B. L. Jackson, Jr., Chairman of the Board and Director
BY: /s/ R. W. Wilkinson Date: March 21, 2000
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R. W. Wilkinson, President & Chief Executive Officer & Director
(Principal Executive Officer)
BY: /s/ Charles A. Peters Date: March 21, 2000
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Charles A. Peters, Secretary and Director
BY: /s/ Paul Cole, Jr. Date: March 21, 2000
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Paul Cole, Jr., Director
BY: /s/ Eustace Frederick Date: March 21, 2000
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Eustace Frederick, Director
BY: Date:
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Robert M. Jones, Jr., M.D., Director
BY: Date:
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Harold L. Miller, Jr., Director
BY: Date:
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C. E. Richner, Director
BY: /s/ Byron K. Satterfield Date: March 21, 2000
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Byron K. Satterfield, Director
9
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BY: /s/ John H. Shott Date: March 21, 2000
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John H. Shott, Director
BY: /s/ Scott H. Shott Date: March 21, 2000
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Scott H. Shott, Director
BY: /s/ Walter L. Sowers Date: March 21, 2000
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Walter L. Sowers, Director
BY: /s/ J. Brookins Taylor, M. D. Date: March 21, 2000
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J. Brookins Taylor, M. D., Director
BY: /s/ Frank W. Wilkinson Date: March 21, 2000
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Frank W. Wilkinson, Director
10
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Exhibit 3.
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
POCAHONTAS BANKSHARES CORPORATION
Pursuant to the provisions of Section 107, Article 1, Chapter 31 of the Code
of West Virginia, as amended, the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is Pocahontas Bankshares Corporation.
SECOND: The following Amendment to the Articles of Incorporation was
adopted by a majority of the Shareholders of the corporation at a meeting duly
held on April 20, 1999 in the manner provided by Section 107, Article 1,
Chapter 31 to amend the Articles of Incorporation and purposes of the
corporation to reflect the following:
The name of the corporation shall be changed from Pocahontas Bankshares
Corporation to First Century Bankshares, Inc.
THIRD: The number of shares of the corporation outstanding at the time of
such adoption was 2,000,000; and the number of shares entitled to vote was
2,000,000.
FOURTH: The designation and number of outstanding shares of each class
entitled to vote, as a class were as follows:
CLASS NUMBER OF SHARES
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Common 2,000,000
FIFTH: The number of shares voted for such amendment was 1,756,869; and the
number of shares voted against such amendment was 18,309; the number of shares
abstaining was 657; and the number of shares not voting was 224,165.
DATED as of May 13, 1999
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POCAHONTAS BANKSHARES CORPORATION
/s/ R. W. Wilkinson
--------------------------------
By: R. W. Wilkinson
Its: President
/s/ Charles A. Peters
----------------------------------
By: Charles A. Peters
Its: Secretary
<PAGE>
STATE OF WEST VIRGINIA,
COUNTY OF Mercer, to wit:
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I, Brenda S. Davis, a notary public, do hereby certify that on
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this 13th day of May, 1999, personally appeared before me R. W.
---- ---
Wilkinson, President, who being by me first duly sworn, declared that he
is the President of Pocahontas Bankshares Corporation, that he signed the
foregoing document as President of the corporation, and that the
statements therein contained are true to the best of his knowledge and
belief.
My Commission Expires: 3/22/2005
---------
/s/ Brenda S. Davis
---------------------------------
Notary Public
[NOTARY SEAL]
STATE OF WEST VIRGINIA,
COUNTY OF Mercer, to-wit:
I, Brenda S. Davis, a notary public, do hereby certify that on
---------------
this 13th day of May, 1999, personally appeared before me Charles A.
---- ---
Peters, who being by me first duly sworn, declared that he is the
Secretary of Pocahontas Bankshares Corporation, that he signed the
foregoing document as Secretary of the corporation, and that the
statements therein contained are true.
My Commission Expires: 3/22/2005
---------
/s/ Brenda S. Davis
---------------------------------
Notary Public
[NOTARY SEAL]
This Instrument Prepared by:
Sandra M. Murphy, Attorney at Law
BOWLES RICE McDAVID GRAFF & LOVE, PLLC
600 Quarrier Street
Charleston, WV 25301
<PAGE>
Exhibit 10
THE FIRST NATIONAL BANK OF BLUEFIELD
EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT
This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made as of the 1st
day of April, 1988, by and between The First National Bank of Bluefield, a West
Virginia corporation (the "Company") and __________________________, an
executive employed by the Company (the "Executive").
1. Definitions. Where indicated by initial capital letters, the following
-----------
terms shall have the following meaning:
(a) Agreement: The Executive Split Dollar Life Insurance Agreement
---------
(including Schedules and attachments) entered into between the Company and
Executive pursuant to the Plan.
(b) Amount: The level of insurance specified by Executive in Schedule A
------
which shall not be more than 5 times Executive's Compensation.
(c) Beneficiary: The person or persons designated in writing by
-----------
Executive to receive the Amount.
(d) Cause: Cause means, but is not limited to, a determination by the
-----
Company that Executive may have been guilty of criminal conduct (regardless of
whether proven or admitted), gross negligence or willful misconduct in the
performance of his duties or otherwise, or has engaged in conduct which, if
generally known, would bring discredit to or give rise to adverse publicity to
the Company.
(e) Compensation: Compensation means the Executive's annual
------------
rate of total cash compensation as in effect on January 1 of any year of an
election to increase the Amount.
(f) Insurer: Crown Life Insurance Company, or any other insurance
-------
company issuing a life insurance contract on Executive's life.
(g) Plan: The First National Bank of Bluefield Executive Split Dollar
----
Life Insurance Plan.
(h) Policy: One or more life insurance contracts issued on the life of
------
Executive pursuant to the Plan as identified on Schedule A.
(i) Recoverable Amount: The Company's annual premium, exclusive of any
-------------------
rating, less any amount received from the Executive, compounded at 6% interest
(compounded annually).
(j) Company Cumulative Outlay: The Company's cumulative total premiums
-------------------------
paid to the Insurer, exclusive of ratings, less all amounts received from the
Executive for the Policy.
<PAGE>
(k) Roll-out: Division of the policy into two separate policies, one to
---------
be retained by the Company, and the other to be transferred to the Executive.
(l) Retirement: Termination of employment (except for Cause) after
----------
attainment of age 55 with at least ten years of service.
2. Application of Insurance. The Company will apply to the Insurer for a
-------------------------
Policy with a face amount at least equal to the amount of insurance to which the
Executive is entitled under the Plan. The Company may apply for additional
insurance to insure payment to the Company of the Recoverable Amount. The
Company and the Executive agree to take any action necessary to cause the
Insurer to issue the Policy. The Policy shall be subject to the terms of this
Agreement.
3. Amount or Insurance. Executive shall have the right to specify initially
-------------------
the Amount, which shall not be more than 5 times Executive's Compensation.
Executive may thereafter increase the Amount as of April 1 of any subsequent
year. If Executive is not then insurable at standard rates, the additional
rating shall be paid by the Company. Any increase in the Amount shall be not
less than $50,000.
4. Ownership. The Company shall be the owner of the Policy, and it may
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exercise all ownership rights granted to the owner by the terms of the Policy
except as otherwise provided in this Agreement. The Company shall keep
possession of the Policy.
5. Dividend Option. All dividends declared by the Insurer on the Policy
---------------
shall be applied to purchase additional paid-up life insurance on the life of
the Executive. The dividend option will not be changed without Executive's
written consent.
6. Payment of Premiums.
-------------------
(a) The Company agrees to pay the total amount of each annual Policy
premium on or before the due date of such premium, or within the grace period
provided, if any.
(b) Thirty (30) days prior to the due date of each annual Policy premium,
the Company shall notify the Executive of the exact amount due from the
Executive to the Company as a premium payment. The amount due shall be equal to
the lesser of (a) the annual cost of the term life insurance protection on the
life of the Executive as measured by the PS-58 rate (or substitute table)
published from time to time by the Internal Revenue Service, and (b) the term
rates published from time to time by the Insurer, as determined by the Insurer.
The annual amount payable by Executive may be deducted ratably from Executive's
Compensation.
7. Death Benefits.
---------------
(a) Upon the Executive's death, the Company will promptly take the
appropriate action to obtain the death benefits provided under the Policy, and
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(i) The Company shall be entitled to receive the excess of the total
Policy proceeds over the Amount specified by Executive pursuant to Section 3.
The receipt by the Company of the excess over the amount shall constitute
satisfaction of the Executive's obligation to the Company under this Agreement;
and
(ii) the beneficiary or beneficiaries named under the Policy shall be
entitled to receive the Amount which shall be paid in accordance with the
settlement option elected by the Company at the Executive's request.
(b) If at the time the Amount becomes payable because of Executive's death
there is no effective beneficiary designation, the Amount shall be paid to the
Executive's estate.
(c) If any beneficiary who is entitled to receive a payment from the
Company pursuant to this Agreement is a minor, the Company, in its discretion,
may dispose of such amount in any one or more of the following ways:
(i) By payment of the Amount directly to the minor;
(ii) By application of the Amount for the benefit of the minor;
(iii) By payment of the Amount to a parent of the minor or to any
adult person with whom the minor is living at the time or to any person who is
legally qualified and is acting as guardian of the minor or of the property of
the minor, provided that the parent or adult person to whom any amount is to be
paid had advised the Company in writing that he or she will hold or use the
Amount for the benefit of the minor.
(iv) By payment of the Amount to a custodian selected by the Company
under the appropriate Uniform Transfers to Minors Act.
(d) If a beneficiary who is entitled to receive a payment from the Company
under this Agreement is physically or mentally incapable of personally receiving
and giving a valid receipt for any payment due, the payment may be made to the
beneficiary's legal representative, the person's spouse, son, daughter, parent,
brother, sister or other person deemed by the Company to have incurred expense
for the person otherwise entitled to payment.
(e) The selection of a method of distribution under this Section shall be
in the discretion of the Company, and the Company may not be compelled to select
any method it does not deem to be in the best interest of the distributee.
8. Policy loans.
------------
(a) The Company has the right to obtain loans secured by the Policy from
the Insurer or from others. The Company also has the right to assign the Policy
as security for the repayment of such loans. The amount of such loans together
with interest thereon shall at no time exceed the Company Cumulative Outlays.
All interest charges with respect to any loans shall be paid by the Company.
(b) If the Policy is assigned or encumbered in any way, other than a
<PAGE>
Policy Loan, on the date of the Executive's death, the Company shall secure a
release or discharge of the assignment or encumbrance to ensure the prompt
payment of death proceeds under the Policy to the Executive's beneficiary or
beneficiaries.
9. Timing of Roll-Out. Roll-out shall occur no later than the first policy
------------------
anniversary on which:
(1) the Company may retain a policy with cash surrender value equal to the
Company Cumulative Outlays and with death benefits at least equal to the
Recoverable Amount, and
(2) the Executive may receive a policy with death benefits at least equal
to the Amount of coverage specified by the Executive, with no outlays required
to sustain this Amount based on the Dividend schedule in effect on the Roll-out
date, and with no loans.
The Executives may elect an earlier Roll-out date provided that the Company
receives a policy with cash surrender value equal to Company Cumulative Outlays
and with death benefits at least equal to the Recoverable Amount.
10. Amendment and Termination of Agreement.
--------------------------------------
(a) This Agreement may not be amended, altered, or modified except in
writing and signed by the Company and the Executive.
(b) This Agreement shall terminate upon the earliest to occur of any of the
following events:
(i) Roll-out
(ii) termination of the Executive's employment other than by reason of
the death, retirement, or disability (unless the Company determines that
Executive shall be treated as an active employee after a termination of
employment);
(iii) cessation of the Company's business or the bankruptcy,
receivership or dissolution of the Company, unless the Company's business is
continued by a successor corporation or business entity;
(iv) termination of the Agreement by Executive upon written notice to
the Company; or
(v) termination of the Plan by the Company.
(c) If the Executive's termination of employment with the Company is by
reason of disability (as determined by the Company) or by reason of Retirement,
this Agreement shall remain in full force and effect.
11. Disposition of Policy on Termination of Agreement.
-------------------------------------------------
(a) As of the Executive's Roll-out date, the Company shall provide the
Policy into two policies, retaining one policy with a cash surrender value equal
to the Company Cumulative Outlays and a death benefit at least equal to the
Recoverable Amount. The Company shall transfer the remaining policy to the
Executive.
<PAGE>
(b) If this Agreement is terminated because of the Executive's termination
of employment for cause (as determined by the Company), the Executive shall have
no rights to the Policy and shall not be permitted to effectuate a Roll-out at
any time.
(c) If this Agreement is terminated because of the Executive's termination
of employment for a reason other than cause, retirement, or a disability, or
pursuant to Section 10 (b) (iii) or (v) of this Agreement, the Executive,
at any time within thirty (30) days after his termination of employment (or
longer period as allowed by the Company) shall have the absolute right to
purchase all of the Company's right, title and interest in the Policy free and
clear of all liens, claims or encumbrances (including any Policy loans) for
cash, by tendering to the Company an amount equal to the Company's Recoverable
Amount. The Executive may direct the Company to borrow against the cash value
of the Policy or surrender any paid-up additions to the Policy and purchase the
Policy, subject to any such Policy loan, for an amount equal to the Company's
Recoverable Amount less such borrowed or cashed-in values.
12. Miscellaneous.
-------------
(a) This Agreement shall not affect any rights the Executive may otherwise
have under any pension, profit sharing or other employee benefit plan
established by the Company.
(b) This Agreement shall be binding on the Company, its successors and
assigns, and it shall be interpreted in accordance with the laws of West
Virginia.
(c) Except as permitted by law or by the Company's written consent, any
benefits to which the Executive or his beneficiaries may become entitled under
this Agreement shall not be subject to anticipation, alienation, sale, transfer,
assignment, or pledge. The Company shall not be liable for, or subject to, the
debts, contracts, liabilities, or torts of any person entitled benefit under
this Agreement.
(d) This Agreement shall not confer upon the Executive any legal or
equitable right against the Company except as expressly provided in this
Agreement, the Plan and the Policy.
(e) Neither this Agreement, the Plan nor the Policy shall constitute an
inducement or consideration for the employment of the Executive and shall not
give the Executive any right to be retained in the employ of the Company, and
the Company hereby retains the right to discharge the Executive at any time,
with or without cause.
(f) The Executive's interest under this Agreement, the Plan and the Policy,
may be assigned by the Executive upon written notice to the Company.
(g) If a provision of this Agreement is not valid or enforceable, that fact
in no way affects the validity of enforceability of any other provision.
<PAGE>
In consideration of the foregoing, the Company and the Executive have
executed this Agreement in duplicate, all as of the day and year first written
above.
THE FIRST NATIONAL BANK OF BLUEFIELD
By:
------------------------------------------
<PAGE>
Exhibit 13
[FIRST CENTURY LOGO APPEARS HERE]
FIRST CENTURY BANKSHARES, INC.
------------------
1999 Annual Report
<PAGE>
Common Shares
Common shares are not traded on any stock exchange nor over-the-counter.
Stockholder Inquiries
Communications regarding transfer requirements and lost certificates should be
directed to the transfer agent.
Transfer Agent/Registrar
First Century Bank, N.A., Stock Transfer Department, Trust Division, P.O. Box
1559, Bluefield, WV 24701.
Form 10-K Information
Copies of the First Century Bankshares, Inc. Annual Report to the Securities and
Exchange Commission, Form 10-K, may be obtained by writing J. Ronald Hypes,
Treasurer, First Century Bankshares, Inc., P.O. Box 1559, Bluefield, WV 24701.
Annual Meeting
The annual meeting of the stockholders will be held at 11:00 AM, Tuesday,
April 18, 2000, at Fincastle Country Club, Bluefield, Virginia. All
stockholders are cordially invited to attend.
Table of Contents
Financial Highlights................................................... 1
Letter to the Stockholders............................................. 2
Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................. 3
Consolidated Statements of Financial Condition......................... 18
Consolidated Statements of Income and Comprehensive Income............. 19
Consolidated Statements of Cash Flows.................................. 20
Consolidated Statements of Changes in Stockholders' Equity............. 21
Notes to Consolidated Financial Statements............................. 22
Report of Independent Accountants...................................... 41
Boards of Directors.................................................... 42
Corporate and Bank Officers............................................ 44
First Century Bankshares, Inc. Subsidiary Locations.......Inside back cover
<PAGE>
Financial
Highlights
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
(Dollars in Thousands, Except Per Share Data)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $ 27,967 $ 25,239 $ 24,118
Total operating expense 22,713 20,223 19,461
Net income 3,416 3,201 3,002
Cash dividends declared 1,600 1,500 1,300
- ----------------------------------------------------------------------------------------------------------------------------
AT YEAR END
Assets $367,578 $294,579 $276,747
Deposits 319,895 251,728 232,337
Loans 243,977 202,214 197,094
Securities 85,131 60,936 53,511
Stockholders' equity 28,874 28,503 26,589
- ----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Net income, basic and diluted $ 1.71 $ 1.60 $ 1.50
Cash dividends declared 0.80 0.75 0.65
Book value 14.44 14.25 13.29
</TABLE>
LOANS ASSETS
($ in millions) ($ in millions)
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
DEPOSITS BOOK VALUE PER SHARE
($ in millions) ($ per common share)
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
First Century Bankshares, Inc. Page 1
<PAGE>
Letter to the
Stockholders
To Our Stockholders, Customers, and Friends:
The directors, officers, and employees of First Century Bankshares, Inc. and
its wholly owned subsidiary, First Century Bank, N.A., are pleased to present
this Annual Report to our shareholders for 1999.
First Century Bankshares, Inc. had the most profitable year in its history
with net income of $3,416,000. This represents an increase for 1999 of 6.7% over
the previous year. On a per share basis, net income rose to $1.71 compared to
$1.60 the previous year. Total assets were $367,578,000, up from $294,579,000 a
year ago. This represents an increase of 24.8% in total assets. The return on
average assets for 1999 was 1.00%, and the return on average equity was 11.74%.
Although slightly below our peers, these ratios continue to improve through our
efforts to expand our customer base and maintain high asset quality standards.
During 1999, First Century Bankshares consolidated its Virginia subsidiary,
First Century Bank, into First Century Bank, N.A. This transaction follows with
our strategic plan to consolidate all areas of our operation to streamline
expenses throughout the bank. We also completed the merger of the Hinton Office
of City National Bank of West Virginia into First Century Bank, N.A. This
acquisition increased our total assets by approximately $60,000,000. The office
in Hinton was originally The First National Bank of Hinton, which has been
serving Summers County and the surrounding area for over 100 years. We have a
wonderful, well-trained staff at our newest location. If you are in the area,
please stop by and say "hello"!
These two transactions will enable our bank to enhance services to our present
customer base, while at the same time, the consolidation efforts will help us
continue to enhance efficiency. We now have offices in Bluefield (3), Hinton,
Oceana, Pineville and Princeton West Virginia, and Bluefield, Wytheville, and
Max Meadows, Virginia. We believe that we are strategically positioned to
compete with other financial service providers in our immediate market areas,
and that with the new Financial Modernization Act, we have the branch
distribution system in place to deliver these new products and services.
First Century Bankshares, Inc. is continuing to look for expansion
opportunities in both West Virginia and Virginia. We will consider possible
associations with other financial institutions; and, as we have done in the
past, will open new offices in locations where we feel we can give quality
service to our present and future customers.
During 1999, your Corporation continued its readiness for the year 2000,and as
the date change occurred, we smoothly transitioned into the new century. All of
our systems responded to the date change, and management took all the necessary
steps to ensure that our systems could recognize "00" as the year 2000. We
believe that the capital expenditures for Year 2000 compliance will serve us
well as we head into the future.
We believe that we are well positioned for the future to continue to provide
quality financial services to the customers of our region. If you feel we could
better serve you please let us know. We ask for your continued support of First
Century Bankshares, Inc. and its wholly owned subsidiary, First Century Bank,
N.A., as we continue to deliver "The experience you expect, the service you
deserve." Your confidence and continued support are greatly appreciated.
Sincerely,
/s/ R. W. "Buz" Wilkinson
R. W. "Buz" Wilkinson
Page 2 First Century Bankshares, Inc.
<PAGE>
Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations
AVERAGE STATEMENTS OF FINANCIAL CONDITION AND NET INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------
(Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-bearing deposits with banks $ 5,083 $ 251 4.94% $ 3,750 $ 196 5.23% $ 1,563 $ 86 5.50%
Securities available for sale
and other equity securities:
U. S. Government securities 21,427 1,234 5.76% 18,439 1,116 6.05% 18,326 1,109 6.05%
U. S. Government agency securities 42,024 2,570 6.12% 20,306 1,296 6.38% 11,587 766 6.61%
Other securities 1,920 122 6.35% 2,572 169 6.57% 4,506 302 6.70%
-----------------------------------------------------------------------------------
Total securities available for sale 65,371 3,926 6.01% 41,317 2,581 6.25% 34,419 2,177 6.32%
-----------------------------------------------------------------------------------
Securities held to maturity:
U. S. Government securities 500 27 5.40% 2,307 122 5.29% 7,796 428 5.49%
U. S. Government agency securities 1,309 72 5.50% 4,662 273 5.86% 13,369 875 6.54%
State and Municipal securities 8,874 448 5.05% 6,752 354 5.24% 6,375 403 6.32%
Other securities 150 10 6.67% 129 9 6.98% 501 31 6.19%
-----------------------------------------------------------------------------------
Total securities held to maturity 10,833 557 5.14% 13,850 758 5.47% 28,041 1,737 6.19%
-----------------------------------------------------------------------------------
Federal funds sold 7,048 341 4.84% 7,158 384 5.36% 3,769 207 5.49%
Loans 222,837 19,700 8.84% 201,059 18,616 9.26% 185,986 17,504 9.41%
-----------------------------------------------------------------------------------
Total interest-earning assets 311,172 24,775 7.96% 267,134 22,535 8.44% 253,778 21,711 8.56%
-----------------------------------------------------------------------------------
Allowance for loan losses (2,788) (2,472) (2,273)
Cash and due from banks--demand 12,824 10,047 9,650
Premises and equipment--net 10,028 9,147 8,562
Other assets 10,150 6,765 6,454
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $341,386 $290,621 $276,171
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits $ 67,395 1,917 2.84% $ 57,317 1,838 3.21% $ 52,849 1,751 3.31%
Savings deposits 75,263 2,549 3.39% 63,687 2,305 3.62% 63,591 2,308 3.63%
Time deposits 119,743 5,990 5.00% 96,118 5,059 5.26% 89,837 4,700 5.23%
-----------------------------------------------------------------------------------
Total interest-bearing deposits 262,401 10,456 3.98% 217,122 9,202 4.24% 206,277 8,759 4.25%
-----------------------------------------------------------------------------------
Short-term debt 15,803 598 3.78% 16,300 661 4.06% 15,139 620 4.10%
-----------------------------------------------------------------------------------
Total interest-bearing liabilities 278,204 11,054 3.97% 233,422 9,863 4.23% 221,416 9,379 4.24%
-----------------------------------------------------------------------------------
Demand deposits 31,813 27,618 27,342
Other liabilities 2,270 2,018 1,669
-----------------------------------------------------------------------------------
TOTAL LIABILITIES 312,287 263,058 250,427
-----------------------------------------------------------------------------------
Stockholders' equity 29,099 27,563 25,744
-----------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $341,386 $290,621 $276,171
- -------------------------------------------------------------------------------------------------------------------------------
Average rate paid to fund earning assets 3.55% 3.69% 3.70%
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST DIFFERENTIAL $13,721 4.41% $12,672 4.74% $12,332 4.86%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of this schedule, interest on nonaccrual loans have been included
only to the extent reflected in the income statement. However, the nonaccrual
loan balance is included in the average amount outstanding. Income on loans
includes loan fees of $228,000 in 1999, $216,000 in 1998, and $266,000 in
1997. Average balances of securities available for sale are reported at
amortized cost; excludes pretax unrealized losses of $442,000 in 1999,
unrealized gains of $298,000 in 1998, and unrealized losses of $156,000 in
1997. Interest income on tax exempt securities is shown based on the actual
yield.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
Increase (Decrease) in Interest
-------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
-------------------------------------------------------------------------------
(Dollars in Thousands)
Due to Change in (1) Due to Change in (1) Due to Change in (1)
-------------------------------------------------------------------------------
Interest income on: Volume Rate Total Volume Rate Total Volume Rate Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $1,971 $ (887) $1,084 $1,407 $ (295) $1,112 $ 528 $ 224 $ 752
Securities available for sale
and other equity securities 1,474 (129) 1,345 434 (30) 404 1,303 (30) 1,273
Securities held to maturity (160) (41) (201) (828) (151) (979) (1,303) 130 (1,173)
Federal funds sold (6) (37) (43) 184 (7) 177 (116) 11 (105)
Interest-bearing deposits with banks 68 (13) 55 117 (7) 110 (24) 4 (20)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 3,347 (1,107) 2,240 1,314 (490) 824 388 339 727
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 305 (226) 79 146 (59) 87 99 (18) 81
Savings deposits 406 (162) 244 3 (6) (3) (40) (12) (52)
Time deposits 1,213 (282) 931 330 29 359 (200) (123) 323
Short-term borrowings (19) (44) (63) 47 (6) 41 153 39 192
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 1,905 (714) 1,191 526 (42) 484 12 (114) (102)
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $1,442 $ (393) $1,049 $ 788 $ (448) $ 340 $ 376 $ 453 $ 829
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Changes due to a combination of volume and rate have been allocated equally
to volume and rate.
First Century Bankshares, Inc. Page 3
<PAGE>
Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations
The purpose of this discussion is to focus and expand on certain information
about the Corporation's financial condition and results of operations which is
not otherwise apparent from the audited consolidated financial statements
included in this Annual Report. Reference should be made to those statements and
the selected financial data presented elsewhere in this report for a thorough
understanding of the following discussion and analysis. Management is not aware
of any market or institutional trends, events or uncertainties that will have or
are reasonably likely to have a material effect on the liquidity, capital
resources or operations of the Corporation, except as discussed herein.
Management is also not aware of any current recommendations by any regulatory
authorities, which would have such a material effect if implemented.
Corporate Structure and Acquisitions
First Century Bankshares, Inc.("Corporation") (formerly Pocahontas Bankshares
Corporation) is chartered under the laws of West Virginia and operates as an
interstate bank holding company, headquartered in Bluefield, WV. The Corporation
began active operations in March 1984, in a business combination with its then
sole subsidiary, The First National Bank of Bluefield. Through a series of
acquisitions and consolidations, the Corporation now operates one subsidiary
bank, First Century Bank, N.A., Bluefield, WV ("FCBNA"). FCBNA is engaged in
commercial banking activities that provide financial services to individuals and
businesses. FCBNA operates 10 branch offices and 14 ATM locations throughout
southern West Virginia and southwestern Virginia.
During the second quarter of 1999, FCBNA completed the acquisition of the
Hinton, West Virginia branch of City National Bank of West Virginia, Charleston,
West Virginia. This banking office added approximately $60 million in deposits
and $40 million in loans, and was a natural extension of FCBNA's primary market
area.
Management continues to seek and evaluate opportunities to increase its market
share throughout the region. The smaller rural communities in the Corporation's
primary market afford the opportunity to provide traditional community banking
services where larger banks have not had a major presence. The passage of the
Graham-Leach-Bliley Financial Modernization Act in late 1999 will now allow the
Corporation to expand its product and service mix into non-traditional areas
such as insurance and brokerage services. Management is evaluating this new
opportunity in order to enhance the Corporation's performance, and ultimately,
shareholder value.
Balance Sheet Analysis
Loans
The Corporation's primary use of funds is loan demand, its most profitable
deployment of funds. Total loans increased $41.8 million or 20.7% in 1999
following a $5.1 million or 2.6% increase in 1998. Approximately $40 million of
this growth occurred during the second quarter with the acquisition of the
Hinton, West Virginia office. Competition in the Corporation's market is very
aggressive for the acquisition of new loans, and with the rising interest rate
environment experienced at the end of 1999, it is an increasing challenge to
maintain loans. At December 31, 1999, the loan portfolio comprised 73.4% of
total interest-earning assets as compared to 74.8% of total interest-earning
assets at December 31, 1998, and contributed 79.5% of total interest income in
1999, compared to 82.6% of total interest income in 1998. Loan demand was
relatively flat through most of 1999, however, management enhanced its position
in the consumer installment and the residential and commercial mortgage
categories of the loan portfolio through the Hinton acquisition.
Page 4 First Century Bankshares, Inc.
<PAGE>
AMOUNTS OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 52,872 $ 42,584 $ 46,012 $ 44,209 $ 45,592
Real estate-construction 5,353 10,369 8,068 5,603 3,541
Real estate-mortgage 149,121 119,076 116,728 105,564 102,178
Installment loans to individuals 36,631 30,185 26,286 24,580 26,483
- -----------------------------------------------------------------------------------------------------
TOTAL LOANS OUTSTANDING $ 243,977 $202,214 $197,094 $179,956 $177,794
- -----------------------------------------------------------------------------------------------------
</TABLE>
MATURITY SCHEDULE OF LOANS
<TABLE>
<CAPTION>
Remaining maturity at December 31, 1999
---------------------------------------
(Dollars in Thousands)
1 Year 1 to 5 After 5
or Less Years Years Total
---------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $26,437 $ 15,042 $11,393 $ 52,872
Real estate-construction 5,117 37 199 5,353
Real estate-mortgage 28,687 61,768 58,666 149,121
Installment loans to individuals 7,762 25,809 3,060 36,631
- -------------------------------------------------------------------------------------------------------------
TOTAL $68,003 $102,656 $73,318 $243,977
- -------------------------------------------------------------------------------------------------------------
Loans with fixed interest rates $49,311 $ 65,932 $24,389 $139,632
Loans with floating interest rates 18,692 36,724 48,929 104,345
- -------------------------------------------------------------------------------------------------------------
TOTAL $68,003 $102,656 $73,318 $243,977
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
(Dollars in Thousands)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $222,837 $201,059 $185,986 $180,341 $175,280
Allowance for loan losses:
Balance at beginning of the year $ 2,533 $ 2,370 $ 2,240 $ 2,145 $ 1,985
Additions from acquisitions 497 -- -- -- --
Loans charged off
Commercial, financial and agricultural 84 66 337 135 225
Real estate-construction -- -- -- -- --
Real estate-mortgage 150 58 9 140 235
Installment loans to individuals 480 316 266 297 254
--------------------------------------------------------------
TOTAL LOANS CHARGED OFF 714 440 612 572 714
--------------------------------------------------------------
Loan recoveries
Commercial, financial and agricultural 7 26 3 3 8
Real estate-construction -- -- -- -- --
Real estate-mortgage 116 -- 31 -- --
Installment loans to individuals 56 33 17 20 27
--------------------------------------------------------------
TOTAL LOAN RECOVERIES 179 59 51 23 35
--------------------------------------------------------------
Net loans charged off (535) (381) (561) (549) (679)
Provision for loan losses 555 544 691 644 839
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT END OF THE YEAR $ 3,050 $ 2,533 $ 2,370 $ 2,240 $ 2,145
- ----------------------------------------------------------------------------------------------------------------
Ratio of net loans charged off to average
loans outstanding 0.24% 0.19% 0.30% 0.30% 0.39%
Allowance at year end as a percent of loans 1.25% 1.25% 1.20% 1.24% 1.21%
Provision for loan losses as a percent of loans 0.23% 0.27% 0.35% 0.36% 0.47%
--------------------------------------------------------------
Nonperforming assets (at year end)
Nonaccrual $ 2,390 $ 1,728 $ 828 $ 1,398 $ 3,194
Past--due ninety days or more and still accruing 2,818 273 165 1,427 781
Restructured loans -- 637 645 -- --
Other real estate owned 104 678 993 1,976 1,206
--------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $ 5,312 $ 3,316 $ 2,631 $ 4,801 $ 5,181
--------------------------------------------------------------
Nonperforming assets/total loans 2.2% 1.6% 1.3% 2.7% 2.9%
Nonperforming assets/total assets 1.4% 1.1% 1.0% 1.7% 1.9%
--------------------------------------------------------------
</TABLE>
First Century Bankshares, Inc. Page 5
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 568 21.67% $ 621 21.06% $ 392 23.35% $ 481 24.57% $ 443 25.64%
Real estate-construction -- 2.19% -- 5.13% -- 4.09% -- 3.11% 20 1.99%
Real estate-mortgage 834 61.13% 332 58.88% 456 59.22% 239 58.66% 502 57.47%
Installment loans to
individuals 698 15.01% 274 14.93% 250 13.34% 191 13.66% 290 14.90%
Unallocated 950 N/A 1,306 N/A 1,272 N/A 1,329 N/A 890 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $3,050 100.00% $ 2,533 100.00% $ 2,370 100.00% $ 2,240 100.00% $ 2,145 100.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1999, solicitation of small and middle-market companies within the
Corporation's primary trade areas primarily accomplished the growth in the
commercial loan portfolio. Emphasis continued to be on strong local companies
with known local management and excellent financial stability. Most of the
commercial loans in the portfolio were made at variable rates of interest.
Additionally, the Corporation continued to make loans available in an expanding
retail marketplace. Consistent with management's philosophy on relationship
banking, most borrowers are also depositors and utilize other banking services.
The average yield of the loan portfolio decreased to an average rate of 8.84% in
1999 compared to 9.26% in 1998. This reflected the falling interest rate
environment during the last half of 1998 and the first half of 1999.
The commercial loan portfolio is generally diversified and geographically
dispersed within the region. There are no concentrations of lines of business or
industry that represent greater than 20% of the Corporation's equity. Within
each specific industry, borrowers are diversified as to specialty, service or
other unique feature of the overall industry. A substantial portion of the
customers' ability to honor their contractual commitment is largely dependent
upon the economic conditions of the respective industry and overall economic
conditions of southern West Virginia and southwestern Virginia.
The consumer portion of the loan portfolio, which increased approximately 21.4%
in 1999, consisted of both secured and unsecured loans made to individuals and
families for various reasons including the purchase of automobiles, home
improvements, educational expenses and other worthwhile purposes. The
Corporation continues to carefully monitor the consumer sector as consumer
bankruptcies continue to increase. If any major weakening in the economy occurs,
the likelihood for increased volatility arises as consumers are servicing higher
credit card and other installment borrowings.
Commitments to extend credit are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total amount of commitments does not
necessarily represent future cash requirements. The subsidiary banks had
outstanding commitments to extend credit of approximately $32,802,000 at
December 31, 1999, and $29,497,000 at December 31, 1998.
Nonperforming assets, including nonaccrual loans, loans past-due 90 days or
more, restructured loans and other real estate owned, increased $1,996,000, or
approximately 60%, from December 31, 1998 to December 31, 1999. This increase
occurred primarily as a result of the deterioration of two significant
commercial loans. The Corporation's policy is to discontinue the accrual of
interest on loans that are past due more than 90 days, unless
Page 6 First Century Bankshares, Inc.
<PAGE>
such loans are well collateralized and in process of collection. Loans that are
on a current payment status or past due less than 90 days may also be classified
as nonaccrual if repayment of principal or interest is in doubt. The
Corporation's holdings of other real estate owned continued to decline in 1999.
Other real estate decreased $574,000, or approximately 84.6% in 1999.
Management continues to enhance the methodology and procedures for determining
the adequacy of the allowance for loan losses. The procedures that are utilized
entail analyzing a loan "watch" list and assigning classifications to each loan,
as set forth by the appropriate regulatory agency. Other real estate owned is
also analyzed and assigned a classification. Subsequently, classified loans are
categorized and allocated appropriate reserves. Other loans, more than 90 days
past due and restructured loans, that have not been considered in the
aforementioned procedures are assigned a classification of Substandard and are
reserved for accordingly. The remaining portfolio is segregated into consumer,
commercial, and residential real estate loans, and the historical net charge off
percentage of each category is applied to the current amount outstanding in that
category. Also, a review of concentrations of credit, classes of loans and
pledged collateral is performed to determine the existence of any deterioration.
In addition, volume and trends in delinquencies and nonaccruals, off-balance
sheet credit risks, the loan portfolio composition, loan volume and maturity of
the portfolio, national and local economic conditions and the experience,
ability and depth of lending management and staff are given consideration.
The Corporation maintains, through its provision, an allowance for loan losses
believed by management to be adequate to absorb probable credit losses inherent
in the portfolio. In 1999, approximately $517,000 was added to the allowance for
loan losses. The addition to the allowance for loan losses was primarily due to
the growth in the loan portfolio from the Hinton acquisition. The allowance for
loan losses was 1.25% of year-end loans at December 31, 1999 and 1998.
During 1999, the Corporation established an outsourcing arrangement for its loan
review function with an independent third-party firm. This process includes a
thorough evaluation of the credit administration systems and personnel. The
objective is to design and implement an effective loan review system to provide
management with information that will produce a more focused and effective
approach in managing credit risk inherent in the loan portfolio. As a result, a
system of loan grades will be developed to further quantify the adequacy of the
loan loss allowance.
Securities
Securities, the second largest asset of the Corporation, increased by $24.2
million or 39.7% during 1999. At December 31, 1999, securities comprised 25.6%
of total interest-earning assets compared to 22.5% of total interest-earning
assets at December 31, 1998. The composition of the Corporation's securities
portfolio reflects management's investment strategy of maximizing portfolio
yields subject to risk and liquidity considerations. The primary objective of
the Corporation's investment strategy is to maintain an appropriate level of
asset liquidity and provide management a tool to assist in controlling and
managing the Corporation's interest rate position while at the same time
producing adequate levels of interest income. Management of the maturity of the
portfolio is necessary to ensure adequate liquidity and manage interest rate
risk. During 1999, in order to enhance liquidity, management continued its
strategy of increasing the available for sale portfolio, as securities matured
in the held to maturity portfolio. Management believes that the potential for
First Century Bankshares, Inc. Page 7
<PAGE>
increased loan demand requires maintaining the liquidity of the securities
portfolio. Net unrealized losses in the held to maturity portfolio amounted to
approximately $213,000 at December 31, 1999,compared to $129,000 in net
unrealized gains at December 31, 1998. This indicates the effects of the rising
interest rate environment during the last quarter of 1999 which were offset by
the reduction in the held to maturity portfolio from $13,957,000 at December
31, 1998, to $9,455,000 at December 31, 1999.
SECURITIES
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998 1997
------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities available for sale:
U. S. Government securities $ 15,995 $ 17,363 $ 19,287
U. S. Government agency securities 57,782 27,793 13,304
Other securities 744 795 2,558
- --------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $ 74,521 $ 45,951 $ 35,149
============================================================================================
Securities held to maturity:
U. S. Government securities $ -- $ 2,005 $ 3,517
U. S. Government agency securities 219 3,407 7,659
State, county and municipal securities 9,086 8,395 6,058
Other securities 150 150 100
- --------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $ 9,455 $ 13,957 $ 17,334
============================================================================================
</TABLE>
State, county and municipal securities contained no individual issues in excess
of 10% of stockholders' equity.
MATURITIES OF SECURITIES
The following table shows the contractual maturities of debt securities at
December 31, 1999 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
---------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U. S. Treasury Securities $12,003 5.68% $ 4,000 6.17% $ -- -- $ -- -- $ 16,003 5.80%
U. S. Government
Agency Securities 998 6.80% 39,088 5.93% 19,313 6.54% -- -- 59,399 6.14%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES
AVAILABLE FOR SALE $13,001 5.77% $43,088 5.95% $19,313 6.54% $ -- -- $ 75,402 6.07%
=============================================================================================================================
Securities held to maturity:
U. S. Government
agency securities $ -- -- $ 219 6.00% $ -- -- $ -- -- $ 219 6.00%
State, county and
municipal securities 690 5.22% 4,801 4.91% 3,060 5.32% 535 5.42% 9,086 5.10%
Other securities -- -- 75 6.73% 75 7.20% -- -- 150 6.97%
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES
HELD TO MATURITY $ 690 5.22% $ 5,095 4.98% $ 3,135 5.36% $ 535 5.42% $ 9,455 5.15%
=============================================================================================================================
</TABLE>
Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
As of December 31, 1999, the Corporation had an investment in a mutual fund
comprised primarily of U.S. agency mortgage-backed securities. The investment is
classified as available for sale. The aggregate book and market value of this
investment was $744,000 at December 31, 1999 and $795,000 at December 31, 1998.
The mutual fund is composed primarily of GNMA and FNMA pools of mortgages that
have weighted average maturities of approximately seven years. Management is not
aware of any adverse information regarding this issue with regard to regulatory
action, downgrading of debt ratings or cessation of dividends. During 1997,
management began a strategy to reduce its position in this mutual fund. As a
result,
Page 8 First Century Bankshares, Inc.
<PAGE>
approximately $34,000 in losses were recognized from the partial sale of the
fund for the year ended December 31, 1998, and approximately $59,000 in losses
were recognized for the year ended December 31, 1997. No losses were recognized
from this investment in 1999.
Deposits
Deposits, the major source of funds, increased approximately $68.2 million or
27.1% in 1999, following an increase of $19.4 million or 8.3% in 1998.
Approximately $60 million of the 1999 increase was attributable to the
acquisition of the Hinton, West Virginia Branch during the second quarter of
1999. The average rate paid on interest-bearing deposits in 1999 was 3.98% and
4.24% in 1998, again as a result of falling interest rates during the last half
of 1998 and early 1999. Fierce competition for deposits continues among
commercial banks, savings banks, thrift institutions, credit unions, mutual
funds, brokerage houses, insurance companies, and certain national retailers.
Despite this intense competition, management continues to evaluate pricing
strategies that will insure the Corporation's long-term benefit of maintaining
market share without sacrificing the Corporation's profitability.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1999 1998 1997
Average Average Average
------------------------------------------------
Amount Rate Amount Rate Amount Rate
------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 31,813 N/A $ 27,618 N/A $ 27,342 N/A
Interest-bearing demand deposits 67,395 2.84% 57,317 3.21% 52,849 3.31%
Savings deposits 75,263 3.39% 63,687 3.62% 63,591 3.63%
Time deposits 119,743 5.00% 96,118 5.26% 89,837 5.23%
- -------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE DEPOSITS $294,214 3.55% $244,740 3.76% $233,619 3.75%
=============================================================================================================
</TABLE>
There are no foreign offices. Average balances are computed on daily balances.
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1999
---------------------
(Dollars in Thousands)
<S> <C>
Under 3 months $ 8,458
3 to 6 months 11,390
6 to 12 months 6,301
Over 12 months 8,094
- ---------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT OF $100,000 OR MORE $34,243
=========================================================================================================
</TABLE>
SHORT-TERM BORROWED FUNDS
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998 1997
-------------------------
<S> <C> <C> <C>
(Dollars in Thousands)
Securities sold under agreements to repurchase $13,918 $12,612 $12,838
U. S. Treasury demand notes and others 3,040 434 4,200
- --------------------------------------------------------------------------------------------------------------------------
TOTAL BORROWED FUNDS $16,958 $13,046 $17,038
==========================================================================================================================
</TABLE>
The approximate average interest rates, average amounts outstanding, and maximum
amounts outstanding at any month-end for securities sold under agreements to
repurchase are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Average interest rates at December 31 3.46% 3.21% 4.16%
Maximum amounts outstanding at any month-end $18,500 $18,148 $18,783
Average daily amount outstanding $14,499 $15,050 $13,589
Weighted average interest rates 3.63% 3.87% 3.93%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rates are calculated by dividing the annual
interest expense by the related average daily amounts outstanding.
First Century Bankshares, Inc. Page 9
<PAGE>
Capital Resources
Cash dividends paid to stockholders during 1999 amounted to $1,600,000 compared
to $1,500,000 paid to stockholders in 1998 and $1,300,000 in 1997. This
represents a dividend pay out ratio (dividends divided by net income) of 47% in
1999 and 1998, and 43% in 1997. Cash dividends per share equaled $0.80 per share
in 1999, $0.75 per share in 1998 and $0.65 per share in 1997. The Corporation is
dependent upon dividends paid by the subsidiary banks to fund dividends to the
stockholders and to cover other operating costs. The Corporation's Board of
Directors considers historical financial performance, future prospects, and
anticipated needs for capital in formulating the dividend payment policy. Future
dividends are dependent upon the Corporation's financial results, capital
requirements and general economic conditions.
One of management's primary objectives is to maintain a strong capital position.
Stockholders' equity, net of unrealized gains (losses) on securities, increased
$371,000 or 1.3% in 1999. This small increase was most affected by a reduction
in accumulated other comprehensive income of $1,445,000, attributable to
unrealized losses in available-for-sale securities. The percentage of earnings
reinvested in the Corporation (net income less dividends as a percentage of net
income) for the years 1999, 1998 and 1997 was 53.6%, 53.1% and 56.7%,
respectively. The internal capital formation rate (net income less dividends as
a percentage of average stockholders' equity) indicates the rate at which assets
can grow while maintaining the current ratio of stockholders' equity to assets.
The internal capital formation rate was 6.2% in 1999 and 1998, and 6.6% in 1997.
REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
Combined Capital
Entity Tier 1 (Tier 1 and Tier 2) Leverage
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated 9.63% 10.86% 6.55%
First Century Bank, N.A. 9.50% 10.73% 6.44%
</TABLE>
Risk-based capital regulations require all banks and bank holding companies to
have a minimum total risk-based capital ratio of 8% with half of the capital
composed of core capital. Conceptually, risk-based capital requirements assess
the risk of a financial institution's balance sheet and off-balance sheet
commitments in relation to its capital. Under the guidelines, capital strength
is measured in two tiers which are used in conjunction with risk adjusted assets
in determining the risk-based capital ratios. The Corporation's Tier I capital,
which consists of stockholders' equity, adjusted for certain intangible assets,
amounted to $23,871,000 at December 31, 1999, or 9.63% of total risk-weighted
assets, compared to $26,495,000 at December 31, 1998, or 12.79% of total risk-
weighted assets. This decline was primarily attributable to additional
intangible assets as a result of the Hinton acquisition. Tier II capital, or
supplementary capital, includes capital components such as qualifying allowance
for loan losses, and can equal up to 100% of an institution's Tier I capital
with certain limitations. The Corporation's Tier II capital amounted to
$3,050,000 at December 31, 1999, or 1.23% of total risk-weighted assets,
compared to $2,533,000 at December 31, 1998, also 1.23% of total risk-weighted
assets. The Corporation's total consolidated risk-based capital was $26,921,000
at December 31, 1999, or 10.86% of total risk-weighted assets, compared to
$29,027,000, or 14.02% of total risk-weighted assets as of December 31, 1998.
Additionally, risk-based capital guidelines require a minimum leverage ratio
(Tier I capital divided by average adjusted total consolidated assets) of 4%,
which may
Page 10 First Century Bankshares, Inc.
<PAGE>
be increased for institutions with higher levels of risk or that are
experiencing or anticipating significant growth. The Corporation has not been
advised by any regulatory agency of any specific minimum leverage ratio
applicable to it. As of December 31, 1999 and 1998, the Corporation's leverage
ratio was 6.55% and 9.08% respectively; therefore, the Corporation exceeded all
current minimum capital requirements.
Asset and Liability Management and Interest Rate Sensitivity
The income stream of the Corporation is subject to risk resulting from interest
rate fluctuations to the extent there is a difference between the amount of the
Corporation's interest-earning assets and the amount of interest-bearing
liabilities that are prepaid, withdrawn, mature or reprice in specified periods.
The goal of asset and liability management is to maintain high quality and
consistent growth of net interest income with acceptable levels of risk to
changes in interest rates.
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds, on which rates change
daily, and loans that are tied to the prime rate differ considerably from long-
term securities and fixed rate loans. Similarly, time deposits of $100,000 and
over, now accounts and money market deposit accounts are much more interest
sensitive than passbook savings accounts and other interest-bearing liabilities.
The Corporation uses a number of tools to measure interest rate risk, including
simulating net interest income under various rate scenarios, monitoring the
change in present value of the asset and liability portfolios under the same
rate scenarios and monitoring the difference or gap between rate sensitive
assets and liabilities over various time periods.
Management continues its efforts to generate variable rate loans. However, with
the lower interest rate environment during the latter part of 1998 and early
1999, customers were requiring more fixed rate commitments. The results of
management's efforts to balance interest-earning assets against interest-bearing
liabilities can be seen in the Analysis of Interest Rate Sensitivity table. The
Corporation had a positive cumulative gap of 6.49% at three months and negative
cumulative gaps of 2.22% at six months and 6.00% at one year. Management
continues to monitor the Corporation's asset/liability gap positions, and thus
has produced interest sensitivity ratios that are within targeted levels
established in the Corporation's asset/liability management guidelines.
Management incorporates more sophisticated risk measurement tools, including
simulation modeling which calculates expected net interest income based on
projected interest-earning assets, interest-bearing liabilities and interest
rates. Utilizing simulation modeling allows the Corporation to evaluate earnings
and capital at risk due to significant changes in interest rates. The
Corporation monitors exposure to the effect of an instantaneous change in rates
of 200 basis points up or down over the same period. As of December 31,
1999, simulation indicated the impact of a 200 basis point increase in rates
would approximate a 8.07% increase in net interest income, while a 200 basis
point decline in rates would approximate a 8.67% decrease from an unchanged rate
environment. These changes are within the Corporation's policy limits for the
maximum negative impact on net interest income from a change in interest rates.
First Century Bankshares, Inc. Page 11
<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Months Years
---------------------------------------------------------------------
Less Than 3 3 - 6 6 - 12 1 - 5 Over 5 Totals
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities $ 4,747 $ 3,227 $ 6,455 $ 47,060 $ 23,642 $ 85,131
Federal funds sold and interest-bearing
balances with banks 3,239 -- -- -- -- 3,239
Loans 136,120 4,846 9,692 68,946 24,373 243,977
---------------------------------------------------------------------------------
Interest-earning assets $ 144,106 $ 8,073 $ 16,147 $ 116,006 $ 48,015 $332,347
---------------------------------------------------------------------------------
Time deposits $ 37,513 $ 37,029 $ 27,771 $ 33,676 $ 75 $136,064
Other interest-bearing deposits 69,621 -- -- 82,467 -- 152,088
Other interest-bearing liabilities 15,398 -- 944 590 26 16,958
---------------------------------------------------------------------------------
Interest-bearing liabilities $ 122,532 $ 37,029 $ 28,715 $ 116,733 $ 101 $305,110
---------------------------------------------------------------------------------
Interest sensitivity gap $ 21,574 $ (28,955) $ (12,569) $ (727) $ 47,914 $ 27,237
Cumulative interest sensitivity gap $ 21,574 $ (7,381) $ (19,950) $ (20,677) $ 27,237
Ratio of interest-earning assets to
interest-bearing liabilities 1.18x 0.22x 0.56x 0.99x 475.40x
---------------------------------------------------------------------
Ratio of cumulative interest sensitivity
gap to total earning assets 6.49% (2.22)% (6.00)% (6.22)% 8.20%
---------------------------------------------------------------------
</TABLE>
Liquidity Management
Liquidity management involves the ability to meet the cash flow requirements of
customers who may be depositors wanting to withdraw funds or borrowers needing
assurance that sufficient funds will be available to meet their credit needs. To
ensure the Corporation is positioned to meet immediate and future cash demands,
management relies on liquidity analysis, knowledge of business trends over past
economic cycles and forecasts of future conditions. Liquidity can best be
demonstrated by an analysis of the Corporation's cash flows. The primary source
of cash flows for the Corporation is from operating activities. A secondary
source of liquidity for the Corporation comes from investing activities in the
maturities of investment securities. This demonstrates management's strategy to
maintain the investment portfolio with short-term, high quality investments. The
Corporation's primary use of cash was from investing activities, primarily
increases in earning assets deployed in investments and loans. This also
demonstrated the Corporation's ability to accommodate loan demand within its
service areas. At December 31, 1999, the Corporation maintained additional
liquidity in the form of currency as a result of the uncertainty surrounding the
Year 2000 problem.
Income Statement Analysis
Earnings Overview
Net income for 1999 was $3,416,000 or $1.71 per share, an increase of $215,000
or 6.7% from the $3,201,000 or $1.60 per share earned in 1998, and $414,000 more
than the $3,002,000 or $1.50 per share earned in 1997. This increase occurred
primarily as a result of an increased net interest margin due to the deployment
of additional assets from the Hinton acquisition.
Page 12 First Century Bankshares, Inc.
<PAGE>
Earnings Per Share
The Earnings Per Share Table summarizes the principal sources of changes in
earnings per share for 1999. For further details on the computation of earnings
per share, refer to Note 9 of the Notes to Consolidated Financial Statements,
presented elsewhere in this report.
EARNINGS PER SHARE
<TABLE>
<S> <C>
Net income per share -- 1998 $ 1.60
- -------------------------------------------------------------
Increase (decrease) due to change in:
Net interest income 0.52
Provision for loan losses 0.01
Other operating income 0.24
Personnel expense (0.36)
Other expense (0.30)
- -------------------------------------------------------------
Net income per share -- 1999 $ 1.71
=============================================================
</TABLE>
Net Interest Income
The major portion of the Corporation's earnings are derived from the net
interest margin, which is the interest income on interest-earning assets less
the interest expense on interest-bearing liabilities. During 1999 the net
interest margin increased $1,049,000 or 8.3%. This followed a 2.8% increase in
1998, and a 7.3% increase in 1997. For the year ended December 31, 1999,
interest income increased $2,240,000, or approximately 9.9%, compared to
increases of $824,000, or 3.8% for 1998, and $727,000, or 3.5% for 1997.
Interest on loans, which increased $1,084,000 or 5.8%, contributed to the
increase for 1999, along with interest on securities, which increased
$1,144,000, or 34.3%. The increase in interest income was offset by an increase
in interest expense of $1,191,000 or 12.1% for 1999. This followed an increase
in interest expense of $484,000, or 5.2% for 1998, and a decrease of $102,000,
or 1.1% for 1997. For 1999, the increased interest expense on time deposits due
to the Hinton branch acquisition was the primary contributor to the increase in
total interest expense.
The net interest margin is affected by many factors, but most significantly by
the prevailing interest rates during the period, the spread between the various
sources and uses of funds, and by changes in the volume of various assets and
liabilities. The performance for 1999 is indicative of the relatively stable
rate environment prevailing through most of 1999 and 1998 as most changes in the
net interest margin were due to changes in the mix of loans and investments.
Noninterest Income and Expense
Noninterest income increased $488,000 or 18.0% in 1999, following a $297,000 or
12.3% increase in 1998, and a $315,000 or 15.1% increase in 1997. The largest
component of noninterest income is fees from fiduciary activities. Fees from
fiduciary activities increased $135,000 or 12.4% for 1999, $66,000 or 6.5% for
1998, and $194,000 or 23.4% for 1997. The second largest component of
noninterest income is service charges on deposit accounts. These fees increased
approximately $189,000 or 19.9% in 1999, after an increase of approximately
$22,000 or 2.4% in 1998, and $100,000 or 12.1% in 1997.
First Century Bankshares, Inc. Page 13
<PAGE>
Noninterest expense, excluding the provision for loan losses, increased 13.1% in
1999, following a 4.5% increase in 1998 and an 8.4% increase in 1997. Personnel
expense is the largest component of noninterest expense. Personnel expense
increased 15.0% in 1999, following an increase of 5.5% in 1998, and 2.7% in
1997. The additional staff required for the Hinton, West Virginia branch
acquisition contributed to the 1999 increase. In addition to salaries, employee
benefits are a significant component of personnel expense. For a complete
discussion of the Corporation's employee benefits, refer to Note 11 of the Notes
to Consolidated Financial Statements, presented elsewhere in this report.
Management remains committed to improving operational efficiency throughout the
organization while keeping personnel expense within current inflationary levels.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 11.74% 11.61% 11.66%
Average total assets 1.00% 1.10% 1.09%
Percentage of dividends declared per common share
to net income per common share 46.78% 46.88% 43.33%
Percentage of average stockholders' equity to average total assets 8.52% 9.48% 9.32%
</TABLE>
Income Taxes
Applicable income taxes for 1999 increased $23,000 or 1.3%. This followed a
$160,000 or 9.7% increase for 1998, and a $198,000 or 13.6% increase for 1997.
Income taxes computed at the statutory rate are reduced primarily by interest
earned on state and municipal obligations. For a complete discussion of the
Corporation's tax position, refer to Note 12 of the Notes to Consolidated
Financial Statements, presented elsewhere in this report.
The Effects of Inflation and Changing Prices
Inflation affects the Corporation in several ways, but not to the same extent
that it does a company that makes large capital expenditures or has a large
investment in inventory. The Corporation's asset and liability structure is
primarily monetary in nature and, therefore, its financial results are more
affected by changes in interest rates than by inflation. However, the actions of
the Federal Reserve Board during 1999 indicate that interest rate management
will be the primary tool used to curtail inflationary pressures. Inflation does
affect noninterest expense, such as personnel expense and the cost of services
and supplies. These increases must be offset to the extent possible, by
increases in noninterest income and by control of noninterest expense.
Year 2000
The change in date to the year 2000 from 1999 had the potential to cause data
recognition problems in certain computers, software and facility operations
dependent on computer chip devices due to programming standards that
historically limited data date fields to two digits. In late 1996, the
Corporation initiated a formal evaluation of year 2000 issues, establishing in
the early months of 1997 a project team to assess and address both internal and
external risks associated with the change in date event. In mid 1998 the
Page 14 First Century Bankshares, Inc.
<PAGE>
Corporation engaged the outside consulting firm of Vitex, Inc. to further assist
us with our Year 2000 preparedness project. The project team executed a
comprehensive Year 2000 readiness plan consisting of five phases: problem
awareness; identification of affected systems, functions and facilities;
conversion or replacement of identified areas to Year 2000 compliant standards;
testing; and implementation. Management estimated that total Year 2000 project
costs would be approximately $80,000. For the year ended December 31, 1999, Year
2000 related expenses were approximately $40,000. As a result of the extensive
planning and preparation, the Corporation experienced no Year 2000 related
problems. Management will continue to monitor date related issues surrounding
the Year 2000 problem, especially in relation to the success of planning by the
Corporation's vendors and customers. The remaining Year 2000 project costs are
not expected to have a material impact on the Corporation's results of
operations, liquidity or capital resources.
Accounting, Legislative and Regulatory Matters
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." As amended, FAS
No. 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, and requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Corporation has
determined that SFAS No. 133 will have no material effect on the Corporation's
results of operations or its financial position as the Corporation does not
engage in these types of activities.
Per Share Data by Quarter
No established public market presently exists for the common stock of the
Corporation. The per share data by quarter table shows the approximate high and
low bid as reported by the transfer agent and local brokers for 1999 and 1998.
Also presented below are the dividends paid for those respective years. The
number of stockholders of record on December 31, 1999, was 607 and outstanding
shares totaled 2,000,000.
PER SHARE DATA BY QUARTER
<TABLE>
<CAPTION>
Market Quotations
---------------------------------------------
Dividends 1999 1998
----------------------------------------------------------------------------
Quarter 1999 1998 High Low High Low
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $0.20 $0.15 $24.00 $21.00 $20.13 $19.50
Second Quarter 0.20 0.15 22.50 19.75 20.25 20.00
Third Quarter 0.20 0.20 23.00 19.00 21.75 20.25
Fourth Quarter 0.20 0.25 19.00 15.00 23.00 21.63
</TABLE>
First Century Bankshares, Inc. Page 15
<PAGE>
Trust Asset Responsibility
Assets managed by the Trust Division are presented at book value, which is the
Federal income tax basis of the assets and is not representative of current
market value. These assets are not included in the financial statements
contained elsewhere in this report. Trust responsibility, as measured by market
value, is substantially greater than book value.
TRUST ASSET RESPONSIBILITY AT BOOK VALUE
($ in millions)
[GRAPH APPEARS HERE]
Page 16 First Century Bankshares, Inc.
<PAGE>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Statistical Summary, 1999 -- 1995
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 % 1998 % 1997 % 1996 % 1995 %
------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $243,977 66 $202,214 69 $197,094 72 $179,956 65 $177,794 67
Securities 85,131 23 60,936 21 53,511 19 65,500 23 58,859 23
Federal funds sold -- -- 4,000 1 3,400 1 5,750 2 6,300 2
Interest-bearing deposits with banks 3,239 1 3,275 1 2,013 1 1,982 1 3,833 1
------------------------------------------------------------------------------
INTEREST-EARNING ASSETS 332,347 90 270,425 92 256,018 93 253,188 91 246,786 93
------------------------------------------------------------------------------
Cash and due from banks 15,372 4 10,473 4 8,883 3 12,421 4 10,000 4
Premises and equipment 10,712 3 9,199 3 8,660 3 8,052 3 5,417 2
Other assets 12,197 4 7,015 2 5,556 2 7,151 3 5,922 2
Allowance for loan losses (3,050) (1) (2,533) (1) (2,370) (1) (2,240) (1) (2,145) (1)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $367,578 100 $294,579 100 $276,747 100 $278,572 100 $265,980 100
======================================================================================================================
Savings deposits $152,088 41 $123,353 42 $115,269 42 $112,970 41 $112,768 42
Time deposits 136,064 37 100,528 34 89,145 32 93,190 33 92,043 35
Other interest-bearing liabilities 16,958 5 13,046 4 17,038 6 16,270 6 9,642 4
------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES 305,110 83 236,927 80 221,452 80 222,430 80 214,453 81
------------------------------------------------------------------------------
Demand deposits 31,743 9 27,847 10 27,923 10 30,562 11 27,361 10
Other liabilities 1,851 -- 1,302 -- 783 -- 951 -- 980 --
------------------------------------------------------------------------------
TOTAL LIABILITIES 338,704 92 266,076 90 250,158 90 253,943 91 242,794 91
------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 28,874 8 28,503 10 26,589 10 24,629 9 23,186 9
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $367,578 100 $294,579 100 $276,747 100 $278,572 100 $265,980 100
======================================================================================================================
TOTAL DEPOSITS $319,895 $251,728 $232,337 $236,722 $232,172
------------------------------------------------------------------------------
BOOK VALUE PER SHARE $ 14.44 $ 14.25 $ 13.29 $ 12.31 $ 11.60
======================================================================================================================
</TABLE>
SUMMARY OF OPERATIONS
Statistical Summary, 1999 -- 1995
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income $24,775 $22,535 $21,711 $20,984 $20,657
Interest expense 11,054 9,863 9,379 9,481 9,052
---------------------------------------------------
NET INTEREST MARGIN 13,721 12,672 12,332 11,503 11,605
---------------------------------------------------
Provision for loan losses 555 544 691 644 839
---------------------------------------------------
Net credit margin 13,166 12,128 11,641 10,859 10,766
---------------------------------------------------
Noninterest income 3,192 2,704 2,407 2,092 1,551
Noninterest expense 11,104 9,816 9,391 8,664 8,561
---------------------------------------------------
INCOME BEFORE INCOME TAXES 5,254 5,016 4,657 4,287 3,756
---------------------------------------------------
Provision for income taxes 1,838 1,815 1,655 1,457 1,342
- --------------------------------------------------------------------------------
NET INCOME $ 3,416 $ 3,201 $ 3,002 $ 2,830 $ 2,414
================================================================================
EARNINGS PER COMMON SHARE:
Basic $ 1.71 $ 1.60 $ 1.50 $ 1.42 $ 1.21
Diluted $ 1.71 $ 1.60 $ 1.50 $ 1.42 $ 1.21
================================================================================
Dividends per common share $ 0.80 $ 0.75 $ 0.650 $ 0.605 $ 0.550
Payout ratio 47% 47% 43% 43% 45%
</TABLE>
First Century Bankshares, Inc. Page 17
<PAGE>
Consolidated
Statements of
Financial
Condition
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
---------------------------
ASSETS (Dollars in Thousands)
<S> <C> <C>
Cash and due from banks $ 15,372 $ 10,473
Interest-bearing balances with banks 3,239 3,275
Securities available for sale 74,521 45,951
Securities held to maturity (estimated market value of $9,242
in 1999 and $14,086 in 1998) 9,455 13,957
Federal Home Loan Bank and Federal Reserve Bank Stock 1,155 1,028
Federal funds sold -- 4,000
Loans 243,977 202,214
Less allowance for loan losses 3,050 2,533
----------------------------
Net loans 240,927 199,681
Premises and equipment, net 10,712 9,199
Other assets 12,197 7,015
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $367,578 $294,579
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 31,743 $ 27,847
Interest-bearing 288,152 223,881
----------------------------
Total deposits 319,895 251,728
Short-term borrowings 16,958 13,046
Other liabilities 1,851 1,302
----------------------------
TOTAL LIABILITIES 338,704 266,076
----------------------------
STOCKHOLDERS' EQUITY
Common stock - $1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1999 and 1998 2,500 2,500
Paid-in capital 785 785
Retained earnings 26,740 24,924
Accumulated other comprehensive income (loss), net of tax (1,151) 294
----------------------------
TOTAL STOCKHOLDERS' EQUITY 28,874 28,503
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $367,578 $294,579
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 18 First Century Bankshares, Inc.
<PAGE>
Consolidated
Statements of
Income and
Comprehensive
Income
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
INTEREST INCOME (Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest and fees on loans $ 19,700 $ 18,616 $ 17,504
Interest on balances with banks 251 196 86
Interest and dividends from securities available for sale:
Taxable 3,926 2,581 2,177
Interest and dividends from securities held to maturity:
Taxable 169 410 1,334
Tax-exempt 388 348 403
Interest on federal funds sold 341 384 207
---------------------------------------------
TOTAL INTEREST INCOME 24,775 22,535 21,711
---------------------------------------------
INTEREST EXPENSE
Interest on time certificates of $100,000 or more 1,452 1,236 1,121
Interest on other deposits 9,004 7,966 7,638
Interest on federal funds purchased and securities
sold under agreements to repurchase 527 583 534
Interest on demand notes to U. S. Treasury and other indebtedness 71 78 86
---------------------------------------------
TOTAL INTEREST EXPENSE 11,054 9,863 9,379
---------------------------------------------
Net interest income 13,721 12,672 12,332
Provision for loan losses 555 544 691
---------------------------------------------
Net interest income after provision for loan losses 13,166 12,128 11,641
---------------------------------------------
NONINTEREST INCOME
Income from fiduciary activities 1,225 1,090 1,024
Service charges on deposit accounts 1,140 951 929
Other noninterest income 827 697 513
Securities gains (losses) -- (34) (59)
---------------------------------------------
TOTAL NONINTEREST INCOME 3,192 2,704 2,407
---------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 5,453 4,741 4,493
Premises and equipment expense 1,574 1,405 1,275
Data processing expense 646 589 575
Advertising and public relations 298 381 359
Insurance and bonding 102 112 122
Supplies and printing 391 361 328
Other noninterest expense 2,640 2,227 2,239
---------------------------------------------
TOTAL NONINTEREST EXPENSE 11,104 9,816 9,391
---------------------------------------------
Income before income taxes 5,254 5,016 4,657
Provision for income taxes 1,838 1,815 1,655
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME 3,416 3,201 3,002
===========================================================================================================================
Other comprehensive income (loss), net of tax (1,445) 213 258
---------------------------------------------
COMPREHENSIVE INCOME $ 1,971 $ 3,414 $ 3,260
===========================================================================================================================
NET INCOME PER COMMON SHARE:
===========================================================================================================================
Basic $1.71 $1.60 $1.50
Diluted $1.71 $1.60 $1.50
===========================================================================================================================
AVERAGE SHARES OUTSTANDING:
===========================================================================================================================
Basic 2,000,000 2,000,000 2,000,000
Diluted 2,001,907 2,001,847 2,000,000
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
First Century Bankshares, Inc. Page 19
<PAGE>
Consolidated
Statements of
Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before adjustments to reconcile net income
to net cash provided by operating activities: $ 3,416 $ 3,201 $ 3,002
Provision for loan losses 555 544 691
Depreciation and amortization 1,083 812 620
Deferred income tax expense (benefit) 139 87 (31)
Securities (gains) losses -- 34 59
(Increase) decrease in interest receivable (364) 31 (45)
Net investment amortization and accretion 56 142 239
Net (increase) decrease in other assets (670) (370) 1,512
Net increase (decrease) in interest payable and other liabilities 98 163 (285)
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,313 4,644 5,762
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity (1,308) (3,665) (1,400)
Purchases of securities available for sale (54,811) (21,066) (13,346)
Purchases of Federal Home Loan Bank stock (127) -- (27)
Proceeds from maturities and calls of securities held to maturity 5,736 6,987 22,986
Proceeds from maturities and calls of securities available for sale 24,004 8,689 2,000
Proceeds from sales of securities available for sale -- 1,760 1,751
Net increase in loans (1,555) (1,881) (17,478)
Net cash received from branch acquisition 14,727 8,510 --
Acquisition of premises and equipment (665) (1,160) (1,195)
Proceeds from disposal of premises and equipment 28 -- 7
-------------------------------
NET CASH USED BY INVESTING ACTIVITIES (13,971) (1,826) (6,702)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits (75) 4,442 (340)
Net increase (decrease) in time deposits 8,284 1,684 (4,045)
Net increase (decrease) in short-term borrowings 3,912 (3,992) 768
Cash dividends paid (1,600) (1,500) (1,300)
-------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 10,521 634 (4,917)
-------------------------------
Net increase (decrease) in cash and cash equivalents 863 3,452 (5,857)
Cash and cash equivalents at beginning of year 17,748 14,296 20,153
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18,611 $ 17,748 $ 14,296
=======================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 10,853 $ 9,826 $ 9,404
Income taxes $ 1,678 $ 1,853 $ 1,369
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 20 First Century Bankshares, Inc.
<PAGE>
Consolidated
Statements of
Changes in
Stockholders'
Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Comprehensive
-------------------- Paid-In Retained Income (Loss),
Shares Amount Capital Earnings Net of tax
----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 (Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 2,000,000 $2,500 $ 785 $21,521 $ (177)
Net income -- -- -- 3,002 --
Other comprehensive income, net of tax -- -- -- -- 258
Cash dividends declared-$0.65 per share -- -- -- (1,300) --
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,000,000 2,500 785 23,223 81
====================================================================================================================
YEAR ENDED DECEMBER 31, 1998
Net income -- -- -- 3,201 --
Other comprehensive income, net of tax -- -- -- -- 213
Cash dividends declared-$0.75 per share -- -- -- (1,500) --
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,000,000 2,500 785 24,924 294
====================================================================================================================
YEAR ENDED DECEMBER 31, 1999
Net income -- -- -- 3,416 --
Other comprehensive income (loss), net of tax -- -- -- -- (1,445)
Cash dividends declared-$0.80 per share -- -- -- (1,600) --
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31,1999 2,000,000 $2,500 $ 785 $26,740 $(1,151)
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
First Century Bankshares, Inc. Page 21
<PAGE>
Notes to
Consolidated
Financial
Statements
1. Summary of Significant Accounting and Reporting Policies
First Century Bankshares, Inc. (the "Corporation"), formerly Pocahontas
Bankshares Corporation, and its wholly owned subsidiary, First Century Bank,
N.A. operate ten branches in southern West Virginia and southwestern Virginia.
The Corporation's primary source of revenue is derived from loans to customers
who are predominately small to medium size businesses and middle income
individuals. The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices within the
banking industry. Certain reclassifications have been made to the prior years'
financial statements to place them on a comparable basis with the current year's
financial statements. The following is a summary of the more significant
accounting and reporting policies:
Management 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.
Principles of Consolidation -- The consolidated financial statements include the
accounts of First Century Bankshares, Inc. and its wholly owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and cash equivalents -- For purposes of reporting cash flows, cash
equivalents include cash on hand and amounts due from banks (including cash
items in process of collection); interest-bearing balances with banks and
federal funds sold. To comply with Federal Reserve regulations, the subsidiary
banks are required to maintain reserve balances with the Federal Reserve Bank of
Richmond. The amount of those reserve balances at December 31, 1999, was
approximately $103,000.
Securities -- Securities are classified as either held to maturity, available
for sale or trading. Classification of securities is determined on the date of
purchase. In determining such classification, debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity and are carried at amortized cost. All other
securities are classified as available for sale and are carried at fair value
with unrealized gains and losses included in comprehensive income. The
Corporation has no securities classified as trading.
Realized gains and losses, determined using the specific identification method,
and declines in value judged to be other than temporary are included in
noninterest income. Premiums and discounts are amortized into interest income
using a level yield method.
Loans -- Loans are reported at their principal outstanding balance net of
charge-offs and certain other deferred or unearned income. Interest income is
recognized when income is earned using the interest method.
Allowance for loan losses -- The adequacy of the allowance for loan losses is
periodically evaluated by the Corporation in order to maintain the allowance at
a level that is sufficient to absorb probable credit losses. Management's
evaluation of the adequacy of the allowance is based on a review of the
Corporation's historical loss experience, known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the
Page 22 First Century Bankshares, Inc.
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
ability of the borrower to repay interest and/or principal, the estimated value
of collateral, and an analysis of the levels and trends of delinquencies,
charge-offs, and the risk ratings of the various loan categories. Such factors
as the level and trend of interest rates and the condition of the national and
local economies are also considered. Estimates may change at some point in the
future.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable.
A loan is considered impaired, based on current information and events, if it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans that are collateral dependent is
based on the fair value of the collateral. The measurement of other impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate.
The Corporation uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial data
and borrowers' operating factors such as cash flows, operating income or loss,
etc.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and subsequent recoveries,
if any, are credited to the allowance.
Income recognition on impaired and nonaccrual loans -- Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-collateralized and in the process of collection. If a
loan or a portion of a loan is classified as doubtful or is partially charged
off, the loan is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms
of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash receipts in excess of that amount are recorded
as recoveries to the allowance for loan losses until prior charge-offs have been
fully recovered.
First Century Bankshares, Inc. Page 23
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
Other Real Estate Owned -- Other real estate owned includes properties on which
the Corporation's subsidiary has foreclosed and taken title. Real estate
properties acquired as a result of foreclosures are carried at the lower of the
recorded investment in the loan or the fair value less estimated selling costs.
Any excess of the outstanding principal loan balance over the fair value of the
foreclosed property is charged to the allowance for loan losses. Any subsequent
fair value adjustments and net operating expenses are charged to noninterest
expense.
Restructured loans -- Loans are considered troubled debt restructurings if, for
economic or legal reasons, a concession has been granted to the borrower related
to the borrower's financial difficulties that the Corporation would not have
otherwise considered. The Corporation has restructured certain loans in
instances where a determination was made that greater economic value will be
realized under new terms than through foreclosure, liquidation, or other
disposition. The terms of the renegotiation generally involve some or all of the
following characteristics: a reduction in the interest pay rate to reflect
actual operating income, an extension of the loan maturity date to allow time
for stabilization of operating income, and partial forgiveness of principal and
interest.
The carrying value of a restructured loan is reduced by the fair value of any
assets or equity interest received. In addition, if the present value of future
cash receipts required under the new terms does not equal the recorded
investment in the loan at the time of restructuring the carrying value would be
further reduced by a charge to the allowance. In addition, at the time of
restructuring, loans are classified as impaired.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straight-line method
based upon the estimated useful lives of the assets. Buildings and improvements
have estimated useful lives of 20 to 40 years. Equipment and fixtures have
estimated useful lives of 3 to 10 years. The cost of major improvements is
capitalized. The expenditures for maintenance and repairs are charged to expense
as incurred. Gains or losses on assets sold are included in other operating
income.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities -- The Corporation applies a financial-components approach that
focuses on control when accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. Under that approach, after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This approach provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings.
Goodwill And Other Intangibles -- The cost of the investments in acquired
institutions in excess of amounts attributable to tangible and identified
intangible assets at dates of acquisition is recorded as goodwill and is being
amortized to operations over periods from 15 - 25 years using the straight-line
method. A portion of the cost of purchased subsidiaries has been allocated to
the value associated with the future earnings potential of the acquired core
deposit base and is being amortized over eight years, the estimated life
Page 24 First Century Bankshares, Inc.
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
of the deposit base. The unamortized balance of intangibles totaled
approximately $6,076,000 at December 31, 1999 and $1,687,000 at December 31,
1998, net of accumulated amortization of $662,000 and $369,000, respectively,
and is included in other assets.
Income Taxes -- The Corporation files a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized as
income or expense in the period that includes the enactment date.
Segment Information -- During the year ended December 31, 1998, the Bank adopted
the provisions of Statement of Financial Accounting Standard ("SFAS") No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
Statement requires that public business enterprises report certain information
about operating segments in their annual financial statements and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report related disclosures and descriptive
information about products and services provided by significant segments,
geographic areas, and major customers, differences between the measurements used
in reporting segment information and those used in the enterprise's general-
purpose financial statements, and changes in the measurement of segment amounts
from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Corporation has determined that is has one significant
operating segment, the providing of general commercial financial services to
customers located in the geographic areas of southern West Virginia and
southwestern Virginia. The various products are those generally offered by
community banks, and the allocation of resources is based on the overall
performance of the institution, versus the individual branches or products.
Other Comprehensive Income -- Effective January 1, 1998, the Corporation adopted
the provisions of SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes requirements for the disclosure of comprehensive income in the
Corporation's consolidated financial statements. Comprehensive income is defined
as net income plus transactions and other occurrences which are the result of
nonowner changes in equity. As required by SFAS No. 130, prior period
consolidated financial statements have been reclassified to reflect application
of the provisions of this statement.
New Accounting Pronouncements -- In June of 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". As amended, SFAS No 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. This standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in
First Century Bankshares, Inc. Page 25
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
other contracts, and for hedging activities. Based on its operations at December
31, 1999, management does not expect this standard to have a material effect on
the Corporation's consolidated financial statements upon adoption.
2. Branch Acquisitions
Effective June 11, 1999, First Century Bank, N.A., completed the acquisition of
the Hinton, West Virginia branch of City National Bank of West Virginia. The
transaction was accounted for as a purchase; accordingly, operating results of
the Hinton Branch have been included in the consolidated financial statements
since the date of acquisition. The purchase price was based on a premium on
deposits of 8.4% and was allocated based on preliminary estimates of fair value.
The allocation of the purchase price was as follows:
<TABLE>
<S> <C>
Cash $14,727
Net loans 39,337
Premises and equipment 1,620
Interest receivable and other assets 160
Goodwill 4,681
- ------------------------------------------------------------------------------------
TOTAL ASSETS ACQUIRED $60,525
====================================================================================
Deposits $59,958
Interest payable and other liabilities 567
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES ASSUMED $60,525
====================================================================================
</TABLE>
Effective April 3, 1998, First Century Bank, N.A., completed the acquisition of
the Bluefield, Virginia branch of First American Federal Savings Bank, Roanoke,
Virginia. The transaction was accounted for as a purchase; accordingly,
operating results of the Virginia Avenue Branch have been included in the
consolidated financial statements since the date of acquisition. The purchase
price was $1,510,000 and was allocated based on preliminary estimates of fair
value. The allocation of the purchase price was as follows:
<TABLE>
<S> <C>
Cash $ 8,510
Net loans 3,239
Premises and equipment 255
Interest receivable and other assets 21
Goodwill 1,441
- -----------------------------------------------------------------------------------
TOTAL ASSETS ACQUIRED $13,466
====================================================================================
Deposits $13,356
Interest payable and other liabilities 110
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES ASSUMED $13,466
====================================================================================
</TABLE>
Goodwill established from these acquisitions is being amortized over an
estimated useful life of 15 years.
Page 26 First Century Bankshares, Inc.
<PAGE>
3. Securities
Securities available for sale at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $16,003 $ 23 $ 31 $15,995
U.S. Government agency obligations 55,833 3 1,547 54,289
Mortgage-backed securities 3,566 -- 73 3,493
Equity securities 822 -- 78 744
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $76,224 $ 26 $1,729 $74,521
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $17,070 $293 $ -- $17,363
U.S. Government agency obligations 23,998 199 26 24,171
Mortgage-backed securities 3,603 21 2 3,622
Equity securities 822 -- 27 795
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $45,493 $513 $ 55 $45,951
========================================================================================================================
</TABLE>
Securities held to maturity at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 219 $ -- $ 6 $ 213
State and municipal obligations 9,086 61 264 8,883
Other debt securities 150 -- 4 146
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $ 9,455 $ 61 $274 $ 9,242
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $ 2,005 $ 3 $ -- $ 2,008
U.S. Government agency obligations 3,014 4 -- 3,018
Mortgage-backed securities 393 -- 2 391
State and municipal obligations 8,395 262 144 8,513
Other debt securities 150 6 -- 156
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $13,957 $275 $146 $14,086
==========================================================================================================================
</TABLE>
Securities with an aggregate par value of $43,000,000 at December 31, 1999 and
$34,000,000 at December 31, 1998, were pledged to secure public and trust
deposits and for other purposes required or permitted by law, including
approximately $15,500,000 at December 31, 1999 and $14,000,000 at December 31,
1998 pledged to secure repurchase agreements.
First Century Bankshares, Inc. Page 27
<PAGE>
3. Securities (continued)
Gross losses of $34,000 and $59,000 were recognized on sales of available for
sale securities for the years ended December 31, 1998 and December
31, 1997, respectively. There were no sales of securities for the year ended
December 31, 1999.
The amortized cost and estimated market value for securities available for sale
and securities held to maturity by contractual maturities at December 31, 1999
are shown in the following tables. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
Estimated Net
Amortized Market Unrealized Gains
Cost Value (Losses)
-----------------------------------------------
(Dollars in Thousands)
-----------------------------------------------
<S> <C> <C> <C>
Due in one year or less $13,000 $12,994 $ (6)
Due after one year through five years 43,089 41,966 (1,123)
Due after five years through ten years 19,313 18,817 (496)
Securities with no contractual maturities 822 744 (78)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $76,224 $74,521 $(1,703)
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Estimated Net
Amortized Market Unrealized Gains
Cost Value (Losses)
-----------------------------------------------
(Dollars in Thousands)
-----------------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 690 $ 692 $ 2
Due after one year through five years 5,095 5,033 (62)
Due after five years through ten years 3,135 3,007 (128)
Due after ten years 535 510 (25)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $9,455 $ 9,242 $(213)
========================================================================================================================
</TABLE>
4. Loans
Loans at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------------------------
(Dollars in Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 52,872 $ 42,584
Real estate-construction 5,353 10,369
Real estate-mortgage (residential and commercial) 149,121 119,076
Installment loans to individuals 36,631 30,185
--------------------------
Total loans 243,977 202,214
Less: allowance for credit losses 3,050 2,533
- ---------------------------------------------------------------------------------------------------------------
NET LOANS $240,927 $199,681
===============================================================================================================
</TABLE>
The Corporation's subsidiaries have had and can be expected to have in the
future various banking transactions with directors, executive officers, their
immediate families and affiliated companies in which they are principal
stockholders (commonly referred to as related parties). The total amount of
these loans was $6,067,000 and $6,355,000 at December 31, 1999 and
1998, respectively. During 1999, $12,434,000 in loan advances were made and
repayments were $12,722,000.
Page 28 First Century Bankshares, Inc.
<PAGE>
5. Allowance for Loan Losses
An analysis of the allowance for loan losses for 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $2,533 $2,370 $2,240
Additions from acquisitions 497 -- --
Provision for loan losses 555 544 691
Recoveries on loans previously charged off 179 59 51
Loans charged off (714) (440) (612)
- ----------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $3,050 $2,533 $2,370
==========================================================================================================
</TABLE>
The following is a summary of loans considered impaired:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
----------------------
(Dollars in Thousands)
<S> <C> <C>
Gross impaired loans $2,969 $2,569
Valuation allowance for impaired loans 491 520
- ----------------------------------------------------------------------------------------------------------
Recorded investment in impaired loans $2,478 $2,049
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The average recorded investment in impaired loans for the years ended December,
31, 1999, 1998 and 1997 was $1,865,000, $1,928,000 and $1,245,000, respectively.
There was no interest income recognized on impaired loans (during the portion of
the year they were impaired) for the years ended December 31, 1999, 1998 and
1997. At December 31, 1999, 1998 and 1997, the Corporation had nonaccrual loans
of $2,390,000, $1,728,000 and $828,000, respectively. Interest income of
$39,000, $1,000 and $5,000 was recognized on these loans in 1999, 1998 and 1997,
respectively. Had these loans performed in accordance with their original terms,
interest income of $198,000, $194,000 and $142,000 would have been recorded in
1999, 1998 and 1997, respectively.
6. Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
----------------------
(Dollars in Thousands)
<S> <C> <C>
Land $ 1,466 $ 1,341
Buildings and improvements 9,485 8,280
Equipment and fixtures 5,076 4,509
----------------------
Total 16,027 14,130
----------------------
Less accumulated depreciation 5,315 4,931
- -------------------------------------------------------------------------------------------------------------
NET PREMISES AND EQUIPMENT $10,712 $ 9,199
=============================================================================================================
</TABLE>
Depreciation charged to operating expense amounted to $791,000 in 1999, $707,000
in 1998, and $579,000 in 1997.
First Century Bankshares, Inc. Page 29
<PAGE>
7. Deposits
Deposits at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------------------------
(Dollars in Thousands)
<S> <C> <C>
Individuals, partnerships and corporations:
Demand deposits $ 28,702 $ 25,685
Time and savings deposits 275,237 215,400
U.S. Government 320 --
States and political subdivisions 13,733 9,275
Certified and official checks 1,903 1,368
- -------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $319,895 $251,728
=======================================================================================================
</TABLE>
The scheduled maturities of time deposits at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
2000 $102,314
2001 22,003
2002 6,942
2003 3,855
Thereafter 950
========================================
Total Time Deposits $136,064
========================================
</TABLE>
Time deposits included certificates of deposit issued in amounts of $100,000 or
more totaling approximately $34,243,000 and $23,251,000 at December 31, 1999 and
1998, respectively.
8. Short-term Borrowings
Short-term borrowings consist of treasury tax and loan deposits, which are
generally repaid within 30 days from the transaction date, and securities sold
under agreements to repurchase. Securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------
(Dollars in Thousands)
<S> <C> <C>
Average balance during the year $14,499 $15,050
Average interest rate during the year 3.63% 3.87%
Maximum month-end balance during the year $18,500 $18,148
</TABLE>
9. Other Comprehensive Income
Other comprehensive income is defined as comprehensive income exclusive of net
income. Unrealized gains (losses) on available for sale investment securities
represent the sole component of the Company's other comprehensive income. Other
comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $(2,163) $ 267 $ 287
Reclassification adjustment for (gains) losses included in net income -- 40 59
----------------------------------
Other comprehensive income (loss) before tax (2,163) 307 346
Income tax (expense) benefit related to other comprehensive income 718 (94) (88)
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $(1,445) $ 213 $ 258
=======================================================================================================================
</TABLE>
Page 30 First Century Bankshares, Inc.
<PAGE>
10. Earnings Per Share
The following table reconciles the numerator and denominator of the basic and
diluted computations for income from continuing operations for the year ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders $3,416,000 2,000,000 $1.71
Diluted EPS:
Effect of dilative securities--Stock options 0 1,907
=======================================================================================================================
Income available to common shareholders and assumed conversions $3,416,000 2,001,907 $1.71
=======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders $3,201,000 2,000,000 $1.60
Diluted EPS:
Effect of dilutive securities--Stock options 0 1,847
=======================================================================================================================
Income available to common shareholders and assumed conversions $3,201,000 2,001,847 $1.60
=======================================================================================================================
</TABLE>
For the year ended December 31, 1997, there were no adjustments to either the
numerator or denominator for the purpose of calculating diluted earnings per
share as the Corporation had no dilutive securities.
11. Stock Option Plans
During 1998, the Corporation adopted the 1998 Officer Stock Option Plan (the
"Officer Plan") which provides for the issuance of options to purchase shares of
the Corporation's common stock to officers of the Corporation. The options have
an original term of ten years with an exercise price equal to the market price
of the common stock on the date of grant, as defined by the plan. The options
vest 20% per year after their date of grant. During the year ended December 31,
1998, 58,470 options were granted under the Officer Plan at an exercise price of
$20.25 per share. During the year ended December 31, 1999, there were no options
granted under the plan. At December 31, 1999, the weighted average remaining
contractual life of the outstanding options was 102 months. At December 31,
1999, options for 111,530 shares of common stock were reserved for future
issuance for the Officer Plan. As of December 31, 1999, no options had been
exercised under the Officer Plan.
During 1998, the Corporation adopted the 1998 Director Stock Option Plan (the
"Director Plan") which provides for the issuance of options to purchase shares
of the Corporation's common stock to directors of the Corporation and its
subsidiaries. The options have an original term of ten years with an exercise
price equal to the market price of the common stock on the date of grant, as
defined by the plan. The options are fully vested upon their date of grant.
During the year ended December 31, 1998, 20,000 options were granted under the
Director Plan at an exercise price of $20.25 per share. During the year ended
December 31, 1999, there were no options granted under the plan. At December
31, 1999, the weighted average remaining contractual life of the outstanding
options was 102
First Century Bankshares, Inc. Page 31
<PAGE>
11. Stock Option Plans (continued)
months. At December 31, 1999, options for 12,000 shares of common stock were
reserved for future issuance for the Director Plan. As of December 31, 1999, no
options had been exercised under the Director Plan, and 2,000 options had
expired unexercised.
The Corporation accounts for the Officer Plan and the Director Plan under the
provisions of SFAS No. 123, "Accounting for Stock Based Compensation". As
permitted by SFAS No. 123, the Corporation has chosen to apply APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for options granted under the plans. Had compensation cost for the Corporation's
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method of SFAS No. 123, the Corporation's
net income and net income per share for the years ended December 31, 1999 and
1998, would have been decreased to the pro forma amounts indicated below. The
Corporation did not award any option grants prior to July 1, 1998, therefore,
there are no pro forma amounts for prior periods.
<TABLE>
<CAPTION>
1999
-----------------------------
As Reported Pro Forma
-----------------------------
<S> <C> <C>
Net income $3,416,000 $3,402,000
======================================================================================================================
Net income per share-Basic and diluted $ 1.71 $ 1.70
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------
As Reported Pro Forma
-----------------------------
<S> <C> <C>
Net income $3,201,000 $3,171,000
======================================================================================================================
Net income per share-Basic and diluted $ 1.60 $ 1.59
======================================================================================================================
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the 1998 grants: 8% dividend growth rate; expected
volatility of 3.31%; risk-free interest rate of 5.46%; and expected life of six
years for directors and seven years for officers.
12. Post Employment Benefits
The Corporation has a noncontributory pension plan covering all eligible
employees with six months of service who have attained the age of twenty and
one-half. Contributions to the plan are based on computations by independent
actuarial consultants. Due to the present excess funded position of the pension
plan, no contributions have been made since 1985. The plan's assets include
common stock, fixed income securities, short-term investments and cash.
The Corporation sponsors two defined benefit post retirement plans that cover
both salaried and nonsalaried employees. One plan provides medical benefits, and
the other provides life insurance benefits. The post retirement health care plan
is contributory and the life insurance plan is noncontributory. The health plan
has an annual limitation (a "cap") on the dollar amount of the employer's share
of the cost of covered benefits incurred by a plan participant. The retiree is
responsible, therefore, for the amount by which the cost of the benefit coverage
under the plan incurred during a year exceeds that cap. No health care cost
increases have been factored into the health plan's actuarial calculations due
to this cap.
Page 32 First Century Bankshares, Inc.
<PAGE>
12. Post Employment Benefits (continued)
The following table outlines the changes in the Corporation's postemployment
benefit plan obligations, assets and funded status for the years ended December
31, 1999 and 1998, and the assumptions and components of net periodic benefit
costs for the three years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $6,871 $5,877 $1,297 $1,180
Service cost 319 264 23 21
Interest cost 439 407 82 81
Amendments -- 219 -- --
Actuarial (gain) loss 171 365 (7) 59
Benefits paid (826) (261) (43) (44)
---------------------------------------------------
Benefit obligation at end of year 6,974 6,871 1,352 1,297
===================================================
Change in plan asset
Fair value of plan assets at beginning of year 9,542 8,581 N/A N/A
Actual return on plan assets 785 1,222 N/A N/A
Employer contribution -- -- N/A N/A
Benefits paid (826) (261) N/A N/A
---------------------------------------------------
Fair value of plan assets at end of year 9,501 9,542 N/A N/A
===================================================
Funded status 2,527 2,671 (1,352) (1,297)
Unrecognized net actuarial gain (1,645) (1,941) (155) (152)
Unrecognized prior service cost 490 534 -- --
Unrecognized transition obligation (389) (454) 720 775
---------------------------------------------------
Prepaid (accrued) benefit cost $ 983 $ 810 $ (787) $ (674)
===================================================
</TABLE>
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------------------------------------------------
Weighted-average assumptions as of 12/31 1999 1998 1997 1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.50% 6.50% 7.00% 6.50% 6.50% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase 3.00% 3.00% 3.00% N/A N/A N/A
Components of net periodic benefit cost
Service cost $ 319 $ 264 $ 245 $ 23 $ 21 $ 18
Interest cost 439 407 359 82 81 785
Expected return on plan assets (848) (767) (627) -- -- --
Amortization of prior service cost 44 30 30 -- -- --
Amortization of transition obligation (65) (65) (65) 55 55 55
Recognized net actuarial gain (62) (62) (41) (4) (7) (9)
------------------------------------------------------------
Net periodic benefit cost $(173) $(193) $ (99) $ 156 $150 $142
============================================================
</TABLE>
The Corporation maintains a qualified 401(k) retirement savings plan. All full
time employees are eligible to participate on a voluntary basis, after
completing their first year of service. All employees may elect to make pretax
contributions up to a maximum of fifteen percent (15%) of their salary, which
are matched fifty percent (50%) by the Corporation. Total amounts charged to
operating expense for payments pursuant to this plan were approximately $110,000
in 1999, $104,000 in 1998 and $99,000 in 1997.
First Century Bankshares, Inc. Page 33
<PAGE>
13. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
Tax provision attributed to income from operations: 1999 1998 1997
----------------------------------------
Current: (Dollars in Thousands)
<S> <C> <C> <C>
Federal $1,409 $1,421 $1,342
State 290 307 344
Deferred expense (benefit) 139 87 (31)
- -----------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX $1,838 $1,815 $1,655
===========================================================================================================
</TABLE>
The components of deferred tax assets and liabilities at December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------
(Dollars in Thousands)
<S> <C> <C>
Allowance for loan losses $ 752 $ 744
Marketable equity securities and capital loss carryforwards 231 220
Unrealized losses on securities available for sale 552 --
Other, net -- 56
======================
Gross deferred tax assets 1,535 1,020
Valuation allowance (231) (220)
----------------------
Deferred tax assets 1,304 800
======================
Depreciation (239) (171)
Retirement plans (47) (24)
Unrealized gains on securities available for sale -- (166)
======================
Gross deferred tax liabilities (286) (361)
- -------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET $1,018 $ 439
=============================================================================================================
</TABLE>
A valuation allowance was established for the writedowns of marketable equity
securities and capital loss carryforwards because their recognition is limited
to future capital gains generated by the Corporation. No tax benefit has been
recognized in the financial statements for the writedowns or capital loss
carryforwards.
The principal differences between the effective tax rate and the federal
statutory rate was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
(Dollars in Thousands)
Amount % Amount % Amount %
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $1,786 34 $1,705 34 $1,583 34
Tax-exempt interest income from certain investment
securities and loans (172) (3) (176) (4) (198) (4)
State income tax expense, net of federal benefit 204 4 203 4 228 5
Other, net 20 -- 83 2 42 1
- ----------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $1,838 35 $1,815 36 $1,655 36
==========================================================================================================
</TABLE>
14. Commitments and Contingencies
In the normal course of business, the Corporation is involved in various legal
suits and proceedings. In the opinion of management, based on the advice of
legal counsel, these suits are without substantial merit and should not result
in judgments which in the aggregate would have a material adverse effect on the
Corporation's financial statements.
Page 34 First Century Bankshares, Inc.
<PAGE>
15. Financial Instruments, Concentrations of Credit and Fair Values
The subsidiary of the Corporation is party to various financial instruments with
off-balance sheet risk arising in the normal course of business to meet the
financing needs of its customers. Those financial instruments include
commitments to extend credit and standby letters of credit. These commitments
include standby letters of credit of approximately $1,341,000 at December
31, 1999 and $622,000 at December 31, 1998. These instruments contain various
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. Additionally, certain off-
balance sheet items of approximately $31,461,000 at December 31, 1999, and
$28,875,000 at December 31, 1998, comprised primarily of unfunded loan
commitments, have an estimated fair value that is not materially different from
the notional amount.
The subsidiary's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is the contractual amount of those instruments. The
subsidiaries use the same credit policies in making commitments and conditional
obligations that they do for on-balance sheet instruments.
The Corporation's subsidiary grants various types of credit including, but not
limited to, agriculture, commercial, consumer, and residential loans to
customers primarily located throughout southern West Virginia and southwestern
Virginia. Each customer's creditworthiness is examined on a case by case basis.
The amount of collateral obtained, if any, is determined by management's credit
evaluation of the customer. Collateral held varies, but may include property,
accounts receivable, inventory, plant and equipment, securities, or other income
producing property. The loan portfolio is generally well diversified and
geographically dispersed within the region. There are no industry concentrations
that represent more than 25% of the Corporation's equity. Within each specific
industry, borrowers are well diversified as to specialty, service, or other
unique feature of the overall industry. A substantial portion of the customers'
ability to honor their contractual commitment is largely dependent upon the
economic conditions of the respective industry and overall economic conditions
of the region.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the estimated fair value of on and off-balance sheet financial
instruments. For the Corporation, as for most financial institutions,
approximately 95% of its assets and liabilities are considered financial
instruments as defined by SFAS 107. Most of the Corporation's financial
instruments, however, lack an available trading market characterized by a
willing buyer and a willing seller engaging in an exchange transaction. It is
also the Corporation's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, significant estimations and present value calculations were used by
the Corporation for the purposes of this disclosure.
Estimated fair values have been determined by the Corporation using the best
available data and an estimation methodology suitable for each category of
financial instruments.
First Century Bankshares, Inc. Page 35
<PAGE>
15. Financial Instruments, Concentrations of Credit and Fair Values (continued)
The estimated fair value and the recorded book balances at December 31, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
-------------------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 18,611 $ 18,611 $ 13,748 $ 13,748
Federal funds sold -- -- 4,000 4,000
Securities available for sale 74,521 74,521 45,951 45,951
Securities held to maturity 9,242 9,455 14,086 13,957
Federal Home Loan Bank and Federal Reserve Bank stock 1,155 1,155 1,028 1,028
Net loans 242,905 240,927 205,052 199,681
Liabilities:
Deposits with no stated maturities $183,832 $183,832 $151,200 $151,200
Deposits with stated maturities 135,025 136,063 101,004 100,528
Short-term borrowings 16,958 16,958 13,046 13,046
</TABLE>
The estimation methodologies used to determine fair value are as follows: For
those loans and deposits with floating interest rates it was presumed that the
estimated fair value generally approximated the recorded book balances.
Securities actively traded in a secondary market have been valued using quoted
available market prices. Deposits with stated maturities have been valued using
a present value discounted cash flow with a discount rate approximating current
market rates for similar assets and liabilities. Deposits with no stated
maturities have an estimated fair value equal to the amount payable on demand
which is the recorded book balance. The net loan portfolio has been valued using
a present value discounted cash flow. The discount rate used in these
calculations is the federal funds sold rate adjusted for noninterest operating
costs, credit losses, and assumed prepayment risk. Fair values for nonperforming
loans are estimated using discounted cash flow analysis, or underlying
collateral values, where applicable. Changes in assumptions or estimation
methodologies may have a material effect on these estimated fair values.
Page 36 First Century Bankshares, Inc.
<PAGE>
16. Regulatory Matters
The Corporation's principal source of funds for dividend payment and debt
service is dividends received from the subsidiary banks.
Under applicable Federal laws, the Comptroller of the Currency, the primary
regulator of First Century Bank, N.A., restricts the total dividend payments of
a national bank in any calendar year to the net profits of that year, as
defined, combined with the retained net profits of the two preceding years. At
December 31, 1999, retained net profits for the years 1999 and 1998, which were
free of such regulatory restrictions, were approximately $3,259,000.
The Corporation and its subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiary must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classifications 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 Corporation and its subsidiary to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and Tier I
capital to average assets (as defined). Management believes, as of December
31, 1999, that the Corporation and its subsidiary meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999, First Century Bank, N.A. has received notification from
the Office of the Comptroller of the Currency that it is well-capitalized under
the regulatory framework for prompt corrective action. To be adequately
capitalized, minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table must be maintained. There are no
conditions or events since the recent notification that management believes have
changed the institution's category.
First Century Bankshares, Inc. Page 37
<PAGE>
16. Regulatory Matters (continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(greater than (greater than (greater than (greater than
or =) or =) or =) or =)
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets):
Consolidated $26,921 10.86% $19,838 8.00%
First Century Bank, N.A. $26,516 10.73% $19,765 8.00% $24,707 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $23,871 9.63% $ 9,919 4.00%
First Century Bank, N.A. $23,466 9.50% $ 9,883 4.00% $14,824 6.00%
Tier I Capital
(to Average Assets):
Consolidated $23,871 6.55% $14,585 4.00%
First Century Bank, N.A. $23,466 6.44% $14,585 4.00% $18,231 5.00%
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(greater than (greater than (greater than (greater than
or =) or =) or =) or =)
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets):
Consolidated $29,027 14.02% $16,566 8.00%
First Century Bank, N.A. $24,620 13.72% $14,359 8.00% $17,949 10.00%
First Century Bank $ 3,955 14.23% $ 2,224 8.00% $ 2,780 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $26,495 12.79% $ 8,283 4.00%
First Century Bank, N.A. $22,425 12.49% $ 7,179 4.00% $10,769 6.00%
First Century Bank $ 3,618 13.01% $ 1,112 4.00% $ 1,668 6.00%
Tier I Capital
(to Average Assets):
Consolidated $26,495 9.08% $11,673 4.00%
First Century Bank, N.A. $22,425 8.71% $10,302 4.00% $12,878 5.00%
First Century Bank $ 3,618 9.62% $ 1,504 4.00% $ 1,881 5.00%
</TABLE>
Page 38 First Century Bankshares, Inc.
<PAGE>
17. Quarterly Financial Data (Unaudited)
The summary financial data by quarter for the years ended December 31, 1999,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
1999
Interest income $5,443 $5,845 $6,744 $6,743
Net interest income 3,025 3,270 3,700 3,726
Provision for possible loan losses 45 120 83 307
Securities gains (losses) -- -- -- --
Income before taxes 1,123 1,353 1,391 1,387
Net income 716 882 918 900
- ------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.36 $ 0.44 $ 0.46 $ 0.45
- ------------------------------------------------------------------------------------------------------------------
1998
Interest income $5,391 $5,731 $5,853 $5,560
Net interest income 3,090 3,213 3,246 3,123
Provision for possible loan losses 188 133 124 99
Securities gains (losses) (14) -- -- (20)
Income before taxes 1,130 1,354 1,290 1,242
Net income 725 864 820 792
- ------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.36 $ 0.43 $ 0.41 $ 0.40
- ------------------------------------------------------------------------------------------------------------------
1997
Interest income $5,252 $5,413 $5,453 $5,593
Net interest income 2,857 3,132 3,111 3,232
Provision for possible loan losses 141 238 204 108
Securities gains (losses) -- 59 -- --
Income before taxes 902 1,262 1,249 1,244
Net income 605 799 817 781
- ------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.30 $ 0.40 $ 0.41 $ 0.39
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
First Century Bankshares, Inc. Page 39
<PAGE>
18. Parent Company Financial Data
Condensed financial information of First Century Bankshares, Inc. (parent
company only) is presented below:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------------------------
Assets: (Dollars in Thousands)
<S> <C> <C>
Cash $ 104 $ 173
Investment in subsidiary at equity 28,469 28,051
Other assets 352 279
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,925 $ 28,503
==================================================================================================================
Liabilities:
Other liabilities $ 51 $ --
----------------------------
TOTAL LIABILITIES 51 --
----------------------------
Stockholders' Equity:
Common stock-$1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1998 and December 31, 1997 2,500 2,500
Paid-in capital 785 785
Retained earnings 25,589 25,218
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 28,874 28,503
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,925 $ 28,503
==================================================================================================================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $1,600 $1,500 $1,300
------------------------------------
TOTAL INCOME 1,600 1,500 1,300
====================================
Expenses:
Other 75 55 33
------------------------------------
TOTAL EXPENSES 75 55 33
------------------------------------
Applicable income taxes (benefits) (28) 25 33
------------------------------------
Income before equity in undistributed
net income of subsidiary 1,553 1,420 1,234
Equity in undistributed net income of subsidiary 1,863 1,781 1,768
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $3,416 $3,201 $3,002
===============================================================================================================
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
Cash flows from operating activities (Dollars in Thousands)
<S> <C> <C> <C>
Net income $ 3,416 $ 3,201 $ 3,002
Adjustments to reconcile net income to net cash
Provided by operating activities:
Equity in undistributed net income of subsidiary (1,863) (1,781) (1,768)
Other adjustments, net (22) 31 1
------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,531 1,451 1,235
------------------------------------------------
Cash flows from financing activities
Cash dividends paid (1,600) (1,500) (1,300)
------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,600) (1,500) (1,300)
------------------------------------------------
Net increase (decrease) in cash (69) (49) (65)
Cash at January 1, 173 222 287
- -----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 104 $ 173 $ 222
=======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 1,678 $ 1,853 $ 1,369
</TABLE>
Page 40 First Century Bankshares, Inc.
<PAGE>
Report of
Independent
Accountants
January 28, 2000
The Board of Directors and Stockholders
First Century Bankshares, Inc.:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income and comprehensive income, of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of First Century Bankshares, Inc.
(formerly Pocahontas Bankshares Corporation) and Subsidiary (the "Corporation")
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Corporation's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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 financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
First Century Bankshares, Inc. Page 41
<PAGE>
Boards of
Directors
<TABLE>
<CAPTION>
FIRST CENTURY BANKSHARES, INC.
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
W. Paul Cole, Jr. Harold Lee Miller, Jr. John C. Shott Frank W. Wilkinson
President Cole Retired, President Chairman of the Board Executive Vice President &
Motor & Cole Flat Top Insurance Agency Paper Supply Company Chief Operating Officer
Chevrolet-Cadillac First Century Bank, N. A.
Charles A. Peters Scott H. Shott
Eustace Frederick President Shott Foundation R. W. Wilkinson
Retired, Senior Vice President- Peters Equipment, Inc. President & Chief Executive
Mining, Consolidation Coal Co., Secretary, First Century Walter L. Sowers Officer, First Century
Southern Appalachia Region Bankshares, Inc. President Bankshares, Inc.,
Pemco Corporation First Century Bank, N. A.
B. L. Jackson, Jr. C. E. Richner
Chairman of the Board President J. Brookins Taylor, M.D.
First Century Bankshares, Inc. C. E. Richner Drilling Co. Physician
Robert M. Jones, Jr., M.D. Byron K. Satterfield
Physician Executive Vice President &
Trust Officer, First Century
Bank, N. A.
<CAPTION>
FIRST CENTURY BANK, N.A.
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J. J. Booker, III, M.D. Robert M. Jones, Jr., MD Byron K. Satterfield William Chandler Swope
Physician Physician Executive Vice President & President
Trust Officer, First Century Swope Construction
C. Scott Briers Harold Lee Miller, Jr. Bank, N. A. Services, Inc.
President, Retired, President
Briers, Inc. Flat Top Insurance Agency John H. Shott J. Brookins Taylor, M.D.
Attorney Physician
W. Paul Cole, Jr. Marshall S. Miller
President, President, Marshall Miller Scott H. Shott Frank W. Wilkinson
Cole Motor & Cole & Associates Shott Foundation Executive Vice President &
Chevrolet-Cadillac Chief Operating Officer
Charles A. Peters Daniel D. Smith First Century Bank, N. A.
Eustace Frederick President President
Retired, Senior Vice President- Peters Equipment, Inc. Pocahontas Land Company R. W. Wilkinson
Mining, Consolidation Coal Co., Secretary, First Century President & Chief Executive
Southern Appalachia Region Bankshares, Inc. Walter L. Sowers Officer, First Century
President Bankshares, Inc.,
B. L. Jackson, Jr. C. E. Richner Pemco Corporation First Century Bank, N. A.
Chairman of the Board President
First Century Bankshares, Inc. C.E. Richner Drilling Co.
<CAPTION>
FIRST CENTURY BANK, N.A.
WYOMING COUNTY OPERATIONS ADVISORY BOARD
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ted Bailey John D. Lay Byron K. Satterfield R. W. Wilkinson
President, Pineville Land Co. Vice President, Wyoming Executive Vice President & President & Chief Executive
County Operations, Trust Officer, First Century Officer, First Century
Tom Evans, Jr. First Century Bank, N. A. Bank, N. A. Bankshares, Inc.,
President, Evans Funeral First Century Bank, N. A.
Home C. E. Richner Frank W. Wilkinson
President, Executive Vice President & Dennis Worrell
C. E. Richner Drilling Co. Chief Operating Officer, Partner, Worrell Exxon &
First Century Bank, N. A. Owner, D & T Car Wash
</TABLE>
Page 42 First Century Bankshares, Inc.
<PAGE>
Board of
Directors
<TABLE>
<CAPTION>
FIRST CENTURY BANK, N. A.
WYTHE COUNTY OPERATIONS ADVISORY BOARD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J. J. Booker, III, M.D. Robert T. Dupuis W. Edward Smith R. W. Wilkinson
Physician President, P & T Products, Inc. Vice President, Wythe President & Chief Executive
County Operations Officer, First Century
James W. Caudill Samual V. Jones, CPA First Century Bank, N. A. Bankshares, Inc.,
President, R.P. Johnson & Sons Hodges, Jones & Mabry, PC First Century Bank, N. A.
Frank W. Wilkinson
Lawrence H. Chewning Stephen A. Lester Executive Vice President &
Chief Executive Officer Ewald-Lester Insurance Chief Operating Officer
Wythe County Community Agency, Inc. First Century Bank, N. A.
Hospital
<CAPTION>
FIRST CENTURY BANK, N. A.
SUMMERS COUNTY OPERATIONS ADVISORY BOARD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C. Scott Briers James E. Monroe, Jr. Byron K. Satterfield R. W. Wilkinson
President President Executive Vice President & President & Chief
Briers, Inc. Greenbrier Nurseries Trust Officer Executive Officer
First Century Bank, N. A. First Century Bankshares, Inc.,
James S. Kerr David L. Parmer First Century Bank, N. A.
Owner Attorney at Law Frank W. Wilkinson
Kerr Realty Executive Vice President &
Bob F. Richmond Chief Operating Officer
Vice President, First Century Bank, N. A.
Summers County Operations
First Century Bank N. A.
</TABLE>
First Century Bankshares, Inc. Page 43
<PAGE>
Officers
<TABLE>
<CAPTION>
FIRST CENTURY BANKSHARES, INC.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
B. L. Jackson, Jr. Robert M. Jones, Jr., MD W. E. Albert J. Ronald Hypes
Chairman of the Board Vice Chairman of the Board Assistant Secretary Treasurer
R. W. Wilkinson Charles A. Peters
President & Chief Executive Secretary
Officer
<CAPTION>
FIRST CENTURY BANK, N.A.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADMINISTRATION Karen Kidd Robert Sexton OPERATIONS
Branch Manager/ Manager, Consumer Loans
R. W. Wilkinson Assistant Cashier, W. E. Albert
President & Chief Executive College Ave. Office Randall Price Senior Vice President & Cashier
Officer Vice President,
Juanita Growe Corporate Lonnie E. Cochran
Frank W. Wilkinson Branch Manager, Development Assistant Vice President,
Executive Vice President Pineville Office Operations
& Chief Operating Officer Marshall V. Lytton
Jean Stanley Loan Officer, Nina C. Dickson
J. Ronald Hypes Branch Manager/ Bluefield Office Manager, Administrative
Senior Vice President & Assistant Cashier, Support Group
Chief Financial Officer Princeton Office Debra Brunty
Assistant Vice President-Loans, Martha Cooper
Wayne L. Blevins Brenda Davidson Wyoming County Operations Assistant Cashier
Assistant Comptroller Branch Manager and
Loan Officer, James Goodwin Harold Mitchell
Barbara Moore-Ray Bluefield, Virginia Office Loan Officer, Assistant Vice President,
Community Development Princeton Office Item Processing
Officer Zerna Felts
Branch and Security Officer, Linda Hamer Rebecca Lynn Daniels
Kenneth W. Beard Fort Chiswell Office Loan Officer, Assistant Cashier, Wyoming
Vice President & College Avenue Office County Operations
Compliance Officer Michelle Thompson
Customer Service Manager Christopher W. Nipper TRUST
Cynthia L. Higgins Loan Officer,
Auditor Rhonda G. Sutherland Princeton Office Byron K. Satterfield
Teller Manager Executive Vice President
Lisa A. Huff Charles Lester & Trust Officer
Director of Human Resources Rita Goodman Loan & Collection Officer
Assistant Cashier, Patsy R. Sykes
John Phillips Oceana Office Barry W. Whitt Vice President & Trust Officer
Assistant Cashier & Loan Administration Officer
Director of Marketing Linda Rider Elizabeth Pruett
IRA Coordinator Shela D. Fortner Vice President
David W. Albert Consumer Loan Officer, & Trust Officer
Network Administrator Ronnie Hamlin Pineville Office
Facilities Manager and Angela M. James
Deborah L. Bowman Assistant Security Officer Charlene Maynard Trust Officer,
Special Projects Officer Consumer Loan Officer, Employee Benefits
Cathy Laxton Oceana Office
BRANCH Bank Security Officer Carol Oliver
ADMINISTRATION Rick Blevins Trust Operations Officer
Nancy Cales Installment Loan
Christina H. Naylor Assistant Cashier Officer/Collections Yvonne Hurst
Vice President, Trust Administrative Officer
Deposit Operations LOANS Randy Bowles
Assistant Vice President,
John D. Lay Jeffrey L. Forlines Summers County Office
Vice President, Senior Vice President,
Wyoming County Operations Chief Credit Officer Bill Keaton
Assistant Vice President,
Bob Richmond Garnett L. Little Summers County Office
Vice President, Vice President, Loans
Summers County Operations Sharon Cole
Hal Absher Assistant Cashier
W. Edward Smith Director of Secondary
Vice President, Mortgage Lending Janet Whitten
Wythe County Assistant Cashier
</TABLE>
Page 44 First Century Bankshares, Inc.
<PAGE>
First Century
Bankshares, Inc.
First Century Bank, N.A.
Locations
500 Federal Street
Bluefield, WV 24701
(304) 325-8181
525 Federal Street
Bluefield, WV 24701
(304) 325-6600
2020 College Avenue
Bluefield, WV 24701
(304) 327-5660
1223 Stafford Drive
Pine Plaza, Princeton, WV 24740
(304) 425-0856
427 Virginia Ave.
Bluefield, VA 24605
(540) 326-2606
Rt. 10, Cook Parkway
Oceana, WV 24870
(304) 682-6221
Rt. 10, East Pineville
Pineville, WV 24874
(304) 732-8850
321 Temple Street
Hinton, WV 25951
(304) 466-2311
200 Pepper's Ferry Road
Wytheville, VA 24382
(540) 223-1115
Route 94
Max Meadows, VA 24360
(540) 637-3100
First Century Bankshares, Inc. Page 45
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,372
<INT-BEARING-DEPOSITS> 3,239
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75,676
<INVESTMENTS-CARRYING> 9,455
<INVESTMENTS-MARKET> 9,242
<LOANS> 243,977
<ALLOWANCE> 3,050
<TOTAL-ASSETS> 367,578
<DEPOSITS> 319,895
<SHORT-TERM> 16,958
<LIABILITIES-OTHER> 1,851
<LONG-TERM> 0
0
0
<COMMON> 2,500
<OTHER-SE> 26,374
<TOTAL-LIABILITIES-AND-EQUITY> 367,578
<INTEREST-LOAN> 19,700
<INTEREST-INVEST> 4,483
<INTEREST-OTHER> 592
<INTEREST-TOTAL> 24,775
<INTEREST-DEPOSIT> 10,456
<INTEREST-EXPENSE> 11,054
<INTEREST-INCOME-NET> 13,721
<LOAN-LOSSES> 555
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,104
<INCOME-PRETAX> 5,254
<INCOME-PRE-EXTRAORDINARY> 3,416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,416
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.71
<YIELD-ACTUAL> 4.41
<LOANS-NON> 2,390
<LOANS-PAST> 2,818
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,533
<CHARGE-OFFS> 714
<RECOVERIES> 179
<ALLOWANCE-CLOSE> 3,050
<ALLOWANCE-DOMESTIC> 3,050
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 950
</TABLE>
