U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 33-14252
FIRST NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 62-1306172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cedar Street, Ronceverte, West Virginia 24970
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 647-4500
Securities registered pursuant to Sec. 12(b) of the Act- None
Securities registered pursuant to Sec. 12(g) of the Act- None
Securities issued pursuant to a registrant statement which became effective
under the Securities Act of 1933-
Common Stock, par value $5.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
[X] Not subject to Section 16(a) requirements.
As of February 28, 1996, the aggregate market value of the outstanding voting
common stock held by nonaffiliates of the registrant, computed by reference to
the price at which said stock was actually sold in a transaction known to
management which took place on or about February 14, 1997, (management believes
$50.00 was paid per share) was $8,100,450. This price was determined from this
transaction known to management of the registrant since its stock is not
extensively traded, listed on any exchange, or quoted by NASDAQ.
The total number of shares of the registrant's common stock outstanding as of
February 28, 1997, was 192,500.
Documents Incorporated by Reference
Part of Form 10-K into which
Document the document is incorporated
Articles of Incorporation, from 12/31/94 10-K Part IV, Item 14
By-Laws, from 12/31/94 Report 10-K Part IV, Item 14
Material Employment Contract, from 12/31/94 Report 10-K Part IV, Item 14
Material Lease Contract, from 03/31/96 Form 10-Q Part IV, Item 14
S-8 Statement, from 07/31/96 Form S-8 Part IV, Item 14
THIS REPORT CONTAINS 65 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 57 .
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FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
Table of Contents
Page
PART I
Item 1 - Business 3
Item 2 - Properties 5
Item 3 - Legal Proceedings 5
Item 4 - Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters 5
Item 6 - Selected Financial Data 7
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 8-20
Item 8 - Financial Statements and Supplementary Data 20-46
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 47
PART III
Item 10 - Directors and Executive Officers of the Registrant 48-50
Item 11 - Executive Compensation 51
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 52
Item 13 - Certain Relationships and Related Transactions 53
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K Financial Statements 54
Signatures 55
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PART I
ITEM 1 - BUSINESS
Organizational History
First National Bankshares Corporation (referred to in this report as "the
Company") is a West Virginia corporation. It was organized on January 28, 1986,
and is a registered bank holding company under the Bank Holding Company Act of
1956, as amended.
The Company has one wholly-owned subsidiary, a national banking association
which was known as The First National Bank in Ronceverte, until January, 1996,
when the name was changed to First National Bank ("the Bank"). The Bank was
originally organized and chartered in 1888, but was reorganized after the Great
Depression and now operates under a charter dated 1933. Pursuant to a plan of
reorganization, the Bank became a wholly-owned subsidiary of the Company on
August 3, 1987. The Company's business activities are conducted through the
Bank, as the Bank presently accounts for substantially all of the Company's
assets, revenues and earnings.
General
The Bank is a Federally insured depository institution offering a wide variety
of services that are typical of full service community banks from its main
office located in Ronceverte and from its branch offices in Lewisburg and
Charleston, West Virginia. The Bank received approval from the Office of the
Comptroller of the Currency in January, 1996, to open the branch facility in
Charleston, West Virginia, which was officially opened in mid-July, 1996.
Concurrent with the application for the Charleston branch, the Bank withdrew its
previous application for a Huntington, West Virginia branch, which had been
approved in January of 1995.
The Bank accepts deposits primarily from customers located within its primary
market area. The Bank offers both its individual and business customers assorted
deposit products with various maturities and interest rates, including
non-interest bearing and interest bearing demand deposits, savings deposits,
certificates of deposit, club accounts and individual retirement accounts.
The Bank offers a full spectrum of lending services to its customers, including
commercial loans and lines of credit, residential real estate loans, consumer
installment loans and other personal loans. Loan terms, including interest
rates, loan to value ratios, and maturities are tailored as much as possible to
meet the needs of the borrower. Commercial loans are generally secured by
various collateral, including commercial real estate, accounts receivable and
business machinery and equipment. Residential real estate loans consist
primarily of mortgages on the borrower's personal residence, and are typically
secured by a first lien on the subject property. Consumer and personal loans are
generally secured, often by first liens on automobiles, consumer goods or
depository accounts. A special effort is made to keep loan products as flexible
as possible within the guidelines of prudent banking practices in terms of
interest rate risk and credit risk. Bank lending personnel adhere to established
lending limits and authorities based on each individual's lending expertise and
experience.
When considering loan requests, the primary factors taken into consideration by
the Bank are the cash flow and financial condition of the borrower, the value of
the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
The Bank also offers a broad range of fiduciary services through its Trust
Department, including the administration of trusts and decedents' estates and
other personal and corporate fiduciary services. Personal fiduciary services
include the settlement of estates, administration of testamentary and inter
vivos trusts, agency or custodial accounts, investment management and guardian
services.
Market Area
The Bank's primary market area includes the cities of Ronceverte and Lewisburg
and surrounding Greenbrier County. This area is predominately rural and
comprised of moderate income households. Major employment in the area includes
agriculture, tourism, health care, education and light manufacturing.
Unemployment rates in the area often exceed the national and West Virginia
averages.
The new branch location in the city of Charleston is located in Kanawha County,
West Virginia. This area is home of the state capital and is the largest
metropolitan area in West Virginia. Primary employment is related to various
professional service industries, health care, state government, and the chemical
industry. The Charleston area typically
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has unemployment rates far below the state average and is much more insulated
from economic downturns than the Greenbrier County area.
Competition
The banking and financial services business is highly competitive, especially in
the Bank's market area. The Bank's principal competitors in Greenbrier County
include four other commercial banks, each of which are owned by statewide or
regional bank holding companies. As of December 31, 1996, management estimates
that the Bank had deposits representing an estimated 15% of total deposits and
loans representing an estimated 14% of total loans of all five commercial banks
servicing its market area. In addition, the Bank also competes for loans,
deposits and trust accounts with other regional banks, credit unions, savings
and loan associations, consumer finance companies, insurance companies and
direct lending agencies affiliated with Federal and state governments.
It is too early to estimate the impact of competition on the new Charleston
branch. The Charleston area is serviced by the state's four largest banking
organizations, as well as several small independent banks. Currently, the
Company's market share is estimated to be less than 1% for both deposits and
loans.
The increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. In order
to compete with the other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized services
tailored to meet its customers' needs.
The Bank generates new business primarily through newspaper and radio
advertising, referrals and direct-calling efforts. Referrals for new business
come from Company directors, present customers of the Bank and professionals
such as attorneys and accountants.
Supervision and Regulation
The Company is subject to regulation under the Bank Holding Company Act of 1956,
as amended ("the Act"). The Act requires the prior approval of the Federal
Reserve Board for a bank holding company to acquire or hold more than a 5%
voting interest in any bank, and restricts interstate banking activities. On
September 29, 1994, the Act was amended by The Interstate Banking and Branch
Efficiency Act of 1994 which authorized interstate bank acquisition anywhere in
the country, effective one year after the date of enactment, and interstate
branching by acquisition and consolidation, effective June 1, 1997 in those
states that have not opted out by that date. The impact of this amendment on the
Company cannot be measured at this time. The Act further restricts bank holding
company nonbanking activities to those which are determined by the Federal
Reserve Board to be closely related to banking and a proper incident thereto.
The Bank is a national banking association chartered under the laws of the
United States. As such, the operations of the Bank are subject to the
regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation ("the FDIC")
and West Virginia law. The Bank is also subject to periodic examination by the
Comptroller of the Currency.
The Federal Deposit Insurance Corporation Improvement Act of 1991 covers a wide
expanse of banking regulatory issues. The FDIC Improvement Act deals with the
recapitalization of the Bank Insurance Fund, with deposit insurance reform,
including requiring the FDIC to establish a risk-based premium assessment
system, and with a number of other regulatory and supervisory matters.
The monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of banks and bank
holding companies. The nature of future monetary policies and the effect of such
policies on the future business and earnings of the Company and the Bank cannot
be predicted.
Employees
At December 31, 1996, the Bank employed 38 full-time and 2 part-time employees.
The Company has no employees who are not also employees of the Bank. Such
employees are not represented by any collective bargaining unit, and management
believes its employee relations are good.
Statistical Information
The disclosures required by Industry Guide 3 - Statistical Disclosure by Bank
Holding Companies are included in "Item 6 - Selected Financial Data" on page 7
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 8 to 20 of this report, and are incorporated
herein by reference.
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ITEM 2 - PROPERTIES
The Bank owns its principal office at One Cedar Street in Ronceverte, West
Virginia. The building is fully used by the Bank in its operations. It also owns
an adjacent drive-in banking facility that provides drive-in services, as well
as customer parking for the principal office of the Bank. During 1996, as in
prior years, the Bank's branch on Route 219 North in Lewisburg, West Virginia,
was leased.
The lease on the Bank's Lewisburg branch commenced April 1, 1986, and ran for a
10-year term, expiring in March of 1996. In January of 1996, Bank Management and
the Board of Directors opted to renegotiate the lease in an attempt to reduce
the annual cost to the Bank, as well as to evaluate other branch options.
Negotiations did not result in a mutually satisfactory agreement, and the Board
of Directors voted not to renew the current lease, but to commence with the
purchase of land and the construction of a new branch location. The Company
completed construction of a new branch facility and commenced operations on
January 27, 1997. The new branch facility is located on U.S. Route 219,
approximately 1 mile north of the previous branch location, and is expected to
be fully used in the Bank's operations. Management does not anticipate that this
action will have any significant impact on its financial position.
The new Charleston branch is located in Laidley Tower, a 16-story high-rise
office building in downtown Charleston, WV. Effective May 1, 1996, the Company
entered into a 10-year non-cancelable lease agreement to occupy approximately
4,532 square feet of the building. Additional information related to this lease
can be found in Note 12 of the Notes to Consolidated Financial Statements which
is included in Item 8 of this filing.
The Bank's properties and leased facilities are considered well suited for its
current needs. Both the main office located in Ronceverte, WV, and the branch
location in Lewisburg, WV, have full-service banking available, including
drive-in banking services. Space at both locations is ample, and no significant
modifications are required at either location. The new branch facility in
Charleston is also a full-service branch offering the same services as the
current locations, except it offers no drive-in banking services.
In January, 1996, the main office of the Bank realized damage due to flood
waters which necessitated significant remodeling of the first floor. This damage
was covered by adequate flood insurance. However, management decided to increase
the construction to include not only the replacement of flood damaged items, but
also the overall remodeling of the first floor. Substantially all remodeling to
the main office was completed by December 31, 1996.
ITEM 3 - LEGAL PROCEEDINGS
The Company and the Bank are not currently involved in any material legal
proceedings, other than routine litigation incidental to their business, which
involve them or any of their properties.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1996.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The Company's stock was first issued on August 3, 1987, as a result of the
consummation of the transaction by which First National Bankshares Corporation
became a one-bank holding company owning all of the outstanding stock of the
Bank. As a result of the issuance of the Company's stock, the stockholders of
the Bank became the stockholders of the Company's receiving 5 shares of the
Company's common stock for each share of the common stock of the Bank held by
them. As of December 31, 1996, the Company's common stock was held by
approximately 442 stockholders of record.
There is no active or organized trading market for the common stock of the
Company. The stock of the Company is traded on a limited basis in privately
negotiated transactions. At present, there is no market maker for the Company's
common stock. Accordingly, the prices shown below may not be indicative of
prices which would prevail if the stock were more actively traded. Bid and ask
prices are not available for the stock of the Company.
While management occasionally knows of the actual price paid for its common
stock in a transaction, management is not aware of prices paid in most, and
sometimes all, sales of the Company stock since such transactions are privately
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negotiated. However, in some of these transactions, individuals have called the
Company and asked for a value for its common stock. In response to such
inquiries, the Company provides the individual with the book value of its common
stock as of the end of the most recent quarter, as well as the most recent price
per share paid in transactions known to management. Stock trades during 1996
that were known to management took place at $50.00 to $50.30 per share, with the
majority of known transactions having a per share price of $50.00. This is
substantially unchanged from prices known for 1995 transactions. The following
high and low prices are the book values of a share of the Company's common stock
at the beginning and end of each of the quarters shown below. These may
represent amounts which may have been paid for the common stock of the Company
during the periods indicated, however management makes no representations
concerning trades that were conducted privately.
- -------------------------------------------------------------------------------
1996 1995
-----------------------------------------------
High Low High Low
First Quarter $ 44.16 $ 44.04 $ 39.70 $ 38.90
Second Quarter 45.02 44.64 41.87 40.24
Third Quarter 45.42 45.28 42.48 41.83
Fourth Quarter 45.93 45.84 43.72 43.03
- ------------------------------------------------------------------------------
The Company traditionally paid dividends on a semi-annual basis. However,
beginning in September of 1994, the Company's Board of Directors voted to begin
a practice of declaring quarterly dividends. A summary of dividends per share
declared during 1996 and 1995 follows:
- -------------------------------------------------------------------------------
1996 1995
------- -------
First Quarter $ .33 $ .30
Second Quarter .33 .30
Third Quarter .33 .30
Fourth Quarter .40 .30
- -------------------------------------------------------------------------------
The Company plans to continue the pattern of declaring quarterly dividends in
the future at a rate consistent with its historical payout ratios.
Payment of dividends by the Company is dependent upon payments to it from the
subsidiary bank. The ability of the subsidiary bank to pay dividends is subject
to certain limitations. These limitations are discussed in Note 14 of the Notes
to Consolidated Financial Statements, which are included in Item 8 of this
filing.
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ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
SUMMARY OF OPERATIONS
Interest income ................ $ 6,166 $ 5,688 $ 5,599 $ 5,926 $ 6,460
Interest expense ............... 2,393 2,115 2,089 2,359 2,887
Net interest income ............ 3,773 3,573 3,510 3,568 3,573
Provision for loan losses ...... 0 0 123 459 460
Non-interest income ............ 433 415 419 366 375
Non-interest expense ........... 3,140 2,920 3,100 2,815 2,814
Income before income taxes ..... 1,066 1,068 706 659 674
Income before cumulative effect of
change in accounting principle . 736 767 542 498 491
Net income ..................... 736 767 542 298 491
PER SHARE DATA
Income before cumulative effect of
change in accounting principle . $ 3.82 $ 3.98 $ 2.82 $ 2.59 $ 2.55
Net income ..................... 3.82 3.98 2.82 1.55 2.55
Cash dividends declared ........ 1.39 1.20 1.00 0.90 0.90
Book value per share ........... 45.93 43.72 37.98 39.56 38.24
AVERAGE BALANCE SHEET SUMMARY
Loans, net of unearned
discount and reserve ........... $48,037 $41,853 $40,954 $44,532 $43,652
Securities ..................... 23,341 27,321 31,722 28,261 25,401
Deposits ....................... 69,838 66,367 72,082 72,584 71,442
Shareholders' equity ........... 8,672 8,223 7,779 7,616 7,314
Total assets ................... 79,985 75,351 80,274 80,615 79,216
AT YEAR END
Loans, net of unearned
discount and reserve ........... $52,800 $45,773 $38,766 $45,240 $44,199
Securities ..................... 22,617 24,015 30,802 29,518 26,443
Deposits ....................... 73,316 66,166 69,685 73,543 72,941
Shareholders' equity ........... 8,841 8,415 7,311 7,487 7,362
Total assets ................... 83,668 75,455 77,738 81,615 80,560
SELECTED RATIOS
Return on average assets (1) ... 0.92% 1.02% 0.68% 0.62% 0.62%
Return on average equity (1) ... 8.49 9.33 6.97 6.54 6.70
Average equity to average assets 10.84 10.91 9.69 9.45 9.23
Dividend payout ratio (1) ...... 36.35 30.12 35.52 34.76 35.32
(1) - Before cumulative effect of change in accounting principle during 1993.
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ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of the Company for the applicable
periods covered by the consolidated financial statements appearing elsewhere in
this report. The statements contained in this discussion may include
forward-looking statements based on management's current expectations, and
actual results may differ materially. This discussion and analysis should be
read in conjunction with such financial statements and the accompanying notes
thereto.
First National Bankshares Corporation (the "Company"), incorporated under the
laws of the State of West Virginia in 1986, is a one bank holding company
headquartered in Ronceverte, West Virginia. The Company owns 100% of the
outstanding common stock of First National Bank ("the Bank"), which comprises
substantially all of the Company's assets and liabilities, and from which the
Company presently derives all of its earnings.
Earnings Summary
The Company reported net income of $736,000 for 1996, representing an decrease
of $31,000 or 4.0% over the $767,000 reported for 1995. This decrease in 1996
earnings was largely attributable to a $158,000 increase in salaries and
employee benefits, and a $29,000 increase in income taxes. The Company's 1996
and 1995 earnings were both significantly improved over 1994's earnings due to
lower loan loss provisions and FDIC assessments, and the continuing increases in
the Company's net interest income.
On a per share basis, net income was $3.82 in 1996, $3.98 in 1995, and $2.82 in
1994. An analysis of the changes in earnings per share by major statement of
income component is presented in the following table:
- -------------------------------------------------------------------------------
1996 1995
vs. vs.
1995 1994
Earning per common share, prior year $ 3.98 $ 2.82
Increase (decrease) from changes in:
Net interest income 1.04 .33
Provision for loan losses .00 .64
Other income .09 (.03)
Other expenses (1.14) .94
Income taxes (.15) (.72)
--------- ---------
Earning per common share $ 3.82 $ 3.98
======== ========
- -------------------------------------------------------------------------------
Return on average assets (ROA), a measure of how effectively the Company
utilizes its assets to produce net income, was 0.92% for 1996, compared to 1.02%
for 1995 and 0.68% for 1994. Return on average equity (ROE), which measures
earnings performance relative to the total amount of equity capital invested in
the Company, was 8.49% in 1996, 9.33% in 1995, and 6.97% in 1994. The decrease
in both of these ratios is due to the lower earnings noted above.
Net Interest Income
The most significant component of the Company's net earnings is net interest
income, which represents the excess of interest income earned on loans,
securities and other interest earning assets over interest expense on deposits.
Net interest income is influenced by changes in volume resulting from growth and
alteration of the balance sheet's composition, as well as by fluctuations in
market interest rates and maturities of sources and uses of funds. Net interest
income is presented and discussed in this section on a fully Federal
tax-equivalent basis to enhance the comparability of the performance of
tax-exempt securities to other fully taxable earning assets. For the years ended
1996, 1995, and 1994, tax-equivalent adjustments of $109,000, $121,000, and
$121,000, respectively, are included in interest income, and were computed
assuming a tax rate of 34% in all periods.
For the year 1996, the Company's net interest income, as adjusted, increased
$188,000 or 5.09% to $3,882,000 as compared to $3,694,000 and $3,631,000 in 1995
and 1994, respectively. This increase was attributable to overall growth in the
loan portfolio which is the Bank's highest-yielding earning asset. The Company's
net interest margin
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remained consistent with the previous year at 5.15% in 1996 compared with 5.16%
in 1995 and 4.78% in 1994.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities and changes in net interest income as a result of changes in
average volume and interest rates are presented in TABLES I and II.
Provision for Loan Losses
The provision for loan losses represents charges to earnings necessary to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. Management
considers various factors in determining the amount of the provision for loan
losses including overall loan quality, changes in the mix and size of the loan
portfolio, previous loss experience and general economic conditions.
No provision for loan losses was considered necessary during 1996 and 1995,
while a provision of $123,000 was considered necessary in 1994. The reduction in
the provision for 1996 and 1995 reflects management's general strengthening of
the Company's loan underwriting standards, a reduction in the level of past due
loans and an overall decline in net charge-offs. See the ALLOWANCE FOR LOAN
LOSSES AND RISK ELEMENTS section of this discussion for additional information
related to the adequacy of the provision for loan losses.
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TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
1996 1995
------------------------ -------------------
Average Yld/ Average Yld/
Balance Int. Rate Balance Int Rate
INTEREST EARNING ASSETS
Loans, net of unearned discount (1) $48,037 $4,667 9.72% $42,632 $4,018 9.42%
Securities:
Taxable 18,855 1,072 5.69 22,494 1,337 5.94
Tax-exempt (2) 4,486 321 7.16 4,827 355 7.35
--------- ------ ----- ------- ----- ----
Total securities 23,341 1,393 5.97 27,321 1,692 6.19
--------- ------ ----- ------- ----- -----
Federal funds sold 4,049 215 5.31 1,635 99 6.05
------- ------ ----- ------- ------ -----
Total interest earnings assets 75,427 6,275 8.32 71,588 5,809 8.11
--------- -------
NON INTEREST EARNING ASSETS
Cash and due from banks 2,475 2,227
Bank premises and equipment 1,499 1,071
Other assets 1,194 1,224
Allowance for loan losses (610) (759)
--------- -------
Total assets $ 79,985 $75,351
========= =======
INTEREST BEARING LIABILITIES
Demand deposits $ 13,449 360 2.67 $13,298 354 2.66
Savings deposits 20,419 727 3.56 20,075 703 3.50
Time deposits 26,325 1,293 4.91 23,744 1,058 4.45
--------- ------ ---- -------- ----- -----
Total interest bearing deposits 60,193 2,380 3.95 57,117 2,115 3.70
Repurchase Agreements 320 13 4.17 0 0 0.00
--------- ------ ---- -------- ----- -----
Total interest bearing liab. 60,513 2,393 3.95 57,117 2,115 3.70
NON INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 9,645 9,250
Other liabilities 1,155 569
Shareholders' equity 8,672 8,415
--------- -------
Total liabilities and
shareholders' equity $ 79,985 $ 75,351
========= ========
NET INTEREST EARNINGS $3,882 $3,694
====== ======
NET YIELD ON INTEREST EARNING ASSETS 5.15% 5.16%
===== =====
(CONTINUED ON NEXT PAGE.)
(1)-For purposes of this table, nonaccruing loans are included in average loan
balances. Loan fees are also included in interest income.
(2)-Computed on a Federal tax-equivalent basis using the rate of 34%
for all years.
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TABLE I - CONTINUED
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
1995 1994
---------------------------------------------
Average Yld/ Average Yld/
Balance Int Rate Balance Int Rate
INTEREST EARNING ASSETS
Loans, net of unearned discount (1) $42,632 $4,018 9.42% $41,882 $3,679 8.78%
Securities:
Taxable 22,494 1,337 5.94 27,169 1,585 5.83
Tax-exempt (2) 4,827 355 7.35 4,553 355 7.80
--------- ----- ----- ----- ----- ----
Total securities 27,321 1,692 6.19 31,722 1,940 6.12
--------- ----- ------ ------ ----- ----
Federal funds sold 1,635 99 6.05 2,365 101 4.27
--------- ------ ---- ------ ------ ----
Total interest earnings assets 71,588 5,809 8.11 75,969 5,720 7.53
-------- ------
NON INTEREST EARNING ASSETS
Cash and due from banks 2,227 2,799
Bank premises and equipment 1,071 1,089
Other assets 1,224 1,345
Allowance for loan losses (759) (928)
--------- --------
Total assets $ 75,351 $80,274
========= ========
INTEREST BEARING LIABILITIES
Demand deposits $ 13,298 354 2.66 $12,077 327 2.71
Savings deposits 20,075 703 3.50 24,801 781 3.15
Time deposits 23,744 1,058 4.45 26,053 981 3.77
--------- ------ ----- ------- ------ ----
Total interest bearing deposits 57,117 2,115 3.70 62,934 2,089 3.32
Repurchase Agreements 0 0 0.00 0 0 0.00
--------- ------ ---- ------- ------ ----
Total interest bearing liab. 57,117 2,115 3.70 62,931 2,089 3.32
NON INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 9,250 9,151
Other liabilities 569 413
Shareholders' equity 8,415 7,779
--------- ------
Total liabilities and
shareholders' equity $ 75,351 $80,274
========= ========
NET INTEREST EARNINGS $3,694 $3,631
====== ======
NET YIELD ON INTEREST EARNING ASSETS 5.16% 4.78%
===== =====
(1) - For purposes of this table, nonaccruing loans are included in average loan
balances. Loan fees are also included in interest income.
(2) - Computed on a Federal tax-equivalent basis using the rate of
34% for all years.
- -------------------------------------------------------------------------------
11
<PAGE>
- -------------------------------------------------------------------------------
TABLE II
CHANGE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
(Dollars in thousands)
1996 vs. 1995 1995 vs 1994
------------------------ --------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
INTEREST EARNING ASSETS
Loans ................... $ 522 $ 127 $ 649 $ 67 $ 272 $ 339
Securities:
Taxable ................. (209) (56) (265) (277) 29 (248)
Tax-exempt (2) .......... (25) (9) (34) 21 (21) 0
----- ----- ----- ----- ----- -----
Total securities ........ (234) (65) (299) (256) 8 (248)
----- ----- ----- ----- ----- -----
Federal funds sold ...... 128 (12) 116 (37) 34 (3)
----- ----- ----- ----- ----- -----
Total interest earning asset 416 50 466 (226) 314 88
----- ----- ----- ----- ----- -----
INTEREST BEARING LIABILITIES
Demand deposits ......... 4 2 6 33 (6) 27
Savings deposits ........ 12 12 24 (159) 81 (78)
Time deposits ........... 120 115 235 (92) 168 76
Repurchase Agreements ... 13 0 13 0 0 0
----- ----- ----- ----- ----- -----
Total interest bearing
liabilities ............. 149 129 278 (218) 243 25
----- ----- ----- ----- ----- -----
NET INTEREST EARNINGS ... $ 267 $ (79) $ 188 $ (8) $ 71 $ 63
===== ===== ===== ===== ===== =====
(1) - The change in interest due to both rate and volume has been allocated
between the factors in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) - Calculated assuming a fully tax-equivalent basis using the rate of 34%.
- -------------------------------------------------------------------------------
11
<PAGE>
Non-interest Income
Non-interest income includes revenues from all sources other than interest
income and yield related loan fees. Noninterest income totaled $433,000,
$415,000, and $419,000 for the years ended December 31, 1996, 1995, and 1994, or
6.56%, 6.80%, and 6.96% of total income, respectively. For the year 1996,
non-interest income was $433,000, up 4.3% from $415,000 in 1995, and also
increased over 1994's level of $419,000. The following table details the
components of non-interest income earned by the Company in 1996, 1995, and 1994,
as well as the percentage increase (decrease) in each over the prior year.
- -------------------------------------------------------------------------------
1996 1995 1994
------------------ ----------------- ----------
Percent Percent
Amount Change Amount Change Amount
Trust department income ...... $ 66,000 (52.5%) $139,000 78.2% $ 78,000
Service fees and commissions . 251,000 20.1 209,000 5.4) 221,000
Securities Gains (Losses), Net 1,000 0.0 1,000 -- --
Other ........................ 115,000 74.2 66,000 (45.0) 120,000
-------- ---- --------- ---- --------
$433,000 4.3% $415,000 (1.0%) $419,000
======== ==== ======= ==== ========
- --------------------------------------------------------------------------------
The decrease in trust department income in 1996 resulted primarily from the loss
of non-recurring fees which were realized in 1995 from the administration of a
large estate. While the Company seeks to attract new trust business, estates and
other trust services tend to fluctuate, and trust revenues are expected to
remain at current levels during 1997. Service charges and commissions increased
by $42,000, or 20.1% to $251,000 in 1996 due to a concentrated effort by the
Bank to increase its fee income on deposit products and other services.
Other non-interest income also increased, reaching $115,000 during 1996 versus
$66,000 for the year ended December 31, 1995. Total other non-interest income
has fluctuated between 1994 to 1996 primarily due to non-recurring items. Other
income increased $49,000, or 74.2%, in 1996 primarily due to a $58,000 gain
recognized from insurance proceeds received as a result of flood damage to the
Bank's main banking facility. Also, other non-interest income decreased $54,000
or 45.0% in 1995 primarily due to the recognition of a $39,000 gain on proceeds
received under a key-man life insurance policy during 1994.
Non-interest Expense
Non-interest expense comprises overhead costs which are not related to interest
expense or to losses from loans or securities. The following table itemizes the
primary components of non-interest expense for 1996, 1995 and 1994, and the
percentage increase (decrease) in each over the prior year.
- --------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------
Percent Percent
Amount Change Amount Change Amount
Salaries and employee benefits $1,628,000 10.7% $1,470,000 (0.5%) $1,477,000
Net occupancy expense ........ 292,000 19.7 244,000 10.9 220,000
Equipment rental, depreciation
and maintenance ........... 216,000 4.3 207,000 (9.2) 228,000
Federal deposit ins. premiums 3,000 (96.3) 80,000 (56.5) 184,000
Data processing .............. 160,000 (9.1) 176,000 (6.4) 188,000
Advertising .................. 77,000 (15.4) 91,000 (8.3) 84,000
Professional & Legal ......... 111,000 (15.9) 132,000 (53.8) 286,000
Mailing and Postage .......... 81,000 22.7 66,000 (5.7) 70,000
Directors' fees and
shareholders' expense .... 92,000 15.0 80,000 66.7 48,000
Stationary & Supplies ........ 97,000 64.4 59,000 (25.3) 79,000
Other ........................ 383,000 21.6 315,000 33.5 236,000
---------- ---- ----------- ---- ----------
$3,140,000 7.5% $2,920,000 (5.8) $3,100,000
========== ==== ========== ==== ==========
- --------------------------------------------------------------------------------
Non-interest expense increased $220,000, or 7.5%, compared to 1995, primarily
due to an increase in salaries and employee benefits of $158,000. Salaries and
employee benefits represent the Company's largest non-interest cost, comprising
approximately 51.8% of total non-interest expense in 1996. The increase in
salaries and employee benefits
12
<PAGE>
in 1996 compared to 1995 is due primarily to the addition of four new positions
at the new Charleston branch office, as well as normal merit increases for the
existing staff. The four new branch employees were on the Bank's payroll for
approximately the last six months of 1996.
Increased occupancy and equipment costs realized in 1996 is a result of the
performance of certain building maintenance and upgrade projects, from the
additional depreciation expense on furnishings, computers and other equipment
acquired in connection with the new Charleston office and the additional lease
expense for the new Charleston office. Total new occupancy expenses associated
with the Charleston office in 1996 which were not present in previous years
include lease expense of $54,000 and additional depreciation expense of $24,000.
Federal Deposit insurance premiums fell dramatically in both 1996, falling by
$77,000 to $3,000. This was due to a general reduction in FDIC assessment
premiums realized throughout the banking industry.
Stationary and supplies expense was 64.4% higher in 1996 versus 1995 due largely
to the new Charleston branch office. Significant promotional material was
printed, as was new letterhead, envelopes, business cards and related stationary
items for the new office. Additionally, the Company ordered new stationary for
the existing offices with an updated corporate logo due to the change in the
Bank's name during the first quarter of 1996.
The 15.4% decrease in advertising expense in 1996 versus 1995, and the
corresponding 15.0% increase in directors' fees and shareholders' expense is due
to the internal reclassification of the cost of annual reports and quarterly
shareholder mailings from advertising expense to shareholders' expense.
The slight decrease in salaries and employee benefits in 1995 compared to 1994
is due primarily to a reduction in the total number of employees. However, the
overall reduction was offset by normal merit salary increases for existing staff
and by the Company's hiring of a Credit Administration Officer, which was a
newly established position. Increased occupancy and equipment costs realized in
1995 is a result of the performance of certain building maintenance and upgrade
projects and from the additional depreciation expense on computers and other
equipment acquired during the latter part of the previous year. Federal Deposit
insurance premiums fell dramatically in 1995, falling by $104,000 to $80,000.
This was due to a general reduction in FDIC assessment premiums realized
throughout the banking industry. 1994's other non-interest expenses was much
higher than 1995's level, primarily due to a one-time, non-recurring consulting
expense realized during 1994.
Income Taxes
The Company's income tax expense, which includes both Federal and State income
taxes, totaled $330,000 or 30.9% of pre-tax income in 1996, compared to $301,000
or 28.2% in 1995, and $164,000 or 23.2% in 1994. For financial reporting
purposes, income tax expense does not equal the Federal statutory income tax
rate of 34% when applied to pre-tax income, primarily because of State income
taxes and interest income derived from tax-exempt securities. The increase in
the Company's effective tax rate is attributable to a disproportionate increase
in taxable income (primarily from loan growth and decreased expense levels) in
comparison to non-taxable income. There was no increase in tax-exempt income for
the Company during 1996, therefore tax-exempt interest income represented a much
smaller percentage of the company's profit before taxes. Additional details
relative to the Company's income taxes are included in Note 9 to the
accompanying consolidated financial statements.
Changes in Financial Position
Total assets increased $8,213,000 or 10.9% to $83,668,000 at year end 1996
compared to $75,455,000 at year end 1995. This increase in total assets resulted
from an increase in total deposits of $7,150,000 or 10.8%, which was primarily
invested in loans due to an increase in overall loan demand. Average Company
total assets also increased, up 6.2% from $75,351,000 during 1995 to $79,985,000
during 1996. TABLE I presents the Company's average balance sheet composition
for the years ended 1996, 1995 and 1994.
Net premises and equipment, the Company's most substantial non-earning asset,
increased by $999,000 to $1,965,000 at year-end 1996 compared to year-end 1995.
This is attributable to the additional fixed assets acquired in connection with
the new Charleston branch facility, as well as the new branch facility located
in Lewisburg, WV. Additional fixed asset increases are due to the additional
equipment and building repairs associated with the aforementioned flood damage
to the main bank location.
Securities
The Company has classified a portion of its securities portfolio as available
for sale to permit sufficient flexibility in regard to the Company's
asset/liability management program. Securities classified as available for sale
are carried at fair value with unrealized gains and losses reported as a
separate component of shareholders' equity, net of deferred income taxes. The
Company does not hold any securities for trading purposes. A large number of
securities matured during 1996 in both the available-for-sale and
held-to-maturity categories, and substantially all new securities purchased
during
13
<PAGE>
1996 were classified as held-to-maturity due to the relatively short maturities
of the securities purchased. Management does not believe that this change in the
securities portfolio composition has any material impact on financial
performance. To offset the anticipated loan demand and to provide for adequate
liquidity, management intends to classify the majority of any new securities
purchased as available-for-sale.
The total securities portfolio decreased $1,398,000 or 5.8% to $22,617,000 at
December 31, 1996, compared to December 31, 1995. Additionally, average total
securities decreased from $27,321,000 during 1995 to $23,341,000 during 1996, or
14.6%. This decrease resulted management's shift in funds from securities to
higher-yielding loans due to increased loan demand. This movement of funds from
securities to loans was a gradual process occurring as various securities
reached their scheduled maturity dates. No securities were sold to fund loan
growth or meet other liquidity needs.
At year end 1996, the Company had an unrealized gain on securities classified as
available for sale of $0, net of applicable deferred income taxes. This
represents a $43,000 decrease over 1995's net unrealized gain of $43,000, net of
applicable deferred income taxes.
Details as to the amortized cost and estimated fair values of the Company's
securities by type are presented in Note 3 of the Notes to Consolidated
Financial Statements, included in Item 8 of this filing. At December 31, 1996,
the Company did not own securities of any one issuer, other than the U.S.
Government or its agencies, that exceeded ten percent of shareholders' equity.
The distribution of non-equity securities together with the weighted average
yields by maturity at December 31, 1996 are summarized in TABLE III.
14
<PAGE>
- -------------------------------------------------------------------------------
TABLE III
SECURITY MATURITY ANALYSIS (2)
(At amortized cost, dollars in thousands)
After One After Five
Within but within but within After
One Year Five Years Ten Years Ten Years
Amt Yld(1) Amt Yld(1) Amt Yld(1) Amt Yld(1)
------------ ----------- ---------- ----------
Securities Held to Maturity
U.S. Treasury securities $2,507 5.59% $ 500 5.57% $ - - % $ - - %
U.S. Government agencies
and corporations 6,967 5.38 4,232 5.65 - - - -
Corporate debt securities - - 500 5.13 - - - -
State and political
subdivisions 235 3.90 605 4.35 3,290 4.79 - -
------ ---- ------ ---- ----- ---- ---- ----
Total $ 9,709 5.40 $5,837 5.46 $3,290 4.79 $ - -
====== ==== ====== ==== ====== ==== ==== ====
Securities Available for Sale
U.S. Treasury securities $ - - % $980 5.97% $ - -% $ - - %
U.S. Government agencies
and corporations 1,001 5.95 1,500 6.11 - - - -
Other - - - - - - - -
------ ---- ------ ---- ----- ---- ---- ----
Total $ 1,001 5.95 $2,480 6.05 $ - - $ - -
====== ==== ====== ==== ===== ==== ==== ====
(1) -- Weighted average yield presented without adjustment to a tax equivalent
basis.
(2) - Excludes Federal Reserve Bank and Federal Home Loan Bank stock which are
considered equity securities.
- --------------------------------------------------------------------------------
Loans
Loans, net of unearned income, increased $7,037,000, or 15.2%, to $53,454,000
during 1996. Average loans outstanding, net of unearned income, increased from
$42,632,000 in 1995 to $48,037,000 in 1996, or 12.7%. A summary of the Company's
year-end loan balances by type, as well as an analysis of the increase
(decrease) in such balances from December 31, 1995 to December 31, 1996, is
summarized in the following table.
- -------------------------------------------------------------------------------
Percent
Increase
1996 (Decrease) 1995
--------------------------------
Commercial, financial and agricultural $19,579,000 49.1% $13,135,000
Real estate - construction ........... 2,396,000 18.6 2,020,000
Real estate - mortgage ............... 24,031,000 2.6 23,430,000
Installment and other ................ 7,553,000 (6.7) 8,093,000
----------- ---- -----------
$53,559,000 14.7 $46,678,000
LESS: Unearned Discount .......... 105,000 (59.8) 261,000
----------- ---- -----------
NET LOANS ............................ $53,454,000 15.2% $46,417,000
=========== ==== ===========
- -------------------------------------------------------------------------------
The increase in loans is primarily attributable to overall growth in the
commercial loan portfolio, as the Bank makes a more concentrated effort to
obtain commercial business. Additionally, the Bank increased its loan portfolio
by approximately $5,055,000, primarily in commercial loans and residential
mortgages, as a direct result of its move into the Charleston market.
Installment loans have decreased by approximately 6.7% since year-end 1995. This
is due largely to a decreased demand for personal and consumer loans in the
Bank's primary Greenbrier County market.
A summary of loan maturities by loan type as of December 31, 1996 is included in
Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of
this filing.
15
<PAGE>
Allowance for Loan Losses and Risk Elements
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Company's management, on a quarterly basis, performs a
comprehensive loan evaluation which encompasses the identification of all
potential problem credits, which are included on an internally generated watch
list. The identification of loans for inclusion on the watch list is facilitated
through the use of various sources, including past due loan reports, previous
internal and external loan evaluations, classified loans identified as part of
regulatory agency loan reviews and reviews of new loans representative of
current lending practices within the Bank. Once this list is reviewed to ensure
it is complete, detail reviews of specific loans for collectibility, performance
and collateral protection are performed. A grade is assigned to the individual
loans reviewed utilizing internal grading criteria, which is somewhat similar to
the criteria utilized by the Bank's primary regulatory agency. Based on the
results of these reviews, specific reserves for potential losses are identified.
In addition, management considers historical loan loss experience, new loan
volume, portfolio composition, levels of non-performing and past due loans and
current and anticipated economic conditions in evaluating the adequacy of the
allowance for loan losses.
As more fully explained in Notes 1 and 5 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing, certain impaired loans are
required to be reported at the present value of expected future cash flows
discounted using the loan's original effective interest rate or, alternatively,
at the loan's observable market price, or at the fair value of the loans'
collateral if the loan is collateral dependent. There has been no significant
change in the amount of loans considered impaired under the provision of SFAS
No. 114, as amended.
At December 31, 1996, the allowance for loan losses was $654,000 or 1.22% of
total loans (net of unearned income) compared to $643,000 or 1.39% at December
31, 1995. The Bank was in a net recovery position (more money was recovered from
previously charged-off loans than was lost on newly charged-off loans) during
1996, resulting in an increase in the allowance for loan losses. Loan
charge-offs, net of recoveries, for 1996 were ($11,000) compared to $209,000 and
$271,000 in 1995 and 1994, respectively. Expressed as a percentage of average
loans outstanding during 1996, 1995 and 1994, net loan charge-offs were (0.02%),
0.49% and 0.65%, respectively. See Note 5 to the consolidated financial
statements for an analysis of the activity in the Company's allowance for loan
losses in 1996, 1995 and 1994. Despite an overall increase in loan volume since
1994, the year-end 1996 allowance is $199,000 less than 1994's year-end balance.
This is due primarily to specific reserve allocations to several problem credits
in 1994 that have since been charged-off or paid-off. Management believes that
the current allowance is sufficient to cover any potential losses in the current
loan portfolio. The increase in the Company's unallocated reserve is due to a
significant decline in the three-year average charge-off history for commercial
loans, which is directly related to increased quality in the loan portfolio. An
allocation of the allowance for loan losses to specific loan categories is
presented in TABLE IV.
- -------------------------------------------------------------------------------
TABLE IV
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
1996 1995 1994
-------------------------------------------------
Pct Pct Pct
of Tot of Tot of Tot
Amnt Loans Amt Loans Amt Loans
Commercial, financial,
and agricultural $ 136 36.6% $ 245 28.1% $ 472 23.1%
Real estate - construction -- 4.5 -- 4.3 -- 1.7
Real estate - mortgage 102 45.0 136 50.2 258 53.3
Installment 103 11.5 101 14.0 123 18.6
Other -- 2.4 -- 3.4 -- 3.3
Unallocated 313 -- 161 -- -- --
------------------------------------------
$ 654 100.0% $ 643 100.0% $ 853 100.0%
==========================================
- -------------------------------------------------------------------------------
The following presents a summary of the Company's non-performing assets and
accruing loans past due 90 days or more at December 31, 1996, 1995 and 1994.
16
<PAGE>
- -------------------------------------------------------------------------------
(in thousands)
December 31,
1996 1995 1994
--------------------------
Non-performing assets:
Nonaccrual loans $ 161 $ 375 $ 933
Other real estate owned 22 10 -
Restructured loans - - -
---------------------------
$ 183 $ 385 $ 933
===========================
Accruing loans past due
90 days or more $ - $ - $ -
===========================
- ------------------------------------------------------------------------------
The Company places into nonaccrual status those loans which the full collection
of principal and interest are unlikely or which are past due 90 or more days,
unless the loans are adequately secured and in the process of collection. If
interest on nonaccrual loans had been accrued, such income would have
approximated $15,000, $41,000 and $72,000 in 1996, 1995 and 1994, respectively.
Interest income recognized on nonaccrual loans and included in Company interest
income is not material.
Deposits
Total deposits increased by 10.8% to $73,316,000 at December 31, 1996, from
$66,166,000 at December 31, 1995. Average total deposits increased from
$66,367,000 during 1995 to $69,838,000 during 1996, an increase of 5.2%. This
increase is primarily the result of an increase in time deposits (CD's) from
year end 1995 to year end 1996, as well as smaller increases in savings
accounts, NOW accounts and Money Market demand accounts. Non-interest bearing
deposits also increased slightly.
The increase in interest-bearing deposits, primarily certificates of deposit,
was an intention of management in order to provide funds for anticipated loan
demand. Two certificate of deposit promotions were offered during 1996 to
increase the Bank's fixed-term deposit base. The increase in savings deposits is
largely due to a new savings deposit product that offers tiered yields based
upon deposit balances. Deposits of approximately $1,534,000 are directly related
to the operation of the new Charleston branch.
Details relative to the maturities of and interest expense on time certificates
of deposit of $100,000 or more are presented in Note 7 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing.
Securities Sold under Agreements to Repurchase
As more fully discussed in Note 8 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing, during 1996 the Bank became
involved in repurchase agreements with three of its commercial customers.
Interest paid on these borrowings is tied to the Federal Funds rate, depending
on the outstanding deposit balances. Total interest paid under these
arrangements was not material during 1996.
Liquidity and Interest Rate Risk Management
Liquidity reflects The Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other Company transactional requirements. Liquidity is provided primarily by
funds invested in cash and due from banks and Federal funds sold, which measured
$5,239,000 at December 31, 1996 or 44.9% more than the $3,614,000 total at
December 31, 1995. This increase in liquidity was due to the increase in
deposits. Liquidity is considered to be more than adequate. The Company's
liquidity position is monitored continuously to ensure that day-to-day as well
as anticipated funding needs are met.
Further enhancing the Company's liquidity is the availability as of December 31,
1996 of $10,710,000 (at amortized cost) in securities maturing within one year.
Also, the Company has additional securities with maturities greater than one
year with an estimated fair value totaling $2,476,000 and classified as
available for sale in response to an unforeseen need for liquidity. Management
is not aware of any trends, commitments, events or uncertainties that have
resulted in or are reasonably likely to result in a material change to the
Company's liquidity.
Interest rate risk represents the volatility in earnings and market values of
interest earning assets and interest bearing liabilities resulting from changes
in market rates. The Company seeks to minimize interest rate risk through
asset/liability management. The Company's principal asset/liability management
strategy is gap management. Gap is the measure of the difference between the
volume of repricing interest earning assets and interest bearing liabilities
during given time periods. When the volume of repricing interest earning assets
exceeds the volume of repricing interest bearing liabilities, the gap is
positive -- a condition which usually is favorable during a rising rate
environment. The opposite case, a negative gap, generally is favorable during a
falling rate environment. When the interest rate sensitivity gap is near zero,
the impact of interest rate risk is limited, for at this point changes in net
interest income are minimal regardless of whether interest rates are rising or
falling. An analysis of the Company's current gap position is presented in TABLE
VI.
- --------------------------------------------------------------------------------
17
<PAGE>
TABLE VI
INTEREST RATE SENSITIVITY GAPS
December 31, 1996
(Dollars in thousands)
Repricing (1)
0-90 91-180 181-365 After
Days Days Days 1 Year Total
INTEREST EARNING ASSETS
Loans, net of unearned discount $22,$25 3,608 $4,487 $23,134 $53,454
Securities (at amortized cost) 2,500 1,735 6,500 11,882 22,617
Federal funds sold 2,663 - - - 2,663
------- ----- ------ -------- -------
Total interest earning assets 27,388 5,343 10,987 35,016 78,734
-------- ----- ------- -------- -------
INTEREST BEARING LIABILITIES
Demand deposits $13,586 $ - $ - $ - $13,586
Savings deposits 21,899 - - - 21,899
Time deposits 9,588 5,071 6,143 6,818 27,620
Repurchase Agreements 492 - - - 492
------- ----- ------ --------- -------
Total interest bearing
liabilities 45,565 5,071 6,143 6,818 63,597
------- ----- ------ --------- -------
Contractual interest
sensitivity gap (18,177) 272 4,844 28,198 15,137
Adjustment (2) 35,485 (35,485) - - -
-------- -------- ------ -------- ------
Adjusted interest
sensitivity gap $ 17,308 $(35,213) $4,844 $28,198 $15,137
======== ========= ====== ========= ======
Cumulative adjusted interest
sensitivity gap $ 17,308 $(17,905) $(13,061) $15,137
======== ========= ========= =======
Cumulative adjusted gap as a percent
of total earning assets 21.98% (22.74%) (16.59%) 19.23%
Cumulative adjusted
rate-sensitivity ratio 2.72 0.65 0.77 1.24
This table includes various assumptions by management of maturities and
repayment patterns.
(1) - Contractual repricing, not contractual maturities, is used in this table
unless otherwise noted. No pre- payment assumptions were assumed.
(2) - Adjustment to approximate the actual repricing of interest bearing demand
deposits and savings accounts are based upon historical experience.
- --------------------------------------------------------------------------------
The preceding table reflects the Bank's cumulative one year net interest
sensitivity position, or gap, as 0.77. Thus, the Bank is in a negative gap
position within a one year time frame. This indicates that a significant
increase in interest rates within a short time frame during 1997 could have a
significant negative impact on the Bank's net interest income in 1997. However,
interest rates on approximately 55% of the Bank's interest-bearing deposits may
be changed by management at any time based on their terms. Since management
believes that repricing of interest bearing deposits in an increasing interest
rate environment will generally lag behind the repricing of interest bearing
assets, the Bank's interest rate risk within one year is at an acceptable level.
The information presented in the table above represents a static view of the
Bank's gap position as of December 31, 1996, and as such, does not consider
variables such as future loan and deposit volumes, mixes and interest rates. The
Company seeks to maintain its adjusted interest sensitivity gap within 12 months
to a relatively small balance, positive or negative, regardless of anticipated
upward or down movements in interest rates in an effort to limit the effects of
interest rate risk on Company net interest income.
18
<PAGE>
Capital Resources
Maintenance of a strong capital position is a continuing goal of the Company's
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth.
Total shareholders' equity at December 31, 1996 was $8,841,000 compared to
$8,415,000 at December 31, 1995, representing an increase of 5.1%. Despite this
increase, total shareholders' equity expressed as a percentage of total assets
decreased from 11.2% at December 31, 1995 to 10.6% at December 31, 1996 due to
higher dividend payout and the rapid asset growth in 1996.
The Company's subsidiary bank is subject to minimum regulatory risk-based
capital guidelines, as more fully described in Note 14 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing. Such
guidelines provide for relative weighting of both on and off-balance sheet items
(such as loan commitments and standby letters of credit) based on their
perceived degree of risk. At December 31, 1996, the Company continues to exceed
each of the regulatory risk-based capital requirements as shown in the following
table.
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
Minimum
Actual Requirement
Tier 1 risk-based capital ratio 16.98% 4.00%
Total risk-based capital ratio 18.23% 8.00%
Leverage ratio 10.56% 3.00%
- ------------------------------------------------------------------------------
Improved operating results and a consistent dividend program, coupled with an
effective management of credit and interest rate risk will be the key elements
towards the Company continuing to maintain its present strong capital position
in the future. Additional information related to regulatory restrictions on
capital and dividends is disclosed in Note 14 of the Notes to Consolidated
Financial Statements included in Item 8 of this filing.
Stock Option Plan
At the Company's regularly scheduled 1996 stockholders' meeting on April 25,
1996, the shareholders voted to approve an incentive stock option plan. The
purpose of the plan is to provide a method whereby key employees of the Company
and its subsidiaries who are responsible for the management, growth and
protection of the business, and who are making substantial contributions to the
success and profitability of the business, may be encouraged to acquire a stock
ownership in the Company, thus providing a proprietary interest in the business.
For more information regarding this plan, please refer to Note 11 of the Notes
to Consolidated Financial Statements included in Item 8 of this filing.
Impact of Inflation and Effects of Changing Prices
The results of operations and financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of noninterest
expenses, such as salaries, benefits and other operating expenses.
As a financial intermediary, the Company holds a high percentage of interest
rate sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the Company's assets and liabilities reprice more
frequently than those of non-banking entities. It is the Company's policy to
have a majority of its loan portfolio reprice within five years by using
variable and balloon payment credit terms in order to reduce the impact of
significant changes in interest rates on its longer-term assets. Further, the
Company's policies attempt to structure its mix of financial instruments and
manage its interest rate sensitivity gap in order to minimize the potential
adverse effects of inflation or other market forces on its net interest income,
earnings and capital. A comparison of the carrying value of the Company's
financial instruments to their estimated fair value as of December 31, 1996 is
disclosed in Note 15 of the Notes to Consolidated Financial Statements included
in Item 8 of this filing.
Indirectly, management of the money supply by the Federal Reserve to control the
rate of inflation has an impact on the earnings of the Company.
19
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's report and consolidated financial statements of the
Company and its subsidiary appear herein. The Company is not subject to the
requirements for disclosure of supplemental quarterly financial data.
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
We have audited the accompanying consolidated balance sheets of First National
Bankshares Corporation and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1996, 1995, and 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Bankshares Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and cash flows for the years ended December 31,
1996, 1995, and 1994, in conformity with generally accepted accounting
principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 31, 1997
21
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996 1995
------------------------
Cash and due from banks $ 2,576,154 $ 2,720,887
Federal funds sold 2,663,000 893,000
Securities held to maturity (estimated fair value
1996 $18,850,067; 1995 $13,609,276) 18,835,775 13,514,482
Securities available for sale 3,781,525 10,500,880
Loans, less allowance for loan losses of $653,954
and $643,439, respectively 52,800,034 45,773,252
Bank premises and equipment, net 1,964,661 999,187
Accrued interest receivable 658,579 706,746
Other assets 388,534 346,482
----------- -----------
Total assets $83,668,262 $75,454,916
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $10,211,415 $ 8,690,907
Interest bearing 63,105,038 57,475,281
----------- -----------
Total deposits 73,316,453 66,166,188
Securities sold under agreements to repurchase 492,473 --
Other liabilities 1,018,724 873,324
----------- -----------
Total liabilities 74,827,650 67,039,512
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Common stock, $5.00 par value, authorized
500,000 shares, issued 192,500 shares 962,500 962,500
Capital surplus 1,000,000 1,000,000
Retained earnings 6,878,037 6,409,585
Net unrealized gain (loss) on securities 75 43,319
---------- ----------
Total shareholders' equity 8,840,612 8,415,404
----------- -----------
Total liabilities and shareholders' equity $83,668,262 $75,454,916
=========== ===========
See Notes to Consolidated Financial Statements
22
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------------------------------
Interest income:
Interest and fees on loans .................... $4,666,820 $4,018,204 $3,678,920
Interest and dividends on securities:
Taxable ................................... 1,072,369 1,336,509 1,585,325
Tax-exempt ................................ 211,876 234,415 234,347
Interest on Federal funds sold ................ 214,946 98,910 100,834
---------- ---------------------
Total interest income .................. 6,166,011 5,688,038 5,599,426
---------- ---------------------
Interest expense:
Deposits ...................................... 2,379,774 2,115,406 2,089,199
Securities sold under agreement to repurchase . 13,356 -- --
-------------------------------
Total interest expense ................. 2,393,130 2,115,406 2,089,199
---------- ---------- ----------
Net interest income .................... 3,772,881 3,572,632 3,510,227
Provision for loan losses ..................... -- -- 123,000
--------------------------------
Net interest income after provision for
loan losses ........................ 3,772,881 3,572,632 3,387,227
---------- ---------- ----------
Other income (expense):
Trust department income ....................... 65,757 139,312 78,389
Service fees .................................. 251,251 209,190 220,843
Securities gains (losses), net ................ 972 990 (391)
Other ......................................... 115,135 65,720 120,262
---------- ---------- ----------
Total other income ..................... 433,115 415,212 419,103
---------- ---------- ----------
Other expenses:
Salaries and employee benefits ................ 1,628,041 1,469,823 1,476,669
Net occupancy expense ......................... 292,250 244,032 219,934
Equipment rentals, depreciation and maintenance 216,373 207,008 227,930
Federal deposit insurance premiums ............ 3,265 80,310 183,697
Data processing ............................... 159,983 176,041 187,665
Advertising ................................... 76,991 90,721 84,428
Professional and legal ........................ 111,382 132,394 286,006
Mailing and postage ........................... 80,642 65,634 70,214
Directors' fees and shareholders' expenses .... 91,449 79,600 48,350
Stationery and supplies ....................... 97,002 58,716 79,632
Other ......................................... 382,365 315,643 235,855
---------- ---------- ----------
Total other expenses ................... 3,139,743 2,919,922 3,100,380
---------- ---------- ----------
Income before income tax expense .............. 1,066,253 1,067,922 705,950
Income tax expense ........................ 330,226 301,108 163,961
---------- ---------- ----------
Net income ......................... $ 736,027 $ 766,814 $ 541,989
========== ========== ==========
Earnings per common share ................. $ 3.82 $ 3.98 $ 2.82
========== ========== ==========
Average common shares outstanding ......... 192,500 192,500 192,500
========== ========== ==========
See Notes to Consolidated Financial Statements
23
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
Net
Unrlzd Total
Gain Share-
Common Capital Retained (Loss)on holders
Stock Surplus Earnings Secrts Equity
Balance, December 31, 1993 $962,500 $1,000,000 $5,524,282 $ - $7,486,782
Net income - - 541,989 - 541,989
Cash dividends declared
on common stock
($1.00 per share) - - (192,500) - (192,500)
Net unrealized gain (loss)
on securities upon adoption
of SFAS No. 115 - - - 311,567 311,567
Change in net unrealized
gain (loss) on securities - - - (836,830)(836,830)
---------------------------------------------------
Balance, December 31, 1994 962,500 1,000,000 5,873,771 (525,263) 7,311,008
Net income - - 766,814 - 766,814
Cash dividends declared
on common stock
($1.20 per share) - - (231,000) - (231,000)
Change in net unrealized
gain (loss) on securities - - - 568,582 568,582
--------------------------------------------------
Balance, December 31, 1995 962,500 1,000,000 6,409,585 43,319 8,415,404
Net income - - 736,027 - 736,027
Cash dividends declared
on common stock
($1.39 per share) - - (267,575) - (267,575)
Change in net unrealized
gain (loss) on securities - - - (43,244) (43,244)
---------------------------------------------------
Balance, December 31, 1996 $ 962,500 $1,000,000 $6,878,037 $75 $8,840,612
===================================================
See Notes to Consolidated Financial Statements
24
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................. $ 736,027 $ 766,814 $ 541,989
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation ................................ 172,046 151,529 147,377
Provision for loan losses ................... -- -- 123,000
Deferred income taxes (benefit) ............. 20,020 72,875 41,383
Securities (gains) losses, net .............. (972) (990) 391
(Gain) loss on sale of other assets ......... 16,000 -- --
(Gain) loss on disposal of bank premises
and equipment ............................... 26,202 4,166 --
Amortization of securities premiums and
(accretion of discounts), net ............... (166,673) (5,659) 57,450
(Increase) decrease in accrued int rec ...... 48,167 89,337 23,978
(Increase) decrease in other assets ......... (3,634) 197,916 (164,989)
Increase (decrease) in other liabilities .... 126,150 48,935 79,203
--------- ---------- ----------
Net cash provided by
operating activities ........................ 973,333 1,324,923 849,782
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity ................ 11,656,739 2,497,865 716,250
Proceeds from maturities and calls of
securities available for sale ............... 7,639,238 7,359,233 6,000,000
Proceeds from sales of securities
available for sale .......................... -- -- 1,000,000
Principal payments received on
securities held to maturity ................. -- -- 83,529
Purchases of securities held to maturity ....(16,790,439)(1,953,302) (3,513,445)
Purchases of securities available for sale .. (1,009,800) (232,200) (6,436,016)
Principal payments received
on (loans made to) customers, net ...........(7,112,188) (7,007,180) 6,350,364
Purchases of bank premises and equipment ....(1,175,222) (119,664) (92,619)
Proceeds from sale of bank
premises and equipment ...................... 11,500 -- --
Proceeds from sales of other assets ......... 37,693 73,000 45,500
---------- ---------- ----------
Net cash provided by (used in)
investing activities ........................(6,742,479) 617,752 4,153,563
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand
deposit, NOW and savings accounts ........... 5,240,980 (4,150,169) (2,057,415)
Proceeds from sales of (payments for
matured) time deposits, net ................. 1,909,285 631,011 (1,799,752)
Net increase (decrease) in securities
sold under agreements to repurchase ......... 492,473 -- --
Dividends paid .............................. (248,325) (250,250) (115,500)
---------- ---------- ----------
Net cash provided by (used in)
financing activities ........................ 7,394,413 (3,769,408) (3,972,667)
---------- ---------- ----------
25
<PAGE>
(Continued)
26
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- --------- ----
Increase (decrease) in cash and
cash equivalents .................... 1,625,267 (1,826,733) 1,030,678
Cash and cash equivalents:
Beginning ........................... 3,613,887 5,440,620 4,409,942
---------- ----------- ----------
Ending .............................. $5,239,154 $ 3,613,887 $5,440,620
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest ............................ $2,320,987 $ 2,093,711 $2,056,556
========== =========== ==========
Income taxes ........................ $ 365,409 $ 83,090 $ 326,673
========== =========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in
settlement of loans ................. $ 85,406 $ -- $ 500
========== =========== ==========
Dividends declared and unpaid ....... $ 77,000 $ 57,750 $ 77,000
========== =========== ==========
See Notes to Consolidated Financial Statements
27
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting and reporting policies of First National Bankshares Corporation
and subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The following is a summary of the
Company's more significant accounting policies.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of First National Bankshares Corporation, and its
wholly-owned subsidiary, The First National Bank (formerly The First National
Bank in Ronceverte). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation of cash flows: For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, Federal funds sold and amounts due from banks
(including cash items in process of clearing). Cash flows from demand deposits,
NOW accounts and savings accounts are reported net since their original
maturities are less than three months. Cash flows from loans and certificates of
deposit and other time deposits are reported net.
Securities: Debt and equity securities are classified as "held to maturity",
"available for sale" or "trading" according to management's intent. The
appropriate classification is determined at the time of purchase of each
security and re-evaluated at each reporting date.
Securities held to maturity - Debt securities for which the Company has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts.
Securities available for sale - Securities not classified as "held to
maturity" or as "trading" are classified as "available for sale."
Securities classified as "available for sale" are those securities the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. "Available for sale" securities are reported at
estimated fair value net of unrealized gains or losses, which are
adjusted for applicable income taxes, and reported as a separate
component of shareholders' equity.
Trading securities - There are no securities classified as "trading" in
the accompanying consolidated financial statements.
Realized gains and losses on sales of securities are recognized on the specific
identification method. Amortization of premiums and accretion of discounts are
computed using the interest method.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for loan losses.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. The
allowance is increased by provisions charged to operating expense and
reduced by net charge-offs. The subsidiary bank makes continuous credit
reviews of the loan portfolio and considers current economic conditions,
historical loan loss experience, review of specific problem loans and
other factors in determining the adequacy of the allowance for loan
losses. Loans are charged against the allowance for loan losses when
management believes collectibility is unlikely.
Unearned interest on discounted loans is amortized to income over the
life of the loans, using methods which approximate the interest method.
For all other loans, interest is accrued daily on the outstanding
balances.
A loan is impaired when, based on current information and events, it is
probable that the subsidiary bank will be unable to collect all amounts
due in accordance with the contractual terms of the specific loan
agreement. Impaired loans, other than certain large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, are required to be reported at the present value of expected
future cash flows discounted using the loan's original effective interest
rate or, alternatively, at the loan's observable market price, or at the
fair value of the loan's collateral if the loan is collateral dependent.
The method selected to measure impairment is made on a loan-by-loan
basis, unless foreclosure is deemed to be probable, in which case the
fair value of the collateral method is used.
Generally, after management's evaluation, loans are placed on non-accrual
status when principal or interest is greater than 90 days past due based
upon the loan's contractual terms. Interest is accrued daily on impaired
loans unless the loan is placed on non-accrual status. Impaired loans are
placed on non-accrual status when the payments of principal and interest
are in default for a period of 90 days, unless the loan is both
well-secured and in the process of collection. Interest on non-accrual
loans is recognized primarily using the cost-recovery method.
Certain loan fees and direct loan costs are recognized as income or
expense when incurred. Whereas, generally accepted accounting principles
require that such fees and costs be deferred and amortized as adjustments
of the related loan's yield over the contractual life of the loan. The
subsidiary bank's method of recognition of loan fees and direct loan
costs produces results which are not materially different from those that
would be recognized had Statement Number 91 of the Financial Accounting
Standards Board been adopted.
Bank premises and equipment: Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed primarily by
the straight-line method for bank premises and equipment over the
estimated useful lives of the assets. Repairs and maintenance
expenditures are charged to operating expenses as incurred. Major
improvements and additions to premises and equipment are capitalized.
Other real estate: Other real estate consists of real estate held for
resale which was acquired through foreclosure on loans secured by such
real estate. At the time of acquisition, these properties are recorded at
fair value with any write-down being charged to the allowance for loan
losses. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of carrying amount
or fair value less cost to sell. Expenses incurred in connection with
operating these properties are insignificant and are charged to operating
expenses. Gains and losses on the sale of these properties are credited
or charged to operating income in the year of the transactions.
Sales of these properties which are financed by the subsidiary bank and
meet the criteria of covered transactions remain classified as other real
estate until such time as principal payments have been received to
warrant classification as a real estate loan.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes: The consolidated provision for income taxes includes
Federal and state income taxes and is based on pretax net income reported
in the consolidated financial statements, adjusted for transactions that
may never enter into the computation of income taxes payable. Deferred
tax assets and liabilities are based on the differences between the
financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date
of enact Valuation allowances are established when deemed necessary to
reduce deferred tax assets to the amount expected to be realized.
Earnings per share: Earnings per common share are computed based upon the
weighted average shares outstanding. The weighted average number of
shares outstanding was 192,500 for each of the years ended December 31,
1996, 1995 and 1994.
Profit sharing and 401(k) plans: The subsidiary bank sponsors a
profit-sharing and 401(k) plan which covers substantially all employees.
Bank contributions to the plans are charged to expense.
Postretirement benefit plans: The subsidiary bank provides certain health
care and life insurance benefits for all retired employees that meet
certain eligibility requirements. The plans are contributory with retiree
contributions and are unfunded. The subsidiary bank's share of the
estimated costs that will be paid after retirement is being accrued by
charges to expense over the employees' active service periods to the
dates they are fully eligible for benefits.
Trust Department: Assets held in an agency or fiduciary capacity by the
subsidiary bank's Trust Department are not assets of the subsidiary bank
and are not included in the accompanying consolidated balance sheets.
Trust Department income is recognized on the cash basis in accordance
with customary banking practice. Reporting such income on a cash basis
rather than on the accrual basis does not have a material effect on net
income.
Reclassifications: Certain accounts in the consolidated financial
statements for 1995 and 1994, as previously presented, have been\
reclassified to conform to current year classifications.
Note 2. Cash Concentrations
At December 31, 1996, the subsidiary bank had a concentration totaling
$3,425,545 and $1,507,630, respectively, with Nationsbank consisting of a
due from bank account balance and Federal funds sold. Deposits with
correspondent banks are generally unsecured and have limited insurance
under current banking insurance regulations.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Securities
During 1995, the subsidiary bank reassessed the classifications of its
securities and transferred securities with an amortized cost of
$6,496,223 and estimated fair value of $6,488,454 from the available for
sale category to the held to maturity category.
The amortized cost, unrealized gains and losses, and estimated fair
values of securities at December 31, 1996 and 1995, are summarized as
follows:
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for sale
Taxable:
U.S. Treasury securities $ .......... 979,860 $ 2,328 $ 0 $ 982,188
U.S. Government agencies
and corporations .................... 2,500,643 5,294 7,500 2,498,437
Federal Reserve Bank stock .......... 56,650 0 0 56,650
Federal Home Loan Bank
stock ............................... 242,000 0 0 242,000
-------------------------------------
Total taxable ....................... 3,779,153 7,622 7,500 3,779,275
-------------------------------------
Tax-exempt:
Federal Reserve Bank
stock ............................... 2,250 0 0 2,250
-------------------------------------
Total ............................... $ 3,781,403 $7,622 $7,500 $3,781,525
-------------------------------------
Carrying
Value Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
Held to maturity
Taxable:
U.S. Treasury securities $ .......... 3,002,858 $ 2,553 $ 410 $ 3,005,001
U.S. Government agencies
and corporations .................... 11,203,343 19,479 30,510 11,192,312
Corporate debt securities ........... 500,000 0 7,255 492,745
--------------------------------------
Total taxable ....................... 14,706,201 22,032 38,175 14,690,058
--------------------------------------
Tax-exempt:
State and political
subdivisions ........................ 4,129,574 44,872 14,437 4,160,009
--------------------------------------
Total ............................... $18,835,775 $66,904 $52,612 $18,850,067
--------------------------------------
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995
Carrying
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for Sale
Taxable:
U.S. Treasury securities $ .......... 969,357 $ 25,329 $ 0 $ 994,686
U.S. Government agencies
and corporations .................... 9,170,332 52,325 7,563 9,215,094
Federal Reserve Bank
stock ............................... 56,650 0 0 56,650
Federal Home Loan
Bank stock .......................... 232,200 0 0 232,200
----------- -------- ------- -----------
Total taxable ....................... 10,428,539 77,654 7,563 10,498,630
----------- -------- ------- -----------
Tax-exempt:
Federal Reserve Bank
stock ............................... 2,250 0 0 2,250
----------- -------- ------- -----------
Total ............................... $10,430,789 $ 77,654 $ 7,563 $10,500,880
=========== ======== ======= ===========
Carrying
Value Estimated
(Amortized Unrealized Fair
Cost Gains Losses Value
Held to maturity
Taxable:
U.S. Treasury securities $ .......... 3,000,783 $ 12,185 $ 0 $ 3,012,968
U.S. Government agencies
and corporations .................... 5,496,523 32,637 9,680 5,519,480
Corporate debt securities ........... 500,000 0 5,800 494,200
----------- -------- ------- -----------
Total taxable ....................... 8,997,306 44,822 15,480 9,026,648
----------- -------- ------- -----------
Tax-exempt:
State and political
subdivisions ........................ 4,517,176 74,882 9,430 4,582,628
----------- -------- ------- -----------
Total ............................... $13,514,482 $119,704 $24,910 $13,609,276
=========== ======== ======= ===========
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities which are included in securities available for sale in the
accompanying consolidated financial statements. Such securities are
carried at cost, since they may only be sold back to the respective
Federal Home Loan Bank or Federal Reserve Bank at par value.
The maturities, amortized cost and estimated fair values of securities at
December 31, 1996, are summarized as follows:
Value Estimated (Estimated
(Amortized Fair Amortized Fair
Cost) Value Cost Value)
Due in one year or less .. $ 9,709,178 $ 9,713,778 $1,000,643 $1,005,000
Due from one to five years 5,837,022 5,818,272 2,479,860 2,475,625
Due from five to ten years 3,289,575 3,318,017 -- --
Equity securities ........ -- -- 300,900 300,900
---------------------------------------------
Total ................ $18,835,775 $18,850,067 $3,781,403 $3,781,525
=========== =========== ========== ==========
The proceeds from sales, calls and maturities of securities and principal
payments received on mortgage-backed obligations and the related gross
gains and losses realized are as follows:
Proceeds From Gross Realized
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
1996
Securities held to
maturity $ 0 $ 11,656,739 $ 0 $ 972 $ 0
Securities available
for sale 0 7,639,238 0 0 0
------ ----------- ------- ------ -----
$ 0 $ 19,295,977 $ 0 $ 972 $ 0
====== ========== ====== ======= =====
1995
Securities held to
maturity $ 0 $ 2,497,865 $ 0 $ 0 $ 0
Securities available
for sale 0 7,359,233 0 990 0
-------- ---------- ------ -------- ------
$ 0 $ 9,857,098 $ 0 $ 990 $ 0
======== =========== ======= ======== =====
1994
Securities held to
maturity $ 0 $ 716,250 $ 83,529 $ 0 $ 437
Securities available
for sale 1,000,000 6,000,000 0 46 0
------------ ----------- ------- --------- -----
$1,000,000 $ 6,716,250 $ 83,529 $ 46 $ 437
========= ========== ======== ======== =======
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996 and 1995, securities carried at $1,500,000 and
$1,000,000, respectively, with estimated
fair values of $1,504,195 and $1,006,900, respectively, were pledged to
secure public deposits, and for other purposes required or permitted by
law.
Note 4. Loans
Loans are summarized as follows:
1996 1995
---------- -----------
Commercial, financial and agricultural $19,578,393 $13,134,525
Real estate - construction ........... 2,395,611 2,019,845
Real estate - mortgage ............... 24,031,283 23,430,089
Installment .......................... 6,254,129 6,522,299
Other ................................ 1,299,839 1,570,863
----------- -----------
Total loans ...................... 53,559,255 46,677,621
Less unearned income .................... 105,267 260,930
----------- -----------
Total loans net of unearned income 53,453,988 46,416,691
Less allowance for loan losses 653,954 643,439
----------- -----------
Loans, net ....................... $52,800,034 $45,773,252
=========== ===========
Included in the net balance of loans are non-accrual loans amounting to
$160,631 and $375,048 at December 31, 1996 and 1995, respectively. If
interest on non-accrual loans had been accrued, such income would have
approximated $15,357, $40,652 and $71,560 for the years ended December
31, 1996, 1995 and 1994, respectively.
The following represents contractual loan maturities at December 31,
1996:
After 1 But After
W/in 1 Year W/in 5 Years 5 Years
----------- ----------- -----------
Commercial, financial and
agricultural ......... $ 7,063,712 $ 8,300,689 $ 4,213,992
Real estate - construction 1,546,509 849,102 --
Real estate - mortgage ... 4,611,250 7,277,325 12,142,708
Installment .............. 1,397,930 4,491,206 364,993
Other .................... 1,299,839 -- --
----------- ----------- -----------
Total ............ $15,919,240 $20,918,322 $16,721,693
=========== =========== ===========
Loans due after one year with:
Variable rates $20,918,322
Fixed rates .. 16,721,693
-----------
Total .... $37,640,015
===========
Concentrations of credit risk: The subsidiary bank grants commercial,
residential and consumer loans to customers primarily located in
Greenbrier and Kanawha Counties of West Virginia.
As of December 31, 1996 and 1995, the Bank had direct extensions of
credit to medical professionals totaling approximately $2,100,000 and
$2,200,000, respectively. The security for these loans generally consists
of mortgages on personal residences and medical office buildings and
liens on medical practice equipment and receivables. The Bank evaluates
the credit worthiness of each such customer on a case-by-case basis and
the amount of collateral obtained is based upon management's credit
evaluation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995, the Bank had direct extensions of
credit to individuals who are employees of a railroad transportation and
holding company totaling approximately $2,800,000 and $3,000,000,
respectively. These loans consisted of residential real estate mortgages
generally secured by liens on the property. The Bank evaluates the credit
worthiness of each such customer on a case-by-case
34
<PAGE>
basis.
Loans to related parties: The subsidiary bank has had, and may be
expected to have in the future, banking transactions in the ordinary
course of business with directors, principal officers, their immediate
families and affiliated companies in which they are principal
stockholders (commonly referred to as related parties), all of which have
been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party:
1996 1995
--------- --------
Balance, beginning ........... $ 777,760 $ 776,860
Additions ................. 291,019 208,563
Amounts collected ......... (548,999) (207,663)
--------- ---------
Balance, ending .............. $ 519,780 $ 777,760
========= =========
Note 5. Allowance for loan losses
An analysis of the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994, is as follows:
1996 1995 1994
--------- -------- ---------
Balance, beginning of year .... ................. $ 643,439 $852,862 $1,000,803
Losses:
Commercial, financial and agricultural .... ... -- 90,348 22,772
Real estate - mortgage ...................... 43,208 75,000 3,249
Installment ................................. 74,226 215,885 400,576
--------- -------- ----------
Total ..................................... 117,434 381,233 426,597
--------- -------- ----------
Recoveries:
Commercial, financial and agricultural ....... -- 3,250 5,683
Real estate - mortgage ....................... 28,395 2,470 1,000
Installment .................................. 99,554 166,090 148,973
--------- -------- ----------
Total ..................................... 127,949 171,810 155,656
--------- -------- ----------
Net (recoveries) losses ...................... (10,515) 209,423 270,941
Provision for loan losses .................... -- -- 123,000
----------
Balance, end of year .............................$ 653,954 $643,439 $ 852,862
========= ======== ==========
The Company's total recorded investment in impaired loans at December 31,
1996 and 1995, approximated $135,682 and $292,161, respectively, for
which the related allowance for loan losses determined in accordance with
generally accepted accounting principles approximated $25,000 and
$125,000, respectively. The Company's average investment in such loans
approximated $152,050 and $483,780 for the years ended December 31, 1996
and 1995, respectively. All impaired loans at December 31, 1996 and 1995,
were collateral dependent, and accordingly, the fair value of the loan's
collateral was used to measure the impairment of each loan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of evaluating impairment, the Company considers groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed the
subsidiary bank's typical residential mortgage loan amount (currently
those in excess of $100,000); small balance commercial loans (currently
those less than $50,000); and installment loans to individuals, exclusive
35
<PAGE>
of those loans in excess of $50,000.
For the years ended December 31, 1996 and 1995, the Company recognized $0
and $2,237, respectively, in interest income on impaired loans. Using a
cash-basis method of accounting, the Company would have recognized
approximately the same amount of interest income on such loans.
Note 6. Bank Premises and Equipment
The major categories of Bank premises and equipment and accumulated
depreciation at December 31, 1996 and 1995, are summarized as follows:
1996 1995
--------- --------
Land ..................................... $ 298,361 $ 108,298
Building and improvements ................ 1,135,114 1,127,603
Furniture and equipment .................. 1,815,561 1,496,851
Construction-in-progress ................. 382,876 --
------------ ------------
3,631,912 2,732,752
Less accumulated depreciation ............ 1,667,251 1,733,565
------------ ------------
Bank premises and equipment, net ......... $ 1,964,661 $ 999,187
============ ============
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
totaled $172,046, $151,529 and $147,377, respectively.
The subsidiary bank opened its new branch facility in Greenbrier County
in January 1997. This new facility replaced the leased branch facility
located in Lewisburg, West Virginia. The cost of the new facility is
included in construction-in-progress in the above schedule.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of
December 31, 1996 and 1995:
1996 1995
---------------------------
Interest bearing demand deposits ......... $ 13,586,411 $ 12,579,368
Savings deposits ......................... 21,899,023 19,185,594
Certificates of deposit .................. 27,619,604 25,710,319
------------ ------------
Total ................................. $ 63,105,038 $ 57,475,281
============ ============
Time certificates of deposit in denominations of $100,000 or more totaled
$3,745,734 and $2,151,222 at December 31, 1996 and 1995, respectively.
Interest paid on time certificates of deposit in denominations of
$100,000 or more was $147,907, $89,256, and $72,418 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The following is a summary of the maturity distribution of certificates
of deposit in denominations of $100,000 or more as of December 31, 1996:
Amount Percent
----------- -----------
Three months or less .............. $ 1,053,803 28%
Three through six months .......... 229,132 6%
Six through twelve months ......... 853,914 23%
Over twelve months ................ 1,608,885 43%
----------- -----------
Total .......................... $ 3,745,734 100%
=========== ===========
A summary of the maturities of time deposits as of December 31,
1996, follows:
Year Amount
1997 $20,802,163
1998 4,407,559
1999 2,228,803
2000 181,079
-----------
$27,619,604
Note 8. Securities Sold Under Agreements to Repurchase
The subsidiary bank's securities sold under agreements to repurchase
(Repurchase Agreement) involve three customers. The interest rate paid on
these borrowings is tied to the Federal funds rate and dependent upon the
outstanding deposit balance. Interest is calculated and credited to the
customer's account on a daily basis. Minimum deposit balance requirements
are established on a case-by-case basis. The repurchase agreements do not
have a specified maturity date as either party reserves the right to
terminate the agreement. The securities underlying these agreements are
under the subsidiary bank's control and secure the total outstanding
daily balances.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information is provided relative to these obligations:
Outstanding at year end $ 492,473
Weighted average interest rate at December 31 4.42%
Maximum amount outstanding at any month end 1,037,275
Average daily amount outstanding 320,098
Weighted average interest rate 4.17%
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the years
ended December 31, 1996, 1995 and 1994, are as follows:
1996 1995 1994
-------- -------- ---------
Current:
Federal ........................ $ 264,755 $ 198,444 $ 104,093
State .......................... 45,451 29,789 18,485
----------- ----------- -----------
310,206 228,233 122,578
Deferred (Federal and State) ...... 20,020 72,875 41,383
----------- ----------- -----------
Total .......................... $ 330,226 $ 301,108 $ 163,961
=========== =========== ===========
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying the statutory income tax rates by book
pretax income for the years ended December 31, 1995, 1994 and 1993, is as
follows:
1996 1995 1994
-----------------------------------------------
Amount Pct Amount Pct Amount Pct
Computed tax at applicable
statutory rate ............... $ 362,526 34.0$ 363,094 34.0$ 240,023 34.0
Increase (decrease) in taxes resulting from:
Tax-exempt interest .......... (72,038) (6.8 (79,701) (7.5 (79,678)
State income taxes, net
of Federal income
tax benefit .................. 29,998 2.8 19,657 1.8 12,349 1.7
Other, net ................... 9,740 1.0 (1,942) (.1 (8,733)(1.3)
--------- ---- --------- ---- --------- ----
Applicable income
taxes ........................ $ 330,226 31.0$ 301,108 28.2$ 163,961 23.2
========= ==== ========= ==== ========= ====
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured for tax purposes. Deferred tax
assets and liabilities represent the future tax return consequences of
temporary differences, which will either be taxable or deductible when
the related assets and liabilities are recovered or settled.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences which give rise to the Company's
deferred tax assets and liabilities as of December 31, 1996 and 1995, are
as follows:
1996 1995
Deferred tax assets:
Allowance for loan losses ............. $ 139,659 $ 141,106
Employee benefits ..................... 150,439 142,503
Accruals .............................. 7,650 --
----------- -----------
297,748 283,609
Deferred tax liabilities:
Depreciation .......................... 15,038 12,600
Accretion on securities ............... 22,187 5,722
Deferred gain on involuntary conversion 15,256 --
Net unrealized gain on securities ..... 47 26,775
----------- -----------
52,528 45,097
Net deferred tax assets ............... $ 245,220 $ 238,512
=========== ===========
Note 10. Employee Benefits
Profit-Sharing Plan: The subsidiary bank sponsors a noncontributory defined
contribution profit-sharing plan covering substantially all employees.
Contributions to the Plan are at the discretion of the Board of Directors.
401(k) Plan: The subsidiary bank also sponsors a 401(k) defined
contribution plan covering substantially all employees. Participants are
eligible to contribute up to 10% of their annual compensation to the
Plan. The Bank matches participant contributions in an amount equal up to
3.5% of each participant's annual compensation. In addition, the Bank is
also eligible to make discretionary contributions to the Plan.
The Bank's contributions to the above Plans for the years ended December
31, 1996, 1995 and 1994, totaled $105,922, $117,500 and $75,259,
respectively.
Postretirement Benefit Plans: The subsidiary bank sponsors a
postretirement health care plan and a postretirement life insurance plan
for all retired employees that meet certain eligibility requirements.
Both plans are contributory with retiree contributions that are
adjustable based on various factors, some of which are discretionary. The
plans are unfunded.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net postretirement benefit cost included the following components for the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
-----------------------------------------------
Health Life Health Life Health Life
Care Ins Care Ins Care Ins
Plan Plan Plan Plan Plan Plan
Service cost-benefits
attributable to
service during
the year ................ $ 5,742 $2,274 $ 4,887 $1,905 $ 6,225 $ 2,454
Interest on
accumulated
postretirement
benefit obligation ...... 16,454 6,151 18,359 6,229 19,355 7,138
Amortization of (gain)
loss .................... (1,041) -- (490) -- 331 694
-------------------------------------------------
Net postretirement
benefit cost ............ $ 21,155 $8,425 $ 22,756 $8,134 $25,911 10,286
=================================================
The following tables set forth the plans' funded status reconciled with
the obligations recognized in the accompanying consolidated balance
sheets at December 31, 1996 and 1995:
Health Life Health Life
Care Ins Care Ins
Plan Plan Total Plan Plan Total
--------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees ..............(106,753) (42,969) (149,722) (117,153) (44,197) (161,350)
Active participants
fully eligible
for benefits .......... (53,444) (20,504) (73,948) (49,559) (19,053) (68,612)
Other active
participants .......... (88,289) (34,250) (122,539) (76,375) (29,587) (105,962)
--------------------------------------------------------
(248,486) (97,723) (346,209) (243,087) (92,837) (335,924)
Plan assets ........... -- -- -- -- -- --
--------------------------------------------------------
Accumulated
postretirement
benefit obligation
in excess of
plan assets ...........(248,486) (97,723) (346,209) (243,087) (92,837) (335,924)
Unrecognized net (gain)
loss .................. (45,225) (254) (45,479) (39,303) (1,703) (41,006)
--------------------------------------------------------
Accrued postretirement
benefit cost .........$(293,711)$(97,977)$(391,688)$(282,390)$(94,540) (376,930)
==========================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average discount rates used in estimating the accumulated
postretirement benefit obligations
40
<PAGE>
of the health care plan and the life insurance plan at December 31, 1996
and 1995, were 7%.
For measurement purposes, a 7% annual rate of increase in per capita health
care costs of covered benefits was assumed through 1999, 6% for the next 5
years, 5 1/2% for the next 5 years, and 5% thereafter. If assumed health
care cost trend rates were increased by 1 percentage point in each year, the
accumulated postretirement benefit obligation at December 31, 1996, would
decrease by $4,297 and the aggregate of the service and interest cost
components of net postretirement benefit cost for the year ended December
31, 1996, would increase by $730.
Note 11. Stock Option Plan
In April 1996, the shareholders approved a stock option plan for key
employees of the Company or of the Bank as identified by the stock option
committee. Grants under the plan are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, no compensation cost has been
recognized for grants under the plan. Had compensation cost for the
stock-based compensation plan been determined based on the grant date fair
values of awards (the method described in FASB Statement 123), the reported
net income and earnings per share would have been reduced to the proforma
amounts shown below:
1996
Net income:
As reported $ 736,027
Proforma $ 736,027
Primary earnings per share:
As reported $ 3.82
Proforma $ 3.82
Fully diluted earnings per share:
As reported $ 3.82
Proforma $ 3.82
The significant provisions of the Plan include authorization to the stock
option committee to grant up to 9,625 shares of common stock between April
25, 1996 and April 25, 2006, with the right to adjust the number of shares
available for the plan at its discretion. On October 31, 1996, 3,200 shares
were granted to certain key employees and must be exercised within 5 years.
Each option fully vests after six months from the grant date.
The fair value of each grant is estimated at the grant date using the
minimum value method with the following weighted-average assumptions for
grants in 1996: dividend rate of 2%; risk free interest rate of 6.25% and
expected life of 5 years.
A summary of the status of the plan at December 31, 1996, and changes during
the year ended is as follows:
1996
Exercise
Shares Price
Fixed Options
Outstanding at beginning of year - $ -
Granted 3,200 50.00
Exercised - -
Forfeited - -
--------- -------
Outstanding at end of year 3,200 50.00
========= =======
Exercisable at end of year - -
Fair value per option of options granted
during the year $ 8.89
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Lease Obligation
41
<PAGE>
The subsidiary bank leased its branch facility in Lewisburg, West Virginia
under an operating lease with a term of ten years, commencing on April 1,
1986. Total lease payments of $90,446 were charged to expense for each of
the three years ended December 31, 1996, 1995 and 1994. The lessor of the
branch facility is an entity owned by two directors of the Company and
subsidiary bank. This lease was terminated effective January 31, 1997, when
the subsidiary bank completed construction of its new branch facility in
Greenbrier County.
The subsidiary bank opened a new branch in Charleston, West Virginia during
1996. The bank leases the office space under an operating lease with an
initial term of ten years commencing on May 1, 1996. The lease provides for
two successive options for five year renewals. Total lease payments of
$54,650 were charged to expense for the year ended December 31, 1996. Total
future minimum lease payments under the lease are as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 101,970
1998 101,970
1999 101,970
2000 101,970
2001 101,970
Thereafter 455,200
-------
$ 965,050
Note 13. Commitments and Contingencies
Reserve Requirements: The subsidiary bank is required to maintain a reserve
balance with the Federal Reserve Bank. At December 31, 1996, the reserve
balance was $625,000. The subsidiary bank does not earn interest on this
balance.
Financial instruments with off-balance sheet risk: The subsidiary bank is a
party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments. At December 31, 1996 and 1995, the subsidiary bank's
financial instruments with off-balance sheet risk are as follows:
Financial instruments whose contract Contract Amount
amounts represent credit risk 1996 1995
-------------------------------------- ------- -------
Commitments to extend credit $8,328,000 $8,560,726
========== ==========
The subsidiary bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments. The
subsidiary bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Bank management evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inventory, equipment or real estate.
Litigation: The Company is involved in various legal actions arising in the
ordinary course of business. In the opinion of counsel, the outcome of these
matters will not have a significant adverse effect on the consolidated
financial statements.
Employment Agreement: The Company has an employment agreement with its chief
executive officer. This agreement contains change in control provisions that
would entitle the officer to receive, under certain circumstances, twice his
annual compensation in the event there is a change in control in the Company
(as defined) and a termination of his employment. The maximum contingent
liability under this agreement approximates $300,000 at December 31, 1996.
Note 14. Regulatory Restrictions on Capital and Dividends
The primary source of funds for the dividends paid by First National
Bankshares Corporation is dividends received from its subsidiary bank.
Dividends paid by the subsidiary bank are subject to restrictions by banking
regulations. The most restrictive provision requires approval by the
regulatory agency if dividends declared in any year exceed the year's net
income, as defined, plus the net retained profits of the two preceding
years. During 1997, the net retained profits available for distribution to
First National Bankshares Corporation as dividends without regulatory
approval are approximately $1,006,000, plus net retained profits, as
defined, for the interim periods through the date of declaration.
The subsidiary bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
subsidiary bank must meet specific capital guidelines that involve
quantitative measures of the subsidiary bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The subsidiary bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that the subsidiary bank meets all capital adequacy requirements
to which it is subject.
The most recent notification from the Office of the Comptroller of the
Currency categorized the subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the subsidiary bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the institution's category.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The subsidiary bank's actual capital amounts and ratios are presented in the
following table (in thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adeq. Purp. Action Provisions
Amt Ratio Amt Ratio Amt Ratio
As of December ------------- ------------ -------------
31, 1996:
Total Capital ............. $9,487 18.23% $4,164 8.0% $5,205 10.0%
(to Risk Weighted
Assets)
Tier I Capital ............ 8,836 16.98% 2,082 4.0% 3,123 6.0%
(to Risk Weighted
Assets)
Tier I Capital ............ 8,836 10.56% 2,510 3.0% 4,184 5.0%
(to Average Assets)
As of December
31, 1995:
Total Capital ............. 8,986 18.16% 3,959 8.0% 4,949 10.0%
(to Risk Weighted
Assets)
Tier I Capital ............ 8,367 16.19% 2,067 4.0% 3,101 6.0%
(to Risk Weighted
Assets)
Tier I Capital ............ 8,367 11.11% 2,259 3.0% 3,765 5.0%
(to Average Assets)
Note 15. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used by the
Company in estimating its fair value disclosures for financial instruments.
Cash and due from banks: The carrying values of cash and due from banks
approximate their estimated fair value.
Federal funds sold: The carrying values of Federal funds sold approximate
their estimated fair values.
Securities: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available,
estimated fair values are based on quoted market prices of comparable
securities.
Loans: The estimated fair values for loans are computed based on scheduled
future cash flows of principal and interest, discounted at interest rates
currently offered for loans with similar terms to borrowers of similar
credit quality. No prepayments of principal are assumed.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued interest receivable: The carrying values of accrued interest
receivable approximate their estimated fair value.
Deposits: The estimated fair values of demand deposits (i.e. non interest
bearing checking, NOW, Super NOW, money market and savings accounts) and
other variable rate deposits approximate their carrying values. Fair values
of fixed maturity deposits are estimated using a discounted cash flow
methodology at rates currently offered for deposits with similar remaining
maturities. Any intangible value of long-term relationships with depositors
is not considered in estimating the fair values disclosed.
Short-term borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
Accrued interest payable: The carrying values of accrued interest payable
approximate their estimated fair value.
Off-balance sheet instruments: The fair values of commitments to extend
credit are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present credit standing of the counter parties. The amounts of fees
currently charged on commitments are deemed insignificant, and therefore,
the estimated fair values and carrying values are not shown below.
The carrying values and estimated fair values of the Company's financial
instruments are summarized below:
December 31, 1996 December 31, 1995
------------------------ ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks ...... $ 2,576,154 $ 2,576,154 $ 2,720,887 $ 2,720,887
Federal funds sold ........... 2,663,000 2,663,000 893,000 893,000
Securities held to maturity .. 18,835,775 18,850,067 13,514,482 13,609,276
Securities available for sale 3,781,525 3,781,525 10,500,880 10,500,880
Loans ........................ 52,800,034 52,208,012 45,773,252 45,680,242
Accrued interest receivable .. 658,579 658,579 706,746 706,746
----------- ----------- ----------- ------------
$81,315,067 $80,737,337 $73,402,501 $74,404,285
================================================
Financial liabilities:
Deposits ..................... $73,316,453 $73,359,556 $66,166,188 $66,202,397
Short-term borrowings ........ 492,473 492,473 -- --
Accrued interest payable ..... 230,356 230,356 158,213 158,213
----------- ----------- ----------- ------------
$74,039,282 $74,082,385 $66,324,401 $66,360,610
================================================
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Condensed Financial Statements of Parent Company
The investment of the Corporation in its wholly-owned subsidiary is
presented on the equity method of accounting. Information relative to the
Corporation's balance sheets at December 31, 1996 and 1995, and the related
statements of income and cash flows for the years ended December 31, 1996,
1995 and 1994, are presented as follows:
Balance Sheets
Assets 1996 1995
------ --------- ---------
Cash $ 4,163 $ 4,833
Investment in bank subsidiary,
eliminated in consolidation 8,835,459 8,409,837
Other assets 77,990 58,484
------ ------
Total assets $8,917,612 $ 8,473,154
========= =========
Liabilities and shareholders' equity
Liabilities
Dividends payable $ 77,000 $ 57,750
------ ------
Shareholders' equity
Common stock, $5.00 par value, authorized
500,000 shares, issued 192,500 shares 962,500 962,500
Capital surplus 1,000,000 1,000,000
Retained earnings (consisting of
undivided profits of subsidiary
not yet distributed) 6,878,037 6,409,585
Net unrealized gain (loss) on securities 75 43,319
Total shareholders' equity 8,840,612 8,415,404
----------- -----------
Total liabilities and shareholders' equity $8,917,612 $ 8,473,154
========= =========
Statements of Income 1996 1995 1994
- -------------------- --------- -------- --------
Income - dividends from bank subsidiary $ 267,575 $231,000 $192,500
Expenses - operating 670 1,932 5,607
------------------------------
Income before income taxes and undistributed
income 266,905 229,068 186,893
Applicable income tax expense (benefit) (256) (733) (2,131)
------------------------------
Income before undistributed income 267,161 229,801 189,024
Equity in undistributed income in bank subsidiary 468,866 537,013 352,965
------------------------------
Net income $ 736,027 $766,814 $541,989
==============================
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows 1996 1995 1994
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................. $ 736,027 $ 766,814 $ 541,989
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiary .................................. (468,866) (537,013) (352,965)
(Increase) decrease in other assets ......... (19,506) 20,647 (74,271)
--------------------------------
Net cash provided by operating activities ... 247,655 250,448 114,753
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders .............. (248,325) (250,250) (115,500)
--------------------------------
Net cash (used in) financing activities ..... (248,325) (250,250) (115,500)
--------------------------------
Increase (decrease) in cash ................. (670) 198 (747)
Cash:
Beginning ................................... 4,833 4,635 5,382
--------------------------------
Ending ...................................... $ 4,163 $ 4,833 $ 4,635
================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Dividends declared and unpaid ............... $ 77,000 $ 57,750 $ 77,000
================================
First National Bankshares Corporation accounts for its investment in its
bank subsidiary by the equity method. During the years ended December 31,
1996, 1995 and 1994, changes were as follows:
Number of shares owned at December 31, 1996 - 38,500 Percent to total shares
at December 31, 1996 - 100%
Balance at December 31, 1993 ............................... $ 7,476,540
Add (deduct):
Equity in net income ............................. 545,465
Dividends declared ............................... (192,500)
Net unrealized gain (loss) on securities ......... (525,263)
-----------
Balance at December 31, 1994 ............................ 7,304,242
Add (deduct):
Equity in net income ............................. 768,013
Dividends declared ............................... (231,000)
Net unrealized gain (loss) on securities ......... 568,582
-----------
Balance at December 31, 1995 ............................ 8,409,837
Add (deduct):
Equity in net income ............................. 736,441
Dividends declared ............................... (267,575)
Change in net unrealized gain (loss) on securities (43,244)
-----------
Balance at December 31, 1996 ............................ $ 8,835,459
===========
47
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company may consist of not less than five (5) nor
more than twenty-five (25) shareholders in accordance with the Company's
Articles of Incorporation. The number of directors within such minimum and
maximum limits shall be determined from time to time by resolution of a majority
of the full Board of Directors, subject to limitations outlined in the Company's
By-laws. Currently the Board of Directors may not increase the number of
directors to a number which exceeds by more than two the number of directors
last elected by the shareholders. The number of directors may also be fixed by a
resolution of the shareholders at any annual or special meeting. No shareholder
may be elected as director after attaining the age seventy (70), unless the
shareholder was a member of the Board of Directors on May 5, 1987.
Due to the Death of Director Moore during March, 1996, the number of directors
fixed by the Board of Directors was reduced from 11 to 10. No decisions have yet
been made regarding the replacement for Dr. Moore. Each director of the Company
is also a director of the Bank. Additional information about the directors,
including their principal occupation and age, is set forth in the following
table:
- --------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- --------------------------------------------------------------------------------
S. Elwood Bare Retired Pharmacist 70 1986 1999
Chairman of the Board,
Member of Asset/Liability,
Audit & Compliance, and
Trust Committees of the Bank
L. Thomas Bulla President & CEO of 57 1993 1998
President & CEO of the First National Bankshares
Company and the Bank; Corp. and First National
Member of Asset/Liability Bank (1993 - present);
and Trust Committees of Director, President & CEO
the Bank of Bank One, West Virginia,
Charleston, NA (1985-1993)
J. R. Dawkins Cattle Dealer; Farm 79 1986 1997
Member of Audit & Compliance Operator
Committee of the Bank
Richard E. Ford Attorney at Law 69 1987 1999
Member of Audit & Partner - The Ford
Compliance and Trust Law Firm
Committees of the Bank
Walter Bennett Fuller Retired Banker 73 1986 1997
Vice Chairman of the Board,
Member of Asset/Liability,
Audit & Compliance, and
Trust Committees of the Bank
- --------------------------------------------------------------------------------
(Table continued on next page)
-------------------------------------------------------------------------------
49
<PAGE>
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- --------------------------------------------------------------------------------
William D. Goodwin Attorney at Law, 53 1986 1998
Member of Asset/Liability Owner/Broker, Coldwell
and Trust Committees of Banker Stuart & Watts Real
the Bank Estate, Inc.
Houston B. Moore, M.D. SEE NOTE BELOW
Member of Asset/Liability
Committee of the Bank
Lucie T. Refsland, Ed.D. Interim Director (1996) and 60 1996 1998
Member of Trust Associate Professor of
Committee of the Bank Mathematics (1993 - present)
Greenbrier Community College
William R. Satterfield, Jr. Owner - Greenbrier 52 1986 1998
Member of Asset/Liability Insurance Agency
and Audit & Compliance
Committees of the Bank
Richard L. Skaggs Partner - Park Grove 74 1986 1997
Member of Audit & Farms (farm feed and
Compliance Committee supply)
of the Bank
Ronald B. Snyder President, R.B.S., Inc. 57 1988 1999
Member of Asset/Liability (construction company)
Committee of the Bank
NOTE: During 1996, Director Houston B. Moore, M.D., died after a long illness.
Dr. Moore's term of office was to expire in 1997 and no person was appointed in
the interim to fill the vacancy. No discussions as to a replacement for Dr.
Moore have been held.
- --------------------------------------------------------------------------------
The directors of the Company are divided into three (3) classes; and as a
result, the shareholders elect approximately one-third of the directors of the
Company each year. Directors Dawkins, Fuller, and Skaggs whose terms expire in
1997, have been nominated to stand for re-election at the 1997 annual meeting of
the Company's stockholders to serve a 3 year term which will expire in 2000.
50
<PAGE>
Executive Officers
The current executive officers of the Company and the Bank and information about
these officers is set forth on the following table.
- --------------------------------------------------------------------------------
Name Age Offices Held During Last Five Years
- --------------------------------------------------------------------------------
L. Thomas Bulla 57 President & CEO of the Company and the
Bank (1993 to present); President and
CEO of Bank One, West Virginia,
Charleston, NA (1985 - 1993)
Charles A. Henthorn 37 Executive Vice President of the
Company and the Bank (1996 to present)
Senior Vice President of the Bank
(1994 to 1996); Vice President and
Senior Commercial Lender of Bank One,
West Virginia, Charleston, NA (1991 -
1994); National Bank Examiner with
the Office of the Comptroller of the
Currency (1983 - 1991)
Darrell G. Echols 60 Vice President of the Company (1987 to
present); Senior Vice President and
Loan Officer of the Bank (1970
to present)
Keith E. Morgan 59 Secretary-Treasurer of the Company
(1987 to present); Senior Vice
President, Cashier, Trust Officer and
Secretary to the Board of the Bank
(1970 to present)
- -------------------------------------------------------------------------------
The executive officers of the Company listed above shall continue in office
until the 1997 organizational meeting of the directors of the Company. It is
expected that, for 1997, the current officers will be re-elected to the offices
they now hold. The executive officers of the Bank listed above shall continue in
office until the 1997 organizational meeting of its directors; and it is
expected that these persons will be re-elected to the offices they now hold.
Compliance with Section 16(a) of the Exchange Act
The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not
have any class of securities registered pursuant to Section 12 of the Exchange
Act, the provisions of Section 16 thereof are not applicable to the Company's
directors, officers and shareholders.
51
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation paid to the
chief executive officer for the years 1996, 1995 and 1994:
- --------------------------------------------------------------------------------
Stock All Other
Name and Salary Bonus Options Compensation
Principal Position Year ($) ($) (1) ($) (2)
- --------------------------------------------------------------------------------
L. Thomas Bulla ...... 1996 150,000 25,000 5,690 28,100
President & CEO of the
Company and the Bank . 1995 137,500 25,000 -- 24,287
1994 125,000 -0- -- 9,498
FOOTNOTES:
(1) The amount shown under the "Stock Options" column represents stock options
for 640 shares, or 20.0% of the 3,200 total options awarded in 1996. The
term of the options is for a period of five years, expiring on October 31,
2001. As of 12/31/96 none of the options had been exercised, and none are
exercisable until April 30, 1997.
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options Options
at FY-End at FY-End
Shares Value Exercisable/ Exercisable/
Name Acquired Realized Unexercisable Unexercisable
L. Thomas Bulla 640 $0 0 / 640 $0 / $5,690
President & CEO of the
Company and the Bank
(2) The amount shown under the "All Other Compensation" column above for 1996
is the total of the following: (i) directors fees of $6,250, (ii) the
amount of premiums paid by the Bank for term life insurance for Mr.
Bulla's benefit of $3,742, (iii) 401-K Plan contribution of $6,226, (iv)
Profit Sharing Supplemental Retirement Plan contribution of $8,992 (v)
personal use of company-owned vehicle of $2,890.
- -------------------------------------------------------------------------------
The Company has an employment agreement with its chief executive officer. This
agreement contains change in control provisions that would entitle the officer
to receive, under certain circumstances, twice his annual salary in the event
there is a change in control in the Company (as defined therein) resulting in
termination of his employment or voluntary resignation. The maximum contingent
liability under this agreement approximated $300,000 at December 31, 1996.
The Directors of the Company do not receive any fees or compensation for
services as directors thereof. All of the directors of the Company, however, are
also directors of the Bank; and, as such, receive $200.00 for each Board, and
$50.00 for each Board Committee meeting attended, plus $200.00 per month. No
Board Committee fees are paid to directors who are also salaried officers of the
Bank.
The Company's bonus plan is discretionary and is based upon several factors,
including the overall financial performance of the Company and individual
performance factors, among others. The bonus plan is directed by the
Compensation Committee of the Board of Directors and currently covers those
classified a Executive Officers of the Company and its subsidiary bank.
At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to
approve an incentive stock option plan. The purpose of the plan is to provide a
method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth, and protection of the business, and who
are making substantial
52
<PAGE>
contributions to the success and profitability of the business, may be
encouraged to acquire a stock ownership in the Company, thus creating a
proprietary interest in the business and providing them with greater incentive
to continue in the service of and to promote the interest of the Company and its
stockholders. Accordingly, the Company will from time to time during the
effective period of the plan, grant to the employees selected in the manner
provided in the plan, options to purchase shares of the common stock of the
Company subject to certain conditions specified in the plan. The maximum number
of shares eligible under this plan is 5.0% of the current outstanding common
shares, or 9,625 shares of the Company's common stock. The total amount of
shares granted under this plan during 1996 was 3,200 shares, or 1.66% of the
current outstanding common shares. No single person received more than 640
shares, or 0.33%. For more information regarding the stock option plan, please
refer to Note 11 of the Consolidated Financial Statements included in Item 8 of
this filing.
Information related to the Company's 401(k) and profit-sharing plans is
summarized in Note 10 of the Consolidated Financial Statements included in Item
8 of this filing.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no shareholders, known to the Company, who beneficially own more than
5% of the Company's common stock, the only class of stock outstanding, as of
December 31, 1996.
The following table sets forth information as of December 31, 1996, regarding
the amount and nature of the beneficial ownership of common stock of the Company
held by each of the directors of the Company and by all of the directors and
executive officers of the Company and the Bank as a group:
- --------------------------------------------------------------------------------
Shares Owned Percent of
Name Beneficially Class
- --------------------------------------------------------------------------------
S. Elwood Bare ...................... 1,150 (1) 0.59%
L. Thomas Bulla ..................... 6,420 (2) 3.33%
John R. Dawkins ..................... 4,665 (3) 2.42%
Richard E. Ford ..................... 3,527 (4) 1.83%
Walter Bennett Fuller ............... 2,000 (5) 1.04%
William D. Goodwin .................. 1,570 (6) 0.81%
Lucie T. Refsland, Ed.D ............. 203 (7) 0.11%
William R. Satterfield, Jr .......... 1,475 (8) 0.77%
Richard L. Skaggs ................... 525 (9) 0.27%
Ronald B. Snyder .................... 3,373 1.75%
All Directors and Executive
Officers of the Company &
Bank as a Group (18 persons) ...... 30,491 15.84%
------- -------
FOOTNOTES
(1) Mr. Bare has sole voting and investment authority for 975 shares and shared
voting and investment authority for 175 shares.
(2) Mr. Bulla has sole voting and investment authority for 3,870 shares and
shared voting and investment authority for 2,550 shares.
(3) Mr. Dawkins has sole voting and investment authority for 4,665 shares.
(4) Mr. Ford has sole voting and investment authority for 1,612 shares and
shared voting and investment authority for 1,915 shares.
(5) Mr. Fuller has sole voting and investment authority for 1,900 shares and
shared voting and investment authority for 100 shares.
(6) Mr. Goodwin has sole voting and investment authority for 920 shares and
shared voting and investment authority for 650 shares.
(7) Ms. Refsland has sole voting and investment authority for 203 shares.
(8) Mr. Satterfield has sole voting and investment authority for 1,075 shares
and shared voting and investment authority for 400 shares.
(9) Mr. Skaggs has sole voting and investment authority for 200 shares and
shared voting and investment authority for 325 shares.
53
<PAGE>
(10) Mr. Snyder has sole voting and investment authority for 325 shares and
shared voting and investment authority for 3,048 shares.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of business the Company's subsidiary, the Bank, as in the
past, has had banking transactions with the directors and executive officers of
the Company and the Bank, members of their immediate families, corporations and
other entities in which such directors and officers were executive officers or
had, directly or indirectly, beneficial ownership of 10% or more in any class of
equity securities, and trusts in which they have a substantial beneficial
interest or for which they serve as a fiduciary. Management of the Company is of
the opinion that any outstanding extensions of credit to such persons were made
in the ordinary course of the business of the Bank on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
in comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. See Note 4
of the Consolidated Financial Statements included in Item 8 of this filing for
additional information related to loans granted to related parties.
The Bank previously leased its branch banking facility on Route 219 North in
Lewisburg, West Virginia, from Company Directors Goodwin and Satterfield. The
lease term began April 1, 1986, and ran for a period of 10 years, expiring in
March of 1996. In January of 1996, Bank Management and the Board of Directors
attempted to renegotiate the lease to reduce the annual cost to the Bank.
Negotiations did not result in a mutually satisfactory agreement, and the Board
of Directors voted not to renew the existing lease, but to commence with the
purchase of land and the construction of a new branch location. The lease was
continued on a month-to-month basis through January, 1997, when construction of
the new Bank-owned branch location was completed. The annual rental during the
initial 10 year term was $90,446.
In 1996, the Bank paid the lessors rent in the amount of $90,446.
On occasion, certain Directors of the Company who are professionals in the
fields of law and insurance have provided, and are expected to continue to
provide, incidental legal and insurance services on behalf of the Company and/or
its subsidiary bank. These services do not individually, or in the aggregate,
exceed 10% of equity.
54
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page(s) in
Form 10-K
(a) (1) Financial Statements
The following consolidated financial statements and accountant's
report appear on pages 19 through 44 of this Form 10-K
Report of independent auditors..........................................21
Consolidated balance sheets at December 31, 1996 and 1995...............22
Consolidated statements of income for the years ended
December 31, 1996, 1995, and 1994.....................................23
Consolidated statements of shareholders' equity
for the years ended December 31, 1996, 1995, and 1994.................24
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995, and 1994..................................25-26
Notes to the consolidated financial statements.......................27-46
(a) (2) Financial Statement Schedules
All other schedules for which provision is made in the applicable
regulations of the Commission have been omitted as the schedules are
not required under the related instructions, or are not applicable, or
the information required thereby is set forth in the financial
statements or the notes thereto
(a) (3) Exhibits required to be filed by Item 601 of Regulation
S-K and 14(c) of Form 10-K
See index to exhibits...............................................57
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant during the
quarter ended December 31, 1996.
(c) Exhibits
See Item 14(a)(3), above
(d) Financial Statement Schedules
See Item 14(a)(2), above
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST NATIONAL BANKSHARES
CORPORATION (Registrant)
By: /s/ L. Thomas Bulla 03/25/97
L. Thomas Bulla
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Lucie T. Refsland 03/25/97
- ------------------------------------ --------------------------------------
S. Elwood Bare, Director Lucie T. Refsland, Director
/s/ William R. Satterfield Jr.03/25/97
- ------------------------------------ --------------------------------------
John R. Dawkins, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/25/97 /s/ Richard L. Skaggs 03/25/97
- ------------------------------------ --------------------------------------
Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/25/97 /s/ Ronald B. Snyder 03/25/97
- ------------------------------------ --------------------------------------
Bennett Fuller, Director Ronald B. Snyder, Director
/s/ William D. Goodwin 03/25/97
- ------------------------------------
William D. Goodwin, Director
/s/ L. Thomas Bulla 03/25/97 /s/ Keith E. Morgan 03/25/97
- ------------------------------------ --------------------------------------
L. Thomas Bulla, President, Chief Keith E. Morgan, Secretary & Treasurer
Executive Officer and Director
(Principal Executive Officer)
/s/ Jack D. Whitt 03/25/97
- ------------------------------------
Jack D. Whitt,
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
56
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company has not yet sent an annual report and proxy materials to its
stockholders. Such report and material shall be sent to its stockholders
subsequent to the filing of this Form 10-K, and copies thereof shall be
furnished to the Commission when they are sent to the stockholders.
57
<PAGE>
INDEX TO EXHIBITS
PAGE NUMBER(S)
IN FORM 10-K, OR
EXHIBIT PRIOR FILING
NUMBER DESCRIPTION REFERENCE
(3)i Articles of Incorporation of Registrant......................( a )
(3)ii By-laws of Registrant........................................( a )
(10) Material Contracts
A Agreement dated October 14, 1993, between L. Thomas Bulla
and First National Bank..................................( a )
B Summary of Lease terms for Charleston branch facility... ( b )
C Form S-8 Registration Statement under the
Securities Act of 1933................................( c )
D Specimen Copy of 1996 Incentive Stock Option
Plan Agreement........................................58-60
(11) Calculation of Primary and Fully Diluted Computation
of Earnings per Share....................................61
(21) Subsidiary of Registrant........................................62
(23) Consents of experts and counsel
Consent of Independent Auditors.............................63
(27) Financial Data Schedule......................................64-65
- -------------------------------------------------------------------------------
(a) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-K Annual Report dated December 31, 1994, and filed
with the Securities and Exchange Commission on or about March 28, 1995.
(b) Incorporated by reference to exhibits to from First National Bankshares
Corporation's Form 10-Q Quarterly Report dated March 31, 1996, filed with
the Securities and Exchange Commission on or about May 3, 1996.
(c) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form S-8 dated July 31, 1996, filed with the Securities and
Exchange Commission on or about July 31, 1996.
58
<PAGE>
EXHIBIT (10D) - MATERIAL CONTRACTS - Specimen Copy of Option Agreement
- -------------------------------------------------------------------------------
THE FIRST NATIONAL BANKSHARES CORPORATION
1996 INCENTIVE STOCK OPTION PLAN
OPTION AGREEMENT
OPTION AGREEMENT made this ______ day of _______________, 19_____, between The
First National Bankshares Corporation, (the "Company"), and
________________________ ________________________, an employee of the Company or
one or more of its subsidiaries (the "Employee").
The Company desires, by affording the Employee an opportunity to purchase its
common shares, of the par value of $5 per share, hereinafter called the Common
Shares, as hereinafter provided, to carry out the purpose of The First National
Bankshares Corporation 1996 Incentive Stock Option Plan, which has been approved
by its shareholders.
Now, thereafter, in consideration of the mutual covenants hereinafter set forth
and for other good and valuable consideration, the parties hereto agree as
follows:
1. Grant of option. The Company hereby irrevocably grants to the Employee the
right and option, hereinafter called the Option, to purchase all or any part of
an aggregate of ______ Common Shares (such number being subject to adjustment as
provided in paragraph 7 hereof) on the terms and conditions herein set forth.
2. Purchase price. The purchase price of the Common Shares covered by the Option
shall be $_________ per share flat or ex-dividend.
3. Term of option. The term of the Option shall be for a period of _____ years
(not to exceed five years in the case of a person owning more than 10% of the
Company's voting power, or ten years otherwise) from the date hereof, subject to
earlier termination as provided in paragraph 6 hereof. The Option may be
exercised within the above limitations, at any time or from time to time, as to
any part of or all the shares covered thereby; provided, however, that the
Option shall not be exercisable prior to the expiration of _____ year(s) (at
least one-half) from the date hereof. Notwithstanding the time period set forth
in the preceding sentence, the option shall become immediately exercisable with
respect to the total number of shares: (i) in the event of a sale of
substantially all of the assets of the Company; (ii) in the event 50% or more of
the capital stock is acquired by any person or entity outside the Company; or
(iii) in the event the Company undergoes any reorganization, merger,
consolidation or other transaction following which the Company's then current
shareholders own less than 50% of the Company's then voting power.
The purchase price of the shares as to which the Option shall be exercised shall
be paid in full in cash at the time of exercise. Except as provided in paragraph
6 hereof, the option may not be exercised at any time unless the Employee shall
have been in the continuous employ of the Company and/or of one or more of its
subsidiaries, from the date hereof to the date of the exercise of the Option.
The holder of the Option shall not have any of the rights of a shareholder with
respect to the shares covered by the Option except to the extent that one or
more certificates for such shares shall be delivered to him upon the due
exercise of the Option. The Option may not be exercised unless at the date of
exercise a registration statement on Form S-8 under the Securities Act of 1933,
as amended, relating to the shares covered by the Option shall be in effect. The
Company will endeavor to obtain prior to the time when the option would
otherwise be exercisable the registration of the shares covered by the option
under the Act, as amended.
4. Nontransferability. The option shall not be transferable otherwise than by
will or the laws of descent and distribution, and the Option may be exercised,
during the lifetime of the Employee, only by him. More particularly (but without
limiting the generality of the forgoing), the Option may not be assigned,
transferred (except as provided above), pledged, or hypothecated in any way,
shall not be assignable by operation of law, and shall not be subject to
execution, attachment, or similar process. Any attempted assignment, transfer,
pledge, hypothecation, or other disposition of the Option contrary to the
provisions hereof, and the levy of any execution, attachment, or similar process
upon the Option, shall be null and void and without effect.
59
<PAGE>
5. Employment. The granting of the Option nor its exercise shall not be
construed as granting to the grantee any right with respect to continuance of
employment by the Company or a subsidiary. Except as may otherwise be limited by
a written agreement between the Company or a subsidiary and the grantee, the
right of the Company or a subsidiary to terminate at will the grantee's
employment with it at any time (whether by dismissal, discharge, retirement or
otherwise) is specifically reserved by the Company as the employer or on behalf
of the employer (whichever the case may be) and acknowledged by the grantee.
6. Termination of option.
(a) The option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null
and void after the expiration of its term as set forth in paragraph 3 (the
"Option Term"), or in the case of Employee's termination of employment at
such earlier time as set forth in (b) below.
(b) Upon the occurrence of the Employee ceasing for any reason to be employed
by the Company or subsidiary (such occurrence being a "termination of the
Employee's employment"), the option, to the extent not previously exercised,
shall terminate and become null and void immediately upon such termination of
the Employee's employment, except in a case where the termination of an
Employee's employment is by reason of retirement, disability or death. Upon
the termination of the Employee's employment by reason of retirement (as
defined below), disability or death, the option may be exercised during the
following periods, but only to the extent that the option was outstanding and
exercisable on such date of retirement, disability or death: (i) the one year
period following the date of such termination of Employee's employment in the
case of disability (within the meaning of Section 22 (e) (3) of the Internal
Revenue Code of 1986), (ii) the six month period following the date of
issuance of letters testamentary or letters of administration to the executor
or administrator of a deceased Employee, in the case of the Employee's death
during his employment by the Company or a subsidiary, but not later than one
year after the Employee's death, and (iii) the three month period following
the date of such termination in the case of retirement on or after attainment
of age 65 years, or in the case of disability other than described in (i)
above. In no event, however, shall any such period extend beyond the Option
Term.
(c ) In the event of the death of the Employee, the option may be exercised
by the Employee's legal representative(s), but only to the extent that the
Option would otherwise have been exercisable by the Employee.
(d) The transfer of the Employee's employment between Company and any
subsidiary shall not be deemed to be a termination of Employee's employment.
(e) Notwithstanding any other provisions set forth herein or in the Plan, if
the Employee (i) commits any act of malfeasance or wrongdoing affecting
Company or any subsidiary, (iii) breaches any covenant not to compete or
employment contract, with Company or any subsidiary or (iii) engages in
conduct that would warrant the Employee's discharge for cause (excluding
general dissatisfaction with the performance of the Employee's duties, but
including any act of disloyalty or any conduct clearly tending to bring
discredit upon Company or any subsidiary), any unexercised portion of the
Option shall immediately terminate and be void.
7. Changes in capital structure. If all or any portion of the Option shall be
exercised subsequent to any share dividend, split-up, recapitalization, merger,
consolidation, combination or exchange of shares, separation, reorganization, or
liquidation occurring after the date hereof, as a result of which shares of any
class shall be issued in respect of outstanding Common Shares or Common Shares
shall be changed into the same or a different number of shares of the same or
another class or classes, the person or persons so exercising the option shall
receive, for the aggregate price paid upon such exercise, the aggregate number
and class of shares which, if Common Shares (as authorized at the date hereof )
had been purchased at the date hereof for the same aggregate price ( on the
basis of the price per share set forth in paragraph 2 hereof ) and had not been
disposed of, such person or persons would be holding, at the time of such
exercise, as a result of such purchase and all such share dividends, split-ups,
recapitalization, mergers, consolidations, combinations or exchanges of shares,
separations, reorganizations, or liquidations; provided, however, that no
fractional share shall be issued upon any such exercise, and the aggregate price
paid shall be appropriately reduced on account of any fractional share not
issued.
8. Limitation. The Employee shall not exercise any one or more Options hereunder
if and to the extent that the Employee would thereby be entitled to purchase
Common Shares in any one calender year the value of which, determined at the
time of the grant of the Option or Options, would exceed $100,000; provided,
however, that such
60
<PAGE>
exercise shall nonetheless be permitted if and to the extent that the right to
first exercise said options shall have accumulated over a number of years rather
than having first occurred in the year of exercise.
9. Method of exercising option. Subject to the terms and conditions of this
Option Agreement, the Option may be exercised by written notice to the Company,
at its Stock Transfer Department, which is now located at the office of the
Company, One Cedar Street, Ronceverte, West Virginia. Such notice shall state
the election to exercise the Option and the number of shares in respect of which
it is being exercised, and shall be signed by the person or persons so
exercising the Option. Such notice shall either: (a) be accompanied by payment
of the full purchase price of such shares, in which event the Company shall
deliver a certificate or certificates representing such shares as soon as
practicable after the notice shall be received; or (b) fix a date ( not less
than five nor more than ten business days from the date such notice shall be
received by the Company) for the payment of the full purchase price of such
shares at the Stock Transfer Department, against delivery of a certificate or
certificates representing such shares. Payment of such price shall, in either
case, be made by check payable to the order of the Company. The certificate or
certificates for the shares as to which the Option shall have been so exercised
shall be registered in the name of the person or persons so exercising the
Option (or, if the Option shall be exercised by the Employee and if the Employee
shall so request in the notice exercising the Option, shall be registered in the
name of the Employee and another person jointly, with right of survivorship) and
shall be delivered as provided above to or upon the written order of the person
or persons exercising the Option. In the event the Option shall be exercised,
pursuant to paragraph 6 (c) hereof, by any person or persons other than the
Employee, such notice shall be accompanied by appropriate proof of the right of
such person or persons to exercise the Option. All shares that shall be
purchased upon the exercise of the Option as provided herein shall be fully paid
and nonassessable.
10. General. The Company shall at all times during the term of the Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement, shall pay all original issue
and transfer taxes with respect to the issue and transfer of shares pursuant
hereto and all other fees and expenses necessarily incurred by the Company in
connection therewith, and will from time to time use its best efforts to comply
with all laws and regulations which, in the opinion of counsel for the Company,
shall be applicable thereto.
11. Subsidiary. As used herein, the term "subsidiary" shall mean any present or
future corporation which would be a "subsidiary corporation" of the Company, as
that term is defined in Section 424 of the Internal Revenue Code of 1986.
In witness whereof the Company has caused this Option Agreement to be duly
executed by a member of the Incentive Stock Option Committee duly authorized,
and the Employee has hereunto set his hand and seal, all of the day and year
first above written.
Attest: THE FIRST NATIONAL BANKSHARES CORPORATION
______________________ By_______________________________________________
-----------------------------------------------
Employee Signature
61
<PAGE>
EXHIBIT (11)
PRIMARY AND FULLY DILUTED COMPUTATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------------------
Primary Earnings Per Share
Primary Earnings per Share is calculated based upon the Company's net
income after income taxes, divided by the weighted average number of
shares outstanding during the fiscal period.
Fully Diluted Earnings Per Share
Fully Diluted Earnings Per Share is calculated based upon the Company's
net income after income taxes, divided by the weighted average number of
shares outstanding during the period plus all exercisable stock options
outstanding but not yet exercised at the end of the period.
62
<PAGE>
EXHIBIT (21)
SUBSIDIARY OF THE REGISTRANT
- -------------------------------------------------------------------------------
The following is the subsidiary of the registrant. Such subsidiary is
incorporated in the State of West Virginia.
FIRST NATIONAL BANK, a national banking association organized under the laws of
the United States of America.
63
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
- -------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our
report dated January 31, 1997, on our audit of the consolidated financial
statements of First National Bankshares Corporation as of December 31, 1996 and
1995, and for the three years in the period ended December 31, 1996, appearing
in Part II, Item 8 of the 1996 Form 10-K of First National Bankshares
Corporation.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 24, 1997
64
<PAGE>
EXHIBIT (27)
FINANCIAL DATA SCHEDULE
- -------------------------------------------------------------------------------
DATE: 12/31/96
[TYPE] EX-27
[DESCRIPTION] FDS --
[TEXT]
[ARTICLE] 9
[CIK]
[NAME] First National Bankshares Corporation
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<TABLE>
<S>
<C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] DEC-31-1996
[EXCHANGE-RATE] 1.00000
[CASH] 2576
[INT-BEARING-DEPOSITS] 63105
[FED-FUNDS-SOLD] 2663
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 3781
[INVESTMENTS-CARRYING] 18836
[INVESTMENTS-MARKET] 18850
[LOANS] 52800
[ALLOWANCE] 654
[TOTAL-ASSETS] 83668
[DEPOSITS] 73316
[SHORT-TERM] 492
[LIABILITIES-OTHER] 1019
[LONG-TERM] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 963
[OTHER-SE] 7878
[TOTAL-LIABILITIES-AND-EQUITY] 83668
[INTEREST-LOAN] 4667
[INTEREST-INVEST] 1284
[INTEREST-OTHER] 215
[INTEREST-TOTAL] 6166
[INTEREST-DEPOSIT] 2380
[INTEREST-EXPENSE] 2393
[INTEREST-INCOME-NET] 3773
[LOAN-LOSSES] 0
[SECURITIES-GAINS] 1
[EXPENSE-OTHER] 3140
[INCOME-PRETAX] 1066
[INCOME-PRE-EXTRAORDINARY] 1066
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 736
[EPS-PRIMARY] 3.82
[EPS-DILUTED] 3.82
[YIELD-ACTUAL] 8.32
[LOANS-NON] 161
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[ALLOWANCE-OPEN] 643
[CHARGE-OFFS] 117
[RECOVERIES] 128
[ALLOWANCE-CLOSE] 654
[ALLOWANCE-DOMESTIC] 654
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
