UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation) Identification No.)
One Cedar Street, Ronceverte, West Virginia 24970
(Address of principal executive offices) (Zip Code)
(304) 647-4500
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.
Yes______x_______ No________________
The number of shares outstanding of the issuer's classes of common stock as of
September 30, 1998:
Common Stock, $5 par value -- 192,903 shares
THIS REPORT CONTAINS 29 PAGES
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2
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FIRST NATIONAL BANKSHARES CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Shareholders' Equity -
Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6-7
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997 8
Notes to Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities none
Item 3. Defaults upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information none
Item 6. Exhibits and Reports on Form 8-K 21
Item 11 - Computation of Per Share Earnings 23
Item 27 - Financial Data Schedule 24
SIGNATURES 22
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3
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PART I. FINANCIAL INFORMATION
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
September 30, December 31,
1998 1997
ASSETS (Unaudited) (1)
Cash and due from banks $ 2,029 $ 2,742
Federal funds sold 4,330 3,159
Securities held to maturity
esitmated fair value
( $6,850 and $12,405, respectively) (Note 2) 6,740 12,322
Securities available for sale (Note 2) 10,129 4,989
Loans, net of allowance of $776 and
$636, respectively (Notes 3 and 4) 68,604 69,108
Bank premises and equipment 1,921 2,073
Accrued interest receivable 635 660
Other assets 1,326 377
--------------- -------
Total assets $ 95,714 $ 95,430
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 9,575 $ 10,035
Interest bearing 68,980 68,301
--------------- ----------------
Total deposits 78,555 78,336
Repurchase agreements 1,225 1,330
Long-term borrowings (Note 7) 5,490 5,500
Other liabilities 844 939
--------------- ----------------
Total liabilities 86,114 86,105
--------------- ----------------
Commitments and Contingencies (Note 5)
Shareholders' equity
Common stock, $5.00 par value,
authorized 500,000 shares,
issued 192,903 and 192,500
shares, respectively 965 963
Surplus 1,019 1,000
Retained earnings 7,603 7,362
Net unrealized gain (loss) on securities 13 -
--------------- ----------------
Total shareholders' equity 9,600 9,325
--------------- ----------------
Total liabilities and
shareholders' equity $ 95,714 $ 95,430
================ ===========
(1) Extracted from December 31, 1997 audited financial statements.
See Notes to Condensed Consolidated Financial Statements
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12
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended
Nine months Ended
September 30,
September 30,
1998 1997 1998 1997
- -------------------------------- --------- --------- ------- ---------
Interest Income
Interest and fees on loans $ 1,652 $ 1,523 $ 4,767 $ 4,279
Interest and dividends
on securities:
Taxable 223 187 619 657
Tax-exempt 43 49 134 149
Interest on Federal funds sold 63 58 172 92
------- -------- -------- --------
Total interest income 1,981 1,817 5,692 5,177
------- --------- --------- -------
Interest Expense
Interest on deposits 758 716 2,217 2,015
Interest on repurchase
agreements 18 14 47 28
Interest on Federal
funds purchased - - - 5
Interest on long-term
borrowings 92 84 272 175
------- ------- -------- -------
Total interest expense 868 814 2,536 2,223
Net interest income 1,113 1,003 3,156 2,954
Provision for loan losses 29 9 449 22
---------- ---------- --------- -------
Net interest income after provision
for loan losses 1,084 994 2,707 2,932
--------- --------- --------- -------
Other income
Service fees 65 62 186 198
Securities gain - - - -
Trust income 21 32 66 44
Other income 55 22 98 77
------- ------- ------ ------
141 116 350 319
- --------------------------------- ------- ---------- --------- ---------
Other expense
Salaries and employee
benefits 384 400 1,163 1,256
Net occupancy expense 73 41 202 155
Equipment rental,
depreciation and
maintenance 66 82 215 222
Data processing 64 31 154 98
Legal and professional 81 36 149 77
Directors' fees and
shareholders' expense 21 20 74 83
Other operating expenses 151 179 448 508
-------- ---------- --------- ---------
840 789 2,405 2,399
- ------------------------- -------- ---------- --------- ---------
Income before income taxes 385 321 652 852
Income tax expense 90 123 180 302
---------- ---------- --------- --------
Net income $ 295 $ 198 $ 472 $ 550
=========== ======== ======== ========
Basic earnings per common
share (Note 6) $ 1.53 $ 1.03 $ 2.45 $ 2.86
========== ========== ========= ==========
Diluted earnings per
common share (Note 6) $ 1.53 $ 1.03 $ 2.44 $ 2.85
========== ========== ========= ==========
Dividends per common share $ 0.40 $ 0.40 $ 1.20 $ 1.20
========== ========== ========= ==========
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended
Nine months Ended
September 30,
September 30,
1998 1997 1998 1997
- ------------------------------------------- ---------- --------- -------
Balance, beginning of period $ 9,376 $ 9,035 $ 9,325 $ 8,841
Net income 295 198 472 550
Cash dividends declared (77) (77) (231) (231)
Issued 403 shares of common
stock pursuant to
stock option exercise - - 21 -
Change in net unrealized
gain (loss) on securities
available for sale 6 6 13 2
---------- ---------- --------- ----------
Balance, end of period $ 9,600 $ 9,162 $ 9,600 $ 9,162
========== ========== ========= =========
See Notes to Condensed Consolidated Financial Statements
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Nine months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 472 $ 550
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 190 169
Provision for loan losses 449 22
Deferred income tax expense (benefit) (95) 21
Amortization of security premiums (accretion) of
security discounts, net (40) (29)
(Gain) loss on sale of other assets (29) (2)
(Gain) loss on disposal of bank premises and
equipment 1 -
(Increase) decrease in accrued interest receivable 25 77
(Increase) decrease in other assets 17 (38)
Increase (decrease) in other liabilities (95) 226
--------- ---------
Net cash provided by (used in)
operating activities 895 996
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 7,575 8,735
Proceeds from maturities and calls
of securities available for sale 2,000 1,500
Purchases of securities held to maturity (2,001) (1,197)
Purchases of securities available for sale (7,071) (3.004)
Principal collected on (loans made to) customers, net (830) (14,177)
Proceeds from sale of other assets 35 -
Purchases of bank premises and equipment (39) (326)
-------- ----------
Net cash provided by (used in)
investing activities (331) (8.469)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW and savings accounts 1,673 (381)
Proceeds from sales of (payments for matured)
time deposits, net (1,454) 4,196
Net increase (decrease) in repurchase agreements (105) 1,944
Proceeds from long-term borrowings - 5,000
Repayment of long-term borrowings (10) -
Proceeds from sale of common stock pursuant to stock
option exercise 21 -
Dividends paid (231) (231)
--------- --------
Net cash provided by (used in)
financing activities (106) 10,528
--------- ---------
Increase (decrease) in cash and
cash equivalents 458 3,055
Cash and cash equivalents:
Beginning 5,901 5,239
--------- ---------
Ending $ 6,359 $ 8,294
========= =========
(Continued)
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
(In thousands of dollars)
Nine months Ended
September 30,
1998 1997
- ----------------------------------------------------------------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 2,541 $ 2,211
========= ==========
Income taxes $ 352 $ 358
========== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 77 $ 77
========= ==========
Other real estate acquired in settlement
of loans $ 885 $ -
========= ==========
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars, except per share data) Unaudited
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net Income $ 295 $ 198 $ 472 $ 550
Other comprehensive
income, net of tax:
Unrealized gains/
(losses) on securities:
Gain (loss)
arising during
the period 6 6 13 2
Reclassification
adjustment - - - -
Other comprehensive income - - - -
---------- ---------- ---------- --------
Comprehensive Income $ 301 $ 204 $ 485 $ 552
======= ======== ====== =====
See Notes to Condensed Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accounting and reporting policies of First National Bankshares
Corporation and Subsidiary (the "Company") conform to generally
accepted accounting principles and to general policies within the
financial services industry. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated statements include the accounts of the
Company and its wholly-owned subsidiary, First National Bank. All
significant intercompany balances and transactions have been
eliminated. The information contained in the condensed
consolidated financial statements is unaudited except where
indicated. In the opinion of management, all adjustments for a
fair presentation of the results of the interim periods have been
made. All such adjustments were of a normal, recurring nature. The
results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results
to be expected for the full year. The condensed consolidated
financial statements and notes included herein should be read in
conjunction with the Company's 1997 audited financial statements
and Form 10-K.
Certain amounts in the condensed consolidated financial statements
for the prior year, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and
estimated fair values of securities at September 30, 1998 and
December 31, 1997 are summarized as follows (in thousands):
September 30, 1998
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Treasury sec. $ - $ - $ - $ -
U.S. Gov. agencies
and corporations 3,229 8 - 3,237
Corporate debt securities - - - -
-------- ----------- ----------- ---------
Total Taxable 3,229 8 - 3,237
Tax Exempt:
State & political
subdivisions 3,511 102 - 3,613
----------- ----------- ----------- ---------
Total securities
held to maturity $ 6,740 $ 110 $ - $ 6,850
========== =========== =========== =========
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Treasury securities $ - $ - $ - $ -
U.S. Government agencies
and corporations 9,466 21 - 9,487
Federal Home Loan Bank Stock 574 - - 574
Federal Reserve Bank Stock 57 - - 57
Other equities 9 - - 9
---------- ----------- ----------- --------
Total Taxable 10,106 21 - 10,127
Tax Exempt:
Federal Reserve Bank Stock 2 - - 2
---------- ----------- ----------- -----------
Total securities
available for sale $ 10,108 $ 21 $ - $ 10,129
========== =========== =========== ===========
December 31, 1997
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Treasury securities $ 500 $ - $ - $ 500
U.S. Government agencies
and corporations 7,233 13 3 7,243
Corporate debt securities 500 - 3 497
---------- --------- ---------- --------
Total Taxable 8,233 13 6 8,240
Tax Exempt:
State & political subdivisions 4,089 76 - 4,165
---------- --------- --------- ------
Total securities
held to maturity $ 12,322 $ 89 $ 6 $ 12,405
========== ========= ========= =======
December 31, 1997
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Treasury securities $ 1,994 $ 3 $ - $ 1,997
U.S. Government agencies
and corporations 2,455 4 7 2,452
Federal Home Loan Bank Stock 481 - - 481
Federal Reserve Bank Stock 57 - - 57
---------- --------- --------- ------
Total Taxable 4,987 7 7 4,987
Tax Exempt:
Federal Reserve Bank Stock 2 - - 2
---------- ----------- ----------- --------
Total securities
available for sale $ 4,989 $ 7 $ 7 $ 4,989
======== ========= ========= =======
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of the
Company's securities at September 30, 1998 are summarized as
follows (in thousands):
Held to Maturity
Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due within 1 year $ 1,483 $ 1,486 $ 4,462 $ 4,476
Due after 1 but
within 5 years 3,371 3,402 5,004 5,011
Due after 5 but
within 10 years 1,886 1,962 - -
Equity Securities - - 642 642
---------- ----------- ----------- -----------
$ 6,740 $ 6,850 $ 10,108 $ 10,129
========== =========== =========== ===========
The Company's Federal Reserve Bank stock and Federal Home Loan
Bank stock are equity securities which are included in securities
available for sale in the accompanying condensed consolidated
financial statements. Such securities are carried at cost, since
they may only be sold back to the respective Federal Reserve or
Federal Home Loan Bank at par value.
The proceeds from sales and calls and maturities of securities and
the related gross gains and losses realized for the nine month
periods ended September 30, 1998 and 1997 are as follows (in
thousands):
Proceeds From
Gross Realized
Calls and Principal
Sales Maturities Payments Gains Losses
Nine months
ended 9/30/98
Securities held
to maturity $ - $ 7,575 $ - $ - $ -
Securities
available for sale - 2,000 - - -
--------- ----------- ----------- ----------- ----------
$ - $ 9,575 $ - $ - $ -
=========== ========== =========== ========== ==========
Nine months
ended 9/30/97:
Securities held
to maturity $ - $ 8,735 $ - $ - $ -
Securities
available for sale - 1,500 - - -
----------- ---------- ----------- ----------- --------
$ - $ 10,235 $ - $ - $ -
=========== ========== =========== =========== ===========
Note 3. Loans
Total loans as of September 30, 1998 and December 31, 1997 are summarized
as follows (in thousands):
September 30, December 31,
1998 1997
- -- ----------------------------------------------------------------- ---------
Commercial, financial and agricultural $ 26,601 $ 29,431
Real estate - construction 1,910 3,515
Real estate - mortgage 30,678 29,067
Installment loans to individuals 8,329 6,389
Other 1,863 1,366
-------------- ---------------
Total loans 69,381 69,768
Less unearned income (1) (24)
-------------- ----------------
Total loans net of unearned income 69,380 69,744
Less allowance for loan losses (776) (636)
-------------- ----------------
Loans, net $ 68,604 $ 69,108
============== ===============
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Allowance for Loan Losses
Analyses of the allowance for loan losses are presented below (in
thousands) for the nine month periods ended September 30, 1998 and
1997:
Nine months Ended
September 30, December 31,
1998 1997 1997
----------------------- ------------
Balance, beginning of period $ 636 $ 654 $ 654
------ ------ ------
Loans charged off (346) (105) (108)
Recoveries 37 42 59
----- ----- ----
Net (losses) recoveries (309) (63) (49)
------ ------ -----
Provision for loan losses 449 22 31
------- ----- -----
Balance, end of period $ 776 $ 613 $ 636
The Company's total recorded investment in impaired loans at
September 30, 1998 and December 31, 1997 approximated $318,000 and
$498,000, respectively, for which the related allowance for credit
losses determined in accordance with generally accepted accounting
principles approximated $250,000 and $215,000, respectively. All
impaired loans were collateral dependent, and accordingly, the
fair value of the loan's collateral was used to measure the
impairment of each loan. Impaired loans are included in nonaccrual
loans.
Note 5. Commitments and Contingencies
The Company's subsidiary bank is, through the ordinary course of
business, party to financial instruments with off-balance sheet
risk. These financial instruments include standby letters of
credit and commitments to extend credit. The contract amount of
unused portions of existing lines of credit and other commitments
to lend as of September 30, 1998 and December 31, 1997 are as
follows, in thousands of dollars:
September 30, December 31,
1998 1997
Commitments to extend credit $ 11,100 $ 10,898
===============================
Management is not aware of any commitments or contingencies which
may reasonably be expected to have a material impact on operating
results, liquidity or capital resources. The Company continues to
have commitments related to various legal actions, commitments to
extend credit, and employment contracts arising in the normal
course of business.
Note 6. Earnings Per Share
Earnings per common share are computed based on the
weighted-average shares outstanding. For the nine month periods
ended September 30, 1998 and 1997, the weighted-average common
shares outstanding was 192,649 and 192,500, respectively. The
weighted average common shares outstanding for the three month
periods then ended was also 192,903 and 192,500, respectively.
Under Financial Accounting Standards Statement No. 128, "Earnings
per Share," the Company is required to present basic and diluted
per share amounts. Diluted per share amounts assume the
conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce the loss or increase
the income per common share from continuing operations. The
Company has an incentive stock option plan which is considered in
determining diluted earnings per share. At September 30, 1998,
shares totaling 3,603 were outstanding under the stock option
plan, all being fully vested and exercisable, with 5,619 shares
remaining as available for grant. Per share information for prior
periods presented have been restated to conform to this Statement
No 128.
For the nine month periods presented, basic and diluted earnings
per share are calculated as follows:
September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- --------------- -----------
Basic EPS
Income available to
common shareholders $ 472,000 $ 192,649 $ 2.45
Effective of Dilutive Securities
Stock options - 918 -
------------- ----------- ----------
Diluted EPS
Income available to
common shareholders $ 472,000 193,567 $ 2.44
=========== =========== ========
September 30,1997
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
Basic EPS
Income available to
common shareholders $ 550,000 $ 192,500 $ 2.86
Effect of Dilutive Securities
Stock options - 321 -
------------- ----------- ----------
Diluted EPS
Income available to
common shareholders $ 550,000 192,821 $ 2.85
=========== ========= =======
Grants under the plan are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, no compensation cost
is recognized for grants under the plan. Had compensation cost for
the stock-based compensation plan been determined on the grant
date in accordance with FAS Statement No 123, the net income and
earnings per share would have been reduced to the proforma amounts
shown below (in thousands except earnings per share data):
Nine Months Ended
September 30,
1998 1997
---- ----
Net income:
As reported $472 $550
Proforma $461 $531
Basic earnings per share:
As reported $2.45 $2.86
Proforma $2.39 $2.76
Diluted earnings per share:
As reported $2.44 $2.86
Proforma $2.38 $2.75
Note 7. Subsequent Event:
On September 8, 1998, the Company terminated merger negotiations
with Pocahontas Bankshares Corporation, a West Virginia
corporation and registered bank holding company and have canceled
their non-binding letter of intent setting forth the merger
agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of First National Bankshares
Corporation (the "Company" ), and its subsidiary, First National Bank for the
periods indicated. This discussion and analysis should be read in conjunction
with the Company's 1997 consolidated financial statements and notes included in
its Annual Report to Shareholders and Form 10-K. This discussion may include
forward-looking statements based upon management's expectations, and actual
results may differ materially.
EARNINGS SUMMARY
The Company reported net income of $295,000 for the three months ended September
30, 1998 compared to $198,000 for the quarter ended September 30, 1997,
representing a 49% increase. For the nine month period ended September 30, 1998,
the Company's net income of $472,000 decreased 14% from the $550,000 reported
for the same period of 1997. The material items impacting both quarterly and
year to date earnings are discussed below.
Basic earnings per common share was $1.53 for the quarter ended September 30,
1998 compared to the $1.03 reported for the third quarter of 1997. For the nine
month period ended September 30, 1998, basic earnings per common share totaled
$2.45 compared with $2.86 for the same period of 1997. An analysis of the
contribution of each major component of the statement of income to basic
earnings per share is presented in the following chart both for the three month
and for the nine month periods ended September 30, 1998 and 1997.
Three Months Ended Nine months Ended
September 30, September 30,
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
- -------------------------------------------------- ------- ------ ----------
Interest income $ 10.29 $ 9.45 $ 0.84 $ 29.53 $ 26.89 $ 2.64
Interest expense 4.51 4.23 0.28 13.16 11.55 1.61
-------- ------- ------- -------- ------- --------
Net interest income 5.78 5.22 0.56 16.37 15.34 1.03
Provision for
loan losses 0.15 0.05 0.10 2.18 0.11 2.07
--------- --------- --------- --------- -------- --------
Net interest income after
provision for
loan losses 5.63 5.17 0.46 14.19 15.23 (1.04)
--------- ------------------- --------- -------- -------
Non-interest income 0.73 0.60 0.13 1.67 1.66 0.01
Non-interest expense 4.36 4.10 0.26 12.48 12.46 0.02
--------- ------- -------- -------- -------- -------
Income before
income taxes 2.00 1.67 0.33 3.38 4.43 (1.05)
Income tax expense 0.47 0.64 (0.17) 0.93 1.57 (0.64)
--------- --------- --------- -------- ------- -------
Net income $ 1.53 $ 1.03 $ 0.50 $ 2.45 $2.86 $(0.41)
========= ========= ======== ======== ======= =======
The Company's annualized return on average assets (ROA) for the third quarter of
1998 was 1.23% compared to 0.89% for the third quarter of 1997. This compares
with ROA of 0.66% and 0.83% for the nine month periods ended September 30, 1998
and 1997, respectively. Annualized return on average shareholders' equity (ROE)
was 12.44% for the third quarter of 1998 compared to 8.60% in the third quarter
of 1997, while year-to-date ROE was 6.63% and 7.95% as of September 30, 1998 and
1997, respectively.
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 earning assets
over the interest expense paid for sources of funds. Net interest income is
affected 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.
For purposes of this discussion, net interest income is presented on a fully
tax-equivalent basis to enhance the comparability of the performance of
tax-exempt to fully taxable earning assets. For the periods ended September 30,
1998 and 1997, the tax-equivalent adjustment was $69,000 and $77,000,
respectively.
The Company's net interest income on a fully tax-equivalent basis totaled
$3,225,000 for the nine month period ended September 30, 1998 compared to
$3,031,000 for the same period of 1997, representing an increase of $194,000 or
6.4%. For the quarters ended September 30, 1998 and 1997, net interest income on
a fully tax-equivalent basis totaled $1,135,000 and $1,029,000, an increase of
$106,000 or 10.3%. While net interest income increased, the Company's net yield
on interest earning assets decreased to 4.73% in 1998 from 4.84% in 1997. The
decrease in the net yield on earning assets is due to a higher cost of
rate-sensitive liabilities in 1998 compared to 1997. The cost of interest
bearing liabilities increased to 4.49% versus the previous year's 4.29%, and was
primarily due to the increased volume of interest bearing deposits and FHLB
borrowings outstanding in 1998 versus 1997.
Loan interest income improved $488,000 to $4,767,000 for the nine months ended
September 30, 1998 compared to September 30, 1997, an increase of 11.4%. The
improvement was predominantly a result of the increased volume of loans
outstanding during 1998 compared to 1997 (see TABLE II). The increase was
further aided by management's decision to restore a long-time nonaccrual loan to
accrual status in September 1998. The quality of the commercial credit has
steadily improved since it was first placed on nonaccrual status in 1993. The
borrower has demonstrated the cashflow ability to support the restored loan
balance. In addition, recent independent appraisals of the collateral securing
the credit indicate the Bank is in a well-secured position with no loss
anticipated. As a result of the restoration, approximately, $97,000 of interest
income was capitalized and recorded in September 1998. The annualized yield on
average loans at September 30, 1998 was 9.19%. Disregarding the impact of the
capitalized interest, the yield would have been 9.00%, which is more indicative
of the year to date yield.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities and changes in its net interest income are presented in
TABLE I and TABLE II.
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
Nine months Ended Nine months Ended
September 30, 1998 September 30, 1997
Average Yield/ Average Yield/
Balance Interest(1) Rate Balance Interest(1) Rate
INTEREST EARNING ASSETS
Loans $ 69,178 $ 4,767 9.19% $ 62,023 $ 4,279 9.20%
Securities:
Taxable 13,753 619 6.00 15,126 657 5.79
Tax-exempt 3,771 203 7.18 4,129 226 7.29
---------- --------- ------- ------- ------- --------
Total securities 17,524 822 6.25 19,255 883 6.11
---------- ---------- ------- --------- ---------- -----
Federal funds
sold 4,158 172 5.52 2,247 92 5.46
---------- ---------- ------- --------- -------- ------
Total interest earning
assets 90,860 5,761 8.45 83,525 5,254 8.39
---------- ---------- ------- --------- -------- ------
NON-INTEREST EARNING ASSETS
Cash and due from banks 2,300 2,606
Bank premises and equipment 2,010 2,089
Other assets 1,492 1,128
Allowance for loan losses (710) (643)
---------- ----------
Total assets $ 95,952 $ 88,705
========== ==========
INTEREST BEARING LIABILITIES
Demand deposits $ 12,549 $ 237 2.52 $ 13,285 $ 259 2.60
Savings deposits 25,780 821 4.25 21,744 628 3.85
Time deposits 29,931 1,159 5.16 29,426 1,128 5.11
------- ------ ----- ------ ------ -----
Total Interest-bearing
deposits 68,260 2,217 4.33 64,455 2,015 4.17
Repurchase agreements 1,605 47 3.90 975 28 3.83
Federal funds purchased - - - 168 5 3.97
Long-term FHLB borrowings 5,496 272 6.60 3,462 175 6.74
------- ------ ----- ------ ----- ------
Total other interest bearing
liabilities 7,101 319 5.99 4,605 208 6.02
Total Interest bearing
liabilities 75,361 2,536 4.49 69,060 2,223 4.29
NON-INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits $ 10,250 $ 9,440
Other liabilities 855 990
Shareholders' equity 9,486 9,215
---------- ----------
Total liabilities and
shareholders' equity $ 95,952 $ 88,705
========== ==========
NET INTEREST
EARNINGS $ 3,225 $ 3,031
========== ==========
NET YIELD ON INTEREST EARNING
ASSETS 4.73% 4.84%
======== ========
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for
1998 and 1997.
(2) - For purposes of these computations, nonaccrual loans are included in the
amounts of average loans outstanding. Included in interest is loan fees of
$51,000 and 66,000 for 1998 and 1997, respectively.
TABLE II
CHANGES IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
(In thousands of dollars)
Nine months Ended
September 30, 1998 vs. September 30, 1997
Increase (Decrease)
Due to Changes in:
Volume(1) Rate(1) Total
INTEREST EARNING ASSETS
Loans $ 493 $ (5) $ 488
Securities:
Taxable (61) 23 (38)
Tax-exempt (2) (20) (3) (23)
------------------------------------------
Total securities (81) 20 (61)
Federal funds sold 79 1 80
------------- ------------ ---------
Total interest earning assets 491 16 507
____________________________________________
INTEREST BEARING LIABILITIES
Demand deposits (14) (8) (22)
Savings deposits 124 69 193
Time deposits 19 12 31
Repurchase agreements 18 1 19
Federal funds purchased (3) (2) (5)
Long-term FHLB borrowings 101 (4) 97
------- ------ -----
Total interest bearing
liabilities 245 68 313
NET INTEREST EARNINGS $ 246 $ (52) $ 94
============ ================ ===========
(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 on a fully tax-equivalent basis using the rate of 34%.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Management's
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, actual loan
loss experience relative to the size and characteristics of the loan portfolio,
change in the composition and risk characteristics of the loan portfolio and the
anticipated influence of national and local economic conditions. The adequacy of
the allowance for loan losses is reviewed quarterly and adjustments are made as
considered necessary.
During the third quarter of 1998, the Bank made a $29,000 provision for loan
losses compared to $9,000 during the third quarter of 1997. For the nine months
ended September 30, 1998 and 1997, respectively, the provision for loan losses
was $449,000 and $22,000. The additional provision in 1998 was primarily a
result of a charge-off on a commercial real estate loan, as well as an increase
in the specific allocation for a previously reserved credit. For additional
discussion of these factors and the related allowance for loan losses account,
refer to the Loan and Related Risk Elements section of this discussion.
NON-INTEREST INCOME
Non-interest income includes revenues for all sources other than interest income
and yield related loan fees. For the nine month period ended September 30, 1998,
non-interest income totaled $350,000, representing an increase of $31,000 from
the $319,000 recorded during the same period of 1997. As a percentage of average
assets, non-interest income was 0.36% for both the nine month periods ended
September 30, 1998 and 1997, respectively. The increase in non-interest income
is due to increased trust and other income. Trust income has increased $22,000
or 50% during the nine months ended September 30, 1998 compared to 1997. Estates
and other trust services tend to fluctuate from year to year, and trust revenues
are currently expected to increase from 1997's levels during 1998. Other income
for the nine months ended September 30, 1998 has increased $21,000 over the
comparable period of 1997. During the quarter, the Bank recognized a $29,000
gain from the sale of two parcels of property acquired in foreclosure. The
increases discussed above were offset by a general decrease in service fees.
On a quarter-to-quarter basis, non-interest income increased to $141,000 for the
third quarter of 1998 compared to $116,000 for the third quarter of 1997 due to
the reasons discussed above.
NON-INTEREST EXPENSE
Non-interest expense comprises overhead costs which are not related to interest
expense or to losses from loans or securities. As of September 30, 1998, the
Company's non-interest expense totaled $2,405,000, representing an increase of
$6,000, or 0.25%, over total non-interest expense incurred for the nine months
ended September 30, 1997. However, expressed as a percentage of average assets,
non-interest expense decreased to 2.51% at September 30, 1998, versus 2.69% at
September 30, 1997.
Salaries and employee benefits are the Company's largest non-interest cost,
representing approximately 48% and 53% of total non-interest expense at
September 30, 1998 and 1997, respectively. Salaries and employee benefits
decreased $93,000, or 7.4% as of September 30, 1998 compared to September 30,
1997. This decrease is primarily due to the net impact of certain job
eliminations and retirements, net of new employees and general merit and
promotion-related pay increases for existing staff.
For the nine month period ended September 30, 1998, data processing expense
totaled $154,000, an increase of $56,000 from the same period in 1997. In 1998,
the Company has incurred $30,000 of additional data processing expense in
connection with its Year 2000 testing. The Company is expected to incur
additional expense during the remainder of 1998, however, the total expense for
the Year 2000 testing related to the data processing function is not expected to
exceed $35,000 for the fiscal year 1998. See additional discussion of Year 2000
issues in the Year 2000 section below.
Legal and professional expense totaled $149,000 for the nine month period ended
September 30, 1998, an increase of $72,000 over the same period of 1997. During
the quarter, the Company incurred approximately $56,000 in non-recurring legal
and professional fees associated with its unsuccessful merger with a bank
holding company. No further legal and professional fees associated
with the aforementioned attempted merger will be incurred as the Company
terminated the merger negotiations. No other significant or unusual items
accounted for the additional increase.
On a quarter-to-quarter basis, other non-interest expense totaled $840,000 for
the third quarter of 1998 from $783,000 during the third quarter of 1997, an
increase of $57,000. The majority of the increase was due to increased data
processing and legal expenses as discussed above. These increases were offset by
a decrease in salaries and related benefits also discussed above.
INCOME TAXES
The Company's income tax expense, which includes both Federal and State income
taxes, totaled $180,000 for the nine month period ended September 30, 1998,
reflecting a $122,000 decrease when compared to the same period of 1997. Income
tax expense equaled 27.6% and 36.6% of income before taxes at September 30, 1998
and 1997, respectively. For financial reporting purposes, income tax expense
does not equal the Federal statutory income tax rate of 34.0% when applied to
pre-tax income, primarily because of state income taxes and tax-exempt interest
income included in income before income taxes.
FINANCIAL CONDITION
The Company's total assets were $95,714,000 at September 30, 1998, compared to
$95,430,000 at December 31, 1997, representing a 0.29% increase, while average
assets increased to $95,952,000 from $90,824,000 for the same periods,
respectively. Details concerning changes in the Company's major balance sheet
items and changes in financial condition follow.
Securities
The Bank's total securities portfolio decreased by $442,000 or 2.5% from
December 31, 1997. This decrease is a result of normal maturities in the
Company's securities portfolio net of new purchases. As a general rule, the
Company is classifying all new securities purchases as available for sale, which
has resulted in a higher percentage of available for sale securities in the
Company's portfolio compared with previous periods. A summary of the Company's
securities portfolio (both held-to-maturity and available-for-sale) is included
as Note 2 to the condensed consolidated financial statements.
Loans and Related Risk Elements
Loans, net of unearned income, decreased during the third quarter of 1998 from
$69,744,000 at year end 1997 to $69,380,000 as of September 30, 1998. Loan
growth has remained relatively flat during 1998 compared to 1997. The majority
of loan growth in 1998 has been mitigated or offset by two significant
commercial loan payoffs during the first quarter of 1998 and the foreclosure and
resulting charge-off of a commercial real estate credit in the second quarter of
1998. A summary of the Bank's loans by category in comparison to year end 1997
is included in Note 3 to the condensed consolidated financial statements.
In contrast to year to date loan growth, the Bank has experienced loan growth
during the last three months of $731,000 or 1.06%, and future growth is
expected, primarily in high-quality commercial and commercial real estate loans
and residential mortgages. Management anticipates that the recent decline
in the prime rate will impact the bank's loan portfolio primarily through
refinancings. The Bank expects to remain competitive with the interest rates
offered on its loan products. See the liquidity and interest rate management
section for further discussion.
The allowance for loan losses was $776,000 at September 30, 1998 compared to
$636,000 at December 31, 1997. Expressed as a percentage of loans (net of
unearned income), the allowance for loan losses was 1.12% at September 30, 1998
compared to 0.91% at December 31, 1997. Loans charged-off, net of recoveries of
previously charged-off loans, totaled $309,000 and $63,000 for the nine months
ended September 30, 1998 and 1997, respectively. For the year ended December 31,
1997, net charge-offs totaled $49,000. See Note 4 of the notes to the condensed
consolidated financial statements for an analysis of the activity in the
Company's allowance for loan losses for the nine month periods ended September
30, 1998 and 1997 and December 31, 1997.
The Company's allowance for loan losses is divided into allocated and
unallocated categories. The allocated portion of the allowance is established on
a loan-by-loan and pool-by-pool basis. The unallocated portion is for inherent
losses that may exist as of the evaluation date, but which have not been
specifically identified by the processes used to establish the allocated portion
due to inherent imprecision in the objective process of identification. The
unallocated portion is subjective and requires judgment based on various
qualitative factors in the loan portfolio and the market in which the Company
operates. At September 30, 1998, the unallocated portion of the allowance
approximated $101,000 compared to $132,000 at year-end 1997, or 13.0% and 20.8%
of the total allowance, respectively. The unallocated amount at September 30,
1998 and December 31, 1997 is considered necessary because the Bank's
methodology used to calculate the allocated portion of the allowance does not
yet reflect the additional risk factors which may be inherent in the portfolio
due to the significant loan growth over the past two years.
The Company places into non-accrual status those loans for 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. A summary of the Company's past due loans and non-performing assets
is provided in the following table:
SUMMARY OF PAST DUE LOANS AND NON-PERFORMING ASSETS
(in thousands of dollars)
September 30, December 31,
1998 1997 1997
- ------------------------------------------- ----------- --------------
Loans past due 90 or more days
still accruing interest $ - $ - $ -
=========== =========== =========
Non-performing assets:
Non-accruing loans $ 425 $ 851 $ 1,733
Other real estate owned 875 22 22
----------- ----------- ---------
$ 1,300 $ 873 $ 1,755
=========== =========== =========
In total, non-performing assets decreased to $1,300,000 compared to $1,755,000
at December 31, 1997. Non-accrual loans decreased significantly to $425,000 as
of September 30, 1998, compared to $851,000 and $1,733,000 at September 30, 1997
and December 31, 1997, respectively. The $1,308,000 decrease from December 31,
1997 was due in large part to the Bank's foreclosure on the real property
securing a commercial real estate construction note in May 1998. The
construction note was placed on nonaccrual status in the first quarter of 1998.
The loan customer has since filed for bankruptcy, and in the best interest of
the Bank, the property was seized at foreclosure in an effort to minimize
losses. The property was subsequently offered at public auction and purchased by
the Bank for $875,000 and placed in other real estate owned in May 1998. The
difference between the note balance and the purchase price ($273,000) was
charged to the allowance for credit losses. The property is approximately 90%
to 95% complete for its intended use. Currently, the Bank is in the
process of marketing the real estate at its current completion state and
several parties have expressed interest in the site. Depending upon the offers
received on the site, management may decide to complete construction of the
property in an effort to improve the site's marketability. Approximately
$50,000 would be needed to complete construction of the property for its
intended use. Due to the extended period in which the Bank has held the
foreclosed property, an updated appraisal value is expected to be obtained
by year end to ensure proper valuation of property. Additional loss may be
incurred.
As a result of the aforementioned foreclosure and related charge to the
allowance for credit loses and subsequent evaluation of the sufficiency of the
allowance, a provision for credit losses of $449,000 during the nine months
ended September 30, 1998 was necessary to restore the unallocated allowance to a
level considered appropriate by management. Based upon management's analysis of
the allocated and unallocated reserve amounts as of September 30, 1998, the
reserve appears adequate to absorb specifically identified losses and other
losses inherent in the loan portfolio. Future provisions for credit losses are
not anticipated for the remainder of 1998.
Deposits
Total deposits increased $219,000 or 0.27% to $78,555,000 as of September 30,
1998, from $78,336,000 at December 31, 1997. In addition, average total deposits
increased from $65,053,000 as of December 31, 1997 to $68,260,000 at September
30, 1998, or 4.70%. The majority of the increase in average total deposits was
in savings accounts. Average savings accounts increased from $22,108,000 at
December 31, 1997 to $25,780,000 at September 30, 1998, or 16.61%. The increase
is primarily due to the competitive rate the Bank offers on a certain savings
product. Overall, deposits are expected to remain at their current levels for
the remainder of 1998.
Long-term borrowings
Due to increased loan demand, the Company obtained a $5,000,000, 3-year advance
from the Federal Home Loan Bank in March of 1997. In anticipation of an increase
in interest rates on borrowed funds, the Company's subsidiary bank borrowed the
funds from the FHLB of Pittsburgh to lock-in a funding source for its
anticipated loan growth. In addition, in late December 1997, the Company
match-funded a certain commercial note with $500,000 of amortizing FHLB
borrowings to lock-in an acceptable fixed interest spread.
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 totaled
$6,359,000 at September 30, 1998 versus $5,901,000 at December 31, 1997. 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 September
30, 1998 of $5,945,000 in securities maturing within one year. Also, the Company
has classified additional securities with an estimated fair value totaling
$5,011,000 as available for sale in response to an unforeseen need for
liquidity. Additionally, the Company's subsidiary bank has unused lines of
credit available under existing borrowing arrangements.
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 position.
Interest rate risk represents the volatility in earnings and market values of
interest earning assets and 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 III.
TABLE III
INTEREST RATE SENSITIVITY GAPS
September 30, 1998
(In thousands of dollars)
Repricing (1)
0 to 3 3 to 6 6 to 12 After
Months Months Months 12 Months Total
INTEREST EARNING ASSETS
Loans, net of
unearned income $21,378 $ 4,104 $ 9,432 $ 34,040 $68,954
Securities 1,984 2,206 1,514 10,523 16,227
Federal funds sold 4,330 - - - 4,330
-------- ------- ------ -------- --------
Total interest
earning assets 27,692 6,310 10,946 44,563 89,511
----------- ---------- --------- --------- --------
INTEREST BEARING LIABILITIES
Demand deposits 12,032 - - - 12,032
Savings deposits 27,438 - - - 27,438
Time deposits 10,016 9,347 5,147 5,000 29,510
Repurchase
agreements 1,225 - - - 1,225
Long-term FHLB
borrowings 6 6 6 5,472 5,490
--------- -------- ------- -------- -----
Total interest bearing
liabilities 50,717 9,353 5,153 10,472 75,695
-------- -------- -------- -------- -------
Contractual interest
sensitivity gap (23,025) (3,043) 5,793 34,091 13,816
Adjustment (2) 39,470 (39,470) - - -
--------- ---------- --------- --------- -------
Adjusted interest
sensitivity gap $ 16,445 $(42,513) $ 5,793 $ 34,091 $ 13,816
=========== ========= ========== ========= =========
Cumulative adjusted
interest
sensitivity gap $ 16,445 $ (26,068) $ (20,275) $ 13,816
=========== ========== ========== =========
Cumulative adjusted
gap ratio 2.46 0.57 0.69 1.18
=========== ========== ========= =========
Cumulative adjusted gap
as a percentage
of total earning assets 18.37% (29.12%) (22.65%) 15.43%
========== ========== ========= =========
(1) - Repricing on a contractual basis unless otherwise noted.
(2) - Adjustment to approximate the actual repricing of interest bearing demand
deposits and savings accounts based upon historical experience.
The preceding table reflects the Bank's cumulative one year net interest
sensitivity position, or gap, as 0.69, or ($20,275). 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 the next
12 months could have a significant impact on the Bank's net interest income.
However, interest rates on the majority 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 September 30, 1998, 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.
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 September 30, 1998 was $9,600,000 compared to
$9,325,000 at December 31, 1997, representing an increase of $275,000, or 2.95%.
A reconciliation of the increase is reported in the Condensed Consolidated
Statement of Shareholders' Equity. Average total shareholders' equity expressed
as a percentage of average total assets decreased from 10.2% at December 31,
1997 to 9.9% at September 30, 1998. Cash dividends totaling $231,000, or
$1.20 per share were declared during the first nine months of 1998, which
is the same dividend level paid in the same period of 1997. These payout levels
represented 49% and 42% of the company's year-to-date earnings for September
30, 1998 and 1997, respectively.
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.
Quantitative measures established by regulation to ensure capital adequacy
require the subsidiary bank to maintain minimum amounts and ratios 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 September 30, 1998, that the subsidiary bank meets
all capital adequacy requirements to which it is subject, as evidenced by the
following table:
RISK-BASED CAPITAL RATIOS
September 30, 1998
Minimum
Actual Requirement
Total risk-based capital ratio 15.60% 8.00%
Tier 1 risk-based capital ratio 14.43% 4.00%
Leverage ratio 9.83% 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.
YEAR 2000
The Year 2000 issue has been given a high priority of the Board and management.
In preparation for the Year 2000, the Board of Directors formed a Year 2000
Committee. The Committee has been in existence since 1997 and has been charged
to review all mission critical systems of the Bank to ensure that all systems
are Year 2000 compliant. The Committee regularly reports to the Board the
progress of its review and testing of the mission critical systems.
The Committee has developed and adopted a formal Year 2000 Plan. The plan
addresses the risks and concerns of not being Year 2000 compliant. It also
outlines the scope of the review and related timetable for testing the mission
critical systems. A contingency plan has been established should the Company
encounter Year 2000 disruptions. The Company has encountered natural disasters
within the past two years in which a similar contingency plan was put into
action. Because of this recent experience, management feels confident the Bank
is in a good position to handle daily operations with minimal disruption and
inconveniences to its customers should mission critical systems fail.
The Company has outsourceed a number of mission critical functions with a data
processor. The data processor is responsible for maintaining the general ledger
and all subsidiary ledgers. In addition, the data processor is responsible for
all report and statement generation. Because of the significant reliance on the
data processor, management and the data processor have partnered in testing the
data interface between the two. Final testing of the interface is expected to be
completed by the end of the year. In addition to the data interface, all
hardware and software of the Company have been inventoried. To date, all
hardware has been tested for Year 2000 compliancy, and currently all such
hardware is Year 2000 compliant. Testing of software is expected to be completed
by the end of the first quarter of 1999, along with all automated teller
machines. In addition to its own internal testing, management will gain
assurance from all major vendors and suppliers that they are Year 2000
compliant.
To date the Company has incurred approximately $30,000 of noncapital expense for
the testing of the interface with its data processor. Approximately $5,000 in
additional expense will be incurred throughout the remainder of the year for
final testing. In addition, the Company has leased ten new computers in
preparation for Year 2000. The lease, which is accounted for as an operating
lease, is for two years with a monthly payment of approximately $800. As
mentioned above, the automated teller machines will be tested in the first
quarter of 1999. The total cost of the testing is not expected to exceed $4,000.
No other material outlays are expected by management in preparation for Year
2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor its subsidiary Bank is currently involved in
any material legal proceedings, other than routine litigation
incidental to their business.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item. 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to stockholders during the third
quarter of 1997.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) All exhibits included with this filing follow the signature page.
1. Exhibit 11, Computation of Per Share Earnings, is filed
herewith. 2. Exhibit 27, Financial Data Schedule, is filed
herewith.
b). A Form 8-K, Current Reports was filed on September 6, 1998
announcing that the Company has canceled its letter of intent to
merge with Pocahontas Bankshares Corporation, a West Virginia
corporation and registered bank holding company. The document is
incorporated herein by reference in its entirety.
SIGNATURES
Pursuant to the requirements 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
By /S/ L. Thomas Bulla
L. Thomas Bulla
President and Chief Executive Officer
By /S/ Charles A. Henthorn
Charles A. Henthorn
Secretary to the Board of Directors
By /S/ Matthew L. Burns
Matthew L. Burns, CPA
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
Date: November 12, 1998
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Basic Earnings Per Share
Basic earnings per share is calculated based upon the Company's net income
after income taxes, divided by the weighted average number of shares
outstanding during the fiscal period.
Diluted Earnings Per Share
Diluted earnings per share is calculated based upon the Company's net
income after income taxes, divided by the weighted average number of shares
outstanding during the period plus the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to increase the
income per common share from continuing operations.
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<INTEREST-INVEST> 753
<INTEREST-OTHER> 172
<INTEREST-TOTAL> 5,692
<INTEREST-DEPOSIT> 2,217
<INTEREST-EXPENSE> 2,536
<INTEREST-INCOME-NET> 3,156
<LOAN-LOSSES> 449
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,405
<INCOME-PRETAX> 652
<INCOME-PRE-EXTRAORDINARY> 472
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472
<EPS-PRIMARY> 2.45
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 4.73
<LOANS-NON> 425
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 636
<CHARGE-OFFS> 346
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 776
<ALLOWANCE-DOMESTIC> 776
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 101
</TABLE>
