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, 1999
----------------------------------
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
November 10, 1999:
Common Stock, $1 par value -- 964,515 shares
THIS REPORT CONTAINS 41 PAGES
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FIRST NATIONAL BANKSHARES CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 1999
INDEX
<S> <C>
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended September 30, 1999 and 1998
Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Shareholders' Equity -
Three Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 7-8
Notes to Condensed Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24-25
SIGNATURES 26
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2
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PART I. FINANCIAL INFORMATION
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
<S> <C> <C>
September 30, December 31,
1999 1998
ASSETS (Unaudited) (1)
Cash and due from banks $ 2,885 $ 2,337
Interest-bearing deposits with other banks 105 -
Federal funds sold 3,931 5,679
Securities held to maturity (estimated fair value
$12,753 and $8,805 respectively) 13,014 8,739
Securities available for sale 14,305 9,127
Loans, net of allowance of $632 and
$766, respectively 71,456 68,671
Bank premises and equipment, net 1,709 1,848
Accrued interest receivable 807 602
Other real estate owned acquired in settlement of loans 865 875
Other assets 525 475
--------------- ----------------
Total assets $ 109,602 $ 98,353
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 11,084 $ 12,123
Interest bearing 83,199 69,098
--------------- ----------------
Total deposits 94,283 81,221
Short-term borrowings 3,907 951
Other liabilities 911 946
Long-term borrowings 477 5,488
--------------- ----------------
Total liabilities 99,578 88,606
--------------- ----------------
Commitments and Contingencies
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 964,515 shares 965 965
Surplus 1,019 1,019
Retained earnings 8,201 7,770
Accumulated other comprehensive income (161) (7)
---------------- ----------------
Total shareholders' equity 10,024 9,747
--------------- ----------------
Total liabilities and shareholders' equity $ 109,602 $ 98,353
=============== ================
(1) Extracted from the December 31, 1998 audited financial statements.
See Notes to Condensed Consolidated Financial Statements
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3
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Interest Income
Interest and fees on loans $ 1,574 $ 1,652 $ 4,510 $ 4,767
Interest and dividends on securities:
Taxable 357 223 830 619
Tax-exempt 41 43 123 134
Interest on interest-bearing deposits with other banks 26 - 75 -
Interest on federal funds sold 39 63 150 172
---------- ---------- --------- ----------
Total interest income 2,037 1,981 5,688 5,692
---------- ---------- --------- ----------
Interest Expense
Interest on deposits 805 758 2,261 2,217
Interest on short-term borrowings 9 18 22 47
Interest on long-term borrowings 71 92 251 272
---------- ---------- --------- ----------
Total interest expense 885 868 2,534 2,536
Net interest income 1,152 1,113 3,154 3,156
Provision for loan losses 50 29 80 449
---------- ---------- --------- ----------
Net interest income after provision
for loan losses 1,102 1,084 3,074 2,707
---------- ---------- --------- ----------
Other income
Service fees 77 65 223 186
Securities gains and (losses) - - - -
Trust income 6 21 47 66
Other income 27 55 72 98
---------- ---------- --------- ----------
110 141 342 350
---------- ---------- --------- ----------
Other expense
Salaries and employee benefits 410 384 1,198 1,163
Net occupancy expense 64 73 205 202
Equipment rental, depreciation and maintenance 70 66 209 215
Data processing 43 64 138 154
Professional and legal 31 81 73 149
Directors' fees and shareholder expense 26 21 74 74
Other operating expenses 178 151 491 448
---------- ---------- --------- ----------
822 840 2,388 2,405
---------- ---------- --------- ----------
Income before income taxes 390 385 1,028 652
Income tax expense 131 90 341 180
---------- ---------- --------- ----------
Net income $ 259 $ 295 $ 687 $ 472
========== ========== ========= ==========
Basic earnings per common share $ 0.27 $ 0.31 $ 0.71 $ 0.49
========== ========== ========= ==========
Diluted earnings per common share $ 0.27 $ 0.31 $ 0.71 $ 0.49
========== ========== ========= ==========
Dividends per common share $ 0.09 $ 0.08 $ 0.27 $ 0.24
========== ========== ========= ==========
See Notes to Condensed Consolidated Financial Statements
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4
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands of dollars)
<S> <C> <C> C> <C>
Unaudited Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Income $ 259 $ 295 $ 687 $ 472
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Gain (loss) arising during the period (31) 6 (154) 13
Reclassification adjustment - - - -
Other comprehensive income - - - -
--------- ---------- ---------- ---------
Comprehensive Income $ 228 $ 301 $ 533 $ 485
========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements
5
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- --------- ----------
Balance, beginning of period $ 9,882 $ 9,376 $ 9,747 $ 9,325
Net income 259 295 687 472
Cash dividends declared (86) (77) (256) (231)
Issued 403 shares of common
stock pursuant to stock option
exercise - - - 21
Change in net unrealized gain(loss) on
securities available for sale (31) 6 (154) 13
---------- ---------- --------- ----------
Balance, end of period $ 10,024 $ 9,600 $ 10,024 $ 9,600
========= ========== ========= ==========
See Notes to Condensed Consolidated Financial Statements
6
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Nine Months Ended
September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 687 $ 472
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 175 190
Provision for loan losses 80 449
Deferred income tax expense(benefit) 71 (95)
Amortization of security premiums (accretion) of
security discounts, net (132) (40)
(Gain) Loss on sale of other assets - (29)
(Gain) Loss on disposal of bank premises and equipment (6) 1
(Increase) Decrease in accrued interest receivable (205) 25
(Increase) Decrease in other assets (21) 17
Increase (Decrease) in other liabilities (36) (95)
--------- ----------
Net cash provided by (used in) operating activities 613 895
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held
to maturity 4,483 7,575
Proceeds from maturities and calls of securities
available for sale 6,502 2,000
Purchases of securities held to maturity (8,722) (2,001)
Purchases of securities available for sale (11,838) (7,071)
Principal collected on (loans made to) customers, net (2,865) (830)
Principal payments received from leases 10 -
Proceeds from sale of other assets - 35
Proceeds from sale of bank premises and equipment 20 -
Purchases of bank premises and equipment (50) (39)
--------- ----------
Net cash provided by (used in) investing activities (12,460) (331)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
and savings accounts 15,504 1,673
Proceeds from sales of (payments for matured)
time deposits, net (2,442) (1,454)
Net increase (decrease) in short-term borrowings 2,956 (105)
Principal payments on long-term borrowings (5,011) (10)
Proceeds from sale of common stock pursuant to
stock option exercise - 21
Dividends paid (255) (231)
--------- ----------
Net cash provided by (used in) financing activities 10,752 (106)
--------- ----------
Increase (decrease) in cash and cash equivalents (1,095) 458
Cash and cash equivalents:
Beginning 8,016 5,901
--------- ----------
Ending $ 6,921 $ 6,359
========= ==========
(Continued)
See Notes to Condensed Consolidated Financial Statements
7
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Nine Months Ended
September 30,
1999 1998
--------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 2,608 $ 2,541
========= ==========
Income taxes $ 267 $ 352
========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 86 $ 77
========= ==========
Property acquired in settlement of loans $ - $ 885
========= ==========
See Notes to Condensed Consolidated Financial Statements
8
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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, (the "Company" or "First National"), and its wholly
owned subsidiary, First National Bank, 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, 1999 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 1998 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.
Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (FAS 133) which
requires all derivatives to be recorded on the balance sheet at
fair value and establishes "special" accounting for fair value,
cash flow, and foreign currency hedges. FAS 133 is effective, as
amended, for years beginning after June 15, 2000. The impact of
adopting the pronouncement would be immaterial as the Company does
not currently hold derivative instruments or engage in hedging
activities.
Stock Split
As discussed in more detail later is this report, the Company
enacted a 5 for 1 stock split on September 24, 1999. The par value
was reduced from $5.00 to $1.00 and 771,612 incremental shares
were issued to shareholders of record. All prior period per share
data has been restated for split in order to enhance comparability
of data presented.
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and
estimated fair values of securities at September 30, 1999 and
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
September 30, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government Agencies
and corporations $ 8,993 $ - $ 150 $ 8,843
State and political subdivisions 500 - 134 366
----------- ----------- ----------- -----------
Total Taxable 9,493 - 284 9,209
Tax Exempt:
State and political subdivisions 3,521 31 8 3,544
----------- ----------- ----------- -----------
Total securities held to maturity $ 13,014 $ 31 $ 292 $ 12,753
=========== =========== =========== ===========
9
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C> <C>
September 30, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government Agencies
and corporations $ 13,929 - 264 13,665
Federal Reserve Bank Stock 57 - - 57
Federal Home Loan Bank Stock 574 - - 574
Other equity securities 7 - - 7
---------- ----------- ----------- -----------
Total Taxable 14,567 - 264 14,303
Tax Exempt:
Federal Reserve Bank Stock 2 - - 2
---------- ----------- ----------- -----------
Total securities available for sale $ 14,569 $ - $ 264 $ 14,305
========== =========== =========== ===========
December 31, 1998
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government Agencies
and corporations $ 5,229 $ 4 $ 23 $ 5,210
State and political subdivisions - - - -
---------- ----------- ----------- -----------
Total Taxable 5,229 4 23 5,210
Tax Exempt:
State and political subdivisions 3,510 85 - 3,595
---------- ----------- ----------- -----------
Total securities held to maturity $ 8,739 $ 89 $ 23 $ 8,805
========== =========== =========== ===========
December 31, 1998
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government Agencies
and corporations $ 8,495 $ 15 $ 25 $ 8,485
Federal Reserve Bank Stock 57 - - 57
Federal Home Loan Bank Stock 574 - - 574
Other equities securities 9 - - 9
---------- ----------- ----------- -----------
Total Taxable 9,135 15 25 9,125
Tax Exempt:
Federal Reserve Bank Stock 2 - - 2
---------- ----------- ----------- -----------
Total securities held to maturity $ 9,137 $ 15 $ 25 $ 9,127
========== =========== =========== ===========
10
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of the Company's
securities at September 30, 1999 are summarized as follows (in thousands):
<S> <C> <C> <C> <C>
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due within 1 year $ 993 $ 991 $ 4,930 $ 4,921
Due after 1 but within 5 years 11,004 10,881 8,000 7,782
Due after 5 but within 10 years 517 515 999 962
Due after 10 years 500 366 - -
Equity securities - - 640 640
---------- ----------- ----------- -----------
$ 13,014 $ 12,753 $ 14,569 $ 14,305
========== =========== =========== ===========
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 issuer at par value.
The proceeds from sales and calls and maturities of securities, including
principal payments received on mortgage-backed securities and the related
gross gains and losses realized for the nine month periods ended September
30, 1999 and 1998 are as follows (in thousands):
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Proceeds From Gross Realized
Calls and Principal
Sales Maturities Payments Gains Losses
Nine months ended September 30, 1999
Securities held to maturity $ - $ 4,483 $ - $ - $ -
Securities available for sale - 6,502 - - -
----------- ---------- ----------- ----------- -----------
$ - $ 10,985 $ - $ - $ -
=========== ========== =========== =========== ===========
Nine months ended September 30, 1998:
Securities held to maturity $ - $ 7,575 $ - $ - $ -
Securities available for sale - 2,000 - - -
----------- ---------- ----------- ----------- -----------
$ - $ 9,575 $ - $ - $ -
=========== ========== =========== =========== ===========
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<S> <C> <C>
Note 3. Loans
Total loans as of September 30, 1999 and December 31, 1998 are
summarized as follows (in thousands):
September 30, December 31,
1999 1998
-------------- ----------------
Commercial, financial and agricultural $ 27,035 $ 26,581
Real estate - construction 1,680 956
Real estate - mortgage 32,012 31,646
Installment loans to individuals 9,276 8,482
Other 2,087 1,772
-------------- ----------------
Total loans 72,090 69,437
Less unearned income 2 -
-------------- ----------------
Total loans net of unearned income 72,088 69,437
Less allowance for credit losses 632 766
-------------- ----------------
Loans, net $ 71,456 $ 68,671
============== ================
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11
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Allowance for Credit Losses
Analyses of the allowance for credit losses are presented below
(in thousands) for the nine month periods ended September 30, 1999
and 1998 and twelve months ended December 31, 1998:
<S> <C> <C> <C>
Nine Months Ended
September 30, Dec 31,
1999 1998 1998
-------------- ----------- ------------
Balance, beginning of period $ 766 $ 636 $ 636
Loans charged off (258) (346) (364)
Recoveries 44 37 45
-------------- --- ---
Net (losses)/recoveries (214) (309) (319)
----- ------ -----
Provision for credit losses 80 449 449
--- ---- ----
Balance, end of period $ 632 $ 776 $ 766
= ===== = ==== = ====
The Company's total recorded investment in impaired loans at
September 30, 1999 and December 31, 1998, approximated $121,000
and $318,000, respectively, for which the related allowance for
credit losses determined in accordance with generally accepted
accounting principles approximated $121,000 and $250,000,
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 non-accrual 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 unused portions of
existing lines of credit at September 30, 1999 and December 31,
1998, and the contract amounts of commitments to lend are as
follows, in thousands of dollars:
September 30, December 31
1999 1998
-------- --------
Commitments to extend credit $ 13,635 $ 11,508
= ====== = ======
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
Basic earnings per common share is computed based upon the
weighted average shares outstanding. The weighted average number
of shares outstanding was 964,515 and 963,245 for nine month
periods ended September 30, 1999 and 1998, respectively.
Under Financial Accounting Standards Statement No. 128, "Earnings
per Share," 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. At September 30, 1999,
32,015 shares were outstanding under the stock option plan, of
which 18,015 are fully vested and exercisable, with 14,095 shares
remaining as available for grant. For the nine month periods
presented, basic and diluted earnings per share are calculated as
follows:
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12
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<S> <C> <C> <C>
September 30, 1999
Income Shares Per Share
(Numerator) ( Denominator) Amount
----------- -- ------------ ------
Basic EPS
Income available to common shareholders $ 687,000 964,515 $ 0.71
= ====
Effect of Dilutive Securities
Stock options - 5,484
--- ----- -----
Diluted EPS
Income available to common shareholders $ 687,000 969,999 $ 0.71
==== ======= ======= = ====
September 30, 1998
Income Shares Per Share
(Numerator) ( Denominator) Amount
----------- -- ------------ ------
Basic EPS
Income available to common shareholders $ 472,000 963,245 $ 0.49
= ====
Effect of Dilutive Securities
Stock options - 4,590
------------- -----------
Diluted EPS
Income available to common shareholders $ 472,000 967,835 $ 0.49
============== =========== = ====
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 FASB 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):
</TABLE>
<TABLE>
<S> <C> <C>
Nine Months Ended
September 30,
1999 1998
---- ----
Net income:
As reported $687 $472
Proforma $664 $461
Basic earnings per share:
As reported $0.71 $0.49
Proforma $0.69 $0.48
Diluted earnings per share:
As reported $0.71 $0.49
Proforma $0.68 $0.48
</TABLE>
13
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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" or "First National"), and its subsidiary, First
National Bank for the periods indicated. This discussion and analysis should be
read in conjunction with the Company's 1998 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 $259,000 for the three months ended September
30, 1999 compared to a net income of $295,000 for the quarter ended September
30, 1998. For the nine month period ended September 30, 1999, the Company's net
income of $687,000 increased $215,000 from the $472,000 reported for the same
period of 1998.
Basic earnings per common share was $0.27 for the quarter ended September 30,
1999 compared to the $0.31 reported for the third quarter of 1998. For the nine
month period ended September 30, 1999, basic earnings per common share totaled
$0.71 compared with $0.49 for the same period of 1999. 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, 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
Increase Increase
1999 1998 (Decrease) 1999 1998 (Decrease)
--------- --------- ------------ ---------- ---------- ----------
Interest income $ 2.11 $ 2.06 $ 0.05 $ 5.90 $ 5.91 $ (0.01)
Interest expense 0.92 0.90 0.02 2.63 2.63 (0.00)
-------- --------- ------------ ---------- ---------- -------
Net interest income 1.19 1.16 0.03 3.27 3.28 (0.01)
Provision for loan losses 0.05 0.03 0.02 0.08 0.47 (0.39)
-------- --------- ------------ ---------- ---------- ------
Net interest income after
provision for loan losses 1.14 1.13 0.01 3.19 2.81 0.38
-------- --------- ------------ ---------- ---------- -----
Non-interest income 0.12 0.14 (0.02) 0.35 0.37 (0.02)
Non-interest expense 0.85 0.87 (0.02) 2.48 2.50 (0.02)
-------- --------- ------------ ---------- ---------- ------
Income before income taxes 0.41 0.40 0.01 1.06 0.68 0.38
Income tax expense 0.14 0.09 0.05 0.35 0.19 0.16
--------- --------- ------------ ---------- ---------- -----
Net income $ 0.27 $ 0.31 $ (0.04) $ 0.71 $ 0.49 $ 0.22
========= ========= ============ ========== ========== = =====
</TABLE>
Return on average assets (ROA) measures how effectively the Company utilizes its
assets to produce income. Annualized ROA for the third quarter of 1999 was 1.00%
compared to 1.23% for the third quarter of 1998. This compares with an ROA of
0.88% and 0.66% for the nine month periods ended September 30, 1999 and 1998,
respectively. Annualized return on average shareholders' equity (ROE) was 10.48%
for the third quarter of 1999 compared to 12.44% in the third quarter of 1998,
while year-to-date ROE was 9.27% and 6.63% as of September 30, 1999 and 1998,
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.
14
<PAGE>
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,
1999 and 1998, the tax-equivalent adjustment was $63,000 and $69,000,
respectively.
The Company's net interest income on a fully tax-equivalent basis totaled
$3,217,000 for the nine month period ended September 30, 1999 compared to
$3,225,000 for the same period of 1998, representing a decrease of $8,000 or
0.24%. For the quarters ended September 30, 1999 and 1998, net interest income
on a fully tax-equivalent basis totaled $1,173,000 and $1,135,000, respectively,
an increase of 38,000, or 3.34%.
As illustrated in Table I, the Company's net yield on interest earning assets
decreased from 4.73% for the nine months ended 1998 to 4.35% in 1999. The
majority of the decline occurred in interest earning assets, where the yield
declined sixty-seven basis points from 8.45% in 1998 to 7.78% in 1999. As a tool
to manage interest rate risk, a majority of the Company's loan portfolio is
written with variable interest rate features, whereby loan interest rates are
repriced at specified time intervals based upon a pre-determined index rate. For
example, variable rate commercial credits are priced based upon the prime rate
as published in the Wall Street Journal. During the first nine months of 1999,
the prime rate stood at 7.75% which compares to 8.50% during the first nine
months of 1998. The seventy-five basis point decline in the prime rate was
responsible for the negative impact on the loan interest yield, where the yield
declined from 9.19% in 1998 to 8.67% in 1999. As shown in Table II, the decline
in the interest rate environment for the nine months ended September 30, 1999
compared to 1998 has equated to a decline in interest income on earning assets
of approximately $330,000.
The decline in interest rates had a similar impact on the Company's cost funds,
or the weighted average rate paid to depositors and other interest-bearing
liabilities. The cost of funds decreased from 4.49% at September 30, 1998 to
4.17% at September 30, 1999. As shown in Table II, this equated to interest
savings of $97,000. Included in interest expense on long-term borrowings was an
interest penalty of approximately $32,000 paid to the FHLB for the early
retirement of its $5,000,000 balloon note, which had a fixed rate of 6.68%. As
such the rate on long-term borrowings increased from 6.60% in 1998 to 7.54% in
1999. Because of the recent rise in interest rates and the short period in which
the note matured, it became advantageous for the Company to pay the note off
with idle funds from overnight investments. By the end of the year 1999, the
Company will have recouped the cost of the interest penalty via the interest
savings, and in total, will save approximately $22,000, pretax.
As discussed above, the volume and composition of the interest-bearing assets
and liabilities will impact interest income. As shown in Table II, greater
volume in the Company's higher-yielding assets, in particular taxable and
tax-exempt securities versus overnight investments, meant an increase in
interest income of $322,000 over 1998. This volume increase nearly negated the
impact of the fallen yields on these assets. Similarly, the volume added to the
interest-bearing liabilities added an additional $97,000 expense to the Company.
This volume increase was offset in its entirety by the impact of the fallen
rates paid on the liabilities.
The net yield on interest earning assets is expected to remain at its current
level for the remainder of 1999. Further analysis of the Company's yields on
interest earning assets and interest earning liabilities and changes in its net
interest income are presented in TABLE I and TABLE II.
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
--------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest(1) Rate Balance Interest(1) Rate
INTEREST EARNING ASSETS
Loans (2): $ 69,386 $ 4,510 8.67% $ 69,178 $ 4,767 9.19%
Securities:
Taxable 19,348 830 5.72 13,753 619 6.00
Tax-exempt 3,567 186 6.95 3,771 203 7.18
---------- ---------- ------ ---------- ---------- -----
Total securities 22,915 1,016 5.92 17,524 822 6.25
---------- ---------- ------ ---------- ---------- -----
Interest-bearing deposits with
other banks 2,073 75 4.82 - - -
Federal funds sold 4,219 150 4.74 4,158 172 5.52
---------- ---------- ------ ---------- ---------- ----
Total interest earning
assets 98,593 5,751 7.78 90,860 5,761 8.45
---------- ---------- ------ ---------- ---------- ----
NON-INTEREST EARNING ASSETS
Cash and due from banks 2,300 2,300
Bank premises and equipment 1,773 2,010
Other assets 2,029 1,492
Allowance for loan losses (702) (710)
---------- -----
Total assets $ 103,993 $ 95,952
========== ==========
INTEREST BEARING LIABILITIES
Demand deposits $ 16,181 $ 283 2.33 $ 12,549 $ 237 2.52
Savings deposits 31,112 948 4.06 25,780 821 4.25
Time deposits 28,295 1,030 4.85 29,931 1,159 5.16
---------- ---------- ------- ---------- ---------- ----
Total interest-bearing deposits 75,588 2,261 3.99 68,260 2,217 4.33
Short-term borrowings 962 22 3.05 1,605 47 3.90
Long-term FHLB borrowings 4,438 251 7.54 5,496 272 6.60
---------- ---------- ------- ---------- ---------- ----
Total other interest bearing liabilities 5,400 273 6.74 7,101 319 5.99
Total interest bearing liabilities 80,988 2,534 4.17 75,361 2,536 4.49
------ ----- ----- ------ ----- ----
NON-INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits $ 12,251 $ 10,250
Other liabilities 870 855
Shareholders' equity 9,884 9,486
---------- ----------
Total liabilities and
shareholders' equity $ 103,993 $ 95,952
========== = ======
NET INTEREST
EARNINGS $ 3,217 $ 3,225
========== ==========
NET YIELD ON INTEREST EARNING
ASSETS 4.35% 4.73%
========= =====
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for 1999
and 1998.
(2) - For purposes of these computations, non-accrual loans are included in the
amounts of average loans outstanding. Included in interest is loan fees of
$120,000 and $51,000 for 1999 and 1998, respectively.
16
</TABLE>
<PAGE>
<TABLE>
TABLE II
CHANGES IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
(In thousands of dollars)
<S> <C> <C> <C>
Nine Months Ended
Sept. 30, 1999 vs. Sept. 30, 1998
Increase (Decrease)
Due to Changes in:
Volume(1) Rate(1) Total
INTEREST EARNING ASSETS
Loans $ 14 $ (271) $ (257)
Securities:
Taxable 241 (30) 211
Tax-exempt (2) (11) (5) (16)
------------ ------------ -------------
Total securities 230 (35) 195
------------ ------------ ----
Interest-bearing deposits with other banks 75 - 75
Federal funds sold 3 (24) (21)
--- ------------ -------------
Total interest earning assets 322 (330) (8)
----------- ------------ -------------
INTEREST BEARING LIABILITIES
Demand deposits 65 (19) 46
Savings deposits 165 (37) 128
Time deposits (61) (67) (128)
Short-term borrowings (16) (9) (25)
Long-term FHLB borrowings (56) 35 (21)
------------ ------------ -------------
Total interest bearing liabilities 97 (97) -
------------ ------------ --
NET INTEREST EARNINGS $ 225 $ (233) $ (8)
============ ============ = ===
(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%.
17
</TABLE>
<PAGE>
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 upon 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 1999, the Bank made a $50,000 provision for loan
losses compared to $29,000 during the third quarter of 1998. For the nine months
ended September 30, 1999 and 1998, respectively, the provision for loan losses
was $80,000 and $449,000. 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 from all sources other than interest
income and yield-related loan fees. For the nine month period ended September
30, 1999, non-interest income totaled $342,000, representing a decrease of
$8,000 from the $350,000 recorded during the same period of 1998. As a
percentage of average assets, non-interest income was 0.44% and 0.49%
(annualized) for the nine month periods ended September 30, 1999 and 1998,
respectively. Effective January 1, 1999, the Bank implemented a new fee schedule
whereby certain service charges assessed on demand deposit accounts were
increased. As a result, service fees increased $37,000 or 19.9%. Estates and
other trust services, which are accounted for on a cash basis, tend to fluctuate
from year to year. Trust income for the nine month period ended 1999, which
totaled $47,000, is $19,000 less than the income level reported for the same
period in 1998. Total assets administered by the Bank's trust department have
decreased following the partial settlement of a single large estate during the
second quarter of 1999, with the estate expected to be fully settled by the end
of 1999. This decrease in trust assets has led to the decline in trust income.
Management expects similar declines in trust income over the remainder of 1999;
however, management expects the decrease in trust income to be offset by
continued growth in service fee income, and in total for the year, non-interest
income for 1999 is not expected to be materially different from 1998's total.
On a quarter-to-quarter basis, non-interest income decreased to $110,000 for the
third quarter of 1999 compared to $141,000 for the third quarter of 1998.
Included in the 1998 quarter end figure is a $29,000 gain realized on the sale
of two parcels of property acquired in foreclosure. Without this item,
non-interest income for the third quarter of 1998 would be $112,000 and only
$2,000 more than 1999's quarter-end total. As discussed above, the increase in
service fees realized during the quarter was offset by a decrease in trust
income.
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, 1999, the
Company's non-interest expense totaled $2,388,000, representing a decrease of
$17,000, or 0.71%, over total non-interest expense incurred for the nine months
ended September 30, 1998. On a quarter-to-quarter basis, other non-interest
expense decreased to $822,000, or 2.14%, for the third quarter of 1999 from
$840,000 during the third quarter of 1998. Expressed as a percentage of average
assets, non-interest expense(annualized), for the nine month periods ended 1999
and 1998 were 3.1% and 3.3%, respectively. The significant items affecting
non-interest expense are discussed below.
Salaries and employee benefits are the Company's largest non-interest cost,
representing approximately 50% and 48% of total non-interest expense for the
nine months ended September 30, 1999 and 1998, respectively. For this period,
salaries and employee benefits increased $35,000, or 3.0% compared to the same
period of September 30, 1998. For the quarter, salaries and employees benefits
increased from 384,000 reported in 1998 to $410,000 reported in the same period
of 1999, an increase of $26,000 or 6.8%. The increase in salaries and employee
benefits during the quarter is predominantly due to management reinstating the
executive incentive plan in 1999. The plan was temporarily suspended in 1998
following the bank's recording of the large loan loss provision in May 1998. No
expense was recorded under the plan in 1998. During the 1999 quarter,
approximately $23,000 was recognized under the plan, and for the year,
approximately $68,000 has been recognized. For the nine months ended September
30, 1999, the impact of reinstating the plan has been mitigated by a $23,000
savings in payroll and related expenses. For the first two quarters of the year,
the Company had been operating with approximately two fewer full-time staff. The
reduction in staff has been the result of voluntary retirements and
18
<PAGE>
resignations. Additional staff were hired during the third quarter which negated
any additional payroll savings, and future savings are not expected for the
fourth quarter of 1999.
Net occupancy expense decreased $9,000 or 12.3% in the third quarter of 1999
compared to 1998. The decrease for the quarter is attributable to a change in
estimate for property taxes in 1998. Upon receiving the property tax tickets in
July 1998, a prospective adjustment was made to property taxes in the third
quarter of 1998, which accounted for approximately $7,000 more expense in 1998
compared to 1999. Recent changes in the State of West Virginia's property tax
laws coupled with the assessment of property taxes on various large dollar
capital additions within the past few years, namely the branch in Lewisburg,
dictated the adjustment in 1998 and have led to a greater expense in 1999. For
the year, the increase in property taxes has been offset by a decrease in
depreciation expense, as various assets have become fully depreciated.
Data processing decreased $21,000 and $16,000 compared to 1998 for the quarter
and nine months ended September 30, 1999, respectively. Year 2000 testing
charges of $30,000 incurred in the third quarter of 1998 accounted for the
differences in the quarter and year to date figures mentioned above. For the
year, only routine data processing fees have been incurred and only routine fees
are expected to be incurred for the remainder of the year. See the YEAR 2000
section following for additional discussion of Year 2000 issues.
Professional and legal expense decreased $50,000 from the $81,000 reported in
quarter end 1998. Similarly, for the nine months ended September 30, 1999, the
expense is $76,000 less than the amount reported in 1998. During the third
quarter of 1998, the bank incurred approximately $56,000 in non-recurring legal
and professional fees associated with its unsuccessful merger negotiations with
a bank holding company. In addition, 1998 was marked by various time-consuming
legal and foreclosure proceedings against two loan customers. No such
significant legal and professional engagements have existed during the first
nine months of 1999, therefore, the expense is lower. Over the fourth quarter of
1999, the Company expects legal and professional fees to increase over the
amounts reported in the first nine months of 1999, as the Company is involved in
similar legal proceedings as incurred in 1998, all of which are incurred in the
normal course of business.
INCOME TAXES
The Company's income tax expense, which includes both federal and state income
taxes, totaled $341,000 for the nine month period ended September 30, 1999,
reflecting a $161,000 increase when compared to the same period of 1998. Income
tax expense equaled 33.2% and 27.6% of income before taxes at September 30, 1999
and 1998, 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.
CHANGES IN FINANCIAL CONDITION
The Company's total assets were $109,602,000 at September 30, 1999, compared to
$98,353,000 at December 31, 1998, representing an increase of $11,249,000, or
11.4%, while average assets increased to $103,993,000 from $96,442,000 for the
same periods, respectively. Details concerning changes in the Company's major
balance sheet items and changes in financial condition follow.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest- bearing
deposits from other banks, and federal funds sold. At September 30, 1999, cash
and cash equivalents totaled $6,921,000 compared to $8,016,000 at December 31,
1998, a decrease of $1,095,000. Following a high of $13,609,000 in cash and cash
equivalents reported at June 30, 1999, First National paid off the $5,000,000
balloon note with the FHLB in August 1999, thereby, reducing its cash and cash
equivalents position [See the BORROWINGS discussion of this section for further
discussion of this transaction]. In addition, a net funding of $2,305,000 in
loans coupled with a net reduction in deposit balances of $2,185,000 during the
third quarter has aided in lowering First National's cash and cash equivalents
position. See the condensed consolidated statement of cash flows for a detailed
description of the activities impacting cash and cash equivalents for he nine
months ended September 30, 1999.
Securities
The Bank's total securities portfolio increased by $9,453,000 or 52.9% from
December 31, 1998. As discussed in the June 30, 1999 Form 10-Q, First National's
significant deposit growth has prompted the increase in the securities
portfolio. In order to maximize the yield on earning assets, management has
opted to invest the
19
<PAGE>
deposit growth in short-term, high-yielding securities as opposed to overnight
funds. In an effort to bolster liquidity, the majority of the purchases have
been designated as available for sale. 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, increased over the nine months ended September
30, 1999 from $69,437,000 at year end 1998 to $72,088,000 as of September 30,
1999, an increase of $2,651,000 or 3.8%. As presented in Note 3 of the Notes to
the Consolidated Financial Statements, net loan growth has occurred in all
category of loans. Through the strength of its business and personal
relationships, future loan growth, primarily in high-quality commercial and
commercial real estate loans, is anticipated by bank management. The bank will
focus its marketing efforts on its primary and contiguous market areas.
The allowance for loan losses was $632,000 at September 30, 1999 compared to
$766,000 at December 31, 1998. Expressed as a percentage of loans (net of
unearned income), the allowance for loan losses was 0.88% at September 30, 1999
compared to 1.10% at December 31, 1998. Loans charged-off, net of recoveries of
previously charged-off loans, totaled $214,000 and $309,000 for the nine months
ended September 30, 1999 and 1998, respectively. For the year ended December 31,
1998, net charge-offs totaled $319,000. As discussed in the June 30, 1999 Form
10-Q, a commercial credit totaling approximately $194,000, which had previously
been on non-accrual status, was charged-off in June 1999 and accounts for the
majority of the charge-offs. The credit was previously reserved in its entirety
via a specific allocation of the allowance for loan losses. Subsequent to
September 30, 1999, the bank has recovered approximately $139,000 of the
charge-off. 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, 1999 and 1998, and
December 31, 1998.
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, 1999, the unallocated portion of the allowance
approximated $145,000 compared to $95,000 at year-end 1998, or 22.9% and 12.4%
of the total allowance, respectively. As noted above, the large recovery
received subsequent to September 30, 1999 will likely impact the amount of the
unallocated reserve in relation to the total reserve reported in future periods.
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)
<TABLE>
<S> <C> <C> <C>
Sept. 30, December 31,
1999 1998 1998
----------- ----------- ----------------
Loans past due 90 or more days still accruing $ - $ - $ -
=========== =========== =========
NON-PERFORMING assets:
Non-accruing loans $ 141 $ 425 $ 318
Other real estate owned 865 875 875
----------- ----------- ---
$ 1,006 $ 1,300 $ 1,193
=========== =========== = =====
</TABLE>
In total, non-performing assets decreased to $1,006,000 compared to $1,193,000
at December 31, 1998. Non-accrual loans decreased to $141,000 as of September
30, 1999, compared to $425,000 and $318,000 at September 30, 1998 and December
31, 1998, respectively. Non-accrual loans are down $513,000 from the June 30,
1999 balance of $654,000. The decrease is due in part to the liquidation of
collateral securing
20
<PAGE>
a residential mortgage, in which proceeds of approximately $137,000 were applied
against the balance. A second (unrelated) residential mortgage totaling $389,000
was restored to accrual status after a careful review of the collateral and
assessment of the borrowers cashflow ability was performed.
As more fully discussed in the Company's annual report and Form 10-K, the other
real estate owned has been leased. The lease is for three years and contains an
option for the lessee to purchase the property at any time during the lease
term.
Deposits
Total deposits increased 16.1% to $94,283,000 as of September 30, 1999, from
$81,221,000 at December 31, 1998. Average total deposits increased from
$78,949,000 as of December 31, 1998 to $87,839,000 at September 30, 1999, or
11.3%. In May 1999, the Company obtained two large demand deposit customers
which has accounted for the significant growth; one interest bearing NOW account
and one non-interest bearing demand deposit account. The two deposit
relationships have maintained average account balance of approximately
$8,483,000 since the accounts were opened. As discussed above and as discussed
in more detail in the following section, due to the nature of demand deposit
accounts and liquidity concerns, much of the deposits have been invested in
short-term assets.
The Company continues to experience deposit growth in its savings products where
total savings deposits have grown $7,996,000 since December 31, 1998. Much of
the growth continues to be in a particular savings product. This product offers
a competitive interest rate and immediate liquidity, which is attractive in the
current interest rate environment. The savings growth has been mitigated by a
net redemption in certificate of deposits of approximately $3,317,000 since year
end 1998, with much of the redemptions being shifted to the savings product
previously mentioned. This shifting of deposits has not materially impacted
interest expense as the highest rate offered on the savings product is
comparable to short-term interest rates offered on certificates of deposit. See
the NET INTEREST INCOME section of this analysis for further discussion of the
impact on the Company's interest expense.
Borrowings
The Company will from time to time need to borrow overnight funds from various
correspondent banks in order to meet short-term liquidity requirements. At
September 30, 1999, its short-term borrowings consisted of federal funds
purchased of $3,000,000 from the FHLB and repurchase agreements from various
customers totaling $907,000. The total short-term borrowings of $3,907,000
compares to $951,000 outstanding at December 31, 1999.
As discussed in the cash and cash equivalents section above, the Company paid
off its $5,000,000 balloon note with the FHLB in August 1999. At September 30,
1999, long-term borrowings consisted of a match-funded note with the FHLB.
Monthly principal and interest payments are made on the note, with a balloon
payment due in December 2002.
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
$6,921,000 at September 30, 1999 versus $8,016,000 at December 31, 1998. 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, 1999 $5,923,000 in debt securities, at amortized cost, maturing within one
year. Also, the Company has classified additional debt securities with an
estimated fair value totaling $8,744,000 as available for sale in response to an
unforeseen need for liquidity. Additionally, the Company's subsidiary bank has
unused portions of 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.
21
<PAGE>
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>
TABLE III
INTEREST RATE SENSITIVITY GAPS
September 30, 1999
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
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 $ 24,205 $ 3,848 $ 7,083 $ 36,952 $ 72,088
Securities, at amortized cost 3,972 1,951 - 21,020 26,943
Interest-bearing deposits with other banks 105 - - - 105
Federal funds sold 3,931 - - - 3,931
----------- ---------- --------- --------- ---------
Total interest-earning assets 32,213 5,799 7,083 57,972 103,067
----------- ---------- --------- --------- ---------
INTEREST-BEARING LIABILITIES
Demand deposits 20,445 - - - 20,445
Savings deposits 35,761 - - - 35,761
Time deposits 7,731 10,294 4,172 4,796 26,993
Short-term borrowings 3,907 - - - 3,907
Long-term FHLB borrowings 4 4 8 461 477
----------- ---------- --------- --------- ---------
Total interest-bearing liabilities 67,848 10,298 4,180 5,257 87,583
----------- ---------- --------- --------- ---------
Contractual interest sensitivity gap (35,635) (4,499) 2,903 52,715 15,484
Adjustment (2) 32,344 (32,344) - - -
----------- ---------- --------- --------- -
Adjusted interest sensitivity gap $ (3,291) $ (36,843) $ 2,903 $ 52,715 $15,484
=========== ========== ========= ========= =======
Cumulative adjusted interest sensitivity gap $ (3,291) $(40,134) $(37,231) $ 15,484
=========== ========= ========= = ======
Cumulative adjusted gap ratio 0.91 0.49 0.55 1.18
=========== ========== ========= =========
Cumulative adjusted gap as a percentage
of total earning assets (3.19)% (38.94)% (36.12)% 15.02%
========== ========== ========= ======
</TABLE>
(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 0.55, or $(37,231). 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.
22
<PAGE>
The information presented in the table above represents a static view of the
Bank's gap position as of September 30, 1999, 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 downward 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, 1999 was $10,024,000 compared to
$9,747,000 at December 31, 1998, representing an increase of $277,000. 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 was approximately 9.5% at September 30,
1999, which is lower than December 31, 1998's level of 9.90% predominantly due
to the large asset growth experienced in 1999. Cash dividends totaling $256,000,
or $0.27 per share were declared during the nine months ended September 30, 1999
which is 13% higher than the dividend level paid during the same period of 1998.
These payout levels represented approximately 37% and 49% of the Company's
year-to-date earnings for the nine-month periods ended September 30, 1999 and
1998, respectively. The Company's return on average equity (ROE) increased to
9.27% for the first nine months of 1999 compared to 6.63% in 1998. The increase
is attributable to the greater earnings in 1999 compared 1998
The Company is unaware of any trends or uncertainties, nor do any material
commitments for capital expenditures exist, which may materially impair its
capital position.
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 (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 September 30, 1999, 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, 1999
<TABLE>
<S> <C> <C>
Minimum
Actual Requirement
Tier 1 risk-based capital ratio 14.2% 4.00%
Total risk-based capital ratio 15.1% 8.00%
Leverage ratio 9.2% 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.
</TABLE>
YEAR 2000:
As discussed in greater detail in the 1998 Form 10-K, the Company has committed
a great amount of effort and resources to ensure that critical information and
non-information systems will operate effectively in the Year 2000 (or "Y2K").
Should problems be confronted, a contingency plan detailing various manual
operations and "backup" procedures is available. A similar contingency plan has
been utilized during recent natural disasters with little or no problems
encountered. In addition to its "in-house" information and non-information
systems, the Company has
23
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sought representations from major vendors, suppliers and customers regarding
their readiness for Y2K. In particular, commercial loan customers identified as
highly susceptible to Y2K failures have been asked by the Company for
representations regarding their readiness for Y2K. These customers will be
closely monitored.
To date, the Company is 99% complete with regards to replacement and remediation
of hardware and software components. Since December 31, 1998, the Company has
incurred outlays totaling approximately $19,600 representing both capital and
non-capital expenditures. To date, approximately $278,000.00 has been
incurred under the Y2K project, representing both capital and non-capital items.
This compares to the project budget of approximately $300,000.00. The company
does not track internal costs related to the project, such as payroll and
related expenses, therefore, these costs are not included in the above figures.
For the remainder of 1999, no material outlays are expected to be incurred.
The Company is approximately 99.9% complete with regards to its testing for Y2K
compliance. During the quarter, the Company completed proxy testing of its
Automated Teller Machines (or "ATMs") and various third party processors and
software, such as payroll and credit bureau vendors. Only minor testing of
immaterial functions remain.
While the Company believes the tests and procedures in place should minimize the
Year 2000 risks and enable it to meet the needs of its customers in the Year
2000, the Company cannot quantify the potential impact of any unforeseen Year
2000 failures that might occur either internally or from external third parties.
Management is addressing possible liquidity concerns in the event depositors
withdraw large amounts of cash at or near year end. At this time, the cash
requirements at or near year end cannot be reasonably predicted. However, the
Bank, with input from industry regulators, will be working on estimating
possible cash requirements in the near future. In addition, the Company stands
to experience a reduction in interest income as a buildup of cash, a
non-interest earning asset, will transpire. The reduced income is not expected
to be material. See the LIQUIDITY AND INTEREST RATE MANAGEMENT section for
further discussion on liquidity.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a human rights complaint, whereby a former
employee has alleged discrimination against the Company, with an expected
trial date in July 2000. At this time, management cannot reasonably
estimate the outcome of the case, nor can it estimate a range of possible
loss, if any. Should a loss transpire, losses will most likely be mitigated
through the Company's liability insurance. There are no other 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
A special meeting of First National Bankshares Corporation
shareholders was held on September 8, 1999. At the meeting, the
shareholders approved the amendment to First National's Articles of
Incorporation, whereby the number of authorized common stock was
increased from 500,000 shares, par value $5.00, to 10,000,000 shares,
par value $1.00, and effecting a 5 for 1 stock split payable September
24, 1999 to shareholders of record as of September 8, 1999. The
results of the voting were reported in the Form 8-K filed on September
9, 1999 and is incorporated by reference in its entirety. The amended
Articles of Incorporation in their entirety are included as Exhibit 3
(i) in Item 6 of this report.
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 3 (i), Articles of Incorporation, as amended
(September 8, 1999)
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2. Exhibit 3 (ii), By-Laws, as amended (August 24, 1999) 3.
Exhibit 11, Computation of Per Share Earnings, is filed herewith.
4. Exhibit 27, Financial Data Schedule, is filed herewith.
b). First National filed two Form 8-Ks during the quarter. The Form
8-K filed on July 13, 1999 announced the board of director's
resolution to amend the number of authorized shares in the
Articles of Incorporation and to effect a 5 for 1 stock split
discussed in Item 4 above. The Form 8-K filed on September 9, 1999
announced shareholders' approval of the amendment and stock split,
also discussed in Item 4 above. Both documents are incorporated
herein by reference in their entirety.
25
<PAGE>
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
L. Thomas Bulla
President and Chief Executive Officer
By
Charles A. Henthorn
Secretary to the Board of Directors
By
Matthew L. Burns, CPA
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
Date: November 10, 1999
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EXHIBIT 3(i)
ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION
OF
FIRST NATIONAL BANKSHARES CORPORATION
(As amended September 8, 1999)
I. The undersigned agree to become a corporation by the name of FIRST
NATIONAL BANKSHARES CORPORATION.
II. The address of the principal office of said corporation will be
located at: One Cedar Street, P. 0. Box 457,
Ronceverte, County of Greenbrier, and State of West Virginia 24970.
III. The period of existence of said corporation is to be perpetual.
IV. The purpose or purposes for which said corporation is organized is the
transaction of any or all lawful business for which corporations may be
incorporated under Article 1, Chapter 31 of the Code of West Virginia, including
(without limitation) engaging in and performing any and or all businesses,
operations, functions, activities and services which are now or hereafter lawful
or permissible for bank holding companies under applicable laws of the United
States of America or any state.
V. The aggregate number of shares which the corporation shall have authority to
issue is Ten Million (10,000,000) common shares of the par value of $1.00 each.
Upon the effective date of this amendment of Article V, each share of common
stock, par value $5.00, issued and outstanding on such effective date, shall be
split and converted into five (5) shares of common stock, par value $1.00 per
share.
VI. No holder of capital stock of the corporation shall have any preemptive
right or other preferential right or privilege to acquire any additional shares
of any class of stock, whether now or hereafter authorized, of the corporation,
or any securities or obligations convertible into or carrying any right to
purchase or acquire any such stock.
VII. (a) Except as provided below in paragraph (c) of this Article VII, no
transaction of a character described in paragraph (b) of this Article VII, and
no agreement, plan, resolution or other corporate action providing for any such
transaction, shall be valid or binding upon the corporation unless such
transaction shall have been approved in compliance with all applicable laws of
the State of West Virginia and shall have been authorized by the affirmative
vote of the holders of a majority of the shares of common stock deemed
independently owned pursuant to paragraph (d) of this Article VII.
(b) Transactions subject to the voting requirements of this Article VII
shall be:
(1) any merger or consolidation to which the corporation and an interested
person are parties; or
(2) any sale, lease, exchange or other disposition, in a single transaction or
series of related transactions, of all or a substantial part of the assets of
the corporation to an interested person; or
(3) any transaction of a character described in subparagraph (1) or (2) above
involving an affiliate or an associate of an interested person or involving an
associate of any such affiliate.
(c) The voting requirements of this Article VII shall not apply to any
transaction described in paragraph (b) of this Article VII should any of the
following events relate to the transaction.
(1) The Board of Directors shall have approved the transaction by majority vote
of all directors prior to the time the interested person connected with the
transaction became an interested person.
(2) The Board of Directors shall have approved the transaction prior to
consummation thereof by majority vote of these directors each of whom was not an
interested person, or an associate of any such affiliate.
27
<PAGE>
(3) The Board of Directors shall have approved such transaction by majority vote
of all directors prior to the consummation thereof, and the consideration to be
received by all shareholders who do not vote in favor of such transaction for
their common stock shall be cash or marketable securities having a fair value
not less than the sum of:
(A) the greater of (i) the highest price per share (including brokerage
commissions and soliciting dealers' fees) paid or agreed to be paid by the
interested person for any common stock within the period of five years
immediately preceding submission to the shareholders of such transaction, or
(ii) the highest price per share at which the common stock traded in public
market during such five-year period, plus
(B) the aggregate amount, if any, by which 5% per annum of such higher price per
share exceeds the aggregate amount of all dividends per share paid in cash on
the common stock since the date on which the interested person connected with
the transaction became an interested person;
and a proxy statement complying with the disclosure provisions of Regulation 14A
under the Securities Exchange Act of 1934 shall have been mailed to all holders
of common stock for the purpose of submitting such transaction for their
approval.
(d) For purposes of this Article VII, all the shares of common stock
which are outstanding and entitled to vote shall be deemed independently owned
except shares that are beneficially owned by an interested person connected with
the transaction, an affiliate or associate of such interested person or an
associate of such affiliate.
(e) The affirmative vote of the holders of at least 75% of the
outstanding shares of common stock entitled to vote shall be required to amend
or repeal this Article VII.
(f) As used in this Article VII:
(1) "affiliate" shall mean a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with another person;
(2) "associate" shall mean any corporation or organization of which a person is
an officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities; or any trust or estate in which a
person has a 10% or larger beneficial interest or as to which a person serves as
trustee or in similar fiduciary capacity; or any relative or spouse of a person,
and any relative of a spouse who has the same residence as such person;
(3) "beneficial ownership" shall mean all shares directly or indirectly owned by
a person and all shares which a person has the right to acquire through the
exercise of any option, warrant or right (whether or not currently exercisable),
through the conversion of a security, pursuant to the power to revoke a trust,
discretionary account or similar arrangement, pursuant to the automatic
termination of a trust, discretionary account or similar arrangement or
otherwise. All shares shall be deemed indirectly owned by a person as to which
such person enjoys benefits substantially equivalent to those of ownership by
reason of any contract, understanding, relationship, agreement or other
arrangement, including without limitation any written or unwritten agreement to
act in concert;
(4) "control" shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract or otherwise;
(5) "interested person" shall mean any person who beneficially owns 10% or more
of the outstanding shares of common stock;
(6) "person" shall mean an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, any unincorporated organization, a
government or political subdivision thereof, a person acting through or in
concert with one or more persons, and any other entity;
(7) "Securities Exchange Act of 1934" shall mean the Securities Exchange Act of
1934, as amended from time to time, as well as any successor or replacement
statute;
28
<PAGE>
(8) "substantial part" shall mean more than 20% of the total consolidated assets
of the corporation, as shown on its consolidated balance sheet as of the end of
the most recent fiscal year.
VIII. (a) The Board of Directors may oppose a tender or other offer for the
corporation's securities, whether the offer is in cash, securities or otherwise.
When considering whether to oppose an offer, the Board of Directors may, but is
not legally obligated to, consider any issue which any director deems relevant.
By way of illustration (but not limitation), the Board of Directors may, but
shall not be legally obligated to, consider any or all of the following:
(1) Whether the offer price is fair and reasonable based upon the historical and
present operating results or financial condition of the corporation;
(2) Whether a more favorable price could be obtained for the corporation's
securities in the future;
(3) The impact which a change in control of the corporation would have on the
employees, depositors and customers of the corporation and its subsidiaries and
the communities which they serve;
(4) The reputation and business practices of the offeror and its management and
affiliates as they would affect the employees, depositors and customers of the
corporation and its subsidiaries and the future value of the corporation's
stock;
(5) The value of the securities (if any) which the offeror is offering in
exchange for the corporation's securities, based upon an analysis of the worth
of the corporation as compared to the corporation or other entity whose
securities are being offered; and
(6) Any antitrust or other legal and regulatory issues that are raised by the
offer.
(b) If the Board of Directors determines that an offer should be rejected, it
may take any lawful action on behalf of the corporation to accomplish that
objective, including, but not limited to, any or all of the following; advising
shareholders not to accept the offer; litigation against the offeror; filing
complaints with any governmental and regulatory authorities; acquiring the
corporation's securities; selling or otherwise issuing, free of all preemptive
rights, authorized but unissued securities or treasury stock or granting options
with respect thereto; acquiring a company to create an antitrust or other
regulatory problem for the offeror; and obtaining a more favorable offer from
another individual or entity.
(c) The affirmative vote of the holders of at least 75% of the outstanding
shares of common stock entitled to vote shall be required to amend or repeal
this Article VIII.
IX. (a) The directors of the corporation shall be classified with respect to the
time for which they shall severally hold office by dividing the Board of
Directors into three classes of as nearly equal numbers of directors as
possible. The term of office of directors of the first class shall expire at the
1987 annual meeting; of the second class at the 1988 annual meeting; of the
third class at the 1989 annual meeting. At each annual meeting, the successors
of the directors of the class whose terms then expire shall be elected to hold
office for a term of three years and until their successors are elected and
qualified. If, at any meeting of shareholders (whether annual or special) for
election of directors, there are to be elected directors or more than one class,
separate elections shall be held for the directors of each class.
(b) The affirmative vote of the holders of at least 75% of the outstanding
shares of common stock entitled to vote shall be required to amend or repeal
this Article IX.
X. The full names and addresses of the incorporators, including street and
street number and the city, including zip number, are as follows:
NAME ADDRESS
S. ELWOOD BARE 1002 Greenbrier Ave., Ronceverte, W. Va. 24970
MARSHALL M. CASDORPH Coffman Hill Road, Ronceverte, W. Va. 24970
29
<PAGE>
JOHN R. DAWKINS Rock Acres Farms, Lewisburg, W. Va. 24901
WILLIAM M. DICKSON Route 2, Box 333, Ronceverte, W. Va. 24970
GRADY W. FORD 204 Dwyer Lane, Lewisburg, W. Va. 24901
WALTER BENNETT FULLER 126 May Apple Tr. Lewisburg, W. Va. 24901
WILLIAM D. GOODWIN 321 Dwyer Lane, Lewisburg, W. Va. 24901
CHARLES W. LEWIS 406 E. Washington St., Lewisburg, W. Va. 24901
HOUSTON B. MOORE 15 Mary's Ln., Buckingham Acres, Lewisburg, WV 24901
WILLIAM R. SATTERFIELD, JR. 31 Francis Way, Underwood Est., Lewisburg, WV 24901
RICHARD L. SKAGGS Route 2, Box 295, Lewisburg, W. Va., 24901
XI. The number of directors constituting the initial Board of Directors of the
corporation is eleven (11), and the names and addresses of the persons who are
to serve as directors until the first annual meeting of shareholders, or until
their successors are elected and shall qualify, are as follows:
NAME ADDRESS
S. ELWOOD BARE 1002 Greenbrier Ave., Ronceverte, WV 24970
MARSHALL M. CASDORPH Coffman Hill Road, Ronceverte, WV 24970
JOHN R. DAWKINS Rock Acres Farms, Lewisburg, W. Va., 24901
WILLIAM M. DICKSON Route 2, Box 333, Ronceverte, W. Va. 24970
GRADY W. FORD 204 Dwyer Lane, Lewisburg, W. Va. 24901
WALTER BENNETT FULLER 126 May Apple Tr., Lewisburg, W. Va. 24901
WILLIAM D. GOODWIN 321 Dwyer Lane, Lewisburg, W. Va. 24901
CHARLES W. LEWIS 406 E. Washington St., Lewisburg, WV 24901
HOUSTON B. MOORE 15 Mary's Ln., Buckingham Acres, Lewisburg, WV 24901
WILLIAM R. SATTERFIELD, JR. 31 Francis Way, Underwood Est., Lewisburg, WV 24901
RICHARD L. SKAGGS Route 2, Box 295, Lewisburg, W. Va. 24901
We, the undersigned, for the purpose of forming a corporation under the
laws of the State of West Virginia, do make and file these Articles of
Incorporation, and we have accordingly hereunto set our hands this 23rd day of
January, 1986.
NAME NAME
/s/ H. B. Moore, M. D. /s/ Walter Bennett Fuller
/s/ R. L. Skaggs /s/ Chas. W. Lewis
30
<PAGE>
/s/ William D. Goodwin /s/ W. M. Dickson
/s/ W. R. Satterfield, Jr. /s/ Grady W. Ford
/s/ S. E. Bare /s/ J. R. Dawkins
/s/ M. M. Casdorph
ARTICLES OF AMENDMENT DATED MAY 5, 1987
FIRST NATIONAL BANKSHARES CORPORATION
By /s/ William M. Dickson
Its President
And /s/ Keith E. Morgan
Its Secretary-Treasurer
ARTICLES OF AMENDMENT DATED SEPTEMBER 8, 1999
FIRST NATIONAL BANKSHARES CORPORATION
By /s/ L. Thomas Bulla, President
/s/ Charles A. Henthorn, Secretary
31
<PAGE>
EXHIBIT 3(ii)
BY-LAWS
On August 24, 1999, the Board of Directors approved amendments to the Company's
by-laws. The amendments include allowing directors to "attend" meetings via
telephone conference calls and establishing the position of Director Emeritus.
The amended by-laws in their entirety follow.
BY-LAWS
OF
FIRST NATIONAL BANKSHARES CORPORATION
As Amended on August 24, 1999
ARTICLE I. OFFICES
The principal office and place of business of the Corporation will be at One
Cedar Street, Ronceverte, Greenbrier County, West Virginia. The Board of
Directors may move the principal office and place of business of the
Corporation, or either, from time to time as it may deem advisable, and may also
establish such offices or places of business elsewhere as in the opinion of the
Board may be advisable.
ARTICLE II. SHAREHOLDERS
Section I. Annual Meeting. The annual meetings of the shareholders of
this Corporation shall be held in the month of April of each year, on such date
and at such time as may be fixed by the Board of Directors, either at the
principal office of the Corporation or at such other place, either within or
without the State of West Virginia, as the Board of Directors may fix by
resolution. The Board of Directors may by resolution authorize any officer or
officers to fix the date, time and place of such annual meeting.
Section II. Special Meeting. Special meetings of the shareholders may
be called at any time by the Board of Directors, the President and
Secretary-Treasurer, or any number of shareholders holding in the aggregate at
least one-tenth of the number of shares entitled to vote at the meeting. Such
meetings shall be held at the principal office of the Corporation unless the
Board of Directors or other persons calling such meeting shall fix some other
place for the meeting, in which event the meeting shall be held at such other
place, which may be either within or without the State of West Virginia.
Section III. Notice of Meetings. Notice of the annual and all other
meetings of the shareholders shall be given by written notice stating the place,
day and hour of the meeting, and, in the case of a special meeting, the purpose
or purposes for which and the officers or persons by whom the meeting is called,
and shall be delivered not less than ten and not more than fifty days before the
date of the meeting, either personally or by mail. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail addressed to
the shareholder at his last post office address appearing on the records of the
Corporation, with postage thereon prepaid. It shall be the duty of every
shareholder to furnish the Secretary-Treasurer of the Corporation his post
office address and to notify the Secretary-Treasurer of any change therein.
Notice of all meetings shall be given to each shareholder of record entitled to
vote at the meeting.
Section IV. Nominations for Director. Nominations for election to the
Board of Directors may be made by the Board of Directors or by any shareholder
of any outstanding class of capital stock of the Corporation entitled to vote
for the election of directors. Nominations, other than those made by or on
behalf of the existing Board of Directors of the Corporation, shall be made in
writing and shall be delivered or mailed to the Secretary-Treasurer of the
Corporation, not less than 14 days and not more than 50 days prior to any
meeting of shareholders called for the election of directors, provided, however,
that if less than 21 days' notice of the meeting is given to shareholders, such
nominations shall be mailed or delivered to the Secretary-Treasurer of the
Corporation not later than the close of business on the seventh day following
the day on which the notice of meeting was mailed. Such nominations shall
contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares of
capital stock of the Corporation that will be voted for each proposed nominee;
(d) the name and residence address of the notifying shareholder; and (e) the
number of shares of capital stock of the Corporation owned by the notifying
shareholder. Nominations not made in accordance herewith may be disregarded by
the chairman of the meeting, in his discretion, and, upon his instructions, the
vote tellers may disregard all votes cast for each such nominee.
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<PAGE>
Section V. Closing of Transfer Books or Fixing Record Date. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any other proper purpose, the Board of Directors of the
Corporation may designate a record date and may provide that the stock transfer
books of the Corporation shall be closed for a stated period but not to exceed,
in any case, fifty (50) days. If the stock transfer books shall be closed for
the purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten (10) days
immediately preceding such meeting.
Section VI. Proxies. At all meetings of shareholders, a shareholder may
vote in person or by written proxy. Such proxy shall be filed with the
Secretary-Treasurer of the Corporation before or at the time of the meeting.
Proxies shall be valid for only one meeting to be specified therein, and any
adjournment of such meeting, unless otherwise provided in the proxy and shall be
filed with the records of the meeting. No proxy shall be valid after eleven
months from the date of its execution, unless otherwise provided in the proxy.
Section VII. Quorum and Voting. A majority of the outstanding shares of
the Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at any meeting of shareholders. If less than a majority of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
an adjourned meeting at which a quorum is present or represented, any business
may be transacted which could have been transacted at the meeting originally
called. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum. At a meeting in which a quorum is
present, the affirmative vote of a majority of the shares represented at the
meeting and entitled to vote on the matter shall be the act of the shareholders,
except in the matter of election of directors, and unless the vote of a greater
number, or other vote, is required by law or the Articles of Incorporation or
By-Laws of the Corporation. Except as otherwise provided by law, or by the
Articles of Incorporation or By-Laws of the Corporation, each outstanding share
shall be entitled to one vote on each matter submitted to a vote at any meeting
of the shareholders.
Section VIII. Record of Meetings. A record shall be kept of the
meetings of the shareholders and the action taken at the same, which shall be
verified by the signature of the chairman of the meeting and the person acting
as secretary thereof.
Section IX. Action by Shareholders Without Meeting. Whenever the vote
of the shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action, the meeting and vote of such shareholders
may be dispensed with if all of the shareholders who would have been entitled to
vote upon the action, if such meeting were held, shall agree in writing to such
corporate action being taken, and such agreement shall have like effect and
validity as though the action were duly taken by the unanimous action of all
shareholders entitled to vote at a meeting of such shareholders duly called and
legally held.
Section X. Waiver of Notice. Where notice of publication of any notice
is required, the same may be waived in writing signed by the shareholder or
shareholders entitled to such notice, filed with the records of the meeting,
whether before or after the time stated therein. Any meeting of the shareholders
at which every shareholder is present or represented by proxy shall be valid,
notwithstanding lack or insufficiency of notice.
ARTICLE III. BOARD OF DIRECTORS
Section I. General Powers. The Board of Directors of the Corporation
shall have power to manage and administer the business and affairs of the
Corporation. Except as expressly limited by law, all corporate powers of the
Corporation shall be vested in and may be exercised by said Board.
Section II. Number, Qualifications and Term. The Board shall consist of
not less than five nor more than twenty-five shareholders of the Corporation,
the exact number within such minimum and maximum limits to be fixed and
determined from time to time by resolution of a majority of the full Board or by
resolution of the shareholders at any meeting thereof; provided, however, that a
majority of the full Board of Directors may not increase the number of directors
to a number which (i) exceeds by more than two the number of directors last
elected by the shareholders where such number was fifteen or less and (ii) to a
number which exceeds by more than four the number of directors last elected by
the shareholders where such number was sixteen or more, but in no event shall
the number of
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directors exceed twenty-five. The directors shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, as determined by the Board of Directors of the
Corporation. At each annual meeting of the shareholders of the Corporation, the
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the annual meeting of shareholders
held in the third year following the year of their election or until their
successors are elected and qualified. Directors need not be residents of the
State of West Virginia. No person shall be nominated to be, or shall serve as, a
director of the Corporation who shall have attained the age of seventy (70) on
or before the meeting at which said person is to be elected or appointed as a
director; provided, however, that the members of the Board of Directors of the
Corporation on May 5, 1987, shall be exempt from the foregoing requirement.
Section III. Elections. If at any meeting of shareholders for election
of directors, there are to be elected directors of more than one class, separate
elections shall be held for the directors to be elected in each such class. In
all elections of directors each shareholder shall have the right to vote, in
person or by proxy, the number of shares owned by him and entitled to vote, for
as many persons as there are directors to be elected in such election, and for
whose election he has a right to vote, or he may cumulate such votes in such
election and give one candidate as many votes as the number of directors in the
class to be elected multiplied by the number of his shares shall equal; or he
may distribute them in such election on the same principle among as many
candidates and in such manner as he shall desire.
Section IV. Removal of Directors. The shareholders, at any meeting
thereof called expressly for the purpose, may remove any director or the entire
Board of Directors, with or without cause, by vote of the holders of a majority
of the shares entitled to vote at an election of directors. However, if less
than the entire Board is to be removed, no one of the directors may be removed
if the votes cast against his removal would be sufficient to elect him.
Section V. Meetings. After the annual meeting of shareholders, the
Secretary-Treasurer shall notify the directors-elect of their election and shall
notify all directors of the time at which they are required to meet at the
principal office of the Corporation for the purpose of organizing the new Board
and electing and appointing officers of the Corporation for the succeeding year.
Such meeting shall be held on the day of the election, or as soon thereafter as
practicable, and, in any event, within thirty days thereof. Regular meetings of
the Board of Directors shall be held, without notice, at the principal office of
the Corporation as the Board may, from time to time, designate. The Chairman of
the Board, the President or any three directors may call special meetings of the
Board of Directors. Each member of the Board of Directors shall be given notice
stating the time and place of such special meeting, by written notice thereof
mailed to each director, or by telegram or telephone, or in person. Notice of a
special meeting shall be given at least two days before the time of such
meeting. Except as otherwise provided by law, the notice of any such special
meeting need not specify the purpose of or the business to be transacted at the
special meeting.
Section VI. Quorum. A majority of the number of directors of the
Corporation as fixed pursuant to those By-Laws, shall constitute a quorum for
the transaction of business at any meeting of the Board of Directors; but, if
less than such majority is present at a meeting, a majority of the Directors
present may adjourn the meeting from time to time without further notice. The
act of a majority of the directors present at any meeting of directors, at which
a quorum is present, shall be and constitute the act of the Board of Directors.
Section VII. Action by Directors Without Meeting. Whenever the vote of
directors at a meeting thereof is required or permitted to be taken in
connection with any corporate action, the meeting and vote of such directors may
be dispensed with if all the directors shall agree in writing to such corporate
action being taken, and such agreement shall have like effect and validity as
though the action were duly taken by the unanimous action of all directors at a
meeting thereof duly called and legally held.
Section VIII. Vacancies. Any vacancy in the Board of Directors
resulting from the removal of a director shall be filled by the shareholders of
the meeting at which such removal occurs. Any directorship to be filled by an
increase in the number of directors, from the failure of the shareholders to act
or occurring from any other cause may be filled by the affirmative vote of a
majority of the remaining directors, though less than a quorum. A director
elected or appointed, as the case may be, to fill a vacancy shall be elected or
appointed for the unexpired term of his predecessor in office. Any directorship
to be filled by reason of an increase in the number of directors may be filled
by the Board of Directors for a term of office continuing only until the next
election of directors.
Section IX. Waiver of Notice. Any meeting of the directors may be
held by agreement in writing signed by all the directors, and where notice of
any meeting is required, a waiver thereof in writing, signed by the director or
34
<PAGE>
directors entitled to notice, filed with the records of the meeting, whether
before or after the time stated therein, shall be equivalent to the giving of
such notice. Attendance of a director at a meeting of the directors shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Except as provided in
the next preceding sentence, any meeting of the directors at which every
director is present in person shall be valid, notwithstanding lack or
insufficiency of notice.
Section X. Conflicts of Interest. No contract or transaction between
the Corporation and any one or more of its directors, or between the Corporation
and any other corporation, firm, association, or entity in which one or more of
its directors are directors or officers, or are financially interested, shall be
either void or voidable because of such relationship or interest, or because
such director or directors are present at the meeting of the Board of Directors,
or a committee thereof, which authorizes, approves, or ratifies such contract or
transaction, or because his or their votes are counted for such purpose, if:
(g) The fact of such relationship or interest is
disclosed or known to the Board of Directors or committee
which authorizes, approves, or ratifies the contract or
transaction by a vote or consent sufficient for the
purpose without counting the votes or consents of such
interested directors; or
(h) The fact of such relationship or interest is
disclosed or known to the shareholders entitled to vote,
and they authorize, approve or ratify such contract
transaction by vote or written consent; or
(i) The contract or transaction is fair and reasonable
to the Corporation.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or a committee thereof which
authorizes, approves, or ratifies such contract or transaction. On any questions
involving the authorization, approval, or ratification of any such contract or
transaction, the names of those voting each way shall be entered on the record
of the proceedings.
Section XI. Record of the Board. The Board of Directors shall cause to
be kept a record of its proceedings, which shall be verified by the signatures
of the persons acting as chairman and secretary of the meeting. Any member of
the Board of Directors, at his request, shall have the right to have his vote
recorded in the minutes of the meeting on any questions coming before the Board.
Section XII. Meeting by Conference Call. At the option of the officer
presiding over any meeting of the Board of Directors, one or more directors may
participate in a meeting of the Board or of a committee of the Board, by means
of a telephone conference call or other type of communication equipment,
provided that all persons participating in the meeting can hear and communicate
with each other. All directors so participating shall be deemed present at such
meeting for purposes of determining a quorum and otherwise conducting such
business as may be transacted during such meeting.
Section XIII. Directors Emeriti. The Board of Directors may appoint
directors emeriti to serve in an advisory capacity. Directors emeriti shall not
be entitled to vote, nor shall they be counted in determining whether a quorum
of directors is present at any meeting of directors, but for all other purposes,
including without limitation, the indemnification provisions of Article X of
these By-Laws, shall be deemed to be directors of the corporation without
distinction between directors and directors emeriti. Directors emeriti shall be
appointed at the regular meeting of the Board of Directors immediately following
the annual meeting of shareholders, or at any regular meeting of the board, and
shall hold office until the next succeeding regular meeting of directors
following the annual meeting of shareholders and until their successors are
appointed.
ARTICLE IV. COMMITTEES OF THE BOARD
Section I. Examining Committee. There shall be an Examining Committee
composed of not less than three (3) Directors, exclusive of any officers of the
Corporation, appointed by the Board annually or more often, whose duty it shall
be to make an examination at least once during each calendar year and within 15
months of the last such examination into the affairs of the Corporation or cause
suitable examinations to be made by auditors responsible only to the Board of
Directors and to report the result of such examination in writing to the Board
at the next meeting thereafter. Such report shall state whether the Corporation
is in a sound condition, whether adequate
35
<PAGE>
internal controls and procedures are being maintained and shall recommend to the
Board such changes in the manner of conducting the affairs of the Corporation as
shall be deemed advisable.
Section II. Other Committees. The Board of Directors may appoint, from
time to time, from its own members, other committees of one or more persons, for
such purposes and with such powers as the Board may determine.
ARTICLE V. OFFICERS
Section I. Number. The officers of the Corporation shall be a
President, one or more Vice-Presidents, and a Secretary-Treasurer, each of whom
shall be elected by the Board of Directors. Such other officers and assistant
officers as may be deemed necessary may be elected or appointed by the Board of
Directors. Any two or more offices may be held by the same person, except the
offices of President and Secretary-Treasurer.
Section II. Compensation. The Board of Directors of the Corporation
shall have the authority to fix the compensation of all officers, including
members of the Board of Directors.
Section III. Election and Term of Office. The officers of the
Corporation shall be elected annually by the Board of Directors at the
organizational meeting of the Board of Directors held after each annual meeting
of the shareholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as practicable. Each
officer shall hold office until the next annual election of officers and until
his successor is duly elected and qualified.
Section IV. Removal. Any officer may be removed by a majority vote of
the Board of Directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the persons so removed. The election or
appointment of any officer of the Corporation shall not of itself be deemed to
create any contract right.
Section V. Chairman of the Board. The Board of Directors may appoint
one of its members to be Chairman of the Board to serve at the pleasure of the
Board. Such person shall preside at all meetings of the Board of Directors. The
Chairman of the Board shall supervise the carrying out of the policies adopted
or approved by the Board, and shall also have and may exercise such further
powers and duties as from time to time may be conferred upon or assigned to him
by the Board of Directors.
Section VI. President. The Board of Directors shall appoint one of its
members to be President of the Corporation. In the absence of the Chairman, the
President shall preside at any meeting of the Board. The President shall have
general executive powers, and shall have and may exercise any and all other
powers and duties pertaining by law, regulation, or practice to the Office of
President or imposed by these By-Laws. The President shall also have and may
exercise such further powers and duties as from time to time may be conferred
upon or assigned to him by the Board of Directors.
Section VII. Vice-President. The Board of Directors may appoint one or
more Vice-Presidents. Each Vice- President shall have such powers and duties as
may be conferred upon or assigned to him by the Board of Directors. One
Vice-President shall be designated by the Board of Directors, in the absence of
the President, to perform all of the duties of the President.
Section VIII. Secretary-Treasurer. The Board of Directors shall appoint
a Secretary-Treasurer, or other designated officer who shall be secretary of the
Board and of the Corporation, and shall keep accurate minutes of all meetings.
The Secretary-Treasurer shall attend to the giving of all notices required by
these By-Laws to be given; shall be custodian of the corporate seal, records,
documents and papers of the Corporation; shall provide for the keeping of proper
records of all transactions of the Corporation; shall have and may exercise any
and all other powers and duties pertaining by law, regulation or practice to the
offices of Secretary and Treasurer or imposed by these By-Laws; and shall also
have such other powers and perform such other duties as may be conferred upon or
assigned to him, from time to time, by the Board of Directors.
Section IX. Other Officers. The Board of Directors may appoint one or
more Assistant Vice-Presidents, one or more Assistant Secretaries, Assistant
Treasurers and such other officers as from time to time may appear to the Board
of Directors to be required or desirable to transact the business of the
Corporation. Such officers shall respectively exercise such powers and perform
such duties as pertain to their several offices, or as may be
36
<PAGE>
conferred upon or assigned to them by the Board of Directors, the Chairman of
the Board or the President of the Corporation.
ARTICLE VI. INVESTMENTS, LOANS, AND DEPOSITS
Section I. Investments. No investments shall be contracted on behalf
of the Corporation and no payment for investments shall be issued in its name
unless authorized by a resolution of the Board of Directors. Such authority may
be general or combined to specific instances.
Section II. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section III. Checks, Drafts, etc. All checks, drafts or other orders
for the payment of money, notes or other evidence of indebtedness issued in the
name of the Corporation, shall be signed by such officer or officers, or agent
or agents, of the Corporation in such manner as shall, from time to time, be
determined by resolution of the Board of Directors.
Section IV. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may select.
ARTICLE VII. STOCK AND STOCK CERTIFICATES
Section I. Certificate of Stock. The Board of Directors shall cause to
be issued to any person appearing on the books of the corporation to be the
owner of any shares of its stock, a certificate or certificates therefor, under
the corporate seal of the Corporation, to be signed by the President, or a
Vice-President, and the Secretary- Treasurer, or an Assistant Secretary, of the
Corporation. Each certificate representing shares of the capital stock of the
Corporation shall state on the face thereof that the Corporation is organized
under the laws of the State of West Virginia; the name of the person to whom
issued; the number and class of shares which such certificate represents; and
the par value of each share represented by such certificate; and shall otherwise
be in such form as the Board of Directors may adopt. Such certificates shall be
issued in order from a stock certificate book to be kept by the
Secretary-Treasurer under the supervision of the Board. No such certificate
shall be issued or delivered until the stock represented thereby has been fully
paid for; such payment may be made in cash, in property, tangible or intangible,
or in labor or services actually performed for the corporation, but neither
promissory notes nor future services shall constitute such payment or part
payment.
Section II. Transfer of Stock. Shares of the capital stock of the
Corporation shall be transferable only upon the books of the Corporation by the
holder thereof in person or by attorney upon surrender and cancellation of the
certificate for the same.
Section III. Lost Certificates. When a person, who appears by the books
of the Corporation to own stock therein, claims that the certificate for such
stock has been lost, destroyed, or wrongfully taken, the proper officers of the
Corporation shall issue to him a certificate in place and stead of the lost,
destroyed, or wrongfully taken certificate, if he shall request the issuance of
a new certificate before the Corporation has notice that the old certificate has
been acquired by a bona fide purchaser, upon his compliance with the following
conditions:
(a) he shall file with the Secretary-Treasurer of the
Corporation an affidavit setting forth the time, place
and circumstances of the loss, destruction, or taking, to
the best of his knowledge and belief; and
(b) he shall execute and deliver to the Corporation a
bond with good security in a penalty at least equal to
the value of the shares of stock represented by the lost,
destroyed, or wrongfully taken certificate, in form
approved by the Board of Directors, to indemnify the
Corporation and all persons whose rights may be affected
by the issuance of the new certificate against any loss
in consequence of the issuance of the new certificate.
A new certificate may be issued, in the discretion of the Board of
Directors, without compliance with the foregoing requirements, upon
such terms and conditions as the Board of Directors may prescribe.
37
<PAGE>
ARTICLE VIII. FISCAL YEAR
The fiscal year of the Corporation, for accounting and tax
purposes, shall begin on the 1st day of January and end on the 31st day
of December of each year.
ARTICLE IX. CORPORATE SEAL
The President, Secretary-Treasurer or any other officer
thereunto designated by the Board of Directors, shall have authority to
affix the Corporation's seal to any document requiring such seal, and
to attest the same. The seal to be here impressed, containing the name
of the Corporation and the words "Corporate Seal, West Virginia," is
hereby adopted as the seal of the Corporation.
( Impression )
(of)
( Seal )
ARTICLE X. INDEMNIFICATION
It shall be the policy of the Corporation to indemnify any
person who serves, or has served, as a director, officer, employee or
agent of the Corporation, or who serves or has served as a director,
officer, partner, employee, or agent of any other corporation,
partnership, joint venture, trust or enterprise at the request or
direction of the Corporation, against expenses (including attorneys'
fees), judgments, fines, taxes, penalties, interest, and payments in
settlement, in connection with any threatened, pending or completed
action or proceeding, and to pay any such expenses in advance of the
final disposition of any such action or proceeding, to the full extent
contemplated and permitted by Section 9 of Chapter 31, Article 1 of the
Code of West Virginia of 1931, as amended, upon such finding or
determination as shall be requisite or appropriate under said section;
and the Corporation is specifically empowered and authorized to
purchase and maintain, at the expense of the Corporation, insurance on
behalf of any such director, officer, partner, employee or agent
against any liability asserted against him or her in such capacity or
arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her under the
provisions of said section.
ARTICLE XI. AMENDMENTS
These By-Laws may be amended by the Board of Directors;
subject, however, to the power of the shareholders to repeal or change
any amendment made by the Board of Directors by affirmative vote of a
majority of the stock then issued and outstanding and entitled to vote
thereon; and in the event of any conflict, the vote of the shareholders
shall be controlling.
38
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
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 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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