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 June 30, 2000
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 past90 days. Yes X No
The number of shares outstanding of the issuer's classes of common stock
as of August 1, 2000:
Common Stock, $1 par value -- 967,015 shares
THIS REPORT CONTAINS 29 PAGES
FIRST NATIONAL BANKSHARES CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
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Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2000 and 1999
Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Shareholders' Equity -
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 7-8
Notes to Condensed Consolidated Financial Statements 9-13
Independent Accountant's Report 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities none
Item 3. Defaults upon Senior Securities none
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
SIGNATURES 25
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
<S> <C> <C>
June 30, December 31,
2000 1999
ASSETS (Reviewed) (1)
Cash and due from banks $ 2,118 $ 3,717
Interest-bearing deposits with other banks 18 17
Federal funds sold - 30
Securities held to maturity (estimated fair value
$11,858 and $11,160 respectively) (Note 2) 12,103 11,520
Securities available for sale (Note 2) 9,819 11,357
Loans, net of allowance of $745 and
$764, respectively (Notes 3 and 4) 83,109 74,264
Bank premises and equipment, net 1,626 1,695
Accrued interest receivable 846 727
Other real estate owned acquired in settlement of loans 863 884
Other assets 714 618
Total assets $ 111,216 $ 104,829
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 11,290 $ 10,741
Interest-bearing 76,346 78,391
Total deposits 87,636 89,132
Short-term borrowings 11,794 4,113
Other liabilities 886 960
Long-term borrowings 466 473
Total liabilities 100,782 94,678
Commitments and Contingencies (Note 5)
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 967,015 and 964,515
shares, respectively 967 965
Surplus 1,042 1,019
Retained earnings 8,665 8,370
Accumulated other comprehensive income (240) (203)
Total shareholders' equity 10,434 10,151
Total liabilities and shareholders' equity $ 111,216 $ 104,829
</TABLE>
(1) Extracted from December 31, 1999 audited financial statements.
See Notes to Condensed Consolidated Financial Statements
3
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
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Three Months Ended Six Months Ended
June 30, June 30,
(Reviewed) (Unaudited) (Reviewed) (Unaudited)
2000 1999 2000 1999
Interest income
Interest and fees on loans $ 1,782 $ 1,478 $ 3,439 $ 2,936
Interest and dividends on securities:
Taxable 288 256 589 473
Tax-exempt 36 40 72 82
Interest on interest-bearing deposits with other banks - 37 - 49
Interest on federal funds sold 11 62 26 111
Total interest income 2,117 1,873 4,126 3,651
Interest expense
Interest on deposits 862 738 1,683 1,456
Interest on short-term borrowings 92 5 155 13
Interest on long-term borrowings 7 91 14 180
Total interest expense 961 834 1,852 1,649
Net interest income 1,156 1,039 2,274 2,002
Provision for loan losses 15 30 15 30
Net interest income after provision
for loan losses 1,141 1,009 2,259 1,972
Other income
Service fees 71 79 143 146
Trust income 8 20 24 41
Other income 24 24 41 45
103 123 208 232
Other expense
Salaries and employee benefits 413 399 837 788
Net occupancy expense 70 72 138 141
Equipment rental, depreciation and maintenance 67 69 137 139
Data processing 55 45 115 95
Professional and legal 30 22 54 42
Directors' fees and shareholder expense 28 21 63 48
Other operating expenses 188 163 363 313
851 791 1,707 1,566
Income before income taxes 393 341 760 638
Income tax expense/(benefit) 132 114 252 210
Net income $ 261 $ 227 $ 508 $ 428
Basic earnings per common share (Note 6) $ 0.27 $ 0.24 $ 0.53 $ 0.44
Diluted earnings per common share (Note 6) $ 0.27 $ 0.23 $ 0.52 $ 0.44
Dividends per common share $ 0.11 $ 0.09 $ 0.22 $ 0.18
See Notes to Condensed Consolidated Financial Statements
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4
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
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Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
(Reviewed) (Unaudited) (Reviewed) (Unaudited)
2000 1999 2000 1999
Net Income $ 261 $ 227 $ 508 $ 428
Other comprehensive income:
Gross unrealized gains/(losses) arising
during the period - (135) (61) (203)
Adjustments for income tax (expense)/
benefit - 53 24 80
Other comprehensive income, net of tax - (82) (37) (123)
Comprehensive Income $ 261 $ 145 $ 471 $ 305
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See Notes to Condensed Consolidated Financial Statements
5
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share data)
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Three Months Ended Six Months Ended
June 30, June 30,
(Reviewed) (Unaudited) (Reviewed) (Unaudited)
2000 1999 2000 1999
Balance, beginning of period $ 10,279 $ 9,822 $ 10,151 $ 9,747
Net income 261 227 508 428
Cash dividends declared ($0.11 and $0.09 per
share, per quarter, respectively) (106) (85) (213) (170)
Issued 2,500 shares of common
stock pursuant to stock option
exercise - - 25 -
Change in net unrealized (loss) on
securities available for sale - (82) (37) (123)
Balance, end of period $ 10,434 $ 9,882 $ 10,434 $ 9,882
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See Notes to Condensed Consolidated Financial Statements
6
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FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<S> <C> <C>
Six Months Ended
June 30,
(Reviewed) (Unaudited)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 508 $ 428
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 109 117
Provision for loan losses 15 30
Deferred income tax expense(benefit) (49) 77
Amortization of security premiums (accretion) of
security discounts, net (19) (43)
(Gain) Loss on disposal of assets - (1)
(Increase) Decrease in accrued interest receivable (119) (100)
(Increase) Decrease in other assets (24) (25)
Increase (Decrease) in other liabilities (74) (139)
Net cash provided by (used in) operating activities 347 344
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held
to maturity 15 3,483
Proceeds from maturities and calls of securities
available for sale 2,000 3,002
Purchases of securities held to maturity (600) (5,453)
Purchases of securities available for sale (501) (9,910)
Principal collected on (loans made to) customers, net (8,860) (561)
Principal payments received from leases 21 2
Net (increase) decrease in interest-bearing deposits with other banks (1) (5,157)
Proceeds from sale of bank premises and equipment - 14
Purchases of bank premises and equipment (40) (25)
Net cash provided by (used in) investing activities (7,966) (14,605)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
and savings accounts (3,596) 17,081
Proceeds from sales of (payments for matured)
time deposits, net 2,100 (1,834)
Net increase (decrease) in short-term borrowings 7,681 (373)
Principal payments on long-term borrowings (7) (7)
Proceeds from sale of common stock pursuant to
stock option exercise 25 -
Dividends paid (213) (170)
Net cash provided by (used in) financing activities 5,990 14,697
Increase (decrease) in cash and cash equivalents (1,629) 436
Cash and cash equivalents:
Beginning 3,747 8,016
Ending $ 2,118 $ 8,452
(Continued)
See Notes to Condensed Consolidated Financial Statements
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7
FIRST NATIONAL BANKSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(In thousands of dollars)
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Six Months Ended
June 30,
(Reviewed) (Unaudited)
2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 1,893 $ 1,650
Income taxes $ 301 $ 211
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 106 $ 85
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See Notes to Condensed Consolidated Financial Statements
8
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Note 1. Basis of Presentation
The accounting and reporting policies of First National Bankshares Corporation, (the "Company"), 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 as of and
for the six months ended June 30, 2000 has been reviewed by our independent accountants 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 six months ended June 30, 2000 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 1999 audited financial
statements and Form 10-K.
Certain amounts in the condensed consolidated financial statements for the prior year, as previously
presented, have been reclassified to conform to current year classifications.
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at
June 30, 2000 and December 31, 1999 are summarized as follows (in thousands):
<S> <C> <C> <C> <C>
June 30, 2000
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government Agencies
and corporations $ 8,600 $ - $ 204 $ 8,396
State and political subdivisions 485 - 28 457
Total Taxable 9,085 - 232 8,853
Tax Exempt:
State and political subdivisions 3,018 12 25 3,005
Total securities held to maturity $ 12,103 $ 12 $ 257 $ 11,858
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government agencies
and corporations $ 9,499 $ - $ 394 $ 9,105
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 646 - - 646
Other equity securities 9 - - 9
Total Taxable 10,211 - 394 9,817
Tax Exempt:
Federal Reserve Bank stock 2 - - 2
Total securities available for sale $ 10,213 $ - $ 394 $ 9,819
December 31, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government agencies
and corporations $ 8,000 $ - $ 196 $ 7,804
State and political subdivisions 500 - 172 328
Total Taxable 8,500 - 368 8,132
Tax Exempt:
State and political subdivisions 3,020 21 13 3,028
Total securities held to maturity $ 11,520 $ 21 $ 380 $ 11,160
December 31, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government agencies
and corporations $ 10,978 $ - $ 333 $ 10,645
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 646 - - 646
Other equities securities 7 - - 7
Total Taxable 11,688 - 333 11,355
Tax Exempt:
Federal Reserve Bank stock 2 - - 2
Total securities held to maturity $ 11,690 $ - $ 333 $ 11,357
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of the Company's securities at June 30, 2000 are
summarized as follows (in thousands):
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due within 1 year $ 2,000 $ 1,988 $ - $ -
Due after 1 but within 5 years 9,349 9,151 9,499 9,105
Due after 5 but within 10 years 269 262 - -
Due after 10 years 485 457 - -
Equity securities - - 714 714
$ 12,103 $ 11,858 $ 10,213 $ 9,819
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 six month periods
ended June 30, 2000 and 1999 are as follows (in thousands):
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Proceeds From Gross Realized
Calls and Principal
Sales Maturities Payments Gains Losses
Six months ended June 30, 2000
Securities held to maturity $ - $ 15 $ - $ - $ -
Securities available for sale - 2,000 - - -
$ - $ 2,015 $ - $ - $ -
Six months ended June 30, 1999:
Securities held to maturity $ - $ 3,483 $ - $ - $ -
Securities available for sale - 3,002 - - -
$ - $ 6,485 $ - $ - $ -
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Note 3. Loans
Total loans as of June 30, 2000 and December 31, 1999 are summarized as follows (in
thousands):
June 30, December 31,
2000 1999
Commercial, financial and agricultural $ 32,647 $ 30,877
Real estate - construction 1,346 1,451
Real estate - mortgage 35,021 31,395
Installment loans to individuals 13,186 9,080
Other 1,654 2,225
Total loans 83,854 75,028
Less unearned income - -
Total loans net of unearned income 83,854 75,028
Less allowance for credit losses 745 764
Loans, net $ 83,109 $ 74,264
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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 three month periods
ended June 30, 2000 and 1999 and twelve months ended December 31, 1999:
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Six Months Ended
June 30, Dec 31,
2000 1999 1999
Balance, beginning of period $ 764 $ 766 $ 766
Loans charged off (53) (246) (291)
Recoveries 19 31 189
Net (losses)/recoveries (34) (215) (102)
Provision for credit losses 15 30 100
Balance, end of period $ 745 $ 581 $ 764
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The Company's total recorded investment in impaired loans at June 30, 2000 approximated
$106,000 for which the related allowance for credit losses determined in accordance with generally
accepted accounting principles approximated $8,000. 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. No such loans were classified as impaired at December 31, 1999.
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 June 30, 2000 and December 31, 1999,
and the contract amounts of commitments to lend are as follows, in thousands of dollars:
June 30, December 31
2000 1999
Commitments to extend credit $ 15,105 $ 13,903
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 965,999 and 964,515 for six month periods ended
June 30, 2000 and 1999, 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
June 30, 2000, 28,140 shares were outstanding under the stock option plan, all being fully-vested and
exercisable, with 15,470 shares remaining as available for grant.
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For the six month periods presented, basic and diluted earnings per share are calculated as follows:
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June 30, 2000
Income Shares Per Share
(Numerator) ( Denominator) Amount
Basic EPS
Income available to common shareholders $ 508,000 965,999 $ 0.53
Effect of Dilutive Securities
Stock options - 6,000
Diluted EPS
Income available to common shareholders $ 508,000 971,999 $ 0.52
June 30, 1999
Income Shares Per Share
(Numerator) ( Denominator) Amount
Basic EPS
Income available to common shareholders $ 428,000 964,515 $ 0.44
Effect of Dilutive Securities
Stock options - 5,485
Diluted EPS
Income available to common shareholders $ 428,000 970,000 $ 0.44
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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):
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Six Months Ended
June 30,
2000 1999
Net income:
As reported $508 $428
Proforma $508 $422
Basic earnings per share:
As reported $0.53 $0.44
Proforma $0.53 $0.44
Diluted earnings per share:
As reported $0.52 $0.44
Proforma $0.52 $0.44
Note 7. Major Customer: Included in the Company's short-term borrowings at December 31, 1999 was a
$2,333,000 repurchase agreement with a customer. The agreement, which carried a fixed interest rate of
5.22%, matured on April 1, 2000 and was not renewed.
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(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
<S> <C>
We have reviewed the accompanying condensed consolidated balance sheet of First National Bankshares
Corporation and subsidiary as of June 30, 2000, and the related condensed statements of income, comprehensive
income and cash flows for the six month period ended June 30, 2000 and 1999. These condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public
Accountants. A review of interim financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying
condensed financial statements referred to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance
sheet of First National Bankshares Corporation and subsidiary as of December 31, 1999, and the related
statements of income, comprehensive income, retained earnings and cash flows for the year then ended (not
presented herein); and in our report dated February 4, 2000, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as
of December 31, 1999 is fairly stated, in all material respects, in relation to the balance sheet from which it has
been derived.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
July 31, 2000
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis focused on significant changes in the financial condition and results
of operations of First National Bankshares Corporation (the "Company" ), and its subsidiary, First National Bank
for the periods indicated. This discussion and analysis should be read in conjunction with the Company's 1999
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 $261,000 for the three months ended June 30, 2000 compared to a net
income of $227,000 for the quarter ended June 30, 1999, an increase of 15.0%. For the six month period
ended June 30, 2000, the Company's net income of $508,000 increased $80,000 from the $428,000 reported
for the same period of 1999, an increase of 18.7%. The increases in quarterly and year-to-date earnings were
primarily attributable to an increase in the Company's net interest income, which is primarily the result of asset
growth over the past six months.
Basic earnings per common share was $0.27 for the quarter ended June 30, 2000 compared to $0.24 reported
for the second quarter of 1999. For the six month period ended June 30, 2000, basic earnings per common
share totaled $0.53 compared with $0.44 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
for both the three month and for the six month periods ended June 30, 2000 and 1999.
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
Interest income $ 2.19 $ 1.94 $ 0.25 $ 4.27 $ 3.79 $ 0.48
Interest expense 0.99 0.86 0.13 1.91 1.71 0.20
Net interest income 1.20 1.08 0.12 2.36 2.08 0.28
Provision for loan losses 0.02 0.03 (0.01) 0.02 0.03 (0.01)
Net interest income after
provision for loan losses 1.18 1.05 0.13 2.34 2.05 0.29
Non-interest income 0.11 0.13 (0.02) 0.22 0.24 (0.02)
Non-interest expense 0.88 0.82 0.06 1.77 1.63 0.14
Income before income taxes 0.41 0.36 0.05 0.79 0.66 0.13
Income tax expense 0.14 0.12 0.02 0.26 0.22 0.04
Net income $ 0.27 $ 0.24 $ 0.03 $ 0.53 $ 0.44 $ 0.09
The Company's annualized return on average assets (ROA) for the second quarter of 2000 was 0.97%
compared to 0.90% for the second quarter of 1999. This compares with an ROA of 0.95% and 0.85% for the
six month periods ended June 30, 2000 and 1999, respectively. Annualized return on average shareholders'
equity (ROE) was 9.57% for the second quarter of 2000 compared to 9.24% in the second quarter of 1999,
while year to date ROE was 9.31% and 8.71% as of June 30, 2000 and 1999, respectively.
NET INTEREST INCOME
The most significant component of the Company's net earnings is net interest income, which represents the
excess of interest income earned on earning assets over the interest expense paid for sources of funds. Net
interest income is affected by changes in volume resulting from growth and alteration of the balance sheet's
composition, as well as by fluctuations in market interest rates and maturities of sources and uses of funds.
For purposes of this discussion, net interest income is presented on a fully tax-equivalent basis to enhance
the comparability of the performance of tax-exempt to fully taxable earning assets. For the six month periods
ended June 30, 2000 and 1999, the tax-equivalent adjustment was $37,000 and $42,000, respectively.
15
Total interest income for the second quarter improved $242,000 over 1999's second quarter total, and for the six
months ended June 30, 2000, it has improved $470,000 or 12.7%. As illustrated in Table II, growth and
composition changes in the Company's interest earning assets contributed $331,000 or 70.4% of the increase
in total interest income, year to date. Loan growth over the past twelve months has impacted interest income
the most, where an additional $591,000 in interest was realized over 1999's six month total. An improvement
in the Company's yield on its interest earning assets from 7.72% to 8.23% accounted for the remaining increase
in interest income, year to date ($139,000). The improvement in the yield is due to the overall increase in the
interest rate environment over the past year. In an effort to minimize the Company's exposure to fluctuations in
interest rates, the Company has written the majority of its loans with variable interest rate features. Therefore,
as interest rates have risen over the past year, so has the Company's yield on such products.
For the six months ended June 30, 2000, the Company's total interest expense was $1,852,000, which is
$203,000 or 12.3% more than 1999's comparable period. Per Table II, volume and composition changes among
the interest-bearing liabilities accounted for an $85,000 increase, while the rise in interest rates accounted for
a $118,000 increase. The Company's weighted average cost of funds was 4.38% at June 30, 2000 compared
to 4.19% at June 30, 1999 and 4.15% at December 31, 1999. Significant changes which impacted interest
expense and the Company's cost of funds include: (1) Growth in a particular savings product, and (2) growth in
short-term borrowings, both of which carry higher interest rates. These increases were mitigated through interest
expense savings from the early retirement of one of its long-term borrowing obligations.
At June 30, 2000, the Company's net yield on interest earning assets ("net interest margin") was 4.57% compared
to 4.27% at June 30, 1999. The current margin compares to 4.64% at March 31, 2000. Management does not
anticipate a significant change in its yield on earning assets over the remainder of 2000; however, greater
competition for deposits in the Company's primary market area has prompted the Company to raise interest rates
on certain deposit products. In addition, loan growth has outpaced deposit growth, spurring additional short-term
borrowings, which will further impact the Company's interest expense. As a result, management anticipates its
cost of funds to increase over the remaining two quarters, causing its net interest margin to decrease. In response,
management will focus on methods to increase its non-interest income and reduce its non-interest expenses.
Further analysis of the Company's yields on interest earning assets and interest bearing liabilities and changes in
net interest income as a result of changes in average volume and interest rates are presented in Tables I and II.
</TABLE>
16
<TABLE>
<CAPTION>
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
Average Yield/ Average Yield/
Balance Interest(1) Rate Balance Interest(1) Rate
INTEREST EARNING ASSETS
Loans (2): $ 77,666 $ 3,439 8.86% $ 68,772 $ 2,936 8.54%
Securities:
Taxable 19,515 589 6.04 16,486 473 5.74
Tax-exempt 3,019 109 7.22 3,619 124 6.85
Total securities 22,534 698 6.20 20,105 597 5.94
Interest bearing deposits with
other banks 53 - - 2,099 49 4.67
Federal funds sold 911 26 5.71 4,746 111 4.68
Total interest earning
assets 101,164 4,163 8.23 95,722 3,693 7.72
NON-INTEREST EARNING ASSETS
Cash and due from banks 3,079 2,120
Bank premises and equipment 1,671 1,798
Other assets 2,183 2,035
Allowance for loan losses (753) (759)
Total assets $ 107,344 $ 100,916
INTEREST-BEARING LIABILITIES
Demand deposits $ 14,802 181 2.45 $ 13,736 160 2.33
Savings deposits 37,345 852 4.56 29,769 595 4.00
Time deposits 26,170 650 4.97 28,752 701 4.88
Total interest-bearing deposits 78,317 1,683 4.30 72,257 1,456 4.03
Short-term borrowings 5,801 155 5.34 908 13 2.86
Long-term borrowings 469 14 5.97 5,484 180 6.56
Other interest-bearing liabilities 6,270 169 5.39 6,392 193 6.04
Total interest-bearing
liabilities 84,587 1,852 4.38 78,649 1,649 4.19
NON-INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 10,987 11,547
Other liabilities 861 894
Shareholders' equity 10,909 9,826
Total liabilities and
shareholders' equity $ 107,344 $ 100,916
NET INTEREST
EARNINGS $ 2,311 $ 2,044
NET YIELD ON INTEREST EARNING
ASSETS 4.57% 4.27%
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for 2000 and 1999.
(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 $43,000 and $61,000 for 2000 and 1999, respectively.
</TABLE>
17
<TABLE>
<CAPTION>
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>
Six Months Ended
June 30, 2000 vs. June 30, 1999
Increase (Decrease)
Due to Changes in:
Volume(1) Rate(1) Total
INTEREST EARNING ASSETS
Loans $ 391 $ 112 $ 503
Securities:
Taxable 90 26 116
Tax-exempt (2) (21) 6 (15)
Total securities 69 32 101
Interest-bearing deposits with other banks (24) (25) (49)
Federal funds sold (105) 20 (85)
Total interest earning assets 331 139 470
INTEREST-BEARING LIABILITIES
Demand deposits 13 8 21
Savings deposits 165 92 257
Time deposits (64) 13 (51)
Short-term borrowings 122 20 142
Long-term borrowings (151) (15) (166)
Total interest-bearing liabilities 85 118 203
NET INTEREST EARNINGS $ 246 $ 21 $ 267
(1) - The change in interest due to both rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
(2) - Calculated on a fully tax-equivalent basis using the rate of 34%.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents charges to earnings necessary to maintain an adequate allowance
for potential future loan losses. Management's determination of the appropriate level of the allowance is based
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 second quarter of 2000, the Bank made a $15,000 provision for loan losses compared to $30,000
during the second quarter of 1999. For the six months ended June 30, 2000 and 1999, respectively, the
provision for loan losses was $15,000 and $30,000. 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 six month period ended June 30, 2000, non-interest income totaled $208,000, representing a decrease
of $24,000 from the $232,000 recorded during the same period of 1999. As a percentage of average assets,
annualized non-interest income was 0.39% and 0.46% for the six month periods ended June 30, 2000 and
1999, respectively.
18
Trust income is down $17,000 year to date compared to the prior year and is down $12,000 in the second
quarter of 2000 compared to 1999's second quarter. A decline in assets managed by the trust department has
led to the decrease. Similar variances from 1999's trust income levels are expected for the remainder of 2000.
For the quarter, service fees were $71,000 compared to $79,000 in 1999, a decline of $8,000 or 10.1%.
Overdraft fees, which account for the majority of the service fee income ($50,000 and $60,000 for 2000 and
1999, respectively), were down due to a volume variance from 1999. Year to date, service fees are down
$3,000 from the same period of 1999.
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 June 30, 2000, the Company's non-interest expense totaled $1,707,000,
representing an increase of $141,000, or 9.0%, over total non-interest expense incurred for the six months
ended June 30, 1999. On a quarter-to-quarter basis, other non-interest expense increased to $851,000, or
7.6%, for the second quarter of 2000 from $791,000 during the second quarter of 1999. Expressed as a
percentage of average assets, annualized non-interest expense was 3.2% and 3.1% for the six months ended
June 30, 2000 and 1999, 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
49.0% and 50.3% of total non-interest expense at June 30, 2000 and 1999, respectively. Salaries and
employee benefits for the six month period ended June 30, 2000 increased $49,000, or 6.2% compared to
June 30, 1999. For the quarter, salaries and employees benefits increased from $399,000 reported in 1999 to
$413,000 reported in the same period of 2000, an increase of $14,000 or 3.5%. Normal merit raises and escalating
medical insurance have accounted for both the year to date and quarter variances. Similar variances from 1999
results are expected for the remainder of 2000.
Data processing has increased $10,000 and $20,000 for the quarter and six months ended June 30, 2000,
respectively. In April 2000, the Company implemented a customer database system, which assists in
identifying product and customer profitability, that accounted for approximately $10,000 of the increase for the
six months ended June 30. The remaining increase is due to a greater volume of reports and transactions
being processed by the Company's third party processor. Beginning in August 2000, the Company will
introduce its online banking product which will further increase data processing; however, the additional
expense is not expected to be material.
Professional and legal expense increased $8,000 from the $22,000 reported in quarter end 1999. Similarly,
for the six months ended June 30, 2000, the expense is $12,000 more than the amount reported in 1999. Both
variances are due to a general increase in the fee schedules of the Company's professional and legal service
providers.
Directors' fees and shareholder expense increased from $21,000 at quarter end 1999 to $28,000 at quarter
end 2000. Year to date, the expense is $15,000 more at June 30, 2000 compared to the same period in 1999.
Directors' fees are greater in 2000 due to the net addition of one board member in 2000 compared to 1999.
Shareholder expenses are more in 2000 compared to 1999 due to the Company outsourcing its stock transfer
function to a third party. Prior to this, the expense was borne by the Company internally, namely in salaries
expense. For these reasons, similar variances are expected in the future.
INCOME TAXES
The Company's income tax expense, which includes both federal and state income taxes, totaled $252,000
for the six month period ended June 30, 2000, reflecting a $42,000 increase when compared to the same
period of 1999. Income tax expense equaled 33.2% and 32.9% of income before taxes at June 30, 2000 and
1999, 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 $111,216,000 at June 30, 2000, compared to $104,829,000 at December
31, 1999, representing an increase of $6,387,000, or 6.1%. Average assets totaled $107,344,000 during the
19
first six months of 2000, up 2.4% from the 1999 year end balance. Details concerning changes in the
Company's major balance sheet items and changes in financial condition follow.
Cash and Cash Equivalents
At June 30, 2000, cash and due from banks totaled $2,118,000 compared to $3,747,000 at December 31,
1999, a decrease of $1,629,000. Subsequent to December 31, 1999, the Company lowered its cash on hand
which was inflated due to Year 2000 liquidity contingencies. The current balance is commensurate with
historical cash requirements.
Securities and Federal Funds Sold
The Bank's total securities portfolio decreased by $955,000 or 4.2% from December 31, 1999. The decrease is
due to net maturities during the year. Due to recent increases in market rates, the estimated fair market value of
the Company's security portfolio (including held to maturity securities) is $639,000 below the portfolio's amortized
cost. The declines, which do not impact net income, are believed to be temporary, as the credit quality of the
portfolio remains strong. The majority of the portfolio consists of U.S. Government agencies and highly-rated state
and municipal bonds (Moody/S&P ratings of AA- and higher). A summary of the Company's securities portfolio
is included as Note 2 to the condensed consolidated financial statements.
It is the Bank's philosophy to minimize its involvement in overnight funds, however due to liquidity reasons (i.e.
fluctuations in loan and deposit balances), the bank may buy or sell funds on an overnight basis. The Company's
federal funds sold position was $0 at June 30, 2000. The average balance for the first half of 2000 was $ 911,000.
Strong loan growth over the past six months has aided in minimizing the Company's investment in the overnight
market. See further discussion of liquidity in the LIQUIDITY AND INTEREST RATE RISK MANAGEMENT section
below.
Loans and Related Risk Elements
Overall, the Company's loan portfolio has increased $8,826,000 or 11.8% since December 31, 1999. The
Company has increased its advertising, particularly in contiguous market areas. As a result, the Company has
been successful in growing its loan portfolio. In addition, bank consolidation in the Company's primary market area
has afforded the Company an opportunity to capitalize on new customer relationships. Additionally, the recent
move in interest rates and the fear of future increases has incited some real estate mortgage growth as loan
customers have locked in a funding source. Through the strength of its business and personal relationships, future
loan growth, primarily in high-quality commercial and commercial real estate loans and residential mortgages, is
anticipated by Bank management. Marketing efforts will continue to focus on the Bank's primary and contiguous
market areas.
The Company's largest loan portfolio is its real estate mortgage portfolio, which totaled $35,021,000 at June 30,
2000 or 41.8% of total loans outstanding, has increased $3,626,000 from year end 1999. Commercial, financial
and agricultural loans (which includes loans secured by commercial real estate) totaled $32,647,000 at June 30,
2000 and represent 38.9% of total loans outstanding at June 30, 2000. The other major portfolio is the Company's
installment loans portfolio which was $13,186,000 at quarter end and comprises approximately 15.7% of total loans
at June 30, 2000. A summary of the Bank's loans by category in comparison to year end 1999 is included in Note
3 to the condensed consolidated financial statements.
The allowance for loan losses was $745,000 at June 30, 2000 compared to $764,000 at December 31, 1999.
Expressed as a percentage of loans (net of unearned income), the allowance for loan losses was 0.89% at June
30, 2000 compared to 1.02% at December 31, 1999. 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 six month
periods ended June 30, 2000 and 1999, and December 31, 1999.
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 June 30, 2000, the unallocated portion
of the allowance was $0.
</TABLE>
20
<TABLE>
<CAPTION>
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)
June 30, December 31,
<S> <C> <C> <C>
2000 1999 1999
Loans past due 90 or more days still accruing $ - $ - $ -
NON-PERFORMING assets:
Non-accruing loans $ 24 $ 654 $ -
Other real estate owned 863 873 884
$ 887 $ 1,527 $ 884
Total non-performing assets at June 30, 2000 increased $3,000 from its December 31, 1999 balance. Included
in other real estate owned is a parcel of commercial property carried at $835,000 as of June 30, 2000. The building
and related improvements are currently leased under a three year contract. The lease is structured as a triple-net
lease, where the lessee pays all expenses associated with the property. All lease payments received under the
agreement have been applied against the carrying amount of the property under a cost-recovery method. See the
Company's financial statements included in the 1999 Form 10-K for a more detailed discussion of the lease
arrangement.
</TABLE>
<TABLE>
<CAPTION>
Deposits and Other Funding Sources
Total deposits decreased 1.7% to $87,636,000 as of June 30, 2000, from $89,132,000 at December 31, 1999.
On average, total deposits during the first six months of 2000 were $89,304,000, nearly equal to the 1999 year
end balance.
At quarter end, non-interest bearing deposits totaled $11,290,000 compared to $10,471,000 at year end 1999. On
average for the six months ended June 30, 2000, these deposits totaled $10,987,000. Interest-bearing deposits
totaled $76,346,000 at June 30, 2000, a decrease of $2,045,000 from the December 31, 1999 balance of
$78,391,000. Average interest-bearing deposits totaled $78,317,000 year to date, a decrease of $74,000 from the
1999 year end balance. Interest-bearing deposits consisted of the following at June 30, 2000 and December 31,
1999 (in thousands):
<S> <C> <C>
June 30, December 31,
2000 1999
Demand deposits $ 13,016 $ 15,549
Savings 35,788 37,400
Certificates of deposit 7,542 25,442
Total $ 76,346 $ 78,391
</TABLE>
<TABLE>
<CAPTION>
The Company has three deposit relationships, comprising of both interest and non-interest bearing deposits, that
may fluctuate significantly on a daily basis. These relationships had average outstanding balances of $3,039,000,
or 3.9% of the average total deposits for the six months ended June 30, 2000. Overall, management expects
future deposit growth to be slow over the next two quarters as the market for deposits remains very competitive.
As a result, the Company will rely on other funding sources, such as its short-term borrowings, in order to meet
liquidity needs.
Short-term borrowings consist of securities sold under agreements to repurchase ('repurchase agreements') and
Federal funds purchased. At June 30, 2000, the respective balances of each borrowing was $2,769,000 and
$9,025,000, respectively. At December 31, 1999, short-term borrowings of $4,113,000 consisted entirely of
repurchase agreements. Slow deposit growth coupled with strong loan demand has prompted additional activity
in the overnight Federal funds purchased market.
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
21
provided primarily by funds invested in cash and due from banks and federal funds sold, which totaled
$2,136,000 at June 30, 2000 versus $3,764,000 at December 31, 1999. The Company's cash position at year
end 1999 was higher than normal due to a cash buildup for Year 2000 withdrawals. 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 June 30, 2000 of $2,000,000, at amortized
cost, in debt securities maturing within one year. Also, the Company has classified additional debt and equity
securities with an estimated fair value totaling $9,819,000 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 with correspondent banks approximating $40,000,000 should the need
arise.
Interest rate risk represents the volatility in earnings and market values of interest earning assets and liabilities
resulting from changes in market rates. The Company seeks to minimize interest rate risk through
asset/liability management. The Company's principal asset/liability management strategy is gap management.
Gap is the measure of the difference between the volume of repricing interest earning assets and interest
bearing liabilities during given time periods. When the volume of repricing interest earning assets exceeds
the volume of repricing interest bearing liabilities, the gap is positive -- a condition which usually is favorable
during a rising rate environment. The opposite case, a negative gap, generally is favorable during a falling
rate environment. When the interest rate sensitivity gap is near zero, the impact of interest rate risk is limited,
for at this point changes in net interest income are minimal regardless of whether interest rates are rising or
falling. An analysis of the Company's current gap position is presented in TABLE III.
TABLE III
INTEREST RATE SENSITIVITY GAPS
June 30, 2000
(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 $ 24,005 $ 6,112 $ 11,901 $ 41,836 $83 ,854
Securities - 1,000 1,000 19,208 21,208
Interest bearing deposits with other banks 18 - - - 18
Federal funds sold - - - - -
Total interest earning assets 24,023 7,112 12,901 61,044 105,080
INTEREST-BEARING LIABILITIES
Demand deposits 13,016 - - - 13,016
Savings deposits 35,478 310 - - 35,788
Time deposits 6,785 3,665 6,283 10,809 27,542
Short-term borrowings 11,156 377 261 - 11,794
Long-term borrowings 4 4 8 450 466
Total interest-bearing liabilities 66,439 4,356 6,552 11,259 88,606
Contractual interest sensitivity gap (42,416) 2,756 6,349 49,785 16,474
Adjustment (2) 22,669 (22,669) - - -
Adjusted interest sensitivity gap $ (19,747) $ (19,913) $ 6,349 $ 49,785 $16,474
Cumulative adjusted interest sensitivity gap $ (19,747) $(39,660) $(33,311) $ 16,474
Cumulative adjusted gap ratio 0.55 0.44 0.57 1.19
Cumulative adjusted gap as a percentage
of total earning assets (18.79)% (37.74)% (31.69)% 15.68%
(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.
</TABLE>
22
<TABLE>
<CAPTION>
The preceding table reflects the Bank's cumulative one year net interest sensitivity position, or gap, as 0.57, or
$(33,311,000). Thus, the Bank is in a negative gap position within a one year time frame. This indicates that a
significant increase in interest rates within a short time frame during the next 12 months could have a significant
impact on the Bank's net interest income. However, interest rates on the majority of the Bank's interest-bearing
deposits may be changed by management at any time based on their terms. Since management believes that
repricing of interest bearing deposits in an increasing interest rate environment will generally lag behind the
repricing of interest bearing assets, the Bank's interest rate risk within one year is at an acceptable level.
The information presented in the table above represents a static view of the Bank's gap position as of June 30,
2000, 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 June 30, 2000 was $10,434,000 compared to $10,151,000 at December 31, 1999,
representing an increase of $283,000. 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 10.2% at June 30, 2000, which is higher than December 31, 1999's level of 10.0%.
Cash dividends totaling $213,000, or $0.22 per share were declared during the first half of 2000 which is 25.0%
higher than the dividend level paid during the first half of 1999. These payout levels represented approximately
41.7% and 39.7% of the Company's year-to-date earnings for the six-month periods ended June 30, 2000 and
1999, respectively.
REGULATORY RESTRICTIONS ON CAPITAL AND DIVIDENDS
The primary source of funds for the dividends paid by First National Bankshares Corporation is dividends received
from its subsidiary bank. Dividends paid by the subsidiary bank are subject to restrictions by banking regulations.
The most restrictive provision requires approval by the regulatory agency if dividends declared in any year exceed
the year's net income, as defined, plus the net retained profits of the two preceding years.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary bank to maintain
minimum amounts and ratios (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 June 30, 2000, that the subsidiary bank meets all capital adequacy requirements to which it is
subject, as evidenced by the following table:
RISK-BASED CAPITAL RATIOS
June 30, 2000
<S> <C> <C>
Minimum
Actual Requirement
Tier 1 risk-based capital ratio 13.4% 4.00%
Total risk-based capital ratio 14.3% 8.00%
Leverage ratio 9.7% 3.00%
Improved operating results and a consistent dividend program, coupled with an effective management of credit
and interest rate risk will be the key elements towards the Company continuing to maintain its present strong capital
position in the future.
YEAR 2000
Industry experts and regulatory officials have identified thirteen critical dates in which the Company must monitor
in order to verify that its critical information systems are operating properly. The Company will continue to monitor
its informational systems as future critical dates approach.
</TABLE>
23
<TABLE>
<CAPTION>
<S> <C>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 2000, the Company reached a settlement with a former employee that filed a discrimination
claim against the Company with the West Virginia Human Rights Commission. Due to confidentiality
provisions included in the agreement, the settlement amount must remain undisclosed. However,
management feels the amount of the settlement is not material to the Company's financial condition.
As of June 30, 2000, neither the Company nor its subsidiary Bank are currently involved in any material
legal proceedings, other than routine litigation incidental to their business.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item. 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of First National Bankshares Corporation was held on April 27, 2000.
A total of 724,817 shares, or 75% of outstanding shares, were voted, with 714,132 represented by proxy
and 10,685 represented in person. At this meeting, the following business was transacted:
a) Election for three-year term
D. Allen Carson, W. Bennett Fuller, G. Thomas Garten and Richard L. Skaggs were elected to
serve as Company directors for a three-year term expiring in the year 2003. Results of the
election were as follows:
TOTAL
VOTES
Nominees selected by Board of Directors
D. Allen Carson 721,642
W. Bennett Fuller 722,067
G. Thomas Garten 701,792
Richard L. Skaggs 721,617
Nominees from the Floor
None
b) Election for two-year term
Michael G. Campbell was elected to serve as Company director for a two-year term expiring in
the year 2002. Results of the election were as follows:
TOTAL
VOTES
Nominee selected by Board of Directors
Michael G. Campbell 719,717
Nominees from the Floor
None
c) The accounting firm of Arnett & Foster, P.L.L.C. of Charleston, WV was approved by the
shareholders as the Company's independent auditing firm as 722,067 shares voted for this
appointment, 2,575 shares abstained from voting and 175 votes were cast against the motion.
d) No other matters were voted upon by the shareholders at this meeting.
Item 5. Other Information
None
24
Item 6. Exhibits and Reports on Form 8-K
a) All exhibits included with this filing follow the signature page.
1. Exhibit 11, Computation of Per Share Earnings, is filed herewith.
2. Exhibit 27, Financial Data Schedule, is filed herewith.
b). The Company did not file any Form 8-K, Current Reports during the quarter ended June 30, 2000.
</TABLE>
25
<TABLE>
<CAPTION>
SIGNATURES
<S> <C>
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST NATIONAL BANKSHARES CORPORATION
By /s/
L. Thomas Bulla
President and Chief Executive Officer
By /s/
Charles A. Henthorn
Secretary to the Board of Directors
By /s/
Matthew L. Burns, CPA
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
Date: August 10, 2000
</TABLE>
26
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<S> <C>
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.
</TABLE>
