U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
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Commission file number 33-14252
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FIRST NATIONAL BANKSHARES CORPORATION
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(Exact name of registrant as specified in its chart
West Virginia 62-1306172
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cedar Street, Ronceverte, West Virginia 24970
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 647-4500
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Securities registered pursuant to Sec. 12(b) of the Act- None
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Securities registered pursuant to Sec. 12(g) of the Act- None
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Securities issued pursuant to a registrant statement which became effective
under the Securities Act of 1933-
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
[X] Not subject to Section 16(a) requirements.
As of March 1, 2000, the aggregate market value of the outstanding voting common
stock held by nonaffiliates of the registrant was $15,432,240. This value is
based on the price at which said stock was actually sold in a transaction
reported to management which took place on or about March 1, 2000, (management
believes $16.00 was paid per share), since its stock is not extensively traded,
listed on any exchange, or quoted by NASDAQ.
The total number of shares of the registrant's common stock outstanding as of
March 1, 2000 was 964,515 .
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Documents Incorporated by Reference:
Part of Form 10-K into which
Document the document is incorporated
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Articles of Incorporation, from September 30, 1999 Form 10-Q Part IV, Item 14
By-Laws, from September 30, 1999 Form 10-Q Part IV, Item 14
Material Employment Contract, from December 31, 1994 Report 10-K Part IV, Item 14
Material Lease Contract, from March 31, 1997 Form 10-Q Part IV, Item 14
S-8 Registration Statement, from July 31, 1997 Form S-8 Part IV, Item 14
Specimen Copy of Incentive Stock Option Plan Agreement, from
December 31, 1996 Report 10-K Part IV, Item 14
THIS REPORT CONTAINS 65 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 57 .
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FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
Table of Contents
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Page
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PART I
Item 1 - Business.........................................................................................3-5
Item 2 - Properties.........................................................................................6
Item 3 - Legal Proceedings..................................................................................6
Item 4 - Submission of Matters to a Vote of Security Holders................................................6
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters..............................................................................7
Item 6 - Selected Financial Data............................................................................8
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation............................................................9-22
Item 8 - Financial Statements and Supplementary Data....................................................22-49
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................................................50
PART III
Item 10 - Directors and Executive Officers of the Registrant............................................51-53
Item 11 - Executive Compensation........................................................................53-55
Item 12 - Security Ownership of Certain Beneficial Owners and
Management..................................................................................55-56
Item 13 - Certain Relationships and Related Transactions...................................................56
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements...........................................................................57
Signatures.................................................................................................58
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PART I
ITEM 1 - BUSINESS
Organizational History
First National Bankshares Corporation (referred to in this report as the
"Company") is a West Virginia corporation. It was organized on January 28, 1986,
and is a registered bank holding company under the Bank Holding Company Act of
1956, as amended.
The Company has one wholly-owned subsidiary, a national banking association
known as First National Bank (the "Bank"). The Bank was originally organized and
chartered in 1888, but was reorganized after the Great Depression and now
operates under a charter dated 1933. Pursuant to a plan of reorganization, the
Bank became a wholly-owned subsidiary of the Company on August 3, 1987. The
Company's business activities are conducted through the Bank, as the Bank
presently accounts for substantially all of the Company's assets, revenues and
earnings.
General
The Bank is a federally insured depository institution offering a wide variety
of services that are typical of full service community banks from its main
office located in Ronceverte and from its branch offices in Lewisburg and
Charleston, West Virginia. In February of 1997, the Bank relocated its Lewisburg
branch from its previously leased facility to a new bank-owned facility
approximately one mile north of the leased location.
The Bank accepts deposits primarily from customers located within its primary
market area. The Bank offers both its individual and business customers assorted
deposit products with various maturities and interest rates, including non-
interest bearing and interest-bearing demand deposits, savings deposits,
certificates of deposit, club accounts and individual retirement accounts. The
Bank offers automated teller machines (ATM's) which allow customers to make
deposits, withdraw cash, and transfer funds. In addition, the Bank offers
automated telephone banking, whereby customers can use a touch-tone telephone to
access account information and transfer funds between accounts. In January 2000
the Bank signed an agreement with an on-line banking service provider. In
cooperation with the Bank's data processor, the on-line banking service will
allow customers to access their loan and deposit accounts via the Internet. The
basic service will allow customers to review account activity and transfer funds
among their accounts. A bill pay service will also be available for those
customers wishing to pay bills electronically. A monthly service fee will be
charged customers who sign up for the service. Management expects the service to
be available in July 2000.
The Bank offers a full spectrum of lending services to its customers, including
commercial loans and lines of credit, residential real estate loans, consumer
installment loans and other personal loans. Loan terms, including interest
rates, loan to value ratios, and maturities are tailored as much as possible to
meet the needs of the borrower. Commercial loans are generally secured by
various collateral, including commercial real estate, accounts receivable and
business machinery and equipment. Residential real estate loans consist
primarily of mortgages on the borrower's personal residence, and are typically
secured by a first lien on the subject property. Consumer and personal loans are
generally secured, often by first liens on automobiles, consumer goods or
depository accounts. A special effort is made to keep loan products as flexible
as possible within the guidelines of prudent banking practices in terms of
interest rate risk and credit risk. Bank lending personnel adhere to established
lending limits and authorities based on each individual's lending expertise and
experience. The Bank does not currently participate in any indirect lending
programs. The Bank's participation in lease financing is immaterial.
When considering loan requests, the primary factors taken into consideration by
the Bank are the cash flow and financial condition of the borrower, the value of
the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
The Bank also offers a broad range of fiduciary services through its Trust
Department, including the administration of trusts and decedents' estates and
other personal and corporate fiduciary services. Personal fiduciary services
include the settlement of estates, administration of various trusts, agency or
custodial accounts, investment management and guardian services.
Market Area
The Bank's primary market area includes the cities of Ronceverte and Lewisburg
and surrounding Greenbrier County, plus Charleston and surrounding Kanawha
County. Greenbrier County is predominately rural and comprised of moderate
income households. Major employment in the area includes agriculture, tourism,
health care, education and light
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manufacturing. Unemployment rates in the Greenbrier county area often exceed the
state average, with 1999's average (seasonally adjusted) unemployment rate being
8.0% versus a West Virginia state-wide average of 6.6%. (All unemployment data
have been taken from the West Virginia State Bureau of Employment Programs
world-wide-web page.)
The Charleston branch is located in Kanawha County, West Virginia. This area is
home of the state capital and is the largest metropolitan area in West Virginia.
Primary employment is related to various professional service industries, health
care, state government, and the chemical industry. The Charleston area typically
has unemployment rates far below the state average, with Kanawha County's 1999
YTD unemployment rate being only 4.6%. The Charleston MSA is much more insulated
from economic downturns than the Greenbrier County area.
Competition
The banking and financial services business are highly competitive, especially
in the Bank's market area. The Bank's principal competitors in Greenbrier County
include four other commercial banks, each of which are owned by statewide or
regional bank holding companies. As of December 31, 1999, management estimates
that the Bank had deposits representing an estimated 20% of total deposits and
loans representing an estimated 15% of total loans of all commercial banks
servicing its market area. In addition, the Bank also competes for loans,
deposits and trust accounts with other regional banks, credit unions, savings
and loan associations, consumer finance companies, insurance companies and
direct lending agencies affiliated with Federal and state governments.
The Charleston area is serviced by the state's four largest banking
organizations, as well as several small independent banks. Currently, the
Company's market share is estimated to be less than 1% for both deposits and
loans.
The increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. In order
to compete with the other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized services
tailored to meet its customers' needs.
The Bank generates new business primarily through newspaper and radio
advertising, referrals and direct-calling efforts. Referrals for new business
come from Company directors, present customers of the Bank and professionals
such as attorneys and accountants. See further discussion of competition in the
following section under GRAMM-LEACH-BLILEY FINANCIAL MODERNIZATION ACT.
Supervision and Regulation
The Company is subject to regulation under the Bank Holding Company Act of 1956,
as amended ("the Act"). The Act requires the prior approval of the Federal
Reserve Board for a bank holding company to acquire or hold more than a 5%
voting interest in any bank. The Act further restricts bank holding company
non-banking activities to those which are determined by the Federal Reserve
Board to be closely related to banking and a proper incident thereto.
The Bank is a national banking association chartered under the laws of the
United States. As such, the operations of the Bank are subject to the
regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation ("the FDIC")
and West Virginia law. The Bank is also subject to periodic examination by the
Comptroller of the Currency.
Capital Standards - The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet, such as assets,
and transactions that are recorded as off-balance sheet items, such as letters
of credit and recourse arrangements. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off-balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred
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stock, long term preferred stock, eligible term subordinated debt and certain
other instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital is subject to certain other requirements and limitations of
the federal banking agencies. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio.
Failure to meet applicable capital guidelines could subject the Company to a
variety of enforcement remedies available to the federal regulatory authorities,
including limitations on the ability to pay dividends or the issuance of a
directive to increase capital, and termination of deposit insurance by the FDIC.
Regulatory capital ratios of the Bank are set forth in Note 14 to the
Consolidated Financial Statements which are included in Item 8 of this filing.
Federal Deposit Insurance Corporation Improvement Act of 1991 - In December
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Corporation Act and made revisions
to several other banking statutes.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well-capitalized, adequately-capitalized, undercapitalized,
significantly-under-capitalized and critically-under-capitalized.
By regulation, an institution is "well-capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk- based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. The Company's banking subsidiary was a
"well-capitalized" institution as of December 31, 1999.
Another requirement of FDICIA is that federal banking agencies must prescribe
regulations relating to various operational areas of banks and bank holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, and such other standards as the agency deems
appropriate.
Community Reinvestment Act - The Bank is subject to the provisions of the
Community Reinvestment Act ("CRA") which requires banks to assess and help meet
the credit needs of the community in which the bank operates. The OCC examines
the Bank to determine its level of compliance with CRA. The OCC and the Federal
Reserve Board are required to consider the level of CRA compliance when
regulatory applications are reviewed. In its most recent CRA examination, the
Company's banking subsidiary was given an "outstanding" CRA rating.
Reigle-Neal Interstate Banking Bill - In 1994, Congress passed the Reigle-Neal
Interstate Banking Bill (the "Bill"). This Bill permitted certain interstate
banking activities through a holding company structure, effective September 30,
1995. It permits interstate branching by merger effective June 1, 1997, unless
states "opt-out" before that date. In March 1996, West Virginia adopted changes
to its banking laws so as to permit interstate banking and branching to the
fullest extent permitted by the Bill. The Bill will also permit consolidation of
banking institutions across state lines and perhaps de novo entry. One result of
the Bill could be increased competitiveness, due to the realization of economies
of scale and/or de novo market entrants, where permitted.
Deposit Acquisition Limitation - Under West Virginia law, an acquisition or
merger is not permitted if the resulting depository institution or its holding
company would assume additional deposits to cause it to control deposits in the
State of West Virginia in excess of twenty five percent (25%) of the total
amount of all deposits held by insured depository institutions in West Virginia.
This limitation may be waived by the Commissioner of Banking for good causes
shown.
Monetary Policies - The monetary policies of regulatory authorities, including
the Federal Reserve Board, have a significant effect on the operating results of
banks and bank holding companies. The nature of future monetary policies and the
effect of such policies on the future business and earnings of the Company and
the Bank cannot be predicted.
Gramm-Leach-Bliley Financial Services Modernization Act - Enacted on November
12, 1999, the Act repeals two provisions of the Glass-Steagall Act that have
separated banking, insurance, and securities activities for the latter two-
thirds of this century. The law creates a new financial services structure, the
financial holding company, under the Bank Holding Company Act. Financial
companies will be able to engage in any activity that is deemed "financial in
nature." Therefore, banks will be able to affiliate with securities firms and
insurance companies within the same financial holding
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company and, through that structure, bring a broad array of financial products
to the marketplace, including traditional banking products, investment products,
insurance, and mutual funds.
Under the new law, it can be expected that the larger banks will merge with
brokerage and insurance companies and make further inroads into local markets.
Technology has broken down the geographic boundaries around a bank's territory
and has made it easier for larger banks with significant resources to build
market share. To combat this, management plans to "reinvent" itself by looking
into offering other lines of business, such as insurance. Although the new law
clearly creates healthy competition, it also creates new opportunities for the
Company.
Employees
At December 31, 1999, the Bank employed 38 full-time and 1 part-time employees.
The Company has no employees who are not also employees of the Bank. Such
employees are not represented by any collective bargaining unit, and management
believes its employee relations are good.
Statistical Information
The disclosures required by Industry Guide 3 - Statistical Disclosure by Bank
Holding Companies are included in "Item 6 - Selected Financial Data" on page 8
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 9 to 22 of this report.
ITEM 2 - PROPERTIES
The Bank owns its principal office at One Cedar Street in Ronceverte, West
Virginia. The building, which approximates 7,700 square feet in size, is fully
used by the Bank in its operations. It also owns an adjacent drive-in banking
facility that provides drive-in services, as well as customer parking for the
principal office of the Bank.
The Lewisburg branch is located on U.S. 219, approximately two miles north of
the Lewisburg city limits. The facility, which approximates 2,100 square feet,
was constructed in 1997 following the expiration of a lease arrangement on a
similar facility in Lewisburg, which the Bank occupied from 1986 to January
1997.
The Charleston branch is located in Laidley Tower, a multi-story office building
in downtown Charleston, WV. Effective May 1, 1996, the Company entered into a
10-year noncancellable lease agreement to occupy approximately 4,532 square feet
of the building. Additional information related to this lease can be found in
Note 12 of the Notes to Consolidated Financial Statements which is included in
Item 8 of this filing.
The Bank's properties and leased facilities are considered well suited for its
current needs. Both the main office located in Ronceverte, WV, and the branch
location in Lewisburg, WV, have full-service banking available, including
drive-in banking services. Space at both locations is ample, and no significant
modifications are required at either location. The branch facility in Charleston
is also a full-service branch offering the same services as the other locations,
except it offers no drive-in banking services.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in a human rights complaint, whereby a former employee
has alleged discrimination against the Company. A trial date of July 2000 is
expected. 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 normal business operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1999.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2000, the Company's common stock was held by approximately 485
stockholders of record.
There is no active or organized trading market for the common stock of the
Company. The stock of the Company is traded on a limited basis in privately
negotiated transactions. At present, there is no market maker for the Company's
common stock. Accordingly, bid and ask prices are not available for the stock of
the Company and the prices shown below may not be indicative of prices which
would prevail if the stock were more actively traded.
While management occasionally knows of the actual price paid for its common
stock in a transaction, management is not aware of prices paid in most, and
sometimes all, sales of the Company stock since such transactions are privately
negotiated. However, in some of these transactions, individuals have called the
Company and asked for a value for its common stock. In response to such
inquiries, the Company provides the individual with the book value of its common
stock as of the end of the most recent quarter, as well as the most recent price
per share paid in transactions reported to management. Stock trades during 1999
that were reported to management took place at $15.00 to $16.00 per share, with
the most recent reported transactions having a per share price of $16.00. Since
trades reported to management are infrequent, and private trades may be
conducted which are not reported to management, no representations can be made
regarding the fair value. Accordingly, the following high and low prices are the
book values of a share of the Company's common stock at the beginning and end of
each of the quarters as shown below.
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Book Value Book Value
1999 1998
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High Low High Low
First Quarter $ 10.16 $ 10.15 $ 9.86 $ 9.81
Second Quarter 10.25 10.22 9.88 9.71
Third Quarter 10.36 10.33 9.93 9.81
Fourth Quarter 10.55 10.42 10.11 10.02
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A summary of dividends per share declared during 1999 and 1998 follows:
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1999 1998
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First Quarter $ 0.09 $ 0.08
Second Quarter 0.09 0.08
Third Quarter 0.09 0.08
Fourth Quarter 0.15 0.09
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The Company plans to continue the pattern of declaring quarterly dividends in
the future at a rate consistent with its historical payout ratios.
Payment of dividends by the Company is dependent upon payments to it from the
subsidiary bank. The ability of the subsidiary bank to pay dividends is subject
to certain limitations under banking regulations. These limitations are
discussed in Note 14 of the Notes to Consolidated Financial Statements, which
are included in Item 8 of this filing.
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ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
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1999 1998 1997 1996 1995
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SUMMARY OF OPERATIONS
Interest income $ 7,707 $ 7,564 $ 7,041 $ 6,166 $ 5,688
Interest expense 3,390 3,372 3,077 2,393 2,115
Net interest income 4,317 4,192 3,964 3,773 3,573
Provision for loan losses 100 449 31 -- -
Non-interest income 455 445 422 433 415
Non-interest expense 3,175 3,167 3,087 3,140 2,920
Income before income taxes 1,497 1,021 1,268 1,066 1,068
Income before cumulative effect of
change in accounting principle 1,002 724 792 736 767
Net income 1,002 724 792 736 767
PER SHARE DATA
Income before cumulative effect of
change in accounting principle $ 1.04 $ 0.75 $ 0.82 $ 0.76 $ 0.80
Net income:
Basic 1.04 0.75 0.82 0.76 0.80
Diluted 1.03 0.75 0.82 0.76 0.80
Cash dividends declared 0.42 0.33 0.32 0.28 0.24
Book value per share 10.52 10.11 9.69 9.19 8.74
AVERAGE BALANCE SHEET SUMMARY
Loans, net of unearned
discount and reserve $ 69,835 $ 68,696 $ 63,620 $ 48,037 $ 41,853
Securities 23,460 17,375 18,646 23,341 27,321
Deposits 88,821 78,949 75,149 69,838 66,367
Long-term Debt 3,439 5,494 3,862 - -
Shareholders' equity 9,941 9,543 9,239 8,672 8,223
Total assets 104,591 96,442 90,824 79,985 75,351
AT YEAR END
Loans, net of unearned
discount and reserve $ 74,264 $ 68,671 $ 69,108 $ 52,800 $ 45,773
Securities 22,876 17,866 17,311 22,617 24,015
Deposits 89,132 81,221 78,336 73,316 66,166
Long-term Debt 473 5,488 5,500 - -
Shareholders' equity 10,151 9,747 9,325 8,841 8,415
Total assets 104,829 98,353 95,430 83,668 75,455
SELECTED RATIOS
Return on average assets 0.96% 0.75% 0.87% 0.92% 1.02%
Return on average equity 10.08 7.59 8.57 8.49 9.33
Average equity to average assets 9.50 9.90 10.17 10.84 10.91
Dividend payout ratio 40.38 43.64 38.92 36.35 30.12
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ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of the Company for the applicable
periods covered by the consolidated financial statements appearing in Item 8 of
this report. The statements contained in this discussion may include
forward-looking statements based on management's current expectations, and
actual results may differ materially. This discussion and analysis should be
read in conjunction with such financial statements and the accompanying notes
thereto. Certain amounts in this discussion, as previously presented, have been
reclassified for prior years to conform to current year classifications. Amounts
and percentages have been rounded for purposes of discussion.
First National Bankshares Corporation (the "Company"), incorporated under the
laws of the State of West Virginia in 1986, is a one bank holding company
headquartered in Ronceverte, West Virginia. The Company owns 100% of the
outstanding common stock of First National Bank ("the Bank"), which comprises
substantially all of the Company's assets and liabilities, and from which the
Company presently derives all of its earnings.
Earnings Summary
The Company reported net income of $1,002,000 for 1999, representing an increase
of $278,000 or 38.4% over the $724,000 reported for 1998. The increase in 1999
earnings was largely attributable to a $349,000 decrease in the provision for
loan losses over 1998's level. The increase in earnings was further aided by a
$125,000 increase in net interest income. The various factors significantly
influencing results of operations are included in the following discussion.
On a per share basis, net income was $1.04 in 1999, $0.75 in 1998, and $0.82 in
1997. An analysis of the changes in earnings per share by major statement of
income component is presented in the following table:
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1999 1998
vs. vs.
1998 1997
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Basic earnings per common share, prior year $ 0.75 $ 0.82
Increase (decrease) from changes in:
Net interest income 0.13 0.24
Provision for loan losses 0.36 (0.43)
Other income 0.01 0.03
Other expenses (0.01) (0.08)
Income taxes (0.20) 0.17
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Basic earnings per common share $ 1.04 $ 0.75
========= ==========
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Return on average assets (ROA), a measure of how effectively the Company
utilizes its assets to produce net income, was 0.96% for 1999, compared to 0.75%
for 1998 and 0.87% for 1997. Return on average equity (ROE), which measures
earnings performance relative to the total amount of equity capital invested in
the Company, was 10.08% in 1999, 7.59% in 1998, and 8.57% in 1997.
Net Interest Income
The most significant component of the Company's net earnings is net interest
income, which represents the excess of interest income earned on loans,
securities and other interest earning assets over interest expense on deposits
and borrowings. Net interest income is influenced by changes in volume resulting
from growth and alteration of the balance sheet's composition, as well as by
fluctuations in market interest rates and maturities of sources and uses of
funds. Net interest income is presented and discussed in this section on a fully
Federal tax-equivalent basis to enhance the comparability of the performance of
tax-exempt securities to other fully taxable earning assets. For the years ended
1999, 1998, and 1997, tax-equivalent adjustments of $84,000, $91,000 and
$102,000, respectively, are included in interest income, and were computed
assuming a tax rate of 34.0% in all periods.
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1999 Versus 1998
The Company's net interest income on a fully tax-equivalent basis totaled
$4,401,000 for the year ended December 31, 1999 compared to $4,283,000 for the
same period of 1998, representing an increase of $118,000 or 2.76%. As
illustrated in Table I, the Company's net yield on interest earning assets
decreased from 4.69% in 1998 to 4.45% in 1999. The yield on interest earing
assets declined from 8.39% in 1998 to 7.88% in 1999. A lower interest rate
environment, coupled with repricing loan, security and overnight investment
portfolios led to the fifty-one basis point decline.
The yield on the Company's loan portfolio declined thirty-nine basis points from
1998 to yield 8.73% for the year ended 1999. As a tool to manage interest rate
risk, a majority of the Company's loan portfolio is written with variable or
floating interest rate features, whereby loan interest rates are repriced at
specified time intervals based upon a predetermined index rate. An overall
decline in the index-rates, such as the prime rate, at or near year end 1998 had
a significant impact on the loan portfolio yield in 1999. As illustrated in
Table II, the decline in the loan portfolio yield equated to a $271,000 decline
in interest income. For all interest earning assets, the decline in the interest
rate environment equated to a decrease in interest income of $333,000.
The decline in the interest rate environment had a similar impact on the
Company's interest bearing liabilities, where the weighted average rate dropped
thirty-one basis points to 4.15% for the year ended 1999. The decrease in rates
paid on the Company's deposit products and short-term borrowings equated to
interest expense savings of $128,000 in 1999. As illustrated in Table I, the
rate on long-term borrowings increased from 6.61% in 1998 to 7.50% in 1999.
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%. Because of the rise in
interest rates in July 1999, it became advantageous for the Company to retire
the debt with excess funds from overnight investments. Since the retirement of
the debt, the Company has recouped the cost of the interest penalty via interest
savings, and in total, will save approximately $22,000, pretax.
As discussed above, the volume and composition of interest-bearing assets and
liabilities will impact interest income. As shown in Table II, volume variances
among the interest earning assets increased interest income $469,000, which more
than negated the impact of the lower interest rate environment discussed above.
Volume variances among the interest-bearing liabilities equated to additional
interest expense of $102,000, and nearly negated the interest savings from the
decreased rate environment discussed above. The volume increase in savings
deposits had the most significant impact on the Company's interest expense,
where the volume increase equated to an increase in interest expense of
$251,000. The volume increase is primarily related to a single savings deposit
product that offers a tiered interest rate that is tied to the prime rate as
published in the Wall Street Journal. In 1999, the savings product grew
approximately $11,109,000 from its outstanding balance at December 31, 1998,
with the bulk of the growth being paid at the maximum tiered rate. A portion of
the growth has been funded through depositors shifting money from certificates
of deposit (as they mature) and other lower yielding demand deposit accounts.
Management expects the growth trend to continue in 2000 with similar impacts on
interest expense.
1998 Versus 1997
As detailed in Table II, growth in the Company's interest earning assets led to
an increase in interest income of approximately $503,000 over 1997's level. The
majority of the increase came from loan growth, where growth in the average
volume of outstanding loans equated to an increase in interest income of
approximately $529,000. This increase was mitigated by a similar increase in
interest expense due to growth in the Company's interest-bearing liabilities.
The most significant items were the growth in savings deposits and the growth in
long-term borrowings. See below for further discussion of the savings growth.
The growth in long-term borrowings and the related interest expense is due to
the debt being outstanding for all of 1998 compared to nine months of 1997. See
the LONG-TERM BORROWINGS section below for further discussion of this funding
source.
In contrast to the 1999 versus 1998 discussion above, changes in the interest
rate environment did not have a significant impact on 1998's net interest
income. As presented in Table II, the change in the interest rate environment
equated to a decrease in net interest income of $23,000. The largest impact was
experienced in the savings products, where the weighted average interest rate
increased from 3.46% in 1997 to 4.20% in 1998 (See Table I). This increase is
the result of growth in a particular savings product that pays a higher interest
rate on the depositors' average available balance, relative to the lower
interest rate savings products offered by the Company, such as passbook savings
accounts. The higher interest rate on this product, coupled with the volume
growth, increased the Company's interest expense $236,000 over 1997's expense.
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.
10
<TABLE>
<CAPTION>
TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
<S> <C>
1999 1998 1997
-------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- --------- -------- ------- --------- -------- -------- -------- -------
INTEREST EARNING ASSETS
Loans, net of unearned discount (1) $ 70,540 $ 6,158 8.73% $69,420 $ 6,328 9.12% $ 63,620 $ 5,811 9.13%
Securities:
Taxable 19,946 1,149 5.76 13,712 819 5.97 14,527 841 5.79
Tax-exempt (2) 3,514 248 7.06 3,663 267 7.29 4,119 303 7.36
--------- --------- ------- --------- -------- ------- ------- ------- -------
Total securities 23,460 1,397 5.95 17,375 1,086 6.25 18,646 1,144 6.13
--------- --------- ------- -------- -------- ------- ------- ------ ------
Interest-bearing deposits with othe banks 1,558 75 4.81 - - - - - -
Federal funds sold 3,353 161 4.80 4,474 241 5.39 3,447 190 5.51
---------- ---------- -------- -------- -------- ------- -------- ------ -------
Total interest earnings assets 98,911 7,791 7.88 91,269 7,655 8.39 85,713 7,145 8.33
----------- ---------- -------- ------- -------- ------- -------- ------ -------
NON INTEREST EARNING ASSETS
Cash and due from banks 2,586 2,305 2,554
Bank premises and equipment 1,753 1,980 2,092
Other assets 2,046 1,612 1,104
Allowance for loan losses (705) (724) (639)
----------- ---------- ----------
Total assets $ 104,591 $ 96,442 $ 90,824
=========== ========== =========
INTEREST-BEARING LIABILITIES
Demand deposits $ 16,562 $ 392 2.37 $12,445 310 2.49 $ 12,953 344 2.66
Savings deposits 32,338 1,335 4.13 26,266 1,104 4.20 22,108 868 3.46
Time deposits 27,861 1,350 4.84 29,892 1,536 5.14 29,992 1,543 5.14
---------- --------- ------- ------- ------ -------- -------- --------- ---------
Total interest bearing deposits 76,761 3,077 4.01 68,603 2,950 4.30 65,053 2,755 4.24
Short-term borrowings 1,508 55 3.65 1,574 59 3.75 1,552 63 4.06
Long-term borrowings 3,439 258 7.50 5,494 363 6.61 3,862 259 6.71
--------- --------- ------ ------- ------ ------ ----- -------- ---------
Total interest bearing
liabilities 81,708 3,390 4.15 75,671 3,372 4.46 70,467 3,077 4.37
NON INTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 12,060 10,346 10,096
Other liabilities 882 882 1,022
Shareholders' equity 9,941 9,543 9,239
----------- ---------- ----------
Total liabilities and
shareholders' equity $ 104,591 $ 96,442 $ 90,824
=========== ========== ==========
NET INTEREST EARNINGS $ 4,401 $ 4,283 $ 4,068
=========== =========== ==========
NET YIELD ON INTEREST EARNING ASSETS 4.45% 4.69% 4.75%
======== ======== =======
(1) - For purposes of this table, nonaccruing loans are included in average loan
balances. Loan fees are also included in interest income.
(2) - Computed on a fully Federal tax-equivalent basis using the rate of 34% for
all years.
11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
CHANGE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1999 vs. 1998 1998 vs 1997
----------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
INTEREST EARNING ASSETS
Loans $ 101 $ (271) $ (170) $ 529 $ (12) $ 517
Securities:
Taxable 359 (30) 329 (48) 26 (22)
Tax-exempt (2) (10) (8) (18) (33) (3) (36)
----------- ---------- ----------- ---------- ---------- ----------
Total securities 349 (38) 311 (81) 23 (58)
----------- ---------- ----------- ---------- ---------- ----------
Interest bearing deposits with
other banks 75 - 75 - - -
Federal funds sold (56) (24) (80) 55 (4) (51)
----------- ---------- ----------- ---------- ---------- ----------
Total interest earning assets 469 (333) 136 503 7 510
----------- ---------- ----------- ---------- ---------- ---------
Interest-bearing LIABILITIES
Demand deposits 98 (16) 82 (13) (21) (34)
Savings deposits 251 (20) 231 172 64 236
Time deposits (101) (85) (186) (5) (2) (7)
Short-term borrowings 3 (7) (4) 2 (7) (5)
Long-term borrowings (149) 44 (105) 108 (4) 104
----------- ---------- ----------- --------- ---------- ---------
Total interest-bearing liabilities 102 (84) 18 264 30 294
----------- ---------- ----------- ---------- ---------- ---------
NET INTEREST EARNINGS $ 367 $ (249) $ 118 $ 239 $ (23) $ 216
=========== ========== =========== ========== ========== =========
(1) - The change in interest due to both rate and volume has been allocated between the factors in proportion to
the relationship of the absolute dollar amounts of the change in each.
(2) - Calculated assuming a fully tax-equivalent basis using the rate of 34%.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision for Loan Losses
The provision for loan losses represents charges to earnings necessary to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. Management
considers various factors in determining the amount of the provision for loan
losses including overall loan quality, changes in the mix and size of the loan
portfolio, previous loss experience and general economic conditions.
During 1999, the Company made a provision for loan losses of $100,000. This
compares to a provision for loan losses of $449,000 and $31,000 made in 1998 and
1997, respectively. During 1998, an increased provision was necessary due to a
significant charge-off on a commercial real estate loan, as well as an increase
in the specific allocation for a previously reserved credit. For additional
discussion of these factors and the related allowance for loan losses account,
refer to the LOAN AND RELATED RISK ELEMENTS section of this discussion.
Non-interest Income
Non-interest income includes revenues from all sources other than interest
income and yield related loan fees. Non- interest income totaled $455,000,
$445,000, and $422,000 for the years ended December 31, 1999, 1998, and 1997, or
5.57%, 5.56%, and 5.65% of total income, respectively. 1999's non-interest
income of $455,000 was up 2.2% and 7.8% from December 31, 1998 and 1997 levels,
respectively. The following table (in thousands) details the components of
non-interest income earned by the Company in 1999, 1998, and 1997, as well as
the percentage increase (decrease) in each over the prior year.
12
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998 1997
----------------------------------------------------------------
Percent Percent
Amount Change Amount Change Amount
Trust department income $ 62 (27.9)% $ 86 32.3 % $ 65
Service fees and commissions 300 21.0 248 (4.6) 260
Securities gains (losses), net (1) - - - -
Other 94 (15.3) 111 14.4 97
----- --------- ------ -------- -------
Total $ 455 2.2% $ 445 5.5% $ 422
========= ======== ======= ======== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Versus 1998
Trust income decreased $24,000 in 1999 compared to 1998 and was nearly equal to
1997's income level of $65,000. During 1999, a single large estate, which had
been administered by the Bank's trust department throughout 1998, was partially
settled in July 1999 and was later fully settled by year end. Therefore, on
average, total assets administered by the Bank's trust department was less in
1999 versus 1998; leading to the decrease in fee income. Management anticipates
trust income to be comparable to 1999's level in 2000. Service fees and
commissions increased $52,000, or 21.0% to $300,000 in 1999. The increase is the
result of the Company implementing a new fee schedule on certain demand deposit
accounts. Management will continue to seek new ways of increasing the Company's
fee income in the future through new product offerings and the restructuring of
existing products. Other income decreased $17,000 from 1998 and was nearly equal
to 1997's level of $97,000. Included in 1998's amount were gains totaling
$23,000 realized on the sale of repossessed property. Although the Company
engages in the foreclosure and sale of such property during the ordinary course
of business, such gains or losses realized from time to time are unusual and are
not expected to be a significant source of income in the future.
1998 Versus 1997
Trust income was $21,000 greater in 1998 compared to 1997. As discussed above,
the increase was due to the Company administering a single large estate during
1998. Service fees and commissions decreased by $12,000, or 4.6% to $248,000 in
1998. The Company did not experience comparable levels of overdrafts, etc. in
1998 compared to 1997, therefore, the decrease occurred. Deposit customers have
become very attuned to service charges assessed on deposit accounts. As a
result, they are keeping larger account balances on hand in order to avoid fees
and/or overdraft charges. As such, a general decline in service fee income
resulted. Other income increased $31,000 from 1997. As discussed above, the
increase in 1998 was due to gains totaling $23,000 realized on the sale of
repossessed property.
Non-interest Expense
Non-interest expense comprises overhead costs which are not related to interest
expense or to losses from loans or securities. The following table itemizes the
primary components of non-interest expense for 1999, 1998 and 1997, and the
percentage increase (decrease) in each over the prior year. A discussion of the
material changes among the years presented also follows the table (in
thousands).
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------
Percent Percent
<S> <C> <C> <C> <C> <C>
Amount Change Amount Change Amount
Salaries and employee benefits $ 1,603 4.0 % $ 1,542 (5.9)% $ 1,639
Net occupancy expense 270 (4.6) 283 1.1 280
Equipment rental, depreciation
and maintenance 280 (4.8) 294 16.7 252
Federal deposit insurance premiums 13 44.4 9 28.6 7
Data processing 183 (6.2) 195 46.6 133
Advertising 67 3.1 65 (15.6) 77
Professional & legal 97 (39.8) 161 56.3 103
Mailing and postage 74 (2.6) 76 0.0 76
Directors' fees and
shareholders' expense 108 8.0 100 (2.0) 102
Stationery and supplies 80 12.7 71 (25.3) 95
Other 400 7.8 371 14.9 323
----------- ---------- ----------- ----------- --------
Total $ 3,175 0.3 % $ 3,167 2.6 % $ 3,087
============= =========== ============= =========== =============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
13
1999 Versus 1998
Salaries and employee benefits represent the Company's largest non-interest
cost, comprising approximately 50.5% of total non-interest expense in 1999 and
48.7% in 1998. Salaries and employee benefits increased $61,000, or 4.0%, from
1998. The increase was due in part to the Company reinstating the executive
incentive plan in 1999, which was previously suspended in 1998. Under the plan
in 1999, approximately $104,000 was expensed compared to $0 in 1998. The
increase from the above plan was mitigated by a decrease in salaries expense of
approximately $18,000. The decrease in salaries was due to the Company having
less full-time equivalent staff employed in 1999 compared to 1998. The decrease
in staff was a result of retirements and voluntary resignations. At year end,
the Company was fully staffed and future savings of this nature are not expected
to occur in 2000.
Net occupancy expense decreased $13,000, or 4.6%, from 1998's total. The
decrease is the result of a lower depreciation charge in 1999 versus 1998, as
several fixed assets have become fully depreciated. Equipment rental,
depreciation and maintenance expense decreased $14,000, or 4.8%, from 1998. In
response to the Company's Year 2000 readiness, the Company incurred
approximately $17,000 more in noncapital expenditures for the replacement and
remediation of various information and non-information systems in 1998 versus
1999.
Data processing totaled $183,000 for the year ended 1999, which is $12,000 less
than the amount incurred in 1998. The Company incurred Year 2000 testing charges
of $30,000 in 1998 which accounted for a portion of the decrease. No such
expenditures were incurred in 1999. The decrease was mitigated by a general
increase in the fees assessed by the Company's data processor.
Professional and legal expense decreased $64,000 from the $161,000 reported in
1998. In 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. Although the
Company was involved in similar proceedings in 1999, all of which were incurred
in the normal course of business, none were of the magnitude of the items
incurred in 1998.
Director's fees and shareholder expense increased $8,000, or 8.0%, from 1998 to
total $108,000 for the year ended 1999. Additional director's fees and
shareholder expense were incurred in 1999 due to the following: (1) the Company
outsourced its stock transfer duties to a third party vendor, (2) a special
shareholder meeting was held in September 1999 whereby the Articles of
Incorporation and Bylaws of the Company were amended, (3) additional
expenditures were incurred with the 5 for 1 stock split, and (4) the Board of
Directors increased the number of board members to twelve and appointed two new
directors in September 1999. With the changes above, the Company expects its
Year 2000 expense to increase over 1999's, namely due to the addition of the
stock transfer agent (this expense was borne by the Company in the past) and the
additional directors.
Stationery and supplies expense totaled $80,000 in 1999 compared to $71,000 in
1998, an increase of 12.7%. The increase was namely due to the company
stockpiling supplies and forms at year end in the event of Year 2000
interruptions. Included in this line item are noncapital purchases of various
office software products. In 1999, the Company upgraded a number of these
products in order for them to be Year 2000 compliant. For 2000, management
expects stationery and supplies expense to be more in line with the expense
incurred in 1998.
1998 Versus 1997
Salaries and employee benefits decreased $97,000 in 1998, or 5.9%, from 1997's
level. The decrease was due in part to the Company having approximately three
fewer full-time equivalent staff employed in 1998 compared to 1997. The decrease
in staff was a result of retirements and voluntary resignations. This decrease
was further aided by the temporary suspension of the executive incentive plan in
1998, whereas $75,000 was incurred under the plan in 1997. The aforementioned
items were mitigated by normal merit raises for the existing staff and a general
increase in the cost of benefit programs offered to all employees of the
Company.
Equipment rental, depreciation and maintenance expense increased $42,000 or
16.7% over 1997's total. In response to the Company's Year 2000 readiness, the
Company upgraded several computers and related equipment in 1998 by entering
into an operating lease arrangement with a supplier. Although the lease payments
would have nearly offset the depreciation on the equipment had it been
purchased, the bulk of the computer equipment replaced was fully depreciated.
Therefore, the lease payments added to the expense incurred in 1998. Overall,
depreciation expense was higher in 1998 due to a full year's depreciation on
1997's acquisitions. A large amount of property, plant and equipment was
acquired in 1997 due to equipping the new branch in Lewisburg.
Data processing expense increased $62,000 or 46.6% from 1997. As discussed
above, the Company incurred approximately $30,000 in 1998 due to expenses for
testing its data processing function for Year 2000 compliancy. The remaining
increase over 1997 is due to the significant growth in the number of loan and
deposit accounts processed. The growth in the number of accounts over the past
two years has been stimulated by the addition of the Charleston branch and new
deposit products.
14
<PAGE>
Legal and professional fees increased $58,000 or 56.3% from 1997. During 1998,
the Company incurred approximately $56,000 in legal and professional fees
associated with its unsuccessful merger discussions with a bank holding company.
No further legal and professional fees associated with the aforementioned merger
discussions will be incurred as the Company terminated the merger negotiations.
Income Taxes
The Company's income tax expense, which includes both Federal and state income
taxes, totaled $495,000 or 33.1% of pretax income in 1999, compared to $297,000
or 29.1% in 1998, and $476,000 or 37.5% in 1997. For financial reporting
purposes, income tax expense does not equal the Federal statutory income tax
rate of 34% when applied to pretax income, primarily because of State income
taxes and interest income derived from tax-exempt securities. Additional details
relative to the Company's income taxes are included in Note 9 to the
accompanying consolidated financial statements.
Changes in Financial Position
Total assets increased $6,476,000 or 6.58% to $104,829,000 at year end 1999
compared to $98,353,000 at year end 1998. Average total assets also increased,
up 8.45% from $96,442,000 during 1998 to $104,591,000 during 1999. TABLE I
presents the Company's average balance sheet composition for the years ended
1999, 1998 and 1997.
A discussion of the significant fluctuations in components of the Company's
balance sheet follows.
Securities
The Company's security portfolio consisted of available or sale and held to
maturity securities. Securities classified as available for sale are carried at
fair value with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income taxes, while held to maturity
securities are carried at amortized cost. The Company does not hold any
securities for trading purposes. At year end 1999, approximately 50% of the
securities (based on amortized cost) were classified as available for sale. This
compares to 51% in 1998. As a general rule, the Company classifies all new
security purchases as available for sale as this portfolio adds to the Company's
flexibility in meeting liquidity needs, should they arise.
The total securities portfolio increased $5,010,000 or 28.04% to $22,876,000 at
December 31, 1999, compared to December 31, 1998. Similarly, average total
securities increased from $17,375,000 during 1998 to $23,460,000 during 1999, an
increase of 35.02%. As discussed in more detail in the Deposits section below, a
significant increase in deposits aided the Company's increase in its security
portfolio by providing excess funds. Management opted to invest in short-term
U.S. Government bonds and agencies to maximize its yield without compromising
liquidity.
At year end 1999, the Company had an unrealized loss on securities classified as
available for sale of approximately $333,000. This compares to an unrealized
loss of approximately $11,000 in 1998. The increase in the unrealized loss over
1998's level is a function of the weighted average yield and maturity of the
available for sale portfolio, relative to market interest rates available on
similar issues with similar maturity intervals at year end. In general, the rise
in the market interest rates over the second half of 1999 had a negative impact
on the portfolio's valuation. Although the held to maturity security portfolio
is carried at amortized cost, the change in the interest rate environment
discussed above had a similar impact on the portfolio's market value, where the
market value at December 31, 1999 was approximately $360,000 less than the
amortized cost. Management believes that the declines in the market values of
the security portfolios are temporary, therefore, no impairment loss is
considered at this time.
Details as to the amortized cost and estimated fair values of the Company's
securities by type are presented in Note 3 of the Notes to Consolidated
Financial Statements, included in Item 8 of this filing. At December 31, 1999,
the Company did not own securities of any one issuer, other than the U.S.
Government or its agencies, that exceeded ten percent (10.0%) of shareholders'
equity. The distribution of non-equity securities together with the weighted
average yields by maturity at December 31, 1999 are summarized in TABLE III.
15
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE III
SECURITY MATURITY ANALYSIS (2)
(At amortized cost, dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
After One After Five
Within but within but within After
One Year Five Years Ten Years Ten Years
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------- --------- ---------- --------- --------- ------------- ------ --------
Securities Held to Maturity
U.S. Government agencies
and corporations $ 1,000 5.21% $ 7,000 5.95% $ - - % $ - - %
State and political
subdivisions 514 4.34 2,237 4.92 269 4.50 500 5.72
--------- ---------- --------- -------
Total $ 1,514 4.91 $ 9,237 5.70 $ 269 4.50 $ 500 5.72
========= =========== ========= =======
Securities Available for Sale
U.S. Government agencies
and corporations $ 2,978 5.49 $ 7,999 5.85 $ - - $ - -
========= ========== ========= =======
(1) -- Weighted average yield presented without adjustment to a tax equivalent
basis.
(2) - Excludes equity securities, such as Federal Reserve Bank and Federal Home
Loan Bank stock.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Loans
During 1999, loans, net of unearned income, increased $5,590,000, or 8.05%, to
$75,027,000 from $69,437,000 at year end 1998. Average loans outstanding, net of
unearned income, increased from $69,420,000 in 1998 to $70,540,000 in 1999, or
1.61%. A summary of the Company's year end loan balances by type, as well as an
analysis of the increase (decrease) in such balances from December 31, 1998 to
December 31, 1999, is summarized in the following table.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Percent Percent of
Increase Total Loans
1999 (Decrease) 1999 1998
---------------------------------------------------------------------------
Commercial, financial and agricultural $ 30,877 16.2 % $ 26,581 41.2% 38.3%
Real estate - construction 1,451 51.8 956 1.9 1.4
Real estate - mortgage 31,395 (0.8) 31,646 41.8 45.5
Installment 9,079 7.0 8,482 12.1 12.2
Other 2,225 25.6 1,772 3.0 2.6
-------------- ------------ ------- ------
$ 75,027 8.1 $ 69,437 100.0 100.0
Less: Unearned Discount - -
------------------ ---------------
TOTAL LOANS $ 75,027 8.1 $ 69,437
================== ===============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Real estate mortgage loans, the Company's largest loan portfolio, decreased
251,000, or 0.8% from 1998. During 1999, the Company found it difficult to grow
the real estate portfolio given customer demand for fixed rate mortgages. In
order to manage its interest rate risk, the Company does not offer fixed rate
mortgages; it only offers variable rate mortgages. In response to the demand for
fixed rate mortgages, the Company began accepting applications for a mortgage
broker in 1998. In return, the Company receives a commission on each mortgage
accepted by the mortgage broker. Management expects growth in this portfolio in
2000, however, the growth is not expected to be significant. The commercial,
financial and agricultural portfolio experienced the largest dollar increase of
the all the loan portfolios, where the portfolio grew $4,296,000 in 1999, or
16.2%. The Company has been very successful in its solicitation efforts,
particularly in the contiguous market areas. Through its personal business
relationships and referrals, management expects future growth in high quality
commercial loans to continue to grow.
16
<PAGE>
A summary of loan maturities by loan type as of December 31, 1999 is included in
Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of
this filing.
Allowance for Loan Losses and Risk Elements
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Company's management, on a quarterly basis, performs a
comprehensive loan evaluation which encompasses the identification of all
potential problem credits, which are included on an internally generated watch
list. The identification of loans for inclusion on the watch list is facilitated
through the use of various sources, including past due loan reports, previous
internal and external loan evaluations, classified loans identified as part of
regulatory agency loan reviews and reviews of new loans representative of
current lending practices within the Bank. Once this list is reviewed to ensure
it is complete, detail reviews of specific loans for collectibility, performance
and collateral protection are performed. A grade is assigned to the individual
loans reviewed utilizing internal grading criteria, which is somewhat similar to
the criteria utilized by the Bank's primary regulatory agency. Based on the
results of these reviews, specific reserves for potential losses are identified.
In addition, management considers historical loan loss experience, new loan
volume, portfolio composition, levels of nonperforming and past due loans and
current and anticipated economic conditions in evaluating the adequacy of the
allowance for loan losses.
As more fully explained in Notes 1 and 5 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing, certain impaired loans are
required to be reported at the present value of expected future cash flows
discounted using the loan's original effective interest rate or, alternatively,
at the loan's observable market price, or at the fair value of the loans'
collateral if the loan is collateral dependent. At December 31, 1999, the
Company had no loans classified as impaired compared to $318,000 at December 31,
1998. Of the loans classified as impaired at December 31, 1998, approximately
$263,000 in principal was collected on the notes in 1999, with the remaining
uncollected balance charged-off during the year. The Company's average balance
of impaired loans was $282,000 for 1999 versus $333,000 in 1998.
At December 31, 1999 and 1998, the allowance for loans losses of $764,000 and
$766,000 represented 1.02% and 1.10% of gross loans, respectively, and was
considered adequate to cover inherent losses in the subsidiary bank's loan
portfolio as of the respective evaluation date. The Company maintains an
allowance for loan losses at a level considered adequate to provide for losses
that can be reasonably anticipated. The Company performs a quarterly evaluation
of the loan portfolio to determine its adequacy. The evaluation is based on
assessments of specifically identified loans, loss experience factors, current
and anticipated economic conditions and other factors to identify and estimate
inherent losses from homogeneous pools of loans.
The allocated portion of the subsidiary bank's allowance for loan losses 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 December 31, 1999 and 1998, respectively, the unallocated portion
of the allowance approximated $280,000 and $95,000 or 36.6% and 12.4% of the
total allowance, respectively. The unallocated amount at December 31, 1999 and
1998 has been considered necessary primarily considering that historical loss
factors used in the Bank's methodology to calculate the allocated portion of the
allowance do not yet reflect the additional risk factors which may be inherent
in the portfolio due to loan growth over the past three years. In addition,
certain subjective factors, such as unemployment and the rate of bankruptcies
claimed in the Company's primary lending area, typically will increase the loss
factors as the Company's loan portfolio is more susceptible in the event of
economic downturns. The current economic expansion may have hidden or delayed
those losses typically seen in the Company's historical loss factors. Management
believes that the current allowance is sufficient to cover any potential losses
in the current loan portfolio. An allocation of the allowance for loan losses to
specific loan categories is presented in TABLE IV.
17
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE IV
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997
-------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
Commercial, financial,
and agricultural $ 189 41.2% $ 380 38.3% $ 310 42.1%
Real estate - construction 1 1.9 1 1.4 - 5.4
Real estate - mortgage 171 41.8 111 45.6 93 41.5
Installment 122 12.1 178 12.2 101 9.1
Other 1 3.0 1 2.5 - 1.9
Unallocated 280 - 95 - 132 -
----------- -------- ----------- --------- ----------- -----
$ 764 100.0% $ 766 100.0% $ 636 100.0%
=========== ========= =========== ========= =========== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank was in a net loss position (more money was charged-off than was
recovered from previously charged-off loans) during 1999. Loan charge-offs, net
of recoveries, for 1999 were $102,000 compared to $319,000 and $49,000 in 1998
and 1997, respectively. Expressed as a percentage of average loans outstanding
during 1999, 1998 and 1997, net loan charge-offs were 0.14%, 0.46% and 0.08%,
respectively. In May 1998, the Company recognized a significant charge-off on a
commercial loan ($273,000). The Company foreclosed on the collateral securing
the note which was valued at $875,000. As a result of the charge-off and its
on-going evaluation of its allowance for loan losses, a provision of $449,000 in
1998 was deemed necessary to restore the allowance for loan losses to a level
considered appropriate by management. This provision compares to $100,000 in
1999. See Note 5 of the Notes to the Consolidated Financial Statements for an
analysis of the activity in the Company's allowance for loan losses in 1999,
1998 and 1997.
The following presents a summary of the Company's nonperforming assets and
accruing loans past due 90 days or more at December 31, 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands)
<S> <C> <C> <C>
December 31,
1999 1998 1997
--------- ----------- -----
Nonperforming assets:
Nonaccrual loans $ - $ 318 $ 1,733
Other real estate owned 883 875 22
Restructured loans - - -
----- ------- -------
$ 883 $ 1,193 $ 1,755
========= =========== ========
Accruing loans past due 90 days or more $ - $ - $ -
========= =========== ========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company places into nonaccrual status those loans which the full collection
of principal and interest are unlikely or which are past due 90 or more days,
unless the loans are adequately secured and in the process of collection. If
interest on nonaccrual loans had been accrued, such income would have
approximated $13,000, $34,000 and $112,000 in 1999, 1998 and 1997, respectively.
As more fully discussed in Note 17 of the Consolidated Financial Statements
include in Item 8 of this filing, other real estate owned consists of commercial
property foreclosed upon in May 1998. The property is currently leased pursuant
to a three year operating lease. All expenses of carrying and operating the
property are borne by the lessee. All lease payments are being applied against
the other real estate owned balance in a cost recovery manner.
Deposits
Total deposits increased 9.7% to $89,132,000 as of December 31, 1999, from
$81,221,000 at December 31, 1998. Similarly, average total deposits increased
from $78,949,000 as of December 31, 1998 to $88,822,000 at December 31, 1999, or
12.5%.
18
<PAGE>
The Company's demand deposits increased $2,268,000, or 9.4%, from its 1998 year
end balance. On average, demand deposits increased $5,831,000, or 25.6%, over
1998's average balance. The growth in deposits has come from two new demand
deposit relationships obtained in May 1999. Together, these new relationships
have maintained average account balances in excess of $6,497,000 since they were
opened. Because the accounts are transactional in nature, and due to liquidity
reasons, much of the growth has been invested short-term government bonds and
overnight investments as discussed above.
The Company continues to experience deposit growth in its savings products where
total savings deposits stood at $37,400,00 at December 31, 1999, which is
$9,635,000 over 1998's year end balance. On average, total savings was
$32,338,000 for 1999 versus $26,266,000 for 1998. The majority of the growth has
been in a particular savings product which offers a tiered interest rate that is
competitive with area financial institutions and brokerage firms. The savings
growth has been mitigated by a net redemption in certificate of deposits of
approximately $3,992,000 since year end 1998, with much of the redemptions being
shifted to the savings product previously mentioned. See the NET INTEREST INCOME
section of this analysis for a discussion of the impact on the Company's
interest expense.
Details relative to the maturities of and interest expense on time certificates
of deposit of $100,000 or more are presented in Note 7 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing.
Short-term borrowings
The Company's short-term borrowings consist of securities sold under agreements
to repurchase ("repurchase agreements") and Federal funds purchased. At December
31, 1999, short-term borrowings totaled $4,113,000 compared to $951,000 at
December 31, 1998. The increase is predominantly due to a large repurchase
agreement ($2,300,000) entered into at year end 1999. For more information on
short-term borrowings refer to Note 8 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing.
Long-term borrowings
As discussed in detail in the Net Interest Income section above, the Company
prepaid its $5,000,000 balloon note with the FHLB in August 1999. See Note 8 of
the Notes to Consolidated Financial Statements included in Item 8 of this filing
for further discussion of this item.
The Company's only remaining long-term borrowing arrangement consists of a real
estate project benefitting low-income residents that was funded in part through
the FHLB's Community Investment Program ("CIP"). This program allows matched
funding of qualifying projects at rates significantly below the market rates for
similar non-CIP funds. In December of 1997, the Company obtained a $500,000
five-year advance as part of the CIP program. This advance is on a matched
amortization with the underlying note and will amortize in accordance with
standard loan terms. At December 31, 1999, the outstanding balance on the note
was $473,000. For more information on this FHLB debt, refer to Note 8 of the
Notes to Consolidated Financial Statements included in Item 8 of this filing.
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, interest-bearing deposits with other
banks and Federal funds sold, which measured $3,764,000 at December 31, 1999.
The Company also has available various lines of credit with correspondent
financial institutions of more than $40,000,000. The Company's liquidity
position is monitored continuously to ensure that day-to-day as well as
anticipated funding needs are met. Liquidity is considered to be more than
adequate.
Further enhancing the Company's liquidity is the availability of approximately
$3,978,000 (at amortized cost) in securities maturing within one year. Also, the
Company has additional securities with maturities greater than one year with an
estimated fair value totaling $7,679,000 classified as available for sale in
response to an unforeseen need for liquidity. Management is not aware of any
trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the Company's liquidity.
Interest rate risk represents the volatility in earnings and market values of
interest earning assets and interest-bearing liabilities resulting from changes
in market rates. The Company seeks to minimize interest rate risk through
asset/liability management. The Company's principal asset/liability management
strategy is gap management. Gap is the measure of the difference between the
volume of repricing interest earning assets and interest-bearing liabilities
during given time periods. When the volume of repricing interest earning assets
exceeds the volume of repricing interest-bearing liabilities, the gap is
positive -- a condition which usually is favorable during a rising rate
environment. The opposite case, a negative gap, generally is favorable during a
falling rate environment. When the interest rate sensitivity gap is near zero,
the impact of interest rate risk is limited, for at this point changes in net
interest income are minimal regardless of whether interest rates are rising or
falling. An analysis of the Company's current gap position is presented in TABLE
VI.
19
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE VI
INTEREST RATE SENSITIVITY GAPS
December 31, 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Repricing (1)
0-90 91-180 181-365 After
Days Days Days 1 Year Total
----------- ----------- ----------- ----------- --------
INTEREST EARNING ASSETS
Loans, net of unearned discount $ 24,875$ 3,441 $ 7,839 $ 38,872 $ 75,027
Securities (at amortized cost) 2,978 - 1,514 18,005 22,497
Interest bearing deposits with other
banks 17 - - - 17
Federal funds sold 30 - - - 30
----------- ----------- ----------- ----------- -----------
Total interest earning assets 27,900 3,441 9,353 56,877 97,571
------------- ----------- ----------- ------------ ------------
Interest-bearing LIABILITIES
Demand deposits $ 15,549 $ - $ - $ - $ 15,549
Savings deposits 37,400 - - - 37,400
Time deposits 10,362 5,095 3,393 6,592 25,442
Short-term borrowings 1,256 2,425 432 - 4,113
Long-term borrowings 4 4 8 457 473
----------- ----------- ----------- ----------- -----------
Total interest bearing
liabilities 64,571 7,524 3,833 7,049 82,977
----------- ----------- ----------- ----------- -----------
Contractual interest
sensitivity gap (36,671) (4,083) 5,520 49,828 14,594
Adjustment (2) 26,130 (26,130) - - -
---------- ------------ ----------- ----------- -------
Adjusted interest
sensitivity gap $ (10,541) $ (30,213) $ 5,520 $ 49,828 $ 14,594
=========== ============ =========== =========== ===========
Cumulative adjusted interest
sensitivity gap $ (10,541) $ (40,754) $ (35,234) $ 14,594
=========== ============ ============ ===========
Cumulative adjusted gap as a percent
of total earning assets (10.80%) (41.77%) (36.11%) 14.96%
Cumulative adjusted
rate-sensitivity ratio 0.73 0.43 0.54 1.18
This table includes various assumptions by management of maturities and
repayment patterns.
(1) - Contractual repricing, not contractual maturities, is used in this
table unless otherwise noted. No prepayment assumptions were assumed.
(2) - Adjustment to approximate the actual repricing of interest-bearing
demand deposits and savings accounts are based upon historical
experience.
- -------------------------------------------------------------------------------
</TABLE>
The preceding table reflects the Bank's cumulative one year net interest
sensitivity position, or gap, as 0.54. 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 2000 could have a
significant negative impact on the Bank's net interest income in 2000. However,
interest rates on approximately 65% of the Bank's interest-bearing liabilities
may be changed by management at any time based on their terms. Since management
believes that repricing of interest-bearing deposits in an increasing interest
rate environment will generally lag behind the repricing of interest-bearing
assets, the Bank's interest rate risk within one year is at an acceptable level.
The information presented in the table above represents a static view of the
Bank's gap position as of December 31, 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 down movements in interest rates in an effort to limit the effects of
interest rate risk on Company net interest income.
20
Capital Resources
Maintenance of a strong capital position is a continuing goal of the Company's
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth.
Total shareholders' equity at December 31, 1999 was $10,151,000 compared to
$9,747,000 at December 31, 1998, representing an increase of 4.14%. A
reconciliation of the increase is reported in the Consolidated Statement of
Shareholders' Equity found in Item 8 of this filing. Average total shareholders'
equity expressed as a percentage of average total assets decreased from 9.90% to
9.50% at December 31, 1999. The decrease is explained by the increase in average
assets of approximately $8,149,000 from 1998.
The Company's subsidiary bank is subject to minimum regulatory risk-based
capital guidelines, as more fully described in Note 14 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing. Such
guidelines provide for relative weighting of both on and off-balance sheet items
(such as loan commitments and standby letters of credit) based on their
perceived degree of risk. At December 31, 1999, the Company continues to exceed
each of the regulatory risk-based capital requirements as shown in the following
table.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
RISK-BASED CAPITAL RATIOS
Minimum
Actual Requirement
Total risk-based capital ratio 15.28% 8.00%
Tier 1 risk-based capital ratio 14.23% 4.00%
Leverage ratio 9.71% 3.00%
- --------------------------------------------------------------------------------
</TABLE>
Improved operating results and a consistent dividend program, coupled with an
effective management of credit and interest rate risk will be the key elements
towards the Company continuing to maintain its present strong capital position
in the future. Additional information related to regulatory restrictions on
capital and dividends are disclosed in Note 14 of the Notes to Consolidated
Financial Statements included in Item 8 of this filing.
Stock Option Plan
Since 1996, the Company has had an incentive stock option plan to provide a
method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth and protection of the business, and who
are making substantial contributions to the success and profitability of the
business, may be encouraged to acquire a stock ownership in the Company, thus
providing a proprietary interest in the business. For more information regarding
this plan, please refer to Note 11 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing.
Year 2000 Issues
The Company's critical information and non-information systems encountered only
minimal problems with the century date change or rollover from the year 1999 to
the year 2000. The Company is not aware of any system failures of its vendors,
customers, or other third parties that would have a significant impact on the
Company's financial condition or ability to operate. The Company believes it has
taken the necessary steps to be Year 2000 compliant, however, there may be
unforeseen external or internal issues which could impact the Company's status
in the future. Total capital and non-capital outlays of approximately $300,000
were incurred from 1997 through 1999 to address the Year 2000 concerns. This
figure does not include internal costs, namely payroll, as the Company did not
separately track these figures, however, they were believed to be immaterial to
the total project cost.
Impact of Inflation and Effects of Changing Prices
The results of operations and financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of non-interest
expenses, such as salaries, benefits and other operating expenses.
As a financial intermediary, the Company holds a high percentage of interest
rate sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the Company's assets and liabilities re-price more
frequently than those of non-banking entities. It is the Company's policy to
have a majority of its loan portfolio re-price within five years by using
variable and balloon payment credit terms in order to reduce the impact of
significant changes in interest rates on its longer-term assets. Further, the
Company's policies attempt to structure its mix of financial instruments and
manage its interest rate sensitivity gap in order to minimize the potential
adverse effects of inflation or
21
other market forces on its net interest income, earnings and capital. A
comparison of the carrying value of the Company's financial instruments to their
estimated fair value as of December 31, 1999 is disclosed in Note 15 of the
Notes to Consolidated Financial Statements included in Item 8 of this filing.
Indirectly, management of the money supply by the Federal Reserve to control the
rate of inflation has an impact on the earnings of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's report and consolidated financial statements of the
Company and its subsidiary appear herein. The Company is not subject to the
requirements for disclosure of supplemental quarterly financial data.
22
<PAGE>
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
We have audited the accompanying consolidated balance sheets of First National
Bankshares Corporation and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Bankshares Corporation and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
February 4, 2000
23
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<S> <C> <C>
ASSETS 1999 1998
---------------- ------------
Cash and due from banks $ 3,716,511 $ 2,336,519
Interest bearing deposits with other banks 17,492 -
Federal funds sold 30,000 5,679,000
Securities held to maturity (estimated fair value
1999 $11,160,273; 1998 $8,804,710) 11,519,992 8,739,119
Securities available for sale 11,356,470 9,126,633
Loans, less allowance for loan losses of $763,523
and $765,542, respectively 74,263,640 68,671,231
Bank premises and equipment, net 1,695,335 1,848,072
Accrued interest receivable 726,868 602,291
Other real estate acquired in settlement of loans 883,496 875,000
Other assets 619,042 475,324
---------------- -------
Total assets $ 104,828,846 $ 98,353,189
================ = ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 10,740,459 $ 12,123,521
Interest bearing 78,391,385 69,097,806
---------- ---------------
Total deposits 89,131,844 81,221,327
Short-term borrowings 4,112,579 950,734
Other liabilities 960,467 946,572
Long-term borrowings 473,288 5,487,598
---------------- ---------------
Total liabilities 94,678,178 88,606,231
---------------- ---------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 964,515 shares 964,515 964,515
Capital surplus 1,019,053 1,019,053
Retained earnings 8,370,344 7,769,966
Accumulated other comprehensive income (203,244) (6,576)
----------------- ---------------
Total shareholders' equity 10,150,668 9,746,958
---------------- ---------
Total liabilities and shareholders' equity $ 104,828,846 $ 98,353,189
================ ===============
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C> <C>
For The Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- ---------------- ------------
Interest income:
Interest and fees on loans $ 6,158,358 $ 6,328,051 $ 5,811,096
Interest and dividends on securities:
Taxable 1,148,635 819,543 841,331
Tax-exempt 163,536 175,715 199,095
Interest on interest bearing deposits with other banks 75,068 - -
Interest on Federal funds sold 160,981 240,544 189,937
------- ---------------- ---------------
Total interest income 7,706,578 7,563,853 7,041,459
--------------- ---------------- ---------------
Interest expense:
Deposits 3,076,961 2,949,576 2,755,866
Short-term borrowings 55,147 59,283 61,561
Long-term borrowings 257,596 362,940 259,697
--------------- ---------------- ---------------
Total interest expense 3,389,704 3,371,799 3,077,124
--------------- ---------------- ---------------
Net interest income 4,316,874 4,192,054 3,964,335
Provision for loan losses 100,000 448,940 31,000
--------------- ---------------- ---------------
Net interest income after provision for
loan losses 4,216,874 3,743,114 3,933,335
--------------- ---------------- ---------------
Other income (expense):
Trust department income 61,407 86,168 64,835
Service fees 300,226 248,286 259,662
Securities gains (losses), net (517) - -
Other 93,594 110,626 97,188
--------------- ---------------- ---------------
Total other income 454,710 445,080 421,685
--------------- ---------------- ---------------
Other expenses:
Salaries and employee benefits 1,603,221 1,541,833 1,639,359
Net occupancy expense 269,737 283,345 279,780
Equipment rentals, depreciation and maintenance 279,937 293,666 252,391
Federal deposit insurance premiums 12,512 9,227 6,890
Data processing 183,192 195,237 132,681
Advertising 67,339 64,446 76,692
Professional and legal 96,862 161,010 103,032
Mailing and postage 74,440 75,979 76,244
Directors' fees and shareholders' expenses 107,860 100,386 102,417
Stationery and supplies 80,316 70,479 94,533
Other 400,009 371,318 322,519
--------------- ---------------- ---------------
Total other expenses 3,175,425 3,166,926 3,086,538
--------------- ---------------- ---------------
Income before income tax expense 1,496,159 1,021,268 1,268,482
Income tax expense 494,543 297,124 476,660
--------------- ---------------- ---------------
Net income $ 1,001,616 $ 724,144 $ 791,822
=============== ================ ===============
Basic earnings per common share $ 1.04 $ 0.75 $ 0.82
================ ================= ================
Diluted earnings per common share $ 1.03 $ 0.75 $ 0.82
================ ================= ================
See Notes to Consolidated Financial Statements
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C>
1999 1998 1997
--------------- ---------------- ------------
Net income $ 1,001,616 $ 724,144 $ 791,822
--------------- ---------------- ---------------
Other comprehensive income:
Gross unrealized gains/(losses) arising
during the period (322,407) (11,492) 589
Adjustments for income tax (expense)/
benefit 125,739 4,476 (224)
--------------- ---------------- ---------------
(196,668) (7,016) 365
--------------- ---------------- ---------------
Other comprehensive income, net of tax (196,668) (7,016) 365
--------------- ---------------- ---------------
Comprehensive income $ 804,948 $ 717,128 $ 792,187
=============== ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C> <C> <C>
Accumulated Total
Other Share-
Common Capital Retained Comprehensive holders'
Stock Surplus Earnings Income Equity
Balance, December 31, 1996 $ 962,500 $ 1,000,000 $ 6,878,037 $ 75 $ 8,840,612
Net income - - 791,822 - 791,822
Cash dividends declared on
common stock ($0.32 per share) - - (308,000) - (308,000)
Change in net unrealized gain
(loss) on securities - - - 365 365
-------------- ------------- ------------- ---------------- -------------
Balance, December 31, 1997 962,500 1,000,000 7,361,859 440 9,324,799
Net income - - 724,144 - 724,144
Cash dividends declared on
common stock ($0.33 per share) - - (316,037) - (316,037)
Issued 2015 shares of common
stock pursuant to exercise of
stock option 2,015 19,053 - - 21,068
Change in net unrealized gain
(loss) on securities - - - (7,016) (7,016)
-------------- ------------- ------------- ---------------- -------------
Balance, December 31, 1998 964,515 1,019,053 7,769,966 (6,576) 9,746,958
Net income - - 1,001,616 - 1,001,616
Cash dividends declared on
common stock ($0.42 per share) - - (401,238) - (401,238)
Change in net unrealized gain
(loss) on securities - - - (196,668) (196,668)
-------------- ------------- ------------- ---------------- -------------
Balance, December 31, 1999 $ 964,515 $ 1,019,053 $ 8,370,344 $ (203,244) $ 10,150,668
============== ============= ============= ================ =============
</TABLE>
See Notes to Consolidated Financial Statement
27
<PAGE>
<TABLE>
<CAPTION>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C>
1999 1998 1997
--------------- --------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,001,616 $ 724,144 $ 791,822
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 233,179 263,089 227,785
Provision for loan losses 100,000 448,940 31,000
Deferred income taxes (benefit) 8,314 (118,984) 33,179
Securities (gains) losses, net 517 - -
(Gain) loss on sale of other assets - (23,288) -
Provision for valuation allowance of other
real estate owned - 1,500 -
(Gain) loss on disposal of bank premises and equipment (5,331) 800 (5,222 )
Amortization of securities premiums and
(accretion of discounts), net (180,938) (69,097) (35,474)
(Increase) decrease in accrued interest receivable (124,577) 57,816 (1,528)
(Increase) decrease in other assets (26,293) (19) (18,715)
Increase (decrease) in other liabilities (45,905) 42 (80,071)
--------------- --------------- ---------------
Net cash provided by operating activities 960,582 1,284,943 942,776
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with
other banks (17,492) - -
Proceeds from maturities and calls of securities held
to maturity 5,980,516 8,575,000 9,735,000
Proceeds from maturities and calls of securities
available for sale 9,499,035 6,000,000 2,000,000
Purchases of securities held to maturity (8,721,753) (5,000,938) (3,200,608)
Purchases of securities available for sale (11,910,494) (10,071,287) (3,191,950)
Principal payments received on (loans made to)
customers, net (5,720,409) (897,037) (16,341,550)
Purchases of bank premises and equipment (95,111) (40,342) (337,906)
Proceeds from sale of bank premises and equipment 20,000 1,300 7,085
Proceeds from sales of other assets - 56,238 -
Proceeds from lease payments on other real
estate owned 19,504 - -
--------------- --------------- ----------------
Net cash provided by (used in)
investing activities (10,946,204) (1,377,066) (11,329,929)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposit, NOW and
savings accounts 11,902,587 4,414,555 1,675,456
Proceeds from sales of (payments for matured)
time deposits, net (3,992,070) (1,528,976) 3,343,839
Net increase (decrease) in short-term borrowings 3,161,845 (379,662) 837,923
Proceeds from long-term borrowings - - 5,500,000
Principal payments on long-term borrowings (5,014,310) (12,402) -
Proceeds from sale of common stock pursuant
to stock option exercise - 21,068 -
Dividends paid (341,438) (308,160) (308,000)
---------------- --------------- ---------------
Net cash provided by (used in)
financing activities 5,716,614 2,206,423 11,049,218
--------------- --------------- ---------------
(Continued)
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
--------------- --------------- -----------
Increase (decrease) in cash and cash equivalents (4,269,008) 2,114,300 662,065
Cash and cash equivalents:
Beginning 8,015,519 5,901,219 5,239,154
--------------- --------------- ---------------
Ending $ 3,746,511 $ 8,015,519 $ 5,901,219
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 3,461,886 $ 3,334,559 $ 3,113,927
=============== =============== ===============
Income taxes $ 491,429 $ 497,945 $ 361,969
=============== =============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 28,000 $ 885,000 $ 2,450
=============== =============== ===============
Dividends declared and unpaid $ 144,677 $ 84,877 $ 77,000
=============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements
29
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of business: First National Bankshares Corporation (the
"Company") is a one bank holding company which was incorporated on
January 28, 1986. The wholly owned subsidiary, First National Bank
is a commercial bank with operations in Greenbrier and Kanawha
Counties of West Virginia. The Bank provides retail and commercial
loans and deposit and trust services primarily to customers
located in Greenbrier, Kanawha and surrounding counties.
Basis of financial statement presentation: The accounting and
reporting policies of First National Bankshares Corporation and
subsidiary conform to generally accepted accounting principles and
to general practices within the banking industry.
Principles of consolidation: The accompanying consolidated
financial statements include the accounts of First National
Bankshares Corporation, and its wholly-owned subsidiary, First
National Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Presentation of cash flows: For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand, Federal funds
sold and amounts due from banks (including cash items in process
of clearing). Cash flows from demand deposits, NOW accounts and
savings accounts are reported net since their original maturities
are less than three months. Cash flows from loans and certificates
of deposit and other time deposits are reported net.
Securities: Debt and equity securities are classified as "held to
maturity", "available for sale" or "trading" according to
management's intent. The appropriate classification is determined
at the time of purchase of each security and re-evaluated at each
reporting date.
Securities held to maturity - Debt securities for which the
Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts.
Securities available for sale - Securities not classified as
"held to maturity" or as "trading" are classified as
"available for sale." Securities classified as "available for
sale" are those securities the Company intends to hold for an
indefinite period of time, but not necessarily to maturity.
"Available for sale" securities are reported at estimated fair
value net of unrealized gains or losses, which are adjusted
for applicable income taxes, and reported as a separate
component of shareholders' equity.
Trading securities - There are no securities classified as
"trading" in the accompanying consolidated financial
statements.
Realized gains and losses on sales of securities are recognized on
the specific identification method. Amortization of premiums and
accretion of discounts are computed using the interest method.
Loans and allowance for loan losses: Loans are stated at the
amount of unpaid principal, reduced by unearned income and an
allowance for loan losses.
Unearned interest on discounted loans is amortized to income over
the life of the loans, using methods which approximate the
interest method. For all other loans, interest is accrued daily on
the outstanding balances.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. The subsidiary bank makes
continuous credit reviews of the loan portfolio and considers
current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining
the adequacy of the allowance for loan losses. Loans are charged
against the allowance for loan losses when management believes
collectibility is unlikely. While management uses the best
information available to make its evaluation, future adjustments
to the allowance may be necessary if there are significant changes
in conditions.
A loan is impaired when, based on current information and events,
it is probable that the subsidiary bank will be unable to collect
all amounts due in accordance with the contractual terms of the
specific loan agreement. Impaired loans, other than certain large
groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, are required to be reported at the
present value of expected future cash flows discounted using the
loan's original effective interest rate or, alternatively, at the
loan's observable market price, or at the fair value of the loan's
collateral if the loan is collateral dependent. The method
selected to measure impairment is made on a loan-by-loan basis,
unless foreclosure is deemed to be probable, in which case the
fair value of the collateral method is used.
Generally, after management's evaluation, loans are placed on
non-accrual status when principal or interest is greater than 90
days past due based upon the loan's contractual terms. Interest is
accrued daily on impaired loans unless the loan is placed on
non-accrual status. Impaired loans are placed on non- accrual
status when the payments of principal and interest are in default
for a period of 90 days, unless the loan is both well-secured and
in the process of collection. Interest on non-accrual loans is
recognized primarily using the cost-recovery method.
Certain loan fees and direct loan costs are recognized as income
or expense when incurred. Whereas, generally accepted accounting
principles require that such fees and costs be deferred and
amortized as adjustments of the related loan's yield over the
contractual life of the loan. The subsidiary bank's method of
recognition of loan fees and direct loan costs produces results
which are not materially different from those that would be
recognized had Statement Number 91 of the Financial Accounting
Standards Board been adopted.
Bank premises and equipment: Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed primarily by the straight-line method for bank premises
and equipment over the estimated useful lives of the assets.
Repairs and maintenance expenditures are charged to operating
expenses as incurred. Major improvements and additions to premises
and equipment are capitalized.
Other real estate: Other real estate consists of real estate held
for resale which was acquired through foreclosure on loans secured
by such real estate. At the time of acquisition, these properties
are recorded at fair value with any write-down being charged to
the allowance for loan losses. After foreclosure, valuations are
periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to
sell. Expenses incurred in connection with operating these
properties are insignificant and are charged to operating
expenses. Gains and losses on the sale of these properties are
credited or charged to operating income in the year of the
transactions.
Sales of these properties which are financed by the subsidiary
bank and meet the criteria of covered transactions remain
classified as other real estate until such time as principal
payments have been received to warrant classification as a real
estate loan.
Income taxes: The consolidated provision for income taxes includes
Federal and state income taxes and is based on pretax net income
reported in the consolidated financial statements, adjusted for
transactions that may never enter into the computation of income
taxes payable. Deferred tax assets and liabilities are based on
the differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment. Valuation allowances are established when
deemed necessary to reduce deferred tax assets to the amount
expected to be realized.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Split: On September 24, 1999, the Company enacted a 5
for 1 stock split. The par value was reduced from $5.00 per share
to $1.00 per share and 771,612 incremental shares were issued to
shareholders of record. All prior period per share data for the
years presented have been restated for comparability.
Basic earnings per share: Basic earnings per common share are
computed based upon the weighted average shares outstanding. The
weighted average number of shares outstanding was 964,515 for the
year ended December 31, 1999 and 963,565 and 962,500 for the years
ended December 31, 1998 and 1997, respectively. The Company is
required to present basic and diluted per share amounts. Diluted
per share amounts assume the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from
continuing operations. Basic and diluted earnings per share are
calculated as follows:
<TABLE>
<CAPTION>
For the Year Ended 1999
<S> <C> <C> <C>
Income Shares Per
(Numer- (Denom- Share
ator) inator) Amount
Basic EPS
Income available to common shareholders $ 1,001,616 964,515 $ 1.04
=============
Effect of Dilutive Securities
Stock options - 5,484
------------- -------------
Diluted EPS
Income available to common shareholders $ 1,001,616 969,999 $ 1.03
============= ============= =============
For the Year Ended 1998
Basic EPS
Income available to common shareholders $ 724,144 963,565 $ 0.75
=============
Effect of Dilutive Securities
Stock options - 4,589
------------- -------------
Diluted EPS
Income available to common shareholders $ 724,144 968,154 $ 0.75
============= ============= =============
For the Year Ended 1997
Basic EPS
Income available to common shareholders $ 791,822 962,500 $ 0.82
=============
Effect of Dilutive Securities
Stock options - 1,607
------------- -------------
Diluted EPS
Income available to common shareholders $ 791,822 964,107 $ 0.82
============= ============= =============
</TABLE>
Profit sharing and 401(k) plans: The subsidiary bank sponsored a
profit-sharing plan through September 30, 1997. The subsidiary
bank also sponsors a 401(k) plan which covers substantially all
employees. Bank contributions to the plans are charged to expense.
Postretirement benefit plans: The subsidiary bank provides certain
healthcare and life insurance benefits for all retired employees
that meet certain eligibility requirements. The plans are
contributory with retiree contributions and are unfunded. The
subsidiary bank's share of the estimated costs that will be paid
after retirement is being accrued by charges to expense over the
employees' active service periods to the dates they are fully
eligible for benefits.
Trust Department: Assets held in an agency or fiduciary capacity
by the subsidiary bank's Trust Department are not assets of the
subsidiary bank and are not included in the accompanying
consolidated balance sheets. Trust Department income is recognized
on the cash basis in accordance with customary banking practice.
Reporting such income on a cash basis rather than on the accrual
basis does not have a material effect on net income.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications: Certain accounts in the consolidated financial
statements for 1998 and 1997, as previously presented, have been
reclassified to conform to current year classifications.
Emerging accounting standards: In June 1998, the Financial
Accounting Standards Board issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. The
Statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Bank expects to adopt the new
Statement effective January 1, 2000. The Statement will require
the Bank to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on
the nature of the hedge, change in the fair value of derivatives
will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item
is recognized in earnings. Since the Company has not utilized
derivatives in the past, management does not anticipate that the
adoption of the new Statement will have a significant effect on
the Bank's earnings or financial position.
Note 2. Cash Concentrations
At December 31, 1998, the subsidiary bank had a cash concentration
totaling $5,720,337, respectively, with a correspondent bank
consisting of a due from bank account balance and Federal funds
sold. At December 31, 1999, no such concentration existed.
Deposits with correspondent banks are generally unsecured and have
limited insurance under current banking insurance regulations.
Note 3. Securities
The amortized cost, unrealized gains and losses, and estimated
fair values of securities at December 31, 1999 and 1998, are
summarized as follows:
<TABLE>
<CAPTION>
1999
<S> <C> <C> <C> <C>
Carrying
Value
(Estimated
Amortized Unrealized Fair
-------------------------------
Cost Gains Losses Value)
-------------- --------- -------------- ----------
Available for sale
Taxable:
U.S. Government agencies
and corporations $ 10,977,168 $ - $ 332,704 $10,644,464
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank
stock 646,100 - - 646,100
Other equities 7,489 - 483 7,006
-------------- ------------- -------------- -------------
Total taxable 11,687,407 - 333,187 11,354,220
-------------- ------------- -------------- -------------
Tax-exempt:
Federal Reserve Bank
stock 2,250 - - 2,250
-------------- ------------- -------------- -------------
Total $ 11,689,657 $ - $ 333,187 $ 11,356,470
============== ============= ============== =============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C> <C>
Carrying
Value Estimated
( Amortized Unrealized Fair
--------------------------------
Cost) Gains Losses Value
Held to maturity
Taxable:
U.S. Government agencies
and corporations $ 8,000,000 $ - $ 196,367 $ 7,803,633
State and political
subdivisions 500,000 - 172,170 327,830
-------------- ------------- -------------- -------------
Total taxable 8,500,000 - 368,537 8,131,463
-------------- ------------- -------------- -------------
Tax-exempt:
State and political
subdivisions 3,019,992 21,266 12,448 3,028,810
-------------- ------------- -------------- -------------
Total $ 11,519,992 $ 21,266 $ 380,985 $ 11,160,273
============== ============= ============== =============
1998
Carrying
Value
(Estimated
Amortized Unrealized Fair
---------------------------------
Cost Gains Losses Value)
-------------- ------------- -------------- -----------
Available for sale
Taxable:
U.S. Government agencies
and corporations $ 8,495,645 $ 15,886 $ 26,183 $ 8,485,348
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank
stock 573,600 - - 573,600
Other equities 9,268 - 483 8,785
-------------- ------------- -------------- -------------
Total taxable 9,135,163 15,886 26,666 9,124,383
-------------- ------------- -------------- -------------
Tax-exempt:
Federal Reserve Bank
stock 2,250 - - 2,250
-------------- ------------- -------------- -------------
Total $ 9,137,413 $ 15,886 $ 26,666 $ 9,126,633
============== ============= ============== =============
Carrying
Value Estimated
( Amortized Unrealized Fair
Cost) Gains Losses Value
------------ --------------------- -----------------
Held to maturity
Taxable:
U.S. Government agencies
and corporations $ 5,228,839 $ 3,662 $ 23,145 $ 5,209,356
-------------- ------------- -------------- -------------
Tax-exempt:
State and political
subdivisions 3,510,280 85,074 - 3,595,354
-------------- ------------- -------------- -------------
Total $ 8,739,119 $ 88,736 $ 23,145 $ 8,804,710
============== ============= ============== =============
Federal Reserve Bank stock and Federal Home Loan Bank stock are
equity securities which are included in securities available for
sale in the accompanying consolidated financial statements. Such
securities are carried at cost, since they may only be sold back
to the respective issuer or another member at par value.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of
securities at December 31, 1999, are summarized as follows:
<S> <C> <C> <C> <C>
Held to Maturity Available for Sale
Carrying
Carrying Value
Value Estimated (Estimated
(Amortized Fair Amortized Fair
Cost) Value Cost Value)
-------------- ------------- -------------- -----------
Due in one year or less $ 1,513,887 $1,501,194 $ 2,978,044 $ 2,964,980
Due from one to five years 9,237,276 9,067,751 7,999,124 7,679,484
Due from five to ten years 268,829 263,498 - -
Due after ten years 500,000 327,830 - -
Equity securities - - 712,489 712,006
-------------- ------------- -------------- -------------
Total $ 11,519,992 $ 11,160,273 $ 11,689,657 $ 11,356,470
============== ============= ============== =============
The proceeds from sales, calls and maturities of securities and
principal payments received on mortgage-backed obligations and the
related gross gains and losses realized are as follows:
Proceeds From Gross Realized
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
1999
Securities held to
maturity $ 997,255 $ 4,983,261 $ - $ - $ 258
Securities available
for sale 997,256 8,501,779 - - 259
------------- ------------- ----------- ----------- -----------
$ 1,994,511 $ 13,485,040 $ - $ - $ 517
============= ============= =========== =========== ===========
1998
Securities held to
maturity $ - $ 8,575,000 $ - $ - $ -
Securities available
for sale - 6,000,000 - - -
------------- ------------- ----------- ----------- -----
$ - $ 14,575,000 $ - $ - $ -
============= ============= =========== =========== =====
1997
Securities held to
maturity $ - $ 9,735,000 $ - $ - $ -
Securities available
for sale - 2,000,000 - - -
------------- ------------- ----------- ----------- -----
$ - $ 11,735,000 $ - $ - $ -
============= ============= =========== =========== =====
At December 31, 1999 and 1998, securities with amortized costs of
$8,500,000 and $5,727,682, respectively, with estimated fair
values of $8,292,873 and $5,729,806, respectively, were pledged to
secure public deposits, and for other purposes required or
permitted by law.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C>
Note 4. Loans
Loans are summarized as follows:
1999 1998
--------------- ------------
Commercial, financial and agricultural $ 30,877,073 $ 26,581,333
Real estate - construction 1,451,024 956,042
Real estate - mortgage 31,395,269 31,645,727
Installment 9,079,335 8,481,967
Other 2,224,462 1,772,031
--------------- ---------------
Total loans 75,027,163 69,437,100
Less unearned income - 327
--------------- ---------------
Total loans net of unearned income 75,027,163 69,436,773
Less allowance for loan losses 763,523 765,542
--------------- ---------------
Loans, net $ 74,263,640 $ 68,671,231
=============== ===============
</TABLE>
Included in the net balance of loans are non-accrual loans
amounting to $0 and $317,873 at December 31, 1999 and 1998,
respectively. If interest on non-accrual loans had been accrued,
such income would have approximated $12,785, $33,670 and $112,444
for the years ended December 31, 1999, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
The following represents contractual maturities of loans at
December 31, 1999:
<S> <C> <C> <C>
After 1 But
Within 1 Year Within 5 Years After 5 Years
--------------- -------------- --------------
Commercial, financial and
agricultural $ 9,540,487 $ 15,712,703 $ 5,623,883
Real estate - construction 607,123 843,901 -
Real estate - mortgage 5,291,900 3,062,691 23,040,678
Installment 4,232,475 4,344,760 502,100
Other 1,314,109 25,557 884,796
---------------- --------------- ---------------
Total $ 20,986,094 $ 23,989,612 $ 30,051,457
================ =============== ===============
Loans due after one year with:
Variable rates $ 18,722,758
Fixed rates 35,318,311
----------------
Total $ 54,041,069
================
</TABLE>
Concentrations of credit risk: The subsidiary bank grants
commercial, residential and consumer loans to customers primarily
located in Greenbrier and Kanawha Counties of West Virginia.
Loans to related parties: The subsidiary bank has had, and may be
expected to have in the future, banking transactions in the
ordinary course of business with directors, principal officers,
their immediate families and affiliated companies in which they
are principal stockholders (commonly referred to as related
parties), all of which have been, in the opinion of management, on
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others.
36
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents the activity with respect to related party
loans aggregating $60,000 or more to any one related party:
<S> <C> <C>
1999 1998
-------------- ----------
Balance, beginning $ 811,541 $ 764,878
Additions 1,501,572 307,680
Amounts collected (637,657) (261,017)
--------------- -------------
Balance, ending $ 1,675,456 $ 811,541
============== =============
</TABLE>
<TABLE>
<CAPTION>
Note 5. Allowance for loan losses
An analysis of the allowance for loan losses for the years ended
December 31, 1999, 1998 and 1997, is as follows:
<S> <C> <C> <C>
1999 1998 1997
------------- -------------- -----------
Balance, beginning of year $ 765,542 $ 635,555 $ 653,954
Losses:
Commercial, financial and agricultural 203,708 - -
Real estate - mortgage 3,576 23,529 -
Real estate - construction - 272,451 -
Installment 83,244 68,470 108,645
------------- -------------- -------------
Total 290,528 364,450 108,645
------------- -------------- -------------
Recoveries:
Commercial, financial and agricultural 138,156 - -
Real estate - mortgage - - -
Real estate - construction - - -
Installment 50,353 45,497 59,246
------------- -------------- -------------
Total 188,509 45,497 59,246
------------- -------------- -------------
Net (recoveries) losses 102,019 318,953 49,399
Provision for loan losses 100,000 448,940 31,000
------------- -------------- -------------
Balance, end of year $ 763,523 $ 765,542 $ 635,555
============= ============== =============
</TABLE>
The Company's total recorded investment in impaired loans at
December 31, 1999 and 1998, approximated $0 and $317,873,
respectively, for which the related allowance for loan losses
determined in accordance with generally accepted accounting
principles approximated $0 and $250,000, respectively. The
Company's average investment in such loans approximated $282,436
and $333,316 for the years ended December 31, 1999 and 1998,
respectively. All impaired loans at December 31, 1999 and 1998,
were collateral dependent, and accordingly, the fair value of the
loan's collateral was used to measure the impairment of each loan.
For purposes of evaluating impairment, the Company considers
groups of smaller-balance, homogeneous loans to include: mortgage
loans secured by residential property, other than those which
significantly exceed the subsidiary bank's typical residential
mortgage loan amount (currently those in excess of $100,000);
small balance commercial loans (currently those less than
$50,000); and installment loans to individuals, exclusive of those
loans in excess of $50,000. For the years ended December 31, 1999
and 1998, the Company recognized $23,046 and $0 in interest income
on impaired loans.
37
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Bank Premises and Equipment
The major categories of Bank premises and equipment and
accumulated depreciation at December 31, 1999 and 1998, are
summarized as follows:
<S> <C> <C>
1999 1998
--------------- ------------
Land $ 298,361 $ 298,361
Building and improvements 1,581,298 1,581,298
Furniture and equipment 2,035,482 2,007,860
--------------- ---------------
3,915,141 3,887,519
Less accumulated depreciation 2,219,806 2,039,447
--------------- ---------------
Bank premises and equipment, net $ 1,695,335 $ 1,848,072
=============== ===============
Depreciation expense for the years ended December 31, 1999, 1998
and 1997 totaled $233,179, $263,089 and $227,785, respectively.
Note 7. Deposits
The following is a summary of interest bearing deposits by type as
of December 31, 1999 and 1998:
1999 1998
--------------- ------------
Interest bearing demand deposits $ 15,548,733 $ 11,898,145
Savings deposits 37,400,255 27,765,194
Certificates of deposit 25,442,397 29,434,467
--------------- ---------------
Total $ 78,391,385 $ 69,097,806
=============== ===============
Time certificates of deposit in denominations of $100,000 or more
totaled $4,182,682 and $6,116,458 at December 31, 1999 and 1998,
respectively. Interest paid on time certificates of deposit in
denominations of $100,000 or more was $265,258, $276,856 and
$272,837 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following is a summary of the maturity distribution of
certificates of deposit in denominations of $100,000 or more as of
December 31, 1999:
Amount Percent
Three months or less $ 1,703,863 40.7%
Three through six months 1,212,961 29.0%
Six through twelve months 348,214 8.3%
Over twelve months 917,644 22.0%
--------------- -------------
Total $ 4,182,682 100.0%
=============== =============
A summary of the maturities of time deposits as of December 31,
1999, follows:
Year Amount
2000 $ 18,849,374
2001 4,128,418
2002 1,086,335
2003 256,163
2004 1,122,107
---------------
$ 25,442,397
38
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank has and expects to have in the future, banking
transactions in the ordinary course of business with directors,
significant stockholders, principal officers, their immediate
families and affiliated companies in which they are principal
stockholders (commonly referred to as related parties). In
management's opinion, these deposits and transactions were on the
same terms as those for comparable deposits and transactions with
nonrelated parties. Aggregate deposit transactions with related
parties for the year ended December 31, 1999 and 1998 were
$2,089,145 and $3,161,312.
Note 8. Other Borrowings
Short-term borrowings: During 1999 and 1998, the Company's
short-term borrowings consisted of securities sold under
agreements to repurchase (repurchase agreements) and Federal funds
purchased from other financial institutions.
Interest paid on these borrowings are based upon either fixed or
variable rates as determined upon origination. Interest is
calculated and credited to the customer's account on a scheduled
basis. Minimum deposit balance requirements are established on a
case-by-case basis. The securities underlying these agreements are
under the subsidiary bank's control and secure the total
outstanding daily balances.
<TABLE>
<CAPTION>
The following information is provided relative to these
obligations:
<S> <C> <C>
1999 1998
Repurchase Federal Funds Repurchase Federal Funds
Agreements Purchased Agreements Purchased
Outstanding at year end $ 4,112,579 $ - $ 950,734 $ -
Weighted average interest
rate at December 31 4.63% 0.00% 2.97% -
Max. amount outstanding at
any month end $ 4,112,579 $ 4,874,500 $ 2,111,650
Average daily amount
outstanding $ 1,198,981 $ 252,003 $ 1,573,575 -
Weighted average interest
rate 3.41% 5.68% 3.76% -
</TABLE>
Long-term borrowings: The Company's long term borrowings consist
of various advances from the Federal Home Loan Bank (or "FHLB").
Of these borrowings, a $500,000 advance, with a fixed interest
rate of 5.86%, was obtained on December 23, 1997 to fund a
commercial loan for a local business. Monthly payments of $3,542,
including principal and interest, began on January 23, 1998, with
a balloon payment due on December 23, 2002. At December 31, 1999,
the outstanding balance totaled $473,288. A summary of the
maturities of this borrowing for the next five years is as
follows: $15,171 in 2000; $16,084 in 2001; and $442,033 in 2002.
The advance is secured by Federal Home Loan Bank of Pittsburgh
stock, qualifying first mortgage loans, certain non-mortgage loans
and all investments not otherwise pledged.
A $5,000,000 balloon note, with a fixed interest rate of 6.68%,
was scheduled to mature on March 23, 2000. This note, with an
outstanding principal balance of $5,000,000 at December 31, 1998
was paid in full on August 5, 1999. Included in interest expense
for the year ended 1999 is a prepayment interest penalty of
approximately $32,000 assessed by the lender.
39
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the
years ended December 31, 1999, 1998 and 1997, are as follows:
<S> <C> <C> <C>
1999 1998 1997
------------- -------------- ----------
Current:
Federal $ 414,085 $ 344,848 $ 370,981
State 72,144 71,260 72,500
------------- -------------- -------------
486,229 416,108 443,481
Deferred (Federal and State) 8,314 (118,984) 33,179
------------- -------------- -------------
Total $ 494,543 $ 297,124 $ 476,660
============= ============== =============
A reconciliation between the amount of reported income tax expense
and the amount computed by multiplying the statutory income tax
rates by book pretax income for the years ended December 31, 1999,
1998 and 1997, is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------------------------- ------------------------ ------------------
Amount Percent Amount Percent Amount Percent
Computed tax at applicable
statutory rate $ 508,694 34.0 $ 347,231 34.0 $ 431,284 34.0
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (71,062) (4.7) (77,173) (7.6) (69,984) (5.5)
State income taxes, net
of Federal income
tax benefit 48,319 3.2 47,031 4.6 48,933 3.9
Disallowed interest 11,482 0.8 9,257 0.9 9,469 0.7
Other, net (2,890) (0.2) (29,222) (2.9) 56,958 4.5
----------- ------- ----------- --------- ----------- ---------
Applicable income
taxes $ 494,543 33.1 $ 297,124 29.0 $ 476,660 37.6
=========== ======= =========== ========= =========== ====
</TABLE>
Deferred income taxes reflect the impact of "temporary
differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes.
Deferred tax assets and liabilities represent the future tax
return consequences of temporary differences, which will either be
taxable or deductible when the related assets and liabilities are
recovered or settled.
The tax effects of temporary differences which give rise to the
Company's deferred tax assets and liabilities as of December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------------- ----------
Deferred tax assets:
Allowance for loan losses $ 191,652 $ 192,440
Employee benefits 170,755 164,245
Contingency accruals 5,265 15,308
Book and tax basis differences - Other real estate owned 7,607 -
Net unrealized loss on securities 129,943 4,204
-------------- -------------
Total 505,222 376,197
-------------- -------------
Deferred tax liabilities:
Depreciation 31,481 32,213
Accretion on securities 21,040 8,708
-------------- -------------
Total 52,521 40,921
-------------- -------------
Net deferred tax assets $ 452,701 $ 335,276
============== = =======
40
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Employee Benefits
401(k) Plan: The subsidiary bank sponsors a 401(k) defined
contribution plan covering substantially all employees.
Participants are eligible to contribute up to 10% of their annual
compensation to the Plan. For the year ended December 31, 1997,
the Bank matched participant contributions in an equal amount up
to 3.5% of each participant's annual compensation. Beginning
January 1, 1998, the Bank matches up to 5% of each participant's
annual compensation. In addition, the Bank is also eligible to
make discretionary contributions to the Plan.
Profit-Sharing Plan: The subsidiary bank sponsored a
noncontributory defined contribution profit-sharing plan covering
substantially all employees through October 1, 1997. Effective
October 1, 1997, the profit sharing plan was terminated.
Contributions to the Plan, prior to October 1, 1997, were at the
discretion of the Board of Directors.
The Bank's contributions to the above Plans for the years ended
December 31, 1999, 1998 and 1997, totaled $48,556, $49,435 and
$47,014, respectively.
Postretirement Benefit Plans: The subsidiary bank sponsors a
postretirement medical plan and a postretirement life insurance
plan for all retired employees that meet certain eligibility
requirements. Effective January 1, 1999, participation in the plan
was closed to all new employees hired after that date. Both plans
are contributory with retiree contributions that are adjustable
based on various factors, some of which are discretionary. The
plans are unfunded. Details regarding the retiree medical plan and
the retiree life insurance plan are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retiree Retiree
Medical Plan Life Insurance Plan Total
-------------------------------- -----------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------------------------------- -----------------------------------------------------------
Change in accumulated
postretirement benefit
obligation
Accumulated postretirement
benefit obligation at
beginning of year $ 374,954 $305,375 $ 248,486 $ 106,188 $ 110,927 $ 97,723 $ 481,142 $ 416,302 $ 346,209
Service cost 7,643 6,155 6,627 2,929 2,443 2,619 10,572 8,598 9,246
est cost 23,979 20,175 16,847 6,779 7,334 6,493 30,758 27,509 23,340
Actuarial (gain)/loss (10,579) 62,181 44,430 10,527 (8,760) 8,589 (52) 53,421 53,019
Benefits paid (16,849) (18,932) (11,015) (8,035) (5,756) (4,497) (24,884) (24,688) (15,512)
--------- -------- --------- --------- --------- ---------- --------- --------- ---------
Accumulated postretirement
benefit obligation at end
of year $ 379,148 $374,954 $ 305,375 $ 118,388 $ 106,188 $ 110,927 $ 497,536 $ 481,142 $416,302
========= ======== ========= ========= ========= ========= ========= ========= ========
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retiree Retiree
Medical Plan Life Insurance Plan Total
------------------------------ ------------------------------- -----------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
--------- ----------- --------- --------- --------- --------- ------------ ---------
Change in plan assets
Fair value of plan assets at
beginning of year $ - $ - $ - $ - $ - $ - $ - $ - $ -
Employer contribution 16,849 18,932 11,015 8,035 5,756 4,497 24,884 24,688 15,512
Benefits paid (16,849) (18,932) (11,015) (8,035) (5,756) (4,497) (24,884) (24,688) (15,512)
--------- ---------- --------- -------- --------- -------- -------- -------- --------
Fair value of plan assets at
end of year $ - $ - $ - $ - $ - $ - $ - $ - $ -
========= ========== ========= ======== ========= ======== ======== ======== ========
Funded status $(379,148) $(374,954) $(305,375) (118,388) $(106,188) $(110,927)(497,536)$(481,142)$(416,302)
Unrecognized net actuarial
(gain)/loss 50,558 62,800 619 10,102 (425) 8,335 60,660 62,375 8,954
--------- ---------- --------- --------- ------- --------- ------- --------- ---------
Accrued postretirement
benefit cost $(328,590) $(312,154) $(304,756) $(108,286) $(106,613) $(102,592)$(436,876)$(418,767)$(407,348)
========= =========== ======== ========= ======== ========= ======== ========= ========
Weighted-average
assumptions as of
December 31
Discount rate 7.25% 6.75% 7.00% 7.25% 6.75% 7.00 - - -
Components of net periodic
postretirement benefit
cost:
Service cost $ 7,643 $ 6,155 $ 6,627 $ 2,929 $ 2,443 $2,619 $ 10,572 $ 8,598 $ 9,246
Interest cost 23,979 20,175 16,847 6,779 7,334 6,493 30,758 27,509 23,340
Amortization of net actuarial
(gain)/loss 1,663 - (1,414) - - - 1,663 - (1,414)
--------- ----------- --------- --------- --------- --------- --------- --------- ---------
Net periodic postretirement
benefit $ 33,285 $ 26,330 $ 22,060 $ 9,708 $ 9,777 $ 9,112 $ 42,993 $ 36,107 $ 31,172
========= =========== ========= ========= ========= ========= ========= ========= ========
</TABLE>
For measurement purposes, a 7% annual rate of increase in per capita healthcare
costs of covered benefits was assumed for the first 3 years, 6% for the next 3
years (6% for the next 5 years for 1998 and 1997, respectively), 5 1/2% for the
next 3 years, (5 1/2 % for the next 5 years for 1998 and 1997, respectively) and
5% thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one- percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
<S> <C> <C>
1 Percent 1 Percent
Point Increase Point Decrease
Increase (decrease) service and interest cost
components $ 1,315 $ (1,176)
================== ====================
(Increase) decrease accumulated postretirement
benefit obligation $ (18,144) $ 16,215
================== ====================
42
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Stock Option Plan
The Company has an incentive stock option plan for key employees
of the Bank as identified by the stock option committee. Grants
under the plan are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has
been recognized for grants under the plan. Had compensation cost
for the stock-based compensation plan been determined based on
the grant date fair values of awards (the method described in
FASB Statement 123), the reported net income and earnings per
share would have been reduced to the proforma amounts shown
below:
<S> <C> <C> <C>
1999 1998 1997
------------- -------------- ----------
Net income:
As reported $ 1,001,616 $ 724,144 $ 791,822
Proforma $ 967,420 $ 712,983 $ 770,623
Basic earnings per share:
As reported $ 1.04 $ 0.75 $ 0.82
Proforma $ 1.00 $ 0.74 $ 0.80
Diluted earnings per share:
As reported $ 1.03 $ 0.75 $ 0.82
Proforma $ 1.00 $ 0.74 $ 0.80
</TABLE>
The significant provisions of the Plan include authorization of
the stock option committee to grant up to 48,125 shares of common
stock between April 25, 1996 and April 25, 2006, with the right
to adjust the number of shares available for the plan at its
discretion. Each option fully vests after six months from the
grant date and must be exercised within 5 years.
The fair value of each grant is estimated at the grant date using
the minimum value method with the following weighted-average
assumptions for grants in 1999 and 1997: dividend rate of 2%;
risk free interest rate of 5.85% and 5.37%, respectively and
expected life of 5 years. No options were granted in 1998.
A summary of the status of the plan at December 31, 1999, 1998
and 1997 and changes during the year ended is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Fixed Options
Outstanding at
beginning of year 18,015 $ 10.43 23,280 $ 10.43 16,000 $10.00
Granted 14,000 15.00 - 8,280 11.20
Exercised - - (2,015) 10.46 - -
Forfeited - - (3,250) 10.37 (1,000) (10.00)
----------- ----------- -----------
Outstanding at
end of year 32,015 12.43 18,015 10.43 23,280 10.43
=========== =========== ===========
Exercisable at end
of year 32,015 12.43 18,015 10.43 15,000 10.00
=========== =========== ===========
Fair value per option
of options granted
during the year $ 2.44 $ - $ 1.62
============ =========== ============
</TABLE>
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the options outstanding under the stock
option plan have exercise prices ranging from $10.00 to $15.00 and
a weighted average remaining contractual life of 3.18 years.
Note 12. Lease Obligation
The subsidiary bank leases the Charleston branch office space under an
operating lease with an initial term of ten years commencing on May 1,
1996. The lease provides for two successive options for five year
renewals. Total minimum lease payments of $101,970 were charged to
expense for each of the years ended December 31, 1999, 1998 and 1997,
respectively. In addition, adjustments may be charged or credited to
the minimum amount for changes in the Company's portion of the common
area maintenance. Total future minimum lease payments under the lease
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ending
December 31, Amount
------------ ------
2000 $ 101,970
2001 101,970
2002 101,970
2003 101,970
Thereafter 251,260
-------------
$ 659,140
</TABLE>
Note 13. Commitments and Contingencies
Reserve Requirements: The subsidiary bank is required to maintain a
reserve balance with the Federal Reserve Bank. At December 31, 1999,
the reserve balance was $645,000. The subsidiary bank does not earn
interest on this balance.
Commitment to Purchase
The subsidiary bank committed to purchase a security with a par value
of $600,000 before the balance sheet date that did not settle until
after December 31, 1999.
Year 2000 Compliant
The Company has evaluated the impact of the Year 2000 issue and is not
aware of any system failures or any problems encountered by vendors,
customers, or other third parties that would have a significant impact
on the Company's financial condition. The Company believes it has
taken the necessary steps to be Year 2000 compliant, however, there
may be unforeseen external or internal issues which could impact the
Company's status in the future.
Financial instruments with off-balance sheet risk: The subsidiary bank
is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The
contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
44
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999 and 1998, the subsidiary bank's financial
instruments with off-balance sheet risk are as follows:
<S> <C> <C>
Financial instruments whose contract Contract Amount
amounts represent credit risk 1999 1998
----------------------------------------- --------------- -----------
Commitments to extend credit $ 13,903,030 $11,508,148
=============== ===========
</TABLE>
The subsidiary bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount
of those instruments. The subsidiary bank uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Bank management
evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include accounts receivable, inventory,
equipment or real estate.
Litigation: The Company is involved in various legal actions arising
in the ordinary course of business. In the opinion of counsel, the
outcome of these matters will not have a significant adverse effect on
the consolidated financial statements.
Employment Agreement: The Company has an employment agreement with its
chief executive officer. This agreement contains change in control
provisions that would entitle the officer to receive, under certain
circumstances, twice his annual compensation in the event there is a
change in control in the Company (as defined) and a termination of his
employment. The maximum contingent liability under this agreement
approximates $397,752 at December 31, 1999.
Note 14. Regulatory Restrictions on Capital and Dividends
The primary source of funds for the dividends paid by First National
Bankshares Corporation is dividends received from its subsidiary bank.
Dividends paid by the subsidiary bank are subject to restrictions by
banking regulations. The most restrictive provision requires approval
by the regulatory agency if dividends declared in any year exceed the
year's net income, as defined, plus the net retained profits of the
two preceding years. During 2000, the net retained profits available
for distribution to First National Bankshares Corporation as dividends
without regulatory approval approximate $1,008,531 plus net retained
profits, as defined, for the interim periods through the date of
declaration.
The subsidiary bank is subject to various regulatory capital
requirements administered by the Federal banking agencies. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the subsidiary bank must meet specific capital
guidelines that involve quantitative measures of the subsidiary bank's
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The subsidiary bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999, that the subsidiary bank
meets all capital adequacy requirements to which it is subject.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The most recent notification from the Office of the Comptroller of the
Currency categorized the subsidiary bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized the subsidiary bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table below. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The subsidiary bank's actual capital amounts and ratios are presented
in the following table (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December
31, 1999:
Total Capital $ 11,091 15.28% $ 5,808 8.0% $ 7,260 10.0%
(to Risk Weighted
Assets)
Tier I Capital 10,328 14.23% 2,904 4.0% 4,355 6.0%
(to Risk Weighted
Assets)
Tier I Capital 10,328 9.71% 3,191 3.0% 5,318 5.0%
(to Average Assets)
As of December
31, 1998:
Total Capital $ 10,493 15.77% $ 5,323 8.0% $ 6,654 10.0%
(to Risk Weighted
Assets)
Tier I Capital 9,728 14.62% 2,662 4.0% 3,992 6.0%
(to Risk Weighted
Assets)
Tier I Capital 9,728 9.94% 2,936 3.0% 4,893 5.0%
(to Average Assets)
</TABLE>
Note 15. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used
by the Company in estimating its fair value disclosures for financial
instruments.
Cash and due from banks and interest bearing deposits with other
banks: The carrying values of these amounts approximate their
estimated fair value.
Federal funds sold: The carrying values of Federal funds sold
approximate their estimated fair values.
Securities: Estimated fair values of securities are based on quoted
market prices, where available. If quoted market prices are not
available, estimated fair values are based on quoted market prices of
comparable securities.
Loans: The estimated fair values for loans are computed based on
scheduled future cash flows of principal and interest, discounted at
interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. No prepayments of principal are
assumed.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued interest receivable: The carrying values of accrued interest
receivable approximate their estimated fair value.
Deposits: The estimated fair values of demand deposits (i.e. non
interest bearing checking, NOW, money market and savings accounts) and
other variable rate deposits approximate their carrying values. Fair
values of fixed maturity deposits are estimated using a discounted
cash flow methodology at rates currently offered for deposits with
similar remaining maturities. Any intangible value of long-term
relationships with depositors is not considered in estimating the fair
values disclosed.
Short-term borrowings: The carrying values of short-term borrowings
approximate their estimated fair values.
Accrued interest payable: The carrying values of accrued interest
payable approximate their estimated fair value.
Off-balance sheet instruments: The fair values of commitments to
extend credit are estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the present credit standing of the counterparties.
The amounts of fees currently charged on commitments are deemed
insignificant, and therefore, the estimated fair values and carrying
values are not shown below.
The carrying values and estimated fair values of the Company's
financial instruments are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
--------------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks $ 3,716,511 $ 3,716,511 $ 2,336,519 $ 2,336,519
Interest bearing deposits
with other Banks 17,492 17,492 - -
Federal funds sold 30,000 30,000 5,679,000 5,679,000
Securities held to maturity 11,519,992 11,160,273 8,739,119 8,804,710
Securities available for sale 11,689,657 11,356,470 9,126,633 9,126,633
Loans 74,263,640 72,281,189 68,671,231 69,020,644
Accrued interest receivable 726,868 726,868 602,291 602,291
--------------- --------------- ---------------- ---------------
$ 101,964,160 $ 99,288,803 $ 95,154,793 $ 95,569,797
=============== =============== ================ ============
Financial liabilities:
Deposits $ 89,131,844 $ 89,959,520 $ 81,221,327 $ 81,324,234
Short-term borrowings 4,112,579 4,112,253 950,734 950,734
Accrued interest payable 159,554 159,554 200,046 200,044
Long-term borrowings 473,288 473,288 5,487,598 5,487,598
--------------- --------------- ---------------- --------------
$ 93,877,265 $ 94,704,615 $ 87,859,705 $ 87,962,610
=============== =============== ================ ===============
</TABLE>
Note 16. Condensed Financial Statements of Parent Company
The investment of the Company in its wholly-owned subsidiary is
presented on the equity method of accounting. Information relative to
the Company's balance sheets at December 31, 1999 and 1998, and the
related statements of income and cash flows for the years ended
December 31, 1999, 1998 and 1997, are presented as follows:
47
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C> <C>
Balance Sheets
Assets 1999 1998
------ ------------- ----------
Cash $ 25,105 $ 25,105
Investment in bank subsidiary, eliminated in consolidation 10,124,524 9,720,814
Other assets 145,716 85,916
------------- --------------
Total assets $ 10,295,345 $ 9,831,835
============= ==============
Liabilities and shareholders' equity
Liabilities
Dividends payable $ 144,677 $ 84,877
------------- --------------
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 964,515 shares 964,515 964,515
Capital surplus 1,019,053 1,019,053
Retained earnings (consisting of undivided profits of
subsidiary not yet distributed) 8,370,344 7,769,966
Accumulated other comprehensive income (203,244) (6,576)
------------- -------------
Total shareholders' equity 10,150,668 9,746,958
----------------------------
Total liabilities and shareholders' equity $ 10,295,345 $ 9,831,835
============= =============
Statements of Income 1999 1998 1997
-------------------- ------------- ------------- ----------
Income - dividends from bank subsidiary $ 401,238 $ 316,037 $ 308,000
Expenses - operating - 77 49
------------- ------------- -----------
Income before income taxes and undistributed
income 401,238 315,960 307,951
Applicable income tax expense (benefit) - (30) (19)
------------- ------------- ------------
Income before undistributed income 401,238 315,990 307,970
Equity in undistributed income in bank subsidiary 600,378 408,154 483,852
------------- ------------- -----------
Net income $ 1,001,616 $ 724,144 $ 791,822
============= ============= ==========
Statements of Cash Flows 1999 1998 1997
------------------------ ------------- ------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,001,616 $ 724,144 $ 791,822
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiary (600,378) (408,154) (483,852)
(Increase) decrease in other assets (59,800) (7,907) (19)
------------- ------------- -----------
Net cash provided by operating activities 341,438 308,083 307,951
------------- ------------- ----------
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock pursuant
to exercise of stock option - 21,068 -
Dividends paid to shareholders (341,438) (308,160) (308,000)
------------- ------------- -----------
Net cash (used in) financing activities (341,438) (287,092) (308,000)
------------- ------------- -----------
Increase (decrease) in cash - 20,991 (49)
Cash:
Beginning 25,105 4,114 4,163
------------- ------------- --------------
Ending $ 25,105 $ 25,105 $ 4,114
============= ============= ==============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 144,677 $ 84,877 $ 77,000
============= ============= ===============
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
First National Bankshares Corporation accounts for its investment in
its bank subsidiary by the equity method. During the years ended
December 31, 1999, 1998 and 1997, changes were as follows:
Number of shares owned at December 31, 1999 - 38,500 Percent
to total shares at December 31, 1999 - 100%
Balance at December 31, 1996 $ 8,835,459
Add (deduct):
Equity in net income 791,852
Dividends declared (308,000)
Change in net unrealized gain (loss) on securities 365
------------------
Balance at December 31, 1997 9,319,676
Add (deduct):
Equity in net income 724,191
Dividends declared (316,037)
Change in net unrealized gain (loss) on securities (7,016)
----------------
Balance at December 31, 1998 9,720,814
Add (deduct):
Equity in net income 1,001,616
Dividends declared (401,238)
Change in net unrealized gain (loss) on securities (196,668)
--------------
Balance at December 31, 1999 $10,124,524
==============
</TABLE>
Note 17. Other Real Estate Acquired in Settlement of Loans
In 1999 the Company entered into an agreement to lease the commercial
property it held in other real estate at December 31, 1998.
The terms of the lease call for the lessee to make monthly
payments for three years as follows:
Months 1 - 3 $ -
Months 4 - 6 2,500
Months 7 - 36 3,500
The lessee has an option to purchase the property at any time during
the lease term at a price equal to the book value of the property at
December 31, 1998, $875,000, reduced by the amount of lease payments
made under the lease agreement, up to a maximum of $100,000. For the
year ended 1999, $19,504 was received under the agreement, all of
which was accounted for as a cost recovery.
49
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company may consist of not less than five (5) nor
more than twenty-five (25) shareholders in accordance with the Company's
Articles of Incorporation. The number of directors within such minimum and
maximum limits shall be determined from time to time by resolution of a majority
of the full Board of Directors, subject to limitations outlined in the Company's
By-laws. Currently the Board of Directors may not increase the number of
directors to a number which exceeds by more than two the number of directors
last elected by the shareholders. The number of directors may also be fixed by a
resolution of the shareholders at any annual or special meeting. No shareholder
may be elected as director after attaining the age seventy (70), unless the
shareholder was also a member of the Board of Directors on May 5, 1987.
In September 1999, the Board of Directors resolved to increase (and fix) the
number of directors from 10 to 12, after which, two new directors were appointed
by the Board (Directors Garten and Campbell). In December 1999, Director J.R.
Dawkins passed away, leaving one vacancy on the board of directors. Mr. Dawkins'
term of office was to expire in 2000 and no person was appointed in the interim
to fill the vacancy. No discussions as to a replacement for Mr. Dawkins have
been held. Additional information about the directors, including their principal
occupation and age, is set forth in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla President & CEO of 60 1993 2001
President & CEO of the First National Bankshares
Company and the Bank, Corp. and First National
Risk Management Cmt., Bank (1993 - present);
Trust Cmt. Director, President & CEO
of Bank One, West Virginia
Charleston, NA (1985-1993)
Michael G. Campbell Investor 51 1999 2002
Audit & Compliance Cmt. Oil & Gas Executive
Owner, Renick Farm
David A. Carson President - Carson Associates 48 1998 2000
Risk Management Cmt.
Audit & Compliance Cmt.
J. R. Dawkins Deceased - 1999
Audit & Compliance Cmt.
Richard E. Ford Attorney at Law 72 1987 2002
Risk Management Cmt. Partner - The Ford
Trust Cmt. Law Firm
Incentive Stock Option Cmt.
Personnel & Comp. Cmt.
Walter Bennett Fuller Retired Banker 76 1986 2000
Vice Chairman of the Board,
Audit & Compliance Cmt.
Incentive Stock Option Cmt.
- -------------------------------------------------------------------------------------------------------------------
(Table continued on next page)
51
<PAGE>
- -------------------------------------------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- -------------------------------------------------------------------------------------------------------------------
G. Thomas Garten President - Alleghany Motor 48 1999 2000
Audit & Compliance Cmt. Owner - Greenway's Real
Estate & Auction Co.
William D. Goodwin Attorney at Law, 56 1986 2001
Risk Management Cmt. Owner/Broker, Coldwell
Trust Cmt. Banker Stuart & Watts Real
Personnel & Compensation Cmt. Estate, Inc.
Lucie T. Refsland, Ed.D. Associate Professor of 63 1995 2001
Risk Management Cmt. Mathematics (1993 - present)
Trust Cmt. Greenbrier Community College
Center of Bluefield State College
William R. Satterfield, Jr. Owner - Greenbrier 55 1986 2001
Risk Management Cmt. Insurance Agency
Personnel & Compensation Cmt.
Richard L. Skaggs Retired 77 1986 2000
Audit & Compliance Cmt.
Incentive Stock Option Cmt.
Ronald B. Snyder President, R.B.S., Inc. 60 1988 2002
Chairman of Board (construction company)
Audit & Compliance Cmt.
Risk Management Cmt.
Incentive Stock Option Cmt.
Personnel & Compensation Cmt.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The directors of the Company are divided into three (3) classes; and as a
result, the shareholders elect approximately one-third of the directors of the
Company each year. Directors Carson, Fuller and Skaggs whose terms expire in
2000, have been nominated to stand for re-election at the 2000 annual meeting of
the Company's stockholders to serve a 3- year term which will expire in 2003.
Director Garten, who was appointed by the Board of Directors in September 1999
to serve in the Class of 2000, will stand for election at the 2000 annual
meeting to serve a 3-year term which will expire in 2003. Director Campbell, who
was appointed by the Board of Directors in September 1999 to serve in the Class
of 2002, will stand for election at the 2000 annual meeting to serve a 2-year
term which will expire in 2002.
The Directors of the Company do not receive any fees or compensation for
services as directors thereof. All of the directors of the Company, however, are
also directors of the Bank, and as such, receive $200.00 for each Board meeting,
and $50.00 for each Board Committee meeting attended, plus $200.00 per month. No
Board Committee fees are paid to directors who are also salaried officers of the
Bank.
52
<PAGE>
Executive Officers
The current executive officers of the Company and the Bank and information about
these officers is set forth on the following table.
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Name Age Offices Held During Last Five Years
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 60 President & CEO of the Company and the Bank (1993 to present);
President and CEO of Bank One, West Virginia, Charleston, NA (1985 -
1993)
Charles A. Henthorn 40 Secretary/Treasurer of the Company (1999 to present); Executive Vice
President of the Company (1996 to 1999); Executive Vice President of
the Bank (1996 to present); Secretary to the Board of Directors (1998
to present); Senior Vice President of the Bank (1994 to 1996); Vice
President and Senior Commercial Lender of Bank One, West Virginia,
Charleston, NA (1991 - 1994); National Bank Examiner with the Office
of the Comptroller of the Currency (1983 - 1991)
Darrell G. Echols 63 Vice President of the Company (1987 to present); Senior Vice
President and Loan Officer of the Bank (1970 to present)
Victoria W. Ballengee 43 Vice President of the Company (1999 to present); Senior Vice President
and Director of Private Banking of the Bank (1996 to present); Vice
President and WV Market Manager, Banc One Mortgage Corporation
(1994 to 1996); Regional Finance Director, Banc One, West Virginia,
Charleston, NA (1993 to 1994
Matthew L. Burns 30 Chief Financial Officer of the Bank (1998 to present); Certified Public
Accountant (1992 to 1998)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The executive officers of the Company listed above shall continue in office
until the 2000 organizational meeting of the directors of the Company. It is
expected that the current officers will be re-elected to the offices they now
hold.
Compliance with Section 16(a) of the Exchange Act
The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not
have any class of securities registered pursuant to Section 12 of the Exchange
Act, the provisions of Section 16 thereof are not applicable to the Company's
directors, officers and shareholders.
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation paid to the
chief executive officer, the only executive officer whose compensation exceeds
$100,000, for the years 1999, 1998 and 1997:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Long-Term
Other Compensation
Annual Compensation Compen- Securities Under-
Name and Salary Bonus sation lying Options
Principal Position Year ($) ($) $ (1) (#) (2)
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 1999 $150,000 $30,000 $18,575 3,250
President & CEO of the 1998 $150,000 - $19,964 -
Company and the Bank 1997 $150,000 $20,250 $22,767 2,000
FOOTNOTES:
(1) These amounts are for director fees, premiums paid for term life
insurance, employer matching 401(k) contributions, and personal use of
company-owned vehicle.
</TABLE>
53
(2) Represent shares granted under the Company's Incentive Stock Option
Plan. The options fully vest six months after the grant date and expire
five years after grant date.
The following table details stock option grants to the chief executive officer
for the year 1999:
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN 1999
<S> <C> <C> <C> <C> <C> <C>
Potential Realizable
Number of Value (3) at Assumed
Securities Annual Rates of Stock
Underlying % of Total Exercise Price Appreciation for
Name and Options Options Price Expiration Option Term
Principal Position Granted (1) Granted ($/Sh) Date 5% ($) (2) 10% ($) (2)
- ----------------------------------------------------------------------------------------------------------
L. Thomas Bulla 3,250 23.2% $15.00 11/25/04 $13,455 $29,770
</TABLE>
FOOTNOTES:
(1) The options were granted under the Company's Incentive Stock Option
Plan. The options fully vest six months after the grant date. Under the
plan, the options carry an exercise price equal to the fair market
value of the stock at the date of the grant. The options cannot be
transferred and all unexercised options expire five years after the
grant date. The options granted to the above executive officer
represents approximately 0.34% of the common stock outstanding on March
1, 2000.
(2) The potential realizable value of the options, if any, granted in 1999
to the executive officer was calculated by multiplying those options by
the excess of (a) the assumed fair market value of the common stock on
the date of the grant (May 25, 1999) if the fair market value of the
common stock were to increase 5% or 10% in each year of the option's
five year term over (b) the exercise price shown. This calculation does
not take into account any taxes or other expenses which might by owed.
The assumed fair market value at a 5% assumed annual appreciation rate
over the five year term is $19.14 and such value at a 10% assumed
annual appreciation rate over that term is $24.16. The 5% and 10%
appreciation rates are set forth in the Securities and Exchange
Commission rules and no representation is made that the common stock
will appreciate at these assumed rates or at all.
The following table details the aggregated option exercises in 1999 and 1999
year end option values:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1999
AND 1999 YEAR END OPTION VALUES
<S> <C> <C> <C> <C> <C> <C>
Shares Number of Securities Value of Unexercised In-The-
Acquired on Underlying Unexercised Money (2) Options at end of
Name and Exercise Value Options at end of 1999 (#) 1999 ($)(3)
Principal Position (# of sh) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla $0 $0 8,450 0 $135,200 $0
FOOTNOTES:
(1) The "value realized" represents the difference between the exercise
price of the option shares and the market price of the option shares on
the date the option was exercised. The value realized was determined
without considering any taxes which may have been owed.
(2) "In-The-Money" options are options whose exercise price was less than the fair market value of common stock
at December 31, 1999.
(3) Assumes a stock price of $16.00 per share, which is the believed
market price per share reported to management by purchasers of the
Company's common stock on or about December 31, 1999.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
54
Employment Agreement
The Company has an employment agreement with its chief executive officer. This
agreement contains change in control provisions that would entitle the officer
to receive, under certain circumstances, twice his annual compensation in the
event there is a change in control in the Company (as defined therein) resulting
in termination of his employment or voluntary resignation. The maximum
contingent liability under this agreement approximated $398,000 at December 31,
1999.
Benefit Plans
The Company's executive incentive plan is discretionary and is based upon
several factors, including the overall financial performance of the Company and
individual performance factors, among others. The plan is directed by the
Compensation Committee of the Board of Directors and currently covers those
employees classified as executive officers of the Company or its subsidiary
bank.
At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to
approve an incentive stock option plan. The purpose of the plan is to provide a
method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth, and protection of the business, and who
are making substantial contributions to the success and profitability of the
business, may be encouraged to acquire a stock ownership in the Company, thus
creating a proprietary interest in the business and providing them with greater
incentive to continue in the service of and to promote the interest of the
Company and its stockholders. The plan is directed by the Incentive Stock Option
Committee, which is comprised of certain board members, who at their discretion
grant shares to employees covered by the plan. For more information regarding
the stock option plan, please refer to Note 11 of the Consolidated Financial
Statements included in Item 8 of this filing.
Information related to the Company's 401(k) and profit-sharing plans is
summarized in Note 10 of the Consolidated Financial Statements included in Item
8 of this filing.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no shareholders, known to the Company, who beneficially own more than
5.0% of the Company's common stock, the only class of stock outstanding, as of
March 1, 2000.
The following table sets forth information as of March 1, 2000, regarding the
amount and nature of the beneficial ownership of common stock of the Company
held by each of the directors of the Company and by all of the directors and
executive officers of the Company and the Bank as a group.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares Owned Percent of
Name Beneficially Class
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 40,550 (1) 4.17%
David A. Carson 4,315 (2) 0.45%
Michael G. Campbell 3,750 (3) 0.39%
Richard E. Ford 20,530 (4) 2.13%
Walter Bennett Fuller 9,500 (5) 0.98%
G. Thomas Garten 1,925 (6) 0.20%
William D. Goodwin 7,975 (7) 0.83%
Lucie T. Refsland, Ed.D. 2,325 (8) 0.24%
William R. Satterfield, Jr. 7,545 (9) 0.78%
Richard L. Skaggs 2,795 (10) 0.29%
Ronald B. Snyder 18,905 (11) 1.96%
All Directors and Executive
Officers of the Company
as a Group (13 persons) 150,140 (12) 15.19%
- -------------------------------------------------------------------------------------------------------------------
FOOTNOTES
(1) Mr. Bulla has sole voting and investment authority for 19,350 shares and shared voting and investment authority
for 12,750 shares. Included in Mr. Bulla's beneficial ownership are 8,450 fully-vested and exercisable stock options.
(2) Mr. Carson has sole voting and investment authority for 700 shares and shared voting and investment authority for
2,845. Included in Mr. Carson's beneficial ownership are 770 shares held by his spouse.
(3) Mr. Campbell has sole voting and investment authority for 3,750 shares.
(4) Mr. Ford has sole voting and investment authority for 8,230 shares and shared voting and investment authority for
10,075 shares. Included in Mr. Ford's beneficial ownership are 2,225 shares held by his spouse.
55
(5) Mr. Fuller has sole voting and investment authority for 9,500 shares.
(6) Mr. Garten has sole voting and investment authority for 1,925 shares. Included in Mr. Garten's beneficial ownership
are 1,000 shares held by family members.
(7) Mr. Goodwin has sole voting and investment authority for 4,725 shares and shared voting and investment authority
for 3,250 shares.
(8) Ms. Refsland has sole voting and investment authority for 2,275 shares. Included in Ms. Refsland's beneficial
ownership are 50 shares held by her spouse.
(9) Mr. Satterfield has sole voting and investment authority for 5,545 shares. Included in Mr. Satterfield's beneficial
ownership are 2,000 shares held by his spouse.
(10) Mr. Skaggs has sole voting and investment authority for 1,625 shares and
shared voting and investment authority for 1,170 shares.
(11) Mr. Snyder has sole voting and investment authority for 1,625 shares and shared voting and investment authority
for 12,780 shares. Included in Mr. Snyder's beneficial ownership are 4,500 held by a corporation in which he has
a controlling interest.
(12) Beneficial ownership includes sole and investment authority of 23,975 shares held by Mr. Henthorn and Mr. Echols,
including 10,300 fully vested stock options.
</TABLE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of business the Company's subsidiary, the Bank, as in the
past, has had banking transactions with the directors and executive officers of
the Company and the Bank, members of their immediate families, corporations and
other entities in which such directors and officers were executive officers or
had, directly or indirectly, beneficial ownership of 10% or more in any class of
equity securities, and trusts in which they have a substantial beneficial
interest or for which they serve as a fiduciary. Management of the Company is of
the opinion that any outstanding extensions of credit to such persons were made
in the ordinary course of the business of the Bank on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
in comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. See Note 4
of the Consolidated Financial Statements included in Item 8 of this filing for
additional information related to loans granted to related parties.
On occasion, certain Directors of the Company who are professionals in the
fields of law and insurance (Directors Ford, Goodwin and Satterfield) have
provided, and are expected to continue to provide, incidental legal and
insurance services on behalf of the Company and/or its subsidiary bank. It is
believed that the payments of these services do not individually, or in the
aggregate, exceed 5% of the respective Directors' total revenue.
56
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
Page(s) in
Form 10-K
( a ) (1)Financial Statements
The following consolidated financial statements and accountant's
report appear on pages 23 through 45 of this Form 10-K
Report of independent auditors..................................................................................23
Consolidated balance sheets at December 31, 1999 and 1998.......................................................24
Consolidated statements of income for the years ended
December 31, 1999, 1998, and 1997............................................................................25
Consolidated statements of comprehensive income for the
years ended December 31, 1999, 1998 and 1997 . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated statements of shareholders' equity
for the years ended December 31, 1999, 1998, and 1997........................................................27
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998, and 1997.......................................................................28 - 29
Notes to the consolidated financial statements.............................................................30 - 49
( a ) (2)Financial Statement Schedules
All other schedules for which provision is made in the applicable
regulations of the Commission have been omitted as the schedules are
not required under the related instructions, or are not applicable,
or the information required thereby is set forth in the financial
statements or the notes thereto
( a ) (3)Exhibits required to be filed by Item 601 of Regulation
S-K and 14( c ) of Form 10-K
See index to exhibits........................................................................................60
( b ) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant during the
quarter ended December 31, 1999.
( c ) Exhibits
See Item 14(a)(3), above
( d ) Financial Statement Schedules
See Item 14(a)(2), above
57
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST NATIONAL BANKSHARES CORPORATION
(Registrant)
/s/ L. Thomas Bulla 03/28/00
-----------------------------------------------------
L. Thomas Bulla
President, Chief Executive Officer & Director
(Principal Executive Officer)
/s/ Charles A. Henthorn 03/28/00
-----------------------------------------------------
Charles A. Henthorn
Executive Vice President and Secretary
To the Board of Directors
/s/ Matthew L. Burns, CPA 03/28/00
-----------------------------------------------------
Matthew L. Burns, CPA
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
<TABLE>
<CAPTION>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<S> <C> <C> <C>
/s/ David A. Carson 03/28/00 /s/ Lucie T. Refsland 03/28/00
- --------------------------------------------------- ---------------------------------------------------------
David A. Carson, Director Lucie T. Refsland, Director
/s/ Michael G. Campbell 03/28/00 /s/ William R. Satterfield Jr. 03/28/00
- --------------------------------------------------- ---------------------------------------------------------
Michael G. Campbell, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/28/00 /s/ Richard L. Skaggs 03/28/00
- --------------------------------------------------- ----------------------------------------------------------
Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/28/00 /s/ Ronald B. Snyder 03/28/00
- ---------------------------------------------------- ----------------------------------------------------------
Bennett Fuller, Director Ronald B. Snyder, Director
/s/ G. Thomas Garten 03/28/00
- ----------------------------------------------------
G. Thomas Garten, Director
/s/ William D. Goodwin 03/28/00
- ----------------------------------------------------
William D. Goodwin, Director
58
</TABLE>
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company has not yet sent an annual report and proxy materials to its
stockholders. Such report and material shall be sent to its stockholders
subsequent to the filing of this Form 10-K, and copies thereof shall be
furnished to the Commission upon request.
59
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
PAGE NUMBER(S)
IN FORM 10-K, OR
EXHIBIT PRIOR FILING
NUMBER DESCRIPTION REFERENCE
(3)I Articles of Incorporation of Registrant...............................................................( a )
(3)ii By-laws of Registrant.................................................................................( a )
(10) Material Contracts
A Agreement dated October 14, 1993, between L. Thomas Bulla
and First National Bank.....................................................................( a )
B Summary of Lease terms for Charleston branch facility............................................( b )
C Form S-8 Registration Statement under the Securities Act of 1933.................................( c )
D Specimen Copy of Incentive Stock Option Plan Agreement...........................................( d )
(11) Calculation of Basic and Diluted Computation of Earnings per Share.......................................61
(21) Subsidiary of Registrant.................................................................................62
(23) Consents of experts and counsel
Consent of Independent Auditors.....................................................................63
(27) Financial Data Schedule.............................................................................64 - 65
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
( a ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-Q Quarterly Report dated September 30, 1999 filed
with the Securities and Exchange Commission on or about November 10,
1999.
( b ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-Q Quarterly Report dated September 30, 1999 filed
with the Securities and Exchange Commission on or about November 10,
1999.
( c ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form S-8 dated July 31, 1996, filed with the Securities and
Exchange Commission on or about July 31, 1996.
( d ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-K Annual Report dated December 31, 1996, and filed
with the Securities and Exchange Commission on or about March 29, 1997.
60
<PAGE>
EXHIBIT (11)
BASIC AND DILUTED COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
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.
61
<PAGE>
EXHIBIT (21)
SUBSIDIARY OF THE REGISTRANT
- --------------------------------------------------------------------------------
The following is the subsidiary of the registrant. Such subsidiary is
incorporated in the State of West Virginia.
FIRST NATIONAL BANK, a national banking association organized under the laws of
the United States of America.
62
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our
report, dated February 4, 2000, on our audit of the consolidated financial
statements of First National Bankshares Corporation as of December 31, 1999
and 1998, appearing in Part II, Item 8 of the 1999 Form 10-K of First National
Bankshares Corporation.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 28, 2000
63
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000814178
<NAME> First National Bankshares Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.0000
<CASH> 3,717
<INT-BEARING-DEPOSITS> 17
<FED-FUNDS-SOLD> 30
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,356
<INVESTMENTS-CARRYING> 11,520
<INVESTMENTS-MARKET> 11,160
<LOANS> 74,264
<ALLOWANCE> 764
<TOTAL-ASSETS> 104,829
<DEPOSITS> 89,132
<SHORT-TERM> 4,113
<LIABILITIES-OTHER> 960
<LONG-TERM> 473
0
0
<COMMON> 965
<OTHER-SE> 9,186
<TOTAL-LIABILITIES-AND-EQUITY> 104,829
<INTEREST-LOAN> 6,158
<INTEREST-INVEST> 1,312
<INTEREST-OTHER> 236
<INTEREST-TOTAL> 7,707
<INTEREST-DEPOSIT> 3,077
<INTEREST-EXPENSE> 3,389
<INTEREST-INCOME-NET> 4,317
<LOAN-LOSSES> 100
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 3,175
<INCOME-PRETAX> 1,496
<INCOME-PRE-EXTRAORDINARY> 1,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,002
<EPS-BASIC> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 4.45
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 766
<CHARGE-OFFS> 291
<RECOVERIES> 189
<ALLOWANCE-CLOSE> 764
<ALLOWANCE-DOMESTIC> 764
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 280
</TABLE>
