UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-----------------------------
Commission File Number: 33-14252
FIRST NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 62-1306172
- ---------------------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
One Cedar Street, Ronceverte, West Virginia 24970
- ------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(304) 647-4500
----------------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
The number of shares outstanding of the issuer's classes of common stock as of
May 1, 2000:
Common Stock, $1 par value -- 967,015 shares
THIS REPORT CONTAINS 29 PAGES
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FIRST NATIONAL BANKSHARES CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 7-8
Notes to Condensed Consolidated Financial Statements 9-13
Independent Accountant's Report 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities none
Item 3. Defaults upon Senior Securities none
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<S> <C> <C>
March 31, December 31,
2000 1999
ASSETS (Reviewed) (1)
Cash and due from banks $ 2,086 3,717
Interest-bearing deposits with other banks 17 17
Federal funds sold 1 30
Securities held to maturity (estimated fair value
$11,781 and $11,160, respectively) (Note 2) 12,104 11,520
Securities available for sale (Note 2) 9,819 11,357
Loans, less allowance for loan losses of $736 and
$764, respectively (Notes 3 and 4) 76,625 74,264
Bank premises and equipment, net 1,678 1,695
Accrued interest receivable 813 727
Other real estate owned acquired in settlement of loans 873 884
Other assets 692 618
--------------- ---------------
Total assets $ 104,708 $ 104,829
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 10,002 $ 10,741
Interest-bearing 78,152 78,391
--------------- ---------------
Total deposits 88,154 89,132
Short-term borrowings 4,864 4,113
Other liabilities 941 960
Long-term borrowings 470 473
--------------- ---------------
Total liabilities 94,429 94,678
--------------- ---------------
Commitments and Contingencies (Note 5)
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 967,015 and
964,515 shares, respectively 967 965
Capital surplus 1,042 1,019
Retained earnings 8,511 8,370
Accumulated other comprehensive income (241) (203)
---------------- ----------------
Total shareholders' equity 10,279 10,151
--------------- ----------------
Total liabilities and shareholders' equity $ 104,708 $ 104,829
=============== ================
(1) Extracted from December 31, 1999 audited financial statements.
See Notes to Condensed Consolidated Financial Statements
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3
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<S> <C> <C>
(In thousands of dollars, except per share data) Three Months Ended
March 31,
2000 1999
(Reviewed) (Unaudited)
Interest income
Interest and fees on loans $ 1,657 $ 1,458
Interest and dividends on securities:
Taxable 301 217
Tax-exempt 36 42
Interest on interest bearing deposits from
other banks - 12
Interest on Federal funds sold 15 49
---------- ---------
Total interest income 2,009 1,778
---------- ---------
Interest expense
Interest on deposits 821 718
Interest on short-term borrowings 63 8
Interest on long-term borrowings 7 89
---------- ---------
Total interest expense 891 815
---------- ---------
Net interest income 1,118 963
Provision for loan losses - -
---------- ---------
Net interest income after
provision for loan losses 1,118 963
---------- ---------
Non-interest income
Service fees 72 67
Trust income 16 21
Other income 17 21
---------- ---------
Total non-interest income 105 109
---------- ---------
Non-interest expense
Salaries and employee benefits 424 389
Net occupancy expense 68 69
Equipment rental, depreciation and maintenance 70 70
Data processing 60 50
Advertising 22 15
Professional & legal 24 20
Mailing & postage 18 17
Directors' fees & shareholder expenses 35 27
Stationary & supplies 21 21
Other operating expenses 114 97
---------- ---------
Total non-interest expense 856 775
---------- ---------
Income before income taxes 367 297
---------- ---------
Income tax expense 120 96
---------- ---------
Net income $ 247 $ 201
========== =========
Basic earnings per common share (Note 6) $ 0.26 $ 0.21
========== =========
Diluted earnings per common share (Note 6) $ 0.25 $ 0.21
========== =========
Dividends per common share $ 0.11 $ 0.09
========== =========
See Notes to Condensed Consolidated Financial Statements
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4
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<S> <C> <C>
(In thousands of dollars, except per share data) Three Months Ended
March 31,
2000 1999
(Reviewed) (Unaudited)
Net Income $ 247 $ 201
---------- --------
Other comprehensive income:
Gross unrealized gains/(losses) arising
during the period (61) (68)
Adjustments for income tax (expense)/
benefit 23 27
---------- --------
Other comprehensive income, net of tax (38) (41)
---------- ---------
Comprehensive Income $ 209 $ 160
========== =========
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See Notes to Condensed Consolidated Financial Statements
5
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)
<S> <C> <C>
Three Months Ended
March 31,
2000 1999
(Reviewed) (Unaudited)
Balance, beginning of period $ 10,151 $ 9,747
Net income 247 201
Cash dividends declared ($0.11 and $0.09
per share, respectively) (106) (85)
Issued 2,500 shares of common stock
pursuant to exercise of stock option 25 -
Change in net unrealized (loss) on
securities available for sale (38) (41)
---------- ---------
Balance, end of period $ 10,279 $ 9,822
========== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<S> <C> <C>
Three Months Ended
March 31,
2000 1999
(Reviewed) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 247 $ 201
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 53 58
Provision for loan losses - -
Deferred income taxes (benefit) (27) 1
Amortization of security premiums (accretion) of
security discounts, net (21) (12)
(Increase) decrease in accrued interest receivable (86) (90)
(Increase) decrease in other assets (24) (49)
Increase (decrease) in other liabilities 20 (20)
--------- ----------
Net cash provided by operating activities 162 89
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held
to maturity 15 1,228
Proceeds from maturities and calls of securities
available for sale 2,000 2,002
Purchases of securities held to maturity (600) (2,478)
Purchases of securities available for sale (501) (3,000)
Principal collected on (loans made to) customers, net (2,361) 1,438
Purchases of bank premises and equipment (36) (15)
Lease payments collected on other real estate owned 11 -
--------- --------
Net cash provided by (used in) investing activities (1,472) (825)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
and savings accounts (1,364) 156
Proceeds from sales of (payments for matured)
time deposits, net 386 (1,187)
Proceeds from sale of common stock pursuant to stock
option exercise 25 -
Net increase (decrease) in short-term borrowings 751 (286)
Principal payments on long-term borrowings (3) (4)
Dividends paid (145) (85)
--------- ----------
Net cash provided by (used in) financing activities (350) (1,406)
--------- ----------
Increase (decrease) in cash and cash equivalents (1,660) (2,142)
Cash and cash equivalents:
Beginning $ 3,747 $ 8,016
--------- ---------
Ending $ 2,087 $ 5,874
========= ====
(Continued)
7
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FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(In thousands of dollars)
Three Months Ended
March 31,
2000 1999
(Reviewed) (Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 935 $ 878
========= ==========
Income taxes $ 11 $ 10
========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 106 $ 85
========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
8
<PAGE>
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Reviewed)
Note 1. Basis of Presentation
The accounting and reporting policies of First National Bankshares
Corporation and Subsidiary (the "Company") conform to generally
accepted accounting principles and to general policies within the
financial services industry. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated statements include the accounts of the
Company and its wholly-owned subsidiary, First National Bank. All
significant inter-company balances and transactions have been
eliminated. The information contained in the condensed
consolidated financial statements has been reviewed by our
independent accountants except where indicated. In the opinion of
management, all adjustments for a fair presentation of the results
of the interim periods have been made. All such adjustments were
of a normal, recurring nature. The results of operations for the
three months ended March 31, 2000 are not necessarily indicative
of the results to be expected for the full year. The condensed
consolidated financial statements and notes included herein should
be read in conjunction with the Company's 1999 audited financial
statements and Form 10-K.
Certain amounts in the condensed consolidated financial statements
for the prior year, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and
estimated fair values of securities at March 31, 2000 and December
31, 1999 are summarized as follows (in thousands):
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<S> <C> <C> <C> <C>
March 31, 2000
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government agencies
and corporations $ 8,600 $ - $ 223 $ 8,377
State & political subdivisions 485 - 86 399
----------- ----------- ----------- -----------
Total taxable 9,085 - 309 8,776
Tax-exempt:
State & political subdivisions 3,019 11 25 3,005
----------- ----------- ----------- -----------
Total securities held to maturity $ 12,104 $ 11 $ 334 $ 11,781
=========== =========== =========== ===========
9
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government agencies
and corporations 9,499 - 394 9,105
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 646 - - 646
Other equity securities 9 - - 9
---------- ----------- ----------- -----------
Total taxable 10,211 - 394 9,817
Tax-exempt:
Federal Reserve Bank stock 2 - - 2
---------- ----------- ----------- -----------
Total securities available for sale $ 10,213 $ - $ 394 $ 9,819
========== =========== =========== ===========
December 31, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity:
Taxable:
U.S. Government agencies
and corporations $ 8,000 $ - $ 196 $ 7,804
State & political subdivisions 500 - 172 328
--- - --- -----------
Total taxable 8,500 - 368 8,132
Tax-exempt:
State & political subdivisions 3,020 21 13 3,028
---------- ----------- ----------- -----------
Total securities held to maturity $ 11,520 $ 21 $ 380 $ 11,160
========== =========== =========== ===========
December 31, 1999
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale:
Taxable:
U.S. Government agencies
and corporations $ 10,978 $ - $ 333 $ 10,645
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 646 - - 646
Other equities 7 - - 7
---------- ----------- ----------- -----------
Total taxable 11,688 - 333 11,355
Tax-exempt:
Federal Reserve Bank stock 2 - - 2
---------- ----------- ----------- -----------
Total securities held to maturity $ 11,690 $ - $ 333 $ 11,357
========== =========== =========== ===========
10
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The maturities, amortized cost and estimated fair values of the
Company's securities at March 31, 2000 are summarized as follows
(in thousands):
Held to Maturity Available for Sale
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
Due within 1 year $ 1,000 $ 995 $ - $ -
Due after 1 but within 5 years 10,350 10,125 9,499 9,105
Due after 5 but within 10 years 269 262 - -
Due after 10 years 485 399 - -
Equity securities - - 714 714
---------- ----------- ----------- -----------
$ 12,104 $ 11,781 $ 10,213 $ 9,819
========== =========== =========== ===========
</TABLE>
The Company's Federal Reserve Bank stock and Federal Home Loan
Bank stock are equity securities which are included in securities
available for sale in the accompanying condensed consolidated
financial statements. Such securities do not have a stated
maturity date, and are carried at cost, since they may only be
sold back to the respective issuer or another member at par value.
The proceeds from sales and calls and maturities of securities,
and the related gross gains and losses realized for the three
month periods ended March 31, 2000 and 1999 are as follows (in
thousands):
<TABLE>
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PROCEEDS FROM GROSS REALIZED
<S> <C> <C> <C> <C>
Calls and
Sales Maturities Gains Losses
Three months ended March 31, 2000
Securities held to maturity $ - $ 15 $ - $ -
Securities available for sale - 2,000 - -
----------- ---------- ----------- ----------
$ - $ 2,015 $ - $ -
=========== ========== =========== ==========
Three months ended March 31, 1999:
Securities held to maturity $ - $ 1,228 $ - $ -
Securities available for sale - 2,002 - -
----------- ---------- ----------- ----------
$ - $ 3,230 $ - $ -
=========== ========== =========== ==========
Note 3. Loans
Total loans as of March 31, 2000 and December 31, 1999 are
summarized as follows (in thousands):
March 31, December 31,
2000 1999
-------------- ---------
Commercial, financial and agricultural $ 29,630 $ 30,877
Real estate - construction 1,438 1,451
Real estate - mortgage 34,292 31,395
Installment loans to individuals 10,315 9,080
Other 1,686 2,225
-------------- ----------------
Total loans 77,361 75,028
Less unearned income - -
-------------- ----------------
Total loans net of unearned income 77,361 75,028
Less allowance for credit losses 736 764
-------------- ----------------
Loans, net $ 76,625 $ 74,264
============== ================
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11
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Allowance for Credit Losses
Analyses of the allowance for loan losses are presented below (in
thousands) for the three month periods ended March 31, 2000 and
1999:
<S> <C> <C> <C>
Three Months Ended
March 31, Dec 31,
-------------------------------------
2000 1999 1999
-------------- ----------- ---------
Balance, beginning of period $ 764 $ 766 $ 766
Loans charged off (35) (34) (291)
Recoveries 7 19 189
-------------- ----------- -----------
Net losses (28) (15) (102)
-------------- ----------- -----------
Provision for credit losses - - 100
-------------- ----------- -----------
Balance, end of period $ 736 $ 751 $ 764
============== =========== ===========
</TABLE>
The Company's total recorded investment in impaired loans at March
31, 1999 approximated $453,000, for which the related allowance
for credit losses determined in accordance with generally accepted
accounting principles approximated $194,000. All impaired loans at
March 31, 1999 were collateral dependent, and accordingly, the
fair value of the loan's collateral was used to measure the
impairment of each loan. No such loans were classified as impaired
at March 31, 2000 or December 31, 1999.
Note 5. Commitments and Contingencies
The Company's subsidiary bank is, through the ordinary course of
business, party to financial instruments with off-balance sheet
risk. These financial instruments include standby letters of
credit and commitments to extend credit. The unused portions of
existing lines of credit at March 31, 2000 and December 31, 1999,
and the contract amount of commitments to lend are as follows, in
thousands of dollars:
<TABLE>
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<S> <C> <C>
March 31, December 31
2000 1999
-------------- -------
Commitments to extend credit $ 14,197 $ 13,903
============== ===========
</TABLE>
Management is not aware of any commitments or contingencies which
may reasonably be expected to have a material impact on operating
results, liquidity or capital resources. The Company continues to
have commitments related to various legal actions, commitments to
extend credit, and employment contracts arising in the normal
course of business.
Note 6. Earnings per share: Basic earnings per common share is computed
based upon the weighted average shares outstanding. The weighted
average number of shares outstanding was 964,803 and 964,515 for
the three months ended March 31, 2000 and 1999, respectively.
Under Financial Accounting Standards Statement No. 128, Earnings
per Share, diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments
unless the effect is to reduce the loss or increase the income per
common share from continuing operations. At March 31, 2000, shares
totaling 28,140 were outstanding under the stock option plan, all
being fully-vested and exercisable, with 15,470 shares remaining
as available for grant.
12
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per share are calculated as follows:
March 31, 2000
Income Shares Per Share
(Numerator) ( Denominator) Amount
----------- ---------------- -----------
Basic EPS
Income available to common shareholders $ 247,000 964,803 $ 0.26
===========
Effect of Dilutive Securities
Stock options - 6,000
------------- -----------
Diluted EPS
Income available to common shareholders $ 247,000 970,803 $ 0.25
============== =========== ===========
March 31, 1999
Income Shares Per Share
(Numerator) ( Denominator) Amount
----------- ---------------- -----------
Basic EPS
Income available to common shareholders $ 201,000 964,515 $ 0.21
===========
Effect of Dilutive Securities
Stock options - 5,485
------------- -----------
Diluted EPS
Income available to common shareholders $ 201,000 970,000 $ 0.21
============== =========== ===========
Note 7. Major Customer: Included in the Company's short-term borrowings
at March 31, 2000 and December 31, 1999 was a $2,333,000
repurchase agreement with a customer. The agreement, which carried
a fixed interest rate of 5.22%, matured on April 1, 2000 and was
not renewed.
</TABLE>
13
<PAGE>
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
We have reviewed the accompanying condensed consolidated balance sheet of First
National Bankshares Corporation and subsidiary as of March 31, 2000, and the
related condensed statements of income , and comprehensive income and cash flows
for the three month period ended March 31, 2000 and 1999. These condensed
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of First National Bankshares
Corporation and subsidiary as of December 31, 1999, and the related statements
of income, comprehensive income, retained earnings and cash flows for the year
then ended (not presented herein); and in our report dated February 4, 2000, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying condensed balance sheet as of
December 31, 1999 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
April 19, 2000
14
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of First National Bankshares
Corporation (the "Company" or "Bankshares"), and its subsidiary, First National
Bank for the periods indicated. This discussion and analysis should be read in
conjunction with the Company's 1999 consolidated financial statements and notes
included in its Annual Report to Shareholders and Form 10-K. The statements
contained in this discussion may include forward-looking statements based upon
management's expectations, and actual results may differ materially.
EARNINGS SUMMARY
The Company reported net income of $247,000 for the three months ended March 31,
2000 compared to $201,000 for the quarter ended March 31, 1999, representing a
22.9% increase. The increase in quarterly earnings was primarily attributable to
an increase in net interest income. See the NET INTEREST INCOME section which
follows for further discussion of this item.
Basic earnings per common share was $0.26 for the quarter ended March 31, 2000
compared to the $0.21 reported for the first quarter of 1999. An analysis of the
contribution of each major component of the statement of income to basic
earnings per share is presented in the following chart for the three month
periods ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three Months Ended
March 31,
Increase
2000 1999 (Decrease)
Interest income $ 2.08 $ 1.84 $ 0.24
Interest expense 0.92 0.84 0.08
---------- ---------- ------------
Net interest income 1.16 1.00 0.16
Provision for loan losses 0.00 0.00 0.00
---------- ---------- ------------
Net interest income after
provision for loan losses 1.16 1.00 0.16
---------- ---------- ------------
Non-interest income 0.11 0.11 0.00
Non-interest expense 0.89 0.80 0.09
---------- ---------- ------------
Income before income taxes 0.38 0.31 0.07
Income tax expense 0.12 0.10 0.02
---------- ---------- ------------
Net income $ 0.26 $ 0.21 $ 0.05
========== ========== ============
</TABLE>
The Company's annualized return on average assets (ROA) for the first quarter of
2000 was 0.94% compared to 0.82% for the first quarter of 1999. Annualized
return on average shareholders' equity (ROE) was 9.61% for the first quarter of
2000 compared to 8.21% in the first quarter of 1999.
NET INTEREST INCOME
The most significant component of the Company's net earnings is net interest
income, which represents the excess of interest income earned on earning assets
over the interest expense paid for sources of funds. Net interest income is
affected by changes in volume resulting from growth and alteration of the
balance sheet's composition, as well as by fluctuations in market interest rates
and maturities of sources and uses of funds.
For purposes of this discussion, net interest income is presented on a fully
tax-equivalent basis to enhance the comparability of the performance of
tax-exempt to fully taxable earning assets. For the periods ended March 31, 2000
and 1999, the tax-equivalent adjustment was $19,000 and $22,000, respectively.
The Company's net interest income on a fully tax-equivalent basis totaled
$1,158,000 for the three-month period ended March 31, 2000 compared to $985,000
for the same period of 1999, representing an increase of $173,000 or 17.6%. As
illustrated in Table I, the Company's net yield on interest earning assets
increased to 4.64% for the three months ended March 31, 2000 compared to 4.25%
reported in the comparable period of 1999.
15
<PAGE>
Interest income for the first quarter improved $249,000 over 1999's first
quarter total. Interest and fee income from the Company's loan portfolio
contributed $220,000 to this increase. As illustrated in Table II, the majority
of the increase in loan income was due to a greater volume of loans being
managed by the Company throughout the first quarter of 2000 compared to 1999,
which accounted for an additional $154,000 in interest and fee income (see the
LOANS section below for a discussion of the increased volume). In addition, an
increase in the average yield earned on the loan portfolio (8.88% in 2000
compared to 8.51% in 1999) improved loan income by $66,000 over 1999. The
improvement in the yield is the result of the rising interest rate environment.
For example, the NY prime rate, which many of the Company's commercial loans are
priced from, was 9.0% as of March 31, 2000 compared to 7.75% at March 31, 1999.
As a means to manage interest rate risk (i.e., the risk to earnings due to
fluctuations in interest rates), a majority of the Company's loans employ
variable or floating interest rate features, whereby the loans will re-price at
specified time intervals based upon predetermined interest rate indexes.
Therefore, the new loan volume coupled with the repricing loans has led to the
increase in the average yield on the total loan portfolio. See further
discussion of INTEREST RATE RISK later in this analysis. Overall, the Company's
yield on interest earning assets increased 45 basis points from 7.76% for the
first quarter of 1999 to 8.21% in 2000.
Interest expense increased $76,000 over 1999's first quarter total. Per Table
II, the increase in the volume of interest- bearing liabilities contributed
$43,000 and the differences in the interest rates contributed $33,000. The most
significant item was savings deposits, where the interest expense increased
$125,000 over 1999's balance. As discussed in more detail in the DEPOSITS
section below, the Company has experienced strong growth in its savings
deposits, where the balance has increased approximately $8,500,000 since March
31, 1999. In addition, the effective rate paid on the deposits has increased 43
basis points as the majority of the growth has been in a particular product that
pays interest based upon the NY prime interest rate (note: the rate floats with
the prime rate). This increase was mitigated through interest expense savings
from the early retirement of one of its long-term borrowing obligations. Total
savings from the extinguishment was$82,000 during the quarter and greatly
contributed to the Company maintaining its overall cost of funds at 4.26%
despite the increased interest rate environment over 1999.
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.
16
<PAGE>
<TABLE>
<CAPTION>
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest(1) Rate Balance Interest(1) Rate
INTEREST EARNING ASSETS
Loans $ 75,566 $ 1,678 8.88% $ 68,550 $ 1,458 8.51%
Securities:
Taxable 20,152 301 5.97 14,724 217 5.90
Tax-exempt 3,019 55 7.29 3,862 64 6.63
---------- ---------- -------- ---------- ---------- ------
Total securities 23,171 356 6.14 18,586 281 6.05
---------- ---------- -------- ---------- ---------- ------
Interest-bearing deposits with
other banks 52 - - 1,342 12 3.58
Federal funds sold 1,081 15 5.55 4,266 49 4.59
---------- ---------- --------- ---------- ---------- ------
Total interest earning assets $ 99,870 $ 2,049 8.21% $ 92,744 $ 1,800 7.76%
---------- ---------- --------- ---------- ---------- ---------
NON-INTEREST EARNING ASSETS
Cash and due from banks 2,668 1,895
Bank premises and equipment 1,690 1,824
Other assets 2,138 1,975
Allowance for credit losses (765) (768)
---------- ----------
Total assets $ 105,601 $ 97,670
========== ==========
INTEREST-BEARING LIABILITIES
Demand deposits $ 14,887 $ 90 2.42% $ 12,065 $ 70 2.32%
Savings deposits 37,064 412 4.45 28,526 287 4.02
Time deposits 26,087 319 4.89 29,398 361 4.91
---------- ---------- -------- ---------- ---------- ------
Total interest-bearing deposits $ 78,038 $ 821 4.21 $ 69,989 $ 718 4.10
Short-term borrowings 5,238 63 4.81 1,072 8 2.99
Long-term borrowings 471 7 5.94 5,486 89 6.49
---------- ---------- --------- ---------- ---------- ------
Other interest bearing liabilities 5,709 70 4.90 6,558 97 5.92
Total interest-bearing liabilities $ 83,747 $ 891 4.26% $ 76,547 $ 815 4.26%
---------- ---------- --------- ---------- ---------- --------
NON-INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 10,717 10,412
Other liabilities 852 924
Shareholders' equity 10,285 9,787
---------- ----------
Total liabilities and
shareholders' equity $ 105,601 $ 97,670
========== ==========
NET INTEREST
EARNINGS $ 1,158 $ 985
========== ==========
NET YIELD ON INTEREST
EARNING ASSETS 4.64% 4.25%
========= ============
</TABLE>
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for 2000
and 1999.
(2) - For purposes of this table, nonaccruing loans are included in average loan
balances and loan fees are included in interest income.
17
<PAGE>
<TABLE>
<CAPTION>
TABLE II
CHANGES IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
(In thousands of dollars)
<S> <C> <C> <C>
Three Months Ended
March 31, 2000 vs. March 31, 1999
---------------------------------------------------------
Increase (Decrease)
Due to Changes in:
Volume (1) Rate (1) Total
INTEREST EARNING ASSETS
Loans $ 154 $ 66 $ 220
Securities:
Taxable 81 3 84
Tax-exempt (2) (15) 6 (9)
---------- --------- --------
Total securities 66 9 75
---------- --------- -------
Interest-bearing deposits with other
other banks (6) (6) (12)
Federal funds sold (43) 9 (34)
---------- --------- ----------
Total interest earning assets 171 78 249
---------- --------- --------
INTEREST-BEARING LIABILITIES
Demand deposits 17 3 20
Savings deposits 93 32 125
Time deposits (40) (2) (42)
Short-term borrowings 48 7 55
Long-term borrowings (75) (7) (82)
---------- --------- ---------
Total interest-bearing liabilities 43 33 76
---------- --------- --------
NET INTEREST EARNINGS $ 128 $ 45 $ 173
========== ========== ==========
(1) - The changes 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) - Tax-exempt securities income has been calculated based upon a fully tax-equivalent basis using the rate of 34%.
</TABLE>
PROVISION FOR LOAN LOSSES AND LOAN QUALITY
The provision for loan losses represents charges to earnings necessary to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. Management
considers various factors in determining the amount of the provision for loan
losses including overall loan quality, changes in the mix and size of the loan
portfolio, previous loss experience and general economic conditions.
No provision for loan losses was considered necessary during the first quarter
of 2000 or 1999. See further discussion of loan quality and the related
allowance for loan losses in the LOAN PORTFOLIO section of this analysis.
NON-INTEREST INCOME
Non-interest income includes revenues from all sources other than interest
income and yield related loan fees. For the three-month period ended March 31,
2000, non-interest income totaled $105,000, down $4,000 or 3.7% from the
$109,000 that was recorded during the first quarter of 1999. Stated as a
percentage of average assets, non-interest income was approximately 0.10% and
0.11% for the first quarter of 2000 and 1999, respectively.
For the first quarter of 2000, service fees were up $5,000 over 1999's first
quarter total, or 7.5%. Service fees, which include fees assessed on deposit
products, overdraft fees, etc, are up due to an increase in the volume of such
assessments over the prior year's quarter. The increase in service fee income
was offset by a $5,000 decline in trust income during the quarter. Estate and
other trust services tend to fluctuate from year to year, and trust revenues are
18
<PAGE>
expected to be lower in 2000 compared to 1999 due to a decline in assets managed
by the trust department. An additional $4,000 decline in other income from
1999's level contributed to the overall decline in non-interest income. Included
in 1999's other income was approximately $4,000 in loan origination fees from
the Bank's secondary mortgage program. This program affords the bank a fee for
30-year fixed rate mortgages originated on behalf of mortgage brokers. No such
loans were originated in the first quarter of 2000, which accounted for the
decline.
NON-INTEREST EXPENSE
Non-interest expense comprises overhead costs which are not related to interest
expense, income taxes or the provision for loan losses. As of March 31, 2000,
the Company's non-interest expense totaled $856,000, representing an increase of
$81,000, or 10.5%, from the $775,000 non-interest expense incurred in the first
quarter of 1999. Expressed as a percentage of average assets, non-interest
expense increased to 0.81% at March 31, 2000, from 0.79% at March 31, 1999.
Salaries and employee benefits are the Company's largest non-interest cost,
representing approximately 50.0% of total non-interest expense at March 31, 2000
and 1999. Salaries and employee benefits increased $35,000, or 9.0% as of March
31, 2000 compared to March 31, 1999. The increase in salaries is due to the
Company's normal merit raises, which accounted for approximately $16,000. The
additional increase is due to escalating employee benefit costs, namely medical
insurance. Employee benefit costs are expected to increase 20.0% in 2000
compared to 1999.
Data processing totaled $60,000 for the first quarter of 2000 compared to
$50,000 for the same period of 1999. The 20.0% increase is largely due to an
increase in the volume of reports and transactions processed by the Company's
third party processor. The expense is expected to increase in the future as the
Company implements its new on-line banking product, which is expected to be
offered to its customers by the end of the second quarter.
Advertising expense increased $7,000, or 46.6%, over the first quarter of 1999.
The Company has increased its advertising campaigns, particularly in contiguous
market areas, in order to increase its book of business. For the remainder of
the year, the expense is expected to level off, and by year end, be comparable
to 1999's total.
Professional and legal expense was $24,000 for the first quarter of 2000
compared to $20,000 for the same period of 1999. The increase of $4,000, or
20.0%, is due to a general increase in the fee schedule of its professional
service providers. In total, the professional and legal expense is expected to
increase in 2000 largely due to the new Securities and Exchange Commission rules
requiring the Company to have reviewed financial statements for its Form 10-Q
filings. The Company expects the quarterly reviews to add approximately $10,000
in additional expense in 2000.
Director's fees and shareholders expenses increased $8,000 or 29.6% over the
first quarter of 1999. Director's fees increased $6,000 during the quarter due
to the Company having two more directors for the 2000 period compared to 1999.
The remaining $2,000 increase is due to the Company outsourcing the stock
transfer function to a third-party vendor. Due to the changes noted above, the
expense for 2000 is expected to increase over 1999's year end total.
INCOME TAXES
The Company's income tax expense, which includes both federal and state income
taxes, totaled $120,000 for the three- month period ended March 31, 2000
compared to $96,000 for same period of 1999. Income tax expense equaled 32.7%
and 32.3% of income before taxes at March 31, 2000 and 1999, respectively. For
financial reporting purposes, income tax expense does not equal the federal
statutory income tax rate of 34.0% when applied to pre-tax income, primarily
because of the state income taxes, net of the federal benefit, and tax-exempt
interest income included in income before income taxes.
CHANGES IN FINANCIAL CONDITION
The Company's total assets were $104,708,000 at March 31, 2000, compared to
$104,829,000 at December 31, 1999, representing a decrease of $121,000 or 0.12%.
Average total assets were $105,601,000 during the quarter. Details concerning
changes in the Company's major balance sheet items and changes in financial
condition follow.
Securities and Federal Funds Sold
The Bank's total securities portfolio decreased by $954,000 or 4.2% from
December 31, 1999. The decrease is due to net maturities during the quarter. Due
to recent increases in market rates, the estimated fair market value of the
Company's security portfolio (including held to maturity securities) is $717,000
below the portfolio's amortized cost. The declines, which do not impact net
income are believed to be temporary, as the credit quality of the portfolio
remains strong. The majority of the portfolio consists of U.S. Government
agencies and highly-rated state and municipal bonds (Moody/S&P ratings of AA-
and higher). A summary of the Company's securities portfolio is included as Note
2 to the condensed consolidated financial statements.
19
<PAGE>
The Company's federal funds sold position was minimal ($1,000) at March 31,
2000, as it was at December 31, 1999 ($30,000). It is the Bank's philosophy to
minimize its involvement in overnight funds, however due to liquidity reasons
(i.e. fluctuations in loan and deposit balances), the bank may buy or sell funds
on an overnight basis. See further discussion of liquidity in the LIQUIDITY AND
INTEREST RATE RISK MANAGEMENT section below.
Loan Portfolio
Loans, net of unearned income, increased during the first quarter of 2000 from
$75,028,000 at year end 1999 to $77,361,000 as of March 31, 2000. Similarly,
average loans outstanding through March 31, 2000, of $75,566,000 increased from
the average loans outstanding for the quarter ended March 31, 1999, of
$68,550,000.
The Company's largest loan portfolio is its real estate mortgage portfolio,
which totaled $34,292,000 at March 31, 2000 or 44.3% of total loans outstanding
at current quarter end. This portfolio increased $2,897,000 from year end 1999.
Commercial, financial and agricultural loans (which includes loans secured by
commercial real estate) totaled $29,630,000 at March 31, 2000 and represent
38.3% of total loans outstanding at March 31, 2000. The other major portfolio is
the Company's installment loans portfolio which was $10,315,000 at quarter end
and comprises approximately 13.3% of total loans at March 31, 2000. A summary of
the Bank's loans by category in comparison to year end 1999 is included in Note
3 to the condensed consolidated financial statements.
As discussed above in the non-interest expense discussion, the Company has
increased its advertising, particularly in contiguous market areas. As a result,
the Company has been successful in growing its loan portfolio. In addition, bank
consolidation in the Company's primary market area has afforded the Company an
opportunity to capitalize on new customer relationships. Through the strength of
its business and personal relationships, future loan growth, primarily in
high-quality commercial and commercial real estate loans and residential
mortgages, is anticipated by Bank management.
Marketing efforts will continue to focus on the Bank's primary and contiguous
market areas.
The allowance for loan losses was $736,000 at March 31, 2000 compared to
$764,000 at December 31, 1999. Expressed as a percentage of loans (net of
unearned income), the allowance for loan losses was 0.95% and 1.02% at March 31,
2000 and December 31, 1999, respectively. Loans charged-off, net of recoveries
of previously charged-off loans, totaled $28,000 and $15,000 for the three
months ended March 31, 2000 and 1999, respectively. See Note 4 of the notes to
the condensed consolidated financial statements for an analysis of the activity
in the Company's allowance for loan losses for the three month periods ended
March 31, 2000 and 1999, and for the year ended December 31, 1999.
The Company's allowance for loan losses is divided into allocated and
unallocated categories. The allocated portion of the allowance is established on
a loan-by-loan and pool-by-pool basis. The unallocated portion is for inherent
losses that may exist as of the evaluation date, but which have not been
specifically identified by the processes used to establish the allocated portion
due to inherent imprecision in the objective process of identification. The
unallocated portion is subjective and requires judgment based upon various
qualitative factors in the loan portfolio and the market in which the Company
operates. At March 31, 2000, the unallocated portion of the allowance
approximated $72,000, or 9.8% of the total allowance.
The Company places into non-accrual status those loans for which the full
collection of principal and interest are unlikely or which are past due 90 or
more days, unless the loans are adequately secured and in the process of
collection. The Company had one impaired loan at March 31, 2000 with an
outstanding balance of $110,000, for which the related allowance for loan loss
approximated $18,000. The loan is collateral dependent, and accordingly, the
fair value of the loan's collateral was used to measure the impairment. There
were loans outstanding at December 31, 1999 identified as being impaired. A
summary of the Company's past due loans and non-performing assets is provided in
the following table:
<TABLE>
<CAPTION>
SUMMARY OF PAST DUE LOANS AND NON-PERFORMING ASSETS
(in thousands of dollars)
<S> <C> <C> <C>
March 31, December 31,
2000 1999 1999
----------- ----------- ----------
Loans past due 90 or more days still accruing $ - - $ -
=========== =========== =========
NON-PERFORMING assets:
Non-accruing loans $ 14 $ 453 $ -
Other real estate owned 873 875 884
----------- ----------- ---------
$ 887 $ 1,328 $ 884
=========== =========== =========
20
</TABLE>
<PAGE>
Total non-performing assets at March 31, 2000 increased $3,000 from its December
31, 1999 balance, with non-accrual loans accounting for the increase. Included
in other real estate owned is a parcel of commercial property carried at
$845,000 as of March 31, 2000. The building and related improvements are
currently leased under a three year contract. The lease is structured as a
triple-net lease, where the lessee pays all expenses associated with the
property. All lease payments received under the agreement have been applied
against the property under a cost-recovery method. See the Company's financial
statements included in the 1999 Form 10-K for a more detailed discussion of the
lease arrangement.
Deposits
Total deposits at the end of the first quarter decreased from year-end 1999,
falling $978,000, or 1.1%, to $88,154,000. Ending balances for non-interest
bearing deposits decreased by $739,000, or 6.9%, while interest bearing deposits
decreased by $239,000, or 0.3%. Historically, the Company has experienced
deposit runoff in the first quarter, particularly in transactional accounts
(e.g., demand deposit, NOW and money market accounts), as depositors access
account balances for various reasons. For comparative purposes, total deposits
fell $1,031,000 or 1.3% in the first quarter of 1999.
As for the mix of interest-bearing deposits, savings deposits, which totaled
$38,040,000 at the current quarter end, were up $640,000 compared to the 1999
year end balance. Much of the growth has occurred in a particular savings
product that offers a tiered interest rate. While the Company has seen new money
deposited in the product, there have been a number of customers transferring
funds from existing deposit accounts into this particular product. The result
has been a higher effective rate paid on savings deposits in total, however, the
overall impact on the Company's net interest margin has been immaterial because
the rate paid at the highest savings deposit tier is equivalent to rates offered
on time deposits of one year. Most transfers occur for liquidity reasons. [See
the NET INTEREST INCOME section for further discussion of the Company's interest
expense.] The increase in savings was offset by a $1,264,000 decline in
interest-bearing demand deposit accounts, such as money market accounts and NOW
accounts. As discussed above, the decline is seasonal and management expects the
balances to build during the year.
Short-Term Borrowings
Short-term borrowings consist of securities sold under agreements to repurchase
("repurchase agreements") and Federal funds purchased. At March 31, 2000, the
respective balances of each borrowing was $4,756,000 and $108,000, respectively.
At December 31, 1999, short-term borrowings of $4,113,000 consisted entirely of
repurchase agreements. One customer accounted for $2,333,000 of the repurchase
agreement balance at March 31, 2000. Subsequent to March 31, 2000, the customer
did not renew the agreement and withdrew the balance in the account. For the
short term, management has opted to replace the funding source with Federal
funds purchased, however, a less expensive funding source is being pursued.
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 to provide
for other Company transactional requirements. Liquidity is provided primarily by
funds invested in cash and due from banks and Federal funds sold, which totaled
$2,104,000 at March 31, 2000 versus $3,764,000 at December 31, 1999. The
Company's cash position at year end 1999 was higher than normal due to cash
buildup for Year 2000 withdrawals. The liquidity position is monitored
continuously to ensure that day-to-day as well as anticipated future funding
needs are met.
Further enhancing the Company's liquidity is the availability of $1,000,000, at
amortized cost, in debt securities maturing within one year as of March 31,
2000. Also, the Company has classified additional debt securities with an
estimated fair value at March 31, 2000 totaling $9,105,000 as available for sale
in response to an unforeseen need for liquidity. Additionally, the Company has
approximately $40,000,000 in available lines of credit with various
correspondent banks should the need arise. 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 gap position as of March 31, 2000, is
presented in TABLE III.
21
<PAGE>
<TABLE>
<CAPTION>
TABLE III
INTEREST RATE SENSITIVITY GAPS
March 31, 2000
(In thousands of dollars)
REPRICING (1)
<S> <C> <C> <C> <C> <C>
Within 3 3 to 6 6 to 12 After
Months Months 12 Months 12 Months Total
----------- ------------ ------------ ----------- ---------
INTEREST EARNING ASSETS
Loans, net of unearned income $ 23,115 $ 4,123 $ 8,803 $ 41,320 $ 77,361
Securities, at amortized cost - - 1,000 20,603 21,603
Interest-bearing deposits with
other banks 17 - - - 17
Federal funds sold 1 - - - 1
---------- ------------ ------------ ----------- -----------
Total interest earning assets 23,133 4,123 9,803 61,923 98,982
---------- ------------ ------------ ----------- -----------
INTEREST-BEARING LIABILITIES
Demand deposits 14,284 - - - 14,284
Savings deposits 38,040 - - - 38,040
Time deposits 5,233 6,768 5,544 8,283 25,828
Short-term borrowings 4,297 57 510 - 4,864
Long-term borrowings 4 4 8 454 470
---------- ------------ ------------ ----------- -----------
Total interest-bearing liabilities 61,858 6,829 6,062 8,737 83,486
---------- ------------ ------------ ----------- -----------
Contractual interest sensitivity gap (38,725) (2,706) 3,741 53,186 15,496
Adjustment (2) 24,119 (24,119) - - -
---------- ------------ ------------ --------- ----------
Adjusted interest sensitivity gap $ (14,606) $ (26,825) $ 3,741 $ 53,186 $ 15,496
=========== ============= ============ =========== ===========
Cumulative adjusted interest
sensitivity gap $ (14,606) $ (41,431) $ (37,690) $ 15,496
=========== ============= ============ ===========
Cumulative adjusted gap ratio 0.61 0.40 0.50 1.19
========== ============ ============ ===========
Cumulative adjusted gap as a
percent of earning assets (14.76%) (41.86%) (38.08%) 15.66%
========== ============ ============ ===========
</TABLE>
(1) - Contractual repricing, not contractual maturities, is used in this table
unless otherwise noted. No pre-payment assumptions were assumed. (2) -
Adjustment to approximate the actual repricing of certain interest bearing
demand deposits and savings accounts based upon historical experience.
The preceding table reflects the Bank's cumulative one year net interest
sensitivity position, or gap, as 0.50, or ($37,690,000.) Thus, the Bank is in a
negative gap position within a one year time frame. This indicates that a
significant increase in interest rates within a short time frame during 2000
could have a significant negative impact on the Bank's net interest income.
However, interest rates on the majority of the Bank's interest-bearing deposits
may be changed by management at any time based on their terms. Since management
believes that repricing of interest-bearing deposits in an increasing interest
rate environment will generally lag behind the repricing of interest-bearing
assets, the Bank's interest rate risk within one year is at an acceptable level.
The information presented in the above table represents a static view of the
Bank's gap position as of March 31, 2000, and as such, does not consider
variables such as future loan and deposit volumes, mixes and interest rates. The
Company seeks to maintain its adjusted interest sensitivity gap within 12 months
to a relatively small balance, positive or negative, regardless of anticipated
upward or down movements in interest rates in an effort to limit the effects of
interest rate risk on Company net interest income.
22
<PAGE>
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of the Company's
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth.
Total shareholders' equity at March 31, 2000 was $10,279,000 compared to
$10,151,000 at December 31, 1999, representing an increase of $128,000. Average
total shareholders' equity expressed as a percentage of average total assets was
approximately 9.7% at March 31, 2000, which is lower than December 31, 1999's
level of 10.0%. Cash dividends totaling $106,000, or $0.11 per share were
declared during the first quarter of 2000 which is 22.2% higher than dividend
level declared during the first quarter of 1999. These payout levels represented
approximately 42.9 and 42.3% of the Company's year-to-date earnings for the
three-month periods ended March 31, 2000 and 1999, respectively.
REGULATORY RESTRICTIONS ON CAPITAL AND DIVIDENDS
The primary source of funds for the dividends paid by First National Bankshares
Corporation is dividends received from its subsidiary bank. Dividends paid by
the subsidiary bank are subject to restrictions by banking regulations. The most
restrictive provision requires approval by the regulatory agency if dividends
declared in any year exceed the year's net income, as defined, plus the net
retained profits of the two preceding years. Management does not anticipate any
such restrictions on its dividends in 2000.
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 March 31, 2000, that the
subsidiary bank meets all capital adequacy requirements to which it is subject,
as evidenced by the following table:
<TABLE>
<CAPTION>
RISK-BASED CAPITAL RATIOS
March 31, 2000
<S> <C> <C>
Minimum
Actual Requirement
Tier 1 risk-based capital ratio 14.24% 4.00%
Total risk-based capital ratio 15.24% 8.00%
Leverage ratio 9.91% 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.
YEAR 2000:
Industry experts and regulatory officials have identified thirteen critical
dates in which the Company must monitor in order to verify that its critical
information systems are operating properly. During the quarter, one such
critical date - February 29, 2000 - was monitored with no reported problems or
data errors. The Company will continue to monitor its informational systems as
future critical dates approach.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in a human rights complaint, whereby a former
employee has alleged discrimination against the Company. The case is
scheduled for mediation with the West Virginia Human Rights Commission
on May 24, 2000. At this time, management cannot reasonably estimate
the outcome of the case, nor can it estimate a range of possible loss,
if any. Should a loss transpire, material losses will most likely be
mitigated through the Company's liability insurance.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item. 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) All exhibits included with this filing follow the signature page.
1. Exhibit 11, Computation of Per Share Earnings
2. Exhibit 23, Consents of experts and counsel: Consent of
Independent Accountants
3. Exhibit 27, Financial Data Schedule
b). The Company did not file any Form 8-K, Current Reports during the
quarter ended March 31, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NATIONAL BANKSHARES CORPORATION
By
/s/ L. Thomas Bulla
President and Chief Executive Officer
By
/s/ Charles A. Henthorn
Secretary/Treasurer, First National
Bankshares Corporation
Executive Vice President, First
National Bank
By
/s/ Matthew L. Burns
Chief Financial Officer, First National
Bank (Principal Financial and
Accounting Officer)
Date: 5/12/00
25
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Earnings Per Share
Basic Earnings per Share is calculated based upon the Company's net income
after income taxes, divided by the weighted average number of shares
outstanding during the fiscal period.
Diluted Earnings Per Share is calculated based upon the Company's net
income after income taxes, divided by the weighted average number of shares
outstanding during the period plus the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to increase the
income per common share from continuing operations.
26
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT ACCOUNTANTS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Quarterly Report on Form 10-Q of our
report dated April 19, 2000, on our review of the consolidated financial
statements of First National Bankshares Corp. as of March 31, 2000 appearing in
Part I, Item I of the March 31, 2000 Form 10-Q of First National Bankshares
Corporation.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
May 10, 2000
27
<PAGE>
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