(Mark One)
For the quarterly period ended June 30, 2003
or
For the transition period from to
Commission File Number: 33-14252
| West Virginia (State or other jurisdiction of incorporation) |
62-1306172 (I.R.S. Employer Identification No.) |
| One Cedar Street, Ronceverte, West Virginia (Address of principal executive offices) |
24970 (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
Indicate by check mark whether the registrant an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes No X
The number of shares outstanding of the issuer’s classes of common stock as of August 1, 2003:
| PART I. FINANCIAL INFORMATION | PAGE |
| Item 1. Financial Statements (Unaudited) | |
|
Consolidated Balance Sheets - June 30, 2003 (Unauditied) and December 31, 2002 |
3 |
|
Consolidated Statements of Income (Unaudited)- Three Months Ended June 30, 2003 and 2002 and Six Months ended June 30, 2003 and 2002 |
4 |
|
Consolidated Statements of Shareholders' Equity (Unaudited) - Three Months Ended June 30, 2003 and 2002 and Six Months Ended June 30, 2003 and 2002 |
5 |
|
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2003 and 2002 |
6 |
| Notes to Consolidated Financial Statements | 7-11 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
11 - 18 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 18 |
| Item 4. Controls and Procedures | 19 |
| PART II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 20 |
| Item 2. Changes in Securities | none |
| Item 3. Defaults upon Senior Securities | none |
| Item 4. Submission of Matters to a Vote of Security Holders | 20 |
| Item 5. Other Information | 20 |
| Item 6. Exhibits and Reports on Form 8-K | 20 |
| SIGNATURES | 21 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Unaudited
June 30, Dec. 31,
2003 2002 (1)
--------------- ---------------
ASSETS
Cash and due from banks $ 3,755 $ 3,037
Interest-bearing deposits with other banks 73 225
Federal funds sold 6,515 2,325
Securities available for sale 19,934 23,125
Securities held to maturity (estimated fair value
of $10,101 and $9,716, respectively) 9,855 9,552
Loans, less allowance for loan losses of $1,106 and
$1,036, respectively 118,872 109,516
Premises and equipment, net 2,639 2,730
Accrued interest receivable 688 720
Other real estate owned and foreclosed assets 8 30
Other assets 546 548
--------------- ---------------
Total assets $ 162,885 $ 151,808
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing $ 17,081 $ 15,610
Interest-bearing 124,225 118,643
--------------- ---------------
Total deposits 141,306 134,253
Short-term borrowings 5,810 2,536
Other liabilities 1,103 1,090
Long-term borrowings 1,625 1,350
--------------- ---------------
Total liabilities 149,844 139,229
--------------- ---------------
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 983,780 shares, respectively 984 984
Capital surplus 1,208 1,208
Retained earnings 10,711 10,331
Accumulated other comprehensive income 138 56
--------------- ---------------
Total shareholders' equity 13,041 12,579
--------------- ---------------
Total liabilities and shareholders' equity $ 162,885 $ 151,808
=============== ===============
(1) Extracted from December 31, 2002 audited financial statements.
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- --------- -------- ---------
Interest income
Interest and fees on loans $ 1,880 $ 1,910 $ 3,711 $ 3,846
Interest and dividends on securities:
Taxable 178 205 376 355
Tax-exempt 59 44 118 88
Interest on Federal funds sold and
interest-bearing deposits 7 26 11 45
-------- --------- -------- ---------
Total interest income 2,124 2,185 4,216 4,334
-------- --------- -------- ---------
Interest expense
Deposits 541 738 1,117 1,480
Short-term borrowings 13 14 20 31
Long-term borrowings 16 7 30 13
-------- --------- -------- ---------
Total interest expense 570 759 1,167 1,524
-------- --------- -------- ---------
Net interest income 1,554 1,426 3,049 2,810
Provision for loan losses 85 104 175 209
Net interest income after
provision for loan losses 1,469 1,322 2,874 2,601
-------- --------- --------- ---------
Noninterest income
Service fees 119 118 238 225
Loan origination fees - secondary market loans 90 91 185 154
Securities gains, net 8 3 10 3
Other income 63 32 132 52
-------- --------- --------- ---------
Total noninterest income 280 244 565 434
-------- --------- --------- ---------
Noninterest expense
Salaries and employee benefits 595 559 1,225 1,119
Net occupancy expense 85 83 171 167
Equipment rental, depreciation and maintenance 96 107 199 210
Data processing 118 90 231 185
Advertising 32 25 68 63
Professional and legal 66 32 116 65
Postage and courier 33 29 67 57
Directors' fees and shareholder expenses 30 30 63 68
Stationery and supplies 31 34 60 75
Loss on foreclosed real estate - 262 - 262
Other operating expenses 129 121 265 241
------- --------- --------- --------
Total noninterest expense 1,215 1,372 2,465 2,512
------- --------- --------- --------
Income before income taxes 534 194 974 523
Income tax expense 181 50 328 154
------- --------- --------- --------
Net income $ 353 $ 144 $ 646 $ 369
======= ========= ========= ========
Net income per common share:
Basic earnings per common share $ 0.36 $ 0.15 $ 0.66 $ 0.38
======= ========= ========= ========
Diluted earnings per common share $ 0.36 $ 0.15 $ 0.66 $ 0.37
======= ========= ========= ========
Cash dividends declared per common share $ 0.13 $ 0.12 $ 0.27 $ 0.25
======= ========= ========= ========
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of dollars)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- -------- --------
Balance, beginning of period $ 12,733 $ 11,884 $ 12,579 $ 11,822
Comprehensive income
Net income 353 144 646 369
Other comprehensive income, net of deferred
income taxes of $52 and $65 for the
three months ended June 30, 2003 and
2002, respectively and $52 and $43 for the
six months ended June 30, 2003 and 2002,
respectively
Unrealized gains on securities 83 102 82 67
--------- --------- -------- --------
Total comprehensive income 436 246 728 436
Cash dividends declared (128) (118) (266) (246)
--------- --------- --------- --------
Balance, end of period $ 13,041 $ 12,012 $ 13,041 $12,012
========== ========== ========= ========
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002
---------- --------
Net income $ 646 $ 369
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 156 161
Loss on disposals of premises and equipment 1 3
Gains on sale of foreclosed assets, net (11) -
Securities gains, net (10) (3)
Provision for loan losses 175 209
Increase in valuation allowance for other real estate owned - 262
Deferred income tax benefit (50) (152)
Net amortization of security premiums 86 20
Decrease (increase) in accrued interest receivable 32 (58)
Increase in other assets (1) (127)
Increase (decrease) in other liabilities 23 (5)
---------- ---------
Net cash provided by operating activities 1,047 679
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale 13,666 6,263
Proceeds from maturities and calls of securities held to maturity 485 3,043
Purchases of securities available for sale (10,412) (16,623)
Purchases of securities held to maturity (793) (881)
Net increase in loans (9,542) (4,417)
Purchases of premises and equipment (65) (580)
Proceeds from sale of foreclosed assets 44 -
---------- ---------
Net cash used in investing activities (6,617) (13,195)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and savings accounts 9,444 10,901
Net (decrease) increase in time deposits (2,391) 861
Net increase (decrease) increase in short-term borrowings 3,274 (514)
Principal advances on long-term borrowings 310 -
Principal payments on long-term borrowings (35) (8)
Dividends paid (276) (393)
---------- ---------
Net cash provided by financing activities 10,326 10,847
---------- ---------
Increase (decrease) in cash and cash equivalents 4,756 (1,669)
Cash and cash equivalents:
Beginning 5,587 5,722
---------- ---------
Ending $ 10,343 $ 4,053
========== =========
See Notes to Consolidated Financial Statements
The accounting and reporting policies of First National Bankshares Corporation, (the “Company” or “First National”), and its wholly owned subsidiaries, First National Bank and FNB Insurance, LLC, conform to accounting principles generally accepted in the United States and to general policies within the financial services industry. The preparation of such financial statements 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 consolidated statements include the accounts of the Company and its wholly owned subsidiaries, First National Bank and FNB Insurance, LLC. All significant intercompany balances and transactions have been eliminated. The information contained in the consolidated financial statements is unaudited. 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 June 30, 2003 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with the Company’s 2002 audited financial statements and Form 10-K.
Earnings per share: Basic earnings per common share are computed based upon the weighted average shares outstanding. Diluted per share amounts assume the conversion, exercise or issuance of all stock options. The computations of basic and diluted earnings per share amounts for the three months and six months ended June 30, 2003 and 2002 are based upon the following outstanding shares:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- --------- ------- --------
Weighted average shares outstanding
for basic earnings per share calculation 983,780 981,780 983,780 981,780
Dilutive effect of stock options 3,393 3,121 2,772 3,121
-------- --------- ------- --------
Weighted average shares outstanding
for dilutive earnings per share calculation 987,173 984,901 986,552 984,901
======== ========= ======= ========
Stock options: The Company has an incentive stock option plan covering certain key employees. Grants under the plan are accounted for under the intrinsic value method. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation for the plan been determined based on the fair value method, reported net income and earnings per share would have been reduced to the pro forma amounts shown below for the three months and six months ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- ---------- --------- --------
Net income:
As reported $ 353 $ 144 $ 646 $ 369
Proforma $ 353 $ 144 $ 646 $ 367
Basic earnings per share:
As reported $ 0.36 $ 0.15 $ 0.66 $ 0.38
Proforma $ 0.36 $ 0.15 $ 0.66 $ 0.37
Diluted earnings per share:
As reported $ 0.36 $ 0.15 $ 0.65 $ 0.37
Proforma $ 0.36 $ 0.15 $ 0.65 $ 0.37
Note 2. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at June 30, 2003 and December 31,
2002 are summarized as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
---------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
Available for Sale
Taxable:
U.S. Government agencies and corporations $ 17,627 $ 227 $ - $ 17,854
Federal Reserve Bank stock 57 - - 57
Federal Home Loan Bank stock 520 - - 520
Other equities 22 - - 22
---------- ---------- ---------- ---------
Total taxable 18,226 227 - 18,453
Tax-exempt:
State and political subdivisions 1,480 - 1 1,479
Federal Reserve Bank stock 2 - - 2
---------- ---------- ---------- ---------
Total tax-exempt 1,482 - 1 1,481
Total securities available for sale $ 19,708 $ 227 $ 1 $ 19,934
========== ========== ========== =========
Held to maturity
Taxable:
U.S. Government agencies and corporations $ 1,000 $ 21 $ - $ 1,021
Certificates of deposit with other banks 2,848 - - 2,848
State and political subdivisions 440 10 - 450
---------- ---------- ---------- ---------
Total taxable 4,288 31 - 4,319
Tax-exempt:
State and political subdivisions 5,567 215 - 5,782
---------- ---------- ---------- ----------
Total securities held to maturity $ 9,855 $ 246 $ - $ 10,101
========== ========== ========== ==========
December 31, 2002
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for Sale
Taxable:
U.S. Government agencies and corporations $ 22,671 $ 93 $ 1 $ 22,763
Federal Reserve Bank Stock 57 - - 57
Federal Home Loan Bank stock 281 - - 281
Other equities 22 - - 22
---------- ---------- ---------- ----------
Total taxable 23,031 93 1 23,123
Tax-exempt:
Federal Reserve Bank stock 2 - - 2
---------- ---------- ---------- ----------
Total securities available for sale $ 23,033 $ 93 $ 1 $ 23,125
========== ========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
----------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Held to maturity:
Taxable:
U.S. Government agencies and corporations $ 1,000 $ 38 $ - $ 1,038
Certificates of deposit with other banks 2,156 - - 2,156
State and political subdivisions 455 18 - 473
---------- ---------- ---------- ----------
Total taxable 3,611 56 - 3,667
Tax-exempt:
State and political subdivisions 5,941 116 8 6,049
---------- ---------- ---------- ----------
Total securities held to maturity $ 9,552 $ 172 $ 8 $ 9,716
========== ========== ========== ==========
The maturities, amortized cost and estimated fair values of the Company's securities at
June 30, 2003 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 $ 3,722 $ 3,765 $ 1,504 $ 1,510
Due after 1 but within 5 years 3,294 3,367 17,343 17,563
Due after 5 but within 10 years 2,149 2,245 260 260
Due after 10 years 690 724 - -
Equity securities - - 601 601
---------- ---------- ----------- ------------
$ 9,855 $ 10,101 $ 19,708 $ 19,934
========== ========== =========== ============
The Company’s Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities that are included in securities available for sale in the accompanying 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.
Note 3. Loans
Loans are summarized as follows (in thousands):
June 30, Dec. 31,
2003 2002
--------------- ---------------
Commercial, financial and agricultural $ 52,303 $ 47,268
Real estate - construction 1,763 1,340
Real estate - mortgage 51,096 45,775
Installment loans to individuals 13,432 13,805
Other 1,493 2,399
--------------- ---------------
Gross loans 120,087 110,587
Net deferred loan origination fees (109) (35)
--------------- ---------------
Total loans net of deferred loan origination fees 119,978 110,552
Less allowance for loan losses 1,106 1,036
--------------- ---------------
Loans, net $ 118,872 $ 109,516
=============== ===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Allowance for Credit Losses
An analysis of the allowance for loan losses is presented below (in thousands):
Six Months Ended June 30, Dec. 31,
-------------------------
2003 2002 2002
----------- ------------ ----------
Balance, beginning of period $ 1,036 $ 837 $ 837
Loans charged off 116 54 121
Recoveries 11 11 16
----------- ------------ ----------
Net (recoveries) losses 105 43 105
----------- ------------ ----------
Provision for loan losses 175 209 304
----------- ------------ ----------
Balance, end of period $ 1,106 $ 1,003 $ 1,036
=========== ============ ==========
The Company’s total recorded investment in impaired loans at June 30, 2003 and December 31, 2002 approximated $827,000 and $433,000,
respectively, for which the related allowance for credit losses determined in accordance with generally accepted accounting
principles approximated $205,000 and $82,000, respectively. All impaired loans at June 30, 2003 were collateral dependent, and
accordingly, the fair value of the loan’s collateral was used to measure the impairment of each loan.
Note 5.
Commitments and Contingencies
In the ordinary course of
business, the Company’s subsidiary bank is a party to financial instruments
with off-balance sheet risk. These financial instruments include standby letters
of credit and commitments to extend credit. The unused portions of existing
lines of credit at June 30, 2003 and December 31, 2002, and the contractual
amount of commitments to lend are as follows, in thousands of dollars:
June 30, Dec. 31,
2003 2002
------------- --------------
Total loan commitments $ 20,087 $ 15,648
============= ==============
Management is not aware of
any commitments or contingencies that may reasonably be expected to have a
material impact on operating results, liquidity or capital resources. The
Company continues to be involved in various legal actions and contractual
matters arising in the normal course of business.
Note 6.
Short-term Borrowings
Included in short-term
borrowings at June 30, 2003 is an advance from the Federal Home Loan Bank of
$3,000,000. The advance, which bears a fixed interest rate of 1.32%, matures on
August 21, 2003. The advance is secured by certain mortgage loans and investment
securities not already pledged.
Note 7. New
Accounting Policies
Financial Accounting
Standards Interpretation No. 45 (FIN 45), Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, is applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. This interpretation requires the
guarantor to recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 clarifies the requirements of Financial Accounting
Standards No. 5, Accounting for Contingencies, relating to guarantees. In
general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying variable (a specified interest rate, security
price, commodity price, foreign exchange rate, index of prices or rates, or
other variable) that is related to an asset, liability, or equity security of
the guaranteed party. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation, including, among
others, guarantees relating to employee compensation, residual value guarantees
under capital lease arrangements, commercial letters of credit, loan
commitments, subordinated interests in an special purpose entity and guarantees
of a company’s own future performance. Other guarantees are subject to the
disclosure requirements of FIN 45 but not to the recognition provisions and
include, among others, a guarantee accounted for as a derivative instrument
under Financial Accounting Standards Statement No. 133, a parent’s
guarantee of debt owed to a third party by its subsidiary or vice versa, and a
guarantee which is based on performance not price. Significant guarantees that
have been entered into by the Company are disclosed in the notes to the
financial statements. The adoption of FIN 45 did not have a material impact on
results of operations, financial position or liquidity.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities” (“VIEs”), an
interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to improve financial reporting of special
purpose and other entities. A VIE is a partnership, limited liability company, trust or other legal entity that does not have
sufficient equity to permit it to finance its activities without additional subordinated financial support from other parties, or
whose investors lack certain characteristics associated with owning a controlling financial interest. Business enterprises that
represent the primary beneficiary of a VIE must consolidate the entity in its financial statements. Prior to the issuance of FIN 46,
consolidation generally occurred when an enterprise controlled another entity through voting interests. The consolidation provisions
of FIN 46 apply to VIEs entered into after January 31, 2003, and for preexisting VIEs in the first interim reporting period after
June 15, 2003. Based upon management’s evaluation of FIN 46, the Company does not expect its current reporting structure to change.
The following is a
discussion and analysis focused on significant changes in the financial
condition and results of operations of First National Bankshares Corporation
(the “Company”), and its wholly owned subsidiaries, First National
Bank and FNB Insurance, LLC, for the periods indicated. This discussion and
analysis should be read in conjunction with the Company’s 2002 consolidated
financial statements and notes included in its Annual Report to Shareholders and
Form 10-K.
FORWARD-LOOKING
STATEMENTS
The following discussion
contains statements that refer to future expectations, contains projections of
the results of operations or of financial condition, or states other information
that is “forward-looking.” “Forward-looking” statements are
easily identified by the use of words such as “could,”
“anticipate,” “estimate,” “believe,” and similar
words that refer to a future outlook. There is always a degree of uncertainty
associated with “forward-looking” statements. The Company’s
management believes the expectations reflected in such statements are based upon
reasonable assumptions and on the facts and circumstances existing at the time
of these disclosures. Actual results could differ significantly from those
anticipated. Some factors that could significantly affect the results include:
changes in economic conditions, either nationally or within the Company’s
markets; changes in market interest rates; changes in competitive pressures;
changes in legal or accounting regulations; and changes in the securities and
investments markets.
APPLICATION OF
CRITICAL ACCOUNTING POLICIES
The Company’s
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and follow general practices
within the industries in which it operates. Application of these principles
requires management to make estimates, assumptions, and judgments that affect
the amounts reported in the financial statements and accompanying notes. These
estimates, assumptions, and judgments are based on information available as of
the date of the financial statements; accordingly, as this information changes,
the financial statements could reflect different estimates, assumptions, and
judgments.
For a complete discussion
of the Company’s significant accounting policies, see “Notes to the
Consolidated Financial Statements” in the Company’s 2002 Annual Report
on pages 25-28. Certain policies are considered critical because they are highly
dependent upon subjective or complex judgments, assumptions and estimates.
Changes in such estimates may have a significant impact on the financial
statements. Management has reviewed the application of these policies with the
Audit Committee of the Company’s Board of Directors. For a discussion of
applying critical accounting policies, see “Application of Critical
Accounting Policies” beginning on page 6 in the Company’s 2002 Annual
Report.
EARNINGS
SUMMARY
The Company reported net
income of $353,000 for the three months ended June 30, 2003 compared to net
income of $144,000 for the quarter ended June 30, 2002, an increase of $209,000
or 145.1%. For the six-month period ended June 30, 2003, the Company’s net
income of $646,000 increased $277,000 from the $369,000 reported for the same
period of 2002, an increase of 75.1%. Asset growth, which has translated to an
improvement in net interest income, and an increase in noninterest income have
aided in the favorable variances in the quarter and year to date net income
figures discussed above. In addition, a charge to earnings in the second quarter
of 2002 due to a write-down of other real estate owned to its estimated net
realizable value further magnified the improvements from 2002.
Diluted earnings per common
share were $0.36 for the quarter ended June 30, 2003 compared with $0.15 in
2002. For the six-month period ended June 30, 2003, diluted earnings per common
share totaled $0.65 compared with $0.37 for the same period of 2002. The
Company’s annualized return on average assets (ROA) for the second quarter
of 2003 was 0.90% compared to 0.41% for the second quarter of 2002. This
compares with an ROA of 0.84% and 0.53% for the six-month periods ended June 30,
2003 and 2002, respectively. Annualized return on average shareholders’
equity (ROE) was 10.9% for the second quarter of 2003 compared to 4.8% in the
second quarter of 2002, while year to date ROE was 10.1% and 6.2% as of June 30,
2003 and 2002, respectively.
NET INTEREST
INCOME
The most significant
component of the Company’s net earnings is net interest income, which
represents the excess of interest income earned on earning assets over the
interest expense paid for sources of funds. Net interest income is affected by
changes in volume resulting from growth and alteration of the balance
sheet’s composition, as well as by fluctuations in market interest rates
and maturities of sources and uses of funds. For purposes of this discussion,
net interest income is presented on a fully tax-equivalent basis to enhance the
comparability of the performance of tax-exempt to fully taxable earning assets.
For the periods ended June 30, 2003 and 2002, the tax-equivalent adjustment was
$61,000 and $45,000, respectively.
For the six months ended June 30, 2003, net interest income on a tax equivalent basis improved by $255,000 or 8.9% compared to 2002.
As reported in Table II, growth in the Company’s interest-earning assets and liabilities has translated into a net increase of
$378,000 in net interest income from the prior year. Mitigating this increase was the impact of the lower interest rate environment,
whereby the decline in the interest rates resulted in a net decline in net interest income of $123,000. For the six months ended
June 30, 2003, the Company’s net yield on interest-earning assets or “margin” was 4.19%, which represents a decline of 17 basis
points from the margin at June 30, 2002. Falling interest rates and competition were key contributors to the decline in the
Company’s margin for this comparison period. Notwithstanding the decline from 2002 to 2003, the Company has experienced a positive
trend in its margin since year-end 2002. During the fourth quarter of 2002, the margin declined to its lowest level in 2002 to
approximately 4.06% and has since improved to 4.17% and 4.21% in the first and second quarters of 2003, respectively. The
improvement coincides with the current loan growth trend in which outstanding loans have increased $13,003,000 or 12.1% over the past
three quarters. During this time period, the loan to deposit ratio has increased from 82.1% to its current level of 84.9%. Future
improvements in the margin will likely be dependent upon the Company’s ability to continue the loan growth trend.
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.
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 the second quarter of 2003,
the Bank made an $85,000 provision for loan losses compared to $104,000 during
the second quarter of 2002. For the six months ended June 30, 2003 and 2002,
respectively, the provision for loan losses was $175,000 and $209,000. See
further discussion of loan quality and the related allowance for loan losses in
the LOAN PORTFOLIO section of this analysis.
NONINTEREST
INCOME
Noninterest income includes
revenues from all sources other than interest income and yield related loan
fees. For the second quarter, noninterest income increased $36,000 compared to
the second quarter of 2002, an increase of 14.8%. Similarly, noninterest income
for the six-month period ended June 30, 2003 totaled $565,000, an increase of
$131,000 or 30.2% from the $434,000 recorded during the same period of 2002. As
a percentage of average assets, annualized noninterest income was 0.73% and
0.62% for the six-month periods ended June 31, 2003 and 2002, respectively.
The improvement in the
quarter-to-quarter earnings described above is predominantly due to an increase
in the Company’s other income. Included in this line item for the quarter
ended June 30, 2003 was a $17,000 nonrecurring fee collected from a third party
as a result of a customer referral. In addition, the Company’s interchange
fee from its debit card program and fee income derived from its merchant service
program increased from the prior year due to an increase in the volume of
customer transactions processed in the respective programs.
On a year to date basis,
loan origination fee income from the Company’s secondary market loan
program has increased as the low interest rate environment continues to
stimulate fixed rate loans. In 2003, the fee income exceeded the prior year by
$31,000. The Company’s other income increased by $80,000. Similar to the
quarter-to-quarter comparison discussed above, the Company’s debit card and
merchant service programs experienced a combined favorable variance of $48,000
for the first six months of 2003. Beginning in August 2003, the Company’s
fee income from its debit card and merchant service programs will be reduced due
to fee structure changes dictated by VISA/MC and the third-party processor of
the transactions. Prospectively, management has estimated that the reduction may
be as much as one-third (33.3%).
NONINTEREST
EXPENSE
Noninterest expense
includes overhead costs that are not related to interest expense or to losses
from loans or securities. As of June 30, 2003, the Company’s noninterest
expense totaled $2,465,000, a decrease of $47,000, or 1.9%, over total
noninterest expense incurred for the six months ended June 30, 2002. On a
quarter-to-quarter basis, noninterest expense decreased $157,000, or 11.4%.
Expressed as a percentage of average assets, annualized noninterest expense was
3.2% and 3.6% for the six months ended June 30, 2003 and 2002, respectively.
TABLE I
AVERAGE BALANCE SHEET AND
NET INTEREST INCOME ANALYSIS
(In thousands of dollars)
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Average Interest Yield/ Average Interest Yield/
Balance (1) Rate Balance (1) Rate
---------- -------- ------ --------- -------- -----
INTEREST EARNING ASSETS
Loans, net of unearned income $ 114,924 $ 3,711 6.46% $ 105,903 $ 3,846 7.26%
Securities:
Taxable 25,458 376 2.95% 16,962 355 4.19%
Tax-exempt (1) 6,007 179 5.95% 3,745 133 7.10%
---------- -------- ------ --------- -------- -----
Total securities 31,465 555 3.53% 20,707 488 4.71%
---------- -------- ------ --------- -------- -----
Federal funds sold and interest-bearing
deposits 2,026 11 1.09% 4,435 45 2.03%
---------- -------- ------ --------- -------- -----
Total interest earning assets 148,415 4,277 5.76% 131,045 4,379 6.68%
---------- -------- ------ --------- -------- -----
NONINTEREST EARNING ASSETS
Cash and due from banks 3,121 3,925
Bank premises and equipment 2,686 2,771
Other assets 1,338 2,184
Allowance for loan losses (1,078) (918)
---------- ---------
Total assets $154,482 $ 139,007
========== =========
INTEREST-BEARING LIABILITIES
Demand deposits 18,439 39 0.42% 17,962 64 0.71%
Savings deposits 69,767 645 1.85% 53,937 706 2.62%
Certificates of deposit 30,932 433 2.80% 34,427 710 4.12%
---------- -------- ------ --------- -------- -----
Total interest-bearing deposits 119,138 1,117 1.88% 106,326 1,480 2.78%
---------- -------- ------ --------- -------- -----
Short-term borrowings 3,520 20 1.14% 3,811 31 1.63%
Long-term borrowings 1,387 30 4.33% 437 13 5.95%
---------- -------- ------ --------- -------- -----
Total other interest-bearing
liabilities 4,907 50 2.04% 4,248 44 2.07%
---------- -------- ------ --------- -------- -----
Total interest-bearing liabilities 124,045 1,167 1.88% 110,574 1,524 2.76%
---------- -------- ------ --------- -------- -----
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 16,377 15,503
Other liabilities 1,227 972
Shareholders' equity 12,833 11,958
---------- --------
Total liabilities and
shareholders' equity $ 154,482 $139,007
========== ========
NET INTEREST EARNINGS $ 3,110 $ 2,855
======== =======
NET YIELD ON INTEREST EARNING ASSETS 4.19% 4.36%
======= ======
(1) - Calculated on a fully tax-equivalent basis using the rate of 34% for 2003 and 2002.
(2) - For purposes of this table, nonaccruing loans are included in average loan balances.
TABLE II
CHANGES IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES
(In thousands of dollars)
Six Months Ended
June 30, 2003 vs. June 30, 2002
Increase (Decrease)
Due to Change In:
----------------------------------
Volume (1) Rate (1) Total
------------ ----------- ---------
INTEREST EARNING ASSETS
Loans $ 312 $ (447) $ (135)
Securities:
Taxable 145 (124) 21
Tax-exempt (2) 70 (24) 46
------------ ----------- ---------
Total securities 215 (148) 67
Federal funds sold and interest-bearing deposits (18) (16) (34)
------------ ----------- ---------
Total interest earning assets 509 (611) (102)
------------ ----------- ---------
INTEREST-BEARING LIABILITIES
Demand deposits 2 (27) (25)
Savings deposits 177 (238) (61)
Certificates of deposit (67) (210) (277)
Short-term borrowings (2) (9) (11)
Long-term borrowings 21 (4) 17
------------ ---------- ---------
Total interest-bearing liabilities 131 (488) (357)
------------ ---------- ---------
NET INTEREST EARNINGS $ 378 $ (123) $ 255
============ ========== =========
(1) - The changes in interest due to both rate and volume have 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%.
Salaries and employee
benefits, the Company’s largest noninterest expense, increased $36,000 or
6.4% on a quarter-to-quarter comparison and $106,000 or 9.5% on a year to date
comparison. Factors contributing to this increase include: (1) the employment of
three additional full-time staff in 2003 compared to 2002 and (2) an increase in
the company’s employee benefit expense resulting from a change in corporate
policy and the hiring of additional staff.
Data processing expense was
up $28,000 and $46,000 for the quarter and year to date, respectively, due in
part to the growth in the Company’s customer base (and the related increase
in the volume of the transactions processed) and annual fee increases stipulated
by the vendor contracts. In addition, the Company upgraded its ATM/Debit Card
network to a real-time processing platform at the end of the first quarter in
2002, which is more expensive to operate.
Professional and legal fees
increased $34,000 and $51,000 for the quarter and year to date comparisons,
respectively. Throughout 2003, Company has procured professional services from
various legal and professional firms in order to assist the Board and management
with various technical and long-term strategic issues. Comparable arrangements
were not present in 2002. The Company anticipates ongoing relationships with
these firms; therefore, similar variances in professional and legal fees are
expected in the immediate future.
INCOME TAXES
The Company’s income
tax expense, which includes both federal and state income taxes, totaled
$181,000 and $328,000 for the three-month and six-month periods ended June 30,
2003 compared to $50,000 and 154,000 for same periods of 2002, respectively. The
effective tax rates approximated 33.9% and 25.8% for the three-months ended June
30, 2003 and 2002 and 33.7% and 29.4% for the six-months ended June 30, 2003 and
2002.
CHANGES IN
FINANCIAL CONDITION
The Company’s total
assets were $162,885,000 at June 30, 2003, compared to $151,808,000 at December
31, 2002, representing an increase of $11,077,000 or 7.3%. On average, total
assets were $154,482,000 during the first six months of 2003. 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 security
portfolio, which represents approximately 18.3% and 21.5% of the Company’s
total assets at June 30, 2003 and December 31, 2002, respectively, declined
$2,888,000 during the first six months of 2003, as the net decrease in the portfolio was
predominantly used to fund loan growth. A more detailed discussion of the
securities portfolio may be found in Note 3 of the consolidated financial
statements found in Item I.
The Bank attempts 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. On average, its daily position in the overnight market
for the six months ended June 30, 2003 was $1,907,000, which compares to
2002‘s average position of $4,141,000. The decline in the average overnight
position is directly related to the increased loan demand experienced in 2003
versus the slower loan demand in 2002.
As more fully discussed in
the DEPOSITS AND OTHER FUNDING SOURCES section, the overnight position at June
30, 2003 was temporarily impacted due to large dollar deposits made at or near
June 30, 2003.
Loan Portfolio
and Asset Quality
Gross loans, which were
$120,087,000 at June 30, 2003, increased $9,500,000 or 8.6% during the first six
months of 2003, with the Covington, Virginia market experiencing the majority of the
growth where loans have increased $6,248,000 since year-end 2002. A key
personnel hire and an aggressive advertising campaign have netted significant
results in Covington. Net loan growth in the Company’s West Virginia locations for
the six months ended June 30, 2003 was $3,252,000. The
majority of this growth was derived from the Company’s involvement in a
specific real estate development project in Greenbrier County. As reported in
Note 3 to the Consolidated Financial Statements included in Item I, the majority
of the growth has transpired in the commercial and real estate loan portfolios.
The allowance for loan
losses was $1,106,000 at June 30, 2003 compared to $1,036,000 at December 31,
2002. Expressed as a percentage of gross loans, the allowance for loan losses
was 0.92% and 0.94% at June 30, 2003 and December 31, 2002, respectively. The
allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably estimated. On a quarterly basis,
management performs a comprehensive evaluation of the adequacy of the allowance
for loan losses using both quantitative and qualitative factors. The assessment
encompasses an evaluation of specifically identified problem loans and their
potential loss, if any. Loss potential for each specifically identified problem
loan is determined based on a quantitative evaluation of repayment from sources
such as cash flow and the fair market value of underlying collateral. For the
remaining loans in the bank’s commercial, installment and real estate
portfolios, management considers the impact of qualitative factors such as
historical loan loss experience, new loan volume, portfolio composition, levels
of nonperforming and past due loans and current and anticipated economic
conditions in evaluating potential loss exposure and the adequacy of the
allowance for loan losses. In management’s opinion, the allowance for loan
losses is adequate to absorb the current estimated risk of loss in the existing
portfolio.
Given the recent economic
conditions, asset quality has remained a focal point across the financial
services industry. The Company is not immune to the negative impact of the
economy, and as a result, has experienced a mild negative trend in its loan
portfolio whereby nonaccrual loans have increased from $242,000 at June 30, 2002
to its current level of $778,000 [Management has estimated a loss exposure of
$162,000 on the pool of nonaccrual loans]. In addition, net charge-offs for the
six months ended June 30, 2003 were $105,000 compared to $43,000 in the
comparable period of 2002 and $105,000 for the entire year in 2002. The timing
and amount of future loan loss provisions will greatly depend on the
Company’s prospective net loss experience and any future impact of
continued economic weakness on the performance of the loan portfolio. See Note 4
of the consolidated financial statements for an analysis of the activity in the
Company’s allowance for loan losses for the six-month periods ended June
30, 2003 and 2002, and for the year ended December 31, 2002.
A summary of the
Company’s past due loans and nonperforming assets is provided in the
following table:
SUMMARY OF PAST DUE LOANS AND NONPERFORMING ASSETS
(in thousands of dollars)
June 30, June 30, Dec. 31,
2003 2002 2002
------------- ------------- -----------
Loans past due 90 or more days still accruing $ - $ - $ -
============= ============= ===========
Nonperforming assets:
Nonaccrual loans $ 778 $ 242 $ 433
Other real estate owned - 534 30
Other foreclosed assets 8 - -
------------- ------------- -----------
Total nonperforming assets $ 786 $ 776 $ 463
============= ============= ===========
Nonperforming assets as a % of total assets 0.48% 0.54% 0.40%
============= ============= ===========
Deposits and
Other Funding Sources
Total deposits at June 30,
2003 increased $7,053,000 or 5.3% from December 31, 2002. On average, deposits
totaled $135,515,000 during the first six months of 2003, which compares to
$134,253,000 on hand as of December 31, 2002. In June 2003, a small group of
unrelated customers deposited significant funds with the Company (approximately
$4,000,000), which inflated the quarter end deposit and Federal funds sold
balances. Based upon the nature of the accounts, management does not expect
these deposits to remain with the Company beyond the third quarter of 2003. The
following table summarizes the quarter-end and average deposit mix for June 30,
2003 as compared to the December 31, 2002 year-end balance:
Percentage
Increase/Decrease
Compared to
Avg. YTD Dec. 31, 2002 Year-end
Balance Balance:
-------------------------
June 30, June 30, June 30, Avg. YTD
2003 2003 2003 Balance
-------------- --------------- ------------ ------------
Demand deposits $ 36,455 $ 34,816 6.7% 1.9%
Savings 74,999 69,767 10.5% 2.8%
Certificates of deposit 29,852 30,932 -7.4% -4.1%
-------------- ---------------
Total deposits $ 141,306 $ 135,515 5.3% 0.9%
============== ===============
As reported above, on
average, deposit growth was flat during the six months ended June 30, 2003,
which was due in part by design by the Company’s management. During most of
2002, deposit growth had outpaced loan growth resulting in an excess funding
position. In 2003, management has chosen to manage its deposit growth by
managing its pricing of interest-bearing products. As a result, deposit growth
has flattened out and the incremental loan growth has been funded via the
conversion of Federal funds sold and the securities portfolio as opposed to
incremental core deposit growth.
The Company’s
involvement in short-term borrowings during the six months ended June 30, 2003
consisted of repurchase agreements, Federal funds sold and a short-term advance
from the Federal Home Loan Bank (“FHLB”). As more fully discussed in
Note 6 of the Consolidated Financial Statements included in Item I, the Company
obtained a $3,000,000 short-term advance from the FHLB in May 2003, which
accounted for the increase in short-term borrowings compared to the December 31,
2002 balance and was utilized to support the loan growth.
Although the Company
remains committed to funding its assets with traditional community bank deposit
products, interest rate costs, timeliness and transaction costs are weighed in
determining the most effective method of funding the bank. Future funding
sources will most likely involve more alternative funding sources, such as
short-term and long-term advances from the FHLB, because of the lower cost of
funds.
LIQUIDITY
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, Federal funds sold and interest-bearing deposits, which
totaled $10,343,000 at June 30, 2003 versus $5,587,000 at December 31, 2002.
Year to date, the average balance of its liquid assets totaled $5,147,000. These
funds are further supplemented by loan payments, proceeds from investment
security transactions (maturities, calls and coupon payments) and increases in
deposits. The Company’s liquidity is further enhanced by the availability
of approximately $50,700,000 in available lines of credit with various
correspondent banks for added funding or liquidity support. 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.
CAPITAL
RESOURCES
Maintenance of a strong
capital position is a continuing goal of the Company’s management. Through
management of its capital resources, the Company seeks to provide an attractive
financial return to its shareholders while retaining sufficient capital to
support future growth.
Total shareholders’
equity at June 30, 2003 was $13,041,000 compared to $12,579,000 at December 31,
2002, representing an increase of $462,000. A reconciliation of the increase is
reported in the consolidated statements of shareholders’ equity included in
Item I. Average total shareholders’ equity expressed as a percentage of
average total assets was approximately 8.31% at June 30, 2003 compared to 8.45%
at December 31, 2002.
Cash dividends totaling
$266,000, or $0.27 per share were declared during the six months ended June 30,
2003, which compares to $246,000 or $0.25 per share declared in the comparable
period of 2002. These payout levels represented approximately 41.1% and 66.7% of
the Company’s year-to-date earnings for the six months ended June 30, 2003
and 2002, respectively. The Company has a dividend policy whereby the dividend
payout level may not exceed 40% of the Company’s annual net income.
Accordingly, future declarations may be limited to the amounts that would be
available under the policy directive.
The Company has experienced
rapid growth over the past three years, and accordingly, the Company’s
leverage ratio (equity to assets) has decreased. Although the Company continues
to report capital ratios well above minimum guidelines as discussed in the
following section, it has become prudent for the Company to manage the dividend
growth rate in order to preserve capital for future internal asset growth and to
build a capital position that will allow the Company to react in a timely manner
to external growth opportunities should they present themselves. As a result,
future dividend payout levels may not be indicative of past payout levels.
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 2003.
Quantitative measures
established by regulation to ensure capital adequacy require the subsidiary bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier capital (as defined) to average assets (as defined).
Management believes, as of June 30, 2003, that the subsidiary bank meets all
capital adequacy requirements to which it is subject, as evidenced by the
following table:
Minimum
Actual Requirement
------------- ---------------
Tier 1 risk-based capital ratio 10.92% 4.00%
Total risk-based capital ratio 11.93% 8.00%
Leverage ratio 7.64% 3.00%
The Company invests in various types of interest-earning assets (primarily loans and investment securities), which are funded largely by interest-bearing liabilities (primarily deposits and FHLB advances). Such financial instruments have varying levels of sensitivity to changes in market interest rates, which creates interest rate risk for the Company. Accordingly, the Company’s net interest income, the most significant component of its net income, is subject to substantial volatility due to changes in interest rates or market yield curves, particularly if there are differences, or gaps, in the re-pricing frequencies of its interest-earning assets and the interest-bearing liabilities which fund them. The Company monitors such interest rate gaps and seeks to manage its interest rate risk by adjusting the re-pricing frequencies of its interest-earning assets and interest-bearing liabilities.
The following table represents the results of the Company’s interest sensitivity simulation analysis as of June 30, 2003. Key assumptions in the preparation of the table include changes in market conditions including interest rates, loan volumes, and pricing; deposit sensitivity; customer preferences; and capital plans. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected balances, maturities and repricing opportunities. The resulting change in cumulative net interest income for the succeeding fiscal year reflects the level of sensitivity that net interest income has in relation to changing interest rates.
Hypothetical%
Change in Net
Interest rate scenario Interest Income
--------------------
Up 100 basis points 3.2%
Down 100 basis points -4.0%
The change in the Down 100 basis points scenario from year-end 2002 is due in part to the current interest rate environment. Many of
the Company’s interest-bearing deposits (including demand and savings deposits which in most cases do not have a stated maturity and
therefore, reprice immediately) are at or near interest rate “floor” levels. Therefore, there is marginal interest expense savings
in a declining interest rate environment. Conversely, the Company’s interest-earning assets are positioned where they will likely
absorb a greater decline in interest income in a falling interest rate environment.
A factor affecting both scenarios reported above is the relationship between the NY prime interest rate (“prime”) as published in the
Wall Street Journal and its impact on the Company’s loan yield and its cost of funds on a significant portion of its interest-bearing
liabilities, principally its savings product. As of June 30, 2003, approximately 50.1% ($61,400,000) of the Company’s loan portfolio
and its related yield are tied to the prime interest rate. Similarly, 43.5% ($61,502,000) of the Company’s total deposits at June
30, 2003 bear an interest rate tied to prime. This compares to 46.0% and 40.8% at December 31, 2002, respectively. Their
respective yield and rate relationship to prime is such that should the prime rate increase or decrease 100 basis points (without
considering the timing of the interest rate changes, which for loans depends on the loan agreement and for savings is generally
immediate), the net impact of the two products tied to prime is to expand (in an increasing rate environment) or contract (in a
decreasing rate environment) the Company’s net interest margin 55 basis points. As a result of the growth in the assets and
liabilities tied to prime, the interest rate scenarios detailed above have changed from the figures reported in the 2002 Annual
Report. Management does not anticipate a significant deviation from this type of asset and liability growth in the future.
As of June 30, 2003, the Company’s interest rate risk as measured above was within the Company’s risk management policy guidelines.
Disclosure
Controls and Procedures
The Company’s
management, with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion.
Internal
Control Over Financial Reporting
There have not been any
changes in the Company’s internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
| Item 1. Legal Proceedings | ||
|
Various legal proceedings are presently pending in which the Bank is a named party. These proceedings involve routine litigation incidental to the Bank’s business. In Management’s opinion, based upon advice of counsel, the resolution of such proceedings will not have a material impact on the Bank’s financial position. |
||
| Item 2. Changes in Securities | ||
|
None. | ||
| Item 3. Defaults upon Senior Securities | ||
|
None. | ||
| Item. 4. Submission of Matters to a Vote of Security Holders | ||
|
The annual meeting of shareholders of First National Bankshares Corporation was held on April 24, 2003. A total of 645,930 shares, or 65.7% of outstanding shares, were voted with 631,655 represented by proxy and 14,275 represented in person. At this meeting, the following business was transacted: |
||
|
a) The following nominees were elected to serve as Company directors for a three-year term expiring in the year 2006: |
| For | Withheld | ||
| Nominees selected by the Board of Directors | |||
| David A. Carson | 628,730 | 17,200 | |
| G. Thomas Garten | 626,115 | 19,815 | |
| Walter Bennett Fuller | 628,463 | 17,467 | |
| Richard L. Skaggs | 627,948 | 17,982 | |
| Nominees from the Floor | |||
| None |
|
b) The appointment of Ernst & Young LLP of Charleston, WV as the Company's independent accountants was ratified by the shareholders with 639,844 shares voting for the appointment, 2,060 shares voting against the motion and 4,026 shares abstaining. |
|
c) No other matters were voted upon by the shareholders at this meeting. |
| 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 31.0, Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes- Oxley Act of 2002. | |
|
2. Exhibit 31.1, Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes- Oxley Act of 2002. | |
|
3. Exhibit 32.0, Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
b) On May 8, 2003 the Company filed a Form 8-K Current Report under reporting Item 9 - Regulation FD Disclosure. The purpose of the report was to announce the Company's financial results for first quarter ended March 31, 2003. |
|
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.
| By /s/ L. Thomas Bulla L. Thomas Bulla President and Chief Executive Officer | |
| By /s/ Matthew L. Burns Matthew L. Burns Chief Financial Officer |
| Date: August 14 , 2003 |
I, L. Thomas Bulla, President and CEO, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of First National Bankshares Corporation; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e)and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: August 14 ,2003 |
By /s/ L. Thomas Bulla
L. Thomas Bulla President and Chief Executive Officer |
I, Matthew L. Burns, Chief Financial Officer, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of First National Bankshares Corporation; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e)and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| c) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: August 14 ,2003 |
By /s/ Matthew L. Burns
Matthew L. Burns Chief Financial Officer |
In connection with the
Quarterly Report on Form 10-Q of First National Bankshares Corporation
(“First National”) for the quarterly period ended June 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
“Report”), L. Thomas Bulla, as President and Chief Executive Officer
of First National, and Matthew L. Burns, as Chief Financial Officer of First
National, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of First National.
| By /s/ L. Thomas Bulla
L. Thomas Bulla President and Chief Executive Officer | |
| Date August 14 ,2003 | By /s/ Matthew L. Burns
Matthew L. Burns Chief Financial Officer |
This certification
accompanies each Report pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of
2002, be deemed filed by First National for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed original of this
written statement required by Section 906 has been provided to First National
Bankshares Corporation and will be retained by First National Bankshares
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.