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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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 of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cedar Street, Ronceverte, West Virginia 24970
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 647-4500
---------------
Securities registered pursuant to Sec. 12(b) of the Act- None
Securities registered pursuant to Sec. 12(g) of the Act- None
Securities issued pursuant to a registrant statement which became effective
under the Securities Act of 1933-
Common Stock, par value $5.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
[X] Not subject to Section 16(a)requirements.
As of February 28, 1998, the aggregate market value of the outstanding voting
common stock held by nonaffiliates of the registrant was $9,186,520. This value
is based on the price at which said stock was actually sold in a transaction
known to management which took place on or about February 23, 1998, (management
believes $56.00 was paid per share), since its stock is not extensively traded,
listed on any exchange, or quoted by NASDAQ.
The total number of shares of the registrant's common stock outstanding as of
February 28, 1998, was 192,500 . -----------
Documents Incorporated by Reference:
Part of Form 10-K into which
Document the document is incorporated
- --------- -----------------------------
Articles of Incorporation, from
December 31, 1994 Report 10-K Part IV, Item 14
By-Laws, from December 31, 1994 Report 10-K Part IV, Item 14
Material Employment Contract,
from December 31, 1994 Report 10-K Part IV, Item 14
Material Lease Contract, from
March 31, 1997 Form 10-Q Part IV, Item 14
S-8 Registration Statement,
from July 31, 1997 Form S-8 Part IV, Item 14
Specimen Copy of Incentive Stock Option
Plan Agreement, from December 31, 1996 Report 10-K Part IV, Item 14
THIS REPORT CONTAINS 61 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 56 .
---- ----
1
FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
Table of Contents
Page
PART I
Item 1 - Business..................................................3
Item 2 - Properties................................................6
Item 3 - Legal Proceedings.........................................6
Item 4 - Submission of Matters to a Vote of Security Holders.......6
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters.....................................6
Item 6 - Selected Financial Data...................................8
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation...................9-21
Item 8 - Financial Statements and Supplementary Data...........22-45
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................46
PART III
Item 10 - Directors and Executive Officers of the Registrant...47-49
Item 11 - Executive Compensation..................................50
Item 12 - Security Ownership of Certain Beneficial Owners and
Management.........................................51-52
Item 13 - Certain Relationships and Related Transactions..........52
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Financial Statements..................................53
Signatures........................................................54
2
PART I
ITEM 1 - BUSINESS
Organizational History
First National Bankshares Corporation (referred to in this report as "the
Company") is a West Virginia corporation. It was organized on January 28, 1986,
and is a registered bank holding company under the Bank Holding Company Act of
1956, as amended.
The Company has one wholly-owned subsidiary, a national banking association
which was known as The First National Bank in Ronceverte, until January, 1996,
when the name was changed to First National Bank ("the Bank"). The Bank was
originally organized and chartered in 1888, but was reorganized after the Great
Depression and now operates under a charter dated 1933. Pursuant to a plan of
reorganization, the Bank became a wholly-owned subsidiary of the Company on
August 3, 1987. The Company's business activities are conducted through the
Bank, as the Bank presently accounts for substantially all of the Company's
assets, revenues and earnings.
General
The Bank is a Federally insured depository institution offering a wide variety
of services that are typical of full service community banks from its main
office located in Ronceverte and from its branch offices in Lewisburg and
Charleston, West Virginia. In February of 1997, the Bank relocated its Lewisburg
branch from its previously leased facility to a new bank-owned facility
approximately one mile north of the leased location.
The Bank accepts deposits primarily from customers located within its primary
market area. The Bank offers both its individual and business customers assorted
deposit products with various maturities and interest rates, including
non-interest bearing and interest bearing demand deposits, savings deposits,
certificates of deposit, club accounts and individual retirement accounts. The
Bank offers automated teller machines (ATM's) which allow customers to make
deposits, withdraw cash, purchase U.S. postage stamps, and transfer funds. In
addition, the Bank offers automated telephone banking, whereby customers can use
a touch-tone telephone to access account information and transfer funds between
accounts.
The Bank offers a full spectrum of lending services to its customers, including
commercial loans and lines of credit, residential real estate loans, consumer
installment loans and other personal loans. Loan terms, including interest
rates, loan to value ratios, and maturities are tailored as much as possible to
meet the needs of the borrower. Commercial loans are generally secured by
various collateral, including commercial real estate, accounts receivable and
business machinery and equipment. Residential real estate loans, which
approximate 42% of loans outstanding at December 31, 1997, consist primarily of
mortgages on the borrower's personal residence, and are typically secured by a
first lien on the subject property. Consumer and personal loans are generally
secured, often by first liens on automobiles, consumer goods or depository
accounts. A special effort is made to keep loan products as flexible as possible
within the guidelines of prudent banking practices in terms of interest rate
risk and credit risk. Bank lending personnel adhere to established lending
limits and authorities based on each individual's lending expertise and
experience. The Bank does not currently participate in any indirect lending
programs. The Bank's participation in lease financing is immaterial.
When considering loan requests, the primary factors taken into consideration by
the Bank are the cash flow and financial condition of the borrower, the value of
the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
The Bank also offers a broad range of fiduciary services through its Trust
Department, including the administration of trusts and decedents' estates and
other personal and corporate fiduciary services. Personal fiduciary services
include the settlement of estates, administration of various trusts, agency or
custodial accounts, investment management and guardian services.
Market Area
The Bank's primary market area includes the cities of Ronceverte and Lewisburg
and surrounding Greenbrier County, plus Charleston and surrounding Kanawha
County. Greenbrier County is predominately rural and comprised of moderate
income households. Major employment in the area includes agriculture, tourism,
health care, education and light manufacturing. Unemployment rates in the
Greenbrier county area often exceed the state average, with 1997's YTD
unemployment rate being 8.2% versus a West Virginia state-wide average of 6.9%.
(All unemployment data has been taken from the West Virginia State Bureau of
Employment Programs world-wide-web page.)
3
The Charleston branch is located in Kanawha County, West Virginia. This area is
home of the state capital and is the largest metropolitan area in West Virginia.
Primary employment is related to various professional service industries, health
care, state government, and the chemical industry. The Charleston area typically
has unemployment rates far below the state average, with Kanawha County's 1997
YTD unemployment rate being only 4.8%. The Charleston MSA is much more insulated
from economic downturns than the Greenbrier County area.
Competition
The banking and financial services business is highly competitive, especially in
the Bank's market area. The Bank's principal competitors in Greenbrier County
include four other commercial banks, each of which are owned by statewide or
regional bank holding companies. As of December 31, 1997, management estimates
that the Bank had deposits representing an estimated 14% of total deposits and
loans representing an estimated 15% of total loans of all five commercial banks
servicing its market area. In addition, the Bank also competes for loans,
deposits and trust accounts with other regional banks, credit unions, savings
and loan associations, consumer finance companies, insurance companies and
direct lending agencies affiliated with Federal and state governments.
The Charleston area is serviced by the state's four largest banking
organizations, as well as several small independent banks. Currently, the
Company's market share is estimated to be less than 2% for both deposits and
loans.
The increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. In order
to compete with the other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized services
tailored to meet its customers' needs.
The Bank generates new business primarily through newspaper and radio
advertising, referrals and direct-calling efforts. Referrals for new business
come from Company directors, present customers of the Bank and professionals
such as attorneys and accountants.
Supervision and Regulation
The Company is subject to regulation under the Bank Holding Company Act of 1956,
as amended ("the Act"). The Act requires the prior approval of the Federal
Reserve Board for a bank holding company to acquire or hold more than a 5%
voting interest in any bank. The Act further restricts bank holding company
non-banking activities to those which are determined by the Federal Reserve
Board to be closely related to banking and a proper incident thereto.
The Bank is a national banking association chartered under the laws of the
United States. As such, the operations of the Bank are subject to the
regulations of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation ("the FDIC")
and West Virginia law. The Bank is also subject to periodic examination by the
Comptroller of the Currency.
Capital Standards - The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. In addition to the risk-based
guidelines, federal banking regulators require banking organizations to maintain
a minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio.
Failure to meet applicable capital guidelines could subject the Company to a
variety of enforcement remedies available
4
to the federal regulatory authorities, including limitations on the ability to
pay dividends or the issuance of a directive to increase capital, and
termination of deposit insurance by the FDIC. Regulatory capital ratios of the
Bank are set forth in Note 12 to the Consolidated Financial Statements which are
included in Item 8 of this filing.
Federal Deposit Insurance Corporation Improvement Act of 1991 - In December,
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Corporation Act and made revisions
to several other banking statutes.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well-capitalized, adequately-capitalized, under-capitalized,
significantly-under-capitalized and critically-under-capitalized.
By regulation, an institution is "well-capitalized" if it has a total risk based
capital ratio of 10% or greater, a Tier 1 risk- based capital ratio of 6% or
greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure. The Company's banking subsidiary was a
"well-capitalized" institution as of December 31, 1997.
Another requirement of FDICIA is that federal banking agencies must prescribe
regulations relating to various operational areas of banks and bank holding
companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, and such other standards as the agency deems
appropriate.
Community Reinvestment Act - The Bank is subject to the provisions of the
Community Reinvestment Act ("CRA") which requires banks to assess and help meet
the credit needs of the community in which the bank operates. The OCC examines
the Bank to determine its level of compliance with CRA. The OCC and the Federal
Reserve Board are required to consider the level of CRA compliance when
regulatory applications are reviewed. In its most recent CRA examination, the
Company's banking subsidiary was given an "outstanding" CRA rating.
Reigle-Neal Interstate Banking Bill - In 1994, Congress passed the Reigle-Neal
Interstate Banking Bill (the "Bill"). This Bill permitted certain interstate
banking activities through a holding company structure, effective September 30,
1995. It permits interstate branching by merger effective June 1, 1997, unless
states "opt-out" before that date. In March, 1996, West Virginia adopted changes
to its banking laws so as to permit interstate banking and branching to the
fullest extent permitted by the Bill. The Bill will also permit consolidation of
banking institutions across state lines and perhaps de novo entry. One result of
the Bill could be increased competitiveness, due to the realization of economies
of scale and/or de novo market entrants, where permitted.
Deposit Acquisition Limitation - Under West Virginia law, an acquisition or
merger is not permitted if the resulting depository institution or its holding
company would assume additional deposits to cause it to control deposits in the
State of West Virginia in excess of twenty five percent (25%) of the total
amount of all deposits held by insured depository institutions in West Virginia.
This limitation may be waived by the Commissioner of Banking for good causes
shown.
Monetary Policies - The monetary policies of regulatory authorities, including
the Federal Reserve Board, have a significant effect on the operating results of
banks and bank holding companies. The nature of future monetary policies and the
effect of such policies on the future business and earnings of the Company and
the Bank cannot be predicted.
Employees
At December 31, 1997, the Bank employed 40 full-time and 3 part-time employees.
The Company has no employees who are not also employees of the Bank. Such
employees are not represented by any collective bargaining unit, and management
believes its employee relations are good.
Statistical Information
The disclosures required by Industry Guide 3 - Statistical Disclosure by Bank
Holding Companies are included in "Item 6 - Selected Financial Data" on page 8
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 9 to 21 of this report, and are incorporated
herein by reference.
5
ITEM 2 - PROPERTIES
The Bank owns its principal office at One Cedar Street in Ronceverte, West
Virginia. The building is fully used by the Bank in its operations. It also owns
an adjacent drive-in banking facility that provides drive-in services, as well
as customer parking for the principal office of the Bank.
The lease on the Bank's former Lewisburg branch commenced April 1, 1986, and ran
for a 10-year term, expiring in March of 1996. Bank Management and the Board of
Directors opted to renegotiate the lease in an attempt to reduce the annual cost
to the Bank, as well as to evaluate other branch options. Negotiations did not
result in a mutually satisfactory agreement, and the Board of Directors voted
not to renew the current lease, but to commence with the purchase of land and
the construction of a new branch location. The former branch facility was leased
on a month-to-month basis through January, 1997. The Company completed
construction of a new branch facility and commenced operations on January 27,
1997. The new branch facility is located on U.S. Route 219, approximately 1 mile
north of the previous branch location, and is expected to be fully used in the
Bank's operations. Management does not anticipate that this action will have any
significant impact on its financial position, other than the reduction in lease
expense which is largely negated by the increased depreciation expense and
ongoing costs of ownership.
The Charleston branch is located in Laidley Tower, a multi-story office building
in downtown Charleston, WV. Effective May 1, 1996, the Company entered into a
10-year non-cancelable lease agreement to occupy approximately 4,532 square feet
of the building. Additional information related to this lease can be found in
Note 12 of the Notes to Consolidated Financial Statements which is included in
Item 8 of this filing.
The Bank's properties and leased facilities are considered well suited for its
current needs. Both the main office located in Ronceverte, WV, and the branch
location in Lewisburg, WV, have full-service banking available, including
drive-in banking services. Space at both locations is ample, and no significant
modifications are required at either location. The branch facility in Charleston
is also a full-service branch offering the same services as the other locations,
except it offers no drive-in banking services.
ITEM 3 - LEGAL PROCEEDINGS
The Company and the Bank are not currently involved in any material legal
proceedings, other than routine litigation incidental to their business, which
involve them or any of their properties.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
As of December 31, 1997, the Company's common stock was held by approximately
463 stockholders of record.
There is no active or organized trading market for the common stock of the
Company. The stock of the Company is traded on a limited basis in privately
negotiated transactions. At present, there is no market maker for the Company's
common stock. Accordingly, bid and ask prices are not available for the stock of
the Company and the prices shown below may not be indicative of prices which
would prevail if the stock were more actively traded.
While management occasionally knows of the actual price paid for its common
stock in a transaction, management is not aware of prices paid in most, and
sometimes all, sales of the Company stock since such transactions are privately
negotiated. However, in some of these transactions, individuals have called the
Company and asked for a value for its common stock. In response to such
inquiries, the Company provides the individual with the book value of its common
stock as of the end of the most recent quarter, as well as the most recent price
per share paid in transactions known to management. Stock trades during 1997
that were known to management took place at $50.00 to $56.00 per share, with the
most recent known transactions having a per share price of $56.00. The following
high and low prices are the book values of a share of the Company's common stock
at the beginning and end of each of the quarters shown below. These may
represent amounts which may have been paid for the common stock of the Company
during the periods indicated,
6
however management makes no representations concerning trades that were
conducted privately.
- -------------------------------------------------------------------------------
Book Value Book Value
1997 1996
--------------- --------------
High Low High Low
First Quarter ..................$ 46.44 $46.19 $44.16 $44.04
Second Quarter ................. 46.95 46.69 45.02 44.64
Third Quarter .................. 47.80 47.29 45.42 45.28
Fourth Quarter ................. 48.44 48.07 45.93 45.84
- -------------------------------------------------------------------------------
A summary of dividends per share declared during 1997 and 1996 follows:
- -------------------------------------------------------------------------------
1997 1996
-------- --------
First Quarter $ 0.40 $ 0.33
Second Quarter 0.40 0.33
Third Quarter 0.40 0.33
Fourth Quarter 0.40 0.40
- -------------------------------------------------------------------------------
The Company plans to continue the pattern of declaring quarterly dividends in
the future at a rate consistent with its historical payout ratios.
Payment of dividends by the Company is dependent upon payments to it from the
subsidiary bank. The ability of the subsidiary bank to pay dividends is subject
to certain limitations under banking regulations. These limitations are
discussed in Note 14 of the Notes to Consolidated Financial Statements, which
are included in Item 8 of this filing.
7
ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Interest income .................. $ 7,041 $ 6,166 $ 5,688 $ 5,599 $ 5,926
Interest expense ................. 3,077 2,393 2,115 2,089 2,359
Net interest income .............. 3,964 3,773 3,573 3,510 3,568
Provision for loan losses ........ 31 0 0 123 459
Non-interest income .............. 422 433 415 419 366
Non-interest expense ............. 3,087 3,140 2,920 3,100 2,815
Income before income taxes ....... 1,268 1,066 1,068 706 659
Income before cumulative effect of
change in accounting principle . 792 736 767 542 498
Net income ....................... 792 736 767 542 298
PER SHARE DATA
Income before cumulative effect of
change in accounting principle . $ 4.11 $ 3.82 $ 3.98 $ 2.82 $ 2.59
Net income:
Basic ....................... 4.11 3.82 3.98 2.82 1.55
Diluted...................... 4.11 3.82 3.98 2.82 1.55
Cash dividends declared .......... 1.60 1.39 1.20 1.00 0.90
Book value per share ............. 48.44 45.93 43.72 37.98 39.56
AVERAGE BALANCE SHEET SUMMARY
Loans, net of unearned
discount and reserve ........... $63,620 $48,037 $41,853 $40,954 $44,532
Securities ....................... 18,646 23,341 27,321 31,722 28,261
Deposits ......................... 75,149 69,838 66,367 72,082 72,584
Long-Term Debt ................... 3,862 -- -- -- --
Shareholders' equity ............. 9,239 8,672 8,223 7,779 7,616
Total assets ..................... 90,824 79,985 75,351 80,274 80,615
AT YEAR END
Loans, net of unearned
discount and reserve .......... $69,108 $52,800 $45,773 $38,766 $45,240
Securities ....................... 17,311 22,617 24,015 30,802 29,518
Deposits ......................... 78,336 73,316 66,166 69,685 73,543
Long-Term Debt ................... 5,500 -- -- -- --
Shareholders' equity ............. 9,325 8,841 8,415 7,311 7,487
Total assets ..................... 95,430 83,668 75,455 77,738 81,615
SELECTED RATIOS
Return on average assets (1) ..... 0.87% 0.92% 1.02% 0.68% 0.62%
Return on average equity (1) ..... 8.57 8.49 9.33 6.97 6.54
Average equity to average assets . 10.17 10.84 10.91 9.69 9.45
Dividend payout ratio (1) ........ 38.92 36.35 30.12 35.52 34.76
(1) - Before cumulative effect of change in accounting principle during 1993.
8
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of the Company for the applicable
periods covered by the consolidated financial statements appearing in Item 8 of
this report. The statements contained in this discussion may include
forward-looking statements based on management's current expectations, and
actual results may differ materially. This discussion and analysis should be
read in conjunction with such financial statements and the accompanying notes
thereto. Certain amounts in this discussion, as previously presented, have been
reclassified for prior years to conform to current year classifications.
Amounts and percentages have been rounded for purposes of discussion.
First National Bankshares Corporation (the "Company"), incorporated under the
laws of the State of West Virginia in 1986, is a one bank holding company
headquartered in Ronceverte, West Virginia. The Company owns 100% of the
outstanding common stock of First National Bank ("the Bank"), which comprises
substantially all of the Company's assets and liabilities, and from which the
Company presently derives all of its earnings.
Earnings Summary
The Company reported net income of $792,000 for 1997, representing an increase
of $56,000 or 7.6% over the $736,000 reported for 1996. This increase in 1997
earnings was largely attributable to an increase in net interest income of
$191,000 primarily due to growth in the Company's earning assets, and a $53,000
decrease in non-interest expense. These improvements were partially offset by an
increased Provision for Loan Losses, decreased non-interest income, and
increased Federal and State income taxes. Net income of $792,000 for 1997
represents the highest earnings year in the Company's history. Those factors
significantly influencing results of operations are included in the following
discussion.
On a per share basis, net income was $4.11 in 1997, $3.82 in 1996, and $3.98 in
1995. An analysis of the changes in earnings per share by major statement of
income component is presented in the following table:
- --------------------------------------------------------------------------------
1997 1996
vs. vs.
1996 1995
---------- ----------
Basic earning per common share, prior year $ 3.82 $ 3.98
Increase (decrease) from changes in:
Net interest income 1.00 1.04
Provision for loan losses (0.16) --
Other income (0.06) (0.09)
Other expenses 0.28 (1.14)
Income taxes (0.77) (0.15)
---------- -----------
Basic earning per common share $ 4.11 $ 3.82
========= ==========
- -------------------------------------------------------------------------------
Return on average assets (ROA), a measure of how effectively the Company
utilizes its assets to produce net income, was 0.87% for 1997, compared to 0.92%
for 1996 and 1.02% for 1995. Return on average equity (ROE), which measures
earnings performance relative to the total amount of equity capital invested in
the Company, was 8.57% in 1997, 8.48% in 1996, and 9.33% in 1995. The decrease
in ROA is primarily due to the Company's lower net interest margin during 1997
in comparison with previous years. The fluctuations in the Company's ROE is
directly attributable to changes in earnings levels over the past three years.
Net Interest Income
The most significant component of the Company's net earnings is net interest
income, which represents the excess of interest income earned on loans,
securities and other interest earning assets over interest expense on deposits.
Net interest income is influenced by changes in volume resulting from growth and
alteration of the balance sheet's composition, as well as by fluctuations in
market interest rates and maturities of sources and uses of funds. Net interest
income is presented and discussed in this section on a fully Federal
tax-equivalent basis to enhance the comparability of the performance of
tax-exempt securities to other fully taxable earning assets. For the years ended
1997, 1996, and 1995, tax-equivalent adjustments of $102,000, $109,000, and
$121,000, respectively, are included in interest income,
9
and were computed assuming a tax rate of 34.0% in all periods.
For the year 1997, the Company's adjusted tax-equivalent net interest income, as
adjusted, increased $186,000 or 4.79% to $4,068,000 as compared to $3,882,000
and $3,694,000 in 1996 and 1995, respectively. This increase was attributable to
overall growth in the loan portfolio which is the Bank's highest-yielding
earning asset. The Company's net interest margin decreased from the previous
year to 4.75% in 1997 compared with 5.15% in 1996 and 5.16% in 1995. This
decrease is due primarily to an increase in the cost of the Company's
interest-bearing liabilities. It is expected that the Company's net interest
margin will remain consistent with 1997's levels in 1998.
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 1997, the Company made a provision for loan losses of $31,000. No
provision for loan losses was considered necessary during 1996 or 1995. The
decision to resume the provision during 1997 was made to provide for potential
losses in the loan portfolio resulting from rapid increases in loan volume
during 1996 and 1997. During the past three years, the low level of loan loss
provisions reflects management's general loan underwriting standards, which
generally requires collateral to provide additional security against possible
losses. See the ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS section of this
discussion for additional information related to the adequacy of the provision
for loan losses.
10
TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
1997 1996 1995
------------------------------ --------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST EARNING ASSETS
Loans, net of unearned disc.(1) $ 63,620 $ 5,811 9.13% $ 48,037 $ 4,667 9.72% $ 42,632 $ 4,018 9.42%
Securities:
Taxable 14,527 841 5.79 18,855 1,072 5.69 22,494 1,337 5.94
Tax-exempt (2) 4,119 303 7.32 4,486 321 7.16 4,827 355 7.35
----------- ------- ----- -------- ------ ------ ---------- ------ -----
Total securities 18,646 1,144 6.13 23,341 1,393 5.97 27,321 1,692 6.19
----------- ------- ----- -------- ------ ------ ---------- ------ -----
Federal funds sold 3,447 190 5.51 4,049 215 .31 1,635 99 6.05
----------- ------- ----- -------- ------ ----- ---------- ------ -----
Total interest earnings assets 85,713 7,145 8.33 75,427 6,275 8.32 71,588 5,809 8.11
----------- ------- -------- ---------
NON INTEREST EARNING ASSETS
Cash and due from banks 2,554 2,475 2,227
Bank premises and equipment 2,092 1,499 1,071
Other assets 1,104 1,194 1,224
Allowance for loan losses (639) (610) (759)
----------- -------- ---------
Total assets $ 90,824 $ 79,985 75,351
=========== ======== =========
INTEREST BEARING LIABILITIES
Demand deposits $ 12,953 $ 344 2.66% $13,449 360 2.67 $ 13,298 354 2.66
Savings deposits 22,108 868 3.93 20,419 727 3.56 20,075 703 3.50
Time deposits 29,992 1,543 5.14 26,325 1,293 4.91 23,744 1,058 4.45
----------- ------- ------ ------- ------- ------ ---------- ------ -------
Total interest bearing deposits 65,053 2,755 4.24 60,193 2,380 3.95 57,117 2,115 3.70
Repurchase Agreements 1,426 56 3.93 320 13 4.17 0 0 0.00
Federal Funds Purchased 126 7 4.76 0 0 0.00 0 0 0.00
Long-term FHLB borrowings 3,862 259 6.71 0 0 0.00 0 0 0.00
----------- ------- ------ ------- ------ ----- ---------- ------ ------
Total interest bearing liabilities 70,467 3,077 4.37 60,513 2,393 3.95 57,117 2,115 3.70
NON INTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 10,096 9,645 9,250
Other liabilities 1,022 1,155 569
Shareholders' equity 9,239 8,672 8,415
----------- ------ ----------
Total liabilities and
shareholders' equity $ 90,824 $79,985 $ 75,351
=========== ======= ==========
NET INTEREST EARNINGS $ 4,068 $ 3,882 $3,694
======= ======== ======
NET YIELD ON INTEREST EARNING ASSETS 4.75% 5.15% 5.16%
===== ====== =====
(1) - For purposes of this table, nonaccruing loans are included in average loan
balances. Loan fees are also included in interest income. (2) - Computed on a
fully Federal tax-equivalent basis using the rate of 34% for all years.
11
- ------------------------------------------------------------------------------
TABLE II
CHANGE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
(Dollars in thousands)
1997 vs. 1996 1996 vs 1995
-------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
INTEREST EARNING ASSETS
Loans $ 1,437 $ (293) $ 1,144 $ 522 $ 127 $ 649
Securities:
Taxable (250) 19 (231) (209) (56) (265)
Tax-exempt (2) (26) 7 (19) (25) (9) (34)
----------- ---------- ----------- ---------- ---------- ----------
Total securities (276) 26 (250) (234) (65) (299)
----------- ---------- ----------- ---------- ---------- ----------
Federal funds sold (33) 8 (25) 128 (12) 116
---------- ---------- ---------
Total interest earning assets 1,128 (259) 869 416 50 466
----------- ---------- ----------- ---------- ---------- ---------
INTEREST BEARING LIABILITIES
Demand deposits (13) (3) (16) 4 2 6
Savings deposits 63 78 141 12 12 24
Time deposits 186 64 250 120 115 235
Repurchase Agreements 43 0 43 13 0 13
Federal Funds purchased 6 0 6 0 0 0
Long-term FHLB borrowings 259 0 259 0 0 0
----------- ---------- ----------- --------- ---------- ---------
Total interest bearing liabilities 544 139 683 149 129 278
----------- ---------- ----------- ---------- ---------- ---------
NET INTEREST EARNINGS $ 584 $ (398) $ 186 $ 267 $ (79) $ 188
=========== ========== =========== ========== ========== =========
(1) - The change in interest due to both rate and volume has been allocated
between the factors in proportion to the relationship of the absolute dollar
amounts of the change in each.
(2) - Calculated assuming a fully tax-equivalent basis using the rate of 34%.
- --------------------------------------------------------------------------------
12
Non-interest Income
Non-interest income includes revenues from all sources other than interest
income and yield related loan fees. Noninterest income totaled $422,000,
$433,000, and $415,000 for the years ended December 31, 1997, 1996, and 1995, or
5.65%, 6.56%, and 6.80% of total income, respectively. 1997's non-interest
income of $422,000 was down 2.5% from $433,000 in 1996, but was increased over
1995's level of $415,000. The following table details the components of
non-interest income earned by the Company in 1997, 1996, and 1995, as well as
the percentage increase (decrease) in each over the prior year.
- --------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------
Percent Percent
Amount Change Amount Change Amount
Trust department income ........ $ 65,000 (1.5)% $ 66,000 (52.5%) $139,000
Service fees and commissions ... 277,000 10.4 251,000 20.1 209,000
Securities Gains (Losses), Net . 0 (100.0) 1,000 0.0 1,000
Gain on Flood Insurance Proceeds 0 (100.0) 39,000 n/a 0
Other .......................... 80,000 5.3 76,000 15.2 66,000
-------- ------- -------- ------- --------
Total ....................... $422,000 (2.5%) $433,000 4.3% $415,000
======== ===== ======== ======= ========
- --------------------------------------------------------------------------------
Trust income during 1997 remained relatively consistent with the previous year,
falling only $1,000 or 1.5%. The higher level of trust department income in 1995
resulted primarily from the administration of a single large estate which was
settled during 1996. Estates and other trust services tend to fluctuate from
year to year, and trust revenues are currently expected to increase from 1997's
level during 1998. Service fees and commissions increased by $26,000, or 10.4%
to $277,000 in 1997 due to a concentrated effort by the Bank to increase its fee
income on deposit products and other services. This concentrated effort to
increase fee income was implemented by management in mid-1996, and the results
of this practice have created significant increases in both 1997 and 1996 in
comparison with 1995's levels. Management will continue to seek new ways of
increasing the Company's fee income in the future through new product offerings
and the restructuring of existing products. During 1996, the Company realized a
net gain of $39,000 from insurance proceeds received as a result of flood damage
to the Bank's main banking facility. A total of $55,000 in direct flood-related
expenses were offset by $94,000 in insurance proceeds. All excess monies were
invested in additional fixed assets and are being depreciated over their
estimated useful lives in accordance with generally accepted accounting
principals. Other income also remained relatively consistent with the prior
year, increasing only $4,000, or 5.3%.
Non-interest Expense
Non-interest expense comprises overhead costs which are not related to interest
expense or to losses from loans or securities. The following table itemizes the
primary components of non-interest expense for 1997, 1996 and 1995, and the
percentage increase (decrease) in each over the prior year.
- --------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------
Percent Percent
Amount Change Amount Change Amount
Salaries and employee benefits ... $1,639,000 0.7% $1,628,000 10.7% $1,470,000
Net occupancy expense ............ 280,000 (4.1) 292,000 19.7 244,000
Equipment rental, depreciation
and maintenance ............... 252,000 16.7 216,000 4.3 207,000
Federal deposit insurance premiums 7,000 133.3 3,000 (96.3) 80,000
Data processing .................. 133,000 (16.9) 160,000 (9.1) 176,000
Advertising ...................... 77,000 0.0 77,000 (15.4) 91,000
Professional & legal ............. 103,000 (7.2) 111,000 (15.9) 132,000
Mailing and postage .............. 76,000 (6.2) 81,000 22.7 66,000
Directors' fees and
shareholders' expense ........ 102,000 10.8 92,000 15.0 80,000
Stationary & supplies ............ 95,000 (2.1) 97,000 64.4 59,000
Other ............................ 323,000 (15.7) 383,000 21.6 315,000
---------- ------- ---------- ------ ----------
Total ......................... $3,087,000 (1.7%) $3,140,000 7.5% $2,920,000
========== ======== ========== ====== ==========
- --------------------------------------------------------------------------------
Non-interest expense decreased $53,000, or 1.7%, compared to 1996, primarily due
to a focus on cost controls and
13
expense cuts throughout the Company. Salaries and employee benefits represent
the Company's largest non-interest cost, comprising approximately 53.1% of total
non-interest expense in 1997 and 51.9% in 1996. The slight dollar increase in
salaries and employee benefits in 1997 compared to 1996 is due primarily to
normal merit increases for the existing staff, plus the elimination of two
positions during 1997 which were offset by a full year of salary and benefit
expense for the Charleston staff. The net impact of these items resulted in an
increase of only $11,000, or 0.7%. The Company also realized a savings in
employee benefits by eliminating an existing profit sharing plan effective
September 30, 1997. Under the previous plan, the Company made contributions to a
profit sharing plan throughout the year, periodically disbursing the proceeds to
eligible employees. This plan has been replaced through an increase in the
Company's matching contribution to employees' 401(k) accounts from 3.5% of gross
pay to 5.0% gross pay beginning in 1998. The net impact of this change is
anticipated to reduce the Company's benefits expense during the next year, as
not all employees are currently taking full advantage of the 401(k) match.
Decreased occupancy and equipment costs in 1997 is largely a result of the
elimination of certain building maintenance and upgrade projects which were
performed during 1996. This decrease was partially offset by the additional
depreciation expense on furnishings, computers and other equipment acquired in
connection with the new Charleston office and the additional lease expense for
the new Charleston office. These factors combined for a net decrease in
occupancy and equipment costs of 4.1%, or $12,000.
Federal Deposit insurance premiums increased by $4,000 in 1997, after falling by
$77,000 1996. These fluctuations were due to general changes in FDIC assessment
premiums realized throughout the banking industry.
Stationary and supplies expense remained consistent in 1997 versus 1996.
However, 1996's level is markedly higher than 1995's level of $59,000 due to the
Company's purchase of stationary and supplies for the new Charleston office, and
the additional office expenses associated with the new branch location.
Advertising and promotion expenses in 1997 remained constant with the prior year
at $77,000. Directors' fees and shareholders' expense increased 10.8%, or
$10,000 due to general increases in the cost of the Company's annual report and
annual shareholders' meeting.
Income Taxes
The Company's income tax expense, which includes both Federal and State income
taxes, totaled $476,000 or 37.5% of pre-tax income in 1997, compared to $330,000
or 30.9% in 1996, and $301,000 or 28.2% in 1995. For financial reporting
purposes, income tax expense does not equal the Federal statutory income tax
rate of 34% when applied to pre-tax income, primarily because of State income
taxes and interest income derived from tax-exempt securities. The increase in
the Company's effective tax rate is attributable to a disproportionate increase
in taxable income (primarily from loan growth and decreased expense levels) in
comparison to non-taxable income. There was no increase in tax-exempt income for
the Company during 1997, therefore tax-exempt interest income represented a much
smaller percentage of the company's profit before taxes. Additional details
relative to the Company's income taxes are included in Note 9 to the
accompanying consolidated financial statements.
Changes in Financial Position
Total assets increased $11,762,000 or 14.1% to $95,430,000 at year end 1997
compared to $83,668,000 at year end 1996. This increase in total assets resulted
from an increase in total deposits of $5,020,000 or 6.8%, and the addition of
$5,500,000 in long-term debt from the Federal Home Loan Bank of Pittsburgh
("FHLB"). (For additional information on these borrowed FHLB funds, please refer
to the Long Term Borrowings section below, as well as Note 8 to the consolidated
financial statements.) These funds were primarily invested in loans due to an
increase in overall loan demand. Average Company total assets also increased, up
13.6% from $79,985,000 during 1996 to $90,824,000 during 1997. TABLE I presents
the Company's average balance sheet composition for the years ended 1997, 1996
and 1995.
Net premises and equipment, the Company's most substantial non-earning asset,
increased by $108,000 to $2,073,000 at year-end 1997 compared to year-end 1996,
an increase of 5.5%. This increase is primarily attributable to the additional
fixed assets connected with the new Lewisburg branch facility and a substantial
investment in new computer local- and wide-area networks and related assets as
part of the Bank's commitment to improving its technological substructure.
Management believes that the Company is now well prepared to meet the continuing
trends in technological growth.
A discussion of the significant fluctuations in components of the Company's
balance sheet follows.
Securities
The Company has classified a portion of its securities portfolio as available
for sale to permit sufficient flexibility in regard to the Company's
asset/liability management program. Securities classified as available for sale
are carried at fair value
14
with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income taxes. The Company does not hold
any securities for trading purposes.
The total securities portfolio decreased $5,306,000 or 23.5% to $17,311,000 at
December 31, 1997, compared to December 31, 1996. Additionally, average total
securities decreased from $23,341,000 during 1996 to $18,646,000 during 1997, a
decrease of 20.1%. Securities represented 18.1% of total assets at December 31,
1997 compared to 27.0% at year-end 1996. This decrease resulted from
management's shift in funds from securities to higher-yielding loans due to
increased loan demand. This movement of funds from securities to loans was a
gradual process occurring as various securities reached their scheduled maturity
dates. No securities were sold to fund loan growth or meet other liquidity
needs.
At year end 1997, the Company had an unrealized gain on securities classified as
available for sale of less than $1,000 net of applicable deferred income taxes.
This is substantially unchanged from 1996's net unrealized gain of less than
$1,000, net of applicable deferred income taxes.
The Company had approximately 71% of its securities portfolio classified as
held-to-maturity at year-end 1997, compared to approximately 83% at year-end
1996. This level of held-to-maturity securities was deemed acceptable due to the
large percentage of securities that are maturing during 1998, combined with the
Company's ample liquidity. As a general rule, the Company classifies all new
securities purchases as available-for-sale.
Details as to the amortized cost and estimated fair values of the Company's
securities by type are presented in Note 3 of the Notes to Consolidated
Financial Statements, included in Item 8 of this filing. At December 31, 1997,
the Company did not own securities of any one issuer, other than the U.S.
Government or its agencies, that exceeded ten percent (10.0%) of shareholders'
equity. The distribution of non-equity securities together with the weighted
average yields by maturity at December 31, 1997 are summarized in TABLE III.
15
- --------------------------------------------------------------------------------
TABLE III
SECURITY MATURITY ANALYSIS (2)
(At amortized cost, dollars in thousands)
After One After Five
Within but within but within After
One Year Five Years Ten Years Ten Years
-------------------- ----------------------- -------------------- ------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Securities Held to Maturity
U.S. Treasury securities $ 500 5.49% $ - - % $ - - % $ - - %
U.S. Government agencies
and corporations 3,002 5.72 4,230 5.25 - - - -
Corporate debt securities 500 5.12 - - - - - -
State and political
subdivisions 350 3.71 1,231 4.21 2,508 4.25 - -
--------- ---------- --------- -------
Total $ 4,352 5.61 $ 5,461 4.90 $ 2,508 4.25 $ - -
========= ========== ========= =======
Securities Available for Sale
U.S. Treasury securities $ 1,994 5.58% $ - - % $ - - % $ - - %
U.S. Government agencies
and corporations 953 6.51 1,502 5.84 - - - -
Other - - - - - - - -
--------- ---------- --------- -------
Total $ 2,947 5.89 $ 1,502 5.84 $ - - $ - -
========= ========== ========= =======
(1) -- Weighted average yield presented without adjustment to a tax equivalent
basis.
(2) - Excludes Federal Reserve Bank and Federal Home Loan Bank stock which are
considered equity securities.
- --------------------------------------------------------------------------------
Loans
During 1997, loans, net of unearned income, increased $16,290,000, or 30.5%, to
$69,744,000 from $53,454,000 at year end 1996. Average loans outstanding, net of
unearned income, increased from $48,037,000 in 1996 to $63,620,000 in 1997, or
32.4%. A summary of the Company's year-end loan balances by type, as well as an
analysis of the increase (decrease) in such balances from December 31, 1996 to
December 31, 1997, is summarized in the following table.
- --------------------------------------------------------------------------------
Percent
Increase
1997 (Decrease) 1996
------------ ----------- -----------
Commercial, financial and agricultural $29,431,000 50.3% $19,579,000
Real estate - construction ........... 3,515,000 46.7 2,396,000
Real estate - mortgage ............... 29,067,000 21.0 24,031,000
Installment .......................... 6,389,000 2.2 6,254,000
Other ................................ 1,366,000 5.2 1,299,000
----------- -----------
$69,768,000 30.3 $53,559,000
LESS: Unearned Discount .......... 24,000 105,000
----------- -----------
TOTAL LOANS .......................... $69,744,000 30.5 $53,454,000
=========== ===========
- --------------------------------------------------------------------------------
The increase in loans is primarily attributable to growth in commercial and
commercial real estate loans as well as mortgage loans. This growth represents
an effort by the Bank to increase its market share and loan portfolios. It is
expected that growth will continue, most notably in the commercial and
commercial real estate portfolios, as the Bank continues its concentrated effort
to obtain new high-quality commercial customers.
A summary of loan maturities by loan type as of December 31, 1997 is included in
Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of
this filing.
16
Allowance for Loan Losses and Risk Elements
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Company's management, on a quarterly basis, performs a
comprehensive loan evaluation which encompasses the identification of all
potential problem credits, which are included on an internally generated watch
list. The identification of loans for inclusion on the watch list is facilitated
through the use of various sources, including past due loan reports, previous
internal and external loan evaluations, classified loans identified as part of
regulatory agency loan reviews and reviews of new loans representative of
current lending practices within the Bank. Once this list is reviewed to ensure
it is complete, detail reviews of specific loans for collectibility, performance
and collateral protection are performed. A grade is assigned to the individual
loans reviewed utilizing internal grading criteria, which is somewhat similar to
the criteria utilized by the Bank's primary regulatory agency. Based on the
results of these reviews, specific reserves for potential losses are identified.
In addition, management considers historical loan loss experience, new loan
volume, portfolio composition, levels of non-performing and past due loans and
current and anticipated economic conditions in evaluating the adequacy of the
allowance for loan losses.
As more fully explained in Notes 1 and 5 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing, certain impaired loans are
required to be reported at the present value of expected future cash flows
discounted using the loan's original effective interest rate or, alternatively,
at the loan's observable market price, or at the fair value of the loans'
collateral if the loan is collateral dependent. There has been no significant
change in the amount of loans considered impaired under the provision of SFAS
No. 114, as amended.
At December 31, 1997 and 1996, the allowance for loans losses of $636,000 and
$654,000 represented 0.9% and 1.2% of gross loans, respectively, and was
considered adequate to cover inherent losses in the subsidiary bank's loan
portfolio as of the respective evaluation date. The Company maintains an
allowance for loan losses at a level considered adequate to provide for losses
that can be reasonably anticipated. The Company performs a quarterly evaluation
of the loan portfolio to determine its adequacy. The evaluation is based on
assessments of specifically identified loans, loss experience factors, current
and anticipated economic conditions and other factors to identify and estimate
inherent losses from homogeneous pools of loans.
The allocated portion of the subsidiary bank's allowance for loan losses is
established on a loan-by-loan and pool-by-pool basis. The unallocated portion is
for inherent losses that may exist as of the evaluation date, but which have not
been specifically identified by the processes used to establish the allocated
portion due to inherent imprecision in the objective process of identification.
The unallocated portion is subjective and requires judgment based on various
qualitative factors in the loan portfolio and the market in which the Company
operates. At December 31, 1997 and 1996, respectively, the unallocated portion
of the allowance approximated $132,000 and $313,000 or 20.8% and 47.9% of the
total allowance. This unallocated portion of the allowance was considered
necessary based on consideration of the known risk elements in certain pools of
loans in the loan portfolio (e.g. loan concentrations, new loan products, etc.)
And management's assessment of the economic environment in which the Company
operates. The unallocated amount at December 31, 1997 and 1996 has been
considered necessary primarily considering that historical loss factors used in
the Bank's methodology to calculate the allocated portion of the allowance do
not yet reflect the additional risk factors which may be inherent in the
portfolio due to recent loan growth.
Despite an overall increase in loan volume since 1995, the year-end 1997
allowance is $18,000 less than 1996's year-end balance. This is due primarily to
specific reserve allocations to several problem credits in prior years that have
since been charged-off or paid-down. Management believes that the current
allowance is sufficient to cover any potential losses in the current loan
portfolio. An allocation of the allowance for loan losses to specific loan
categories is presented in TABLE IV.
17
- -------------------------------------------------------------------------------
TABLE IV
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
1997 1996 1995
-----------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
Commercial, financial,
and agricultural ...... $310 42.1% $136 36.6% $245 28.1%
Real estate - construction -- 5.4 -- 4.5 -- 4.3
Real estate - mortgage ... 93 41.5 102 45.0 136 50.2
Installment .............. 101 9.1 103 11.5 101 14.0
Other .................... -- 1.9 -- 2.4 -- 3.4
Unallocated .............. 132 -- 313 -- 161 --
---- ----- ---- ----- ---- -----
$636 100.0% $654 100.0% $643 100.0%
==== ===== ==== ===== ==== =====
- -------------------------------------------------------------------------------
The Bank was in a net loss position (more money was charged off than was
recovered from previously charged-off loans) during 1997. Loan charge-offs, net
of recoveries, for 1997 were $49,000 compared to ($11,000) and $209,000 in 1996
and 1995, respectively. Expressed as a percentage of average loans outstanding
during 1997, 1996 and 1995, net loan charge-offs were 0.08%, (0.02%) and 0.49%,
respectively. See Note 5 of the Notes to the Consolidated Financial Statements
for an analysis of the activity in the Company's allowance for loan losses in
1997, 1996 and 1995.
The following presents a summary of the Company's non-performing assets and
accruing loans past due 90 days or more at December 31, 1997, 1996 and 1995.
- -------------------------------------------------------------------------------
(in thousands)
December 31,
1997 1996 1995
-------- ------ -------
Non-performing assets:
Nonaccrual loans ...... $1,733 $ 161 $ 375
Other real estate owned 22 22 10
Restructured loans .... -- -- --
------ ------ ------
$1,755 $ 183 $ 385
====== ====== ======
Accruing loans past due 90 days or more ...$ -- $ -- $ --
====== ====== ======
- --------------------------------------------------------------------------------
The Company places into nonaccrual status those loans which the full collection
of principal and interest are unlikely or which are past due 90 or more days,
unless the loans are adequately secured and in the process of collection. If
interest on nonaccrual loans had been accrued, such income would have
approximated $112,000, $15,000 and $41,000 in 1997, 1996 and 1995, respectively.
Interest income recognized on nonaccrual loans and included in Company interest
income is not material. The significant increase in nonaccrual loans in 1997 is
partly due to a $1,148,000 commercial real estate credit placed on nonaccrual
status on October 1, 1997. Subsequently, the commercial real estate loan has
been brought current, the collateral value has been significantly improved
through the injection of additional funds from the Borrower, and the original
repayment plan has been resumed. Due to these facts, the Company placed the note
back on accrual status in late January of 1998. No loss of principal is
anticipated on this credit.
Deposits
Total deposits increased by 6.8% to $78,336,000 at December 31, 1997, from
$73,316,000 at December 31, 1996. Average total deposits increased from
$69,838,000 during 1996 to $75,149,000 during 1997, an increase of 7.6%. This
increase is primarily the result of an increase in savings and time deposits
from year end 1996 to year end 1997, as well as smaller increases in NOW
accounts and Money Market demand accounts. Non-interest bearing deposits also
increased slightly. The increase in interest-bearing deposits, primarily
certificates of deposit, was an intention of management in order to provide
funds for anticipated loan demand. The increase in savings deposits is largely
due to a new savings deposit product that offers tiered yields based upon
deposit balances.
18
Details relative to the maturities of and interest expense on time certificates
of deposit of $100,000 or more are presented in Note 7 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing.
Securities Sold under Agreements to Repurchase
As more fully discussed in Note 8 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing, during 1996 the Bank became
involved in repurchase agreements with certain commercial customers. The
balances involved in repurchase agreements increased during 1997 as additional
commercial accounts were obtained, and it is expected that these balances will
continue to grow during 1998 as the Bank seeks additional commercial accounts.
Interest paid on these borrowings is tied to the Federal Funds rate, depending
on the outstanding deposit balances.
Long-term borrowings
Due to increased loan demand, the Company obtained a $5,000,000, 3-year advance
from the Federal Home Loan Bank in March of 1997. In anticipation of an increase
in interest rates on borrowed funds, the Company's subsidiary bank borrowed the
funds from the FHLB of Pittsburgh to lock-in a funding source for its
anticipated loan growth. For more information on this FHLB debt refer to Note 8
of the Notes to Consolidated Financial Statements included in Item 8 of this
filing.
Additionally, a real estate project benefiting low-income residents was funded
in part through the FHLB's Community Investment Program ("CIP"). This program
allows matched funding of qualifying projects at rates significantly below the
market rates for similar non-CIP funds. In December of 1997, the Company
obtained a $500,000 five-year advance as part of the CIP program. This advance
is on a matched amortization with the underlying note and will amortize in
accordance with standard loan terms. For more information on this FHLB debt
refer to Note 8 of the Notes to Consolidated Financial Statements included in
Item 8 of this filing.
Liquidity and Interest Rate Risk Management
Liquidity reflects The Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other Company transactional requirements. Liquidity is provided primarily by
funds invested in cash and due from banks and Federal funds sold, which measured
$5,901,000 at December 31, 1997. Liquidity is considered to be more than
adequate. The Company's liquidity position is monitored continuously to ensure
that day-to-day as well as anticipated funding needs are met.
Further enhancing the Company's liquidity is the availability of approximately
$7,300,000 (at amortized cost) in securities maturing within one year. Also, the
Company has additional securities with maturities greater than one year with an
estimated fair value totaling $1,502,000 classified as available for sale in
response to an unforeseen need for liquidity. Management is not aware of any
trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the Company's liquidity.
Interest rate risk represents the volatility in earnings and market values of
interest earning assets and interest bearing liabilities resulting from changes
in market rates. The Company seeks to minimize interest rate risk through
asset/liability management. The Company's principal asset/liability management
strategy is gap management. Gap is the measure of the difference between the
volume of repricing interest earning assets and interest bearing liabilities
during given time periods. When the volume of repricing interest earning assets
exceeds the volume of repricing interest bearing liabilities, the gap is
positive -- a condition which usually is favorable during a rising rate
environment. The opposite case, a negative gap, generally is favorable during a
falling rate environment. When the interest rate sensitivity gap is near zero,
the impact of interest rate risk is limited, for at this point changes in net
interest income are minimal regardless of whether interest rates are rising or
falling. An analysis of the Company's current gap position is presented in TABLE
VI.
19
- --------------------------------------------------------------------------------
TABLE VI
INTEREST RATE SENSITIVITY GAPS
December 31, 1997
(Dollars in thousands)
Repricing (1)
0-90 91-180 181-365 After
Days Days Days 1 Year Total
----------- ----------- ----------- ----------- --------
INTEREST EARNING ASSETS
Loans, net of unearned discount $ 23,281 $ 4,039 $ 7,813 $ 34,611 $ 69,744
Securities (at amortized cost) 1,500 300 5,500 10,011 17,311
Federal funds sold 3,159 - - - 3,159
----------- ----------- ----------- ----------- -----------
Total interest earning assets 27,940 4,389 13,313 44,572 90,214
------------- ----------- ------------- ------------ ------------
INTEREST BEARING LIABILITIES
Demand deposits $ 13,300 $ - $ - $ - $ 13,300
Savings deposits 24,037 - - - 24,037
Time deposits 8,291 5,850 11,711 5,111 30,963
Repurchase Agreements 1,330 - - - 1,330
Long-term FHLB borrowings - - - 5,500 5,500
----------- ----------- ----------- ----------- -----------
Total interest bearing
liabilities 46,958 5,850 11,711 10,611 75,130
----------- ----------- ----------- ----------- -----------
Contractual interest
sensitivity gap (19,018) (1,461) 1,602 33,961 15,084
Adjustment (2) 37,337 (37,337) - - -
----------- ------------ ----------- ----------- -------
Adjusted interest
sensitivity gap $ 18,319 $ (38,798) $ 1,602 $ 33,961 $ 15,084
=========== ============ =========== =========== ===========
Cumulative adjusted interest
sensitivity gap $ 18,319 $ (20,479) $ (18,877) $ 15,084
=========== ============ ============ ===========
Cumulative adjusted gap as a percent
of total earning assets 20.30% (22.70%) (20.92%) 16.73%
Cumulative adjusted
rate-sensitivity ratio 2.90 0.75 0.71 1.20
This table includes various assumptions by management of maturities and
repayment patterns.
(1) - Contractual repricing, not contractual maturities, is used in this table
unless otherwise noted. No pre-payment assumptions were assumed.
(2) - Adjustment to approximate the actual repricing of interest bearing demand
deposits and savings accounts are based upon historical experience.
- --------------------------------------------------------------------------------
The preceding table reflects the Bank's cumulative one year net interest
sensitivity position, or gap, as 0.71. 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 1998 could have a
significant negative impact on the Bank's net interest income in 1998. However,
interest rates on approximately 51.5% of the Bank's interest-bearing liabilities
may be changed by management at any time based on their terms. Since management
believes that repricing of interest bearing deposits in an increasing interest
rate environment will generally lag behind the repricing of interest bearing
assets, the Bank's interest rate risk within one year is at an acceptable level.
The information presented in the table above represents a static view of the
Bank's gap position as of December 31, 1997, 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.
Capital Resources
Maintenance of a strong capital position is a continuing goal of the Company's
management. Through management of
20
its capital resources, the Company seeks to provide an attractive financial
return to its shareholders while retaining sufficient capital to support future
growth.
Total shareholders' equity at December 31, 1997 was $9,325,000 compared to
$8,841,000 at December 31, 1996, representing an increase of 5.5%. Despite this
increase, total shareholders' equity expressed as a percentage of total assets
decreased from 10.6% at December 31, 1996 to 9.8% at December 31, 1997 due to
the Company's higher dividend payout and rapid asset growth during 1997.
The Company's subsidiary bank is subject to minimum regulatory risk-based
capital guidelines, as more fully described in Note 14 of the Notes to
Consolidated Financial Statements included in Item 8 of this filing. Such
guidelines provide for relative weighting of both on and off-balance sheet items
(such as loan commitments and standby letters of credit) based on their
perceived degree of risk. At December 31, 1997, the Company continues to exceed
each of the regulatory risk-based capital requirements as shown in the following
table.
- --------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
Minimum
Actual Requirement
Total risk-based capital ratio 14.98% 8.00%
Tier 1 risk-based capital ratio 14.02% 4.00%
Leverage ratio 9.60% 3.00%
- --------------------------------------------------------------------------------
Improved operating results and a consistent dividend program, coupled with an
effective management of credit and interest rate risk will be the key elements
towards the Company continuing to maintain its present strong capital position
in the future. Additional information related to regulatory restrictions on
capital and dividends is disclosed in Note 14 of the Notes to Consolidated
Financial Statements included in Item 8 of this filing.
Stock Option Plan
Since 1996, the Company has had an incentive stock option plan to provide a
method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth and protection of the business, and who
are making substantial contributions to the success and profitability of the
business, may be encouraged to acquire a stock ownership in the Company, thus
providing a proprietary interest in the business. For more information regarding
this plan, please refer to Note 11 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing.
Year 2000 Issues
The Company is partially dependent upon systems and software vendors to
represent that the products provided are, or will be, "Year 2000 Compliant."
Since Management is currently still in the process of reviewing its computer
systems in preparation for the Year 2000 issue, no estimates as to the costs
expected to be incurred are currently available. For more information regarding
this issue, please refer to Note 13 of the Notes to Consolidated Financial
Statements included in Item 8 of this filing.
Impact of Inflation and Effects of Changing Prices
The results of operations and financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains and losses on securities available
for sale. Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of noninterest
expenses, such as salaries, benefits and other operating expenses.
As a financial intermediary, the Company holds a high percentage of interest
rate sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the Company's assets and liabilities reprice more
frequently than those of non-banking entities. It is the Company's policy to
have a majority of its loan portfolio reprice within five years by using
variable and balloon payment credit terms in order to reduce the impact of
significant changes in interest rates on its longer-term assets. Further, the
Company's policies attempt to structure its mix of financial instruments and
manage its interest rate sensitivity gap in order to minimize the potential
adverse effects of inflation or other market forces on its net interest income,
earnings and capital. A comparison of the carrying value of the Company's
financial instruments to their estimated fair value as of December 31, 1997 is
disclosed in Note 16 of the Notes to Consolidated Financial Statements included
in Item 8 of this filing.
Indirectly, management of the money supply by the Federal Reserve to control the
rate of inflation has an impact on the earnings of the Company.
21
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's report and consolidated financial statements of the
Company and its subsidiary appear herein. The Company is not subject to the
requirements for disclosure of supplemental quarterly financial data.
22
(Arnett & Foster, P.L.L.C. Letterhead)
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
We have audited the accompanying consolidated balance sheets of First National
Bankshares Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Bankshares Corporation and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 30, 1998
23
Consolidated Balance Sheets
ASSETS 1997 1996
------------- -----------
Cash and due from banks ......................... $ 2,742,219 $ 2,576,154
Federal funds sold .............................. 3,159,000 2,663,000
Securities held to maturity (estimated fair value
1997 $12,404,834; 1996 $18,850,067) ........ 12,321,508 18,835,775
Securities available for sale ................... 4,989,413 3,781,525
Loans, less allowance for loan losses of $635,555
and $653,954, respectively ................. 69,108,134 52,800,034
Bank premises and equipment, net ................ 2,072,919 1,964,661
Accrued interest receivable ..................... 660,107 658,579
Other assets .................................... 376,296 388,534
----------- -----------
Total assets ............................... $95,429,596 $83,668,262
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing .................... $10,034,508 $10,211,415
Interest bearing ........................ 68,301,240 63,105,038
----------- -----------
Total deposits ...................... 78,335,748 73,316,453
Securities sold under agreements to repurchase 1,330,396 492,473
Other liabilities ............................ 938,653 1,018,724
Long-term borrowings ......................... 5,500,000 --
----------- -----------
Total liabilities ....................... 86,104,797 74,827,650
----------- -----------
Commitments and Contingencies (Note 13)
Shareholders' Equity
Common stock, $5.00 par value, authorized
500,000 shares, issued 192,500 shares .... 962,500 962,500
Capital surplus ............................... 1,000,000 1,000,000
Retained earnings ............................. 7,361,859 6,878,037
Net unrealized gain (loss) on securities ...... 440 75
----------- -----------
Total shareholders' equity ............... 9,324,799 8,840,612
----------- -----------
Total liabilities and shareholders' equity $95,429,596 $83,668,262
=========== ===========
See Notes to Consolidated Financial Statements
24
Consolidated Statements of Income
For The Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ----------- ----------
Interest income:
Interest and fees on loans .................... $5,811,096 $4,666,820 $4,018,204
Interest and dividends on securities:
Taxable .............................. 841,331 1,072,369 1,336,509
Tax-exempt ........................... 199,095 211,876 234,415
Interest on Federal funds sold ................ 189,937 214,946 98,910
---------- ---------- ----------
Total interest income ..................... 7,041,459 6,166,011 5,688,038
---------- ---------- ----------
Interest expense:
Deposits ...................................... 2,761,332 2,379,774 2,115,406
Securities sold under agreement to repurchase . 56,095 13,356 --
Long-term borrowings .......................... 259,697 -- --
---------- ---------- ----------
Total interest expense .................... 3,077,124 2,393,130 2,115,406
---------- ---------- ----------
Net interest income ....................... 3,964,335 3,772,881 3,572,632
Provision for loan losses ..................... 31,000 -- --
---------- ---------- ----------
Net interest income after provision for
loan losses .......................... 3,933,335 3,772,881 3,572,632
---------- ---------- ----------
Other income (expense):
Trust department income ....................... 64,835 65,757 139,312
Service fees .................................. 276,529 251,251 209,190
Securities gains (losses), net ................ -- 972 990
Other ......................................... 80,321 115,135 65,720
---------- ---------- ----------
Total other income ........................ 421,685 433,115 415,212
---------- ---------- ----------
Other expenses:
Salaries and employee benefits ................ 1,639,359 1,628,041 1,469,823
Net occupancy expense ......................... 279,780 292,250 244,032
Equipment rentals, depreciation and maintenance 252,391 216,373 207,008
Federal deposit insurance premiums ............ 6,890 3,265 80,310
Data processing ............................... 132,681 159,983 176,041
Advertising ................................... 76,692 76,991 90,721
Professional and legal ........................ 103,032 111,382 132,394
Mailing and postage ........................... 76,244 80,642 65,634
Directors' fees and shareholders' expenses .... 102,417 91,449 79,600
Stationery and supplies ....................... 94,533 97,002 58,716
Other ......................................... 322,519 382,365 315,643
---------- ---------- ----------
Total other expenses ...................... 3,086,538 3,139,743 2,919,922
---------- ---------- ----------
Income before income tax expense ................... 1,268,482 1,066,253 1,067,922
Income tax expense ............................ 476,660 330,226 301,108
---------- ---------- ----------
Net income ................................ $ 791,822 $ 736,027 $ 766,814
========== ========== ==========
Basic earnings per common share ........... $ 4.11 $ 3.82 $ 3.98
========== ========== ==========
Diluted earnings per common share ......... $ 4.11 $ 3.82 $ 3.98
========== ========== ==========
See Notes to Consolidated Financial Statements
25
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
Net
Unrealized Total
Gain Share-
Common Capital Retained (Loss) on holders'
Stock Surplus Earnings Securities Equity
Balance, December 31, 1994 $ 962,500 $ 1,000,000 $ 5,873,771 $ (525,263) $ 7,311,008
Net income - - 766,814 - 766,814
Cash dividends declared on common
stock ($1.20 per share) - - (231,000) - (231,000)
Change in net unrealized gain (loss)
on securities - - - 568,582 568,582
--------- ---------- --------- ---------- ----------
Balance, December 31, 1995 962,500 1,000,000 6,409,585 43,319 8,415,404
Net income - - 736,027 - 736,027
Cash dividends declared on common
stock ($1.39 per share) - - (267,575) - (267,575)
Change in net unrealized gain (loss)
on securities - - - (43,244) (43,244)
---------- --------- ---------- ---------- ----------
Balance, December 31, 1996 962,500 1,000,000 6,878,037 75 8,840,612
Net income - - 791,822 - 791,822
Cash dividends declared on common
stock ($1.60 per share) - - (308,000) - (308,000)
Change in net unrealized gain (loss)
on securities - - - 365 365
---------- -------- --------- ----------- -------------
Balance, December 31, 1997 $ 962,500 $ 1,000,000 $ 7,361,859 $ 440 $ 9,324,799
=========== ============== ============== ========== =============
See Notes to Consolidated Financial Statements
26
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................. $ 791,822 $ 736,027 $ 766,814
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation ................................................................ 227,785 172,046 151,529
Provision for loan losses ................................................... 31,000 -- --
Deferred income taxes (benefit) ............................................. 33,179 20,020 72,875
Securities (gains) losses, net .............................................. -- (972) (990)
(Gain) loss on sale of other assets ......................................... -- 16,000 --
(Gain) loss on disposal of bank premises and equipment ...................... (5,222) 26,202 4,166
Amortization of securities premiums and
(accretion of discounts), net ......................................... (35,474) (166,673) (5,659)
(Increase) decrease in accrued interest receivable .......................... (1,528) 48,167 89,337
(Increase) decrease in other assets ......................................... (18,715) (3,634) 197,916
Increase (decrease) in other liabilities .................................... (80,071) 126,150 48,935
------------ ------------ ------------
Net cash provided by operating activities ................................... 942,776 973,333 1,324,923
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities held to maturity ........... 9,735,000 11,656,739 2,497,865
Proceeds from maturities and calls of securities available for sale.......... 2,000,000 7,639,238 7,359,233
Purchases of securities held to maturity .................................... (3,200,608) (16,790,439) (1,953,302)
Purchases of securities available for sale .................................. (3,191,950) (1,009,800) (232,200)
Principal payments received on (loans made to) customers, net ............... (16,341,550) (7,112,188) (7,007,180)
Purchases of bank premises and equipment .................................... (337,906) (1,175,222) (119,664)
Proceeds from sale of bank premises and equipment ........................... 7,085 11,500 --
Proceeds from sales of other assets ......................................... -- 37,693 73,000
------------ ------------ ------------
Net cash provided by (used in) investing activities ......................... (11,329,929) (6,742,479) 617,752
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposit, NOW
and savings accounts ................................................. 1,675,456 5,240,980 (4,150,169)
Proceeds from sales of (payments for matured) time
deposits, net ......................................................... 3,343,839 1,909,285 631,011
Net increase (decrease) in securities sold under
agreements to repurchase .............................................. 837,923 492,473 --
Proceeds from long-term borrowings .......................................... 5,500,000 -- --
Dividends paid .............................................................. (308,000) (248,325) (250,250)
------------ ------------ ------------
Net cash provided by (used in) financing activities ......................... 11,049,218 7,394,413 (3,769,408)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ............................... 662,065 1,625,267 (1,826,733)
Cash and cash equivalents:
Beginning ................................................................. 5,239,154 3,613,887 5,440,620
------------ ------------ ------------
Ending .................................................................... $ 5,901,219 $ 5,239,154 $ 3,613,887
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest ................................................................ $ 3,113,927 $ 2,320,987 $ 2,093,711
Income taxes ............................................................ $ 361,969 $ 365,409 $ 83,090
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans ....................... $ 2,450 $ 85,406 $ --
Dividends declared and unpaid ........................................... $ 77,000 $ 77,000 $ 57,750
See Notes to Consolidated Financial Statements
27
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Nature of business: First National Bankshares Corporation is a one
bank holding company which was incorporated on January 28, 1986.
The wholly owned subsidiary, First National Bank is a commercial
bank with operations in Greenbrier and Kanawha Counties of West
Virginia. The Bank provides retail and commercial loans, deposit
and trust services principally to customers in Greenbrier and
Kanawha County, West Virginia and the surrounding counties.
Basis of financial statement presentation: The accounting and
reporting policies of First National Bankshares Corporation and
subsidiary conform to generally accepted accounting principles and
to general practices within the banking industry.
Principles of consolidation: The accompanying consolidated
financial statements include the accounts of First National
Bankshares Corporation, and its wholly-owned subsidiary, First
National Bank (formerly The First National Bank in Ronceverte).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Presentation of cash flows: For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand, Federal funds
sold and amounts due from banks (including cash items in process
of clearing). Cash flows from demand deposits, NOW accounts and
savings accounts are reported net since their original maturities
are less than three months. Cash flows from loans and certificates
of deposit and other time deposits are reported net.
Securities: Debt and equity securities are classified as "held to
maturity", "available for sale" or "trading" according to
management's intent. The appropriate classification is determined
at the time of purchase of each security and re-evaluated at each
reporting date.
Securities held to maturity - Debt securities for which the
Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts.
Securities available for sale - Securities not classified as
"held to maturity" or as "trading" are classified as
"available for sale." Securities classified as "available for
sale" are those securities the Company intends to hold for an
indefinite period of time, but not necessarily to maturity.
"Available for sale" securities are reported at estimated fair
value net of unrealized gains or losses, which are adjusted
for applicable income taxes, and reported as a separate
component of shareholders' equity.
Trading securities - There are no securities classified as
"trading" in the accompanying consolidated financial
statements.
Realized gains and losses on sales of securities are recognized on
the specific identification method. Amortization of premiums and
accretion of discounts are computed using the interest method.
Loans and allowance for loan losses: Loans are stated at the
amount of unpaid principal, reduced by unearned income and an
allowance for loan losses.
Unearned interest on discounted loans is amortized to income over
the life of the loans, using methods which approximate the
interest method. For all other loans, interest is accrued daily on
the outstanding balances.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. The subsidiary bank makes
continuous credit reviews of the loan portfolio and considers
current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining
the adequacy of the allowance for loan losses. Loans are charged
against the allowance for loan losses when management believes
collectibility is unlikely. While management uses the best
information available to make its evaluation, future adjustments
to the allowance may be necessary if there are significant changes
in conditions. A loan is impaired when, based on current
information and events, it is probable that the subsidiary bank
will be unable to collect all amounts due in accordance with the
contractual terms of the specific loan agreement. Impaired loans,
other than certain large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, are required
to be reported at the present value of expected future cash flows
discounted using the loan's original effective
28
Notes to Consolidated Financial Statements
interest rate or, alternatively, at the loan's observable market
price, or at the fair value of the loan's collateral if the loan
is collateral dependent. The method selected to measure impairment
is made on a loan-by-loan basis, unless foreclosure is deemed to
be probable, in which case the fair value of the collateral method
is used.
Generally, after management's evaluation, loans are placed on
non-accrual status when principal or interest is greater than 90
days past due based upon the loan's contractual terms. Interest is
accrued daily on impaired loans unless the loan is placed on
non-accrual status. Impaired loans are placed on non-accrual
status when the payments of principal and interest are in default
for a period of 90 days, unless the loan is both well-secured and
in the process of collection. Interest on non-accrual loans is
recognized primarily using the cost-recovery method.
Certain loan fees and direct loan costs are recognized as income
or expense when incurred. Whereas, generally accepted accounting
principles require that such fees and costs be deferred and
amortized as adjustments of the related loan's yield over the
contractual life of the loan. The subsidiary bank's method of
recognition of loan fees and direct loan costs produces results
which are not materially different from those that would be
recognized had Statement Number 91 of the Financial Accounting
Standards Board been adopted.
Bank premises and equipment: Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is
computed primarily by the straight-line method for bank premises
and equipment over the estimated useful lives of the assets.
Repairs and maintenance expenditures are charged to operating
expenses as incurred. Major improvements and additions to premises
and equipment are capitalized.
Other real estate: Other real estate consists of real estate held
for resale which was acquired through foreclosure on loans secured
by such real estate. At the time of acquisition, these properties
are recorded at fair value with any write-down being charged to
the allowance for loan losses. After foreclosure, valuations are
periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to
sell. Expenses incurred in connection with operating these
properties are insignificant and are charged to operating
expenses. Gains and losses on the sale of these properties are
credited or charged to operating income in the year of the
transactions.
Sales of these properties which are financed by the subsidiary
bank and meet the criteria of covered transactions remain
classified as other real estate until such time as principal
payments have been received to warrant classification as a real
estate loan.
Income taxes: The consolidated provision for income taxes includes
Federal and state income taxes and is based on pretax net income
reported in the consolidated financial statements, adjusted for
transactions that may never enter into the computation of income
taxes payable. Deferred tax assets and liabilities are based on
the differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to
affect taxable income. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment. Valuation allowances are established when
deemed necessary to reduce deferred tax assets to the amount
expected to be realized.
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 192,500 for each of the
years ended December 31, 1997, 1996 and 1995.
For the year ended December 31, 1997, the Company adopted
Financial Accounting Standards Statement No. 128, Earnings Per
Share and accordingly per share information for the prior years
has been restated to conform to this statement. Under this
statement, the Company is required to present basic and diluted
per share amounts. Diluted per share amounts assume the
conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce the loss or increase
the income per common share from continuing operations. Basic and
diluted earnings per share are calculated as follows:
For the Year Ended 1997
Income Shares Per Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to common shareholders $791,822 192,500 $ 4.11
========
Effect of Dilutive Securities
Stock options ......................... -- 321
-------- --------
Diluted EPS
Income available to common shareholders $791,822 192,821 $ 4.11
======== ======== ========
29
Notes to Consolidated Financial Statements
For the Year Ended 1996
Income Shares Per Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to common shareholders $736,027 192,500 $ 3.82
=====
Effect of Dilutive Securities
Stock options ......................... -- --
-------- -----
Diluted EPS
Income available to common shareholders $736,027 192,500 $ 3.82
======== ======== =====
For the Year Ended 1995
Income Shares Per Share
(Numerator)(Denominator) Amount
Basic EPS
Income available to common shareholders $766,814 192,500 $ 3.98
=====
Effect of Dilutive Securities
Stock options ......................... -- --
-------- -----
Diluted EPS
Income available to common shareholders $766,814 192,500 $ 3.98
======== ======== =====
Profit sharing and 401(k) plans: The subsidiary bank sponsored a
profit-sharing plan through September 30, 1997. The subsidiary
bank also sponsors a 401(k) plan which covers substantially all
employees. Bank contributions to the plans are charged to expense.
Postretirement benefit plans: The subsidiary bank provides certain
health care and life insurance benefits for all retired employees
that meet certain eligibility requirements. The plans are
contributory with retiree contributions and are unfunded. The
subsidiary bank's share of the estimated costs that will be paid
after retirement is being accrued by charges to expense over the
employees' active service periods to the dates they are fully
eligible for benefits.
Trust Department: Assets held in an agency or fiduciary capacity
by the subsidiary bank's Trust Department are not assets of the
subsidiary bank and are not included in the accompanying
consolidated balance sheets. Trust Department income is recognized
on the cash basis in accordance with customary banking practice.
Reporting such income on a cash basis rather than on the accrual
basis does not have a material effect on net income.
Emerging accounting standards: In June 1997, the Financial
Accounting Standards Board issued Statement No. 130, Reporting
Comprehensive Income. This Statement requires an entity to include
a statement of comprehensive income in their full set of
general-purpose financial statements. Statement No. 130 is
effective for years beginning after December 15, 1997, and will
require financial statements of earlier periods that are presented
for comparative purposes to be reclassified. Based on the
Company's operations at December 31, 1997, this pronouncement is
not expected to have a significant impact on the Company upon
adoption.
Reclassifications: Certain accounts in the consolidated financial
statements for 1996 and 1995, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Cash Concentrations
At December 31, 1997 and 1996, the subsidiary bank had a
concentration totaling $3,199,595 and $3,425,545, respectively,
with a correspondent bank consisting of a due from bank account
balance and Federal funds sold. Deposits with correspondent banks
are generally unsecured and have limited insurance under current
banking insurance regulations.
Note 3. Securities
The amortized cost, unrealized gains and losses, and estimated
fair values of securities at December 31, 1997 and 1996, are
summarized as follows:
30
Notes to Consolidated Financial Statements
1997
Carrying
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for sale
Taxable:
U.S. Treasury securities . $1,993,751 $ 3,437 $ -- $1,997,188
U.S. Government agencies
and corporations ...... 2,455,251 3,803 6,529 2,452,525
Federal Reserve Bank stock 56,650 -- -- 56,650
Federal Home Loan Bank
stock ................. 480,800 -- -- 480,800
---------- ---------- ---------- ----------
Total taxable ....... 4,986,452 7,240 6,529 4,987,163
---------- ---------- ---------- ----------
Tax-exempt:
Federal Reserve Bank
stock ................. 2,250 -- -- 2,250
---------- ---------- ---------- ----------
Total ............... $4,988,702 $ 7,240 $ 6,529 $4,989,413
========== ==========
1997
Carrying
Value
Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
Held to maturity
Taxable:
U.S. Treasury securities $ 500,000 $ -- $ -- $ 500,000
U.S. Government agencies
and corporations ..... 7,232,490 13,547 3,363 7,242,674
Corporate debt securities 500,000 -- 2,650 497,350
----------- ----------- ----------- -----------
Total taxable ...... 8,232,490 13,547 6,013 8,240,024
----------- ----------- ----------- -----------
Tax-exempt:
State and political
subdivisions ......... 4,089,018 76,157 365 4,164,810
----------- ----------- ----------- -----------
Total .............. $12,321,508 $ 89,704 $ 6,378 $12,404,834
=========== =========== =========== ===========
31
Notes to Consolidated Financial Statements
1996
Carrying
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for sale
Taxable:
U.S. Treasury securities . $ 979,860 $ 2,328 $ -- $ 982,188
U.S. Government agencies
and corporations ...... 2,500,643 5,294 7,500 2,498,437
Federal Reserve Bank stock 56,650 -- -- 56,650
Federal Home Loan Bank
stock ................. 242,000 -- -- 242,000
---------- ---------- ---------- ----------
Total taxable ....... 3,779,153 7,622 7,500 3,779,275
---------- ---------- ---------- ----------
Tax-exempt:
Federal Reserve Bank
stock ................. 2,250 -- -- 2,250
---------- ---------- ---------- ----------
Total ............... $3,781,403 $ 7,622 $ 7,500 $3,781,525
========== ========== ========== ==========
1996
Carrying
Value Estimated
(Amortized Unrealized Fair
Cost) Gains Losses Value
Held to maturity
Taxable:
U.S. Treasury securities $ 3,002,858 $ 2,553 $ 410 $ 3,005,001
U.S. Government agencies
and corporations ..... 11,203,343 19,479 30,510 11,192,312
Corporate debt securities 500,000 -- 7,255 492,745
----------- ----------- ----------- -----------
Total taxable ...... 14,706,201 22,032 38,175 14,690,058
----------- ----------- ----------- -----------
Tax-exempt:
State and political
subdivisions ......... 4,129,574 44,872 14,437 4,160,009
----------- ----------- ----------- -----------
Total .............. $18,835,775 $ 66,904 $ 52,612 $18,850,067
=========== =========== =========== ===========
Federal Reserve Bank stock and Federal Home Loan Bank stock are
equity securities which are included in securities available for
sale in the accompanying consolidated financial statements. Such
securities are carried at cost, since they may only be sold back
to the respective Federal Home Loan Bank or Federal Reserve Bank
at par value.
32
Notes to Consolidated Financial Statements
The maturities, amortized cost and estimated fair values of
securities at December 31, 1997, are summarized as follows:
Held to maturity Available for sale
Carrying
Carrying Value
Value Estimated (Estimated
(Amortized Fair Amortized Fair
Cost) Value Cost Value)
Due in one year or less .. $ 4,352,396 $ 4,353,890 $ 2,947,180 $ 2,944,088
Due from one to five years 5,460,936 5,473,990 1,501,822 1,505,625
Due from five to ten years 2,508,176 2,576,954 -- --
Equity securities ........ -- -- 539,700 539,700
----------- ----------- ----------- -----------
Total ................ $12,321,508 $12,404,834 $ 4,988,702 $ 4,989,413
=========== =========== =========== ===========
The proceeds from sales, calls and maturities of securities and
principal payments received on mortgage-backed obligations and the
related gross gains and losses realized are as follows:
Proceeds From Gross Realized
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
1997
Securities held to maturity $ -- $ 9,735,000 $ -- $-- $ --
Securities available for sale -- 2,000,000 -- -- --
-- ------------ ---- ---- ------
$ -- $ 11,735,000 $ -- $-- $ --
= ============ ==== ==== ======
1996
Securities held to maturity$ -- $ 11,656,739 $ -- $972 $ --
Securities available for sale -- 7,639,238 -- -- --
- ------------ ---- ---- ------
$ -- $ 19,295,977 $ -- $972 $
= ============ ==== ==== ======
1995
Securities held to maturity $ -- $ 2,497,865 $ -- $-- $ --
Securities available for sale -- 7,359,233 -- 990 --
- ------------ ---- ---- ------
$ -- $ 9,857,098 $ -- $990 $ --
= ============ ==== ==== ======
At December 31, 1997 and 1996, securities with amortized costs of
$4,992,845 and $1,500,000, respectively, with estimated fair
values of $4,996,182 and $1,504,195, respectively, were pledged to
secure public deposits, and for other purposes required or
permitted by law.
Note 4. Loans
Loans are summarized as follows:
1997 1996
-------------- -----------
Commercial, financial and agricultural $29,431,003 $19,578,393
Real estate - construction ........... 3,514,835 2,395,611
Real estate - mortgage ............... 29,066,834 24,031,283
Installment .......................... 6,388,754 6,254,129
Other ................................ 1,366,457 1,299,839
----------- -----------
Total loans .................. 69,767,883 53,559,255
Less unearned income ................. 24,194 105,267
----------- -----------
Total loans net of unearned income 69,743,689 53,453,988
Less allowance for loan losses ... 635,555 653,954
----------- -----------
Loans, net ................... $69,108,134 $52,800,034
=========== ===========
33
Notes to Consolidated Financial Statements
Included in the net balance of loans are non-accrual loans
amounting to $1,732,941 and $160,631 at December 31, 1997 and
1996, respectively. If interest on non-accrual loans had been
accrued, such income would have approxi mated $112,444, $15,357
and $40,652 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following represents contractual loan maturities at December
31, 1997:
After 1 But
Within 1 Year Within 5 Year After 5 Years
------------- ------------ ------------
Commercial, financial and agricultural $10,190,085 $14,337,276 $ 4,903,642
Real estate - construction ........... 2,509,400 932,285 73,150
Real estate - mortgage ............... 3,310,964 5,439,492 20,316,378
Installment .......................... 1,935,801 4,221,481 231,472
Other ................................ 1,167,274 -- 199,183
----------- ----------- -----------
Total ........................ $19,113,524 $24,930,534 $25,723,825
=========== =========== ===========
Loans due after one year with:
Variable rates ..... $29,371,498
Fixed rates ........ 21,282,861
-----------
Total .............. $50,654,359
===========
Concentrations of credit risk: The subsidiary bank grants
commercial, residential and consumer loans to customers primarily
located in Greenbrier and Kanawha Counties of West Virginia.
As of December 31, 1997 and 1996, the Bank had direct extensions
of credit to individuals who are employees of a railroad
transportation and holding company totaling approximately
$2,700,000 and $2,800,000, respectively. These loans consisted of
residential real estate mortgages generally secured by liens on
the property. The Bank evaluates the credit worthiness of each
such customer on a case-by-case basis.
Loans to related parties: The subsidiary bank has had, and may be
expected to have in the future, banking transactions in the
ordinary course of business with directors, principal officers,
their immediate families and affiliated companies in which they
are principal stockholders (commonly referred to as related
parties), all of which have been, in the opinion of management, on
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others.
The following presents the activity with respect to related party
loans aggregating $60,000 or more to any one related party:
1997 1996
---------- ---------
Balance, beginning .. $ 519,780 $ 777,760
Additions ....... 447,660 291,019
Amounts collected (202,562) (548,999)
--------- ---------
Balance, ending ..... $ 764,878 $ 519,780
========= =========
Note 5. Allowance for loan losses
An analysis of the allowance for loan losses for the years ended
December 31, 1997, 1996 and 1995, is as follows:
34
Notes to Consolidated Financial Statements
1997 1996 1995
------------ --------- ----------
Balance, beginning of year ............... $ 653,954 $ 643,439 $ 852,862
Losses:
Commercial, financial and agricultural -- -- 90,348
Real estate - mortgage ............... -- 43,208 75,000
Installment .......................... 108,645 74,226 215,885
--------- --------- ---------
Total ............................. 108,645 117,434 381,233
--------- --------- ---------
Recoveries:
Commercial, financial and agricultural -- -- 3,250
Real estate - mortgage ............... -- 28,395 2,470
Installment .......................... 59,246 99,554 166,090
--------- --------- ---------
Total ............................. 59,246 127,949 171,810
--------- --------- ---------
Net (recoveries) losses .............. 49,399 (10,515) 209,423
Provision for loan losses ............ 31,000 -- --
--------- --------- ---------
Balance, end of year ..................... $ 635,555 $ 653,954 $ 643,439
========= ========= =========
The Company's total recorded investment in impaired loans at
December 31, 1997 and 1996, approximated $497,883 and $135,682,
respectively, for which the related allowance for loan losses
determined in accordance with generally accepted accounting
principles approximated $215,000 and $25,000, respectively. The
Company's average investment in such loans approximated $897,757
and $152,050 for the years ended December 31, 1997 and 1996,
respectively. All impaired loans at December 31, 1997 and 1996,
were collateral dependent, and accordingly, the fair value of the
loan's collateral was used to measure the impairment of each loan.
For purposes of evaluating impairment, the Company considers
groups of smaller-balance, homogeneous loans to include: mortgage
loans secured by residential property, other than those which
significantly exceed the subsidiary bank's typical residential
mortgage loan amount (currently those in excess of $100,000);
small balance commercial loans (currently those less than
$50,000); and installment loans to individuals, exclusive of those
loans in excess of $50,000.
For the years ended December 31, 1997 and 1996, the Company
recognized $0 and $0, respectively, in interest income on impaired
loans. Using a cash-basis method of accounting, the Company would
have recognized approximately the same amount of interest income
on such loans.
Note 6. Bank Premises and Equipment
The major categories of Bank premises and equipment and
accumulated depreciation at December 31, 1997 and 1996, are
summarized as follows:
1997 1996
---------- ----------
Land ........................... $ 298,361 $ 298,361
Building and improvements ...... 1,577,953 1,135,114
Furniture and equipment ........ 1,999,590 1,815,561
Construction-in-progress ....... -- 382,876
---------- ----------
3,875,904 3,631,912
Less accumulated depreciation .. 1,802,985 1,667,251
---------- ----------
Bank premises and equipment, net $2,072,919 $1,964,661
========== ==========
Depreciation expense for the years ended December 31, 1997, 1996
and 1995 totaled $227,785, $172,046 and $151,529, respectively.
35
Notes to Consolidated Financial Statements
The subsidiary bank opened its new branch facility in Greenbrier
County in January 1997. This new facility replaced the leased
branch facility located in Lewisburg, West Virginia.
Note 7. Deposits
The following is a summary of interest bearing deposits by type as
of December 31, 1997 and 1996:
1997 1996
----------- ----------
Interest bearing demand deposits $13,300,150 $13,586,411
Savings deposits ............... 24,037,647 21,899,023
Certificates of deposit ........ 30,963,443 27,619,604
----------- -----------
Total ...................... $68,301,240 $63,105,038
=========== ===========
Time certificates of deposit in denominations of $100,000 or more
totaled $5,715,801 and $3,745,734 at December 31, 1997 and 1996,
respectively. Interest paid on time certificates of deposit in
denominations of $100,000 or more was $272,837, $147,907, and
$89,256 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The following is a summary of the maturity distribution of
certificates of deposit in denominations of $100,000 or more as of
December 31, 1997:
Amount Percent
Three months or less .... $1,661,457 29.1%
Three through six months 820,445 14.4%
Six through twelve months 2,574,588 45.0%
Over twelve months ...... 659,311 11.5%
---------- -----
Total ............... $5,715,801 100.0%
========== =====
A summary of the maturities of time deposits as of December 31,
1997, follows:
Year Amount
---- -----------
1998 $25,852,051
1999 3,937,305
2000 1,064,429
2001 109,658
-----------
$30,963,443
At December 31, 1997 and 1996, deposits of related parties
including directors, executive officers, and their related
interest of First National Bankshares Corp. and subsidiary were
insignificant to total deposits.
Note 8. Other Borrowings
Short-term borrowings: During 1997 and 1996, the Company's
short-term borrowings consisted of securities sold under
agreements to repurchase (repurchase agreements) involving seven
and three customers, respectively.
The interest rate paid on these borrowings is tied to the Federal
funds rate and dependent upon the outstanding deposit balance.
Interest is calculated and credited to the customer's account on a
daily basis. Minimum deposit balance requirements are established
on a case-by-case basis. The repurchase agreements do not have a
specified maturity date as either party reserves the right to
terminate the agreement. The securities underlying these
agreements are under the subsidiary bank's control and secure the
total outstanding daily balances.
The following information is provided relative to these
obligations:
1997 1996
------------- ----------
Outstanding at year end ..................... $1,330,396 $ 492,472
Weighted average interest rate at December 31 3.73% 4.42%
Maximum amount outstanding at any month end . $3,397,637 $1,037,275
Average daily amount outstanding ............ $1,412,493 $ 320,098
Weighted average interest rate .............. 3.99% 4.17%
36
Notes to Consolidated Financial Statements
Long-term borrowings: The Company's long-term borrowings of
$5,500,000 at December 31, 1997, consisted of advances from the
FHLB. Of these borrowings, $500,000, with a fixed interest rate of
5.86% and maturing on December 23, 2002, was used by the Company
to fund a commercial loan for a local business. A summary of the
maturity of this borrowing of the next five years is as follows:
$12,402 in 1998; $14,310 in 1999; $15,171 in 2000; $16,084 in
2001; and $442,033 in 2002.
The remaining $5,000,000 was borrowed from the FHLB during the
year to fund various loans. This loan with a fixed rate of 6.68%
is a balloon note that is due and payable on March 24, 2000. The
Company is required to make interest only payments each month with
the remaining balance due at maturity. These advances are secured
by Federal Home Loan Bank of Pittsburgh stock, qualifying first
mortgage loans, certain non-mortgage loans and all investments not
otherwise pledged.
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the
years ended December 31, 1997, 1996 and 1995, are as follows:
1997 1996 1995
-------- -------- --------
Current:
Federal ............... $370,981 $264,755 $198,444
State ................. 72,500 45,451 29,789
-------- -------- --------
443,481 310,206 228,233
Deferred (Federal and State) 33,179 20,020 72,875
-------- -------- --------
Total ................. $476,660 $330,226 $301,108
======== ======== ========
A reconciliation between the amount of reported income tax expense
and the amount computed by multiplying the statutory income tax
rates by book pretax income for the years ended December 31, 1997,
1996 and 1995, is as follows:
1997 1996 1995
------------------ --------------------- -------------------
Amount Percent Amount Percent Amount Percent
Computed tax at applicable
statutory rate $ 431,284 34.0 $ 362,526 34.0 $ 363,094 34.0
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (69,984) (5.5) (72,038) (6.8) (79,701) (7.5)
State income taxes, net
of Federal income
tax benefit 48,933 3.9 29,998 2.8 19,657 1.8
Disallowed interest 9,469 0.7 9,116 0.8 9,137 0.8
Other, net 56,958 4.5 624 0.2 (11,079) (.9)
----------- ------- ---------- ------- ------------ -------
Applicable income
taxes $ 476,660 37.6 $ 330,226 31.0 $ 301,108 28.2
=========== ======= ========== ======= ============ ======
Deferred income taxes reflect the impact of "temporary
differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes.
Deferred tax assets and liabilities represent the future tax
return consequences of temporary differences, which will either be
taxable or deductible when the related assets and liabilities are
recovered or settled.
The tax effects of temporary differences which give rise to the
Company's deferred tax assets and liabilities as of December 31,
1997 and 1996, are as follows:
37
Notes to Consolidated Financial Statements
1997 1996
-------- --------
Deferred tax assets:
Allowance for loan losses ............. $108,086 $139,659
Employee benefits ..................... 158,383 150,439
Accruals .............................. -- 7,650
-------- --------
266,469 297,748
Deferred tax liabilities:
Depreciation .......................... 29,038 15,038
Accretion on securities ............... 21,479 22,187
Deferred gain on involuntary conversion 3,864 15,256
Net unrealized gain on securities ..... 272 47
-------- --------
54,653 52,528
Net deferred tax assets ............... $211,816 $245,220
======== ========
Note 10. Employee Benefits
Profit-Sharing Plan: The subsidiary bank sponsored a
noncontributory defined contribution profit-sharing plan covering
substantially all employees through October 1, 1997. Effective
October 1, 1997, the profit sharing plan was terminated.
Contributions to the Plan, prior to October 1, 1997, were at the
discretion of the Board of Directors.
401(k) Plan: The subsidiary bank also sponsors a 401(k) defined
contribution plan covering substantially all employees.
Participants are eligible to contribute up to 10% of their annual
compensation to the Plan. The Bank matches participant
contributions in an amount equal up to 3.5% of each participant's
annual compensation. In addition, the Bank is also eligible to
make discretionary contributions to the Plan.
The Bank's contributions to the above Plans for the years ended
December 31, 1997, 1996 and 1995, totaled $47,014, $105,922 and
$117,500, respectively.
Postretirement Benefit Plans: The subsidiary bank sponsors a
postretirement health care plan and a postretirement life
insurance plan for all retired employees that meet certain
eligibility requirements. Both plans are contributory with
retiree contributions that are adjustable based on various
factors, some of which are discretionary. The plans are unfunded.
Net postretirement benefit cost included the following components
for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
------------------------- --------------------- -----------------------
Health Life Health Life Health Life
Care Insurance Care Insurance Care Insurance
Plan Plan Plan Plan Plan Plan
Service cost-benefits
attributable to
service during
the year $ 6,627 $ 2,619 $ 5,742 $ 2,274 $ 4,887 $1,905
Interest on
accumulated
postretirement
benefit obligation 16,847 6,493 16,454 6,151 18,359 6,229
Amortization of (gain)
loss (1,414) - (1,041) - (490) -
---------- ------------- ---------- ---------- ----------- --
Net postretirement
benefit cost $ 22,060 $ 9,112 $ 21,155 $ 8,425 $ 22,756 $ 8,134
========== ============= ========== ========== ============ =======
The following tables set forth the plans' funded status reconciled with
the obligations recognized in the accompanying consolidated balance
sheets at December 31, 1997 and 1996:
38
Notes to Consolidated Financial Statements
1997 1996
----------------------------------- ---------------------------------
Health Life Health Life
Care Insurance Care Insurance
Plan Plan Total Plan Plan Total
Accumulated postretirement benefit obligation:
Retirees $(192,418) $(67,147) $ (259,565) $(106,753) $(42,969) $(149,722)
Active participants
fully eligible
for benefits (39,822) (15,286) (55,108) (53,444) (20504) (73,948)
Other active
participants (73,135) (28,494) (101,629) (88,289) (34,250) (122,539)
---------- ---------- ----------- ----------- --------- ----------
(305,375) (110,927) (416,302) (248,486) (97,723) (346,209)
Plan Assets -- -- -- -- -- --
---------- ------------------------------------------------------ ----------
Accumulated postretirement
benefit obligation
in excess of
plan assets (305,375) (110,927) (416,302) (248,486) (97,723) (346,209)
Unrecognized net (gain)
loss 619 8,335 8,954 (45,225) (254) (45,479)
---------- ------------ ----------- ---------- ---------- ------------
Accrued postretirement
benefit cost $(304,756) $(102,592) $(407,348) $(293,711) $(97,977) $(391,688)
---------- ---------- ----------- ---------- ---------- ------------
The weighted average discount rate used in estimating the accumulated
postretirement benefit obligations of the health care plan and the life
insurance plan at December 31, 1997 and 1996, was 7.0%.
For measurement purposes, a 7% annual rate of increase in per capita
health care costs of covered benefits was assumed through 1999, 6% for
the next 5 years, 5 1/2% for the next 5 years, and 5% thereafter. If
assumed health care cost trend rates were increased by 1 percentage
point in each year, the accumulated postretirement benefit obligation
at December 31, 1997, would increase by $12,994 and the aggregate of
the service and interest cost components of net postretirement benefit
cost for the year ended December 31, 1997, would decrease by $301.
Note 11. Stock Option Plan
In April 1996, the shareholders approved a stock option plan for key
employees of the Bank as identified by the stock option committee.
Grants under the plan are accounted for following APB Opinion No. 25
and related interpretations. Accordingly, no compensation cost has been
recognized for grants under the plan. Had compensation cost for the
stock-based compensation plan been determined based on the grant date
fair values of awards (the method described in FASB Statement 123), the
reported net income and earnings per share would have been reduced to
the proforma amounts shown below:
1997 1996 1995
----------- ----------- -------------
Net income:
As reported ............ $ 791,822 $ 736,027 $ 766,814
Proforma ............... $ 768,391 $ 726,544 $ 766,814
Basic earnings per share:
As reported ............ $ 4.11 $ 3.82 $ 3.98
Proforma ............... $ 4.00 $ 3.77 $ 3.98
Diluted earnings per share:
As reported ............ $ 4.11 $ 3.82 $ 3.98
Proforma ............... $ 4.00 $ 3.77 $ 3.98
The significant provisions of the Plan include authorization of the
stock option committee to grant up to 9,625 shares of common stock
between April 25, 1996 and April 25, 2006, with the right to adjust the
number of shares available for the plan at its discretion. On December
9, 1997 and October 31, 1996, 1,656 and 3,200 shares, respectively,
were granted
39
Notes to Consolidated Financial Statements
to certain key employees and must be exercised within 5 years. Each
option fully vests after six months from the grant date.
The fair value of each grant is estimated at the grant date using the
minimum value method with the following weighted-average assumptions
for grants in 1997 and 1996: dividend rate of 2%; risk free interest
rate of 5.37% and 6.25%, respectively and expected life of 5 years.
A summary of the status of the plan at December 31, 1997 and 1996, and
changes during the year ended is as follows:
1997 1996
-------------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Fixed Options
Outstanding at beginning of year 3,200 $ 50.00 - $ -
Granted 1,656 56.00 3,200 50.00
Exercised - - - -
Forfeited (200) 50.00 - -
---------- ----------
Outstanding at end of year 4,656 52.13 5,200 50.00
=========== -----=====
Exercisable at end of year 3,000 50.00 - -
Fair value per option of options
granted during the year $ 8.09 $ 8.89
=========== ==========
At December 31, 1997, the options outstanding under the stock
option plan have exercise prices ranging from $50 to $56 and a
weighted average remaining contractual life of 4.22 years.
Note 12. Lease Obligation
Prior to 1997 and during January of 1997, the subsidiary bank
leased its branch facility in Lewisburg, West Virginia under an
operating lease. Total lease payments of $7,537 were charged to
expense for the year ended December 31, 1997 and lease payments of
$90,446 were charged to expense for each of the years ended
December 31, 1996 and 1995. The lessor of the branch facility was
an entity owned by two directors of the Company and subsidiary
bank. This lease was terminated effective January 31, 1997, when
the subsidiary bank completed construction of its new branch
facility in Greenbrier County.
The subsidiary bank opened a new branch in Charleston, West
Virginia during 1996. The bank leases the office space under an
operating lease with an initial term of ten years commencing on
May 1, 1996. The lease provides for two successive options for
five year renewals. Total lease payments of $101,970 and $54,650
were charged to expense for the years ended December 31, 1997 and
1996, respectively. Total future minimum lease payments under the
lease are as follows:
Year Ending
December 31, Amount
------------ ------------
1998 $ 101,970
1999 101,970
2000 101,970
2001 101,970
2002 101,970
Thereafter 353,230
------------
$ 863,080
Note 13. Commitments and Contingencies
Reserve Requirements: The subsidiary bank is required to maintain
a reserve balance with the Federal Reserve Bank. At December 31,
1997, the reserve balance was $575,000. The subsidiary bank does
not earn interest on this balance.
40
Notes to Consolidated Financial Statements
Year 2000 Compliant: The Company is conducting a comprehensive
review of its subsidiary bank's computer systems to identify the
systems that could be affected by the "Year 2000 Issue" ("Issue")
and is developing a remediation plan to resolve the Issue. The
Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate
erroneous data or cause a system to fail. The subsidiary bank is
heavily dependent on computer processing in the conduct of its
business activities. While management believes it is doing
everything technologically possible to assure Year 2000
compliance, it is in part dependent upon systems and software
vendors to represent that the products provided are, or will be,
"Year 2000 Compliant".
Because the Company has not completed its review of computer
systems, management is unable to estimate the costs of making the
system Year 2000 compliant.
Financial instruments with off-balance sheet risk: The subsidiary
bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of
financial instruments.
At December 31, 1997 and 1996, the subsidiary bank's financial
instruments with off-balance sheet risk are as follows:
Financial instruments whose contract Contract Amount
amounts represent credit risk 1997 1996
- -------------------------------------- -------------- ------------
Commitments to extend credit $ 10,897,800 $ 8,328,000
============== ============
The subsidiary bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual
amount of those instruments. The subsidiary bank uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Bank
management evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, equipment or real estate.
Litigation: The Company is involved in various legal actions
arising in the ordinary course of business. In the opinion of
counsel, the outcome of these matters will not have a significant
adverse effect on the consolidated financial statements.
Employment Agreement: The Company has an employment agreement with
its chief executive officer. This agreement contains change in
control provisions that would entitle the officer to receive,
under certain circumstances, twice his annual compensation in the
event there is a change in control in the Company (as defined) and
a termination of his employment. The maximum contingent liability
under this agreement approximates $300,000 at December 31, 1997.
Note 14. Regulatory Restrictions on Capital and Dividends
The primary source of funds for the dividends paid by First
National Bankshares Corporation is dividends received from its
subsidiary bank. Dividends paid by the subsidiary bank are subject
to restrictions by banking regulations. The most restrictive
provision requires approval by the regulatory agency if dividends
declared in any year exceed the year's net income, as defined,
plus the net retained profits of the two preceding years. During
1998, the net retained profits available for distribution to First
National Bankshares Corporation as dividends without regulatory
approval approximates $952,718 plus net retained profits, as
defined, for the interim periods through the date of declaration.
The subsidiary bank is subject to various regulatory capital
requirements administered by the Federal banking
41
Notes to Consolidated Financial Statements
agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the subsidiary bank must
meet specific capital guidelines that involve quantitative
measures of the subsidiary bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. The subsidiary bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weights and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the subsidiary bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier capital (as defined) to average assets
(as defined). Management believes, as of December 31, 1997, that
the subsidiary bank meets all capital adequacy requirements to
which it is subject.
The most recent notification from the Office of the Comptroller of
the Currency categorized the subsidiary bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the subsidiary bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have
changed the institution's category.
The subsidiary bank's actual capital amounts and ratios are
presented in the following table (in thousands):
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total Capital $ 9,955 14.98% $ 5,317 8.0% $ 6,646 10.0%
(to Risk Weighted
Assets)
Tier I Capital 9,320 14.02% 2,659 4.0% 3,989 6.0%
(to Risk Weighted
Assets)
Tier I Capital 9,320 9.60% 2,913 3.0% 4,854 5.0%
(to Average Assets)
As of December 31, 1996:
Total Capital $ 9,487 18.23% $ 4,164 8.0% $ 5,205 10.0%
(to Risk Weighted
Assets)
Tier I Capital 8,836 16.98% 2,082 4.0% 3,123 6.0%
(to Risk Weighted
Assets)
Tier I Capital 8,836 10.56% 2,510 3.0% 4,184 5.0%
(to Average Assets)
Note 15. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions
used by the Company in estimating its fair value disclosures for
financial instruments.
Cash and due from banks: The carrying values of cash and due from
banks approximate their estimated fair value.
Federal funds sold: The carrying values of Federal funds sold
approximate their estimated fair values.
Securities: Estimated fair values of securities are based on
quoted market prices, where available. If quoted market prices are
not available, estimated fair values are based on quoted market
prices of comparable securities.
42
Notes to Consolidated Financial Statements
Loans: The estimated fair values for loans are computed based on
scheduled future cash flows of principal and interest, discounted
at interest rates currently offered for loans with similar terms
to borrowers of similar credit quality. No prepayments of
principal are assumed.
Accrued interest receivable: The carrying values of accrued
interest receivable approximate their estimated fair value.
Deposits: The estimated fair values of demand deposits (i.e. non
interest bearing checking, NOW, money market and savings accounts)
and other variable rate deposits approximate their carrying
values. Fair values of fixed maturity deposits are estimated using
a discounted cash flow methodology at rates currently offered for
deposits with similar remaining maturities. Any intangible value
of long-term relationships with depositors is not considered in
estimating the fair values disclosed.
Short-term borrowings: The carrying values of short-term
borrowings approximate their estimated fair values.
Accrued interest payable: The carrying values of accrued interest
payable approximate their estimated fair value.
Off-balance sheet instruments: The fair values of commitments to
extend credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit standing of the
counter parties. The amounts of fees currently charged on
commitments are deemed insignificant, and therefore, the estimated
fair values and carrying values are not shown below.
The carrying values and estimated fair values of the Company's
financial instruments are summarized below:
December 31, 1997 December 31, 1996
------------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks ..... $ 2,742,219 $ 2,742,219 $ 2,576,154 $ 2,576,154
Federal funds sold .......... 3,159,000 3,159,000 2,663,000 2,663,000
Securities held to maturity . 12,321,508 12,404,834 18,835,775 18,850,067
Securities available for sale 4,989,413 4,989,413 3,781,525 3,781,525
Loans ....................... 69,108,134 69,074,868 52,800,034 52,208,012
Accrued interest receivable . 660,107 660,107 658,579 658,579
----------- ----------- ----------- -----------
$92,980,381 $93,030,441 $81,315,067 $80,737,337
=========== =========== =========== ===========
Financial liabilities:
Deposits .................... $78,335,748 $78,408,972 $73,316,453 $73,359,556
Short-term borrowings ....... 1,330,396 1,330,396 492,473 492,473
Accrued interest payable .... 193,553 193,553 230,356 230,356
Long-term borrowings ........ 5,500,000 5,500,000 -- --
----------- ----------- ----------- -----------
$85,359,697 $85,432,921 $74,039,282 $74,082,385
=========== =========== =========== ===========
Note 16. Condensed Financial Statements of Parent Company
The investment of the Corporation in its wholly-owned subsidiary
is presented on the equity method of accounting. Information
relative to the Corporation's balance sheets at December 31, 1997
and 1996, and the related statements of income and cash flows for
the years ended December 31, 1997, 1996 and 1995, are presented as
follows:
43
Notes to Consolidated Financial Statements
Balance Sheet
Assets 1997 1996
---------- ----------
Cash ............................................$ 4,114 $ 4,163
Investment in bank subsidiary,
liminated in consolidation 9,319,676 8,835,459
Other assets .................................... 78,009 77,990
---------- ----------
Total assets ................................$9,401,799 $8,917,612
========== ==========
Liabilities and shareholders' equity
Liabilities
Dividends payable ...............................$ 77,000 $ 77,000
---------- ----------
Shareholders' equity
Common stock, $5.00 par value, authorized
500,000 shares, issued 192,500 shares ........... 962,500 962,500
Capital surplus ..................................1,000,000 1,000,000
Retained earnings (consisting of undivided
profits of subsidiary not yet distributed) ..7,361,859 6,878,037
Net unrealized gain (loss) on securities ......... 440 75
---------- ----------
Total shareholders' equity .......................9,324,799 8,840,612
---------- ----------
Total liabilities and shareholders' equity ..$9,401,799 $8,917,612
========== ==========
Statements of Income ......................... 1997 1996 1995
-------- --------- ---------
Income - dividends from bank subsidiary .....$ 308,000 $ 267,575 $ 231,000
Expenses - operating ........................... 49 670 1,932
--------- --------- ---------
Income before income taxes and undistributed
income ....................................307,951 266,905 229,068
Applicable income tax expense (benefit) ... (19) (256) (733)
--------- --------- ---------
Income before undistributed income ............307,970 267,161 229,801
Equity in undistributed income of
bank subsidiary 483,852 468,866 537,013
--------- --------- ---------
Net income ..........................$ 791,822 $ 736,027 $ 766,814
========= ========= =========
44
Notes to Consolidated Financial Statements
Statements of Cash Flows 1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................. $ 791,822 $ 736,027 $ 766,814
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiary .............................. (483,852) (468,866) (537,013)
(Increase) decrease in other assets ......... (19) (19,506) 20,647
--------- --------- ---------
Net cash provided by operating activities 307,951 247,655 250,448
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders .............. (308,000) (248,325) (250,250)
--------- --------- ---------
Net cash (used in) financing activities . (308,000) (248,325) (250,250)
--------- --------- ---------
Increase (decrease) in cash ................. (49) (670) 198
Cash:
Beginning ............................... 4,163 4,833 4,635
--------- --------- ---------
Ending .................................. $ 4,114 $ 4,163 $ 4,833
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Dividends declared and unpaid ................... $ 77,000 $ 77,000 $ 57,750
========= ========= =========
First National Bankshares Corporation accounts for its investment
in its bank subsidiary by the equity method. During the years
ended December 31, 1997, 1996 and 1995, changes were as follows:
Number of shares owned at December 31, 1997 - 38,500 Percent
to total shares at December 31, 1997 - 100%
Balance at December 31, 1994 ............................. 7,304,242
Add (deduct):
Equity in net income ............................. 768,013
Dividends declared ............................... (231,000)
Net unrealized gain (loss) on securities ......... 568,582
-----------
Balance at December 31, 1995 ............................. 8,409,837
Add (deduct):
Equity in net income ............................. 736,441
Dividends declared ............................... (267,575)
Change in net unrealized gain (loss) on securities (43,244)
-----------
Balance at December 31, 1996 ............................. $ 8,835,459
Add (deduct):
Equity in net income ............................. 791,852
Dividends declared ............................... (308,000)
Change in net unrealized gain (loss) on securities 365
-----------
Balance at December 31, 1997 ............................. $ 9,319,676
===========
45
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company may consist of not less than five (5) nor
more than twenty-five (25) shareholders in accordance with the Company's
Articles of Incorporation. The number of directors within such minimum and
maximum limits shall be determined from time to time by resolution of a majority
of the full Board of Directors, subject to limitations outlined in the Company's
By-laws. Currently the Board of Directors may not increase the number of
directors to a number which exceeds by more than two the number of directors
last elected by the shareholders. The number of directors may also be fixed by a
resolution of the shareholders at any annual or special meeting. No shareholder
may be elected as director after attaining the age seventy (70), unless the
shareholder was also a member of the Board of Directors on May 5, 1987.
Due to the Death of Director Moore during March, 1996, the number of directors
fixed by the Board of Directors was reduced from 11 to 10. However, effective
January 1, 1998, the number of directors was once again increased to 11 when Mr.
David A. Carson was appointed by the Board of Directors as a new Board member.
Additional information about the directors, including their principal occupation
and age, is set forth in the following table:
- -------------------------------------------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- -------------------------------------------------------------------------------------------------------------------
S. Elwood Bare Retired Pharmacist 71 1986 1999
Chairman of the Board,
Audit & Compliance Committee
Incentive Stock Option Cmt.
Personnel & Compensation Cmt.
L. Thomas Bulla President & CEO of 58 1993 1998
President & CEO of the First National Bankshares
Company and the Bank, Corp. and First National
Risk Management Cmt., Bank (1993 - present);
Trust Cmt. Director, President & CEO
of Bank One, West Virginia,
Charleston, NA (1985-1993)
David A. Carson President & CEO of Greenbrier 46 1998 2000
Risk Management Cmt. Respiratory Care Services
J. R. Dawkins Cattle Dealer; Farm 80 1986 2000
Audit & Compliance Cmt. Operator
Richard E. Ford Attorney at Law 70 1987 1999
Risk Management Cmt. Partner - The Ford
Trust Cmt. Law Firm
Incentive Stock Option Cmt.
Walter Bennett Fuller Retired Banker 74 1986 2000
Vice Chairman of the Board,
Audit & Compliance Cmt.
Incentive Stock Option Cmt.
William D. Goodwin Attorney at Law, 54 1986 1998
Risk Management Cmt. Owner/Broker, Coldwell
Trust Cmt. Banker Stuart & Watts Real
Personnel & Compensation Cmt. Estate, Inc.
Lucie T. Refsland, Ed.D. Associate Professor of 61 1995 1998
Risk Management Cmt. Mathematics (1993 - present)
Trust Cmt. Greenbrier Community College
Center of Bluefield State College
William R. Satterfield, Jr. Owner - Greenbrier 53 1986 1998
Risk Management Cmt. Insurance Agency
Personnel & Compensation Cmt.
Richard L. Skaggs Retired 75 1986 2000
Audit & Compliance Cmt.
Incentive Stock Option Cmt.
Ronald B. Snyder President, R.B.S., Inc. 58 1988 1999
Audit & Compliance Cmt. (construction company)
Personnel & Compensation Cmt.
- -------------------------------------------------------------------------------------------------------------------
The directors of the Company are divided into three (3) classes; and as a
result, the shareholders elect approximately one-third of the directors of the
Company each year. Directors Bulla, Goodwin, Refsland and Satterfield whose
terms expire in 1998, have been nominated to stand for re-election at the 1998
annual meeting of the Company's stockholders to serve a 3 year term which will
expire in 2001.
48
Executive Officers
The current executive officers of the Company and the Bank and information about
these officers is set forth on the following table.
- -------------------------------------------------------------------------------
Name Age Offices Held During Last Five Years
- --------------------------------------------------------------------------------
L. Thomas Bulla 58 President & CEO of the Company and the Bank (1993 to present);
President and CEO of Bank One, West Virginia, Charleston, NA (1985
- 1993)
Charles A. Henthorn 38 Executive Vice President of the Company and the Bank (1996 to
present); Secretary to the Board of Directors (1998 to present); Senior
Vice President of the Bank (1994 to 1996); Vice President and Senior
Commercial Lender of Bank One, West Virginia, Charleston, NA (1991
- 1994); National Bank Examiner with the Office of the Comptroller of
the Currency (1983 - 1991)
Darrell G. Echols 61 Vice President of the Company (1987 to present); Senior Vice
President and Loan Officer of the Bank (1970 to present)
Keith E. Morgan (retired) 60 Secretary-Treasurer of the Company (1987 to 1997); Vice President,
Cashier, Trust Officer and Secretary to the Board of the
Bank (1970 to 1997). Effective January 1, 1998, Mr. Morgan
retired from both the Company and the Bank.
- -------------------------------------------------------------------------------
The executive officers of the Company listed above (except for Mr. Morgan) shall
continue in office until the 1998 organizational meeting of the directors of the
Company. It is expected that the current officers will be re-elected to the
offices they now hold. The executive officers of the Bank listed above shall
continue in office until the 1998 organizational meeting of its directors; and
it is expected that these persons will be re-elected to the offices they now
hold.
Compliance with Section 16(a) of the Exchange Act
The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not
have any class of securities registered pursuant to Section 12 of the Exchange
Act, the provisions of Section 16 thereof are not applicable to the Company's
directors, officers and shareholders.
49
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation paid to the
chief executive officer, the only executive officer whose compensation exceeds
$100,000, for the years 1997, 1996 and 1995:
- -------------------------------------------------------------------------------------------------------------------
Stock All Other
Name and Salary Bonus Options Compensation
Principal Position Year ($) ($) (1) ($) (2)
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 1997 $150,000 $20,000 $3,236 $22,767
President & CEO of the
Company and the Bank 1996 $150,000 $25,000 $5,690 $28,100
1995 $137,500 $25,000 - $24,287
FOOTNOTES:
(1) 1997 - The amount shown under the "Stock Options" column represents stock
options for 400 shares, or 24.2% of the 1,656 total options awarded in
1997. The term of the options is for a period of 5 years, expiring on
December 9, 2002. The options granted during 1997 will become exercisable
on June 09, 1998.
1996 - The amount shown under the "Stock Options" column represents stock
options for 640 shares, or 20.0% of the 3,200 total options awarded in
1996. The term of the options is for a period of five years, expiring on
October 31, 2001. As of 12/31/97 none of the options had been exercised,
but all options granted during 1996 became exercisable on 04/30/97.
Number of
Securities
Underlying Value of
Options Options
at FY-End at FY-End
Name and Shares Value Exercisable/ Exercisable/
Principal Position Year Acquired Realized Unexercisable Unexercisable
L. Thomas Bulla 1997 400 $0 0 / 400 $0 / $3,236
President & CEO of the 1996 640 $0 640 / 0 $5,690 / $0
Company and the Bank 1995 0 $0 0 / 0 $0 / $0
(2) The amount shown under the "All Other Compensation" column above for 1997
is the total of the following: (I) directors fees of $7,000, (ii) the
amount of premiums paid by the Bank for term life insurance for Mr.
Bulla's benefit of $1,266, (iii) 401-K Plan contribution of $6,390, (iv)
Profit Sharing Supplemental Retirement Plan contribution of $5,228 (v)
personal use of company-owned vehicle of $2,883.
- --------------------------------------------------------------------------------
The Company has an employment agreement with its chief executive officer. This
agreement contains change in control provisions that would entitle the officer
to receive, under certain circumstances, twice his annual salary in the event
there is a change in control in the Company (as defined therein) resulting in
termination of his employment or voluntary resignation. The maximum contingent
liability under this agreement approximated $300,000 at December 31, 1997.
The Directors of the Company do not receive any fees or compensation for
services as directors thereof. All of the directors of the Company, however, are
also directors of the Bank; and, as such, receive $200.00 for each Board, and
$50.00 for each Board Committee meeting attended, plus $200.00 per month. No
Board Committee fees are paid to directors who are also salaried officers of the
Bank.
The Company's bonus plan is discretionary and is based upon several factors,
including the overall financial performance of the Company and individual
performance factors, among others. The bonus plan is directed by the
Compensation Committee of the Board of Directors and currently covers those
classified a Executive Officers of the
50
Company and its subsidiary bank.
At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to
approve an incentive stock option plan. The purpose of the plan is to provide a
method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth, and protection of the business, and who
are making substantial contributions to the success and profitability of the
business, may be encouraged to acquire a stock ownership in the Company, thus
creating a proprietary interest in the business and providing them with greater
incentive to continue in the service of and to promote the interest of the
Company and its stockholders. Accordingly, the Company will from time to time
during the effective period of the plan, grant to the employees selected in the
manner provided in the plan, options to purchase shares of the common stock of
the Company subject to certain conditions specified in the plan. The maximum
number of shares eligible under this plan is 5.0% of the current outstanding
common shares, or 9,625 shares of the Company's common stock. The total amount
of shares granted under this plan during 1996 was 3,200 shares, or 1.66% of the
current outstanding common shares, with 200 shares reverting back to the plan
due to an officer's termination during 1997. Thus, there are 3,000 shares
outstanding as part of the 1996 option grant. No single person received more
than 640 shares, or 0.33% of the current outstanding shares. The total amount of
shares granted under this plan during 1997 was1,656 shares, or 0.86% of the
current outstanding common shares. During 1997 no single person received more
than 400 shares, or 0.21% of the current outstanding shares.
For more information regarding the stock option plan, please refer to Note 11 of
the Consolidated Financial Statements included in Item 8 of this filing.
Information related to the Company's 401(k) and profit-sharing plans is
summarized in Note 10 of the Consolidated Financial Statements included in Item
8 of this filing.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no shareholders, known to the Company, who beneficially own more than
5.0% of the Company's common stock, the only class of stock outstanding, as of
December 31, 1997.
The following table sets forth information as of December 31, 1997, regarding
the amount and nature of the beneficial ownership of common stock of the Company
held by each of the directors of the Company and by all of the directors and
executive officers of the Company and the Bank as a group. As noted previously
under Item 10, Mr. David A.
Carson became a director of the Company and the Bank effective January 1, 1998.
- -------------------------------------------------------------------------------
Shares Owned Percent of
Name Beneficially Class
- --------------------------------------------------------------------------------
Elwood Bare .................. 1,150 (1) 0.59%
L. Thomas Bulla .............. 6,420 (2) 3.33%
David A. Carson .............. 100 (3) 0.05%
John R. Dawkins .............. 4,665 (4) 2.42%
Richard E. Ford .............. 3,527 (5) 1.83%
Walter Bennett Fuller ........ 2,000 (6) 1.04%
William D. Goodwin ........... 1,570 (7) 0.81%
Lucie T. Refsland, Ed.D ...... 303 (8) 0.16%
William R. Satterfield, Jr ... 1,475 (9) 0.77%
Richard L. Skaggs ............ 525 (10) 0.27%
Ronald B. Snyder ............. 3,747 (11) 1.95%
All Directors and Executive
Officers of the Company &
Bank as a Group (17 persons) 28,455 14.78%
- -------------------------------------------------------------------------------
FOOTNOTES
(1) Mr. Bare has sole voting and investment authority for 975 shares and
shared voting and investment authority for 175 shares.
(2) Mr. Bulla has sole voting and investment authority for 3,870 shares and
shared voting and investment authority for 2,550 shares.
(3) Mr. Carson has sole voting and investment authority for 100 shares.
(4) Mr. has sole voting and investment authority for 4,665 shares.
(5) Mr. Ford has sole voting and investment authority for 1,612 shares and
shared voting and investment authority for 1,915 shares.
(6) Mr. Fuller has sole voting and investment authority for 1,900 shares
and shared voting and investment authority for 100 shares.
(7) Mr. Goodwin has sole voting and investment authority for 920 shares
and shared voting and investment authority for 650 shares.
(8) Ms. Refsland has sole voting and investment authority for 303 shares.
(9) Mr. Satterfield has sole voting and investment authority for 1,075
shares and shared voting and investment authority for 400 shares.
(10)Mr. Skaggs has sole voting and investment authority for 200 shares and
shared voting and investment authority for 325 shares.
(11)Mr. Snyder has sole voting and investment authority for 325 shares and
shared voting and investment authority for 3,422 shares.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of business the Company's subsidiary, the Bank, as in the
past, has had banking transactions with the directors and executive officers of
the Company and the Bank, members of their immediate families, corporations and
other entities in which such directors and officers were executive officers or
had, directly or indirectly, beneficial ownership of 10% or more in any class of
equity securities, and trusts in which they have a substantial beneficial
interest or for which they serve as a fiduciary. Management of the Company is of
the opinion that any outstanding extensions of credit to such persons were made
in the ordinary course of the business of the Bank on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
in comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. See Note 4
of the Consolidated Financial Statements included in Item 8 of this filing for
additional information related to loans granted to related parties.
The Bank previously leased its branch banking facility on Route 219 North in
Lewisburg, West Virginia, from Company Directors Goodwin and Satterfield. The
lease term began April 1, 1986, and ran for a period of 10 years, expiring in
March of 1996. The annual rental during the initial 10 year term was $90,446. In
January of 1996, Bank Management and the Board of Directors attempted to
renegotiate the lease to reduce the annual cost to the Bank. Negotiations did
not result in a mutually satisfactory agreement, and the Board of Directors
voted not to renew the existing lease, but to commence with the purchase of land
and the construction of a new branch location. The lease was continued on a
month-to-month basis through January, 1997, when construction of the new
Bank-owned branch location was completed. During 1997, the Bank paid the lessors
total rent in the amount of $7,537.
On occasion, certain Directors of the Company who are professionals in the
fields of law and insurance have provided, and are expected to continue to
provide, incidental legal and insurance services on behalf of the Company and/or
its subsidiary bank. These services do not individually, or in the aggregate,
exceed 10% of equity.
52
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page(s) in
Form 10-K
( a ) (1)Financial Statements
The following consolidated financial statements and accountant's
report appear on pages 23 through 45 of this Form 10-K
Report of independent auditors.................................................................................23
Consolidated balance sheets at December 31, 1997 and 1996......................................................24
Consolidated statements of income for the years ended
December 31, 1997, 1996, and 1995...........................................................................25
Consolidated statements of shareholders' equity
for the years ended December 31, 1997, 1996, and 1995.......................................................26
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996, and 1995...........................................................................27
Notes to the consolidated financial statements............................................................28 - 45
( a ) (2)Financial Statement Schedules
All other schedules for which provision is made in the applicable
regulations of the Commission have been omitted as the schedules are
not required under the related instructions, or are not applicable,
or the information required thereby is set forth in the financial
statements or the notes thereto
( a ) (3)Exhibits required to be filed by Item 601 of Regulation
S-K and 14( c ) of Form 10-K
See index to exhibits.......................................................................................56
( b ) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant during the
quarter ended December 31, 1997.
( c ) Exhibits
See Item 14(a)(3), above
( d ) Financial Statement Schedules
See Item 14(a)(2), above
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST NATIONAL BANKSHARES CORPORATION
(Registrant)
By: /s/ L. Thomas Bulla 03/24/98
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L. Thomas Bulla
President, Chief Executive Officer & Director
(Principal Executive Officer)
/s/ Charles A. Henthorn 03/24/98
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Charlest A. Henthron
Executive Vice President and Secretary to the
Board of Directors
/s/ Jack D. Whitt 03/24/98
-------------------------------------------------
Jack D. Whitt,
Chief Financial Officer, First National Bank
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ William D. Goodwin 03/24/98
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S. Elwood Bare, Director William D. Goodwin, Director
/s/ Lucie T. Refsland 03/24/98
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David A. Carson, Director Lucie T. Refsland, Director
/s/ William R. Satterfield Jr. 03/24/98
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John R. Dawkins, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/24/98 /s/ Richard L. Skaggs 03/24/98
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Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/24/98 /s/ Ronald B. Snyder 03/24/98
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Bennett Fuller, Director Ronald B. Snyder, Director
Date: 03/24/98
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54
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The Company has not yet sent an annual report and proxy materials to its
stockholders. Such report and material shall be sent to its stockholders
subsequent to the filing of this Form 10-K, and copies thereof shall be
furnished to the Commission upon request.
55
INDEX TO EXHIBITS
PAGE NUMBER(S)
IN FORM 10-K, OR
EXHIBIT PRIOR FILING
NUMBER DESCRIPTION REFERENCE
(3)I Articles of Incorporation of Registrant........................................... ( a )
(3)ii By-laws of Registrant............................................................. ( a )
(10) Material Contracts
A Agreement dated October 14, 1993, between L. Thomas Bulla
and First National Bank................................................. ( a )
B Summary of Lease terms for Charleston branch facility........................ ( b )
C Form S-8 Registration Statement under the Securities Act of 1933............. ( c )
D Specimen Copy of Incentive Stock Option Plan Agreement....................... ( d )
(11) Calculation of Basic and Diluted Computation of Earnings per Share................ 57
(21) Subsidiary of Registrant.......................................................... 58
(23) Consents of experts and counsel
Consent of Independent Auditors.............................................. 59
(27) Financial Data Schedule.......................................................... 60 - 61
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( a ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-K Annual Report dated December 31, 1994, and filed
with the Securities and Exchange Commission on or about March 28, 1995.
( b ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-Q Quarterly Report dated March 31, 1996, filed with
the Securities and Exchange Commission on or about May 3, 1996.
( c ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form S-8 dated July 31, 1996, filed with the Securities
and Exchange Commission on or about July 31, 1996.
( d ) Incorporated by reference to exhibits to First National Bankshares
Corporation's Form 10-K Annual Report dated December 31, 1996, and filed
with the Securities and Exchange Commission on or about March 29, 1997.
56
EXHIBIT (11)
BASIC AND DILUTED COMPUTATION OF EARNINGS PER SHARE
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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.
57
EXHIBIT (21)
SUBSIDIARY OF THE REGISTRANT
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The following is the subsidiary of the registrant. Such subsidiary is
incorporated in the State of West Virginia.
FIRST NATIONAL BANK, a national banking association organized under the laws of
the United States of America.
58
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
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(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our
report dated January 30, 1998, on our audit of the consolidated financial
statements of First National Bankshares Corporation as of December 31, 1997 and
1996, and for the three years in the period ended December 31, 1997, appearing
in Part II, Item 8 of the 1997 Form 10-K of First National Bankshares
Corporation.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 30, 1998
59
EXHIBIT (27)
FINANCIAL DATA SCHEDULE
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DATE: 12/31/97