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, 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 46% of loans outstanding at December 31, 1998, 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 1998's YTD unemployment rate being 7.5% versus a West Virginia state-wide average of 6.6%. (All unemployment data has been taken from the West Virginia State Bureau of Employment Programs world-wide-web page.)
The Charleston branch is located in Kanawha County, West Virginia. This area is home of the state capital and is the largest metropolitan area in West Virginia. Primary employment is related to various professional service industries, health care, state government, and the chemical industry. The Charleston area typically has unemployment rates far below the state average, with Kanawha County's 1998 YTD unemployment rate being only 4.5%. 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, 1998, management estimates that the Bank had deposits representing an estimated 19% of total deposits and loans representing an estimated 16% of total loans of all commercial banks servicing its market area. In addition, the Bank also competes for loans, deposits and trust accounts with other regional banks, credit unions, savings and loan associations, consumer finance companies, insurance companies and direct lending agencies affiliated with Federal and state governments.
The Charleston area is serviced by the state's four largest banking organizations, as well as several small independent banks. Currently, the Company's market share is estimated to be less than 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, such as assets, and transactions that are recorded as off-balance sheet items, such as letters of credit and recourse arrangements. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio.
Failure to meet applicable capital guidelines could subject the Company to a variety of enforcement remedies available
to the federal regulatory authorities, including limitations on the ability to pay dividends or the issuance of a directive to increase capital, and termination of deposit insurance by the FDIC. Regulatory capital ratios of the Bank are set forth in Note 14 to the Consolidated Financial Statements which are included in Item 8 of this filing.
Federal Deposit Insurance Corporation Improvement Act of 1991 - In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Corporation Act and made revisions to several other banking statutes.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution's capital category. Among other things, FDICIA authorizes regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well-capitalized, adequately-capitalized, 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, 1998.
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, 1998, the Bank employed 38 full-time and 2 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.
ITEM 2
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 fully used in the Bank's operations. Management does not anticipate that this action will have any significant impact on its financial results, 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
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
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 1998.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- As of February 28, 1999, the Company's common stock was held by approximately 487 stockholders of record.
There is no active or organized trading market for the common stock of the Company. The stock of the Company is traded on a limited basis in privately negotiated transactions. At present, there is no market maker for the Company's common stock. Accordingly, bid and ask prices are not available for the stock of the Company and the prices shown below may not be indicative of prices which would prevail if the stock were more actively traded.
While management occasionally knows of the actual price paid for its common stock in a transaction, management is not aware of prices paid in most, and sometimes all, sales of the Company stock since such transactions are privately negotiated. However, in some of these transactions, individuals have called the Company and asked for a value for its common stock. In response to such inquiries, the Company provides the individual with the book value of its common stock as of the end of the most recent quarter, as well as the most recent price per share paid in transactions reported to management. Stock trades during 1998 that were reported to management took place at $56.00 to $75.00 per share, with the most recent reported transactions having a per share price of $75.00. Since trades reported to management are infrequent, and private trades may be conducted which are not reported to management, no representations can be made regarding the fair value. Accordingly, the following high and low prices are the book values of a share of the Company's common stock at the beginning and end of each of the quarters as shown below.
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Book Value Book Value 1998 1997 -------------------------- --------------------- High Low High Low First Quarter $ 49.29 $ 49.04 $ 44.44 $ 46.19 Second Quarter 49.41 48.54 46.95 46.69 Third Quarter 49.63 49.03 47.80 47.29 Fourth Quarter 50.53 50.11 48.44 48.07
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A summary of dividends per share declared during 1998 and 1997 follows:
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1998 1997 -------- ------- First Quarter $ 0.40 $ 0.40 Second Quarter 0.40 0.40 Third Quarter 0.40 0.40 Fourth Quarter 0.44 0.40
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The Company plans to continue the pattern of declaring quarterly dividends in the future at a rate consistent with its historical payout ratios.
Payment of dividends by the Company is dependent upon payments to it from the subsidiary bank. The ability of the subsidiary bank to pay dividends is subject to certain limitations under banking regulations. These limitations are discussed in Note 14 of the Notes to Consolidated Financial Statements, which are included in Item 8 of this filing.
ITEM 6.
ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
1998 1997 1996 1995 1994 ------ ------ ------- ------- --------- SUMMARY OF OPERATIONS Interest income $ 7,564 $ 7,041 $ 6,166 $ 5,688 $ 5,599 Interest expense 3,372 3,077 2,393 2,115 2,089 Net interest income 4,192 3,964 3,773 3,573 3,510 Provision for loan losses 449 31 -- -- 123 Non-interest income 445 422 433 415 419 Non-interest expense 3,167 3,087 3,140 2,920 3,100 Income before income taxes 1,021 1,268 1,066 1,068 706 Income before cumulative effect of change in accounting principle 724 792 736 767 542 Net income 724 792 736 767 542
PER SHARE DATA Income before cumulative effect of change in accounting principle $ 3.76 $ 4.11 $ 3.82 $ 3.98 $ 2.82 Net income: Basic 3.76 4.11 3.82 3.98 2.82 Diluted 3.74 4.11 3.82 3.98 2.82 Cash dividends declared 1.64 1.60 1.39 1.20 1.00 Book value per share 50.53 48.44 45.93 43.72 37.98
AVERAGE BALANCE SHEET SUMMARY Loans, net of unearned discount and reserve $ 68,696 $ 63,620 $ 48,037 $ 41,853 $ 40,954 Securities 17,375 18,646 23,341 27,321 31,722 Deposits 78,949 75,149 69,838 66,367 72,082 Long-Term Debt 5,494 3,862 -- -- -- Shareholders' equity 9,543 9,239 8,672 8,223 7,779 Total assets 96,442 90,824 79,985 75,351 80,274
AT YEAR END Loans, net of unearned discount and reserve $ 68,671 $ 69,108 $ 52,800 $ 45,773 $ 38,766 Securities 17,866 17,311 22,617 24,015 30,802 Deposits 81,221 78,336 73,316 66,166 69,685 Long-Term Debt 5,488 5,500 -- -- -- Shareholders' equity 9,747 9,325 8,841 8,415 7,311 Total assets 98,353 95,430 83,668 75,455 77,738
SELECTED RATIOS Return on average assets 0.75% 0.87% 0.92% 1.02% 0.68% Return on average equity 7.59 8.57 8.49 9.33 6.97 Average equity to average assets 9.90 10.17 10.84 10.91 9.69 Dividend payout ratio 43.64 38.92 36.35 30.12 35.52
ITEM 7.
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
Item 8 of this filing.
Allowance for Loan Losses and Risk Elements The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company's management, on a quarterly basis, performs a comprehensive loan evaluation which encompasses the identification of all potential problem credits, which are included on an internally generated watch list. The identification of loans for inclusion on the watch list is facilitated through the use of various sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part of regulatory agency loan reviews and reviews of new loans representative of current lending practices within the Bank. Once this list is reviewed to ensure it is complete, detail reviews of specific loans for collectibility, performance and collateral protection are performed. A grade is assigned to the individual loans reviewed utilizing internal grading criteria, which is somewhat similar to the criteria utilized by the Bank's primary regulatory agency. Based on the results of these reviews, specific reserves for potential losses are identified. In addition, management considers historical loan loss experience, new loan volume, portfolio composition, levels of 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, 1998 and 1997, the allowance for loans losses of $766,000 and $636,000 represented 1.1% and 0.9% 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, 1998 and 1997, respectively, the unallocated portion of the allowance approximated $95,000 and $132,000 or12.4% and 20.8% of the total allowance. The unallocated amount at December 31, 1998 and 1997 has been considered necessary primarily considering that historical loss factors used in the Bank's methodology to calculate the allocated portion of the allowance do not yet reflect the additional risk factors which may be inherent in the portfolio due to loan growth over the past two years.
The year end 1998 allowance is $130,000 more than 1997's year end balance. As more fully discussed in the following paragraphs, this is due primarily to an increase in the specific allocation of loss assigned to a commercial note and the charge-off of a construction note in May 1998. 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.
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TABLE IV ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands)
1998 1997 1996 ---------------------------------------------------- Percent Percent Percent of Total of Total of Total Amount Loans Amount Loans Amount Loans
Commercial, financial, and agricultural $ 380 38.3% $310 42.1% $ 136 36.6% Real estate - construction 1 1.4 - 5.4 - 4.5 Real estate - mortgage 111 45.6 93 41.5 102 45.0 Installment 178 12.2 101 9.1 103 11.5 Other 1 2.5 - 1.9 - 2.4 Unallocated 95 - 132 - 313 - --------- ------- -------- -------- ------ ------
$ 766 100.0% $636 100.0% $ 654 100.0% ========= ======= ======== ======== ====== ======
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The Bank was in a net loss position (more money was charged-off than was recovered from previously charged-off loans) during 1998. Loan charge-offs, net of recoveries, for 1998 were $319,000 compared to $49,000 and ($11,000) in 1997 and 1996, respectively. Expressed as a percentage of average loans outstanding during 1997, 1996 and 1995, net loan charge-offs were 0.46%, 0.08% and (0.02)%, respectively. The increase in the net charge-offs is directly related to the Company's foreclosure on a construction note in May 1998. The construction note was placed on nonaccrual status in the first quarter of 1998. The loan customer has since filed for bankruptcy, and in the best interest of the Bank, the property was seized at foreclosure in an effort to minimize losses. The property was subsequently offered at public auction, purchased by the Company for $875,000 and placed in Other Real Estate Owned in May 1998. The difference between the note balance and the purchase price ($273,000) was charged to the allowance for credit losses.
As a result of the aforementioned foreclosure and related charge to the allowance for loan losses and subsequent evaluation of the sufficiency of the allowance, a provision for loan losses of $449,000 during the year ended 1998 was necessary to restore the unallocated allowance to a level considered appropriate by management. 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 1998, 1997 and 1996.
The following presents a summary of the Company's non-performing assets and accruing loans past due 90 days or more at December 31, 1998, 1997 and 1996.
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(in thousands) December 31, 1998 1997 1996 --------- ---------- -------- Non-performing assets: Nonaccrual loans $ 318 $ 1,733 $ 161 Other real estate owned 875 22 22 Restructured loans - - - --------- --------- -------
$ 1,193 $ 1,755 $ 183 ========= ========== =========
Accruing loans past due 90 days or more $ - $ - $ - ========= ========== =========
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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 $34,000, $112,000 and $15,000 in 1998, 1997 and 1996, respectively. Interest income recognized on nonaccrual loans and included in Company interest income is not material. As discussed above, a construction note, which was included in nonaccrual accrual loans at December 31, 1997 was foreclosed upon in 1998. The property remains in Other Real Estate Owned at December 31, 1998. As more fully discussed in Note 17 of the Notes to the Consolidated Financial Statements, subsequent to year end the property was leased.
Deposits Total deposits increased by 3.68% to $81,221,000 at December 31, 1998, from $78,336,000 at December 31, 1997. Average deposits increased $3,800,000 or 5.05% from 1997 to total $78,949,000 at December 31, 1998. As previously discussed, savings deposits, on average, grew 4.61% or $1,158,000 from 1997. The majority of the growth was in a savings product that pays interest at a tiered rate based upon the average outstanding balance in the account. Deposit customers are attracted to this product due to the competitive interest rate offered on the product, along with the liquidity afforded a savings product. Both interest-bearing demand deposits and certificate of deposits balances, on average, decreased marginally from 1997. The majority of the runoff in these deposits products was shifted to the savings deposits. See Table I for a comparison of the average deposit balances for the years ended 1998, 1997 and 1996.
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 1998 as additional commercial accounts were obtained, and it is expected that these balances will continue to grow during 1999 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 benefitting 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 $8,016,000 at December 31, 1998. 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 $3,976,000 (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 $5,981,000 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.
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TABLE VI INTEREST RATE SENSITIVITY GAPS December 31, 1998 (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 $23,967 $4,765 $8,754 $31,951 $69,437 Securities (at amortized cost) 2,221 255 1,500 13,259 17,235 Federal funds sold 5,679 - - - 5,679 --------- ------- -------- ------- ------- Total interest earning assets 31,867 5,020 10,254 45,210 92,351 --------- ------- -------- ------- -------
INTEREST BEARING LIABILITIES Demand deposits $11,898 $ - $ - $ - $11,898 Savings deposits 22,958 413 2,167 2,227 27,765 Time deposits 10,125 5,818 6,398 7,094 29,435 Repurchase Agreements 951 - - - 951 Long-term FHLB borrowings 6 6 6 5,470 5,488 --------- ------- ------- -------- ------- Total interest bearing liabilities 45,938 6,237 8,571 14,791 75,537 --------- ------- ------- -------- -------
Contractual interest sensitivity gap (14,071) (1,217) 1,683 30,418 16,813
Adjustment (2) 19,899 (19,899) - - - --------- -------- -------- -------- ------
Adjusted interest sensitivity gap $ 5,828 $(21,116) $1,683 $30,418 $16,813 ======== ======== ======== ======= ======
Cumulative adjusted interest sensitivity gap $ 5,828 $(15,288) $(13,605) $16,813 ========= ======== ========= =======
Cumulative adjusted gap as a percent of total earning assets 6.31% (16.55%) (14.73%) 18.21%
Cumulative adjusted rate-sensitivity ratio 1.22 0.71 0.78 1.22
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.
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The preceding table reflects the Bank's cumulative one year net interest sensitivity position, or gap, as 0.78. 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 1999 could have a significant negative impact on the Bank's net interest income in 1999. However, interest rates on approximately 35.2% 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, 1998, 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 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, 1998 was $9,747,000 compared to $9,325,000 at December 31, 1997, representing an increase of 4.53%. A reconciliation of the increase is reported in the Consolidated Statement of Shareholders' Equity found in Item 8 of this filing. Average total shareholders' equity expressed as a percentage of average total assets decreased from 10.17% to 9.90% at December 31, 1998. The decrease is explained by the increase in average assets from 1997 coupled with lower earnings in 1998.
The Company's subsidiary bank is subject to minimum regulatory risk-based capital guidelines, as more fully described in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Such guidelines provide for relative weighting of both on and off-balance sheet items (such as loan commitments and standby letters of credit) based on their perceived degree of risk. At December 31, 1998, the Company continues to exceed each of the regulatory risk-based capital requirements as shown in the following table.
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RISK-BASED CAPITAL RATIOS Minimum Actual Requirement
Total risk-based capital ratio 15.77% 8.00% Tier 1 risk-based capital ratio 14.62% 4.00% Leverage ratio 9.94% 3.00%
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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 relies heavily on computer systems to accurately process date-sensitive data. As such, there is a general concern that computer systems that operate with two digit date fields rather than four digit date fields will recognize the year 2000 as the year 1900, resulting in system failures and erroneous data. This concern is widely known as the Year 2000 Issue (or "Y2K"). The concern is not limited to information or traditional computer systems only. The potential risk also extends to non-information systems such as software applications, telephones, heating and cooling systems, security systems or any other machine or application that employs computer technology or embedded chips. The Year 2000 issue has been given a high priority by Management. In preparation for the Year 2000, Management formed a Year 2000 Committee. The Committee has been in existence since early 1998 and has been charged to perform the following tasks as adopted in a formal Year 2000 Plan: (1) To make aware to all employees, customers, and vendors the issues concerning Year 2000 and the potential consequences of not being Year 2000 compliant; (2) To assess the Company's readiness for Year 2000 by identifying all critical information systems, as well as non-information systems, that potentially could be impacted by the Year 2000; (3) To renovate/remediate systems that are not Year 2000 compliant; (4) To test or validate that all critical information and non-information systems are Year 2000 compliant; and (5) Based upon the results of the testing/validation, to implement final plans or programs that will ensure accurate and timely processing of transactions in the new millennium.
To date, the Company is 100% complete towards the awareness and assessment tasks described above. The Company is approximately 90% complete with regards to renovation and remediation. Various computer equipment must be replaced in order for all hardware to be Y2K compliant. See below for an estimate of the costs to be incurred with its renovation.
To date the Company is approximately 80% complete with regards to its testing. The Company has outsourced the majority of its data processing function with the third largest third party data processor. The third party data processor provides information technology systems responsible for the processing of all loans and deposits, along with the general ledger function. The Company's in-house technology systems are primarily responsible for capturing and uploading the data to the third party processor. In November 1998, the Company and the third party data processor partnered in testing all loan, deposit, and general ledger applications/functions for Year 2000 compliancy. The results of the testing were favorable with only minor problems encountered. To date, all hardware of the Company has been tested for Year 2000 compliancy. In addition to the third party data processor's software, the Company employs various other software packages in its daily operations. Such software is expected to be tested for Year 2000 compliancy by the end of the first quarter of 1999. Also, testing of the four automated teller machines is expected to be completed in this same time frame. For the majority of the critical non-information systems, such as utilities, etc., the Company has no means of insuring or verifying that these systems will be ready for Year 2000, and the impact of a failure is these systems is not determinable.
In addition to its own systems, the Company has taken steps to assess the readiness for Y2K with its major vendors, suppliers, and customers. Interruptions of business operations of its commercial customers could potentially impact the Company's ability to collect on loans and impair asset quality. During 1998, management, along with account officers, identified high-risk industries and loan customers. Representations regarding Y2K readiness have been requested from the high-risk commercial accounts. Those customers and industries judged to be high risk will be closely monitored and estimated loan losses resulting from potential Y2K exposure will be incorporated in the evaluation of the loan loss reserve.
In an effort to mitigate interruptions from Y2K failures, the Company has developed a contingency plan to handle day to day activities should systems fail. Although the circumstances that may be encountered cannot be reasonably predicted, the Company has encountered natural disasters within the past two years in which management believes could parallel the worst case scenario in a Y2K failure. In both natural disaster instances, the Company utilized a contingency plan and was able to process transactions without significant difficulties. A similar contingency plan will be utilized in the event of a Y2K failure.
For the year ended 1998, the Company has incurred approximately $30,000 of noncapital expense in testing Y2K compliance with its third party data processor. In addition, the Company has incurred other related expenses totaling $15,000. During 1998, the Company upgraded a majority of its computer hardware by entering into a lease agreement with a supplier. The lease, which is accounted for as an operating lease, is for two years with a monthly payment of approximately $800. As mentioned above, the automated teller machines will be tested in the first quarter of 1999. The total cost of the testing is not expected to exceed $4,000. In order to complete renovation of its computer systems, approximately $15,000 of computer equipment will purchased in 1999. The Company does not separately track internal costs for the Y2K project, principally payroll costs, however, it is believed to be immaterial to date. No other material outlays are expected to be incurred in preparation for Year 2000.
Given the inherent uncertainty of the scope of the Year 2000 compliance issues worldwide and the various levels of severity and catastrophe that have been predicted by numerous "experts" and commentators, there can be no absolute assurance that management will be able to identify all Year 2000 compliance risks faced by the Company, or that contingency plans will assure uninterrupted business operations across the millennium.
Impact of Inflation and Effects of Changing Prices The results of operations and financial position of the Company have been presented based on historical cost, unadjusted for the effects of inflation, except for the recording of unrealized gains and losses on securities available for sale. Inflation could significantly impact the value of the Company's interest rate sensitive assets and liabilities and the cost of non-interest expenses, such as salaries, benefits and other operating expenses.
As a financial intermediary, the Company holds a high percentage of interest rate sensitive assets and liabilities. Consequently, the estimated fair value of a significant portion of the Company's assets and liabilities re-price more frequently than those of non-banking entities. It is the Company's policy to have a majority of its loan portfolio re-price within five years by using variable and balloon payment credit terms in order to reduce the impact of significant changes in interest rates on its longer-term assets. Further, the Company's policies attempt to structure its mix of financial
instruments and manage its interest rate sensitivity gap in order to minimize the potential adverse effects of inflation or 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, 1998 is disclosed in Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this filing. Indirectly, management of the money supply by the Federal Reserve to control the rate of inflation has an impact on the earnings of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's report and consolidated financial statements of the Company and its subsidiary appear herein. The Company is not subject to the requirements for disclosure of supplemental quarterly financial data.
(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, 1998 and 1997, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia January 22, 1999
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
ASSETS 1998 1997 ----------- ----------
Cash and due from banks $ 2,336,519 $ 2,742,219 Federal funds sold 5,679,000 3,159,000 Securities held to maturity (estimated fair value 1998 $8,804,710; 1997 $12,404,834) 8,739,119 12,321,508 Securities available for sale 9,126,633 4,989,413 Loans, less allowance for loan losses of $765,542 and $635,555, respectively 68,671,231 69,108,134 Bank premises and equipment, net 1,848,072 2,072,919 Accrued interest receivable 602,291 660,107 Other real estate acquired in settlement of loans 875,000 22,000 Other assets 475,324 354,296 ------------- -----------
Total assets $ 98,353,189 $ 95,429,596
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities Deposits Non interest bearing $ 12,123,521 $ 10,034,508 Interest bearing 69,097,806 68,301,240 ------------ ----------- Total deposits 81,221,327 78,335,748
Securities sold under agreements to repurchase 950,734 1,330,396 Other liabilities 946,572 938,653 Long-term borrowings 5,487,598 5,500,000 ------------ ----------- Total liabilities 88,606,231 86,104,797 ------------ -----------
Commitments and Contingencies
Shareholders' Equity Common stock, $5.00 par value, authorized 500,000 shares, issued 192,903 and 192,500 shares, respectively 964,515 962,500 Capital surplus 1,019,053 1,000,000 Retained earnings 7,769,966 7,361,859 Accumulated other comprehensive income (6,576) 440 ---------- ---------- Total shareholders' equity 9,746,958 9,324,799 ---------- ----------
Total liabilities and shareholders' equity $ 98,353,189 $ 95,429,596 ============ ===========
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------- --------------- --------------- Interest income: Interest and fees on loans $ 6,328,051 $ 5,811,096 $ 4,666,820 Interest and dividends on securities: Taxable: 819,543 841,331 1,072,369 Tax-exempt: 175,715 199,095 211,876 Interest on Federal funds sold 240,544 189,937 214,946 ---------- ------------- ------------- Total interest income 7,563,853 7,041,459 6,166,011 --------- ------------- -------------
Interest expense: Deposits 2,949,576 2,761,332 2,379,774 Securities sold under agreement to repurchase 59,283 56,095 13,356 Long-term borrowings 362,940 259,697 - ----------- ------------- ------------ Total interest expense 3,371,799 3,077,124 2,393,130 ----------- ------------- ------------
Net interest income 4,192,054 3,964,335 3,772,881 Provision for loan losses 448,940 31,000 - ----------- ------------ ----------- Net interest income after provision for loan losses 3,743,114 3,933,335 3,772,881 ----------- ----------- -----------
Other income (expense): Trust department income 86,168 64,835 65,757 Service fees 248,286 276,529 251,251 Securities gains (losses), net - - 972 Other 110,626 80,321 115,135 ----------- ---------- ---------- Total other income 445,080 421,685 433,115 ----------- ---------- ----------
Other expenses: Salaries and employee benefits 1,541,833 1,639,359 1,628,041 Net occupancy expense 283,345 279,780 292,250 Equipment rentals, depreciation and maintenance 293,666 252,391 216,373 Federal deposit insurance premiums 9,227 6,890 3,265 Data processing 195,237 132,681 159,983 Advertising 64,446 76,692 76,991 Professional and legal 161,010 103,032 111,382 Mailing and postage 75,979 76,244 80,642 Directors fees and shareholders expenses 100,386 102,417 91,449 Stationery and supplies 70,479 94,533 97,002 Other 371,318 322,519 382,365 ----------- ------------ ------------ Total other expenses 3,166,926 3,086,538 3,139,743 ----------- ------------ ------------
Income before income tax expense 1,021,268 1,268,482 1,066,253
Income tax expense 297,124 476,660 330,226 ----------- ------------ ------------
Net income $ 724,144 $ 791,822 $ 736,027 ============= ============ ===========
Basic earnings per common share $ 3.76 $ 4.11 $ 3.82 ============= ============= =========== Diluted earnings per common share $ 3.74 $ 4.11 $ 3.82 ============ ============= ===========
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- --------- ----------
Net income $ 724,144 $ 791,822 $ 736,027 ------------- --------- ----------
Other comprehensive income, net of tax: Unrealized gains on investment securities net of income taxes: Gain (loss) arising during the period (7,016) 365 (43,244) Reclassification adjustments (adjustments for years ended December 31, 1997 and 1996 are not presented) - - -
Other comprehensive income (7,016) 365 (43,244) -------------- ------------ -----------
Comprehensive income $ 717,128 $ 792,187 $ 692,783 ============== ============= ===========
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Accumulated Total Other Share- Common Capital Retained Comprehensive holders' Stock Surplus Earnings Income Equity
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
Net income - - 724,144 - 724,144 Cash dividends declared on common stock ($1.64 per share) - - (316,037) - (316,037) Issued 403 shares of common stock pursuant to exercise of stock option 2,015 19,053 - - 21,068 Change in net unrealized gain (loss)on securities - - - (7,016) (7,016) -----------------------------------------------
Balance, December 31, 1998 $ 964,515 $ 1,019,053 $7,769,966 $(6,576)$9,746,958 ============= =========== ========= ====== =======
See Notes To Consolidated Financial Statements
See Notes To Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION AND SUBSIDIARY
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The subsidiary bank makes continuous credit reviews of the loan portfolio and considers current economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance for loan losses. Loans are charged against the allowance for loan losses when management believes collectibility is unlikely. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in conditions.
A loan is impaired when, based on current information and events, it is probable that the subsidiary bank will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used.
Generally, after management's evaluation, loans are placed on non-accrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non-accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method.
Certain loan fees and direct loan costs are recognized as income or expense when incurred. Whereas, generally accepted accounting principles require that such fees and costs be deferred and amortized as adjustments of the related loan's yield over the contractual life of the loan. The subsidiary bank's method of recognition of loan fees and direct loan costs produces results which are not materially different from those that would be recognized had Statement Number 91 of the Financial Accounting Standards Board been adopted.
Bank premises and equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for bank premises and equipment over the estimated useful lives of the assets. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment are capitalized.
Other real estate: Other real estate consists of real estate held for resale which was acquired through foreclosure on loans secured by such real estate. At the time of acquisition, these properties are recorded at fair value with any write-down being charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Expenses incurred in connection with operating these properties are insignificant and are charged to operating expenses. Gains and losses on the sale of these properties are credited or charged to operating income in the year of the transactions.
Sales of these properties which are financed by the subsidiary bank and meet the criteria of covered transactions remain classified as other real estate until such time as principal payments have been received to warrant classification as a real estate loan.
Income taxes: The consolidated provision for income taxes includes Federal and state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized.
Basic earnings per share: Basic earnings per common share are computed based upon the weighted average shares outstanding. The weighted average number of shares outstanding was 192,713 for the year ended December 31, 1998 and 192,500 for the years ended December 31, 1997 and 1996. 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 1998 Income Shares Per (Numer- Denom- Share ator) inator) Amount Basic EPS Income available to common shareholders $ 724,144 $ 192,713 $ 3.76 ======= Effect of Dilutive Securities Stock options - 918 ------------------------------- Diluted EPS Income available to common shareholders $ 724,144 $ 193,631 $ 3.74 =========== ============= ==========
For the Year Ended 1997 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 ============= ============= =========
For the Year Ended 1996 Basic EPS Income available to common shareholders $ 736,027 192,500 $ 3.82 ========= Effect of Dilutive Securities - - ------------------------------- Diluted EPS Income available to common shareholders $ 736,027 192,500 $ 3.82 ============= ============= =========
Profit sharing and 401(k) plans: The subsidiary bank sponsored a profit-sharing plan through September 30, 1997. The subsidiary bank also sponsors a 401(k) plan which covers substantially all employees. Bank contributions to the plans are charged to expense.
Postretirement benefit plans: The subsidiary bank provides certain healthcare and life insurance benefits for all retired employees that meet certain eligibility requirements. The plans are contributory with retiree contributions and are unfunded. The subsidiary bank's share of the estimated costs that will be paid after retirement is being accrued by charges to expense over the employees' active service periods to the dates they are fully eligible for benefits.
Trust Department: Assets held in an agency or fiduciary capacity by the subsidiary bank's Trust Department are not assets of the subsidiary bank and are not included in the accompanying consolidated balance sheets. Trust Department income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than on the accrual basis does not have a material effect on net income.
Comprehensive income: During the year ended December 31, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income. The Statement requires that financial statements presented for earlier periods be reclassified. The Company has elected to omit data regarding reclassification adjustments for the years ended December 31, 1997 and 1996, as permitted by the Statement.
Reclassifications: Certain accounts in the consolidated financial statements for 1997 and 1996, as previously presented, have been reclassified to conform to current year classifications.
Emerging accounting standards: In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Bank expects to adopt the new Statement effective January 1, 2000. The Statement will require the Bank to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, change in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Since the Company has not utilized derivatives in the past, management does not anticipate that the adoption of the new Statement will have a significant effect on the Bank's earnings or financial position.
Note 2. Cash Concentrations
At December 31, 1998 and 1997, the subsidiary bank had a cash concentration totaling $5,720,337 and $3,199,595, 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, 1998 and 1997, are summarized as follows: Carrying Value (Estimated Amortized Unrealized Fair Cost Gains Losses Value) Available for sale Taxable: U.S. Government agencies and corporations $8,495,645 $ 15,886 $ 26,183 $ 8,485,348 Federal Reserve Bank stock 56,650 - - 56,650 Federal Home Loan Bank stock 573,600 - - 573,600 Other equities 9,268 - 483 8,785 --------------- ----------- --------- --------- Total taxable 9,135,163 15,886 26,666 9,124,383 -------------- ----------- --------- ----------
Tax-exempt: Federal Reserve Bank stock 2,250 - - 2,250 ---------------- ----------------------------------
Total $ 9,137,413 $ 15,886 $ 26,666 $9,126,633 ============== =========== ========= ===========
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities which are included in securities available for sale in the accompanying consolidated financial statements. Such securities are carried at cost, since they may only be sold back to the respective issuer or another member at par value.
The maturities, amortized cost and estimated fair values of securities at December 31, 1998, are summarized as follows:
At December 31, 1998 and 1997, securities with amortized costs of $5,727,682 and $4,992,845, respectively, with estimated fair values of $5,729,806 and $4,996,182, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.
================
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, 1998 and 1997, the Bank had direct extensions of credit to individuals who are employees of a railroad transportation and holding company totaling approximately $1,792,302 and $2,700,000, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
The Company's total recorded investment in impaired loans at December 31, 1998 and 1997, approximated $317,873 and $497,883, respectively, for which the related allowance for loan losses determined in accordance with generally accepted accounting principles approximated $250,000 and $215,000, respectively. The Company's average investment in such loans approximated $333,316 and $897,757 for the years ended December 31, 1998 and 1997, respectively. All impaired loans at December 31, 1998 and 1997, 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, 1998 and 1997, the Company did not recognize any interest income on impaired loans.
Note 6. Bank Premises and Equipment
The major categories of Bank premises and equipment and accumulated depreciation at December 31, 1998 and 1997, are summarized as follows:
At December 31, 1998 and 1997, 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 1998 and 1997, the Company's short-term borrowings consisted of securities sold under agreements to repurchase (repurchase agreements).
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:
Long-term borrowings: The Company's long-term borrowings of $5,487,598 and $5,500,000 at December 31, 1998 and 1997, respectively consisted of two advances from the Federal Home Loan Bank (or "FHLB"). Of these borrowings, a $500,000 advance, with a fixed interest rate of 5.86%, was obtained on December 23, 1997 to fund a commercial loan for a local business. Monthly payments of $3,542, including principal and interest, began on January 23, 1998, with a balloon payment due on December 23, 2002. At December 31, 1998, the outstanding balance totaled $487,598. A summary of the maturities of this borrowing for the next five years is as follows: $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 March 1997 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. Both 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, 1998, 1997 and 1996, are as follows:
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, 1998 and 1997, are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Employee Benefits
401(k) Plan: The subsidiary bank sponsors a 401(k) defined contribution plan covering substantially all employees. Participants are eligible to contribute up to 10% of their annual compensation to the Plan. For the years ended December 31, 1997 and 1996, the Bank matched participant contributions in an equal amount up to 3.5% of each participant's annual compensation. Beginning January 1, 1998, the Bank matches up to 5% of each participants annual compensation. In addition, the Bank is also eligible to make discretionary contributions to the Plan.
Profit-Sharing Plan: The subsidiary bank sponsored a noncontributory defined contribution profit-sharing plan covering substantially all employees through October 1, 1997. Effective October 1, 1997, the profit sharing plan was terminated. Contributions to the Plan, prior to October 1, 1997, were at the discretion of the Board of Directors.
The Bank's contributions to the above Plans for the years ended December 31, 1998, 1997 and 1996, totaled $49,435, $47,014 and $105,922, respectively.
Postretirement Benefit Plans: The subsidiary bank sponsors a postretirement medical plan and a postretirement life insurance plan for all retired employees that meet certain eligibility requirements. Both plans are contributory with retiree contributions that are adjustable based on various factors, some of which are discretionary. The plans are unfunded.
During 1998 the Company adopted the provisions of Statement of Financial Accounting Standards No. 132 which changed the presentation of the required footnote disclosures for the years ending December 31, 1998, 1997 and 1996. Details regarding the retiree medical plan and the retiree life insurance plan are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For measurement purposes, a 7% annual rate of increase in per capita healthcare costs of covered benefits was assumed for the first 3 years, 6% for the next 5 years, 5 1/2% for the next 5 years, and 5% thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Stock Option Plan
In April 1996, the shareholders approved an incentive stock option plan for key employees of the Bank as identified by the stock option committee. Grants under the plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement 123), the reported net income and earnings per share would have been reduced to the proforma amounts shown below:
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 to certain key employees and must be exercised within 5 years. Each option fully vests after six months from the grant date. There were no options granted in 1998.
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: 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, 1998 and 1997, and changes during the year ended is as follows:
At December 31, 1998, the options outstanding under the stock option plan have exercise prices ranging from $50 to $56 and a weighted average remaining contractual life of 3.23 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Lease Obligation
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 were charged to expense for each of the years ended December 31, 1998 and 1997, respectively. Total future minimum lease payments under the lease are as follows:
Year Ending December 31, Amount -------- --- ------------ 1999 $ 101,970 2000 101,970 2001 101,970 2002 101,970 Thereafter 353,230
$ 761,110
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 was charged to expense for the year ended December 31, 1996. 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.
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, 1998, the reserve balance was $480,000. The subsidiary bank does not earn interest on this balance.
Year 2000 Compliant: A team was assembled to study, test and remedy Year 2000 issues ------------------- (Issue) because the Bank, as well as some of its suppliers, customers and service providers are heavily dependent on computers in the conduct of business activities. As a result, a remediation plan was developed. The costs associated with this issue are anticipated to total $40,000, of which $33,000 was expensed or capitalized, as appropriate, during 1998. To complete the execution of the plan, additional testing is scheduled for the first half of 1999. Based on the actions taken to resolve the Bank's Year 2000 issue, management believes it will be Year 2000 compliant to meet the needs of its customers, however, there may be unforeseen external or internal issues which could impact the Bank's status.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998 and 1997, the subsidiary bank's financial instruments with off-balance sheet risk are as follows:
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 $346,000 at December 31, 1998.
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 1999, the net retained profits available for distribution to First National Bankshares Corporation as dividends without regulatory approval approximate $892,000 plus net retained profits, as defined, for the interim periods through the date of declaration.
The subsidiary bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the subsidiary bank must meet specific capital guidelines that involve quantitative measures of the subsidiary bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The subsidiary bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the subsidiary bank meets all capital adequacy requirements to which it is subject.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The most recent notification from the Office of the Comptroller of the Currency categorized the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the subsidiary bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category.
The subsidiary bank's actual capital amounts and ratios are presented in the following table (in thousands):
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.
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 counterparties. The amounts of fees currently charged on commitments are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below.
The carrying values and estimated fair values of the Company's financial instruments are summarized below:
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, 1998 and 1997, and the related statements of income and cash flows for the years ended December 31, 1998, 1997 and 1996, are presented as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Other Real Estate Acquired in Settlement of Loans
Subsequent to year end the Company entered into an agreement to lease the commercial property it held in other real estate at December 31, 1998.
The terms of the lease call for the lessee to make monthly payments for three years as follows:
Months 1 - 3 $ - Months 4 - 6 2,500 Months 7 - 36 3,500
The lessee has an option to purchase the property at any time during the lease term at a price equal to the book value of the property at December 31, 1998, $875,000, reduced by the amount of lease payments made under the lease agreement, up to a maximum of $100,000.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
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 Mr. S. Elwood Bare, during May, 1998, the number of directors fixed by the Board of Directors was reduced from 11 to 10. Additional information about the directors, including their principal occupation and age, is set forth in the following table:
NOTE: During 1998, Director S. Elwood Bare died after a long illness. Mr. Bare's term of office was to expire in 1999 and no person was appointed in the interim to fill the vacancy. No discussions as to a replacement for Mr. Bare have been held. Subsequently, Mr. Ronald B. Synder was appointed Chairman of the Board.
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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 Ford and Snyder whose terms expire in 1999, have been nominated to stand for re-election at the 1999 annual meeting of the Company's stockholders to serve a 3 year term which will expire in 2002.
Executive Officers The current executive officers of the Company and the Bank and information about these officers is set forth on the following table.
The executive officers of the Company listed above shall continue in office until the 1999 organizational meeting of the directors of the Company. It is expected that the current officers will be re-elected to the offices they now hold.
Compliance with Section 16(a) of the Exchange Act The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). Since the Company does not have any class of securities registered pursuant to Section 12 of the Exchange Act, the provisions of Section 16 thereof are not applicable to the Company's directors, officers and shareholders.
ITEM 11
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 1998, 1997 and 1996:
FOOTNOTES:
(1)1998 - No stock options were granted.
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 five years, expiring on December 9, 2002. The options granted during 1997 became exercisable on June 9, 1998 and have an exercise price of $56.00 per share.
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. The options granted during 1997 became exercisable on April 4, 1997 and have an exercise price of $50.00 per share.
(2) The amount shown under the "All Other Compensation" column above for 1998 is the total of the following: (I) directors fees of $7,550, (ii) the amount of premiums paid by the Bank for term life insurance for Mr. Bulla's benefit of $904, (iii) 401-K Plan contribution of $8,655, (iv) personal use of company-owned vehicle of $2,855.
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The Company has an employment agreement with its chief executive officer. This agreement contains change in control provisions that would entitle the officer to receive, under certain circumstances, twice his annual compensation in the event there is a change in control in the Company (as defined therein) resulting in termination of his employment or voluntary resignation. The maximum contingent liability under this agreement approximated $346,000 at December 31, 1998.
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 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 2,300 shares fully-vested and available for exercise at December 31, 998. 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, with 1,303 shares fully-vested and available for exercise at December 31, 1998. During 1997 no single person received more than 400 shares, or 0.21% of the current outstanding shares. No shares were granted under the plan in 1998.
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
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, 1998.
The following table sets forth information as of December 31, 1998, 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.
ITEM 13
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 (Directors Ford, Goodwin and Satterfield) have provided, and are expected to continue to provide, incidental legal and insurance services on behalf of the Company and/or its subsidiary bank. It is believed that the payments of these services do not individually, or in the aggregate, exceed 5% of the respective Directors' total revenue.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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 03/23/99 L. Thomas Bulla President, Chief Executive Officer & Director (Principal Executive Officer)
/s/ Charles A. Henthorn 03/23/99 Charles A. Henthorn Executive Vice President and Secretary To the Board of Directors
/s/ Matthew L. Burns, CPA 03/23/99 Matthew L. Burns, CPA 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/ David A. Carson 03/23/99 /s/ Lucie T. Refsland 03/23/99 David A. Carson, Director Lucie T. Refsland, Director
/s/ John R. Dawkins 03/23/99 /s/ William R. Satterfield Jr. 03/23/99 John R. Dawkins, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/23/99 /s/ Richard L. Skaggs 03/23/99 Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/23/99 /s/ Ronald B. Snyder 03/23/99 Bennett Fuller, Director Ronald B. Snyder, Director
/s/ William D. Goodwin 03/23/99 William D. Goodwin, Director
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.
INDEX TO EXHIBITS
( 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.
EXHIBIT (11) BASIC AND DILUTED COMPUTATION OF EARNINGS PER SHARE - --------------------------------------------------------------------------------
Earnings Per Share Basic Earnings per Share is calculated based upon the Company's net income after income taxes, divided by the weighted average number of shares outstanding during the fiscal period.
Diluted Earnings Per Share is calculated based upon the Company's net income after income taxes, divided by the weighted average number of shares outstanding during the period plus the conversion, exercise or issuance of all potential common stock instruments unless the effect is to increase the income per common share from continuing operations.
EXHIBIT (21) SUBSIDIARY OF THE REGISTRANT - --------------------------------------------------------------------------------
The following is the subsidiary of the registrant. Such subsidiary is incorporated in the State of West Virginia.
FIRST NATIONAL BANK, a national banking association organized under the laws of the United States of America.
EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS - --------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our report, dated January 22, 1999, on the consolidated financial statements of First National Bankshares Corporation as of December 31, 1998 and 1997, and for the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the years ended December 31, 1998, 1997, and 1996.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia March 26, 1999
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