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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission file number 33-14252
FIRST NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 62-1306172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cedar Street, Ronceverte, West Virginia 24970
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 647-4500
Securities registered pursuant to Sec. 12(b) of the Act- None
Securities registered pursuant to Sec. 12(g) of the Act- None
Securities issued pursuant to a registrant statement which became effective
under the Securities Act of 1933-
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K
[X] Not subject to Section 16(a) requirements.
As of March 1, 2001, the aggregate market value of the outstanding voting
common stock held by nonaffiliates of the registrant was $15,540,240. This
value is based on the price at which said stock was actually sold in a
transaction reported to management which took place on or about March 1, 2001,
(management believes $16.00 was paid per share), since its stock is not
extensively traded, listed on any exchange, or quoted by NASDAQ.
The total number of shares of the registrant's common stock outstanding as of
March 1, 2001 was 971,265 .
Documents Incorporated by Reference:
Part of Form 10-K into which
Document the document is incorporated
Articles of Incorporation, from September 30, 1999 Form 10-Q Part IV, Item 14
By-Laws, from September 30, 1999 Form 10-Q Part IV, Item 14
Material Employment Contract, from December 31, 1994 Report 10-K Part IV, Item 14
Material Lease Contract, from March 31, 1996 Form 10-Q Part IV, Item 14
S-8 Registration Statement, from July 31, 1996 Form S-8 Part IV, Item 14
Specimen Copy of Incentive Stock Option Plan Agreement, from
December 31, 1996 Report 10-K Part IV, Item 14
THIS REPORT CONTAINS 61 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 55 .
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FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
Table of Contents
Page
PART I
Item 1 - Business.........................................................................................3-6
Item 2 - Properties.........................................................................................6
Item 3 - Legal Proceedings..................................................................................6
Item 4 - Submission of Matters to a Vote of Security Holders................................................7
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Stockholder Matters..............................................................................7
Item 6 - Selected Financial Data............................................................................8
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation..............................................................9-19
Item 7a - Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . 19-22
Item 8 - Financial Statements and Supplementary Data.......................................................22-44
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..........................................................45
PART III
Item 10 - Directors and Officers of the Registrant......................................................45-47
Item 11 - Executive Compensation........................................................................47-49
Item 12 - Security Ownership of Certain Beneficial Owners and
Management..................................................................................49-50
Item 13 - Certain Relationships and Related Transactions................................................50-51
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................52
Signatures.................................................................................................53
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PART I
ITEM 1 - BUSINESS
Organizational History
First National Bankshares Corporation (referred to in this report as the "Company") is a West Virginia corporation. It was
organized on January 28, 1986, and is a registered bank holding company under the Bank Holding Company Act of 1956,
as amended.
The Company has two wholly-owned subsidiaries, a national banking association known as First National Bank (the
"Bank") and a non-banking subsidiary known as FNB Insurance, LLC. 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. FNB Insurance, LLC
was organized on September 27, 2000 for the purpose of investing in ProServ, LLC, an insurance agency operating in the
State of West Virginia selling property and casualty insurance. Along with other investors, FNB Insurance, LLC will share
in the results of ProServ, LLC. The majority of 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. As such, the following
discussion will primarily focus on issues affecting the Bank.
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. 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
noninterest-bearing and interest-bearing demand deposits, savings deposits, certificates of deposit, club accounts and
individual retirement accounts. The Bank offers automated teller machines (ATM's) which allow customers to make
deposits, withdraw cash, and transfer funds. In addition, the Bank offers automated telephone banking, whereby
customers can use a touch-tone telephone to access account information and transfer funds between accounts. In July
2000 the Bank began offering its online banking product Mr. First(sm). The basic service enables customers to access their
accounts via a secure Internet connection from the Bank's web-site (www.fnbwv.com), where they can review account
activity and transfer funds among their accounts. A bill pay service is also available for those customers wishing to pay
bills electronically.
The Bank offers a full spectrum of lending services to its customers, including commercial loans and lines of credit,
residential real estate loans, consumer installment loans and other personal loans. Loan terms, including interest rates,
loan to value ratios, and maturities are tailored as much as possible to meet the needs of the borrower. Commercial loans
are generally secured by various collateral, including commercial real estate, accounts receivable and business machinery
and equipment. Residential real estate loans consist primarily of mortgages on the borrower's personal residence, and
are typically secured by a first lien on the subject property. Consumer and personal loans are generally secured, often
by first liens on automobiles, consumer goods or depository accounts. A special effort is made to keep loan products
as flexible as possible within the guidelines of prudent banking practices in terms of interest rate risk and credit risk. The
Bank's interest rate terms generally include variable rate features or three to five year balloon maturities, thereby
minimizing the Bank's exposure to interest rate risk. The Bank offers fixed rate residential loans through its secondary
market program, whereby the Bank will originate fixed rate loans on behalf of a third party in exchange for a loan fee
collected at the time of the loan's closing. The loan product is offered in all markets in which the Bank competes and will
be the main focus of the new loan production office in Covington, VA. See further discussion of the Covington operations
in the PROPERTIES section. 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
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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 2000's average
(seasonally adjusted) unemployment rate being 6.9% versus West Virginia's statewide average of 5.5%. As of December
31, 2000, the Bank's operations in Greenbrier County accounted for approximately 74% of total loans and 96% of total
deposits.
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 average unemployment rate for 2000 being 4.2%. The Charleston MSA is much
more insulated from economic downturns than the Greenbrier County area.
In February 2001, the Company opened a loan production office ("LPO") in Covington, VA. The office is currently staffed
with one full-time loan officer who will specialize in mortgage loans. The office is located approximately thirty-six miles
west of the Company's headquarters. Over the past year, the Company has conducted light advertising in this market
in anticipation of its opening the LPO. The market appears to be a natural fit for the Company due to its demographics
and proximity.
Competition
The banking and financial services business are highly competitive, especially in the Bank's market area. The Bank's
principal competitors in Greenbrier County include four other commercial banks, each of which are owned by statewide
or regional bank holding companies. As of December 31, 2000, management estimates that the Bank had 18% of the
deposit market share and 15% of the total loan market share. 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 five largest banking organizations, as well as regional and small independent
banks. Currently, the Company's market share is estimated to be less than 1% for both deposits and loans.
The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product
delivery systems, and the 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
4
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, undercapitalized, significantly-under-
capitalized and critically-under-capitalized.
By regulation, an institution is "well-capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-
based capital ratio of 6% or greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any capital measure. The Company's banking
subsidiary was a "well-capitalized" institution as of December 31, 2000.
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
5
of West Virginia in excess of twenty five percent (25%) of the total amount of all deposits held by insured depository
institutions in West Virginia. This limitation may be waived by the Commissioner of Banking for good causes shown.
Monetary Policies - The monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant
effect on the operating results of banks and bank holding companies. The nature of future monetary policies and the effect
of such policies on the future business and earnings of the Company and the Bank cannot be predicted.
Gramm-Leach-Bliley Financial Services Modernization Act - Enacted on November 12, 1999, the Act repeals two
provisions of the Glass-Steagall Act that have separated banking, insurance, and securities activities for the latter two-
thirds of this century. The law creates a new financial services structure, the financial holding company, under the Bank
Holding Company Act. Financial companies will be able to engage in any activity that is deemed "financial in nature."
Therefore, banks will be able to affiliate with securities firms and insurance companies within the same financial holding
company and, through that structure, bring a broad array of financial products to the marketplace, including traditional
banking products, investment products, insurance, and mutual funds.
Employees
At December 31, 2000, the Bank employed 40 full-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
7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 to 19 of this
report.
ITEM 2 - PROPERTIES
The Bank owns its principal office at One Cedar Street in Ronceverte, West Virginia. The building, which approximates
7,700 square feet in size, is fully used by the Bank in its operations. It also owns an adjacent drive-in banking facility
that provides drive-in services, as well as customer parking.
The Lewisburg branch is located on U.S. 219, approximately two miles north of the Lewisburg city limits. The facility,
which approximates 2,100 square feet, was constructed in 1997 following the expiration of a lease arrangement on a
similar facility in Lewisburg, which the Bank occupied from 1986 to January 1997.
The Charleston branch is located in Laidley Tower, a multi-story office building in downtown Charleston, WV. Effective
May 1, 1996, the Company entered into a 10-year noncancellable lease agreement to occupy approximately 4,532 square
feet of the building. Additional information related to this lease can be found in Note 12 of the Notes to Consolidated
Financial Statements which is included in Item 8 of this filing.
The LPO in Covington, VA is located at 180 Monroe avenue in Covington, VA. The location, which consists of a one-room
office space comprising approximately 100 square feet, is currently leased from a related party on a monthly basis.
The Bank's properties and leased facilities are considered well suited for its current needs. Both the main office located
in Ronceverte, WV, and the branch location in Lewisburg, WV, have full-service banking available, including drive-in
banking services. Space at both locations is ample, and no significant modifications are required at either location. The
branch facility in Charleston is also a full-service branch offering the same services as the other locations, except it offers
no drive-in banking services.
ITEM 3 - LEGAL PROCEEDINGS
Various legal proceedings are presently pending in which the Bank is a named party. These proceedings involve routine
litigation incidental to the Bank's business. In Management's opinion, based upon advice of counsel, the resolution of
such proceedings will not have a material impact on the Bank's financial position.
6
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 2000.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2001, the Company's common stock was held by approximately 450 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 2000 that were reported to management were at $16.00 per share. 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.
- -------------------------------------------------------------------------------------------------------------------
Book Value Book Value
2000 1999
High Low High Low
First Quarter $ 10.63 $ 10.55 $10.16 $ 10.15
Second Quarter 10.79 10.69 10.25 10.22
Third Quarter 11.06 10.88 10.36 10.33
Fourth Quarter 11.31 11.14 10.55 10.42
- -------------------------------------------------------------------------------------------------------------------
A summary of dividends per share declared during 2000 and 1999 follows:
- --------------------------------------------------------------------------------
2000 1999
First Quarter $ 0.11 $ 0.09
Second Quarter 0.11 0.09
Third Quarter 0.13 0.09
Fourth Quarter 0.17 0.15
- --------------------------------------------------------------------------------
The Company plans to continue the pattern of declaring quarterly dividends in
the future at a rate consistent with its historical payout ratios.
Payment of dividends by the Company is dependent upon payments to it from the
subsidiary bank. The ability of the subsidiary bank to pay dividends is subject
to certain limitations under banking regulations. These limitations are
discussed in Note 14 of the Notes to Consolidated Financial Statements,
which are included in Item 8 of this filing.
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ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
2000 1999 1998 1997 1996
SUMMARY OF OPERATIONS
Interest income $ 8,761 $ 7,707 $ 7,564 $ 7,041 $ 6,166
Interest expense 4,079 3,390 3,372 3,077 2,393
Net interest income 4,682 4,317 4,192 3,964 3,773
Provision for loan losses 73 100 449 31 0
Noninterest income 433 455 445 422 433
Noninterest expense 3,404 3,175 3,167 3,087 3,140
Income before income taxes 1,638 1,497 1,021 1,268 1,066
Net income 1,100 1,002 724 792 736
PER SHARE DATA
Net income:
Basic $ 1.14 $ 1.04 $ 0.75 $ 0.82 $ 0.76
Diluted 1.13 1.03 0.75 0.82 0.76
Cash dividends declared 0.52 0.42 0.33 0.32 0.28
Book value per share 11.31 10.52 10.11 9.69 9.19
AVERAGE BALANCE SHEET SUMMARY
Loans, net $ 81,681 $ 69,835 $ 68,696 $ 63,620 $ 48,037
Securities 21,722 23,460 17,375 18,646 23,341
Deposits 91,173 88,821 78,949 75,149 69,838
Long-term debt 465 3,439 5,494 3,862 0
Shareholders' equity 10,798 9,941 9,543 9,239 8,672
Total assets 110,493 104,591 96,442 90,824 79,985
AT YEAR END
Loans, net $ 87,759 $ 74,264 $ 68,671 $ 69,108 $ 52,800
Securities 20,996 22,876 17,866 17,311 22,617
Deposits 96,525 89,132 81,221 78,336 73,316
Long-term debt 458 473 5,488 5,500 0
Shareholders' equity 10,986 10,151 9,747 9,325 8,841
Total assets 114,875 104,829 98,353 95,430 83,668
SELECTED RATIOS
Return on average assets 1.00% 0.96% 0.75% 0.87% 0.92%
Return on average equity 10.19 10.08 7.59 8.57 8.49
Average equity to average assets 9.77 9.50 9.90 10.17 10.84
Dividend payout ratio 45.76 40.38 43.64 38.92 36.35
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ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-looking Statements
The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for
investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate
management. This Annual Report on Form 10-K contains forward-looking statements that involve risk and uncertainty.
In order to comply with the terms of the safe harbor, the corporation notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the anticipated results or other expectations expressed
in those forward-looking statements.
Introduction
The following is a discussion and analysis focused on significant changes in the financial condition and results of
operations of the Company for the applicable periods covered by the consolidated financial statements appearing in Item
8 of this report. This discussion and analysis should be read in conjunction with such financial statements and the
accompanying notes thereto. Certain amounts in this discussion, as previously presented, have been reclassified from
prior years to conform to current year classifications. Amounts and percentages have been rounded for purposes of
discussion.
Earnings Summary
The Company reported net income of $1,100,000 for 2000, an increase of $98,000 or 9.8% over the $1,002,000 reported
for 1999. On a per share basis, diluted earnings per share was $1.13 in 2000, $1.03 in 1999, and $0.75 in 1998. The
increase in 2000 earnings was largely attributable to a $365,000 or an 8.5% increase, in net interest income. The increase
was partially offset by an increase in operational costs which were up 7.2% or $229,000 in 2000. The various factors
significantly influencing results of operations are included in the following discussion.
Return on average assets (ROA), a measure of how effectively the Company utilizes its assets to produce net income,
was 1.00% for 2000, compared to 0.96% for 1999 and 0.75% for 1998. Return on average equity (ROE), which measures
earnings performance relative to the total amount of equity capital invested in the Company, was 10.19% in 2000, 10.08%
in 1999, and 7.59% in 1998.
Net Interest Income
The most significant component of the Company's net earnings is net interest income, which is the excess of interest
income earned on loans, securities and other interest earning assets over interest expense on deposits and borrowings.
Net interest income is influenced by changes in volume resulting from growth and alteration of the balance sheet's
composition, as well as by fluctuations in market interest rates and maturities of sources and uses of funds. Net interest
income is presented and discussed in this section on a fully Federal tax-equivalent basis to enhance the comparability
of the performance of tax-exempt securities to other fully taxable earning assets. For the years ended 2000, 1999, and
1998, tax-equivalent adjustments of $75,000, $84,000 and $91,000, respectively, are included in interest income, and were
computed assuming a tax rate of 34.0% in all periods.
2000 Versus 1999
The Company's net interest income increased $357,000 or 8.1% from 1999 on a fully tax equivalent basis. The increase
is largely due to the16.9% growth in the Company's average loans outstanding. Funding of the Company's growth came
in part from the conversion of its short-term investments (Federal funds sold) and net maturities from its security portfolio.
The remaining funding came from a $5,733,000 increase in average short-term borrowings. As shown in Table II, the rate
volume analysis, increased average loan volume contributed $1,071,000 in additional interest income. Similarly, increased
volume in the Company's interest-bearing liabilities contributed an additional $328,000 in interest expense. The
company's net yield on interest earning assets or net interest margin measured 4.54%, 4.45% and 4.69% for 2000, 1999
and 1998, respectively. The improvement is due in part to the deployment of more assets in loans, which are the
Company's highest yielding asset.
Year 2000 was marked by a rising interest rate environment. The prime rate increased 1.25% from the beginning of the
year to the end of the year. As a result, the Company's yield on interest earing assets increased from 7.88% in 1999 to
8.44% in 2000. A similar effect was experienced in the Company's cost of funds, where the weighted average rate on its
interest-bearing liabilities increased from 4.15% in 1999 to 4.64% in 2000. As presented in Table II, the overall change
in rate had a negative impact on net interest income of $72,000. Competition for deposits remains a challenge for the
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Company as well as the industry. In order to fund the loan growth, the Company offered competitive rates on its seven
and eighteen month time deposits.
1999 Versus 1998
Net interest income in 1999 was $118,000 greater than net interest income reported in 1998. The net increase was due
to the growth in the Company's interest earning assets relative to the growth in interest-bearing liabilities. The growth was
primarily funded by two new significant demand deposit relationships obtained in May 1999, a portion of which was
maintained in a noninterest-bearing account. Because the cost of funds is lower on demand deposits, the Company was
able to capitalize on the spread between the yield on the assets acquired or funded with the deposits and the weighted
average interest rate paid on the new accounts. The net effect of the growth in interest earning and interest-bearing
liabilities was a $367,000 increase in net interest income.
In contrast to 2000, 1999 was marked by a declining interest rate environment. The Company's net interest margin
declined from 4.69% in 1998 to 4.45% in 1999. As shown in Table II, the change in rate contributed to a $249,000 loss
in interest income compared to 1999's level. The majority of the Company's loan portfolio includes variable interest rate
features, therefore, as the interest rate environment declined, the yield on the loans declined, leading to the decline in the
net interest margin.
Provision for Loan Losses
The provision for loan losses represents charges to earnings necessary to maintain the allowance for loan losses at a level
which is considered adequate in relation to the estimated risk inherent in the loan portfolio. Management considers various
factors in determining the amount of the provision for loan losses including overall loan quality, changes in the mix and
size of the loan portfolio, previous loss experience and general economic conditions.
During 2000, the Company made a provision for loan losses of $73,000. This compares to a provision for loan losses of
$100,000 and $449,000 made in 1999 and 1998, respectively. During 1998, an increased provision was necessary due
to a significant loss on a commercial real estate loan. For additional discussion of these factors and the related allowance
for loan losses account, refer to the LOAN AND RELATED RISK ELEMENTS section of this discussion.
Noninterest Income
Noninterest income includes revenues from all sources other than interest income and yield related loan fees. Non-interest
income totaled $433,000, $455,000, and $445,000 for the years ended December 31, 2000, 1999, and 1998. As a
percentage of average assets, other income was 0.39%, 0.44%, and 0.46% for 2000, 1999 and 1998, respectively.
10
TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2000 1999 1998
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST-EARNING ASSETS
Loans, net of unearned discount (1) $ 82,446 $7,454 9.04% $ 70,540 $6,158 8.73% $ 69,420 $6,328 9.12
Securities:
Taxable 18,704 1,132 6.05 19,946 1,149 5.76 13,712 819 5.97
Tax-exempt (2) 3,018 220 7.28 3,514 248 7.06 3,663 267 7.29
Total securities 21,722 1,352 6.22 23,460 1,397 5.95 17,375 1,086 6.25
Interest-bearing deposits with other banks 51 1 1.96 1,558 75 4.81 - - -
Federal funds sold 519 30 5.78 3,353 161 4.80 4,474 241 5.39
Total interest earnings assets 104,738 8,837 8.44 98,911 7,791 7.88 91,269 7,655 8.39
NONINTEREST-EARNING ASSETS
Cash and due from banks 2,658 2,586 2,305
Bank premises and equipment 1,627 1,753 1,980
Other assets 2,235 2,046 1,612
Allowance for loan losses (765) (705) (724)
Total assets $ 110,493 $ 104,591 $ 96,442
INTEREST-BEARING LIABILITIES
Demand deposits $ 14,596 350 2.40 $ 16,562 392 2.37 $ 12,445 310 2.49
Savings deposits 36,860 1,736 4.71 32,338 1,335 4.13 26,266 1,104 4.20
Time deposits 28,663 1,543 5.38 27,861 1,350 4.84 29,892 1,536 5.14
Total interest bearing deposits 80,119 3,629 4.53 76,761 3,077 4.01 68,603 2,950 4.30
Short-term borrowings 7,241 423 5.84 1,508 55 3.65 1,574 59 3.75
Long-term borrowings 465 27 5.81 3,439 258 7.50 5,494 363 6.61
Total interest bearing liabilities 87,825 4,079 4.64 81,708 3,390 4.15 75,671 3,372 4.46
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 11,054 12,060 10,346
Other liabilities 816 882 882
Shareholders' equity 10,798 9,941 9,543
Total liabilities and
shareholders' equity $ 110,493 $ 104,591 $ 96,442
NET INTEREST EARNINGS 4,758 $4,401 $ 4,283
NET YIELD ON INTEREST EARNING ASSETS 4.54% 4.45% 4.69%
(1) - For purposes of this table, nonaccruing loans are included in average loan balances. Loan fees are also included in interest
income.
(2) - Computed on a fully Federal tax-equivalent basis using the rate of 34% for all years.
11
- --------------------------------------------------------------------------------
TABLE II
CHANGE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
(Dollars in thousands)
2000 vs. 1999 1999 vs 1998
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
INTEREST EARNING ASSETS
Loans $ 1,071 $ 225 $ 1,296 $ 101 $ (271) $ (170)
Securities:
Taxable (74) 57 (17) 359 (30) 329
Tax-exempt (2) (36) 8 (28) (10) (8) (18)
Total securities (110) 65 (45) 349 (38) 311
Interest bearing deposits with
other banks (46) (28) (74) 75 - 75
Federal funds sold (158) 27 (131) (56) (24) (80)
Total interest earning assets 757 289 1,046 469 (333) 136
INTEREST-BEARING LIABILITIES
Demand deposits (47) 5 (42) 98 (16) 82
Savings deposits 200 201 401 251 (20) 231
Time deposits 40 153 193 (101) (85) (186)
Short-term borrowings 318 50 368 3 (7) (4)
Long-term borrowings (183) (48) (231) (149) 44 (105)
Total interest-bearing liabilities 328 361 689 102 (84) 18
NET INTEREST EARNINGS $ 429 $ (72) $ 357 $ 367 $ (249) $ 118
(1) - The change in interest due to both rate and volume has been allocated between the factors in proportion to
the relationship of the absolute dollar amounts of the change in each.
(2) - Calculated assuming a fully tax-equivalent basis using the rate of 34%.
- -------------------------------------------------------------------------------------------------------------------
The following table (in thousands) details the components of non-interest income earned by the Company in 2000, 1999,
and 1998, as well as the percentage increase (decrease) in each over the prior year.
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Percent Percent
Amount Change Amount Change Amount
Trust income $ 30 (51.6)% $ 62 (27.9)% $ 86
Service fees and commissions 294 (2.0) 300 21.0 248
Securities (losses), net (3) 200.0 (1) - -
Other 112 19.1 94 (15.3) 111
Total $ 433 (4.8)% $ 455 2.2% $ 445
- -------------------------------------------------------------------------------------------------------------------
12
2000 Versus 1999
Trust income for 2000 is $32,000 less than the income level reported for the same period in 1999. Total assets
administered by the Bank's trust department have decreased following the settlement of a single large estate in 1999.
This decrease in trust assets has led to the decline in trust income. In July 2000, the Bank signed an agreement with
a trust manager whereby all current and future estates and trusts will be managed by the third party. The agreement
bolsters the Bank's access to various resources and expertise in trust management, and will allow the Bank to focus on
marketing the service in its primary and contiguous market areas, a service which management feels can be efficacious
given the demographics of the market areas. The agreement provides for a revenue sharing arrangement between the Bank
and the third-party, therefore, depending upon the success of the marketing efforts, income may be lower in 2001.
Other income increased $18,000 or 19.1% due to securities received when a mutual company the Bank uses for its key-
man life insurance polices converted to a stock company.
1999 Versus 1998
As discussed above, the amount of trust assets administered by the Bank has curtailed over the past two years, which
has led to the decline in trust-related income. Service fees and commissions increased $52,000, or 21.0% to $300,000
in 1999. The increase is the result of the Company implementing a new fee schedule on certain demand deposit accounts.
Other income decreased $17,000 from 1998. Included in 1998's amount were gains totaling $23,000 realized on the sale
of repossessed property. Although the Company engages in the foreclosure and sale of such property during the ordinary
course of business, such gains or losses realized from time to time are unusual and are not expected to be a significant
source of income.
Noninterest Expense
The following table itemizes the primary components of non-interest expense for 2000, 1999 and 1998, and the percentage
increase (decrease) in each over the prior year. A discussion of the material changes among the years presented also
follows the table (in thousands).
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Percent Percent
Amount Change Amount Change Amount
Salaries and employee benefits $ 1,701 6.1 % $ 1,603 4.0% $ 1,542
Net occupancy expense 270 0.0 270 (4.6) 283
Equipment rental, depreciation
and maintenance 278 (0.7) 280 (4.8) 294
Data processing 227 24.0 183 (6.2) 195
Advertising 92 37.3 67 3.1 65
Professional & legal 127 30.9 97 (39.8) 161
Mailing and postage 78 5.4 74 (2.6) 76
Director' fees and
shareholders' expense 111 2.8 108 8.0 100
Stationery and supplies 83 3.8 80 12.7 71
Other 437 5.8 413 8.7 380
Total $ 3,404 7.2 % $ 3,175 0.3 % $ 3,167
Non-interest expense as a
percentage of average earning assets 3.25% 3.21% 3.47%
- -------------------------------------------------------------------------------------------------------------------
2000 Versus 1999
Salaries and employee benefits, the Company's largest noninterest cost, increased $98,000 or 6.1% from 1999's level.
On average, the Company employed two more full-time staff in 2000 compared to 1999, which in addition to normal merit
raises, contributed to the increase. The continued upward trend in the Company's health care costs has impacted the
Company's employee benefit costs, wherein total insurance premiums increased 20.8% in 2000. A similar increase in
healthcare costs is expected in 2001.
Data processing increased $44,000 or 24.0% in 2000, primarily due to the Company's introduction of its online banking
product in July 2000 and the addition of a customer profitability model. Together, these items increased the line item by
$31,000 or 16.9%. The remaining increase is due to the annual fee increase levied by the Company's third-party data
13
processor and additional fees associated with a greater volume of transactions and reports being processed by the
servicer.
Advertising increased $25,000 or 37.3% in 2000 compared to 1999. The increase is due to the additional advertising in
contiguous market areas, such as Covington, VA. Included in this line item are customer promotions which include the
cost of complimentary checks borne by the Bank for new demand deposit customers. The expense associated with the
complimentary checks doubled due to the bank opening 678 new deposit accounts in 2000 versus 378 new deposit
accounts in 1999.
Professional and legal fees increased due to a general increase in the fee schedule of the Company's professional service
providers and an increase in the amount of services performed during the year, principally the quarterly review work required
by the SEC.
1999 Versus 1998
Salaries and employee benefits increased $61,000, or 4.0%, from 1998. The increase was due in part to the Company
reinstating the executive incentive plan in 1999, which was previously suspended in 1998. Under the plan in 1999,
approximately $104,000 was expensed compared to $0 in 1998. The increase from the above plan was mitigated by a
decrease in salaries expense of approximately $18,000. The decrease in salaries was due to the Company having less
full-time equivalent staff employed in 1999 compared to 1998. The decrease in staff was a result of retirements and
voluntary resignations.
Professional and legal expense decreased $64,000 from the $161,000 reported in 1998. In 1998, the bank incurred
approximately $56,000 in non-recurring legal and professional fees associated with its unsuccessful merger negotiations
with a bank holding company. In addition, 1998 was marked by various time-consuming legal and foreclosure proceedings
against two loan customers. Although the Company was involved in similar proceedings in 1999, all of which were incurred
in the normal course of business, none were of the magnitude of the items incurred in 1998.
Income Taxes
The Company's income tax expense, which includes both Federal and state income taxes, totaled $538,000 or 32.8%
of pretax income in 2000, compared to $495,000 or 33.1% in 1999, and $297,000 or 29.1% in 1998. For financial reporting
purposes, income tax expense does not equal the Federal statutory income tax rate of 34% when applied to pretax
income, primarily because of state income taxes and interest income derived from tax-exempt securities. Additional details
relative to the Company's income taxes are included in Note 9 to the accompanying consolidated financial statements.
Changes in Financial Position
Total assets increased $10,046,000 or 9.6% to $114,875,000 at year end 2000 compared to $104,829,000 at year end
1999. Average total assets increased 5.6% from $104,591,000 during 1999 to $110,493,000 during 2000. TABLE I
presents the Company's average balance sheet composition for the years ended 1999, 1998 and 1997. A discussion of
the significant fluctuations in components of the Company's balance sheet follows.
Securities
The Company's security portfolio consisted of available or sale and held to maturity securities. Securities classified as
available for sale are carried at fair value with unrealized gains and losses reported as a separate component of
shareholders' equity, net of deferred income taxes, while held to maturity securities are carried at amortized cost. The
Company does not hold any securities for trading purposes. At year end 2000, approximately 46% of the securities (based
on amortized cost) were classified as available for sale. This compares to 50% in 1999. At the time of purchase,
management decides whether securities will be classified as available for sale or held to maturity.
The securities portfolio averaged $21,722,000 in 2000, a $1,738,000 decline from 1999's average balance of $23,460,000.
At year end 2000, the Company had an unrealized loss on securities classified as available for sale of approximately
$68,000. This compares to an unrealized loss of approximately $333,000 in 1999. The decrease in the unrealized loss
from 1999's level is a function of the weighted average yield and maturity of the available for sale portfolio, relative to market
interest rates available on similar issues with similar maturity intervals. Although the held to maturity security portfolio
is carried at amortized cost, the market value of the portfolio at December 31, 2000 was approximately $3,000 less than
the amortized cost, which is an improvement of $357,000 from 1999's unrealized loss. Management believes that the
declines in the market values of the security portfolios are temporary, therefore, no impairment loss is considered
necessary.
14
Details as to the amortized cost and estimated fair values of the Company's securities by type are presented in Note 3
of the Notes to Consolidated Financial Statements, included in Item 8 of this filing. At December 31, 2000, the Company
did not own securities of any one issuer, other than the U.S. Government or its agencies, that exceeded ten percent
(10.0%) of shareholders' equity. The distribution of non-equity securities together with the weighted average yields by
maturity at December 31, 2000 are summarized in TABLE III.
- -------------------------------------------------------------------------------------------------------------------
TABLE III
SECURITY MATURITY ANALYSIS (2)
(At amortized cost, dollars in thousands)
After One After Five
Within but within but within After
One Year Five Years Ten Years Ten Years
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
Securities Held to Maturity
U.S. Government agencies
and corporations $ 3,000 6.06% $ 4,600 5.96% $ - - % $ - - %
State and political
subdivisions - - 2,998 4.77 268 4.50 485 5.80
Total $ 3,000 6.06% $ 7,598 5.49% $ 268 4.50% $ 485 5.80%
Securities Available for Sale
U.S. Government agencies
and corporations $ - - % $ 8,999 5.86% $ - - % $ - - %
(1) -- Weighted average yield presented without adjustment to a tax equivalent basis.
(2) - Excludes equity securities, such as Federal Reserve Bank and Federal Home Loan Bank stock.
- -------------------------------------------------------------------------------------------------------------------
Loans
In 2000, loans increased $13,350,000, or 17.8%, to $88,377,000 from $75,027,000 at year end 1999. Average loans
outstanding increased from $70,540,000 in 1999 to $82,446,000 in 2000, an increase of $11,906,000 or 16.9%. A
summary of the Company's year end loan balances by type is summarized in the following table (in thousands).
- -------------------------------------------------------------------------------------------------------------------
Percent Percent of
Increase Total Loans
2000 (Decrease) 1999 2000 1999
Commercial, financial and agricultural $ 32,687 5.9 % $ 30,877 37.0% 41.2%
Real estate - construction 502 (65.4) 1,451 0.5 1.9
Real estate - mortgage 38,312 22.0 31,395 43.4 41.8
Installment 14,083 55.1 9,079 15.9 12.1
Other 2,793 25.6 2,225 3.2 3.0
TOTAL LOANS $ 88,377 17.8 $ 75,027 100.0 100.0
- -------------------------------------------------------------------------------------------------------------------
Real estate mortgage loans, the Company's largest loan portfolio, increased $6,917,000, or 22.0% from 1999. The loan
portfolio predominantly consists of single family residential loans in Greenbrier and surrounding counties. Mortgage
demand was very steady during 2000, particularly after the first round of market interest rate increases in March 2000.
Many home owners and buyers were speculating that additional interest rate increases were forthcoming, therefore,
refinancings and originations increased.
15
The commercial, financial and agricultural portfolio grew $1,810,000 or 5.9% in 2000. The portfolio consists of installment
and real estate loans secured by commercial property. The Company has been very successful in its solicitation efforts,
particularly in the contiguous market areas. Through its personal business relationships and referrals, management
expects future growth in high quality commercial loans to continue to grow.
The Company's installment portfolio, consisting of retail (e.g. auto loans), revolving credit and other personal installment
loans, grew $5,004,000 or 55.1% in 2000. The increase is due to several large-dollar loans granted to credit worthy
individuals in 2000.
Another contributor to the overall growth in the Company's portfolio is the consolidation of banks in the Company's primary
market area. The Company is the only remaining independent bank in the market, where timely loan decisions are made
locally, The Company has experienced a migration of loan customers from competitors who do not agree with the new
style of policies and procedures imposed by the new owners in the market.
A summary of loan maturities by loan type as of December 31, 2000 is included in Note 3 of the Notes to Consolidated
Financial Statements included in Item 8 of this filing.
Allowance for Loan Losses and Risk Elements
At December 31, 2000 and 1999, the allowance for loans losses of $619,000 and $764,000 represented 0.70% and 1.02%
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 allowance for loan losses is maintained at a level considered adequate to provide
for inherent losses that can be reasonably estimated. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. The Company's management, on a quarterly basis, performs a comprehensive
loan evaluation which encompasses the identification of all potential problem credits, which are included on an internally
generated watch list. The identification of loans for inclusion on the watch list is facilitated through the use of various
sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part
of regulatory agency loan reviews and reviews of new loans representative of current lending practices within the Bank.
Once this list is reviewed to ensure it is complete, detail reviews of specific loans for collectibility, performance and
collateral protection are performed. A grade is assigned to the individual loans reviewed utilizing internal grading criteria,
which is somewhat similar to the criteria utilized by the Bank's primary regulatory agency. Based on the results of these
reviews, specific reserves for potential losses are identified. In addition, management considers historical loan loss
experience, new loan volume, portfolio composition, levels of nonperforming and past due loans and current and anticipated
economic conditions in evaluating the adequacy of the allowance for loan losses.
As more fully explained in Notes 1 and 4 of the Notes to Consolidated Financial Statements included in Item 8 of this filing,
certain impaired loans are required to be reported at the present value of expected future cash flows discounted using the
loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loans'
collateral if the loan is collateral dependent. At December 31, 2000, the Company had $232,000 in loans classified as
impaired ($123,000 of which was on nonaccrual) compared to $0 at December 31, 1999. The related allowance for loss
allocated to the impaired loans at December 31, 2000 was approximately $14,000. The Company's average investment
in impaired loans was $618,000 for 2000 versus $282,000 in 1999.
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. In 2000, the Company refined its method of allocating
inherent loss factors to the various loan portfolios. As such, the allocation of the allowance from prior years has been
reclassified in order to enhance the comparability to 2000's methodology. At December 31, 2000 and 1999, the
unallocated portion of the allowance approximated $56,000 and $26,000 or 9.0% and 3.4% of the total allowance,
respectively. In addition to loan performance factors discussed above (e.g. new loan volume, past due performance and
charge-off history), management evaluates national and local economic conditions which may impact future performance
of the loan portfolios. High unemployment and an increasing trend in bankruptcies in the Company's primary lending area
have warranted additional consideration by management in evaluating estimated loss factors. Because the Company's
primary market area is predominantly rural, these factors tend to be magnified in economic downturns. As a result of
the evaluation of the subjective factors, management has adjusted the historical loss experience to better reflect losses
that are inherent in the portfolio. 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.
16
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- ----------------------------------------------------------------------------------------------------
TABLE IV
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
2000 1999 1998
Portfolio Portfolio Portfolio
As a As a As a
Percent Percent Percent
of Total of Total of Total
Amount Loans Amount Loans Amount Loans
Commercial, financial,
and agricultural $ 202 37.0% $ 263 41.2% $ 380 38.3%
Real estate - construction 1 0.5 1 1.9 1 1.4
Real estate - mortgage 205 43.4 311 41.8 111 45.6
Installment 150 15.9 158 12.1 178 12.2
Other 5 3.2 5 3.0 1 2.5
Unallocated 56 - 26 - 95 -
$ 619 100.0% $ 764 100.0% $ 766 100.0%
- -------------------------------------------------------------------------------------------------------------------
Loan charge-offs, net of recoveries, for 2000 were $217,000 compared to $102,000 and $319,000 in 1999 and 1998,
respectively. Expressed as a percentage of average loans outstanding during 2000, 1999 and 1998, net loan charge-offs
were 0.26%, 0.14% and 0.46%, respectively. See Note 5 of the Notes to the Consolidated Financial Statements for an
analysis of the activity in the Company's allowance for loan losses in 2000, 1999 and 1998.
The following presents a summary of the Company's nonperforming assets and accruing loans past due 90 days or more
at December 31, 2000, 1999 and 1998.
- -------------------------------------------------------------------------------------------------------------------
(in thousands)
December 31,
2000 1999 1998
Nonperforming assets:
Nonaccrual loans $ 123 $ - $ 318
Other real estate owned 1,013 883 875
Restructured loans - - -
$ 1,136 $ 883 $ 1,193
As a percentage of outstanding loans 1.29% 1.18% 1.72%
Accruing loans past due 90 days or more $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------
The Company classifies a loan as nonaccrual when the full collection of principal and interest is unlikely or when the loan
is past due 90 or more days, unless the loan is adequately secured and in the process of collection. If interest on
nonaccrual loans had been accrued in accordance with the original loan terms, such income would have approximated
$17,000, $13,000 and $39,000 in 2000, 1999 and 1998, respectively. No income was recognized on such loans during
2000, 1999 or 1998. At December 31, 2000, nonaccrual loans consisted of a commercial loan. Subsequent to year end,
the collateral securing the note was sold by the borrower, and the Company collected the full amount of the principal and
interest in accordance with the original terms of the loan.
At December 31, 2000, other real estate owned consisted of a foreclosure on a single family residential mortgage, which
is carried at $200,000, and commercial property with a carrying balance of $813,000 that was originally foreclosed upon
in May 1998. The Bank recognized a charge-off of approximately $175,000 on the residential mortgage note. The
residential property is being prepared for a sale in Spring 2001. As more fully discussed in Note 5 of the Consolidated
17
Financial Statements include in Item 8 of this filing, the commercial property is currently leased pursuant to a three year
operating lease. All expenses of carrying and operating the property are borne by the lessee. All lease payments are
being accounted for under the cost recovery method as reductions in the carrying value of the property.
Deposits
Total deposits increased 8.3% to $96,525,000 as of December 31, 2000, from $89,132,000 at December 31, 1999.
Similarly, average total deposits increased from $88,821,000 as of December 31, 1999 to $91,173,000 at December 31,
2000, an increase of 2.6%. Over the fourth last quarter, the Company experienced strong deposit growth in all of its
products due to consolidation and cultural differences facing one of its competitors following its acquisition by a large out
of state financial institution. Management expects to capitalize on similar growth in 2001. A summary of the Company's
average deposits by product follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF AVERAGE DEPOSITS
2000 1999
Demand deposits $ 25,650 $ 28,622
Savings 36,860 32,338
Time deposits 28,663 27,861
Total $ 91,173 $ 88,821
- -------------------------------------------------------------------------------------------------------------------
The Company's average demand deposits decreased $2,972,000, or 10.4%, from its 1999 average balance. The overall
decline in demand deposits has resulted from the decline in the average deposit relationship of two customers. The
relationships maintained an average balance of $6,497,000 in 1999 versus an average balance of $2,041,000 in 2000.
The decline of $4,456,000 has been offset by an increase from other core relationships.
The Company continues to experience deposit growth in its savings products where on average, total savings increased
14.0% in 2000. The growth was primarily in a savings product that offers a tiered interest rate.
Based upon its average balance, time deposits grew 2.9% in 2000. During the fourth quarter of 2000, the Company's time
deposits averaged $33,013,000 and is representative of the year end balance of $35,123,000. The growth has been
spurred by the competitive rates offered by the Company and the migration of customers from area competitors due the
consolidation issue mentioned above.
Details relative to the maturities of and interest expense on time certificates of deposit of $100,000 or more are presented
in Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this filing.
Short-term borrowings
The Company's short-term borrowings consist of securities sold under agreements to repurchase ("repurchase
agreements"), Federal funds purchased and short-term advances from the Federal Home Loan Bank ("FHLB"). At
December 31, 2000, short-term borrowings totaled $5,909,000 compared to $4,113,000 at December 31, 1999. On
average, the Company's utilization of these arrangements was $7,241,000 in 2000 compared to $1,508,000 in 1999. As
discussed in the loan and deposits section above, loan growth outpaced the deposit growth for much of the year spurring
the use of short-term borrowings as a funding source. For more information on short-term borrowings refer to Note 8 of
the Notes to Consolidated Financial Statements included in Item 8 of this filing.
Long-term borrowings
Average long-term borrowings were $465,000 for 2000 versus $3,439,000 for 1999, a decrease of $2,974,000. In August
1999, the Company repaid a $5,000,000 balloon note due the FHLB which had an original maturity of March 2000. The
Company's remaining long-term borrowings consist of a $500,000 five-year advance as part of the FHLB's Community
Investment Program. This advance is on a matched amortization with the underlying note and will amortize in accordance
with standard loan terms. At December 31, 2000, the outstanding balance on the note was $458,000. For more
information on this FHLB debt, refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this
filing.
18
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. Over the past two years, the Company's average total shareholders' equity
expressed as a percentage of average total assets remained strong at 9.8% and 9.5% for 2000 and 1999, respectively.
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, 2000, the Company continues to exceed each of the regulatory risk-
based capital requirements as shown in the following table.
- -------------------------------------------------------------------------------------------------------------------
RISK-BASED CAPITAL RATIOS
Minimum
Actual Requirement
Total risk-based capital ratio 13.94% 8.00%
Tier 1 risk-based capital ratio 13.19% 4.00%
Leverage ratio 9.55% 3.00%
- -------------------------------------------------------------------------------------------------------------------
Improved operating results and a consistent dividend program, coupled with an effective management of credit and interest
rate risk will be the key elements towards the Company continuing to maintain its present strong capital position in the
future. Additional information related to regulatory restrictions on capital and dividends are disclosed in Note 14 of the
Notes to Consolidated Financial Statements included in Item 8 of this filing.
Impact of Inflation and Effects of Changing Prices
The results of operations and financial position of the Company have been presented based on historical cost, unadjusted
for the effects of inflation, except for the recording of unrealized gains and losses on securities available for sale. Inflation
could significantly impact the value of the Company's interest rate sensitive assets and liabilities and the cost of 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. 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, 2000 is disclosed in Note 15 of the Notes to Consolidated
Financial Statements included in Item 8 of this filing.
ITEM 7a - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Liquidity and Interest Rate Risk Management
Liquidity reflects The Company's ability to ensure the availability of adequate funds to meet loan commitments and deposit
withdrawals, as well as provide for other Company transactional requirements. Liquidity is provided primarily by funds
invested in cash and due from banks, interest-bearing deposits with other banks and Federal funds sold, which measured
$2,052,000 at December 31, 2000. The Company also has available various lines of credit with correspondent financial
institutions of more than $40,000,000. The Company's liquidity position is monitored continuously to ensure that day-to-
day as well as anticipated long-term funding needs are met.
Further enhancing the Company's liquidity is the availability of approximately $3,000,000 (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 $8,932,000 classified as available for sale in response to an unforeseen need for liquidity.
Subsequent to year end and as a result of the Federal Reserve Board's decision to lower interest rates by 0.5% in January
2001 and another 0.5% in February 2001, approximately $6,600,000 in principal from its debt security portfolio has been
called by the issuers. Of the remaining portfolio at March 1, 2001, the Company holds approximately $9,615,000 in par
19
value from issues that are callable before December 31, 2001. Additional calls will predominantly depend upon future
movements in interest rates. Earnings are not expected to be materially affected by the reinvestment of the proceeds in
lower yielding securities or Federal funds sold. Management is not aware of any other 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 December 31, 2000 and 1999 gap positions are presented in
TABLE VI and VII, respectively.
- -------------------------------------------------------------------------------------------------------------------
TABLE VI
INTEREST RATE SENSITIVITY GAPS
December 31, 2000
(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 $ 26,814 $ 7,076 $ 10,913 $ 43,574 $ 88,377
Securities (at amortized cost) - 2,000 1,000 18,062 21,062
Interest-bearing deposits with other
banks 17 - - - 17
Federal funds sold 1 - - - 1
Total interest earning assets 26,832 9,076 11,913 61,636 109,457
INTEREST-BEARING LIABILITIES
Demand deposits $ 13,384 $ - $ - $ - $ 13,384
Savings deposits 35,251 195 390 1,036 36,872
Time deposits 6,352 6,367 10,320 12,084 35,123
Short-term borrowings 5,367 106 308 128 5,909
Long-term borrowings 3 3 6 446 458
Total interest-bearing liabilities 60,357 6,671 11,024 13,694 91,746
Contractual interest
sensitivity gap (33,525) 2,405 889 47,942 17,711
Adjustment (2) 24,318 (24,318) - - -
Adjusted interest
sensitivity gap $ (9,207) $ (21,913) $ 889 $ 47,942 $ 17,711
Cumulative adjusted interest
sensitivity gap $ (9,207) $ (31,120) $ (30,231) $ 17,711
Cumulative adjusted gap as a percent
of total earning assets (8.41%) (28.43%) (27.62%) 16.18%
Cumulative adjusted
rate-sensitivity ratio 0.74 0.54 0.61 1.19
This table includes various assumptions by management of maturities and repayment patterns.
(1) - The amounts reflect the earlier of contractual repricing or maturity. No prepayment assumptions were assumed.
(2) - Adjustment to approximate the actual repricing of interest-bearing demand deposits and savings accounts based upon historical
experience.
- -------------------------------------------------------------------------------------------------------------------
20
- -------------------------------------------------------------------------------------------------------------------
TABLE VII
INTEREST RATE SENSITIVITY GAPS
December 31, 1999
(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 $ 24,875 $ 3,441 $ 7,839 $ 38,872 $ 75,027
Securities (at amortized cost) 2,978 - 1,514 18,005 22,497
Interest-bearing deposits with other
banks 17 - - - 17
Federal funds sold 30 - - - 30
Total interest earning assets 27,900 3,441 9,353 56,877 97,571
Interest-bearing LIABILITIES
Demand deposits $ 15,549 $ - $ - $ - $ 15,549
Savings deposits 37,400 - - - 37,400
Time deposits 10,362 5,095 3,393 6,592 25,442
Short-term borrowings 1,256 2,425 432 - 4,113
Long-term borrowings 4 4 8 457 473
Total interest-bearing liabilities 64,571 7,524 3,833 7,049 82,977
Contractual interest
sensitivity gap (36,671) (4,083) 5,520 49,828 14,594
Adjustment (2) 26,130 (26,130) - - -
Adjusted interest
sensitivity gap $ (10,541) $ (30,213) $ 5,520 $ 49,828 $ 14,594
Cumulative adjusted interest
sensitivity gap $ (10,541) $ (40,754) $ (35,234) $ 14,594
Cumulative adjusted gap as a percent
of total earning assets (10.80%) (41.77%) (36.11%) 14.96%
Cumulative adjusted
rate-sensitivity ratio 0.73 0.43 0.54 1.18
This table includes various assumptions by management of maturities and repayment patterns.
(1) - Contractual repricing, not contractual maturities, is used in this table unless otherwise noted. No prepayment assumptions
were assumed.
(2) - Adjustment to approximate the actual repricing of interest-bearing demand deposits and savings accounts based upon historical
experience.
- -------------------------------------------------------------------------------------------------------------------
As displayed in Table VI, the Bank's cumulative one year net interest sensitivity position at December 31, 2000, or gap,
is 0.61. 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 2001 could have a significant negative impact on the Bank's net
interest income in 2001.
Although there has not been a significant change in the Company's overall gap position, there have been some minor
changes. The cumulative gap has increased to $17,711,000 at December 31, 2000 versus $14,594,000 at December 31,
1999, an increase of 21.4%. This is consistent with the growth in the Company's interest earning assets (principally
loans), a portion of which has been funded by noninterest-bearing deposits, noninterest earning assets (e.g., cash and
due from banks) and income from operations. The cumulative one year gap has improved from 0.54 in 1999 to 0.61 in
2000. The improvement has resulted from the Company attracting time deposits with maturities greater than one year.
At December 31, 2000, approximately 34.4% of the time deposits ($12,084,000) are scheduled to mature after one year
compared to 25.9% ($6,592,000) in 1999. Although the Company strives to maintain a one year cumulative gap ratio of
1.00, the current gap position is considered adequate by management due to its ability to change interest rates on the
bulk of its demand and savings deposits within a short time period.
21
The information presented in the above tables represents a static view of the Bank's gap position as of December 31, 2000
and 1999, and as such, does not consider variables such as future loan and deposit volumes, mixes and interest rates.
The Company seeks to maintain its adjusted interest sensitivity gap within 12 months to a relatively small balance, positive
or negative, regardless of anticipated upward or down movements in interest rates in an effort to limit the effects of interest
rate risk on Company net interest income.
The following table represents the results of the Company's interest sensitivity simulation analysis as of December 31,
2000. Key assumptions in the preparation of the table include changes in market conditions including interest rates, loan
volumes, and pricing; deposit sensitivity; customer preferences; and capital plans. To attempt to quantify the potential
change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected
balances, maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity
that net interest income has in relation to changing interest.
Annualized Hypothetical%
Interest Rate Scenario Change in Net Interest Income
Up 300 Basis Points - 15.4%
Up 100 Basis Points - 5.1
Down 100 Basis Points 5.1
Down 300 Basis Points 13.0
As of year end 2000, a sharp increase or decrease in interest rates would have a significant impact on the Company's
earnings. Modest changes in the interest rate environment, would not have as dramatic an impact.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditor's report and consolidated financial statements of the Company and its subsidiary appear herein.
The Company is not subject to the requirements for disclosure of supplemental quarterly financial data.
22
(ERNST & YOUNG LLP LETTERHEAD)
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First National Bankshares Corporation
We have audited the accompanying consolidated balance sheet of First National Bankshares Corporation and subsidiaries
(the Company) as of December 31, 2000, and the related consolidated statements of income, shareholder' equity, and cash
flows for the year then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit. The accompanying consolidated
balance sheet of the Company as of December 31, 1999 and the related consolidated statements of income, shareholders'
equity, and cash flows for the years ended December 31, 1999 and 1998, were audited by other auditors whose report dated
February 4, 2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the 2000 financial statements referred to above present fairly, in all material respects, the consolidated financial
position of First National Bankshares Corporation and subsidiaries at December 31, 2000, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Charleston, WV
February 14, 2001
23
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS 2000 1999
Cash and due from banks $ 2,034,560 $ 3,716,511
Federal funds sold 1,000 30,000
Interest-bearing deposits with other banks 16,718 17,492
Securities available for sale at estimated fair value
(amortized cost of $9,713,199 and $11,689,657) 9,645,230 11,356,470
Securities held to maturity (estimated fair value
of $11,348,441 and $11,160,273) 11,351,137 11,519,992
Loans, less allowance for loan losses of $618,656
and $763,523 87,758,799 74,263,640
Bank premises and equipment, net 1,536,567 1,695,335
Accrued interest receivable 937,375 726,868
Other real estate acquired in settlement of loans 1,013,496 883,496
Other assets 579,831 619,042
Total assets $ 114,874,713 $ 104,828,846
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 11,146,615 $ 10,740,459
Interest-bearing 85,378,554 78,391,385
Total deposits 96,525,169 89,131,844
Short-term borrowings 5,908,704 4,112,579
Other liabilities 996,462 960,467
Long-term borrowings 458,117 473,288
Total liabilities 103,888,452 94,678,178
Shareholders' Equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 971,265 and
964,515 shares, respectively 971,265 964,515
Capital surplus 1,089,453 1,019,053
Retained earnings 8,967,004 8,370,344
Accumulated other comprehensive income (41,461) (203,244)
Total shareholders' equity 10,986,261 10,150,668
Total liabilities and shareholders' equity $ 114,874,713 $ 104,828,846
See Notes to Consolidated Financial Statements
24
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Interest income:
Interest and fees on loans $ 7,453,061 $ 6,158,358 $ 6,328,051
Interest and dividends on securities:
Taxable 1,131,623 1,148,635 819,543
Tax-exempt 145,203 163,536 175,715
Interest on Federal funds sold and interest-
bearing deposits 30,733 236,049 240,544
Total interest income 8,760,620 7,706,578 7,563,853
Interest expense:
Deposits 3,628,942 3,076,961 2,949,576
Short-term borrowings 422,295 55,147 59,283
Long-term borrowings 27,258 257,596 362,940
Total interest expense 4,078,495 3,389,704 3,371,799
Net interest income 4,682,125 4,316,874 4,192,054
Provision for loan losses 72,500 100,000 448,940
Net interest income after provision for
loan losses 4,609,625 4,216,874 3,743,114
Other income (expense):
Trust department income 30,511 61,407 86,168
Service fees 293,789 300,226 248,286
Securities (losses), net (3,440) (517) -
Other 111,465 93,594 110,626
Total other income 432,325 454,710 445,080
Other expenses:
Salaries and employee benefits 1,700,934 1,603,221 1,541,833
Net occupancy expense 269,917 269,737 283,345
Equipment rentals, depreciation and maintenance 277,527 279,937 293,666
Data processing 226,945 183,192 195,237
Advertising 92,063 67,339 64,446
Professional and legal 126,918 96,862 161,010
Mailing and postage 77,953 74,440 75,979
Directors' fees and shareholders' expenses 110,554 107,860 100,386
Stationery and supplies 83,341 80,316 70,479
Other 437,793 412,521 380,545
Total other expenses 3,403,945 3,175,425 3,166,926
Income before income tax expense 1,638,005 1,496,159 1,021,268
Income tax expense 537,912 494,543 297,124
Net income $ 1,100,093 $ 1,001,616 $ 724,144
Basic earnings per common share $ 1.14 $ 1.04 $ 0.75
Diluted earnings per common share $ 1.13 $ 1.03 $ 0.75
See Notes to Consolidated Financial Statements
25
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated Total
Other Share-
Common Capital Retained Comprehensive holders'
Stock Surplus Earnings Income Equity
Balance, December 31, 1997 $ 962,500 $ 1,000,000 $ 7,361,859 $ 440 $ 9,324,799
Comprehensive income:
Net income 724,144 724,144
Other comprehensive income,
net of deferred income taxes
of $4,476:
Unrealized losses on securities (7,016) (7,016)
Total comprehensive income 717,128
Cash dividends declared on
common stock ($0.33 per share) (316,037) (316,037)
Issued 2,015 shares of common
stock pursuant to exercise of
stock option 2,015 19,053 21,068
Balance, December 31, 1998 964,515 1,019,053 7,769,966 (6,576) 9,746,958
Comprehensive income:
Net income 1,001,616 1,001,616
Other comprehensive income,
net of deferred income taxes
of $125,739:
Unrealized losses on securities (196,668) (196,668)
Total comprehensive income 804,948
Cash dividends declared on
common stock ($0.42 per share) (401,238) (401,238)
Balance, December 31, 1999 964,515 1,019,053 8,370,344 (203,244) 10,150,668
Comprehensive income:
Net income 1,100,093 1,100,093
Other comprehensive income,
net of deferred income taxes
of $103,435:
Unrealized gains on securities 161,783 161,783
Total comprehensive income 1,261,876
Cash dividends declared on
common stock ($0.52 per share) (503,433) (503,433)
Issued 6,750 shares of common
stock pursuant to exercise of
stock option 6,750 70,400 77,150
Balance, December 31, 2000 $ 971,265 $ 1,089,453 $ 8,967,004 $ (41,461) $10,986,261
See Notes to Consolidated Financial Statements
26
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash Flows From Operating Activities
Net income $ 1,100,093 $ 1,001,616 $ 724,144
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 219,412 233,179 263,089
Provision for loan losses 72,500 100,000 448,940
Deferred income tax expense (benefit) 11,707 8,314 (118,984)
Securities losses, net 3,440 517 -
Loss (gain) on sale of other assets 4,000 - (23,288)
Provision for valuation allowance on other
real estate owned - - 1,500
(Gain) loss on disposal of bank premises and equipment - (5,331) 800
(Accretion of securities discounts) and amortization of
premiums, net (17,072) (180,938) (69,097)
(Increase) decrease in accrued interest receivable (210,507) (124,577) 57,816
(Increase) in other assets (75,931) (26,293) (19)
Increase (decrease) in other liabilities 15,557 (45,905) 42
Net cash provided by operating activities 1,123,199 960,582 1,284,943
Cash Flows From Investing Activities
Net decrease (increase) in interest bearing deposits with
other banks 774 (17,492) -
Proceeds from maturities and calls of securities held
to maturity 1,011,560 5,980,516 8,575,000
Proceeds from sales, maturities and calls of securities
available for sale 2,500,000 9,499,035 6,000,000
Purchases of securities held to maturity (851,025) (8,721,753) (5,000,938)
Purchases of securities available for sale (501,590) (11,910,494) (10,071,287)
(Loans made to) principal payments received from
customers, net (13,767,659) (5,720,409) (897,037)
Purchases of bank premises and equipment (60,644) (95,111) (40,342)
Proceeds from sale of bank premises and equipment - 20,000 1,300
Proceeds from sales of other assets 24,000 - 56,238
Proceeds from lease payments on other real
estate owned 42,000 19,504 -
Net cash (used in) investing activities (11,602,584) (10,946,204) (1,377,066)
(Continued)
27
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash Flows From Financing Activities
Net (decrease) increase in demand deposit, NOW and
savings accounts (2,287,663) 11,902,587 4,414,555
Proceeds from sales of (payments for matured)
time deposits, net 9,680,988 (3,992,070) (1,528,976)
Net increase (decrease) in short-term borrowings 1,796,125 3,161,845 (379,662)
Principal payments on long-term borrowings (15,171) (5,014,310) (12,402)
Proceeds from issuance of common stock pursuant
to stock option plans 77,150 - 21,068
Dividends paid (482,995) (341,438) (308,160)
Net cash provided by financing activities 8,768,434 5,716,614 2,206,423
(Decrease) increase in cash and cash equivalents (1,710,951) (4,269,008) 2,114,300
Cash and cash equivalents:
Beginning 3,746,511 8,015,519 5,901,219
Ending $ 2,035,560 $ 3,746,511 $ 8,015,519
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 3,998,842 $ 3,461,886 $ 3,334,559
Income taxes $ 602,362 $ 491,429 $ 497,945
Supplemental Schedule of Noncash
Investing and Financing Activities
Other real estate acquired in settlement of loans $ 200,000 $ 28,000 $ 885,000
Dividends declared and unpaid $ 165,115 $ 144,677 $ 84,877
See Notes to Consolidated Financial Statements
28
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of business: First National Bankshares Corporation (the "Company") is a holding company which
provides financial products and services through its wholly owned subsidiaries First National Bank and FNB
Insurance, LLC. First National Bank is a commercial bank with operations in Greenbrier and Kanawha
Counties of West Virginia. The Bank provides retail and commercial loans and deposit and trust services
primarily to customers in Greenbrier, Kanawha and surrounding counties. FNB Insurance, LLC was
organized on September 27, 2000, for the purpose of investing in ProServ, LLC, an insurance agency
operating in the State of West Virginia selling property and casualty insurance. Along with other investors,
FNB Insurance, LLC will share in the results of ProServ, LLC.
The Company's only defined business segment is community banking. As a community bank, the
Company offers its customers a full range of products through traditional branches, ATMs, and personal
computers.
Principles of consolidation: The accounting and reporting policies of First National Bankshares
Corporation and its subsidiaries conform to accounting principles generally accepted in the United States
and to general practices within their respective industries. The accompanying consolidated financial
statements include the accounts of First National Bankshares Corporation and its wholly-owned
subsidiaries, First National Bank and FNB Insurance, LLC. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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 - Securities purchased with the intention of recognizing short-term profits are placed
in a trading account and carried at market value. Realized and unrealized gains and losses are
included in income. There are no securities classified as "trading" in the accompanying consolidated
financial statements.
Realized gains and losses on sales of securities are recognized on the specific identification method.
Amortization of premiums and accretion of discounts are computed using the interest method.
Loans and allowance for loan losses: Loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan losses.
Unearned interest on discounted loans is amortized to income over the life of the loans, using methods
which approximate the interest method. For all other loans, interest is accrued daily on the outstanding
balances.
The allowance for loan losses is maintained at a level considered adequate to absorb losses in the loan
portfolio. 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
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 nonaccrual 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 nonaccrual 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 nonaccrual loans is recognized primarily
using the cost-recovery method, whereby no income will be recognized until the entire principal balance is
collected.
Loan fees and costs: Loan origination and commitment fees and direct loan origination costs are being
recognized as collected and incurred. The use of this method of recognition does not produce results that
are materially different from results which would have been produced if such costs and fees were deferred
and amortized as an adjustment of the loan yield over the life of the related loan.
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.
Income taxes: Deferred income taxes (included in other assets) are provided for temporary differences
between the tax basis of an asset or liability and its reported amount in the financial statements at the
statutory tax rate. The components of other comprehensive income included in the Consolidated
Statements of Stockholders' Equity have been computed based upon a 39% effective tax rate.
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 966,823, 964,515 and
963,565 for the years ended December 31, 2000, 1999 and 1998, respectively. Diluted per share amounts
assume the conversion, exercise or issuance of all stock options. The dilutive impact of stock options was
5,752 shares in 2000, 5,484 shares in 1999, and 4,589 shares in 1998.
401(k) plan: The subsidiary bank 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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications: Certain amounts in the 1999 and 1998 consolidated financial statements 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, as amended. This
statement establishes new accounting and reporting requirements for derivative instruments, including
certain derivative instruments embedded in other contracts and hedging activities. The Company adopted
the pronouncement on January 1, 2001. The adoption had no impact on the Company's balance sheet nor
its income statement because the Company did not hold any financial instruments that qualified as
derivatives.
Note 2. Securities
The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31,
2000 and 1999, are summarized as follows:
2000
Carrying
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for sale
Taxable:
U.S. Government agencies
and corporations $ 8,999,276 $ - $ 67,486 $ 8,931,790
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank
stock 646,100 - - 646,100
Other equities 8,923 - 483 8,440
Total taxable 9,710,949 - 67,969 9,642,980
Tax-exempt:
Federal Reserve Bank
stock 2,250 - - 2,250
Total $ 9,713,199 $ - $ 67,969 $ 9,645,230
Carrying
Value Estimated
( Amortized Unrealized Fair
Cost) Gains Losses Value
Held to maturity
Taxable:
U.S. Government agencies
and corporations $ 7,600,000 $ 5,080 $ 32,650 $ 7,572,430
State and political
subdivisions 485,000 - 7,052 477,948
Total taxable 8,085,000 5,080 39,702 8,050,378
Tax-exempt:
State and political
subdivisions 3,266,137 32,056 130 3,298,063
Total $ 11,351,137 $ 37,136 $ 39,832 $ 11,348,441
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999
Carrying
Value
(Estimated
Amortized Unrealized Fair
Cost Gains Losses Value)
Available for sale
Taxable:
U.S. Government agencies
and corporations $ 10,977,168 $ - $ 332,704 $ 10,644,464
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank
stock 646,100 - - 646,100
Other equities 7,489 - 483 7,006
Total taxable 11,687,407 - 333,187 11,354,220
Tax-exempt:
Federal Reserve Bank
stock 2,250 - - 2,250
Total $ 11,689,657 $ - $ 333,187 $ 11,356,470
Carrying
Value Estimated
( Amortized Unrealized Fair
Cost) Gains Losses Value
Held to maturity
Taxable:
U.S. Government agencies
and corporations $ 8,000,000 $ - $ 196,367 $ 7,803,633
State and political
subdivisions 500,000 - 172,170 327,830
Total taxable 8,500,000 - 368,537 8,131,463
Tax-exempt:
State and political
subdivisions 3,019,992 21,266 12,448 3,028,810
Total $ 11,519,992 $ 21,266 $ 380,985 $ 11,160,273
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, 2000, are
summarized as follows:
Held to Maturity Available for Sale
Carrying
Carrying Value
Value Estimated (Estimated
(Amortized Fair Amortized Fair
Cost) Value Cost Value)
Due in one year or less $ 3,000,000 $2,999,700 $ - $ -
Due from one to five years 7,597,801 7,602,159 8,999,276 8,931,790
Due from five to ten years 268,336 268,634 - -
Due after ten years 485,000 477,948 - -
Equity securities - - 713,923 713,440
Total $ 11,351,137 $ 11,348,441 $ 9,713,199 $ 9,645,230
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2000 and 1999, securities with amortized costs of $11,800,000 and $8,500,000,
respectively, with estimated fair values of $11,737,785 and $8,292,873, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law.
Gross realized losses on securities were $3,440, $517 and $0 in 2000, 1999 and 1998.
Note 3. Loans
Loans are summarized as follows:
2000 1999
Commercial, financial and agricultural $ 32,686,861 $ 30,877,073
Real estate - construction 502,089 1,451,024
Real estate - mortgage 38,311,909 31,395,269
Installment 14,082,820 9,079,335
Other 2,793,776 2,224,462
Total loans net of unearned income 88,377,455 75,027,163
Less allowance for loan losses 618,656 763,523
Loans, net $ 87,758,799 $ 74,263,640
Included in the net balance of loans are nonaccrual loans amounting to $122,900 and $0 at December 31,
2000 and 1999, respectively. If interest on nonaccrual loans had been recognized under the original terms
of the loans, such income would have approximated $16,524, $12,785 and $38,670 for the years ended
December 31, 2000, 1999 and 1998, respectively. No income was recognized on such loans during 2000,
1999 or 1998.
The following represents contractual maturities of loans at December 31, 2000:
After 1 But
Within 1 Year Within 5 Years After 5 Years
Commercial, financial and
agricultural $ 13,521,239 $ 16,229,392 $ 2,936,230
Real estate - construction 502,089 - -
Aggregate of remaining loan portfolio 19,005,387 15,164,944 21,018,174
Total $ 33,028,715 $ 31,394,336 $ 23,954,404
Loans due after one year with:
Variable rates $ 32,765,277
Fixed rates 22,583,463
Total $ 55,348,740
Concentrations of credit risk: The subsidiary bank grants commercial, residential and consumer loans
to customers primarily located in Greenbrier and Kanawha Counties of West Virginia.
Loans to related parties: The subsidiary bank has had, and may be expected to have in the future,
banking transactions in the ordinary course of business with directors, principal officers, their immediate
families and affiliated companies in which they are principal stockholders (commonly referred to as related
parties). In the opinion of management, all such loans were made 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:
2000 1999
Balance, beginning $ 1,675,456 $ 811,541
Additions 1,467,358 1,501,572
Amounts collected (764,730) (637,657)
Balance, ending $ 2,378,084 $ 1,675,456
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Allowance for Loan Losses
An analysis of the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 is as
follows:
2000 1999 1998
Balance, beginning of year $ 763,523 $ 765,542 $ 635,555
Losses:
Commercial, financial and agricultural 9,600 203,708 -
Real estate - mortgage 176,926 3,576 23,529
Real estate - construction - - 272,451
Installment 66,615 83,244 68,470
Total 253,141 290,528 364,450
Recoveries:
Commercial, financial and agricultural - 138,156 -
Real estate - mortgage - - -
Real estate - construction - - -
Installment 35,774 50,353 45,497
Total 35,774 188,509 45,497
Net losses 217,367 102,019 318,953
Provision for loan losses 72,500 100,000 448,940
Balance, end of year $ 618,656 $ 763,523 $ 765,542
The Company's total recorded investment in impaired loans at December 31, 2000 and 1999, approximated
$231,798 and $0, respectively, for which the related allowance for loan losses approximated $13,750 and
$0, respectively. The Company's average investment in such loans approximated $618,024, $282,436 and
$333,316 for the years ended December 31, 2000, 1999 and 1998. All impaired loans at December 31,
2000 and 1999, 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, 2000, 1999
and 1998, the Company recognized $38,247, $23,046 and $0 in interest income on impaired loans.
Note 5. Other Real Estate Acquired in Settlement of Loans
In 1999 the Company entered into an agreement to lease the commercial property it had acquired in
settlement of a loan and held in other real estate. The terms of the lease call for the lessee to make
monthly payments of $3,500, which are being accounted for under the cost recovery method as reductions
in the carrying value of the property.
The lessee has an option to purchase the property at any time during the lease term at a price equal to the
carrying value of the property at the date of the lease, $875,000, reduced by the amount of lease payments
made under the lease agreement up to a maximum of $100,000.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Bank Premises and Equipment
The major categories of bank premises and equipment and accumulated depreciation at December 31 are
summarized as follows:
2000 1999
Land $ 298,361 $ 298,361
Building and improvements 1,588,288 1,581,298
Furniture and equipment 2,074,584 2,035,482
3,961,233 3,915,141
Less accumulated depreciation 2,424,666 2,219,806
Bank premises and equipment, net $ 1,536,567 $ 1,695,335
Depreciation expense for the years ended December 31, 2000, 1999 and 1998, totaled $219,412, $233,179
and $263,089, respectively.
Note 7. Deposits
The following is a summary of interest-bearing deposits by type as of December 31:
2000 1999
Interest-bearing demand deposits $ 13,383,876 $ 15,548,733
Savings deposits 36,871,293 37,400,255
Certificates of deposit 35,123,385 25,442,397
Total $ 85,378,554 $ 78,391,385
Time certificates of deposit in denominations of $100,000 or more totaled $7,371,880 and $4,182,682 at
December 31, 2000 and 1999, respectively. Interest paid on time certificates of deposit in denominations
of $100,000 or more was $314,791, $265,258 and $276,856 for the years ended December 31, 2000, 1999
and 1998, respectively.
The following is a summary of the maturity distribution of certificates of deposit in denominations of
$100,000 or more as of December 31, 2000:
Amount Percent
Three months or less $ 1,351,352 18.3%
Three through six months 959,624 13.0%
Six through twelve months 2,695,137 36.6%
Over twelve months 2,365,767 32.1%
Total $ 7,371,880 100.0%
A summary of the maturities of time deposits as of December 31, 2000, follows:
Year Amount
2001 $ 23,037,865
2002 9,821,149
2003 1,074,853
2004 1,145,978
2005 43,540
$ 35,123,385
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank has, and expects to have in the future, banking transactions in the ordinary course of business
with directors, significant stockholders, principal officers, their immediate families, and affiliated companies
in which they are principal stockholders (commonly referred to as related parties). In management's
opinion, these deposits and transactions were on the same terms as those for comparable deposits and
transactions with nonrelated parties. Aggregate deposit and related balances (principally repurchase
agreements) with related parties for the year ended December 31, 2000 and 1999, were $1,617,287 and
$2,089,145.
Note 8. Other Borrowings
Short-term borrowings: During 2000 and 1999, the Company's short-term borrowings consisted of
securities sold under agreements to repurchase (repurchase agreements), Federal funds purchased from
other financial institutions and short-term advances from the Federal Home Loan Bank.
Interest paid on these borrowings are based upon either fixed or variable rates as determined upon
origination. For the Company's repurchase agreements, minimum deposit balance requirements are
established on a case-by-case basis. The securities underlying these agreements are under the subsidiary
bank's control and secure the total outstanding daily balances.
The following information is provided relative to these obligations:
2000 1999
Repurchase Federal Funds Short-term Repurchase Federal Funds Short-term
Agreements Purchased Advances - FHLB Agreements Purchased Advances - FHLB
Outstanding at year end $ 2,672,704 $ 236,000 $ 3,000,000 $4,112,579 $ - $ -
Weighted average interest
rate at December 31 4.94% 6.63% 6.69% 4.63% 0.00% 0.00%
Maximum amount outstanding
at any month end 5,093,377 9,025,000 3,000,000 4,112,579 4,874,500 -
Average daily amount
outstanding 3,181,469 2,887,305 1,172,131 1,198,981 252,003 -
Weighted average interest
rate 4.85% 6.56% 6.59% 3.41% 5.68% 0.00%
Long-term borrowings: The Company's long-term borrowings consist of a $500,000 advance from the
Federal Home Loan Bank (or "FHLB') with a fixed interest rate of 5.86%. Payments of $3,542, including
principal and interest, are due monthly, with a balloon payment due on December 23, 2002. At December
31, 2000, the outstanding balance totaled $458,117. A summary of the maturities of this borrowing for the
next five years is as follows: $16,084 in 2001 and $442,033 in 2002. The advance is secured by Federal
Home Loan Bank of Pittsburgh stock, qualifying first mortgage loans, certain nonmortgage 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 are as
follows:
2000 1999 1998
Current:
Federal $ 462,132 $ 414,085 $ 344,848
State 64,073 72,144 71,260
526,205 486,229 416,108
Deferred (Federal and State) 11,707 8,314 (118,984)
Total $ 537,912 $ 494,543 $ 297,124
A reconciliation between the amount of reported income tax expense and the amount computed by
multiplying the statutory income tax rates by book pretax income for the years ended December 31 is as
follows:
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
Amount Percent Amount Percent Amount Percent
Computed tax at applicable
statutory rate $ 556,922 34.0 $ 508,694 34.0 $ 347,231 34.0
Increase (decrease) in
taxes resulting from:
Tax-exempt interest (61,453) (3.8) (59,580) (3.9) (67,916) (6.7)
State income taxes, net
of Federal income
tax benefit 43,278 2.7 48,319 3.2 47,031 4.6
Other, net (835) (0.1) (2,890) (0.2) (29,222) (2.9)
Applicable income
taxes $ 537,912 32.8 $ 494,543 33.1 $ 297,124 29.0
The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities
as of December 31are as follows:
2000 1999
Deferred tax assets:
Allowance for loan losses $ 135,154 $ 191,652
Employee benefits 177,450 170,755
Accrued expenses - 5,265
Other real estate owned 23,986 7,607
Net unrealized loss on securities 26,508 129,943
363,098 505,222
Deferred tax liabilities:
Depreciation 23,460 31,481
Accretion on securities 2,079 21,040
25,539 52,521
Net deferred tax assets $ 337,559 $ 452,701
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.
The Bank matches up to 5% of each participant's annual compensation. In addition, the Bank is also
eligible to make discretionary contributions to the Plan. Contributions to the above Plan for the years ended
December 31, 2000, 1999 and 1998, totaled $57,170, $48,556 and $49,435, 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.
Participation in the plans is limited to all employees hired prior to January 1, 1999. Both plans are
contributory with retiree contributions that are adjustable based on various factors, some of which are
discretionary. The plans are unfunded. Details regarding the retiree medical plan and the retiree life
insurance plan are as follows:
Retiree Retiree
Medical Plan Life Insurance Plan Total
2000 1999 1998 2000 1999 1998 2000 1999 1998
Change in accumulated
postretirement benefit
obligation
Accumulated postretirement
benefit obligation at
beginning of year $ 379,148 $374,954 $ 305,375 $ 118,388 $ 106,188 $ 110,927 $ 497,536 $ 481,142 $416,302
Service cost 6,963 7,643 6,155 2,817 2,929 2,443 9,780 10,572 8,598
Interest cost 26,109 23,979 20,175 8,013 6,779 7,334 34,122 30,758 27,509
Actuarial (gain) loss (20,265) (10,579) 62,181 (102,908) 10,527 (8,760) (123,173) (52) 53,421
Benefits paid (20,115) (16,849) (18,932) (8,692) (8,035) (5,756) (28,807) (24,884) (24,688)
Accumulated postretirement
benefit obligation at end
of year $ 371,840 $379,148 $ 374,954 $ 17,618 $ 118,388 $ 106,188 $ 389,458 $ 497,536 $481,142
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retiree Retiree
Medical Plan Life Insurance Plan Total
2000 1999 1998 2000 1999 1998 2000 1999 1998
Change in plan assets
Fair value of plan assets at
beginning of year $ - $ - $ - $ - $ - $ - $ - $ - $ -
Employer contribution 20,115 16,849 18,932 8,692 8,035 5,756 28,807 24,884 24,688
Benefits paid (20,115) (16,849) (18,932) (8,692) (8,035) (5,756) (28,807) (24,884) (24,688)
Fair value of plan assets at
end of year $ - $- $ - $ - $ - $ - $ - $ - $ -
Funded status $(371,840) $(379,148) $(374,954) $(17,618) $(118,388) $(106,188) $(389,458)$(497,536)$(481,142)
Unrecognized net actuarial
loss (gain) 29,388 50,558 62,800 (92,806) 10,102 (425) (63,418) 60,660 62,375
Accrued postretirement
benefit cost $(342,452) $(328,590)$(312,154) $(110,424) $(108,286) $(106,613) $(452,876) $(436,876) $(418,767)
Components of net periodic
postretirement benefit
cost
Service cost $ 6,963 $ 7,643 $ 6,155 $ 2,817 $ 2,929 $ 2,443 $ 9,780 $ 10,572 $ 8,598
Interest cost 26,109 23,979 20,175 8,013 6,779 7,334 34,122 30,758 27,509
Amortization of net actuarial
loss 905 1,663 - - - - 905 1,663 -
Net periodic postretirement
benefit cost $ 33,977 $ 33,285 $ 26,330 $ 10,830 $ 9,708 $ 9,777 $ 44,807 $ 42,993 $ 36,107
2000 1999 1998
Actuarial assumptions:
Discount rate (both plans) 7.25% 7.25% 6.75%
Annual increase in per capita 7% for the first 3 years; 7% for the first 3 years; 7% for the first 4 years;
healthcare costs of covered 6% for the next 3 years; 6% for the next 5 years; 6% for the next 5 years;
benefits 5-1/2% for the next 3 years; 5-1/2% for the next 5 years; 5-1/2% for the next 5 years;
and 5% thereafter and 5% thereafter 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:
One Percent One Percent
Point Increase Point Decrease
Increase (decrease) service and interest cost
components $ 1,081 $ (978)
(Increase) decrease accumulated postretirement
benefit obligation $ (14,912) $ 13,485
Note 11. Stock Option Plan
The Company has an incentive stock option plan covering certain key employees. Grants under the plan are
accounted for under the intrinsic value method. Accordingly, no compensation cost has been recognized for
grants under the plan. Had compensation cost for the stock-based compensation plan been determined based
on the fair value method, reported net income and earnings per share would have been reduced to the proforma
amounts shown below:
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
Net income:
As reported $ 1,100,093 $ 1,001,616 $724,144
Proforma $ 1,085,250 $ 967,420 $712,983
Basic earnings per share:
As reported $ 1.14 $ 1.04 $ 0.75
Proforma $ 1.12 $ 1.00 $ 0.74
Diluted earnings per share:
As reported $ 1.13 $ 1.03 $ 0.75
Proforma $ 1.12 $ 1.00 $ 0.74
The significant provisions of the Plan include authorization of the stock option committee to grant up to 48,125
shares of common stock between April 25, 1996 and April 25, 2006, with the right to adjust the number of
shares available for the plan at its discretion. Each option fully vests after six months from the grant date and
must be exercised within 5 years.
A summary of the status of the plan at December 31, 2000, 1999 and 1998, and changes during the year
ended, along with the assumptions used in calculating the estimated fair value of the options, is as follows:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Fixed Options
Outstanding at
beginning of year 32,015 $ 12.43 18,015 $ 10.43 23,280 $ 10.43
Granted 15,470 16.00 14,000 15.00 - -
Exercised (6,750) 11.43 - - (2,015) 10.46
Forfeited (3,125) 14.95 - - (3,250) 10.37
Outstanding at
end of year 37,610 13.87 32,015 12.43 18,015 10.43
Exercisable at end
of year 23,890 12.65 32,015 12.43 18,015 10.43
Fair value per option
granted during the year $ 1.83 $ 2.44 $ -
Option pricing method Black-Scholes Minimum Value n/a - no grants
Assumptions:
Expected dividend yield 3.00% 2.00% -
Risk-free interest rate 5.92% 5.85% -
Expected life of the options 5 Years 5 Years -
At December 31, 2000, the options outstanding under the stock option plan have exercise prices ranging
from $10.00 to $16.00 and a weighted average remaining contractual life of 3.13 years.
Note 12. Lease Obligation
The subsidiary bank leases the Charleston branch office space under an operating lease with an initial term
of ten years expiring on May 1, 2006. The lease provides for two successive options for five year renewals.
Total minimum lease payments of $101,970 were charged to expense for each of the years ended December
31, 2000, 1999 and 1998. In addition, adjustments may be charged or credited to the minimum amount for
changes in the Company's portion of the common area maintenance.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total future minimum lease payments under the lease are as follows:
Year Ending
December 31 Amount
2001 $ 101,970
2002 101,970
2003 101,970
2004 101,970
Thereafter 135,960
$ 543,840
Note 13. Commitments and Contingencies
Reserve Requirements: The subsidiary bank is required to maintain average balances with the Federal
Reserve Bank. During 2000, the average balance maintained was $548,000. The subsidiary bank does not
earn interest on this balance.
Financial instruments with off-balance sheet risk: The subsidiary bank is a party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments. At December 31, 2000 and 1999,
the subsidiary bank's financial instruments with off-balance sheet risk are as follows:
Financial instruments whose contract Contract Amount
amounts represent credit risk 2000 1999
Commitments to extend credit $ 13,475,401 $ 13,903,030
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 management, based upon the advice of counsel, the outcome of these matters will not have a
significant adverse effect on the consolidated financial position of the Company.
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 $398,000 at December 31, 2000.
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 2001, the net retained profits available for distribution to First National Bankshares Corporation as
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dividends without regulatory approval approximates $1,197,000 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, 2000, that the subsidiary bank meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Office of the Comptroller of the Currency categorized the subsidiary bank
as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized the subsidiary bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since that notification that management
believes have changed the institution's classification.
The following table sets forth the subsidiary bank's actual capital amounts and ratios (in thousands):
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2000:
Total Capital $ 11,544 13.94% $ 6,625 8.0% $ 8,281 10.0%
(to Risk Weighted
Assets)
Tier I Capital 10,925 13.19% 3,313 4.0% 4,970 6.0%
(to Risk Weighted
Assets)
Tier I Capital 10,925 9.55% 3,432 3.0% 5,720 5.0%
(to Average Assets)
As of December 31, 1999:
Total Capital $ 11,091 15.28% $ 5,808 8.0% $ 7,260 10.0%
(to Risk Weighted
Assets)
Tier I Capital 10,328 14.23% 2,904 4.0% 4,355 6.0%
(to Risk Weighted
Assets)
Tier I Capital 10,328 9.71% 3,191 3.0% 5,318 5.0%
(to Average Assets)
Note 15. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used by the Company in estimating its
fair value disclosures for financial instruments.
Cash and due from banks and interest-bearing deposits with other banks: The carrying values of these
amounts approximate their estimated fair value.
Federal funds sold: The carrying values of Federal funds sold approximate their estimated fair values.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. noninterest-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:
December 31, 2000 December 31, 1999
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks $ 2,034,560 $ 2,034,560 $ 3,716,511 $ 3,716,511
Interest bearing deposits
with other Banks 16,718 16,718 17,492 17,492
Federal funds sold 1,000 1,000 30,000 30,000
Securities held to maturity 11,351,137 11,348,441 11,519,992 11,160,273
Securities available for sale 9,713,199 9,645,230 11,689,657 11,356,470
Loans 87,758,799 87,646,590 74,263,640 72,281,189
Accrued interest receivable 937,375 937,375 726,868 729,868
$ 111,812,788 $ 111,629,914 $ 101,964,160 $ 99,291,803
Financial liabilities:
Deposits $ 96,525,169 $ 96,454,549 $ 89,131,844 $ 89,959,520
Short-term borrowings 5,908,704 5,908,704 4,112,579 4,112,253
Accrued interest payable 239,207 239,207 159,554 159,554
Long-term borrowings 458,117 458,117 473,288 473,288
$ 103,131,197 $ 103,060,577 $ 93,877,265 $ 94,704,615
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Condensed Financial Statements of Parent Company
Balance Sheets
December 31
Assets 2000 1999
Cash $ - $ 25,105
Securities held to maturity (estimated fair value $251,025) 251,006 -
Investment in bank subsidiary 10,882,998 10,124,524
Investment in insurance subsidiary 6,503 -
Other assets 169,904 145,716
Total assets $11,310,411 $ 10,295,345
Liabilities and shareholders' equity
Liabilities
Dividends payable $ 165,115 $ 144,677
Due to bank subsidiary 159,035 -
Total liabilities 324,150 144,677
Shareholders' equity
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 971,265 and 964,515
shares, respectively 970,265 964,515
Capital surplus 1,090,453 1,019,053
Retained earnings (consisting of undivided profits of
subsidiaries not yet distributed) 8,967,004 8,370,344
Accumulated other comprehensive income (41,461) (203,244)
Total shareholders' equity 10,986,261 10,150,668
Total liabilities and shareholders' equity $ 11,310,411 $ 10,295,345
Year Ended December 31
Statements of Income 2000 1999 1998
Interest on securities - tax exempt $ 481 $ - $ -
Income - dividends from bank subsidiary 503,433 401,238 316,037
Expenses - operating - - 77
Income before income taxes and undistributed
income 503,914 401,238 315,960
Applicable income tax expense (benefit) 15 - (30)
Income before undistributed income 503,899 401,238 315,990
Equity in undistributed income in subsidiaries 596,194 600,378 408,154
Net income $ 1,100,093 $ 1,001,616 $ 724,144
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31
Statements of Cash Flows 2000 1999 1998
Cash Flows From Operating Activities
Net income $ 1,100,093 $ 1,001,616 $ 724,144
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of securities premiums 18 - -
Equity in undistributed net income of
subsidiaries (596,194) (600,378) (408,154)
(Increase) in other assets (24,188) (59,800) (7,907)
Increase (decrease) in other liabilities 159,035 - -
Net cash provided by operating activities 638,764 341,438 308,083
Cash Flows From Investing Activities
Capital contribution - FNB Insurance, LLC (7,000) - -
Purchases of securities held to maturity (251) - -
Net cash (used in) financing activities (258,024) -
Cash Flows From Financing Activities
Proceeds from sale of common stock pursuant
to exercise of stock option 77,150 - 21,068
Dividends paid to shareholders (482,995) (341,438) (308,160)
Net cash (used in) financing activities (405,845) (341,438) (287,092)
Increase (decrease) in cash (25,105) - 20,991
Cash:
Beginning 25,105 25,105 4,114
Ending $ - $ 25,105 $ 25,105
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Dividends declared and unpaid $ 165,115 $ 144,677 $ 84,877
44
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The Board of Directors of the Company may consist of not less than five (5) nor more than twenty-five (25) shareholders
in accordance with the Company's By-laws. 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 or by a resolution of the shareholders
at any annual or special meeting, 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. 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. Additional information about the directors,
including their principal occupation and age, is set forth in the following table:
- -------------------------------------------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla President & CEO of 61 1993 2001
President & CEO of the First National Bankshares
Company and the Bank, Corp. and First National
Member of the Risk Bank
Management and Trust Cmts.
Michael G. Campbell Investor 52 1999 2002
Member of the Audit & Oil & Gas Executive
& Compliance and Incentive Owner, Renick Farm
Stock Option Cmts.
David A. Carson President - Carson Associates 49 1998 2003
Member of the Audit
& Compliance, Personnel
& Comp. and Executive Cmts.
Richard E. Ford Attorney at Law 73 1987 2002
Chairman of the Trust Cmt. Partner - The Ford
Member of the Personnel & Law Firm
Comp. and Incentive Stock
Option Cmts.
Walter Bennett Fuller Retired Banker 77 1986 2003
Vice Chairman of the Board,
Chairman, Audit & Compliance Cmt.
Chairman, Incentive Stk Option Cmt.
- -------------------------------------------------------------------------------------------------------------------
(Table continued on next page)
45
- -------------------------------------------------------------------------------------------------------------------
Name, Positions and Year First Year
Offices Held (Other Became a Term
Than Director) Principal Occupation Director of
With the Company or Employment for of the Office
and the Bank the Past Five Years Age Company Expires
- -------------------------------------------------------------------------------------------------------------------
G. Thomas Garten President - Alleghany Motors 49 1999 2003
Member of the Risk Owner - Greenway's Real
Management Cmt. Estate & Auction Co.
William D. Goodwin Attorney at Law, 57 1986 2001
Member of the Risk Owner/Broker, Coldwell
Management, Trust, Banker Stuart & Watts Real
Personnel & Compensation Estate, Inc.
and Executive Cmts.
Lucie T. Refsland, Ed.D. Professor of Mathematics 64 1995 2001
Member of the Risk Greenbrier Community College
Management and Trust Cmts. Center of Bluefield State College
William R. Satterfield, Jr. Owner - Greenbrier 56 1986 2001
Chairman, Risk Management Cmt. Insurance Agency, Inc.
Member of the Personnel &
Compensation and Executive Cmts.
Richard L. Skaggs Retired 78 1986 2003
Member of the Audit & Compliance
and Incentive Stock Option Cmts.
Ronald B. Snyder President, R.B.S., Inc. 61 1988 2002
Chairman of Board
Chairman, Personnel & Comp. Cmt.
Member of the Audit & Compliance,
Risk Management, Incentive
Stock Option and Executive Cmts.
- -------------------------------------------------------------------------------------------------------------------
The directors of the Company are divided into three (3) classes; and as a result, the shareholders elect approximately
one-third of the directors of the Company each year. Directors Bulla, Goodwin, Refsland and Satterfield whose terms
expire in 2001, have been nominated to stand for re-election at the 2001 annual meeting of the Company's stockholders
to serve a 3-year term which will expire in 2004.
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 $400.00 for each Board meeting,
and $100.00 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.
46
Executive Officers
The current executive officers of the Company and the Bank and information about these officers is set forth in the following
table.
- -------------------------------------------------------------------------------------------------------------------
Name Age Offices Held During Last Five Years
L Thomas Bulla 61 President & CEO of the Company and the Bank (1993 to present);
President and CEO of Bank One, West Virginia, Charleston, NA (1985 -
1993)
Charles A. Henthorn 41 Secretary/Treasurer of the Company (1999 to present); Executive Vice
President of the Company (1996 to 1999); Executive Vice President of
the Bank (1996 to present); Secretary to the Board of Directors (1998 to
present); Senior Vice President of the Bank (1994 to 1996); Vice
President and Senior Commercial Lender of Bank One, West Virginia,
Charleston, NA (1991 - 1994); National Bank Examiner with the Office
of the Comptroller of the Currency (1983 - 1991)
Darrell G. Echols 64 Retired effective December 29, 2000; Vice President of the Company
(1987 to 2000); Senior Vice President and Loan Officer of the Bank (1970
to 2000)
Victoria W. Ballengee 43 Vice President of the Company (1999 to present); Senior Vice President
and Director of Private Banking of the Bank (1996 to present); Vice
President and WV Market Manager, Banc One Mortgage Corporation
(1994 to 1996); Regional Finance Director, Banc One, West Virginia,
Charleston, NA (1993 to 1994)
Matthew L. Burns 31 Chief Financial Officer of the Bank (1998 to present); Certified Public
Accountant (1992 to 1998)
- -------------------------------------------------------------------------------------------------------------------
The executive officers of the Company listed above, with the exception of Mr. Echols, shall continue in office until the 2001
organizational meeting of the directors of the Company. It is expected that the current officers will be re-elected to the
offices they now hold.
Compliance with Section 16(a) of the Exchange Act
The Company files this Form 10-K Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"). Since the Company does not have any class of securities registered pursuant to Section 12 of the
Exchange Act, the provisions of Section 16 thereof are not applicable to the Company's directors, officers and
shareholders.
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation paid to the named executive officers whose
compensation exceeds $100,000 for the years 2000, 1999 and 1998:
47
- -------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Other Compensation
Compensation Compen- Securities Under-
Salary Bonus sation lying Options
Executive Officer Year ($) ($) $ (1) (#) (2)
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 2000 $150,000 $35,000 $17,447 4,300
1999 $150,000 $30,000 $18,575 3,250
1998 $150,000 $ - $19,964 -
Charles A. Henthorn (3) 2000 $115,000 $17,000 $8,859 3,000
FOOTNOTES:
(1) These amounts are for director fees, employer matching 401(k) contributions, and personal use of company-owned
vehicle.
(2) Represent shares granted under the Company's Incentive Stock Option Plan. The options fully vest six months
after the grant date and expire five years after grant date.
(3) Prior to 2000, Mr. Henthorn's compensation did not meet the requirement for reporting, therefore, no amounts are
reported for 1999 and 1998.
The following table details stock option grants for the executive officers named in the above compensation table for the year
2000:
STOCK OPTION GRANTS IN 2000
Potential Realizable
Number of Value (3) at Assumed
Securities Annual Rates of Stock
Underlying % of Total Exercise Price Appreciation for
Executive Options Options Price Expiration Option Term
Officer Granted(1) Granted ($/Sh) Date 5% ($) (2) 10% ($) (2)
L. Thomas Bulla 4,300 27.8% $16.00 08/08/05 $19,006 $42,011
Charles A. Henthorn 3,000 19.4% $16.00 08/08/05 $13,260 $29,310
FOOTNOTES:
(1) The options were granted under the Company's Incentive Stock Option Plan. The options fully vest six months
after the grant date. Under the plan, the options carry an exercise price equal to the fair market value of the stock
at the date of the grant. The options cannot be transferred and all unexercised options expire five years after the
grant date.
(2) The potential realizable value of the options, if any, granted in 2000 to the executive officer was calculated by
multiplying those options by the excess of (a) the assumed fair market value of the common stock on the date of
the grant (August 8, 2000) if the fair market value of the common stock were to increase 5% or 10% in each year
of the option's five year term over (b) the exercise price shown. This calculation does not take into account any
taxes or other expenses which might by owed. The assumed fair market value at a 5% assumed annual
appreciation rate over the five year term is $20.42 and such value at a 10% assumed annual appreciation rate over
that term is $25.77. The 5% and 10% appreciation rates are set forth in the Securities and Exchange Commission
rules and no representation is made that the common stock will appreciate at these assumed rates or at all.
The following table details the aggregated option exercises in 2000 and year end
option values for the executive officers named in the above compensation table:
48
AGGREGATED OPTION EXERCISES IN 2000
AND YEAR END OPTION VALUES
Shares Number of Securities Value of Unexercised In-The-
Acquired on Underlying Unexercised Money (2) Options at year end
Executive Exercise Value Options at Year end (#) ($) (3)
Officer (# of sh) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
L. Thomas Bulla 0 $0 8,450 4,300 $135,200 $0
Charles A. Henthorn 0 $0 6,050 3,000 $ 96,800 $0
FOOTNOTES:
(1) The "value realized" represents the difference between the exercise price of the option shares and the market price
of the option shares on the date the option was exercised. The value realized was determined without considering
any taxes which may have been owed.
(2) "In-The-Money" options are options whose exercise price was less than the fair market value of common stock at
December 31, 2000.
(3) Assumes a stock price of $16.00 per share, which is the believed market price per share reported to management
by purchasers of the Company's common stock on or about December 31, 2000.
- -------------------------------------------------------------------------------------------------------------------
Employment Agreement
The Company has an employment agreement with its chief executive officer. This agreement contains change in control
provisions that would entitle the officer to receive, under certain circumstances, twice his annual compensation in the event
there is a change in control in the Company (as defined therein) resulting in termination of his employment or voluntary
resignation. The maximum contingent liability under this agreement approximated $398,000 at December 31, 2000
Benefit Plans
The Company's executive incentive plan is discretionary and is based upon several factors, including the overall financial
performance of the Company and individual performance factors, among others. The plan is directed by the Compensation
Committee of the Board of Directors and currently covers those employees classified as executive officers of the Company
or its subsidiary bank.
At the regularly scheduled 1996 stockholders' meeting, the shareholders voted to approve an incentive stock option plan.
The purpose of the plan is to provide a method whereby key employees of the Company and its subsidiaries who are
responsible for the management, growth, and protection of the business, and who are making substantial contributions
to the success and profitability of the business, may be encouraged to acquire a stock ownership in the Company, thus
creating a proprietary interest in the business and providing them with greater incentive to continue in the service of and
to promote the interest of the Company and its stockholders. The plan is directed by the Incentive Stock Option
Committee, which is comprised of certain board members, who at their discretion grant shares to employees covered by
the plan. For more information regarding the stock option plan, please refer to Note 11 of the Consolidated Financial
Statements included in Item 8 of this filing.
Information related to the Company's 401(k) and its postretirement benefit plans is summarized in Note 10 of the
Consolidated Financial Statements included in Item 8 of this filing.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no shareholders, known to the Company, who beneficially own more than 5% of the Company's common stock,
the only class of stock outstanding, as of March 1, 2001.
49
The following table sets forth information as of March 1, 2001, 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.
- -------------------------------------------------------------------------------------------------------------------
Shares Owned Percent of
Name Beneficially Class
- -------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 44,850 (1) 4.56%
David A. Carson 4,315 (2) 0.44%
Michael G. Campbell 4,375 (3) 0.45%
Richard E. Ford 20,530 (4) 2.11%
Walter Bennett Fuller 9,500 (5) 0.98%
G. Thomas Garten 5,060 (6) 0.52%
William D. Goodwin 7,975 (7) 0.82%
Lucie T. Refsland, Ed.D. 2,325 (8) 0.24%
William R. Satterfield, Jr. 7,545 (9) 0.78%
Richard L. Skaggs 2,795 (10) 0.29%
Ronald B. Snyder 21,405 (11) 2.20%
All Directors and Executive
Officers of the Company
as a Group (13 persons) 148,800 (12) 14.88%
- -------------------------------------------------------------------------------------------------------------------
FOOTNOTES
(1) Mr. Bulla has sole voting and investment authority for 19,350 shares and shared voting and investment authority for
12,750 shares. Included in Mr. Bulla's beneficial ownership are 12,750 fully-vested and exercisable stock options.
(2) Mr. Carson has sole voting and investment authority for 700 shares and shared voting and investment authority for
2,845. Included in Mr. Carson's beneficial ownership are 770 shares held by his spouse.
(3) Mr. Campbell has sole voting and investment authority for 4,375 shares.
(4) Mr. Ford has sole voting and investment authority for 8,230 shares and shared voting and investment authority for
10,075 shares. Included in Mr. Ford's beneficial ownership are 2,225 shares held by his spouse.
(5) Mr. Fuller has sole voting and investment authority for 9,500 shares.
(6) Mr. Garten has sole voting and investment authority for 3,360 shares. Included in Mr. Garten's beneficial ownership
are 1,700 shares held by family members.
(7) Mr. Goodwin has sole voting and investment authority for 4,725 shares and shared voting and investment authority
for 3,250 shares.
(8) Ms. Refsland has sole voting and investment authority for 2,275 shares. Included in Ms. Refsland's beneficial
ownership are 50 shares held by her spouse.
(9) Mr. Satterfield has sole voting and investment authority for 5,545 shares. Included in Mr. Satterfield's beneficial
ownership are 2,000 shares held by his spouse.
(10) Mr. Skaggs has sole voting and investment authority for 1,170 shares and shared voting and investment authority for
1,625 shares.
(11) Mr. Snyder has sole voting and investment authority for 1,625 shares and shared voting and investment authority for
12,780 shares. Included in Mr. Snyder's beneficial ownership are 4,500 held by a corporation in which he has a
controlling interest and 2,500 shares held in a trust in which he has investment authority.
(12) Shares beneficially owned by executive officers include sole and/or shared voting and investment authority of 2,175
shares and 15,950 fully-vested and exercisable stock options.
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
50
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 did not involve more
than the normal risk of collectibility or present other unfavorable features. See Note 4 of the Consolidated Financial
Statements included in Item 8 of this filing for additional information related to loans granted to related parties.
On occasion, certain Directors of the Company who are professionals in the fields of law and insurance (Directors Ford,
Goodwin and Satterfield) have provided, and are expected to continue to provide, incidental legal and insurance services
on behalf of the Company and/or its subsidiary bank. It is believed that the payments of these services do not individually,
or in the aggregate, exceed 5% of the respective law practice or insurance company revenue.
51
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page(s) in
Form 10-K
( a ) (1)Financial Statements
The following consolidated financial statements and accountant's
report appear on pages 22 through 44 of this Form 10-K
Report of independent auditors..................................................................................23
Consolidated balance sheets at December 31, 2000 and 1999.......................................................24
Consolidated statements of income for the years ended
December 31, 2000, 1999, and 1998............................................................................25
Consolidated statements of shareholders' equity
for the years ended December 31, 2000, 1999, and 1998........................................................26
Consolidated statements of cash flows for the years ended
December 31, 2000, 1999, and 1998.........................................................................27-28
Notes to the consolidated financial statements...............................................................29-44
( a ) (2)Financial Statement Schedules
All other schedules for which provision is made in the applicable regulations
of the Commission have been omitted as the schedules are not required
under the related instructions, or are not applicable, or the information required
thereby is set forth in the financial statements or the notes thereto
( a ) (3)Exhibits required to be filed by Item 601 of Regulation
S-K and 14( c ) of Form 10-K
See index to exhibits........................................................................................55
( b ) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant
during the quarter ended December 31, 2000.
( c ) Exhibits
See Item 14(a)(3), above
( d ) Financial Statement Schedules
See Item 14(a)(2), above
52
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 03/27/01
L. Thomas Bulla
President, Chief Executive Officer & Director
(Principal Executive Officer)
/s/ Charles A. Henthorn 03/27/01
Charles A. Henthorn
Executive Vice President and Secretary
To the Board of Directors
/s/ Matthew L. Burns, CPA 03/27/01
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 03/27/01 /s/ Lucie T. Refsland 03/27/01
David A. Carson, Director Lucie T. Refsland, Director
/s/ Michael G. Campbell 03/27/01 /s/ William R. Satterfield Jr. 03/27/01
Michael G. Campbell, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/27/01 /s/ Richard L. Skaggs 03/27/01
Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/27/01 /s/ Ronald B. Snyder 03/27/01
Bennett Fuller, Director Ronald B. Snyder, Director
/s/ G. Thomas Garten 03/27/01
G. Thomas Garten, Director
/s/ William D. Goodwin 03/27/01
William D. Goodwin, Director
53
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 annual report and proxy materials are expected to be mailed to shareholders of record as of March 14, 2001 on or
around March 28, 2001. Copies thereof shall be furnished to the Commission upon request.
54
INDEX TO EXHIBITS
PAGE NUMBER(S)
IN FORM 10-K, OR
EXHIBIT PRIOR FILING
NUMBER DESCRIPTION REFERENCE
(3)I Articles of Incorporation of Registrant...............................................................( a )
(3)ii By-laws of Registrant.................................................................................( a )
(10) Material Contracts
A Agreement dated October 14, 1993, between L. Thomas Bulla
and First National Bank.....................................................................( b )
B Summary of Lease terms for Charleston branch facility............................................( c )
C Form S-8 Registration Statement under the Securities Act of 1933.................................( d )
D Specimen Copy of Incentive Stock Option Plan Agreement...........................................( e )
(11) Calculation of Basic and Diluted Computation of Earnings per Share.......................................56
(21) Subsidiaries of Registrant...............................................................................57
(23) Consents of experts and counsel
Consent of Independent Auditors.....................................................................58
(27) Financial Data Schedule...............................................................................59-60
(99) Report of Arnett & Foster, P.L.L.C., Independent Auditors................................................61
- -------------------------------------------------------------------------------------------------------------------
( a ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-Q Quarterly Report dated
September 30, 1999 filed with the Securities and Exchange Commission on or about November 10, 1999.
( b ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-K Annual Report dated
December 31, 1994 filed with the Securities and Exchange Commission on or about March 28, 1995.
( c ) 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.
( d ) 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.
( e ) Incorporated by reference to exhibits to First National Bankshares Corporation's Form 10-K Annual Report dated
December 31, 1996 filed with the Securities and Exchange Commission on or about March 29, 1997.
55
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.
56
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
- --------------------------------------------------------------------------------
FIRST NATIONAL BANK, a national banking association organized under the laws of
the United States of America.
FNB INSURANCE, LLC, a West Virginia limited liability company.
57
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-K of our
report dated February 4, 2000, on our audit of the consolidated financial
statements of First National Bankshares Corp. as of December 31, 1999 and 1998
of the Form 10-K of First National Bankshares Corporation for the year ended
December 31, 2000.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 19, 2001
EXHIBIT (99)
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
(ARNETT & FOSTER, P.L.L.C. LETTERHEAD)
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First National Bankshares Corporation
and subsidiary
Ronceverte, West Virginia
We have audited the accompanying consolidated balance sheets of First National
Bankshares Corporation and subsidiary as of December 31, 1999, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Bankshares Corporation and subsidiary as of December 31, 1999, and the results
of their operations and cash flows for each of the two years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
February 4, 2000