1
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, 2001
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OR
[ ]TRANSITION REPORT UNDER SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
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Commission file number 33-14252
FIRST NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
West Virginia 62-1306172
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Cedar Street, Ronceverte, West Virginia 24970
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 647-4500
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Securities registered pursuant to Sec. 12(b) of the Act- None
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Securities registered pursuant to Sec. 12(g) of the Act- None
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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, 2002, the aggregate market value of the outstanding voting common
stock held by nonaffiliates of the registrant was $17,672,040.
The total number of shares of the registrant's common stock outstanding as of
March 1, 2002 was 981,780.
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 67 PAGES. THE INDEX TO EXHIBITS IS ON PAGE 53
FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
Table of Contents
Page
PART I
Item 1 - Business...................................................... 3-6
Item 2 - Properties..................................................... 6-7
Item 3 - Legal Proceedings...................................... 7
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.................. 9-18
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 - Financial Statements and Supplementary Data................ 19-42
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 43
PART III
Item 10 - Directors and Officers of the Registrant.................. 43-45
Item 11 - Executive Compensation.................................... 45-48
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................................ 48-49
Item 13 - Certain Relationships and Related
Transactions.............................................................. 49
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form
8-K.............................................. 50
Signatures................................................................... 51
2
FIRST NATIONAL BANKSHARES CORPORATION
Form 10-K
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. In February 2001, the Company rented office space in
Covington, Virginia and opened a loan production office operating as FNB
Mortgage Center. All transactions conducted from the loan production office in
2001 were directly related to the Banks' fixed rate mortgage product. After
receiving regulatory approval in August 2001, the Bank began building a
full-service branch in the City of Covington. The facility, which offers the
same products and services as the main and branch bank, was completed in January
2002 and opened for business on February 4, 2002. See further discussion of the
facilities in the ITEM 2 - PROPERTIES.
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. The basic service
enables customers to access their accounts via a secure Internet connection from
the Bank's website (, 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. 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 not
material. When considering loan requests, the primary factors taken into
consideration by the Bank are the cash flow and financial condition of the
borrower, the value of the underlying collateral, if any, and the
character and integrity of the borrower. These factors are evaluated in a number
of ways including an analysis of financial statements, credit reviews and visits
to the borrower's place of business.
The Bank also offers a broad range of fiduciary services through its Trust
Department, including the administration of trusts and decedents' estates and
other personal and corporate fiduciary services. Personal fiduciary services
include the settlement of estates, administration of various trusts, agency or
custodial accounts, investment management and guardian services.
Market Area
The Bank's primary market area includes the cities of Ronceverte and
Lewisburg and surrounding Greenbrier County, plus Charleston and surrounding
Kanawha County. Greenbrier County is predominately rural and comprised of
moderate-income households. Major employment in the area includes agriculture,
tourism, health care, education and light manufacturing. Unemployment rates in
the Greenbrier county area often exceed the state average, with 2001's average
(seasonally adjusted) unemployment rate being 6.2% versus West Virginia's
statewide average of 4.9%. As of December 31, 2001, the Bank's operations in
Greenbrier County accounted for approximately 79% of total loans and 94% 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 2001 being 4.0%. The Charleston MSA is much more
insulated from economic downturns than the Greenbrier County area.
The Company's new market, Covington, Virginia, is located in Alleghany County.
The location is approximately 40 miles west of its main location in Ronceverte.
The demographics of the market are similar to the Company's Greenbrier County
market except that there is a stronger manufacturing segment. Management
anticipates that the loan and deposit product mix will also be similar to the
Greenbrier County operations. Management expects to capitalize on its community
banking operating style in the market, which it feels is underserved.
Competition
The banking and financial services business is highly competitive, especially in
the Bank's market area. The Bank's principal competitors in Greenbrier County
include four other commercial banks, each of which is owned by statewide or
regional bank holding companies. As of December 31, 2001, management estimates
that the Bank had 20% of the deposit market share and 15% of the total loan
market share in the Greenbrier County market. In the Kanawha County market, the
state's five largest banking organizations, as well as regional and small
independent banks service the Charleston area. 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 ("OCC"), 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 OCC.
Capital Standards - The Federal Reserve Board and the OCC have adopted
risk-based minimum capital guidelines intended to provide a measure of capital
that reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet, such as assets,
and transactions that are recorded as off-balance sheet items, such as letters
of credit and recourse arrangements. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off-balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long-term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. In addition to the risk-based
guidelines, federal banking regulators require banking organizations to maintain
a minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio.
Failure to meet applicable capital guidelines could subject the Company to a
variety of enforcement remedies available to the federal regulatory authorities,
including limitations on the ability to pay dividends or the issuance of a
directive to increase capital, and termination of deposit insurance by the FDIC.
Regulatory capital ratios of the Bank are set forth in Note 14 to the
Consolidated Financial Statements which are included in Item 8 of this filing.
Federal Deposit Insurance Corporation Improvement Act of 1991 - In December
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Corporation Act and made revisions
to several other banking statutes.
FDICIA establishes a new regulatory scheme, which ties the level of supervisory
intervention by bank regulatory authorities primarily to a depository
institution's capital category. Among other things, FDICIA authorizes regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, 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, 2001.
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") that requires banks to assess and help meet
the credit needs of the community in which the bank operates. The OCC examines
the Bank to determine its level of compliance with CRA. The OCC and the Federal
Reserve Board are required to consider the level of CRA compliance when
regulatory applications are reviewed. In its most recent CRA examination, the
Company's banking subsidiary was given an "outstanding" CRA rating.
Reigle-Neal Interstate Banking Bill - In 1994, Congress passed the Reigle-Neal
Interstate Banking Bill (the "Bill"). This Bill permitted certain interstate
banking activities through a holding company structure, effective September 30,
1995. It permits interstate branching by merger effective June 1, 1997, unless
states "opt-out" before that date. In March 1996, West Virginia adopted changes
to its banking laws so as to permit interstate banking and branching to the
fullest extent permitted by the Bill. The Bill will also permit consolidation of
banking institutions across state lines and perhaps de novo entry. One result of
the Bill could be increased competitiveness, due to the realization of economies
of scale and/or de novo market entrants, where permitted.
Deposit Acquisition Limitation - Under West Virginia law, an acquisition or
merger is not permitted if the resulting depository institution or its holding
company would assume additional deposits to cause it to control deposits in the
State of West Virginia in excess of twenty five percent (25%) of the total
amount of all deposits held by insured depository institutions in West Virginia.
The Commissioner of Banking for good causes shown may waive this limitation.
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, 2001, the Company employed 43 full-time employees, of
which 40 employees are allocated to the bank and three are allocated to the
holding company. FNB Insurance, LLC had no employees during 2001. At peak
staffing, the Covington facility is expected to incrementally add seven
additional employees. The employees of the Company and the Bank are not
represented by a 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 18 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 also provides 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 loan production office in Covington, Virginia was located at 180 Monroe
Avenue in Covington, VA. The location, which consisted of a one-room office
space, comprised approximately 100 square feet and was leased from a related
party on a monthly basis. The lease was terminated upon completion of the new
3,700 square foot branch facility in Covington.
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. The newly
constructed facility in Covington, Virginia is similar to the main and Lewisburg
locations in that it offers full-service banking, including drive-in 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.
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
2001.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2002, approximately 475 stockholders of record held the Company's
common stock.
In an effort to improve shareholder liquidity, the Company sought and obtained
approval (December 2001) for listing on the Over the Counter Bulletin Board
("OTCBB"), which is sponsored by NASDAQ. Currently, three brokerage firms make a
market in the Company's stock, which trades under the symbol of FNWV. Prior to
the listing and for most of 2001, the stock was predominantly traded on a
limited basis in privately negotiated transactions. Stock trades that were
reported to management, were reported between $16.00 and $17.50 per share, with
the last reported trade at or near the high end of the trading range. Since the
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 per share prior to its listing on the bulletin board.
Since its listing on the OTCBB, the trading range has been between $16.50 and
$18.00 per share, with the most recent trade (March 19, 2002) at $18.00 per
share.
Historically, the Company has paid quarterly dividends to its shareholders.
Aggregate dividends declared in 2001 were $0.54 per share compared to $0.52 per
share in 2000. Payment of dividends by the Company is dependent upon payments to
it from the subsidiary bank. The ability of the subsidiary bank to pay dividends
is subject to certain limitations under banking regulations. These limitations
are discussed in Note 14 of the Notes to Consolidated Financial Statements,
which are included in Item 8 of this filing.
ITEM 6. - SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data and ratios)
2001 2000 1999 1998 1997
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Interest income $ 9,224 $ 8,761 $ 7,707 $ 7,564 $ 7,041
Interest expense 4,123 4,079 3,390 3,372 3,077
Net interest income 5,101 4,682 4,317 4,192 3,964
Provision for loan losses 257 73 100 449 31
Noninterest income 657 433 455 445 422
Noninterest expense 3,729 3,404 3,175 3,167 3,087
Income before income taxes 1,772 1,638 1,497 1,021 1,268
Net income 1,200 1,100 1,002 724 792
PER SHARE DATA
Net income:
Basic $ 1.23 $ 1.14 $ 1.04 $ 0.75 $ 0.82
Diluted 1.22 1.13 1.03 0.75 0.82
Cash dividends declared 0.54 0.52 0.42 0.33 0.32
Book value per share 12.04 11.31 10.52 10.11 9.69
AVERAGE BALANCE SHEET SUMMARY
Loans, net $ 95,045 $ 81,681 $ 69,835 $ 68,696 $ 63,620
Securities 20,087 21,722 23,460 17,375 18,646
Deposits 108,847 91,173 88,821 78,949 75,149
Long-term debt 449 465 3,439 5,494 3,862
Shareholders' equity 11,453 10,798 9,941 9,543 9,239
Total assets 127,852 110,493 104,591 96,442 90,824
AT YEAR END
Loans, net $ 102,801 $ 87,759 $ 74,264 $ 68,671 $ 69,108
Securities 18,327 20,996 22,876 17,866 17,311
Deposits 114,620 96,525 89,132 81,221 78,336
Long-term debt 442 458 473 5,488 5,500
Shareholders' equity 11,822 10,986 10,151 9,747 9,325
Total assets 131,319 114,875 104,829 98,353 95,430
SELECTED RATIOS
Return on average assets 0.94% 1.00% 0.96% 0.75% 0.87%
Return on average equity 10.47 10.19 10.08 7.59 8.57
Average equity to average assets 8.96 9.77 9.50 9.90 10.17
Dividend payout ratio 43.93 45.76 40.38 43.64 38.92
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 $1,200,000 for 2001, an increase of $100,000
or 9.1% over the $1,100,000 reported for 2000. On a per share basis, diluted
earnings per share were $1.22 in 2001, $1.13 in 2000, and $1.03 in 1999. The
increase in 2001 earnings was largely attributable to a $419,000 or an 8.9%
increase, in net interest income, which came primarily as a result of the asset
growth. Additionally, a significant improvement in noninterest income enhanced
the Company's earnings. These increases were partially offset by an increase in
operational costs, which were up 9.5%, or $325,000 in 2001. 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 0.94% for 2001, compared to 1.00%
for 2000 and 0.96% for 1999. Return on average equity (ROE), which measures
earnings performance relative to the total amount of equity capital invested in
the Company, was 10.47% in 2001, 10.19% in 2000, and 10.08% in 1999.
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
2001, 2000, and 1999, tax-equivalent adjustments of $82,000, $75,000 and
$84,000, respectively, are included in interest income, and were computed
assuming a tax rate of 34.0% in all periods.
2001 Versus 2000
The Company's net interest income increased $425,000 or 8.9% from 2000 on a
fully tax equivalent basis. As in the previous year, the Company experienced
significant asset growth, particularly in loans, its highest yielding asset,
which bolstered the Company's interest income. Overall, the increase in
interest-earning assets translated to an increase in interest income of
$1,208,000. Similarly, the growth in interest-bearing liabilities incrementally
increased interest expense by $705,000. Therefore, the impact of the volume
changes was a net increase in the Company's net interest income of $503,000. As
was common across the industry, the Company's net interest margin declined 28
basis points from the previous year as a result of the lower interest rate
environment in 2001 and competitive pricing for loan and deposit customers.
Overall the decline in the net interest margin had a negative impact on the
Company's net interest income of $78,000.
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 the 16.9% 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,
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. In 2000, interest rates trended higher, where the prime
rate increased 1.25% in total. As a result, the Company's yield on interest
earning 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.
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 based upon
management's periodic assessment of the adequacy of the allowance for loan
losses.
During 2001, the Company made a provision for loan losses of $257,000. This
compares to a provision for loan losses of $73,000 and $100,000 made in 2000 and
1999, respectively. The increase in the provision was dictated in part by the
loan growth experienced in 2001. Additionally, an increased provision was
warranted due to the continued economic recession that persisted during 2001
which is expected to have a negative impact on the Bank's loan portfolio. 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. Noninterest income totaled $657,000, $433,000, and
$455,000 for the years ended December 31, 2001, 2000, and 1999. As a percentage
of average assets, other income was 0.51%, 0.39%, and 0.44% for 2001, 2000 and
1999, respectively.
The following table (in thousands) details the components of non-interest income
earned by the Company in 2001, 2000, and 1999, as well as the percentage
increase (decrease) in each over the prior year.
====================================================================================================================================
2001 2000 1999
-----------------------------------------------------------------
Percent Percent
Amount Change Amount Change Amount
-----------------------------------------------------------------
Service fees $ 443 50.7% $ 294 (2.0)% $ 300
Securities (losses), net - 100.0 (3) 200.0 (1)
Loan origination fees on secondary
market loans 128 1,063.6 11 10.0 10
Other 86 (34.4) 131 (10.3) 146
-----------------------------------------------------------------
Total $ 657 51.7% $ 433 2.2% $ 455
=================================================================
====================================================================================================================================
2001 Versus 2000
Service fees increased significantly following the implementation of a new fee
schedule in the second quarter of 2001. This change coupled with the increase in
the number of deposit customers accounted for the $149,000 or 50.7% increase in
fees. Loan origination fees recognized from the Bank's secondary market loan
program increased dramatically in 2001. The volume of loans originated were up
significantly due to the favorable mortgage interest rate environment and the
opening of the loan production office in Covington, Virginia, which accounted
for approximately 42.2% of the loan fees in 2001. Other income was down in 2001
due to a nonrecurring gain recognized in 2000, which is discussed below.
2000 Versus 1999
Other income declined in part due to a $32,000 reduction in trust revenue in
2000. 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. A portion of the decline in
trust revenue was mitigated by a gain recognized following the restructuring of
a life insurance company the Bank used for its key-man life insurance polices.
Noninterest Expense
The following table itemizes the primary components of noninterest expense for
2001, 2000 and 1999, 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).
====================================================================================================================================
2001 2000 1999
----------------------- ----------------------- ------------
Percent Percent
Amount Change Amount Change Amount
----------------------- ----------------------- ------------
Salaries and employee benefits $ 1,823 7.2% $ 1,701 6.1% $ 1,603
Net occupancy expense 306 13.3 270 - 270
Equipment rental, depreciation
and maintenance 332 19.4 278 (0.7) 280
Data processing 283 24.7 227 24.0 183
Advertising 94 2.2 92 37.3 67
Professional & legal 128 0.8 127 30.9 97
Director' fees and shareholders' expense 106 (4.5) 111 2.8 108
Stationery and supplies 112 34.9 83 3.8 80
Other 545 5.8 515 5.8 487
----------------------- ----------------------- ------------
Total $ 3,729 9.5% $ 3,404 7.2% $ 3,175
======================= ======================= ============
Non-interest expense as a
percentage of average earning assets 3.1% 3.3% 3.2%
====================================================================================================================================
2001 Versus 2000
Salaries and employee benefits, which is the Company's largest noninterest
expense, increased $122,000 or 7.2% in 2001. The increase was due in part to the
hiring of three additional staff in 2001. In addition, the Company's employee
health insurance and other related employee benefits increased 30.7% in 2001.
Both net occupancy and equipment maintenance line items increased in 2001 due to
a number of reconditioning and refurbishment projects undertaken on the bank
premises and equipment. Also, depreciation expense increased due to the purchase
and installation of new equipment in 2001. Data processing was up in 2001 due to
a full-year's expense associated with the Bank's online banking product and an
increase in the third-party data processor's fees. An increase in the volume of
accounts and transactions processed by the servicer along with various product
enhancements have led to the increase in the servicer's fees. The increase in
stationery and supplies is commensurate with the increase in the number of loan
and deposit customers and incidental supplies used in connection with various
direct mail advertising campaigns.
Due to the opening of the new facility in Covington in February 2002, all of the
above line items are expected to increase in 2002.
2000 Versus 1999
Salaries and employee benefits 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. Data processing increased $44,000 or
================================================================================
TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2001 2000 1999
----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans, net of unearned discount (1) $ 95,045 $ 7,968 8.38% $ 82,446 $ 7,454 9.04% $ 70,540 $ 6,158 8.73%
Securities:
Taxable 16,693 868 5.20 18,704 1,132 6.05 19,946 1,149 5.76
Tax-exempt (2) 3,394 242 7.13 3,018 220 7.28 3,514 248 7.06
-------- ------- ------- --------- -------- ------- --------- -------- --------
Total securities 20,087 1,110 5.53 21,722 1,352 6.22 23,460 1,397 5.95
-------- ------- ------- --------- -------- ------- --------- -------- --------
Interest-bearing deposits with
other banks 1,968 69 3.51 51 1 1.96 1,558 75 4.81
Federal funds sold 4,504 159 3.53 519 30 5.78 3,353 161 4.80
-------- ------- ------- -------- -------- -------- --------- --------- --------
Total interest-earnings assets 121,604 9,306 7.65 104,738 8,837 8.44 98,911 7,791 7.88
-------- ------- ------- -------- -------- -------- --------- --------- --------
NONINTEREST-EARNING ASSETS
Cash and due from banks 2,934 2,658 2,586
Bank premises and equipment 1,746 1,627 1,753
Other assets 2,268 2,235 2,046
Allowance for loan losses (700) (765) (705)
-------- -------- ----------
Total assets $127,852 $110,493 $104,591
========= ========= ==========
INTEREST-BEARING LIABILITIES
Demand deposits 15,473 212 1.37 14,596 350 2.40 16,562 392 2.37
Savings deposits 43,362 1,559 3.60 36,860 1,736 4.71 32,338 1,335 4.13
Time deposits 37,275 2,070 5.55 28,663 1,543 5.38 27,861 1,350 4.84
--------- ------- ------ --------- ------- ------ -------- ------- ------
Total interest-bearing deposits 96,110 3,841 4.00 80,119 3,629 4.53 76,761 3,077 4.01
Short-term borrowings 5,984 256 4.28 7,241 423 5.84 1,508 55 3.65
Long-term borrowings 449 26 5.79 465 27 5.81 3,439 258 7.50
--------- ------- ------ --------- ------- ------- --------- ------- ------
Total interest-bearing
liabilities 102,543 4,123 4.02 87,825 4,079 4.64 81,708 3,390 4.15
--------- -------- ------ --------- ------- ------- --------- ------- ------
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 12,737 11,054 12,060
Other liabilities 1,119 816 882
Shareholders' equity 11,453 10,798 9,941
---------- --------- ---------
Total liabilities and
shareholders equity $ 127,852 $ 110,493 $104,591
=========== ========== ==========
NET INTEREST EARNINGS $ 5,183 $ 4,758 $ 4,401
======== ======== =======
NET YIELD ON INTEREST-EARNING ASSETS 4.26% 4.54% 4.45%
====== ====== =======
(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.
====================================================================================================================================
====================================================================================================================================
TABLE II
CHANGE IN INTEREST INCOME AND EXPENSE
DUE TO CHANGES IN AVERAGE VOLUME AND INTEREST RATES (1)
(Dollars in thousands)
2001 vs. 2000 2000 vs. 1999
----------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans $1,083 $ (569) $ 514 $ 1,071 $ 225 $1,296
Securities:
Taxable (114) (150) (264) (74) 57 (17)
Tax-exempt (2) 27 (5) 22 (36) 8 (28)
----------------------------------------------------------------------------------
Total securities (87) (155) (242) (110) 65 (45)
----------------------------------------------------------------------------------
Interest-bearing deposits with
other banks 67 1 68 (46) (28) (74)
Federal funds sold 145 (16) 129 (158) 27 (131)
----------------------------------------------------------------------------------
Total interest-earning
assets 1,208 (739) 469 757 289 1,046
----------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES
Demand deposits 20 (158) (138) (47) 5 (42)
Savings deposits 275 (452) (177) 200 201 401
Time deposits 477 50 527 40 153 193
Short-term borrowings (66) (101) (167) 318 50 368
Long-term borrowings (1) - (1) (183) (48) (231)
----------------------------------------------------------------------------------
Total interest-bearing
liabilities 705 (661) 44 328 361 689
----------------------------------------------------------------------------------
NET INTEREST EARNINGS $ 503 $(78) $425 $429 $(72) $357
==================================================================================
(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%.
====================================================================================================================================
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 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.
Income Taxes
The Company's income tax expense, which includes both Federal and state income
taxes, totaled $572,000 or 32.3% of pretax income in 2001, compared to $538,000
or 32.8% in 2000, and $495,000 or 33.1% in 1999. 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 $16,444,000 or 14.3% to $131,319,000 at year-end 2001
compared to $114,875,000 at year-end 2000. Average total assets increased 15.7%
from $110,493,000 during 2000 to $127,852,000 during 2001. TABLE I presents the
composition of the Company's average balance sheet for the years ended 2001,
2000 and 1999. A discussion of the significant fluctuations in components of the
Company's balance sheet follows.
Securities and Overnight Investments
The Company's security portfolio consisted of available for 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 2001, approximately 61% of the
securities (based on amortized cost) were classified as available for sale. This
compares to 46% in 2000. At the time of purchase, management decides whether
securities will be classified as available for sale or held to maturity. For
liquidity reasons, management intends to designate all future purchases of
securities as available for sale, therefore the ratio of available for sale
securities to held to maturity securities will be magnified over the coming
years.
The securities portfolio averaged $20,087,000 in 2001, a $1,635,000 decline from
2000's average balance of $21,722,000. The decline in the average balance is due
to the Company investing a portion of the proceeds from maturities and calls in
the loan portfolio. 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, 2001, 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, 2001 is 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 $ 1,985 4.1% $ 1,000 5.3% $ - 0.0% $ - 0.0%
State and political
subdivisions 250 4.8 3,089 4.7 371 4.7 470 5.8
---------- ---------- ---------- ---------
Total $ 2,235 4.2% $ 4,089 4.8% $ 371 4.7% $ 470 5.8%
========== ========== ========== =========
Securities Available for Sale
U.S. Government agencies
and corporations $ 2,223 4.1% $ 8,191 4.4% $ - 0.0% $ - 0.0%
========== ========== ========== =========
(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.
====================================================================================================================================
At year-end, the Company's investment in overnight positions, such as Federal
funds sold and interest-bearing deposits held at other banks, was $2,152,000 in
2001 versus $18,000 in 2000. On average, the overnight position was $6,472,000
in 2001 compared to $517,000 in 2000. Additional liquidity in the form of these
positions was warranted due to the increased liquidity demands, which included
increased loan demand and transactional needs of the depositors. A portion of
the growth in the average balance came from early calls experienced in the
securities portfolio and from the deposit growth.
Loans
In 2001, loans increased $15,261,000, or 17.3%, to $103,638,000 from $88,377,000
at year-end 2000. Average loans outstanding increased from $82,446,000 in 2000
to $95,045,000 in 2001, an increase of $12,599,000 or 15.3%. 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
2001 (Decrease) 2000 2001 2000
--------------------------------------------------------------
Commercial, financial and agricultural $ 42,541 30.1% $ 32,687 41.0% 37.0%
Real estate - construction 1,163 131.7 502 1.1 0.5
Real estate - mortgage 44,399 15.9 38,312 42.9 43.4
Installment 13,236 (6.0) 14,083 12.8 15.9
Other 2,299 (17.7) 2,793 2.2 3.2
--------------------------------------------------------------
TOTAL LOANS $103,638 17.3% $ 88,377 100.0 100.0
==============================================================
====================================================================================================================================
Loan demand remained steady throughout 2001, particularly with the commercial
and real estate mortgage portfolios. The increased demand was due in part to
easing of interest rates during 2001. Additionally, most of the loan growth has
come from the Company's primary market area - Greenbrier County, West Virginia.
This market, which accounts for approximately 79% of the total loan portfolio,
has experienced new ownership of various competitors by both in-state and
out-of-state institutions over the past few years. The Company has capitalized
on the operational and pricing differences that have transpired, and as a
result, has experienced growth due to the migration of customers from its
competitors. Loan demand in this market is not expected to be as healthy in
2002; however, penetration into the Covington, Virginia market is expected to
mitigate a portion of the slower demand. Additionally, key personnel
acquisitions in all three markets coupled with the continuing marketing and
sales campaigns should assist in garnering additional market share.
A summary of loan maturities by loan type as of December 31, 2001 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, 2001 and 2000, the allowance for loans losses of $837,000 and
$619,000 represented 0.81% and 0.70% 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 that 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, 2001, the
Company had $294,000 in loans classified as impaired, all of which were on
nonaccrual. The related allowance for loss allocated to the impaired loans at
December 31, 2001 was approximately $16,000. The Company's average investment in
impaired loans was $306,000 for 2001 versus $618,000 in 2000.
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.
Although the unallocated portion is a minor portion of the allowance for loan
losses, it is, nonetheless, subjective and requires judgment based on various
qualitative factors in the loan portfolio and the market in which the Company
operates. At December 31, 2001 and 2000, the unallocated portion of the
allowance approximated $25,000 and $56,000 or 3.0% and 9.0% 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.
====================================================================================================================================
TABLE IV
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
2001 2000 1999
------------------------- ------------------------ -------------------------
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 $ 564 41.0% $ 202 37.0% $ 263 41.2%
Real estate - construction 1 1.1 1 0.5 1 1.9
Real estate - mortgage 123 42.9 205 43.4 311 41.8
Installment 107 12.8 150 15.9 158 12.1
Other 17 2.2 5 3.2 5 3.0
Unallocated 25 - 56 - 26 -
------------------------- ------------------------ -------------------------
$ 837 100.0% $ 619 100.0% $ 764 100.0%
========================= ======================== =========================
====================================================================================================================================
Loan charge-offs, net of recoveries, for 2001 were $38,000 compared to $217,000
and $102,000 in 2000 and 1999, respectively. Expressed as a percentage of
average loans outstanding, net loan charge-offs were 0.04%, 0.26% and 0.14%
during 2001, 2000 and 1999, 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 2001, 2000 and 1999.
The following table presents a summary of the Company's nonperforming assets and
accruing loans past due 90 days or more at December 31, 2001, 2000 and 1999 (in
thousands).
====================================================================================================================================
December 31,
2001 2000 1999
---------------------------------------------------------
Nonperforming assets
Nonaccrual loans $ 294 $ 123 $ -
Other real estate owned 796 1,013 883
Restructured loans - - -
---------------------------------------------------------
Total nonperforming assets $ 1,090 $ 1,136 $ 883
=========================================================
As a percentage of outstanding loans 1.1% 1.3% 1.2%
=========================================================
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 $37,000, $17,000 and $13,000 in
2000, 1999 and 1998, respectively. No income was recognized on such loans during
2001, 2000 or 1999.
At December 31, 2001, other real estate owned consisted of commercial property
that was originally foreclosed on in May 1998. As more fully discussed in Note 5
of the Consolidated Financial Statements include in Item 8 of this filing, the
carrying amount of the property has been reduced by rental payments received on
the property. In August, the lessee terminated the lease agreement and the
property is currently vacant. Management is actively pursuing the sale of the
property. In the interim, the Company will incur some holding costs associated
with the property; however, these costs are not expected to be material.
Deposits
Total deposits increased 18.7% to $114,620,000 as of December 31, 2001, from
$96,525,000 at December 31, 2000. Similarly, average total deposits increased
from $91,173,000 as of December 31, 2000 to $108,847,000 at December 31, 2001,
an increase of 19.4%. A summary of the Company's average deposits by product
follows (in thousands):
====================================================================================================================================
SUMMARY OF AVERAGE DEPOSITS
2001 2000
-------------------------
Demand deposits $ 28,210 $ 25,650
Savings 43,362 36,860
Certificates of deposits 37,275 28,663
-------------------------
Total $108,847 $ 91,173
=========================
====================================================================================================================================
As reported in the above table, the Company has experienced growth across all
deposit products. The overall growth is the result of various factors including:
(1) the implementation of a deposit growth strategy to fund the increased loan
demand, (2) the unfavorable stock market conditions and (3) the continued
migration of customers from local competitors due to reasons more fully
discussed in the loan section above. By entering the Covington, Virginia market,
the Company expects to build on its growth by forging new deposit relationships
in 2002. 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, 2001,
short-term borrowings totaled $3,401,000 compared to $5,909,000 at December 31,
2000. On average, the Company's utilization of these arrangements was $5,984,000
in 2001 compared to $7,241,000 in 2000. A $3,000,0000 advance from the FHLB that
was outstanding at December 31, 2000 matured in August 2001, which accounted for
the decline in average balance. As reported in the loan and deposit sections
above, the deposit growth has held pace with the loan growth for much of the
year, and that has reduced the need for short-term fundings. 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.
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 8.9% and 9.8% for 2001 and 2000,
respectively. This ratio has decreased over the past two years due to the
significant asset growth realized by the Company over this time period. In
addition, the dividend payout ratios have increased over the past two years,
which have limited the growth of capital. Because of the sizeable investment of
capital in the Covington, Virginia market and as a means to support future asset
growth, the Company will maintain dividends at current levels to preserve
capital. Therefore, 2002 dividends are expected to approximate 2001 amounts.
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, 2001, 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 12.40% 8.00%
Tier 1 risk-based capital ratio 11.52% 4.00%
Leverage ratio 8.29% 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, 2001 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 $5,721,000 at December 31, 2001.
The Company also has available various lines of credit with correspondent
financial institutions of more than $43,000,000. 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 $4,457,000 (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
$8,184,000 classified as available for sale that may be liquidated should an
unforeseen need for liquidity arise. 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. Company's Risk Management Committee, which is
comprised of directors and management, meets on a regular basis to review the
Company's sources and uses of funds for the succeeding (30), (60) and (90) day
time frames. In addition, projected balance sheets for the succeeding (12) month
time frame are prepared and reviewed in order to ensure that liquidity is within
policy guidelines, and if not, that appropriate strategies are formulated,
implemented and measured for effectiveness in order to bring liquidity risk
within policy guidelines. Management is not aware of any trends, commitments,
events or uncertainties that have resulted in or are reasonably likely to result
in a material change in the Company's liquidity.
The following table represents the results of the Company's interest sensitivity
simulation analysis as of December 31, 2001 and 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 %
Change in Net
Interest Income
Interest Rate Scenario 2001 2000
- ----------------------------------- -------------------------
Up 300 Basis Points -12.9% -15.4%
Up 100 Basis Points - 4.8 - 5.1
Down 100 Basis Points 4.8 5.1
Down 300 Basis Points 9.8 13.0
====================================================================================================================================
As of year-end 2001, 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.
Report of Independent Auditors
Board of Directors and Shareholders
First National Bankshares Corporation
We have audited the accompanying consolidated balance sheets of First National
Bankshares Corporation and subsidiaries (the Company) as of December 31, 2001
and 2000, and the related consolidated statements of income, shareholders'
equity, and cash flows for the years 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 audits. The accompanying
consolidated statements of income, shareholders' equity and cash flows of the
Company for the year ended December 31, 1999, were audited by other auditors
whose report dated February 4, 2000, expressed an unqualified opinion on those
statements.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the 2001 and 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 18, 2002
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
------------------- -------------------
ASSETS
Cash and due from banks $ 3,569,614 $ 2,034,560
Federal funds sold 13,000 1,000
Interest-bearing deposits with other banks 2,138,601 16,718
Securities available for sale at estimated fair value
(amortized cost of $11,141,227 and $9,713,199) 11,161,171 9,645,230
Securities held to maturity (estimated fair value
of $7,290,628 and $11,348,441) 7,165,447 11,351,137
Loans, less allowance for loan losses of $837,436 and
$618,656 102,800,646 87,758,799
Premises and equipment, net 2,456,403 1,536,567
Accrued interest receivable 711,937 937,375
Other real estate owned 795,826 1,013,496
Other assets 506,816 579,831
------------------- -------------------
Total assets $ 131,319,461 $ 114,874,713
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 15,535,851 $ 11,146,615
Interest-bearing 99,083,772 85,378,554
------------------- -------------------
Total deposits 114,619,623 96,525,169
Short-term borrowings 3,400,858 5,908,704
Other liabilities 1,035,334 996,462
Long-term borrowings 442,033 458,117
------------------- -------------------
Total liabilities 119,497,848 103,888,452
------------------- -------------------
Shareholders' equity
Common stock, $1.00 par value, authorized 10,000,000 shares,
issued 981,780 and 971,265, respectively 981,780 971,265
Capital surplus 1,188,006 1,089,453
Retained earnings 9,639,661 8,967,004
Accumulated other comprehensive income 12,166 (41,461)
------------------- -------------------
Total shareholders' equity 11,821,613 10,986,261
------------------- -------------------
Total liabilities and shareholders' equity $ 131,319,461 $ 114,874,713
=================== ===================
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------------- ---------------- ----------------
Interest income
Interest and fees on loans $ 7,969,213 $ 7,453,061 $ 6,158,358
Interest and dividends on securities:
Taxable 867,763 1,131,623 1,148,635
Tax-exempt 159,922 145,203 163,536
Interest on Federal funds sold and interest-
bearing deposits 227,470 30,733 236,049
---------------- ---------------- ----------------
Total interest income 9,224,368 8,760,620 7,706,578
---------------- ---------------- ----------------
Interest expense
Deposits 3,840,931 3,628,942 3,076,961
Short-term borrowings 256,292 422,295 55,147
Long-term borrowings 26,340 27,258 257,596
---------------- ---------------- ----------------
Total interest expense 4,123,563 4,078,495 3,389,704
---------------- ---------------- ----------------
Net interest income 5,100,805 4,682,125 4,316,874
Provision for loan losses 256,500 72,500 100,000
---------------- ---------------- ----------------
Net interest income after provision 4,844,305 4,609,625 4,216,874
for loan losses
---------------- ---------------- ----------------
Noninterest income
Service fees 442,739 293,789 300,226
Securities (losses) - (3,440) (517)
Loan origination fees on secondary market loans 128,235 10,746 10,476
Other income 86,025 131,230 144,525
---------------- ---------------- ----------------
Total noninterest income 656,999 432,325 454,710
---------------- ---------------- ----------------
Noninterest expense
Salaries and employee benefits 1,823,007 1,700,934 1,603,221
Net occupancy expense 305,343 269,917 269,737
Equipment rental, depreciation and maintenance 332,070 277,527 279,937
Data processing 283,317 226,945 183,192
Advertising 94,392 92,063 67,339
Professional and legal 127,840 126,918 96,862
Directors' fees and shareholder expenses 105,957 110,554 107,860
Stationery and supplies 112,148 83,341 80,316
Other operating expenses 544,833 515,746 486,961
---------------- ---------------- ----------------
Total noninterest expense 3,728,907 3,403,945 3,175,425
---------------- ---------------- ----------------
Income before income taxes 1,772,397 1,638,005 1,496,159
Income tax expense 572,693 537,912 494,543
----------------- ---------------- ----------------
Net income $ 1,199,704 $ 1,100,093 $ 1,001,616
================= ================ ================
Basic earnings per common share $ 1.23 $ 1.14 $ 1.04
================= ================ ================
Diluted earnings per common share $ 1.22 $ 1.13 $ 1.03
================= ================ ================
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Other Total
Common Capital Retained Comprehensive Shareholders'
Stock Surplus Earnings Income Equity
--------------------------------------------------------------------------
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 tax benefit of
$125,739:
Unrealized gains 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 tax 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 stock option plans 6,750 70,400 77,150
--------------------------------------------------------------------------
Balance, December 31, 2000 971,265 1,089,453 8,967,004 (41,461) 10,986,261
Comprehensive income:
Net income 1,199,704 1,199,704
Other comprehensive income, net of
deferred income tax of $34,286
Unrealized gains on securities 53,627 53,627
----------------
Total comprehensive income 1,253,331
Cash dividends declared on common
stock ($0.54 per share) (527,047) (527,047)
Issued 10,515 shares of common stock
pursuant to stock option plans 10,515 98,553 109,068
--------------------------------------------------------------------------
Balance, December 31, 2001 $ 981,780 $ 1,188,006 $ 9,639,661 $ 12,166 $ 11,821,613
==========================================================================
See Notes to Consolidated Financial Statements
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---------------------------------------------------
Cash Flows From Operating Activities
Net income $ 1,199,704 $ 1,100,093 $ 1,001,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 243,871 219,412 233,179
Loss (gain) on disposal of premises and equipment 1,184 - (5,331)
(Gain) loss on sale of other assets (4,188) 4,000 -
Provision for loan losses 256,500 72,500 100,000
Deferred income (benefit) tax (21,747) 11,707 8,314
Accretion of security discounts, net (103,466) (17,072) (180,938)
Securities losses, net - 3,440 517
Decrease (increase) in accrued interest receivable 225,438 (210,507) (124,577)
Decrease (increase) in other assets 58,570 (75,931) (26,293)
Increase (decrease) in other liabilities 56,720 15,557 (45,905)
---------------------------------------------------
Net cash provided by operating activities 1,912,586 1,123,199 960,582
---------------------------------------------------
Cash Flows From Investing Activities
Net (increase) decrease in interest-bearing deposits
with other banks (2,121,883) 774 (17,492)
Proceeds from maturities and calls of securities held
to maturity 109,805,000 1,011,560 5,980,516
Proceeds from maturities and calls of securities
available for sale 22,260,000 2,500,000 9,499,035
Purchases of securities held to maturity (105,488,780) (851,025) (8,721,753)
Purchases of securities available for sale (23,715,092) (501,590) (11,910,494)
Net increase in loans (15,298,347) (13,767,659) (5,720,409)
Purchases of premises and equipment (1,167,755) (60,644) (95,111)
Proceeds from sale of bank premises and equipment 4,770 - 20,000
Proceeds from sales of other assets 204,188 24,000 -
Lease payments collected on other real estate owned 17,670 42,000 19,504
---------------------------------------------------
Net cash used in investing activities (15,500,229) (11,602,584) (10,946,204)
---------------------------------------------------
(Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
--------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits, NOW
and savings accounts 19,239,903 (2,287,663) 11,902,587
Net increase in time deposits (1,145,449) 9,680,988 (3,992,070)
Proceeds from issuance of common stock pursuant to
stock option plans 109,068 77,150 -
Net (decrease) increase in short-term borrowings (2,507,846) 1,796,125 3,161,845
Principal payments on long-term borrowings (16,084) (15,171) (5,014,310)
Dividends paid (544,895) (482,995) (341,438)
---------------------------------------------------
Net cash provided by financing activities 15,134,697 8,768,434 5,716,614
---------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,547,054 (1,710,951) (4,269,008)
Cash and cash equivalents:
Beginning 2,035,560 3,746,511 8,015,519
---------------------------------------------------
Ending $ 3,582,614 $ 2,035,560 $ 3,746,511
===================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,218,851 $ 3,998,842 $ 3,461,886
===================================================
Income taxes $ 730,499 $ 602,362 $ 491,429
===================================================
Supplemental Schedule of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans $ - $ 200,000 $ 28,000
===================================================
Dividends declared and unpaid $ 147,267 $ 165,115 $ 144,677
===================================================
See Notes to Consolidated Financial Statements
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 and Alleghany County in 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. In February 2001, the Company opened
a loan production office, FNB Mortgage Center, in Covington, Virginia. The
office specializes in originating secondary market mortgage loans for a third
party mortgage lender. In August 2001, the Company received regulatory approval
to open a full-service branch in Covington. Construction of the facility was
completed in January 2002 and the facility opened on February 4, 2002.
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 probable
losses inherent in the loan portfolio. Provisions charged to operating expense
and reduced by net charge-offs increase the allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The subsidiary bank makes continuous credit reviews of the loan portfolio and
considers current economic conditions, historical loan loss experience, review
of specific problem loans and other factors in determining the adequacy of the
allowance for loan losses. Loans are charged against the allowance for loan
losses when management believes collectibility is unlikely. While management
uses the best information available to make its evaluation, future adjustments
to the allowance may be necessary if there are significant changes in
conditions.
A loan is impaired when, based on current information and events, it is probable
that the subsidiary bank will be unable to collect all amounts due in accordance
with the contractual terms of the specific loan agreement. Impaired loans, other
than certain large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, are 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. When a loan is placed on nonaccrual status, interest accrued and not
collected in the current year is reversed and interest accrued and not collected
from the prior year is charged to the allowance for loan losses. 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
that 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,
management periodically performs valuations 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 975,690, 966,823 and 964,515 for the years ended December 31,
2001, 2000 and 1999, respectively. Diluted per share amounts assume the
conversion, exercise or issuance of all stock options. The dilutive impact of
stock options was 5,525 shares in 2001, 5,752 shares in 2000, and 5,484 shares
in 1999.
Stock options: The Company's stock option plan covers certain key employees and
is accounted for under the intrinsic value method. Because the exercise price of
the option equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Reclassifications: Certain amounts in the 2000 and 1999 consolidated financial
statements have been reclassified to conform to current year classifications.
Emerging accounting standards:
- -----------------------------
Accounting for Transfers and Servicing of Financial Assets and Liabilities
Effective April 1, 2001, the Company adopted SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Liabilities" ("SFAS No. 140").
SFAS 140 revised the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain additional
disclosures concerning transferred assets and collateral. The impact of adopting
SFAS No. 140 was not significant to the Company's financial position, results of
operations or cash flows.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended. The
new standard significantly changed the accounting treatment for derivatives the
Company may use in asset and liability management activities. The adoption had
no impact on the Company's balance sheet or its income statement because the
Company did not hold any financial instruments that qualified as derivatives.
Business Combinations and Goodwill and Other Intangible Assets
In July 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method of accounting and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but rather be tested at least annually
for impairment. SFAS No. 142 is effective January 1, 2002 for calendar year
companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. The impact of
adopting SFAS No. 141 and 142 had no impact on the Company's financial position
or net income.
Impairment or Disposal of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
SFAS No. 144 addresses the financial accounting and reporting for the impairment
or disposal of long-lived assets. The Company currently believes that the
impact, if any, of adopting this statement will not be significant to its
financial position and net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
The amortized cost, unrealized gains and losses, and estimated fair values of
securities at December 31, 2001 and 2000, are summarized as follows:
December 31, 2001
-------------------------------------------------------------------
Carrying
Value
Amortized Unrealized Unrealized (Estimated
Cost Gains Losses Fair Value)
-------------------------------------------------------------------
Available for Sale
Taxable:
U.S. Government agencies and corporations $ 10,413,710 $ 62,436 $ 42,009 $ 10,434,137
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank stock 646,100 - - 646,100
Other equities 22,517 - 483 22,034
-------------------------------------------------------------------
Total taxable 11,138,977 62,436 42,492 11,158,921
Tax-exempt:
Federal reserve bank stock 2,250 - - 2,250
-------------------------------------------------------------------
Total securities available for sale $ 11,141,227 $ 62,436 $ 42,492 $ 11,161,171
===================================================================
December 31, 2001
-------------------------------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Unrealized Fair
Cost) Gains Losses Value
-------------------------------------------------------------------
Held to maturity:
Taxable:
U.S. Government agencies and corporations $ 2,984,833 $ 41,666 $ - $ 3,026,499
State and political subdivisions 470,000 14,509 - 484,509
-------------------------------------------------------------------
Total taxable 3,454,833 56,175 - 3,511,008
Tax-exempt
State and political subdivisions 3,710,614 70,212 1,206 3,779,620
-------------------------------------------------------------------
Total securities held to maturity $ 7,165,447 $ 126,387 $ 1,206 $ 7,290,628
===================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
-------------------------------------------------------------------
Carrying
Value
Amortized Unrealized Unrealized (Estimated
Cost Gains Losses Fair 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 securities available for sale $ 9,713,199 $ - $ 67,969 $ 9,645,230
===================================================================
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 securities held to maturity $ 11,351,137 $ 37,136 $ 39,832 $ 11,348,441
===================================================================
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, 2001, are summarized as follows:
Held To Maturity Available for Sale
--------------------------------- ---------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
Due within 1 year $ 2,234,833 $ 2,244,970 $ 2,222,600 $ 2,249,721
Due after 1 but within 5 years 4,089,336 4,186,452 8,191,110 8,184,416
Due after 5 but within 10 years 371,278 374,697 - -
Due after 10 years 470,000 484,509 - -
Equity securities - - 727,517 727,034
---------------- ---------------- ---------------- ----------------
$ 7,165,447 $ 7,290,628 $ 11,141,227 $ 11,161,171
================ ================ ================ ================
At December 31, 2001 and 2000, securities with amortized costs of $10,818,543
and $11,800,000, respectively, with estimated fair values of $10,895,101 and
$11,737,785, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Loans
Loans are summarized as follows:
2001 2000
-------------------- -------------------
Commercial, financial and agricultural $ 42,540,798 $ 32,686,861
Real estate - construction 1,163,417 502,089
Real estate - mortgage 44,399,052 38,311,909
Installment loans to individuals 13,236,237 14,082,820
Other 2,298,578 2,793,776
-------------------- -------------------
Total loans 103,638,082 88,377,455
Less allowance for loan losses 837,436 618,656
-------------------- -------------------
Loans, net $ 102,800,646 $ 87,758,799
==================== ===================
Included in the net balance of loans are nonaccrual loans amounting to $294,452
and $122,900 at December 31, 2001 and 2000, respectively. If interest on
nonaccrual loans had been recognized under the original terms of the loans, such
income would have approximated $37,021, $16,524 and $12,785 for the years ended
December 31, 2001, 2000, and 1999, respectively. No income was recognized on
such loans during 2001, 2000 or 1999.
The following represents contractual maturities of loans at December 31, 2001:
After 1 But
Within 1 Year Within 5 Years After 5 Years
---------------------- --------------------- ----------------------
Commercial, financial and
Agricultural $ 18,780,842 $ 20,025,763 $ 3,734,193
Real estate - construction 1,163,417 - -
Aggregate of remaining loan portfolio 21,367,194 13,980,354 24,586,319
---------------------- --------------------- ----------------------
Total $ 41,311,453 $ 34,006,117 $ 28,320,512
====================== ===================== ======================
Loans due after one year with:
Variable rates $ 39,921,900
Fixed rates 22,182,328
----------------------
Total $ 62,104,228
======================
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 table presents the
activity with respect to related party loans aggregating $60,000 or more to any
one related party:
2001 2000
------------------- ------------------
Balance, beginning $ 2,378,084 $ 1,675,456
Additions 1,543,717 1,467,358
Amounts collected (1,712,731) (764,730)
------------------- ------------------
Balance, ending $ 2,209,070 $ 2,378,084
=================== ==================
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,
2001, 2000 and 1999 is as follows:
2001 2000 1999
----------------- ------------------ -----------------
Balance, beginning of year $ 618,656 $ 763,523 $ 765,542
Losses:
Commercial, financial and agricultural 7,342 9,600 203,708
Real estate - mortgage - 176,926 3,576
Installment 48,796 66,615 83,244
----------------- ------------------ -----------------
Total 56,138 253,141 290,528
Recoveries:
Commercial, financial and agricultural - - 138,156
Installment 18,418 35,774 50,353
----------------- ------------------ -----------------
Total 18,418 35,774 188,509
----------------- ------------------ -----------------
Net losses 37,720 217,367 102,019
Provision for loan losses 256,500 72,500 100,000
----------------- ------------------ -----------------
Balance, end of year $ 837,436 $ 618,656 $ 763,523
================= ================== =================
The Company's total recorded investment in impaired loans at December 31, 2001
and 2000 approximated $294,452 and $231,798, respectively, for which the related
allowance for loan losses approximated $16,000 and $13,750, respectively. The
Company's average investment in such loans approximated $306,334, $618,024 and
$282,436 for the years ended December 31, 2001, 2000 and 1999. All impaired
loans at December 31, 2001 and 2000 were collateral dependent and, accordingly,
the fair value of the loan's collateral was used to measure the impairment of
each loan. For the years ended December 31, 2001, 2000 and 1999, the Company
recognized $23,807, $38,247 and $23,046 in interest income on impaired loans.
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.
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 via foreclosure and currently holds in other real estate. The
terms of the lease called for the lessee to make monthly payments of $3,500,
which were being accounted for under the cost recovery method as reductions in
the carrying value of the property. Total lease payments received for the years
ended December 31, 2001, 2000 and 1999 totaled $17,670, $42,000 and $19,504.
In accordance with the lease agreement and at the option of the lessee, the
lease agreement was terminated in October 2001. The property is currently vacant
and the Company is actively pursuing a buyer or a lessee for the property.
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:
2001 2000
--------------------- ----------------------
Land $ 554,273 $ 298,361
Building and improvements 1,640,205 1,588,288
Furniture and equipment 2,092,996 2,074,584
Construction in process 542,112 -
--------------------- ----------------------
4,829,586 3,961,233
Less accumulated depreciation 2,373,183 2,424,666
--------------------- ----------------------
Bank premises and equipment, net $ 2,456,403 $ 1,536,567
===================== ======================
Depreciation expense for the years ended December 31, 2001, 2000 and 1999,
totaled $241,965, $219,412 and $233,179, respectively.
At December 31, 2001, the Company had incurred construction costs and equipment
procurement outlays totaling $542,113, all of which, relate to a new
full-service branch facility being built in Covington, Virginia. The total cost
of the project is approximately $725,000, which includes the cost of the
building and the furniture and fixtures. The facility opened on February 4,
2002.
Note 7. Deposits
The following is a summary of interest-bearing deposits by type as of December
31:
2001 2000
--------------------- ---------------------
Interest-bearing demand deposits $ 15,779,572 $ 13,383,876
Savings deposits 49,326,264 36,871,293
Certificates of deposit 33,977,936 35,123,385
--------------------- ---------------------
Total $ 99,083,772 $ 85,378,554
===================== =====================
Time certificates of deposit in denominations of $100,000 or more totaled
$7,074,563 and $7,371,880 at December 31, 2001 and 2000, respectively. Interest
paid on time certificates of deposit in denominations of $100,000 or more was
$474,126, $314,791 and $265,258 for the years ended December 31, 2001, 2000 and
1999, 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, 2001:
Amount Percent
--------------------- ------------------
Three months or less $ 1,371,557 19.4%
Three through six months 1,232,223 17.4%
Six through twelve months 3,457,216 48.9%
Over twelve months 1,013,567 14.3%
--------------------- ------------------
Total $ 7,074,563 100.0%
===================== ==================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the maturities of certificates of deposit as of December 31, 2001,
follows:
Year Amount
- ----------- --------------------
2002 $ 27,197,893
2003 4,601,697
2004 1,648,054
2005 56,708
2006 473,584
--------------------
$ 33,977,936
====================
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 years ended December 31, 2001 and 2000, were $1,543,234
and $1,617,287.
Note 8. Other Borrowings
Short-term borrowings: During 2001 and 2000, 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.
2001 2000
------------------------------------------------------------------------------------
Federal Short-term Federal Short-term
Repurchase Funds Advances- Repurchase Funds Advances-
Agreements Purchased FHLB Agreements Purchased FHLB
-------------------------------------------------------------------------------------
Outstanding at year end $ 3,400,858 $ - $ - $ 2,672,704 $ 236,000 $ 3,000,000
Weighted average interest
rate at December 31 2.36% - - 4.94% 6.63% 6.69%
Maximum amount outstanding
at any month end 17,956,394 244,000 3,000,000 5,093,377 9,025,000 3,000,000
Average daily amount
outstanding 4,123,240 28,175 1,832,877 3,181,469 2,887,305 1,172,131
Weighted average interest rate 3.89% 5.67% 5.15% 4.85% 6.56% 6.59%
Interest paid on these borrowings is 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.
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, 2001, the
outstanding balance totaled $442,033. The advance is secured by Federal Home
Loan Bank stock, qualifying first mortgage loans, certain nonmortgage loans and
all investments not otherwise pledged.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the years ended
December 31 are as follows:
2001 2000 1999
------------------ ------------------- -----------------
Current:
Federal $ 508,348 $ 462,132 $ 414,085
State 86,092 64,073 72,144
------------------ ------------------- -----------------
594,440 526,205 486,229
Deferred (Federal and State) (21,747) 11,707 8,314
------------------ ------------------- -----------------
Total $ 572,693 $ 537,912 $ 494,543
================== =================== =================
A reconciliation between the amounts 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:
2001 2000 1999
--------------------------- --------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
-------------- ------------ -------------- ------------ ------------- ------------
Computed tax at applicable
statutory rate $ 602,615 34.0 $ 556,922 34.0 $ 508,694 34.0
Increase (decrease) in taxes
from:
Tax exempt interest (75,217) (4.3) (61,453) (3.8) (59,580) (3.9)
State income taxes, net of
Federal income tax benefit 54,981 3.1 43,278 2.7 48,319 3.2
Other, net (9,686) (0.6) (835) (0.1) (2,890) (0.2)
-------------- ------------ -------------- ------------ ----------- ------------
Applicable income taxes $ 572,693 32.2 $ 537,912 32.8 $ 494,543 33.1
============== ============ ============== ============ =========== ============
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities as of December 31are as follows:
2001 2000
------------------ ------------------
Deferred tax assets:
Allowance for loan losses $ 220,478 $ 135,154
Employee benefits 177,995 177,450
Other real estate owned 22,493 23,986
Net unrealized loss on securities - 26,508
------------------ ------------------
420,966 363,098
------------------ ------------------
Deferred tax liabilities
Depreciation 14,078 23,460
Accretion on securities 23,937 2,079
Deferred loan fees 50,153 -
Net unrealized gain on securities 7,778 -
------------------ ------------------
95,946 25,539
------------------ ------------------
Net deferred tax assets $ 325,020 $ 337,559
================== ==================
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 15% 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, 2001, 2000 and 1999, totaled $51,443, $57,170
and $48,556, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Benefit cost
Retiree Medical Plan Retiree Life Insurance Plan Total
----------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
----------------------------------------------------------------------------------------------
Change in accumulated
postretirement
benefit
obligation
Accumulated
postretirement
benefit obligation at
beginning of year $371,840 $379,148 $ 374,954 $ 17,618 $ 118,388 $ 106,188 $ 389,458 $ 497,536 $ 481,142
Service cost 6,350 6,963 7,643 505 2,817 2,929 6,855 9,780 10,572
Interest cost 25,049 26,109 23,979 1,199 8,013 6,779 26,248 34,122 30,758
Actuarial loss (gain) 46,616 (20,265) (10,579) (1,600) (102,908) 10,527 45,016 (123,173) (52)
Benefits paid (27,681) (20,115) (16,849) (847) (8,692) (8,035) (28,528) (28,807) (24,884)
----------------------------------------------------------------------------------------------
Accumulated
postretirement
benefit obligation
at end of year $422,174 $371,840 $ 379,148 $ 16,875 $ 17,618 $ 118,388 $ 439,049 $ 389,458 $ 497,536
==============================================================================================
Change in plan assets
Fair value of plan
assets at
beginning of year $ - $ - $ - $ - $ - $ - $ - $ - $ -
Employer contributions 27,681 20,115 16,849 847 8,692 8,035 28,528 28,807 24,884
Benefits paid (27,681) (20,115) (16,849) (847) (8,692) (8,035) (28,528) (28,807) (24,884)
----------------------------------------------------------------------------------------------
Fair value of plan
assets at end
of year $ - $ - $ - $ - $ - $ - $ - $ - $ -
==============================================================================================
Funded status $(422,174)$(371,840)$(379,148) $ (16,875)$ (17,618) $(118,388)$(439,049) $(389,458) $(497,536)
Unrecognized net
actuarial
loss (gain) 76,004 29,388 50,558 (87,894) (92,806) 10,102 (11,890) (63,418) 60,660
----------------------------------------------------------------------------------------------
Accrued postretirement
benefit cost $(346,170)$(342,452) $(328,590) $(104,769)$(110,424) $(108,286)$(450,939) $(452,876) $(436,876)
==============================================================================================
Components of net
periodic postretirement
benefit cost
Service cost $ 6,350 $ 6,963 $ 7,643 $ 505 $ 2,817 $ 2,929 $ 6,855 $ 9,780 $ 10,572
Interest cost 25,049 26,109 23,979 1,199 8,013 6,779 26,248 34,122 30,758
Amortization of net
actuarial
loss (gain) - 905 1,663 (6,512) - - (6,512) 905 1,663
----------------------------------------------------------------------------------------------
Net periodic
postretirement
benefit cost $ 31,399 $ 33,977 $ 33,285 $ (4,808)$ 10,830 $ 9,708 $ 26,591 $ 44,807 $ 42,993
==============================================================================================
2001 2000 1999
------------------------- ------------------------ ------------------------
Actuarial assumptions:
Discount rate (both plans) 7.00% 7.25% 7.25%
Annual increase in per capita 7% for the first 3 years; 7% for the first 3 years; 7% for the first 3 years
healthcare costs 6% for the next 3 years; 6% for the next 3 years; 6% for the next 3 years;
of covered benefits 5 1/2% for the next 3 5 1/2% for the next 3 5 1/2% for the next 5
years; years; 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 Point One Percent Point
Increase Decrease
-------------------- --------------------
Increase (decrease) service and interest cost components 1,297 (1,169)
==================== ====================
(Increase) decrease accumulated postretirement benefit obligation (18,521) 16,712
==================== ====================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for the 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:
2001 2000 1999
Net Income: ----------------- ----------------- ----------------
As reported $ 1,199,704 $ 1,100,093 $ 1,001,616
Proforma $ 1,197,505 $ 1,085,250 $ 967,420
Basic earnings per share:
As reported $ 1.23 $ 1.14 $ 1.04
Proforma $ 1.23 $ 1.12 $ 1.00
Diluted earnings per share:
As reported $ 1.22 $ 1.13 $ 1.03
Proforma $ 1.22 $ 1.12 $ 1.00
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. 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, 2001, 2000 and 1999, and
changes during the year ended, along with the assumptions used in calculating
the estimated fair value of the options, is as follows:
2001 2000 1999
-------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- ------------------------- -------------------------
Fixed Options
Outstanding at beginning
of year $ 37,610 $ 13.87 32,015 $ 12.43 18,015 $ 10.43
Granted 5,250 17.50 15,470 16.00 14,000 15.00
Exercised (10,515) 10.37 (6,750) 11.43 - -
Forfeited (3,500) 15.50 (3,125) 14.95 - -
------------- ------------ ------------
Outstanding at end of year 28,845 15.61 37,610 13.87 32,015 12.43
============= ============ ============
Exercisable at end of year 23,595 15.19 23,890 12.65 32,015 12.43
============= ============ ============
Estimated fair value per option
granted during the year $ 1.27 $ 1.83 $ 2.44
============= ============ ============
2001 2000 1999
--------------------- -------------------- ---------------------
Option pricing method Black-Scholes Black-Scholes MinimumValue
Assumptions:
Expected dividend yield 3.00% 3.00% 2.00%
Risk-free interest rate 4.33% 5.92% 5.85%
Expected life of options 5 Years 5 Years 5 Years
At December 31, 2001, the options outstanding under the stock option plan have
exercise prices ranging from $11.20 to $17.50 and a weighted average remaining
contractual life of 3.23 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001, 2000 and 1999. In addition, adjustments may be charged or
credited to the minimum amount for changes in the Company's portion of the
common area maintenance.
Total future minimum lease payments under the lease are as follows:
Year Ending
December 31 Amount
- ----------------- ------------------
2002 $ 101,970
2003 101,970
2004 101,970
2005 101,970
Thereafter 33,990
------------------
$ 441,870
==================
Note 13. Commitments and Contingencies
Reserve Requirements: The subsidiary bank is required to maintain average
balances with the Federal Reserve Bank. During 2001, the average balance
maintained was approximately $630,000. 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, 2001
and 2000, the subsidiary bank's financial instruments with off-balance sheet
risk are as follows:
Financial instruments whose contract Contract Amount
amounts represent credit risk 2001 2000
- ----------------------------------------- ------------------- -------------------
Commitments to extend credit $ 15,371,867 $ 13,475,401
=================== ===================
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements: The Company signed a ten-year employment contract with
its Chief Executive Officer on April 18, 2001. Included in the contract is an
involuntary termination clause, whereby if the board of directors without cause
terminates the agreement, the Executive is entitled to receive twice his annual
compensation as severance. Similarly, a change in control contract entered into
on October 14, 1993 and as amended on December 17, 1998, contains provisions
that would entitle the Executive 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, including his voluntary
resignation. Although the above contracts are mutually exclusive, there is a
provision in the employment contract that stipulates that the Executive waives
his right to receive any compensation under the involuntary termination clause
of the employment contract if the involuntary termination gives the Executive a
right to any payment under the change in control agreement. The maximum
contingent liability under either agreement approximates $374,000 at December
31, 2001.
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 2002, the net retained
profits available for distribution to First National Bankshares Corporation as
dividends without regulatory approval approximates $548,000 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, 2001, 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, 2001:
Total Capital $ 11,713 12.40% $ 7,554 8.00% $ 9,443 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 10,876 11.52% 3,777 4.00% 5,666 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 10,876 8.29% 3,938 3.00% 6,563 5.00%
(to Average Assets)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 8.00% $ 8,281 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 10,925 13.19% 3,313 4.00% 4,970 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 10,925 9.55% 3,432 3.00% 5,720 5.00%
(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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying values and estimated fair values of the Company's financial
instruments are summarized below:
December 31, 2001 December 31, 2000
--------------------------------------- --------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------------- ------------------- ------------------- ------------------
Financial assets:
Cash and due from banks $ 3,569,614 $ 3,569,614 $ 2,034,560 $ 2,034,560
Interest-bearing deposits with
other banks 2,138,601 2,138,601 16,718 16,718
Federal funds sold 13,000 13,000 1,000 1,000
Securities available for sale 11,161,171 11,161,171 9,645,230 9,645,230
Securities held to maturity 7,165,447 7,290,628 11,351,137 11,348,441
Loans 102,800,646 104,145,143 87,758,799 87,646,590
Accrued interest receivable 711,937 711,937 937,375 937,375
------------------- ------------------- ------------------- ------------------
$ 127,560,416 $ 129,030,094 $ 111,744,819 $ 111,629,914
=================== =================== =================== ==================
Financial liabilities:
Deposits $ 114,619,623 $ 115,033,899 $ 96,525,169 $ 96,454,549
Short-term borrowings 3,400,858 3,400,858 5,908,704 5,908,704
Accrued interest payable 143,919 143,919 239,207 239,207
Long-term borrowings 442,033 442,033 458,117 458,117
------------------- ------------------- ------------------- ------------------
$ 118,606,433 $ 119,020,709 $ 103,131,197 $ 103,060,577
=================== =================== =================== ==================
Note 16. Condensed Financial Statements of Parent Company
Balance Sheets
December 31
2001 2000
------------------- -------------------
Assets
Cash $ 463,222 $ -
Securities held to maturity (estimated fair value
of $703,446 and $251,025) 700,305 251,006
Investment in bank subsidiary 10,888,344 10,882,998
Investment in insurance subsidiary 10,003 6,503
Loans 385,055 -
Other assets 292,974 169,904
------------------- -------------------
Total assets $ 12,739,903 $ 11,310,411
=================== ===================
Liabilities and shareholders' equity
Liabilities
Dividends payable $ 147,267 $ 165,115
Due to bank subsidiary 771,023 159,035
------------------- -------------------
Total liabilities 918,290 324,150
------------------- -------------------
Shareholders' equity
Common stock, $1.00 par value, authorized 10,000,000
shares issued 981,780 and 971,265, respectively 981,780 971,265
Capital surplus 1,188,006 1,089,453
Retained earnings 9,639,661 8,967,004
Accumulated other comprehensive income 12,166 (41,461)
------------------- -------------------
Total shareholders' equity 11,821,613 10,986,261
------------------- -------------------
Total liabilities and shareholders' equity $ 12,739,903 $ 11,310,411
=================== ===================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Income
Year Ended December 31
2001 2000 1999
----------------- ---------------- -----------------
Interest and fees on loans $ 11,024 $ - $ -
Interest on securities - tax exempt 15,161 481 -
Income - dividends from bank subsidiary 1,453,391 503,433 401,238
Expenses - operating 367,070 - -
----------------- ---------------- -----------------
Income before income taxes and undistributed income 1,112,506 503,914 401,238
Applicable income tax (benefit) expense (135,479) 15 -
----------------- ---------------- -----------------
Income before (excess dividends from) undistributed
income of subsidiaries 1,247,985 503,899 401,238
(Excess dividends from) equity in undistributed income
of subsidiaries (48,281) 596,194 600,378
----------------- ---------------- -----------------
Net income $ 1,199,704 $ 1,100,093 $ 1,001,616
================= ================ =================
Statements of Cash Flows
Year Ended December 31
2001 2000 1999
----------------- ----------------- -----------------
Net income $ 1,199,704 $ 1,100,093 $ 1,001,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of securities premiums 1,464 18 -
Excess dividends from (equity in undistributed net
income of) subsidiaries 48,281 (596,194) (600,378)
Increase in other assets (123,070) (24,188) (59,800)
Increase in other liabilities 611,988 159,035 -
----------------- ----------------- -----------------
Net cash provided by operating activities 1,738,367 638,764 341,438
----------------- ----------------- -----------------
Cash Flows From Investing Activities
Capital contribution - FNB Insurance, LLC (3,500) (7,000) -
Purchases of securities held to maturity (450,763) (251,024) -
Net increase in loans (385,055) - -
----------------- ----------------- -----------------
Net cash used in investing activities (839,318) (258,024) -
----------------- ----------------- -----------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock pursuant
to stock option plans 109,068 77,150 -
Dividends paid to shareholders (544,895) (482,995) (341,438)
----------------- ----------------- -----------------
Net cash used in financing activities (435,827) (405,845) (341,438)
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 463,222 (25,105) -
Cash and cash equivalents:
Beginning - 25,105 25,105
----------------- ----------------- -----------------
Ending $ 463,222 $ - $ 25,105
================= ================= =================
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. At present,
the number of Board Members has been fixed at eleven (11). 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 62 1993 2004
President & CEO of the First National Bankshares
Company and the Bank, Corporation and First National
Member of the Risk Bank
Management and Trust Cmts. Ronceverte, WV
Michael G. Campbell Investor 53 1999 2002
Member of the Audit & Oil & Gas Executive
& Compliance and Incentive Owner, Renick Farm
Stock Option Cmts. Renick, WV
David A. Carson President, Carson Associates 50 1998 2003
Member of the Audit Lewisburg, WV
& Compliance, Personnel
& Comp. and Executive Cmts.
Richard E. Ford Attorney at Law 74 1987 2002
Chairman of the Trust Cmt. Partner, The Ford Law Firm
Member of the Personnel & Lewisburg, WV
Comp. and Incentive Stock
Option Cmts.
Walter Bennett Fuller Retired Banker 78 1986 2003
Vice Chairman of the Board, Lewisburg, WV
Chairman, Audit & Compliance Cmt.
Chairman, Incentive Stk Option Cmt.
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 Motor Corp. 50 1999 2003
Member of the Risk Owner, Greenway's Real Estate
Management Cmt. & Auction Co.
Covington, VA
William D. Goodwin Attorney at Law, 58 1986 2004
Member of the Risk Owner/Broker, Coldwell
Management, Trust, Banker Stuart & Watts Real
Personnel & Compensation Estate, Inc.
and Executive Cmts. Lewisburg, WV
Lucie T. Refsland, Ed.D. Professor of Mathematics 65 1995 2004
Member of the Risk Greenbrier Community College
Management and Trust Cmts. Center of Bluefield State College
Lewisburg, WV
William R. Satterfield, Jr. President, Greenbrier Insurance 57 1986 2004
Chairman, Risk Management Cmt. Agency, Inc.
Member of the Personnel & Lewisburg, WV
Compensation and Executive Cmts.
Richard L. Skaggs Retired 79 1986 2003
Member of the Audit & Compliance Lewisburg, WV
and Incentive Stock Option Cmts.
Ronald B. Snyder President, R.B.S., Inc. 62 1988 2002
Chairman of Board dba Greenbrier Ready Mix,
Chairman, Personnel & Comp. Cmt. Greystone Block & Greystone
Member of the Audit & Compliance, Quarry
Risk Management, Incentive White Sulphur Springs, WV
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 Campbell, Ford and Snyder whose terms expire in
2002, 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 2005.
The Directors of the Company do not receive any fees or compensation for
services. All of the directors of the Company, however, are also directors of
the Bank, and as such, receive $400 for each Board meeting, and $100 for each
Board Committee meeting attended, plus $200 per month. No Board Committee fees
are paid to directors who are also salaried officers of the Bank.
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 62 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 42 Secretary/Treasurer of the Company (1999 to present); Executive Vice
President of the Company (1996 to 1999); Chief Operating Officer
of the Bank (2001 to present); Executive Vice President of the
Bank (1996-2000); Secretary to the Board of Directors (1998 to
present); Senior Vice President of the Bank (1994-1996); 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)
Matthew L. Burns 32 Chief Financial Officer of the Bank (1998 to present); Certified Public
Accountant (1992-1998)
Robert A. Lovas 33 Snr. Vice President, Director of Private Banking of the Bank (2001
to present); Vice President and Relationship Manager, Bank of America
Private Bank (1998-2001); Vice President and Banking Center Manager,
NationsBank, NA (1991-1997)
================================================================================
The executive officers of the Company listed above shall continue in office
until the 2002 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 $100,000 for the years 2001,
2000 and 1999:
====================================================================================================================================
Long-term
Other Compensation
Annual Compensation Compen- Securities Under-
Salary Bonus sation lying Options
Executive Officer Year ($) ($) ($) (1) (#) (2)
- --------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 2001 $ 150,000 $ 54,000 $ 19,162 2,050
2000 $ 150,000 $ 35,000 $ 17,447 4,300
1999 $ 150,000 $ 30,000 $ 18,575 3,250
Long-term
Other Compensation
Annual Compensation Compen- Securities Under-
Salary Bonus sation lying Options
Executive Officer Year ($) ($) ($) (1) (#) (2)
- --------------------------------------------------------------------------------------------------------------------
Charles A. Henthorn (3) 2001 $ 115,000 $ 18,000 $ 9,587 1,400
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) Represents 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 the grant date.
(3) Prior to 2000, Mr. Henthorn's compensation did not meet the reporting
requirement, therefore, no amounts are reported for 1999.
================================================================================
The following table details stock option grants for the executive officers named
in the above compensation table for the year 2001:
================================================================================
Number of
Securities Grant
Underlying % of Total Exercise Date
Options Options Price Expiration Present
Executive Officer Granted(1) Granted ($/Sh) Date Value($) (2)
- --------------------------------------------------------------------------------------------------------------------
L. Thomas Bulla 2,050 39.0% $17.50 10/1/2006 $2,604
Charles A. Henthorn 1,400 26.7% $17.50 10/1/2006 $1,778
FOOTNOTES:
(1) The options were granted under the Company's Incentive Stock Option Plan.
The options fully vest six months after the grant date. Under the plan, the
options carry an exercise price equal to the fair market value of the stock
at the date of the grant. The options cannot be transferred and all
unexercised options expire five years after the grant date.
(2) These values were calculated as of the grant date using the Black-Scholes
option pricing model. The values shown are theoretical and do not
necessarily reflect the actual values the recipients may eventually
realize. Any actual value to the officer will depend on the extent to which
the market value of the Company's common shares at a future date exceeds
the exercise price. The following assumptions were used to calculate the
values shown: a five-year period to exercise each option, an expected
dividend yield of 3.00%, an expected price volatility of 0.058 and a
risk-free rate of return of 4.33%.
================================================================================
The following table details the aggregated option exercises in 2001 and year-end
option values for the executive officers named in the above compensation table:
==================================================================================================================
AGGREGATED OPTION EXERCISES IN 2001
AND YEAR END OPTION VALUES
Shares Number of Securities Value of Unexercised In-The-
Acquired on Underlying Unexercised Money (2) Options at Year-end
Exercise Value Options at Year-end (#) ($) (3)
Executive Officer (# of sh) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------
L. Thomas Bulla 3,200 $ 24,000 9,550 2,050 $ 27,175 $ 0
Charles A. Henthorn 3,800 $ 24,800 5,250 1,400 $ 10,125 $ 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, 2001.
(3) Assumes a stock price of $17.50 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, 2001.
================================================================================
Employment Agreement
The Company signed a ten-year employment contract with its Chief Executive
Officer on April 18, 2001. Included in the contract is an involuntary
termination clause, whereby if the board of directors without cause terminates
the agreement, the Executive is entitled to receive twice his annual
compensation as severance. Similarly, a change in control contract entered into
on October 14, 1993 and as amended on December 17, 1998, contains provisions
that would entitle the Executive 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, including his voluntary
resignation. Although the above contracts are mutually exclusive, there is a
provision in the employment contract that stipulates that the Executive waives
his right to receive any compensation under the involuntary termination clause
of the employment contract if the involuntary termination gives the Executive a
right to any payment under the change in control agreement. The maximum
contingent liability under either agreement approximates $374,000 at December
31, 2001. The agreement in its entirety is included as Exhibit 10 to this filing
on page 54.
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, 2002.
The following table sets forth information as of March 1, 2002, 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 45,625 (1) 4.59%
David A. Carson 7,315 (2) 0.75%
Michael G. Campbell 12,754 (3) 1.30%
Richard E. Ford 20,530 (4) 2.09%
Walter Bennett Fuller 9,500 (5) 0.97%
G. Thomas Garten 12,179 (6) 1.24%
William D. Goodwin 7,975 (7) 0.81%
Lucie T. Refsland, Ed.D. 2,387 (8) 0.24%
William R. Satterfield, Jr. 7,545 (9) 0.77%
Richard L. Skaggs 2,795 (10) 0.28%
Ronald B. Snyder 22,185 (11) 2.26%
All Directors and Executive
Officers of the Company
as a Group (14 persons) 164,565 (12) 16.41%
FOOTNOTES
(1) Mr. Bulla has sole voting and investment authority for 19,950 shares
and shared voting and investment authority for 14,075 shares. Included
in Mr. Bulla's beneficial ownership are 11,600 fully vested and
exercisable stock options.
(2) Mr. Carson has investment authority for 7,315 shares held by a family
limited partnership, in which Mr. Carson is the General Partner.
(3) Mr. Campbell has sole voting and investment authority for 12,354 shares
and shared voting and investment authority for 400 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 6,573 shares.
Included in Mr. Garten's beneficial ownership are 5,606 shares held by
immediate 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 2,387 shares.
(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.
67
(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 shares held by a
corporation in which he has a controlling interest, 2,500 shares held in
a trust in which he has investment authority and 780 shares held by his
spouse.
(12) Shares beneficially owned by executive officers include sole and/or shared
voting and investment authority of 3,075 shares, 1,000 shares held by a
corporation in which an executive officer has a controlling interest and
9,700 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 persons were made
in the ordinary course of business for 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.
49
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 20 through 42 of this Form 10-K
Report of independent auditors 20
Consolidated balance sheets at December 31, 2001 and 2000 21
Consolidated statements of income for the years ended
December 31, 2001, 2000, and 1999 22
Consolidated statements of shareholders' equity
for the years ended December 31, 2001, 2000, and 1999 23
Consolidated statements of cash flows for the years ended
December 31, 2001, 2000, and 1999 24-25
Notes to the consolidated financial statements 26-42
(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 53
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the registrant during the
quarter ended December 31, 2001.
(c) Exhibits
See Item 14(a)(3), above
(d) Financial Statement Schedules
See Item 14(a)(2), above
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 03/26/02
-----------------------------------------------------------
L. Thomas Bulla
President, Chief Executive Officer & Director
(Principal Executive Officer)
/s/ Charles A. Henthorn 03/26/02
-----------------------------------------------------------
Charles A. Henthorn
Executive Vice President and Secretary
To the Board of Directors
/s/ Matthew L. Burns, CPA 03/26/02
-----------------------------------------------------------
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 03/26/02 /s/ Lucie T. Refsland 03/26/02
- --------------------------------------------------------------- ---------------------------------------------------
David A. Carson, Director Lucie T. Refsland, Director
/s/ Michael G. Campbell 03/26/02 /s/ William R. Satterfield 03/26/02
- --------------------------------------------------------------- ---------------------------------------------------
Michael G. Campbell, Director William R. Satterfield, Jr., Director
/s/ Richard E. Ford 03/26/02 /s/ Richard L. Skaggs 03/26/02
- --------------------------------------------------------------- ---------------------------------------------------
Richard E. Ford, Director Richard L. Skaggs, Director
/s/ Bennett Fuller 03/26/02 /s/ Ronald B. Snyder 03/26/02
- --------------------------------------------------------------- ---------------------------------------------------
Bennett Fuller, Director Ronald B. Snyder, Director
/s/ G. Thomas Garten 03/26/02
- ---------------------------------------------------------------
G. Thomas Garten, Director
/s/ William D. Goodwin 03/26/02
- ---------------------------------------------------------------
William D. Goodwin, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
The annual report and proxy materials are expected to be mailed to shareholders
of record as of March 1, 2002 on or around March 15, 2002. Copies thereof shall
be furnished to the Commission upon request.
INDEX TO EXHIBITS
(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 Bankshares.......................................................( 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 )
E Employment Agreement dated April 18, 2001 between L. Thomas Bulla
and First National Bankshares......................................................54-61
(11) Calculation of Basic and Diluted Computation of Earnings per Share.......................................62
(12) Computation of Ratios....................................................................................63
(21) Subsidiaries of Registrant...............................................................................64
(23) Consents of experts and counsel
23 (A) Consent of Ernst & Young LLP Independent Auditors....................................65
23 (B) Consent of Arnett & Foster, P.L.L.C..................................................66
(99) Report of Arnett & Foster, P.L.L.C., Independent Auditors................................................67
- --------------------------------------------------------------------------------
(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.
EXHIBIT (10)
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made as of April 18, 2001, by and between First
National Bankshares Corporation, a West Virginia corporation with its principal
place of business in Ronceverte, West Virginia ("Company"), and L. Thomas Bulla,
an individual residing in Lewisburg, West Virginia ("Executive").
The Executive currently serves as the President and Chief Executive Officer of
the Company and its principal subsidiary. The Company desires to secure the
services of the Executive in these positions for a definite future period,
subject to the terms and conditions set forth below in this Agreement. The
Company and the Executive mutually desire to provide for a gradual reduction in
the Executive's responsibilities and time-commitment as he approaches retirement
in the years ahead, but to also provide for the Executive's continuing
leadership and involvement with the Company during this transition. The
Executive is willing to continue to serve in the employ of the Company on the
terms and conditions set forth in this Agreement.
Therefore, in consideration of the premises and the mutual covenants and
agreements contained in this Agreement, and intending to be legally bound
hereby, the Company and the Executive agree as follows:
1. Employment
The Company agrees to employ the Executive and the Executive agrees to be
employed by the Company for the Period of Employment described in Section 2
below, in the positions described in Section 3 below, and upon the other terms
and conditions provided in this Agreement.
2. Period of Employment
The Period of Employment under this Agreement will commence as of January 1,
2001 and shall continue until December 31, 2010, unless sooner terminated
pursuant to Section 6 below. The first portion of the Period of Employment (from
January 1, 2001 to December 31, 2004) is referred to as the "First Portion," and
the second portion of the Period of Employment (from January 1, 2005 until
December 31, 2010) is referred to as the "Second Portion". The references in
this Employment Agreement to the Period of Employment shall refer both to the
First Portion and the Second Portion, unless expressly stated otherwise.
3. Position and Responsibilities
(a) First Portion. In exchange for the compensation and other benefits described
under this Agreement, or as set forth in any benefit plan or program not
specifically described under this Agreement but to which Executive otherwise may
be entitled, and upon the terms and conditions set forth herein, Executive
agrees to serve during the First Portion as President and Chief Executive
Officer of the Company, reporting directly to the Board of Directors of the
Company (the "Board") and as President and Chief Executive Officer of First
National Bank, a national banking association and a wholly owned subsidiary of
the Company ("Bank"). The Executive shall be a full-time employee of the Company
during the First Portion and shall devote all of his business time, attention
and skill exclusively to the business and affairs of the Company and the Bank
during the Period of Employment; provided, however, that the Executive shall be
entitled to paid sabbaticals not exceeding sixty (60) days in the aggregate
during the First Portion of this Agreement and shall not be obligated to perform
the duties described herein during the period of these sabbaticals. The
Executive shall be responsible for the efficient management and operation of all
activities of the Company and the Bank and, as such, shall have such duties,
authorities and responsibilities as may be reasonably assigned to him by the
Board or as are consistent with the policies and procedures adopted by the
Company and/or the Bank. In addition, the Executive shall also be responsible
for performing any services consistent with his position, as may be directed by
the Board from time to time. The Executive will not engage in any other business
activity without the express written consent of the Board, and will perform
faithfully the duties, which may be assigned to him from time to time by the
Board.
(b) Second Portion. In exchange for the compensation and other benefits
described under this Agreement, or as set forth in any benefit plan or program
not specifically described under this Agreement but to which Executive otherwise
may be entitled, and upon the terms and conditions set forth herein, Executive
agrees to serve during the Second Portion as President and Chief Executive
Officer of the Company, reporting directly to the Board. The Executive shall
have responsibilities and duties relative to business development, community
relations, and other aspects of the management and operation of the Company and
the Bank, as shall be determined by the Board and communicated to the Executive
at the beginning of the Second Portion and annually thereafter. The Executive
shall perform such services from time to time as may be directed by the Board,
consistent with his position. The Executive shall be a part-time employee of the
Company during the Second Portion and shall devote as much business time,
attention and skill to the business and affairs of the Company during the Second
Portion as are determined by the Board and the Executive to be necessary to
fulfill his duties; provided, however, that the Executive shall not be required
to provide service under this Agreement in excess of 30 hours per week during
the Second Portion of this Agreement (nor shall 30 hours per week be considered
a measure of expected service, it serving solely as a maximum limit not to be
exceeded). The Executive will not engage in any other business activity without
the express written consent of the Board, and will perform faithfully the
duties, which may be assigned to him from time to time by the Board.
4. Compensation
(a) Base Salary
In exchange for the performance of his duties, the Company agrees to pay the
Executive a Base Salary ("Base Salary") of at least $150,000 per year during the
First Portion of this Agreement, and of $100,000 per year during the Second
Portion of this Agreement. During the First Portion of this Agreement, the
Personnel and Compensation Committee of the Board shall review the performance
of the Executive annually, on or before December 15th of each year, and the
Executive's Base Salary may be increased consistent with recommendations, if
any, of the Committee based upon such review. Base Salary shall be payable
according to the customary payroll practices of the Company.
(b) Incentive Compensation Plan
The Executive shall be eligible to participate in an incentive compensation
program during the Period of Employment, which shall be based on the operating
performance of the Company and/or the Bank, or such other measure agreed upon by
the Executive and the Personnel and Compensation Committee. The specific terms
of the incentive compensation program and the applicable measures of operating
performance for the Company and/or the Bank shall be agreed upon by the
Personnel and Compensation Committee and the Executive within ninety (90) days
of the date of this Agreement. The Executive shall be entitled to elect how and
when the payment of any incentive compensation that has been earned by the
Executive under such program shall be made, after consultation with the
Committee. The Executive's participation in and benefits under this incentive
compensation arrangement shall be governed by the terms and conditions thereof,
which shall be established in writing by the Personnel and Compensation
Committee and the Executive.
5. Benefits and Perquisites
During the Period of Employment, the Executive shall be entitled to participate,
on the same terms and subject to the same conditions as other executive-level
employees of the Company, in any Company-sponsored retirement or pension,
supplemental retirement or pension, group medical and dental, disability and
life insurance, supplemental disability and life insurance, fringe benefit
program or policy, and all perquisites, made available to full-time
executive-level employees of the Company, whether now existing or hereafter
established by the Company. The Executive's participation in and benefits under
such plans, programs and polices shall be governed by the respective terms
thereof.
6. Termination of Agreement
This Agreement shall terminate upon the occurrence of the earlier of (i) the
Involuntary Termination (as defined in Subsection (a) below) of the Executive,
(ii) the voluntary termination of the Executive, (iii) termination for Cause (as
defined in Subsection (c) below), (iv) the death of the Executive, (v) the
Disability (as defined in Subsection (e) below) of the Executive or (vi) the
expiration of the Period of Employment. Notwithstanding the termination of this
Agreement pursuant to this Section 6, the Company's obligation to make any
payment under this Section 6 shall survive the termination of this Agreement and
continue in full force and effect until such obligation has been satisfied in
full.
This Section 6 shall apply only to the rights and obligations of the Company and
the Executive under this Agreement and shall not affect any rights that the
Executive has under the "Change-in-Control Agreement" between the Company and
the Executive, dated October 14, 1993, as amended December 17, 1998, which
provides the Executive with the right 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 Executive's rights under the Change in Control
Agreement may be exercised independently of any of the terms of this Agreement
and without any limitation resulting from any outcome under this Agreement.
(a) Involuntary Termination
The Company may at any time provide notice to the Executive of the intent to
terminate this Agreement on account of an Involuntary Termination prior to the
expiration of the Period of Employment. For this purpose, "Involuntary
Termination" means the Executive's separation from service with the Company
involuntarily, other than by reason of the Executive's death, Disability,
retirement, voluntary termination or termination for Cause.
In the event of Involuntary Termination, all of the Company's obligations under
this Agreement shall immediately cease, except that the Company shall pay to the
Executive any Base Salary that has been earned but is unpaid as of the effective
date of the Executive's termination. The respective terms and provisions of the
compensation arrangements described in Section 4 shall control in the case of an
Involuntary Termination.
The Company recognizes that the Executive may incur economic loss and damage to
personal and professional reputation in the community were an Involuntary
Termination to occur that is not compensable under the terms of the Change in
Control Agreement. Consequently, in the event of an Involuntary Termination, the
Company shall continue payments to the Executive, as liquidated damages, of
twice the amount of his then current total annual compensation for a period of
twelve (12) months; provided, however, that liquidated damages shall not be
payable under this Section 6(a) if the Involuntary Termination gives the
Executive a right to any payment under the Change in Control Agreement. Payments
hereunder shall be payable according to the customary payroll practices of the
Company. As a condition to receiving payment of any benefits under this Section
6(a), the Executive shall enter into an agreement with the Company and its
successor agreeing to waive any and all rights, and to accept such payment in
full satisfaction, release and settlement of any and all claims, known and
unknown, that the Executive has or may have against the Company and its
successor under this Agreement and any other employment or compensation
agreements, understanding or commitments, whether oral or written, whether for
"front pay," "back pay," compensatory damages, punitive damages, damages for
pain and suffering, or attorneys' fees and costs.
(b) Voluntary Termination
If the Executive voluntarily resigns from employment with the Company during the
Period of Employment, then the Company shall pay the Executive any Base Salary
which has been earned through the effective date of his termination but which
remains unpaid as of that date. The respective terms and provisions of the
compensation arrangements described in Section 4 shall control in the case of a
Voluntary Termination. The Executive must notify the Company in writing of his
intent to voluntarily terminate employment at least sixty (60) day's prior to
the effective date of such Voluntary Termination. Except as provided in this
subparagraph, all other obligations of the Company under the Agreement shall
cease as of the effective date of the Voluntary Termination.
(c) Termination for Cause
Notwithstanding any other provision contained in this Agreement, the Company
retains the right, at any time, to terminate the employment of the Executive
under this Agreement for "Cause," as defined below in this Subsection (c). Upon
the date of such termination for Cause, the Company shall cease making any and
all payments of Base Salary or any other benefit referred to in this Agreement
to which the Executive would otherwise be entitled hereunder, except for Base
Salary or any other benefit which the Executive has earned and is entitled to
through the date of such termination but which remains unpaid. Any such unpaid
amounts shall be paid to the Executive as soon as practical following the
termination of the Executive's employment. The respective terms and provisions
regarding the compensation arrangements described in Section 4 shall control in
the case of a termination for Cause.
In the event the Company elects to terminate the Executive's employment for
Cause, the Company shall send written notice to that effect to the Executive.
This notice shall describe the actions of the Executive constituting grounds for
termination for Cause. Except as otherwise provided in this subparagraph, the
Executive's employment under this Agreement shall terminate as of the date
specified in such notice all obligations of the Company under the Agreement
shall cease as of the effective date specified in the notice.
For this purpose termination for "Cause" means the Executive's separation from
service with the Company on account of any of the following acts:
(i) The Executive shall have failed to substantially perform his
duties hereunder on a regular basis, other than by reason of
disability, or shall have materially breached the provisions
of this Agreement, and such failure or breach shall have
continued for a period of at least thirty (30) days after
written notice to the Executive from the Board specifying such
failure or breach;
(ii) The Executive shall have committed any fraud, embezzlement,
misappropriation or other act of dishonesty against the
Company, as reasonably determined by the Board; or
(iii) The Executive shall have been convicted of, or pleaded guilty
to, any felony or crime involving moral turpitude.
(d) Death
In the event of the death of the Executive, all of the Company's obligations
under the Agreement shall immediately cease, except that the Company shall: (1)
pay the Executive's estate any earned but unpaid Base Salary remaining at his
death and (2) pay the Executive's estate any amounts due the Executive pursuant
to subparagraph (a) of this Section 6 remaining unpaid at death. The respective
terms and provisions regarding the compensation arrangements described in
Section 4 shall control in the event of death.
(e) Disability
This Agreement shall be terminated at any time by the Company or the Executive
in the event of the Disability of the Executive. For this purpose, "Disability"
means the inability of the Executive to substantially perform his duties under
this Agreement due to physical or mental illness as reasonably determined by the
Company or established by the Executive. All of the Company's obligations under
the Agreement shall immediately cease except that the Company shall (1) pay the
Executive any earned but unpaid Base Salary remaining at the date of his
Disability, (2) pay the Executive any amounts due the Executive pursuant to
subparagraph (a) of this Section 6 remaining unpaid at the date of his
Disability, and (3) pay the Executive his then current Base Salary for a period
of six (6) months from the date of his Disability. The respective terms and
provisions regarding the compensation arrangements described in Section 4 shall
control in the event of Disability. Payments hereunder shall be payable
according to the customary payroll practices of the Company.
7. Confidentiality and Restrictive Covenant
(a) The Executive hereby acknowledges that, as an employee of the Company, he
will have use of, acquire and add to confidential information of a special and
unique nature and value relating to the Company and its financial operations,
including, but not limited to, the Company's business, the identity of the
Company's clients, the prices being charged by the Company to such clients, the
Company contracts, and business records relating to the Company. The Executive
further recognizes and acknowledges that all confidential information is the
exclusive property of the Company, is material and confidential, and greatly
affects the goodwill and the successful conduct of the business of the Company.
Accordingly, and notwithstanding any other provision of the Agreement, the
Executive hereby covenants and agrees that he will use confidential information
for the benefit of the Company only and shall not at any time, directly or
indirectly, during the term of this Agreement, and for all periods thereafter,
divulge, reveal or communicate any confidential information to any person, firm,
corporation or entity not authorized by the Company to possess such information,
or use any confidential information for his own benefit or for the benefit of
others.
(b) The Executive covenants and agrees that during the term of this Agreement
and for any period of time thereafter during which he is receiving Base Salary
hereunder (not to exceed twelve (12) months), he will not, personally or in
association with others, either directly or indirectly, establish or engage in,
financially or otherwise, any enterprise or any affiliated entity that is
engaged in providing substantially the same services as the Company and is
located within sixty (60) miles of (i) the headquarters of the Company, (ii) any
branch office of the Company or the Bank, or (iii) any affiliated facility,
without prior written authorization by the Company.
(c) Recognizing the irreparable nature of the injury that could result from the
Executive's violation of this Section 7 and that damages would be inadequate
compensation therefore, it is agreed that any violation by the Executive of the
provisions of this Section 7 shall be the proper subject for immediate
injunctive and other equitable relief to the Company. The Executive and the
Company further agree that this Section 7 shall survive the termination of this
Agreement and shall continue in full force and effect thereafter.
8. Consolidation, Merger or Sale of Assets
Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all or substantially all of its assets to
another organization, which assumes this Agreement and all obligations and
undertakings of the Company hereunder. Upon such a consolidation, merger or sale
of assets, the term "the Company" as used herein will mean the other
organization, and this Agreement shall continue in full force and effect.
9. Assignment
In the event of a consolidation, merger or sale of assets as described in
Section 8 above, the Company shall have the right to assign this Agreement to
the surviving organization, and all covenants and agreements hereunder shall
inure to the benefit of, and be enforceable by, or against, such successors and
assigns. This Agreement provides for the personal services of the Executive. The
Executive shall not have the right to assign or transfer any of the Executive's
rights, obligations or benefits hereunder, nor shall benefits or rights to
receive payment hereunder be subject to voluntary or involuntary alienation,
sale, assignment, encumbrance, levy or attachment.
10. Amendment, Modification, Termination or Waiver
The parties hereby irrevocably agree that no attempted amendment, modification,
termination, discharge or change of this Agreement shall be valid and effective,
unless the parties shall unanimously agree in writing to such amendment,
modification, termination, discharge or change. No waiver of any provision of
this Agreement shall be effective unless it is in writing and signed by the
party against whom it is asserted, and any such written waiver shall only be
applicable to the specific instance to which it relates and shall not be deemed
to be a continuing or future waiver.
11. Entire Agreement
This Agreement sets forth all the promises, covenants, agreements, conditions
and understandings between the parties hereto, and supersedes all prior and
contemporaneous agreements, understandings, inducements or conditions expressed
or implied, oral or written, except as herein contained. This Agreement shall
not operate to reduce any benefit or compensation inuring to the Executive of a
kind elsewhere provided and not expressly provided in this Agreement.
12. Provisions Severable
This Agreement is intended to be performed in accordance with, and only to the
extent permitted by, all applicable laws, ordinances, rules and regulations of
the jurisdiction in which the parties do business. If any provision of this
Agreement, or the application thereof, to any person or circumstance shall, for
any reason or to any extent, be invalid or unenforceable, the remainder of this
Agreement and the application of such provision to other persons or
circumstances shall not be affected thereby, but rather shall be enforced to the
greatest extent permitted by law.
A party's failure to insist on compliance or enforcement of any provision of
this Employment Agreement shall not affect the validity of enforceability or
constitute a waiver of future enforcement of that provision or of any other
provision of this Employment Agreement by that party or any other party.
13. Tax Withholding
The Company shall have the right to withhold from any and all payments required
to be made to the Executive pursuant to this Agreement all federal, state,
local, and/or other taxes, which the Company determines, are required to be
withheld in accordance with applicable statutes and regulations.
14. Notice
Any notice given to the Executive pursuant to this Agreement shall be
sufficiently given if sent to him by registered or certified mail addressed to
him at his home address or such other address or addresses as the Executive
shall designate in writing to the Company. Any notice given to the Company
pursuant to this Agreement shall be sufficiently given if sent to the Company by
registered or certified mail to the Company's address or such other address as
the Company shall designate by written notice to the Executive.
15. Governing Law
This Agreement shall be construed in accordance with the laws of the State of
West Virginia.
16. Headings and Use of Terms
Headings used in this Agreement have been inserted solely for convenience of
reference and in no way define or limit the scope or substance of any provision
of this Agreement. Whenever any words are used in this Agreement in the
masculine, feminine or neuter gender, they shall be construed as though they
were also used in another gender in all cases where they would so apply, and
whenever words are used in this Agreement in the singular or plural form, they
shall be construed as though they were also used in the other form in all cases
where they would so apply.
17. Binding Effect
This Agreement is binding upon the parties hereto, their heirs, executors,
administrators, successors or permitted assigns.
IN WITNESS WHEREOF, and with intent to be legally bound, the parties hereto have
executed this Agreement effective as of the day and year first above written.
Attest: First National Bankshares Corporation
By: /s/ Charles A. Henthorn By:/s/ Ronald B. Snyder
- --------------------------- -------------------------------
Title: Secretary Title: Chairman
Executive
/s/ Charles A. Henthorn By: /s/ L. Thomas Bulla
- ----------------------- -------------------------------
Witness L. Thomas Bulla
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.
62
EXHIBIT (12)
COMPUTATION OF RATIOS
Net Income Per Share = Net Income/Average Common Shares Outstanding
Cash Dividends Per Share = Dividends Paid/Average Common Shares Outstanding
Book Value Per Share = Total Shareholders' Equity/Average Common Shares
Outstanding
Return on Average Assets = Net Income/Average Assets
Return on Average Shareholders' Equity = Net Income/Average Shareholders' Equity
Net Interest Margin = Net Interest Income/Average Earning Assets
Noninterest Expense to Average Assets = Noninterest Expense/Average Assets
Efficiency Ratio = Noninterest Expense/(Net Interest Income Plus
Noninterest Income)
Average Loans to Deposits = Average Net Loans/Average Deposits Outstanding
Dividend Payout = Dividends Declared/Net Income
Average Shareholders' Equity to Average Assets = Average Shareholders' Equity/Average Assets
Tier I Capital Ratio = Shareholders' Equity - Intangible Assets -
Securities Mark-to-market Capital Reserve
(Tier I Capital)/ Risk Adjusted Assets
Total Capital Ratio = Tier I Capital Plus Allowance for Loan
Losses/Risk Adjusted Assets
Tier I Leverage Ratio = Tier I Capital/Average Assets
Net Charge-offs to Average Loans = (Gross Charge-offs Less Recoveries)/ Average Net Loans
Non-performing Loans to Period End Loans = (Nonaccrual Loans Plus Loans Past Due 90 Days or
Greater)/Gross Loans Net of Unearned Interest)
Non-performing Assets to Period End Assets = (Nonaccrual Loans Plus Loans Past Due 90 Days or
Greater Plus Other Real Estate)/Total Assets
Allowance for Loan Losses to Period = Loan Loss Reserve/(Gross Loans Net of
End Loans Unearned Interest)
Allowance for Loan Losses to Non- = Loan Loss Reserve/(Nonaccrual Loans Performing
Loans Plus Loans Past Due 90 days or Greater)
63
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.
EXHIBIT (23) A
CONSENT OF ERNST & YOUNG LLP
We consent to the inclusion in this Annual Report (Form 10-K) of First National
Bankshares and subsidiaries of our report dated February 18, 2002, on its
consolidated financial statements as of December 31, 2001 and 2000 and for the
years then ended.
/S/ Ernst & Young LLP
Charleston, West Virginia
February 18, 2002
EXHIBIT (23) B
CONSENT OF ARNETT & FOSTER, P.L.L.C.
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 Corporation as of December 31, 1999 and
for the year then ended.
/S/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
March 25, 2002
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 the year 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 the year ended December 31, 1999, in
conformity with generally accepted accounting principles.
/S/ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
February 4, 2000