[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 33-14252
FIRST
NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
| West Virginia | 62-1306172 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
One Cedar Street, Ronceverte, West Virginia 24970
Telephone Number: (304) 647-4500
None
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.
[X] Yes [ ] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
[ ] Yes [X] No
As of March 1, 2003, the aggregate market value of the outstanding voting common stock held by nonaffiliates of the registrant was $18,052,363, as calculated based upon the closing price of $17.85 on said date.
The total number of shares of the registrant’s common stock outstanding as of March 1, 2003 was 983,780.
Portions of the Registrant’s definitive proxy statement dated March 19, 2003 with respect to its Annual Meeting of Shareholders to be held on April 24, 2003 are incorporated by reference into Part III, Items 10-13.
Table of Contents
Page
PART I
Item 1 - Business ............................................................. 3
Item 2 - Properties ........................................................... 7
Item 3 - Legal Proceedings..................................................... 8
Item 4 - Submission of Matters to a Vote of Security Holders................... 8
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Stockholder Matters.............................................. 8
Item 6 - Selected Financial Data............................................... 9
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of of Operation............................ 10
Item 7a - Quantitative and Qualitative Disclosures About Market Risk........... 22
Item 8 - Financial Statements and Supplementary Data........................... 23
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 46
PART III
Item 10 - Directors and Officers of the Registrant............................. 46
Item 11 - Executive Compensation............................................... 46
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters .................... 46
Item 13 - Certain Relationships and Related Transactions....................... 46
Item 14 - Controls and Procedures.............................................. 46
PART IV
Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 47
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 various lines of insurance products. 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.
The Bank is a federally insured depository institution offering a wide variety of services that are typical of full service community banks. The Bank primarily engages in retail and commercial banking in its defined geographic market areas. Following is a description of both activities and their related risks.
Retail Banking: Retail banking services to individuals include deposit (demand, savings and time deposit accounts) and lending activities. Principal lending types include installment loans (primarily loans secured by automobiles, consumer goods and deposit accounts), mortgage and home equity loans, overdraft protection, personal credit lines and credit card programs. Mortgage and home equity lending have the lowest risk profile due to the nature of the collateral. Installment loans have an intermediate risk due to the lower principal amounts and the depreciating nature of the collateral. Personal lines and overdraft protection have the highest degree of risk since the loans are generally unsecured or secured by marketable securities. The credit card programs are fee services for originating the relationships and the Bank retains no credit risk. The Bank offers fixed rate residential loans through its secondary market program, whereby the Bank will originate fixed rate loans on behalf of third party mortgage brokers in exchange for a fee collected at the time of the loan’s funding. The underwriting decision, credit risk and funding responsibilities are borne by the third party brokers. The Bank’s involvement is limited to marketing the product and assisting the broker in the preparation of the underwriting documentation and closing documents.
Commercial Banking: Wide ranges of financial services are provided to commercial and small business entities. These services include, among others, lending, deposits, letters of credit and cash management services. The lending products are tailored to specific customer needs and are generally secured by various types of collateral, including commercial real estate, accounts receivable and business machinery and equipment. 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 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. Commercial lending has a higher risk profile than does retail lending due to the larger dollar amounts involved, the nature of the collateral and a greater variety of economic risks that could potentially affect the loan customer.
The Bank manages its credit risk via a centralized credit administration process. Bank lending personnel follow established lending limits and authorities based on each individual’s lending expertise and experience. Loan policies and procedures require lending personnel to document and corroborate such items as: loan-to-value and debt coverage ratios, credit history and financial performance of the borrower. 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 loan officers will risk-rate their respective loan customers at the origination date of the loan based upon the strength of the borrower and the structure of the loan. During the term of the loan, the loan officer, along with the credit administrator, will monitor the performance of the loan and modify the risk rating based upon new information, such as current financial information, industry trends or fluctuations in collateral value.
The Bank does not currently participate in any indirect lending programs. The Bank’s participation in lease financing is not material.
Trust Services: 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.
Investment Portfolio and Policies – As a complement to its commercial and retail banking activities, the Bank also carries a securities investment portfolio. The level of assets that the company holds in securities is dependent upon a variety of factors. Chief among these factors is the optimal utilization of the Company’s capital. After consideration of loan demand, excess capital is available to allocate to high-quality investment activities that can generate additional income for the Company and its shareholders, while still maintaining strong capital ratios. In addition to producing additional interest spreads for the Bank, the investment portfolio is used as a source of liquidity, to manage interest rate risk and to meet pledging requirements of the Bank. The investment portfolio is governed by an investment policy designed to provide maximum flexibility in terms of liquidity and to contain risk from changes in interest rates. Individual holdings are diversified, maximum terms and durations are limited and minimum credit ratings are enforced and monitored. The Bank does not engage in trading activities.
Sources of Fundings – Liquidity management is the process by which the Company, through its Risk Management Committee and treasury function, ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, withdrawals by depositors, repayment of debt, maintaining adequate collateral for secured deposits and borrowings, paying dividends to its parent company, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.
Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of investment securities; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines (FED funds), Federal Home Loan Bank (FHLB) advances and repurchase agreements.
The Bank conducts business from four locations located in West Virginia and Virginia. The Bank’s primary market area includes the cities of Ronceverte and Lewisburg and surrounding Greenbrier County, West Virginia. As of December 31, 2002, the Bank’s operations in Greenbrier County accounted for approximately 71.8% of total loans and 85.7% of total deposits. 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 2002‘s unemployment rate being 7.5% versus West Virginia’s statewide average (seasonally adjusted) of 6.1%. Employment is seasonal and is dependent on a small number of major employers.
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 below the state average, with Kanawha County’s average unemployment rate for 2002 being 4.9%. Consolidation in the chemical industry has negatively impacted the unemployment rate and attrition has led to a decline in the population. Real estate values have softened due to a high number of personal residences on the market.
The Company first entered the Covington, Virginia (located in Alleghany county) market in 2001 via a loan production office specializing in the fixed rate mortgage program discussed above. A newly constructed branch, which opened February 4, 2002, is located approximately 40 miles east of the Bank’s 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. Unemployment in Virginia is well below the national average (3.6% at December 31, 2002). In Allegheny County, the unemployment rate is slightly higher than the state’s unemployment rate (3.9% at December 31, 2002), while the City of Covington’s unemployment rate is higher yet (4.7% at December 31, 2002).
Active competition exists for all services offered by the Company and its subsidiaries with other national and state banks, savings and loan associations, credit unions, finance companies, personal loan companies, brokerage and mutual fund companies, mortgage bankers, insurance agencies, financial advisory services, and other financial institutions serving the respective market areas. The principal competitive factors in the banking and financial services industry are quality of services to customers, ease of access to services and pricing of services, including interest rates paid on deposits, interest rates charged on loans, and fees charged for fiduciary and other professional services.
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 also permits consolidation of banking institutions across state lines and perhaps de novo entry, subject to regulatory approval from the Office of the Comptroller of Currency (or “OCC”).
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 June 30, 2002 (the latest data available from the FDIC), the Bank had 21.2% of the deposit market share, which is up from the 19.3% market share reported by the FDIC a year earlier. 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.
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 (the “FRB”) 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 FRB to be closely related to banking and a proper incident thereto. The Company is required by the Act to file quarterly and annual reports of its operations and is subject, along with its subsidiaries, to examination by the FRB.
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 FRB 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 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 Bank was a “well-capitalized” institution as of December 31, 2002.
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 to 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.
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 cause shown may waive this limitation.
Monetary Policies - The earnings of all subsidiaries are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the FRB influences general economic conditions and interest rates through various monetary policies and tools. It does so primarily through open–market operations in U.S. Government securities, varying the discount rate on member and non-member bank borrowings, and setting reserve requirements against bank deposits. FRB monetary policies have had a significant effect on the operating results of banks in the past and are expected to do so in the future. The general effect of such policies upon the future business and earnings of each of the subsidiary companies cannot accurately be predicted.
Interest rate sensitivity has a major impact on the earnings of banks. As market rates change, yields earned on assets may not necessarily move to the same degree as rates paid on liabilities. For this reason, the Bank attempts to minimize earnings volatility related to fluctuations in interest rates through the use of a formal asset/liability management program. See Item 7A additional discussion of interest rate sensitivity.
Gramm-Leach-Bliley Financial Services Modernization Act - Enacted on November 12, 1999, the Act repeals two provisions of the Glass-Steagall Act that previously separated banking, insurance, and securities activities. 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. The end result may be a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves.
The foregoing references to applicable statutes and regulations are brief summaries thereof and are not intended to be complete and are qualified in their entirety by reference to the full text of such statutes and regulations.
At December 31, 2002, the Company employed 52 full-time employees, of which 49 employees were allocated to the Bank and three were allocated to the Company. FNB Insurance, LLC had no employees during 2002.
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.”
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 Bank owns its Lewisburg branch, which 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, West Virginia. 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 Bank owns its Covington branch, which is located at 151 North Court Avenue in Covington, Virginia. The newly constructed facility opened on February 4, 2002 and replaces the loan production office opened in February 2001, which consisted of leased office space at 180 Monroe Avenue in Covington, VA. The new facility approximates 3,700 square feet.
The Bank’s properties and leased facilities are considered well suited for its current needs. The main office located in Ronceverte, WV, and the branch locations in Lewisburg and Covington 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.
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.
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 2002.
As of March 1, 2003, approximately 560 stockholders of record held the Company’s common stock.
In December 2001, the Company received approval for listing on the Over the Counter Bulletin Board (“OTCBB”), which is sponsored by NASDAQ. Currently, four brokerage firms make a market in the Company’s stock, which trades under the symbol of FNWV. Prior to the listing, the stock was predominantly traded on a limited basis in privately negotiated transactions. For trades conducted and reported to management in 2001, the trading range was between $16.00 and $17.50 per share, with the last reported trade at or near the high end of the trading range. Since such trades reported to management were infrequent, and private trades may have been conducted which were not reported to management, no representations can be made regarding the fair value per share prior to its listing on the bulletin board. The following table sets forth the high and low closing prices for the Company’s common stock for 2002 and 2001 as derived from various external resources believed to be accurate.
2002 2001
High Low High Low
------------------------ -----------------------
First Quarter $ 18.00 $ 16.50 $ 16.00 $ 16.00
Second Quarter 18.00 17.50 17.50 16.00
Third Quarter 16.50 17.50 17.25 17.50
Fourth Quarter 16.50 17.50 15.00 17.45
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 included with this Annual Report. The following table sets forth the quarterly dividends per share declared on First National’s common stock.
2002 2001 2000
------------- ------------- ------------
First Quarter $ 0.13 $ 0.13 $ 0.11
Second Quarter 0.12 0.12 0.11
Third Quarter 0.07 0.14 0.13
Fourth Quarter 0.14 0.15 0.17
Total $ 0.46 $ 0.54 $ 0.52
(Dollars in thousands, except per share data and ratios)
(December 31,)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Interest income $ 8,692 $ 9,224 $ 8,761 $ 7,707 $ 7,564
Interest expense 2,925 4,123 4,079 3,390 3,372
Net interest income 5,767 5,101 4,682 4,317 4,192
Provision for loan losses 304 257 73 100 449
Noninterest income 991 671 432 455 445
Noninterest expense 4,741 3,743 3,403 3,175 3,167
Income before income taxes 1,713 1,772 1,638 1,497 1,021
Net income 1,144 1,200 1,100 1,002 724
PER SHARE DATA
Net income:
Basic $ 1.16 $ 1.23 $ 1.14 $ 1.04 $ 0.75
Diluted 1.16 1.22 1.13 1.03 0.75
Cash dividends declared 0.46 0.54 0.52 .42 0.33
Book value 12.79 12.04 11.31 10.52 10.11
AVERAGE BALANCE SHEET SUMMARY
Loans, net $106,772 $ 95,045 $ 81,681 $ 69,835 $ 68,696
Securities 24,313 20,087 21,722 23,460 17,375
Deposits 126,649 108,847 91,173 88,821 78,949
Long-term debt 374 449 465 3,439 5,494
Shareholders' equity 12,147 11,453 10,798 9,941 9,543
Total assets 143,672 127,852 110,493 104,591 96,442
AT YEAR END
Loans, net $109,516 $102,801 $ 87,759 $ 74,264 $ 68,671
Securities 32,677 18,327 20,996 22,876 17,866
Deposits 134,253 114,620 96,525 89,132 81,221
Long-term debt 1,350 442 458 473 5,488
Shareholders' equity 12,579 11,822 10,986 10,151 9,747
Total assets 151,808 131,319 114,875 104,829 98,353
SELECTED RATIOS
Return on average assets 0.80% 0.94% 1.00% 0.96% 0.75%
Return on average equity 9.42% 10.47% 10.19% 10.08% 7.59%
Average equity to average assets 8.45% 8.96% 9.77% 9.50% 9.90%
Dividend payout ratio 39.52% 43.93% 45.76% 40.38% 43.64%
First National Bankshares Corporation (the “Company”) is a bank 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, Alleghany 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 various lines of insurance products. Along with other investors, FNB Insurance, LLC will share in the results of ProServ, LLC.
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 this Annual 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.
The following discussion contains statements that refer to future expectations, contains projections of the results of operations or of financial condition, or states other information that is “forward-looking.” “Forward-looking” statements are easily identified by the use of words such as “could,” “anticipate,” “estimate,” “believe,” and similar words that refer to a future outlook. There is always a degree of uncertainty associated with “forward-looking” statements. The Company’s management believes the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated. Some factors that could significantly affect the results include: changes in economic conditions, either nationally or within the Company’s markets; changes in market interest rates; changes in competitive pressures; changes in legal or accounting regulations; and changes in the securities and investments markets.
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS section of this financial review.
The Company reported net income of $1,144,000 for 2002, a decrease of $56,000 or 4.6% over the $1,200,000 reported for 2001. On a per share basis, diluted earnings per share were $1.16 in 2002, $1.22 in 2001, and $1.13 in 2000. Improvements in net interest income and noninterest income were offset by higher operating costs incurred following the opening of a new full-service branch in Covington, Virginia, in February 2002 and a $266,000 pre-tax loss on the sale of foreclosed property. The new branch replaces the loan production office opened in Covington in February 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 0.80% for 2002, compared to 0.94% for 2001 and 1.00% for 2000. Return on average equity (ROE), which measures earnings performance relative to the total amount of equity capital invested in the Company, was 9.42% in 2002, 10.47% in 2001, and 10.19% in 2000.
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 2002, 2001, and 2000, tax-equivalent adjustments of $91,000, $82,000 and $75,000, respectively, are included in interest income, and were computed assuming a tax rate of 34.0% in all periods.
2002 Versus 2001
In 2002, the Company’s
net interest income on a fully tax-equivalent basis increased $675,000 or 13.0%
compared to 2001. The prevailing reason for the increase has been the growth in
the Company’s interest-earning assets, which has been the driving force
over the past three years as displayed in Table I. On average, interest-earning
assets have increased from $121,604,000 in 2001 to $136,415,000 in 2002, an
increase of 12.2%.
Interest rates have steadily declined over the past several months with many indices and benchmarks at or near historical lows. As a result of variable interest rate terms, contractual maturities and prepayments, a significant portion of the Company’s interest-earning assets have repriced at lower interest rates during 2002. As a result, the net yield on interest-earning assets has declined from 7.65% to 6.44%, or 121 basis points. Similarly, interest-bearing liabilities repriced during 2002, resulting in a 147 basis point decrease in the average interest rate paid on liabilities. Overall, the net impact of lower interest rates resulted in a net decrease in net interest income of $174,000.
An important component to any financial institution’s success is its ability to effectively manage its net yield on interest-earning assets or “margin.” Despite the falling rate environment, the Company was able to maintain its margin in 2002 (4.29% versus 4.26%). This was done by funding a portion of the growth in interest-earning assets with noninterest-bearing deposits and internal capital and controlling its interest cost. Notwithstanding the stable margin, the Company has seen signs of an eroding margin in the third and fourth quarters of 2002, which has been a common theme throughout the industry for the past two years. Slower loan demand relative to the increased asset growth has put added pressure on the margin.
See Tables I and II for further analysis of the Company’s net interest income.
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 2001, 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, growth in
interest-bearing liabilities incrementally increased interest expense by
$705,000. The overall 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.
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 2002, the Company made a provision for loan losses of $304,000. This compares to a provision of $257,000 and $73,000 made in 2001 and 2000 respectively. There has been a marked increase in the provision over the past three years. The increase is due in part to the increase in loan volume. Average loans have increased from $82,446,000 in 2000 to $106,772,000 in 2002. Secondly, a shift in various inherent risk factors directly related to asset quality, such as the current economic conditions, has warranted an increase in the provision. For additional discussion of these factors and the related allowance for loan losses account, refer to the ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS section of this discussion.
Noninterest income, which includes revenues from all sources other than interest income and yield related loan fees, totaled $991,000, $671,000, and $432,000 for the years ended December 31, 2002, 2001, and 2000. As a percentage of average assets, other income was 0.69%, 0.52%, and 0.39% for 2002, 2001 and 2000 respectively.
The following table (in thousands) details the components of non-interest income earned by the Company in 2002, 2001, and 2000, as well as the percentage increase (decrease) in each over the prior year.
================================================================================
NONINTEREST INCOME
2002 2001 2000
--------------- ----------------- -------
Percent Percent
Amount Change Amount Change Amount
--------------- ----------------- -------
Service fees $467 5.4% $443 50.7% $ 294
Securities gains (losses), net 84 n/a - (100.0) (3)
Loan origination fees - secondary
market loans 308 140.6 128 1,063.6 11
Other 132 33.3 99 (23.8) 130
------ ------ ------
Total $991 47.7 $671 55.3 $ 432
====== ====== ======
================================================================================
2002 Versus 2001
A significant component of
noninterest income in 2002 was loan fees derived from originating fixed-rate
loans for third party mortgage brokers. The underwriting decision, credit risk
and funding responsibilities are borne by the third party brokers. The
Company’s involvement is limited to marketing the product and assisting the
broker in the preparation of underwriting documentation and closing documents.
In return, the Company receives a fee based upon the interest rate charged to
the mortgage customer. Total fees were $308,000 in 2002 compared to $128,000 in
2001, and it accounted for nearly one-third of total noninterest income. The low
interest rate environment spurred demand for this product in 2002.
In the past, the Company’s involvement in selling securities held in its available for sale portfolio was very limited. This strategy will likely continue in the future with sales generally occurring as a result of liquidity needs or issuer quality concerns, not as a significant source of revenue generation. Although liquidity needs were not significant in 2002, the Company did take advantage of a favorable interest rate environment by selling various securities that resulted in securities gains. The underlying purpose for the sales was to better manage future liquidity needs by matching future loan growth with maturing securities.
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 an increase in 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 was 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 compared to 2000
due to a nonrecurring gain recognized following the restructuring of a life
insurance company the Bank used for its key-man life insurance policies.
The following table itemizes the primary components of noninterest expense for 2002, 2001 and 2000, 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).
===========================================================================================
NONINTEREST EXPENSES
2002 2001 2000
------------------- ---------------- -------
Percent Percent
Amount Change Amount Change Amount
------------------ ----------------- -------
Salaries and employee benefits $2,194 20.4% $1,823 7.2% $1,701
Net occupancy expense 344 12.4 306 13.3 270
Equipment rental, depreciation
and maintenance 409 23.2 332 19.4 278
Data processing 397 18.2 336 23.1 273
Advertising 143 52.1 94 2.2 92
Professional & legal 132 3.1 128 0.8 127
Directors' fees shareholders' expense 118 11.3 106 (4.5) 111
Postage and courier 130 38.3 94 20.5 78
Stationery and supplies 140 25.0 112 34.9 83
Loss on foreclosed real estate 266 - - - -
Other 468 13.6 412 5.6 390
------ ------ ------ ------ ------
Total $4,741 26.7 $3,743 10.0 $3,403
====== ====== ======
Noninterest expense as a
percentage of average earning assets 3.5% 3.1% 3.2%
===========================================================================================
TABLE I
AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2002 2001 2000
--------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans, net of unearned discount (1) $ 106,772 $ 7,631 7.15% $ 95,045 $ 7,969 8.38% $ 82,446 $ 7,454 9.04%
Securities:
Taxable 20,508 792 3.86 16,693 868 5.20 18,704 1,132 6.05
Tax-exempt (2) 3,805 268 7.04 3,394 242 7.13 3,018 220 7.28
------------ ---------- -------- ----------- ---------- ------- --------- --------- -------
Total securities 24,313 1,060 4.36 20,087 1,110 5.53 21,722 1,352 6.22
------------ ---------- -------- ----------- ---------- ------- --------- --------- -------
Federal funds sold and interest-bearing deposits 5,330 92 1.73 6,472 228 3.52 570 31 5.44
Total interest earnings assets 136,415 8,783 6.44 121,604 9,307 7.65 104,738 8,837 8.44
------------ ---------- -------- ----------- ---------- ------- --------- --------- -------
NONINTEREST-EARNING ASSETS
Cash and due from banks 3,496 2,934 2,658
Bank premises and equipment 2,785 1,746 1,627
Other assets 1,940 2,268 2,235
Allowance for loan losses (964) (700) (765)
------------ ------------ ------------
Total assets $ 143,672 $ 127,852 $110,493
============ ============ ============
INTEREST-BEARING LIABILITIES
Demand deposits 18,926 126 0.67 15,473 212 1.37 14,596 350 2.40
Savings deposits 57,546 1,448 2.52 43,362 1,559 3.60 36,860 1,736 4.71
Certificates of deposit 34,444 1,272 3.69 37,275 2,070 5.55 28,663 1,543 5.38
------------ ---------- --------- ---------- ---------- ------- --------- --------- ------
Total interest bearing deposits 110,916 2,846 2.57 96,110 3,841 4.00 80,119 3,629 4.53
Short-term borrowings 3,382 51 1.51 5,993 257 4.29 7,241 423 5.84
Long-term borrowings 374 28 7.49 449 26 5.79 465 27 5.81
------------ ---------- --------- ---------- ---------- ------- --------- --------- ------
Total interest bearing liabilities 114,672 2,925 2.55 102,552 4,124 4.02 87,825 4,079 4.64
------------ ---------- --------- ---------- ---------- ------- --------- --------- ------
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 15,733 12,737 11,054
Other liabilities 1,120 1,110 816
Shareholders' equity 12,147 11,453 10,798
------------ ---------- -----------
Total liabilities and shareholders equity $ 143,672 $ 127,852 $ 110,493
============= =========== ===========
NET INTEREST EARNINGS $ 5,858 $ 5,183 $ 4,758
========= ========== =========
NET YIELD ON INTEREST EARNING ASSETS 4.29% 4.26% 4.54%
======= ======== ========
(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 a 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)
2002 vs. 2001 2001 vs. 2000
----------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------------
INTEREST EARNING ASSETS
Loans $ 917 $ ( 1,254) $ (337) $ 1,083 $ (568) $ 515
Securities:
Taxable 174 (250) (76) (114) (150) (264)
Tax-exempt (2) 29 (3) 26 27 (5) 22
----------------------------------------------------------------------------------
Total securities 203 (253) (50) 87 (155) (242)
----------------------------------------------------------------------------------
Federal funds sold and interest-bearing
deposits with other banks (35) (101) (136) 212 (15) 197
----------------------------------------------------------------------------------
Total interest earning assets 1,085 (1,608) (523) 1,208 (738) 470
----------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Demand deposits 4 (126) (86) 20 (158) (138)
Savings deposits 430 (541) (111) 275 (452) (177)
Certificates of deposit (147) (651) (798) 477 50 527
Short-term borrowings (82) (123) (205) (65) (101) (166)
Long-term borrowings (5) 7 2 (1) - (1)
----------------------------------------------------------------------------------
Total interest-bearing liabilities 236 (1,434) (1,198) 706 (661) 45
----------------------------------------------------------------------------------
NET INTEREST EARNINGS $ 849 $ (174) $ 675 $ 502 $ (77) $ 425
==================================================================================
(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%.
=======================================================================================================
2002 Versus 2001
As expected, the opening of
the Covington branch in February 2002 had a significant impact on the
Company’s non-interest expense in 2002 compared to 2001. Overall, expenses
increased $998,000 or 26.7% in 2002. Direct operating expenses associated with
Covington were $495,000 or nearly 50.0% of the overall increase. Practically all
expense items increased as a result of the new branch with salaries and related
benefits accounting for the majority of the direct operating expenses
($277,000).
In February 2002, the Company upgraded its ATM network to a real-time processing platform. As a result of the upgrade, the Company’s data processing fees increased approximately $31,000. The remaining increase over 2001 is primarily a result of annual fee increases stipulated in the service providers’ contracts.
As more fully discussed in the Note 5 to the Consolidated Financial Statements, the Company recognized a $266,000 pretax charge to earnings as a result of the sale of foreclosed property in 2002.
2001 Versus 2000
Salaries and employee
benefits, which are 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 premiums 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. Additionally, depreciation expense increased over the prior year due to various capital outlays for equipment and infrastructure improvement in 2001.
Data processing increased in 2001 compared to 2000 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. Data processing fees charged by the third party servicer rose in 2001 due to an increase in the volume of accounts and transactions processed by the servicer and due to new fees associated with various product enhancements purchased by the Company.
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.
The Company’s income tax expense, which includes both Federal and state income taxes, totaled $569,000 or 33.2% of pretax income in 2002, compared to $572,000 or 32.3% in 2001, and $538,000 or 32.8% in 2000. 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.
Total assets increased $20,489,000 or 15.6% to $151,808,000 at year-end 2002 compared to $131,319,000 at year-end 2001. Average total assets increased 12.4% from $127,852,000 during 2001 to $143,672,000 during 2002. TABLE I presents the composition of the Company’s average balance sheet for the years ended 2002, 2001 and 2000. A discussion of the significant fluctuations in components of the Company’s balance sheet follows.
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 2002, approximately 71% of the securities (based on amortized cost) was classified as available for sale. This compares to 61% in 2001. At the time of purchase, management decides whether securities will be classified as available for sale or held to maturity. For liquidity reasons, management will likely designate the majority of future purchases of securities as available for sale.
The securities portfolio averaged $24,313,000 in 2002, a $4,226,000 increase from 2001‘s average balance of $20,087,000. By year-end (and for much of 2002), deposit growth had outpaced loan growth by $12,685,000 or nearly 3 to 1, leading to growth in the Company’s security portfolio.
At December 31, 2002, 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, 2002 is summarized in TABLE III.
At year-end, the Company’s investment in overnight positions, such as Federal funds sold and interest-bearing deposits held at other banks, was $2,550,000 in 2002 versus $2,152,000 in 2001. On average, the overnight position was $5,330,000 in 2002 compared to $6,472,000 in 2001. It is the Bank’s philosophy to minimize its involvement in the overnight funds market; however due to liquidity reasons (i.e. fluctuations in loan and deposit balances), the bank may buy or sell funds on an overnight basis.
=====================================================================================================================
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 $ 1,000 5.3% $ - 0.0% $ - 0.0% $ - 0.0%
State and political
subdivisions 1,520 5.3% 1,791 3.6% 2,002 3.3% 1,084 5.2%
Certificates of deposit with
other banks 887 2.5% 1,268 2.3% - 0.0% - 0.0%
------------- ------------- ----------- ------------
Total $ 3,407 4.6% $ 3,059 3.1% $ 2,002 3.3% $ 1,084 5.2%
============= ============= =========== ============
Securities Available for Sale
U.S. Government agencies
and corporations $ 4,185 2.8% $ 18,487 3.0% $ - 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.
==================================================================================================================
In 2002, loans increased $6,949,000, or 6.7%, to $110,587,000 from $103,638,000 at year-end 2001. Average loans outstanding increased from $95,045,000 in 2001 to $106,772,000 in 2002, an increase of $11,727,000 or 12.3%. 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
2002 (Decrease) 2001 2002 2001
-------------- ------------- -------------- -----------------------
Commercial, financial and agricultural $ 47,268 11.1% $ 42,541 42.7% 41.0%
Real estate - construction 1,340 15.2 1,163 1.2 1.1
Real estate - mortgage 45,775 3.1 44,399 41.4 42.9
Installment 13,805 4.3 13,236 12.5 12.8
Other 2,399 4.3 2,299 2.2 2.2
-------------- ------------ ------------- ---------
Total Loans $ 110,587 6.7 $ 103,638 100.0% 100.0%
============== ============= ============= =========
===================================================================================================================
Overall, loan demand was restrained in 2002 due to depressed economic conditions and a decline in consumer confidence and spending. However, the Company did experience modest loan growth in its Covington market. In 2002, Covington was responsible for $6,931,000 in net loan growth, while the Company’s other markets experienced flat loan growth. In the fourth quarter of 2002, Covington accounted for $4,506,000 in net loan growth. The majority of this growth coincides with the hiring of a local, experienced commercial loan officer who is primarily responsible for business development in Covington and contiguous markets.
The Covington market will be experiencing significant changes in 2003. Two competitors, which together hold a significant amount of the market share in Covington, announced an agreement to merge. The merger is expected to close by the end of the third quarter in 2003. As a result of the consolidation, management expects that growth opportunities for the Company may arise during the transition of this consolidation; however, this cannot be assured. In the Company’s remaining markets, Greenbrier and Kanawha Counties, loan demand is expected to remain moderate to flat. A dampened economy has slowed growth in these markets. In addition, competition for loan customers has heightened, as previous and new competitors remain extremely active. Management will continue to rely on its current advertising campaign and personal relationships to stimulate loan growth.
A summary of loan maturities by loan type as of December 31, 2002, is included in Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report.
At December 31, 2002 and 2001, the allowance for loans losses of $1,036,000 and $837,000 represented 0.94% and 0.81% 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. 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, detailed 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 for both the Bank and its peer group, new loan volume, portfolio composition, levels of nonperforming and past due loans, trends in the Special Mention and Classified Assets, and current and anticipated national and local economic conditions in evaluating the adequacy of the allowance for loan losses.
The subsidiary bank’s allowance for loan losses is established on a loan-by-loan and pool-by-pool basis. In addition to loan performance factors (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. An increase in the national unemployment rate, current economic uncertainty, an increase in home foreclosures, and a record number of bankruptcy filings in the United States have warranted additional consideration by management in evaluating estimated loss factors. 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. In 2002, the Company refined its method of allocating inherent loss factors to the various loan portfolios. As such, the allocation of the allowance from prior years has been reclassified in order to enhance the comparability to 2002‘s methodology. The Company’s unallocated portion has historically represented a minor portion of the allowance for loan losses. Management believes the 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 the table below.
The portion of the subsidiary bank’s allowance for loan losses specifically allocated to commercial, financial, and agricultural loans increased from $276,000 at December 31, 2001, to $329,000 at December 31, 2002, while the portion of the allowance for loan losses specifically allocated to real estate - construction loans remained unchanged at $1,000. The specific allocation for real estate - mortgage loans rose from $423,000 at December 31, 2001, to $508,000 at December 31, 2002. Meanwhile, the specific allocation for installment and other loans increased from $119,000 and $18,000, respectively, at December 31, 2001, to $168,000 and $30,000, respectively, at December 31, 2002. The increase in the specific allocations for each of the loan portfolios is attributable to an increase in the number of loans with identified losses. In addition, various risk factors discussed in the preceding paragraph have heightened over the past year and have dictated a higher reserve.
========================================================================================
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(in thousands)
2002 2001
-----------------------------------------------------
Portfolio Portfolio
As a As a
Percent Percent
of Total of Total
Amount Loans Amount Loans
-----------------------------------------------------
Commercial, financial,
and agricultural $ 329 42.7% $ 276 41.0%
Real estate - construction 1 1.2 1 1.1
Real estate - mortgage 508 41.4 423 42.9
Installment 168 12.5 119 12.8
Other 30 2.2 18 2.2
-----------------------------------------------------
$ 1,036 100.0% 837 100.0%
=====================================================
========================================================================================
As more fully explained in Notes 1 and 4 of the Notes to Consolidated Financial Statements included in this Annual Report, 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 loan’s collateral if the loan is collateral dependent. At December 31, 2002 and 2001, the Company had $433,000 and $294,000 in loans classified as impaired, all of which were nonaccrual. The related allowance for loss allocated to the impaired loans at December 31, 2002 and 2001 was approximately $82,000 and $16,000. The Company’s average investment in impaired loans was $302,000 for 2002 versus $306,000 in 2001.
Loan charge-offs, net of recoveries, for 2002 were $106,000 compared to $38,000 and $217,000 in 2001 and 2000, respectively. Expressed as a percentage of average loans outstanding, net loan charge-offs were 0.10%, 0.04% and 0.26% during 2002, 2001 and 2000, 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 2002, 2001 and 2000. The following table presents a summary of the Company’s nonperforming assets and accruing loans past due 90 days or more at December 31, 2002, 2001 and 2000 (in thousands).
========================================================================================
NONPERFORMING ASSETS
2002 2001
-------------- --------------
Nonperforming assets
Nonaccrual loans $ 433 $ 294
Other real estate owned 30 796
Restructured loans - -
-------------- --------------
Total nonperforming assets $ 463 $ 1,090
============== ==============
As a percentage of outstanding loans 0.4% 1.1%
============== ==============
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 $22,000, $17,000 and $17,000 in 2002, 2001 and 2000, respectively. No income was recognized on such loans during 2002, 2001 or 2000.
Other real estate owned totaled $30,000 and $796,000 at December 31, 2002 and 2001, respectively. The December 31, 2002 carrying amount consists of a single parcel of residential property. Subsequent to year-end, the property was sold for cash wherein the Company recognized a $10,000 gain. The December 31, 2001 carrying amount consisted of a single parcel of commercial property. The property was leased for a period of time during 2001 and 2000 pursuant to an agreement signed in 1999. The property was sold for cash in August 2002 wherein the Company recognized a $266,000 pre-tax loss.
Total deposits increased 17.1% to $134,253,000 as of December 31, 2002, from $114,620,000 at December 31, 2001. Similarly, average total deposits increased from $108,847,000 as of December 31, 2001 to $126,649,000 at December 31, 2002, an increase of 16.4%. A summary of the Company’s average deposits by product follows (in thousands):
========================================================================================
SUMMARY OF AVERAGE DEPOSITS
2002 2001
--------------- ----------------
Demand deposits $ 34,659 $ 28,210
Savings 57,546 43,362
Certificates of deposits 34,444 37,275
--------------- ----------------
Total $ 126,649 $ 108,847
=============== ================
========================================================================================
The opening of the Covington branch had a significant impact on the Company’s deposit growth in 2002. This location was responsible for $12,817,000 or nearly 65.3% of the total growth experienced in 2002. The deposit mix at the new location is similar to the consolidated mix shown in the above table. Although the deposit growth from the Company’s other locations has slowed following a rapid increase over a 24-month period, it accounted for the remaining $6,816,000, representing a 6.3% growth rate over the prior year. Competition from new and existing competitors has slowed deposit growth in Greenbrier County, West Virginia, which accounts for a majority of the Company’s current deposit base. In addition, management has opted to manage deposit growth with its pricing decisions. This is in response to the slower loan demand.
Over the past year and coinciding with the fall in interest rates, there has been a distinct trend for depositor preference in short-term, liquid deposits, which yield a competitive return. This preference has led to significant growth in the Company’s savings balance relative to other deposit products. As illustrated above, savings deposits have grown 32.7% since December 31, 2001. This trend is likely to continue should interest rates remain at their low levels and should equity markets continue to be highly volatile.
Although the Company remains committed to funding its assets with traditional community bank deposit products, interest rate costs, timing and transaction costs are weighed in determining the most effective method of funding the bank. With the advent of short-term and long-term funding alternatives discussed below, the reliance on core deposits as a significant funding source has lessened.
Details relative to the interest-bearing deposits are presented in Note 7 of the Notes to Consolidated Financial Statements included with this Annual Report.
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, 2002, short-term borrowings totaled $2,535,000 compared to $3,401,000 at December 31, 2001. On average, the Company’s utilization of these arrangements was $3,382,000 in 2002 compared to $5,993,000 in 2001. Because of the deposit growth and the resulting Federal funds sold position for most of 2002, the Company’s use of short-term advances or Federal funds purchased was negligible in 2002, which led to the decrease in the average balance in 2002 compared to 2001.
Long-term borrowings totaled $1,350,000 and $442,033 at December 31, 2002 and 2001, respectively. The outstanding loan at December 31, 2001, was paid off in August 2002. The Company entered into a $1,350,000 fixed-rate long-term borrowing with the FHLB in December 2002. The borrowing was obtained in order to fund a specific loan credit with similar interest rate and repayment terms.
For more information on borrowings refer to Note 8 of the Notes to Consolidated Financial Statements included in this report.
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 8.5% and 9.0% for 2002 and 2001, respectively.
Cash dividends totaling $452,000, or $0.46 per share were declared in 2002 compared to $527,000 or $0.54 per share declared in 2001. These payout levels represented approximately 39.5% and 43.9% of the Company’s net income in 2002 and 2001, respectively. The Company has a dividend policy whereby the dividend payout level may not exceed 40% of the Company’s annual net income. In 2001, the Board approved the dividend payout in excess of the policy limit. Accordingly, future declarations may be limited to the amounts that would be available under the policy directive.
Although the Company continues to report capital ratios well above minimum guidelines as discussed below, it has become prudent for the Company to manage the dividend growth rate in order to preserve capital for future internal asset growth and to build a capital position that will allow the Company to react in a timely manner to external growth opportunities should they present themselves. As a result, future dividends are expected to remain flat. Additional information related to regulatory restrictions on capital and dividends are disclosed in Note 14 of the Notes to Consolidated Financial Statements included with this Annual Report.
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 this Annual Report. 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, 2002, 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 12.18% 8.00%
Tier 1 risk-based capital ratio 11.16% 4.00%
Leverage ratio 7.64% 3.00%
========================================================================================
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, 2002, is disclosed in Note 15 of the Notes to Consolidated Financial Statements included with this report.
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 $5,587,000 at December 31, 2002. The Company also has
available various lines of credit with correspondent financial institutions of
more than $41,000,000 at year-end. Further enhancing the Company’s
liquidity is the availability of approximately $7,591,000 (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
$18,553,000 classified as available for sale that may be liquidated should an
unforeseen need for liquidity arise. The Company’s liquidity position is
monitored continuously to ensure that day-to-day as well as anticipated
long-term funding needs are met. Management is not aware of any other trends,
commitments, events or uncertainties that have resulted in or are reasonably
likely to result in a material change to the Company’s liquidity.
Interest rate risk represents the volatility in earnings and market values of interest earning assets and interest-bearing liabilities resulting from changes in market rates. The Company seeks to minimize interest rate risk through asset/liability management. The Company’s 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, 2002 and 2001. Key assumptions in the preparation of the table include changes in market conditions including interest rates, loan volumes, and pricing; prepayment assumptions; 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 2002 2001
- --------------------------------- ----------- -----------
Up 100 Basis Points -2.3% -4.8%
Down 100 Basis Points 1.8% 4.8%
========================================================================================
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
-------------------- -------------------
ASSETS
Cash and due from banks $ 3,036,801 $ 3,569,614
Federal funds sold 2,325,000 13,000
Interest-bearing deposits with other banks 225,325 2,138,601
Securities available for sale at estimated fair value
(amortized cost of $23,033,527 and $11,141,227) 23,125,364 11,161,171
Securities held to maturity (estimated fair value
of $9,715,842 and $7,290,628) 9,552,089 7,165,447
Loans, less allowance for loan losses of $1,035,857 and
$837,436 109,515,824 102,800,646
Premises and equipment, net 2,729,979 2,456,403
Accrued interest receivable 719,646 711,937
Other real estate owned 30,000 795,826
Other assets 548,421 506,816
-------------------- -------------------
Total assets $ 151,808,449 $ 131,319,461
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing $ 15,610,048 $ 15,535,851
Interest-bearing 118,643,351 99,083,772
-------------------- -------------------
Total deposits 134,253,399 114,619,623
Short-term borrowings 2,535,361 3,400,858
Other liabilities 1,090,190 1,035,334
Long-term borrowings 1,350,000 442,033
-------------------- -------------------
Total liabilities 139,228,950 119,497,848
-------------------- -------------------
Shareholders' equity
Common stock, $1.00 par value, authorized 10,000,000 shares,
issued 983,780 and 981,780, respectively 983,780 981,780
Capital surplus 1,208,406 1,188,006
Retained earnings 10,331,292 9,639,661
Accumulated other comprehensive income 56,021 12,166
-------------------- -------------------
Total shareholders' equity 12,579,499 11,821,613
-------------------- -------------------
Total liabilities and shareholders' equity $ 151,808,449 $ 131,319,461
==================== ===================
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- ----------------- -----------------
Interest income
Interest and fees on loans $ 7,631,521 $ 7,969,213 $ 7,453,061
Interest and dividends on securities:
Taxable 791,650 867,763 1,131,623
Tax-exempt 177,063 159,922 145,203
Interest on Federal funds sold and
interest-bearing deposits 92,089 227,470 30,733
---------------- ----------------- -----------------
Total interest income 8,692,323 9,224,368 8,760,620
---------------- ----------------- -----------------
Interest expense
Deposits 2,846,518 3,840,931 3,628,942
Short-term borrowings 51,364 256,292 422,295
Long-term borrowings 27,678 26,340 27,258
---------------- ----------------- -----------------
Total interest expense 2,925,560 4,123,563 4,078,495
---------------- ----------------- -----------------
Net interest income 5,766,763 5,100,805 4,682,125
Provision for loan losses 304,000 256,500 72,500
Net interest income after provision
for loan losses 5,462,763 4,844,305 4,609,625
---------------- ----------------- -----------------
Noninterest income
Service fees 467,134 442,739 293,789
Securities gains (losses), net 83,948 - (3,440)
Loan origination fees - secondary market loans 308,355 128,235 10,746
Other income 131,717 99,710 130,345
---------------- ----------------- -----------------
Total noninterest income 991,154 670,684 431,440
---------------- ----------------- -----------------
Noninterest expense
Salaries and employee benefits 2,193,917 1,823,007 1,700,934
Net occupancy expense 343,632 305,343 269,917
Equipment rental, depreciation and maintenance 409,433 332,070 277,527
Data processing 396,916 336,166 273,588
Advertising 142,588 94,392 92,063
Professional and legal 132,546 127,840 126,918
Directors' fees and shareholder expenses 117,735 105,957 110,554
Postage and courier 130,184 94,220 77,953
Stationery and supplies 140,296 112,148 83,341
Loss on foreclosed real estate 265,902 - -
Other operating expenses 467,980 411,449 390,265
---------------- ----------------- -----------------
Total noninterest expense 4,741,129 3,742,592 3,403,060
---------------- ----------------- -----------------
Income before income taxes 1,712,788 1,772,397 1,638,005
Income tax expense 569,258 572,693 537,912
---------------- ----------------- -----------------
Net income $ 1,143,530 $ 1,199,704 $ 1,100,093
================ ================= =================
Basic earnings per common share $ 1.16 $ 1.23 $ 1.14
================ ================= =================
Diluted earnings per common share $ 1.16 $ 1.22 $ 1.13
================ ================= =================
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
Accumulated
Other Compre- Total
Common Capital Retained hensive Shareholders'
Stock Surplus Earnings Income (1) Equity
------------ ----------- ------------ -------------- ----------------
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) (503,433) (503,433)
Issued 6,750 shares of common stock
pursuant to stock option plan 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) (527,047) (527,047)
Issued 10,515 shares of common stock
pursuant to stock option plan 10,515 98,553 109,068
------------- ----------- ------------ --------------- -----------------
Balance, December 31, 2001 981,780 1,188,006 9,639,661 12,166 11,821,613
Comprehensive income:
Net income 1,143,530 1,143,530
Other comprehensive income, net of deferred
income tax of $28,038:
Unrealized gains on securities net of
reclassification adjustment 43,855 43,855
---------------
Total comprehensive income 1,187,385
Cash dividends declared on common stock ($0.46) (451,899) (451,899)
Issued 2,000 shares of common stock
pursuant to stock option plan 2,000 20,400 22,400
------------- ------------ ----------- --------------- -----------------
Balance, December 31, 2002 $ 983,780 $ 1,208,406 $ 10,331,292 $ 56,021 $ 12,579,499
============= ============ =========== =============== ==================
2002 2001 2000
------------------------------------------
(1) Disclosure of reclassification amount for the years ended:
Net unrealized appreciation arising during the period, net of tax $ 75,522 $ 53,627 $ 161,783
Less: reclassification adjustment for net securities gains
included in net income, net of tax (31,667) - -
-------------- ------------ ------------
Net unrealized appreciation on investment $ 43,855 $ 53,627 $ 161,783
==========================================
FIRST NATIONAL BANKSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,143,530 $ 1,199,704 $ 1,100,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 324,814 243,871 219,412
Loss on disposal of premises and equipment 2,900 1,184 -
Loss (gain) on sale of foreclosed assets 265,902 (4,188) 4,000
Provision for loan losses 304,000 256,500 72,500
Deferred income tax (benefit) expense (6,446) (21,747) 11,707
Accretion of security discounts, net 73,509 (103,466) (17,072)
Securities (gains) losses, net (83,948) - 3,440
(Increase) decrease in accrued interest receivable (7,709) 225,438 (210,507)
(Increase) decrease in other assets (65,118) 58,570 (75,931)
Increase in other liabilities 64,394 56,720 15,557
----------------------------------------------------------
Net cash provided by operating activities 2,015,828 1,912,586 1,123,199
----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities
held to maturity 27,730,999 109,805,000 1,011,560
Proceeds from maturities and calls of securities
available for sale 3,047,750 22,260,000 2,500,000
Purchases of securities held to maturity (5,423,713) (105,488,780) (851,025)
Purchases of securities available for sale (39,623,539) (23,715,092) (501,590)
Net increase in loans (7,049,178) (15,298,347) (13,767,659)
Purchases of premises and equipment (599,369) (1,167,755) (60,644)
Proceeds from sale of premises and equipment - 4,770 -
Proceeds from sales of foreclosed assets 529,924 204,188 24,000
Lease payments collected on other real estate owned - 17,670 42,000
----------------------------------------------------------
Net cash used in investing activities (21,387,126) (13,378,346) (11,603,358)
----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
and savings accounts 21,369,032 19,239,903 (2,287,663)
Net (decrease) increase in time deposits (1,735,256) (1,145,449) 9,680,988
Proceeds from issuance of common stock pursuant
to stock option plan 22,400 109,068 77,150
Net (decrease) increase in short-term borrowings (865,497) (2,507,846) 1,796,125
Principal payments on long-term borrowings (442,033) (16,084) (15,171)
Proceeds from long-term borrowings 1,350,000 - -
Dividends paid (461,437) (544,895) (482,995)
----------------------------------------------------------
Net cash provided by financing activities 19,237,209 15,134,697 8,768,434
----------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------ --------------- ---------------------
(Decrease) increase in cash and cash equivalents $ (134,089) $ 3,668,937 $ (1,711,725)
Cash and cash equivalents:
Beginning 5,721,215 2,052,278 3,764,003
------------------ ---------------- ---------------------
Ending $ 5,587,126 $ 5,721,215 $ 2,052,278
================== ================ =====================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 2,987,534 $ 4,218,851 $ 3,998,842
================== ================ =====================
Income taxes $ 639,255 $ 730,499 $ 602,362
================== ================ =====================
upplemental Schedule of Noncash Investing
and Financing Activities
Other real estate acquired in settlement of loans $ 30,000 $ - $ 200,000
================== ================ ======================
Dividends declared and unpaid $ 137,729 $ 147,267 $ 165,115
================== ================ ======================
Nature of business: First National Bankshares Corporation (the “Company”) is a bank 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, Alleghany 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 various lines of insurance products. Along with other investors, FNB Insurance, LLC will share in the results of ProServ, LLC.
The Company’s only defined business segment is community banking. As a community bank, the Company offers its customers a full range of products through traditional branches, ATMs, and personal computers.
Principles of consolidation: The accounting and reporting policies of the Company 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 the Company 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.
Presentation of cash flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, balances due from banks (including cash items in process of clearing), Federal funds sold and interest-bearing deposits with other banks. Cash flows from demand deposits, NOW and savings accounts are reported net since their original maturities are less than three months. Cash flows from loans and certificates of deposit are reported net.
Securities: Debt and equity securities are classified as “held to maturity,” “available for sale” or “trading” according to management’s intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.
Securities held to maturity - Debt securities which the Company has the positive intent and ability to hold to maturity are reported at cost and 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 an allowance for loan losses. 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. 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 nonaccrual 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: Effective July 1, 2002, loan origination and commitment fees and direct loan origination costs are deferred and amortized as an adjustment of the loan yield over the life of the related loan. Prior to this date, the fees and costs were being recognized as collected and incurred, which did not produce results that were materially different from the recognition method adopted July 1, 2002.
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 estimated fair value less selling expenses 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 Shareholders’ 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. Diluted per share amounts assume the conversion, exercise or issuance of all stock options. The computation of basic and diluted earnings per share amounts at December 31, 2002, 2001 and 2000 is based upon the following outstanding shares:
2002 2001 2000
--------------- --------------- --------------
Weighted average shares outstanding
for basic earnings per share calculation 981,906 975,690 966,823
Effect of dilutive securities
stock options 2,876 5,525 5,752
--------------- --------------- --------------
Weighted average shares outstanding
for fully-diluted earnings per share calculation 984,782 981,215 972,575
=============== =============== ==============
Stock options: The Company has an incentive stock option plan covering certain key employees. Grants under the plan are accounted for under the intrinsic value method. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation for the plan been determined based on the fair value method, reported net income and earnings per share would have been reduced to the pro forma amounts shown below:
2002 2001 2000
--------------- ----------------- -----------------
Net income:
As reported $ 1,143,530 $ 1,199,704 $ 1,100,093
Pro forma $ 1,141,329 $ 1,197,505 $ 1,085,250
Basic earnings per share:
As reported $ 1.16 $ 1.23 $ 1.14
Pro forma $ 1.16 $ 1.23 $ 1.12
Diluted earnings per share:
As reported $ 1.16 $ 1.22 $ 1.13
Pro forma $ 1.16 $ 1.22 $ 1.12
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 health care and life insurance benefits for all retired employees that meet certain eligibility requirements. The plans are contributory with retiree contributions and are unfunded. The subsidiary bank’s share of the estimated costs that will be paid after retirement is being accrued by charges to expense over the employees’ active service periods to the dates they are fully eligible for benefits.
Reclassifications: Certain amounts in the 2001 and 2000 consolidated financial statements have been reclassified to conform to current year classifications.
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.
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 was effective January 1, 2002. The Company adopted the accounting standards as required and there was no impact on the Company's financial position or net income.
Recent Accounting Developments In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies the requirements of FAS 5, Accounting for Contingencies, relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or equity security of the guaranteed party. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002.
The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Company does not expect the requirements of FIN 45 to have a material impact on its financial statements.
In June 2002, the FASB issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This pronouncement is effective for exit or disposal activities initiated after December 31, 2002. This statement addresses financial accounting and reporting for costs associated with exit or disposal. The statement is not expected to have a material impact on the Company’s financial statements.
In April 2002, the FASB issued FAS No. 145, which updates, clarifies, and simplifies certain existing accounting pronouncements. The changes required by FAS No. 145 are not expected to have a material impact on results of operations, financial position, or liquidity of the Company.
The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 2002 and 2001, are summarized as follows:
December 31, 2002
-------------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ---------------- -----------------
Available for sale
Taxable:
U.S. Government agencies and corporations $ 22,671,210 $ 92,975 $ 655 $ 22,763,530
Federal Reserve Bank stock 56,650 - - 56,650
Federal Home Loan Bank stock 280,900 - - 280,900
Other equities 22,517 - 483 22,034
--------------- ---------------- ----------------- ----------------
Total taxable 23,031,277 92,975 1,138 23,123,114
Tax-exempt:
Federal Reserve Bank stock 2,250 - - 2,250
--------------- ---------------- ----------------- ----------------
Total securities available for sale $ 23,033,527 $ 92,975 $ 1,138 $ 23,125,364
=============== ================ ================= ================
Held to maturity
Taxable:
U.S. Government agencies and corporations $ 1,000,000 $ 38,200 $ - $ 1,038,200
State and political subdivisions 455,000 18,177 - 473,177
Certificates of deposit with other banks 2,155,805 - - 2,155,805
--------------- ---------------- ------------------ ---------------
Total taxable 3,610,805 56,377 - 3,667,182
Tax-exempt:
State and political subdivisions 5,941,284 116,071 8,695 6,048,660
--------------- ---------------- ------------------ ---------------
Total securities held to maturity $ 9,552,089 $ 172,448 $ 8,695 $ 9,715,842
=============== ================ ================== ===============
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
=============== ================ ================== ===============
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, 2002, are summarized as follows:
Held to Maturity Available for Sale
-------------------------------- ---------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ----------------
Due within 1 year $ 3,406,824 $ 3,485,330 $ 4,184,482 $ 4,210,070
Due after 1 but within 5 years 3,059,444 3,116,912 18,486,728 18,553,460
Due after 5 but within 10 years 2,001,841 1,999,903 - -
Due after 10 years 1,083,980 1,113,697 - -
Equity securities - - 362,317 361,834
--------------- ---------------- ---------------- ----------------
$ 9,552,089 $ 9,715,842 $ 23,033,527 $ 23,125,364
=============== ================ ================ ================
At December 31, 2002 and 2001, securities with amortized costs of $11,864,694 and $10,818,543, respectively, with estimated fair values of $11,961,085 and $10,895,101, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
2002 2001
------------------------ ----------------------
Commercial, financial and agricultural $ 47,268,220 $ 42,540,798
Real estate - construction 1,340,230 1,163,417
Real estate - mortgage 45,774,579 44,399,052
Installment loans to individuals 13,805,306 13,236,237
Other 2,398,461 2,298,578
------------------------ ----------------------
Total loans 110,586,796 103,638,082
Net deferred loan origination fees (35,115) -
------------------------ ----------------------
Total loans net of deferred loan origination fees 110,551,681 103,638,082
Less allowance for loan losses 1,035,857 837,436
------------------------ ----------------------
Loans, net $ 109,515,824 $ 102,800,646
======================== ======================
Included in the net balance of loans are nonaccrual loans amounting to $433,004 and $294,452 at December 31, 2002 and 2001, respectively. If interest on nonaccrual loans had been recognized under the original terms of the
loans, such income would have approximated $22,288, $16,822 and $16,524 for the years ended December 31, 2002, 2001 and 2000, respectively. No income was recognized on such loans during 2002, 2001 or 2000.
The following represents contractual maturities of loans at December 31, 2002:
After 1 But
Within 1 Year Within 5 Years After 5 Years
----------------------- ------------------------ ----------------------
Commercial, financial and agricultural $ 15,267,020 $ 24,784,470 $ 7,216,730
Real estate - construction 1,340,230 - -
Aggregate of remaining loan portfolio 21,229,430 15,435,230 25,313,686
----------------------- ------------------------ ----------------------
Total $ 37,836,680 $ 40,219,700 $ 32,530,416
======================= ======================== ======================
Loans due after one year with:
Variable rates $ 49,873,745
Fixed rates 22,876,371
-----------------------
Total $ 72,750,116
=======================
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 and Alleghany County in 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:
2002 2001
--------------------- ----------------------
Balance, beginning $ 2,209,070 $ 2,378,084
Additions 2,832,076 1,543,717
Amounts collected (1,960,666) (1,712,731)
--------------------- ----------------------
Balance, ending $ 3,080,480 $ 2,209,070
===================== ======================
An analysis of the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000
---------------------- ------------------------ ----------------------
Balance, beginning of year $ 837,436 $ 618,656 $ 763,523
Losses:
Commercial, financial and agricultural 8,375 7,342 9,600
Real estate - mortgage 37,702 - 176,926
Installment loans to individuals 72,119 43,393 56,607
Other 3,308 5,403 10,008
---------------------- ------------------------ ----------------------
Total 121,504 56,138 253,141
Recoveries:
Commercial, financial and agricultural 764 - -
Installment loans to individuals 13,913 15,500 29,077
Other 1,248 2,918 6,697
---------------------- ------------------------ ----------------------
Total 15,925 18,418 35,774
Net losses 105,579 37,720 217,367
Provision for loan losses 304,000 256,500 72,500
---------------------- ------------------------ ----------------------
Balance, end of year $ 1,035,857 $ 837,436 $ 618,656
====================== ======================== ======================
The Company’s total recorded investment in impaired loans at December 31, 2002 and 2001 approximated $433,004 and $294,452, respectively, for which the related allowance for loan losses approximated $82,405 and $16,000, respectively. The Company’s average investment in such loans approximated $302,279, $306,334 and $618,024 for the years ended December 31, 2002, 2001 and 2000, respectively. All impaired loans at December 31, 2002 and 2001 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, 2002, 2001 and 2000, the Company recognized $21,719, $23,807 and $38,247, respectively, 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.
Other real estate owned totaled $30,000 and $795,826 at December 31, 2002 and 2001, respectively. The December 31, 2002 carrying amount consists of a single parcel of residential property. Subsequent to year-end, the property was sold wherein the Company recognized a $9,567 gain. The December 31, 2001 carrying amount consisted of a single parcel of commercial property. The property was leased for a period of time during 2001 and 2000 pursuant to an agreement signed in 1999. Lease payments were 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 and 2000 totaled $17,670 and $42,000, respectively. The property was sold for cash in August 2002 wherein the Company recognized a $265,902 loss.
2002 2001
--------------- --------------
Land $ 554,273 $ 554,273
Building and improvements 2,385,776 1,640,205
Furniture and equipment 2,449,191 2,092,996
Construction in process - 542,112
--------------- --------------
5,389,240 4,829,586
Less accumulated depreciation 2,659,261 2,373,183
--------------- ---------------
Bank premises and equipment, net $ 2,729,979 $ 2,456,403
================= ================
Depreciation expense for the years ended December 31, 2002, 2001 and 2000, totaled $322,893, $241,965 and $219,412, respectively.
At December 31, 2001, the Company had incurred construction costs and equipment procurement outlays totaling $542,112, all of which related to a new full-service branch facility built in Covington, Virginia. The facility opened on February 4, 2002.
2002 2001
-------------- --------------
Interest-bearing demand deposits $ 18,551,872 $ 15,779,572
Savings deposits 67,848,799 49,326,264
Certificates of deposit 32,242,680 33,977,936
-------------- --------------
Total $ 118,643,351 $ 99,083,772
================= ================
Time certificates of deposit in denominations of $100,000 or more totaled $5,595,192 and $7,074,563 at December 31, 2002 and 2001, respectively. Interest paid on time certificates of deposit in denominations of $100,000 or more was $267,472, $474,126 and $314,791 for the years ended December 31, 2002, 2001 and 2000, 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, 2002:
Amount
-----------------
Three months or less $ 1,040,211
Three through six months 437,216
Six through twelve months 2,270,193
Over twelve months 1,847,572
-----------------
Total $ 5,595,192
=================
A summary of the maturities of certificates of deposit as of December 31, 2002, follows:
Year Amount
-------- --------------
2003 $ 22,741,184
2004 6,351,428
2005 2,146,841
2006 921,737
2007 81,490
--------------
$ 32,242,680
==============
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, 2002 and 2001, were $3,305,662 and $1,543,234, respectively.
Short-term borrowings: During 2002 and 2001, 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.
2002
-------------------------------------------------------
Federal Short-term
Repurchase Funds Advances-
Agreements Purchased FHLB
-------------------------------------------------------
Outstanding at year-end $ 2,535,361 $ - $ -
Weighted average interest rate at December 31 0.9% 0.0% 0.0%
Maximum amount outstanding at any month-end $ 3,854,353 $ - $ -
Average daily amount outstanding $ 3,377,734 $ 4,268 $ -
Weighted average interest rate 1.5% 2.1% 0.0%
2001
-------------------------------------------------------
Federal Short-term
Repurchase Funds Advances-
Agreements Purchased FHLB
-------------------------------------------------------
Outstanding at year-end $ 3,400,858 $ - $ -
Weighted average interest rate at December 31 2.4% 0.0% 0.0%
Maximum amount outstanding at any month-end $ 17,956,394 $ 244,000 $ 3,000,000
Average daily amount outstanding $ 4,123,240 $ 28,175 $ 1,832,877
Weighted average interest rate 3.9% 5.7% 5.2%
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 of $1,350,000 and $442,033 at December 31, 2002 and December 31, 2001, respectively, consist of advances from the Federal Home Loan Bank (“FHLB”). These borrowings bear fixed rates and are secured by Federal Home Loan Bank stock, qualifying first mortgage loans, certain nonmortgage loans and all investments not otherwise pledged. The average interest rate on the borrowings at December 31, 2002 and 2001 was 4.3% and 5.9%, respectively.
A summary of the maturities of all long-term borrowings for the next five years and thereafter is as follows:
Year Ending
December 31, Amount
--------------- ------------
2003 $ 65,409
2004 68,291
2005 71,300
2006 74,443
2007 77,722
Thereafter 992,835
-------------
$ 1,350,000
==============
2002 2001 2000
------------ ------------- --------------
Current:
Federal $ 487,051 $ 508,348 $ 462,132
State 88,653 86,092 64,073
------------ ------------- --------------
575,704 594,440 526,205
Deferred (Federal and State) (6,446) (21,747) 11,707
------------ ------------- --------------
Total $ 569,258 $ 572,693 $ 537,912
================ ================ ================
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:
2002 2001 2000
-----------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------ ----------- ------------ ---------- ----------- ----------
Computed tax at applicable
statutory rate $ 582,348 34.0 $ 602,615 34.0 $ 556,922 34.0
Increase (decrease) in taxes from:
Tax-exempt interest (80,333) (4.7) (75,217) (4.3) (61,453) (3.8)
State income taxes, net of
Federal income tax benefit 57,965 3.4 54,981 3.1 43,278 2.7
Other, net 9,278 0.5 (9,686) (0.6) (835) (0.1)
------------ ----------- ------------- --------- ----------- -----------
Applicable income taxes $ 569,258 33.2 $ 572,693 32.2 $ 537,912 32.8
============ =========== ============= ========= =========== ===========
The tax effects of temporary differences that give rise to the Company’s deferred tax assets and liabilities as of December 31 are as follows:
2002 2001
---------------- ----------------
Deferred tax assets:
Allowance for loan losses $ 297,861 $ 220,478
Employee benefits 191,025 177,995
Other real estate owned - 22,493
---------------- ----------------
488,886 420,966
---------------- ----------------
Deferred tax liabilities:
Depreciation 60,682 14,078
Accretion on securities 3,564 23,937
Net deferred loan origination fees 85,215 50,153
Basis differences - other assets 181 -
Net unrealized gain on securities 35,816 7,778
---------------- ----------------
185,458 95,946
---------------- ----------------
Net deferred tax assets $ 303,428 $ 325,020
================ ================
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, 2002, 2001 and 2000, totaled $47,451, $51,443 and $57,170, respectively.
Postretirement benefit plans: The subsidiary bank sponsors a postretirement medical plan and a postretirement life insurance plan for all retired employees that meet certain eligibility requirements. Participation in the plans is limited to all employees hired prior to January 1, 1999. Both plans are contributory with retiree contributions that are adjustable based on various factors, some of which are discretionary. The plans are unfunded. Details regarding the retiree medical plan and the retiree life insurance plan are as follows:
Retiree Medical and Life Insurance Plans
-----------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------
Change in accumulated postretirement
benefit obligation
Accumulated postretirement benefit
obligation at beginning of year $ 439,049 $ 389,458 $ 497,536
Service cost 5,572 6,855 9,780
Interest cost 28,594 26,248 34,122
Actuarial loss (gain) 77,717 45,016 (123,173)
Benefits paid (28,723) (28,528) (28,807)
------------------- ---------------------- ----------------------
Accumulated postretirement benefit
obligation at end of year $ 522,209 $ 439,049 $ 389,458
=================== ====================== ======================
Retiree Medical and Life Insurance Plans
-----------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ - $ - $ -
Employer contributions 28,723 28,528 28,807
Benefits paid (28,723) (28,528) (28,807)
------------------- ---------------------- ----------------------
Fair value of plan assets at end of year $ - $ - $ -
=================== ====================== ======================
Funded status $ (522,209) $ (439,049) $ (389,458)
Unrecognized net actuarial loss (gain) 69,804 (11,890) (63,418)
------------------- ---------------------- ----------------------
Accrued postretirement benefit cost $ (452,405) $ (450,939) $ (452,876)
=================== ====================== ======================
Retiree Medical and Life Insurance Plans
-----------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------
Components of net periodic
postretirement benefit cost
Service cost $ 5,572 $ 6,855 $ 9,780
Interest cost 28,594 26,248 34,122
Amortization of net actuarial (gain) loss (3,977) (6,512) 905
------------------- ---------------------- ----------------------
Net periodic postretirement benefit cost $ 30,189 $ 26,591 $ 44,807
=================== ====================== ======================
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One Percent One Percent
Point Increase Point Decrease
---------------- --------------------
Increase (decrease) service and interest rate components $ 1,221 $ (1,232)
================ ====================
(Increase) decrease accumulated postretirement benefit obligation $ (18,774) $ 18,953
================ ====================
Information regarding the Company’s stock option plan is presented below. The significant provisions of the plan include authorization of the stock option committee to grant up to 98,125 shares of common stock between April 25, 1996 and April 25, 2006 (the shareholders approved an amendment to the plan in April 2002 allocating an additional 50,000 shares to the plan). Each option fully vests after six months from the grant date and must be exercised within five years.
A summary of the status of the plan at December 31, 2002, 2001 and 2000, and changes during the year ended, along with the assumptions used in calculating the estimated fair value of the options, are as follows:
2002 2001 2000
------------------------ ------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------ ------------------------------ ---------------------------
Fixed options
Outstanding at beginning
of year 28,845 $ 15.61 37,610 $ 13.87 32,015 $ 12.43
Granted - - 5,250 17.50 15,470 16.00
Exercised (2,000) 11.20 (10,515) 10.37 (6,750) 11.43
Forfeited - - (3,500) 15.50 (3,125) 14.95
------------ --------------- -------------
Outstanding at end of year 26,845 15.93 28,845 15.61 37,610 13.87
============ =============== =============
Exercisable at end of year 26,845 15.93 23,595 15.19 23,890 12.65
============ =============== =============
Fair value per option granted
during the year N/A $ 1.27 $ 1.83
=============== =============
Option pricing method N/A Black-Scholes Black-Scholes
Assumptions:
Expected dividend yield 3.00% 3.00%
Risk-free interest rate 4.33% 5.92%
Expected life of options 5 Years 5 Years
At December 31, 2002, the options outstanding under the stock option plan have exercise prices ranging from $15.00 to $17.50 and a weighted average remaining contractual life of 2.4 years.
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, 2002, 2001 and 2000. 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
------------------
2003 $ 101,970
2004 101,970
2005 101,970
2006 33,990
------------------
$ 339,900
==================
Reserve requirements: The subsidiary bank is required to maintain average balances with the Federal Reserve Bank. During 2002, the average balance maintained was approximately $712,000. 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, 2002 and 2001, the subsidiary bank’s financial instruments with off-balance sheet risk are as follows:
Financial instruments whose contract Contract Amount
amounts represent credit risk 2002 2001
- ----------------------------------------- ---------------- ----------------
Total loan commitments $ 15,647,977 $ 15,371,867
================ ================
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 creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate.
Litigation: The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, based upon the advice of counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial position of the Company.
Employment 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, which stipulates that the Executive shall receive no 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 $361,000 at December 31, 2002.
The primary source of funds for the dividends paid by the Company 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 2003, the net retained profit available for distribution to the Company as dividends without regulatory approval approximates $503,000 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, 2002, 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, 2002:
Total Capital $ 12,464 12.18% $ 8,189 8.00% $ 10,236 10.00%
(to Risk-Weighted Assets)
Tier 1 Capital 11,428 11.16% 4,094 4.00% 6,141 6.00%
(to Risk-Weighted Assets)
Tier 1 Capital 11,428 7.64% 4,489 3.00% 7,481 5.00%
(to Average Assets)
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)
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, interest-bearing deposits with other banks and Federal funds sold: The carrying values of these amounts approximate their estimated fair value.
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.
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.
Long-term borrowings: The estimated fair values for long-term borrowings are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for borrowings with similar terms.
Accrued interest payable: The carrying values of accrued interest payable approximate their estimated fair value.
Off-balance sheet instruments: The fair values of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments are deemed insignificant and, therefore, the estimated fair values and carrying values are not shown below.
The carrying values and estimated fair values of the Company’s financial instruments are summarized below:
December 31, 2002 December 31, 2001
-------------------------------------- ---------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------- ---------------------------------------
Financial assets:
Cash and due from banks $ 3,036,801 $ 3,036,801 $ 3,569,614 $ 3,569,614
Interest-bearing deposits with
other banks 225,325 225,325 2,138,601 2,138,601
Federal funds sold 2,325,000 2,325,000 13,000 13,000
Securities available for sale 23,033,527 23,125,364 11,161,171 11,161,171
Securities held to maturity 9,552,089 9,715,842 7,165,447 7,290,628
Loans 109,515,824 121,927,703 102,800,646 104,145,143
Accrued interest receivable 719,646 719,646 711,937 711,937
-------------- ----------------------- --------------- -----------------------
$148,408,212 $161,075,681 $ 127,560,416 $129,030,094
============== ======================= =============== =======================
Financial liabilities:
Deposits $134,253,399 $134,571,895 $ 114,619,623 $115,033,899
Short-term borrowings 2,535,361 2,539,730 3,400,858 3,400,858
Accrued interest payable 81,945 81,945 143,919 143,919
Long-term borrowings 1,350,000 1,438,896 442,033 442,033
-------------- ----------------------- --------------- -----------------------
$138,220,705 $138,632,466 $ 118,606,433 $119,020,709
============== ======================= =============== =======================
Balance Sheets
2002 2001
--------------------- ---------------------
Assets
Cash $ 1 $ 463,222
Securities held to maturity (estimated fair value
of $814,478 and $703,446) 792,706 700,305
Investment in bank subsidiary 11,483,795 10,888,344
Investment in insurance subsidiary 9,977 10,003
Loans, less allowance for loan losses of $0 362,452 385,055
Dividends receivable - bank subsidiary 137,729 147,267
Other assets 136,645 145,707
--------------------- ---------------------
Total assets $ 12,923,305 $ 12,739,903
===================== =====================
Liabilities and shareholders' equity
Liabilities
Dividends payable to shareholders $ 137,729 $ 147,267
Due to bank subsidiary 166,271 771,023
Other liabilities 39,806 -
--------------------- ---------------------
Total liabilities 343,806 918,290
--------------------- ---------------------
Shareholders' equity
Common stock, $1.00 par value, authorized 10,000,000 shares,
issued 983,780 and 981,780, respectively 983,780 981,780
Capital surplus 1,208,406 1,188,006
Retained earnings 10,331,292 9,639,661
Accumulated other comprehensive income 56,021 12,166
--------------------- ---------------------
Total shareholders' equity 12,579,499 11,821,613
--------------------- ---------------------
Total liabilities and shareholders' equity $ 12,923,305 $ 12,739,903
===================== =====================
Statements of Income
2002 2001 2000
----------------- ------------------ ----------------
Interest and fees on loans $ 15,282 $ 11,024 $ -
Interest on securities:
Taxable 1,525 - -
Tax-exempt 30,160 15,161 481
Income - dividends from bank subsidiary 761,900 1,453,391 503,433
Expenses - operating 342,053 367,070 -
-------------- ------------------ --------------
Income before income taxes and undistributed income 466,814 1,112,506 503,914
Applicable income tax (benefit) expense (125,146) (135,479) 15
-------------- ------------------ --------------
Income before undistributed income of (excess dividends
from) subsidiaries 591,960 1,247,985 503,899
Equity in undistributed income (excess dividends from)
subsidiaries 551,570 (48,281) 596,194
----------------- ------------------ ----------------
Net income $ 1,143,530 $ 1,199,704 $ 1,100,093
================= ================== ================
Cash flows from operating activities 2002 2001 2000
-------------------------------------------------------
Net income $ 1,143,530 $ 1,199,704 $ 1,100,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of securities premiums 2,599 1,464 18
Equity in undistributed net income of (excess
dividends from) subsidiaries (551,570) 48,281 (596,194)
Decrease (increase) in receivables and other assets 18,600 (123,070) (24,188)
(Decrease) increase in payables and other liabilities (564,946) 611,988 159,035
-------------------------------------------------------
Net cash provided by operating activities 48,213 1,738,367 638,764
-------------------------------------------------------
Cash flows from investing activities
Capital contribution - FNB Insurance, LLC - (3,500) (7,000)
Proceeds from maturities and calls of securities
held to maturity 5,000 - -
Purchases of securities held to maturity (100,000) (450,763) (251,024)
Net decrease (increase) in loans 22,603 (385,055) -
-------------------------------------------------------
Net cash used in investing activities (72,397) (839,318) (258,024)
-------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of common stock pursuant
to stock option plan 22,400 109,068 77,150
Dividends paid to shareholders (461,437) (544,895) (482,995)
-------------------------------------------------------
Net cash used in financing activities (439,037) (435,827) (405,845)
-------------------------------------------------------
(Decrease) increase in cash and cash equivalents (463,221) 463,222 (25,105)
Cash and cash equivalents:
Beginning 463,222 - 25,105
-------------------------------------------------------
Ending $ 1 $ 463,222 $ -
=======================================================
Supplemental Schedule of Noncash Investing
and Financing Activities
Dividends declared and upaid $ 137,729 $ 147,267 $ 165,115
=======================================================
The following is a summary of quarterly financial data for the years ended December 31, 2002 and 2001.
2002
-----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ----------------- -----------------
Interest income $ 2,149,000 $ 2,185,000 $ 2,200,000 $ 2,158,000
Interest expense 765,000 759,000 728,000 673,000
Net interest income 1,384,000 1,426,000 1,472,000 1,485,000
Provision for loan losses 105,000 104,000 30,000 65,000
Securities gains, net - - 3,000 81,000
Net income 225,000 144,000 359,000 416,000
Earnings per share:
Basic $ 0.23 $ 0.15 $ 0.37 $ 0.42
Fully-diluted $ 0.23 $ 0.15 $ 0.36 $ 0.42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001
-----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ----------------- -----------------
Interest income $ 2,295,000 $ 2,386,000 $ 2,322,000 $ 2,221,000
Interest expense 1,111,000 1,145,000 1,009,000 858,000
Net interest income 1,184,000 1,241,000 1,313,000 1,363,000
Provision for loan losses 30,000 40,000 81,000 106,000
Securities gains, net - - - -
Net income 258,000 305,000 309,000 328,000
Earnings per share:
Basic $ 0.27 $ 0.31 $ 0.32 $ 0.33
Fully-diluted $ 0.26 $ 0.31 $ 0.31 $ 0.33
Board of Directors and Shareholders
First National Bankshares Corporation
We have audited the accompanying consolidated balance sheets of First National Bankshares Corporation and subsidiaries as of December
31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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.
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 consolidated 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, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States.
| Charleston, West Virginia February 11, 2003 |
/S/ Ernst & Young LLP |
Information relating to this item is contained on pages 10 to 14 of the Company’s definitive Proxy Statement, dated March 19, 2003, with respect to the Annual Meeting of Shareholders to be held on April 24, 2003, filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
Information relating to this item is contained on page 5 of the Company’s definitive Proxy Statement, dated March 19, 2003, with respect to the Annual Meeting of Shareholders to be held on April 24, 2003, filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference.
Information relating to this item is contained on pages 6 and 7 of the Company’s definitive Proxy Statement, dated March 19, 2003, with respect to the Annual Meeting of Shareholders to be held on April 24, 2003, filed pursuant to regulation 14(a) of the Securities Exchange Act of 1934 and which is incorporated herein by reference. See also Note 3 to the Notes to Consolidated Financial Statements included in Item 8.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company’s disclosure controls and procedures (as such term is
defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)), as of a date
within 90 days prior to the filing date of this annual report (the
“Evaluation Date”). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Company’s disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company required to be included in the
Company’s periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date,
there have been no significant changes in the Company’s internal controls
or in other factors that could significantly affect such controls.
| The following Consolidated Financial Statements of the Company are filed as a part of this document under Item 8. Financial Statements and Supplementary Data. |
|
Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Independent Auditors’ Report |
| 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 |
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
03/25/03 L. Thomas Bulla President, Chief Executive Officer & Director (Principal Executive Officer) | |
| /s/ Charles A. Henthorn
03/25/03 Charles A. Henthorn Executive Vice President and Secretary To the Board of Directors |
|
| /s/ Matthew L. Burns, CPA
03/25/03 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
03/25/03 David A. Carson, Director |
/s/ Lucie T. Refsland
03/25/03 Lucie T. Refsland, Director |
| /s/ Michael G. Campbell
03/25/03 Michael G. Campbell, Director |
/s/ William R. Satterfield Jr.
03/25/03 William R. Satterfield, Jr., Director |
|
Richard E. Ford, Director |
/s/ Richard L. Skaggs
03/25/03 Richard L. Skaggs, Director |
| /s/ Bennett Fuller
03/25/03 Bennett Fuller, Director |
/s/ Ronald B. Snyder
03/25/03 Ronald B. Snyder, Director |
| /s/ G. Thomas Garten
03/25/03 G. Thomas Garten, Director |
|
| /s/ William D. Goodwin
03/25/03 William D. Goodwin, Director |
I, L. Thomas Bulla, President and CEO, certify that:
| 1. | I have reviewed this annual report on Form 10-K of First National Bankshares Corporation; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and | |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: March 25 ,2003 |
By /s/ L. Thomas Bulla
L. Thomas Bulla President and Chief Executive Officer |
I, Matthew L. Burns, Chief Financial Officer, certify that:
| 1. | I have reviewed this annual report on Form 10-K of First National Bankshares Corporation; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and | |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and |
| 6. | The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: March 25 ,2003 |
By /s/ Matthew L. Burns
Matthew L. Burns, CPA Chief Financial Officer, First National Bank (Principal Financial and Accounting Officer) |
INDEX TO EXHIBITS
(3.1) Articles of Incorporation of Registrant.....................................................( a )
(3.2) 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....................................................( f )
(11) Calculation of Basic and Diluted Computation of Earnings per Share.............................52
(12) Computation of Ratios..........................................................................53
(21) Subsidiaries of Registrant.....................................................................54
(23) Consents of experts and counsel
23 (A) Consent of Ernst & Young LLP Independent Auditors..................................55
(99.1) Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 .......................................................56
(99.2) Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 .......................................................57
- -----------------------------------------------------------------------------------------------------------------------
| ( a ) | Incorporated by reference to exhibits to First National Bankshares Corporation’s Form 10-Q Annual 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 Annual 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 and Form S-8 dated May 28, 2002, filed with the Securities and Exchange Commission on or about May 31, 2002. |
| ( 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. |
| ( f ) | Incorporated by reference to exhibits to First National Bankshares Corporation’s Form 10-K Annual Report dated December 31, 2001 filed with the Securities and Exchange Commission on or about March 29, 2002. |
| 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. |
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)
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.
Consent of Independent Auditors
We consent to the incorporation by reference in REgistration Statement From S-8, No. 333-89460 pertaining to the First National Bankshares Corporation 1996 Incentive Stock Option Plan of Our report dated February 11, 2003 with respect to the consolidated financial statements of First National Bankshares Corporation and subsidiaries included in its Annual Report (Form 10-K) for the year ended December 31, 2002 filed with the Securities and Exchange Commission.
| Charleston, West Virginia March 26, 2003 |
/S/ Ernst & Young LLP |
In connection with the Annual Report of First National Bankshares Corporation (“First National”) on Form 10-K for the period ending December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L. Thomas Bulla, President and Chief Executive Officer of First National, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and| Date: March 25, 2003 | By /s/ L. Thomas Bulla
L. Thomas Bulla President and Chief Executive Officer |
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First National Bankshares Corporation (“First National”) on Form 10-K for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew L. Burns, Chief Financial Officer of First National, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and| Date: March 25, 2003 | By /s/ Matthew L. Burns
Matthew L. Burns, CPA Chief Financial Officer, First National Bank (Principal Financial and Accounting Officer) |