-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3btsygHyqzp21j8MP7MtP3L74Mq2FoFoOOsl81N/4d6V8b1TmMkgM+7H0mD+Uyn kARo8BbjQVbqzGgL+lGuuQ== 0000796534-95-000011.txt : 19951119 0000796534-95-000011.hdr.sgml : 19951119 ACCESSION NUMBER: 0000796534-95-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000796534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541375874 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15204 FILM NUMBER: 95589464 BUSINESS ADDRESS: STREET 1: 100 SOUTH MAIN ST CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 BUSINESS PHONE: 7035522011 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET STREET 2: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 10-Q 1 3RD QUARTER ENDED SEPT 30, 1995 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended Commission File Number: September 30, 1995 0-15204 NATIONAL BANKSHARES, INC. - --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1375874 - --------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 South Main Street P.O. Box 90002 Blacksburg, Virginia 24062-9002 - --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (540)552-2011 ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 9, 1995 - ------------------------------- --------------------------------- COMMON STOCK, $2.50 PAR VALUE 1,714,152 (This report contains 26 pages) NATIONAL BANKSHARES, INC. FORM 10-Q INDEX Page ---- PART I FINANCIAL INFORMATION - -------------------------------- ITEM 1 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 3-4 CONSOLIDATED STATEMENTS OF INCOME, THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 5-6 CONSOLIDATED STATEMENTS OF INCOME, NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 7-8 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 9 CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 10-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12-21 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22-24 PART II OTHER INFORMATION - ---------------------------- ITEMS 1 - 3 - LEGAL PROCEEDINGS; CHANGES IN SECURITIES; DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5 - OTHER INFORMATION 25 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K 25 SIGNATURES 26 -2- CONSOLIDATED BALANCE SHEETS NATIONAL BANKSHARES, INC. SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994 SEPTEMBER DECEMBER 30, 1995 31, 1994 ($ in thousands) ========= ============ ASSETS Cash and due from banks (note 2) $ 5,381 6,648 Federal funds sold 4,610 1,400 Securities available for sale, at fair 12,854 12,114 value (note 3) Securities held to maturity at amortized cost (fair value $53,832 in 1995 and $55,816 in 1994) (note 3) 53,105 57,389 Mortgage loans held for sale (note 4) 1,318 392 Loans: Real estate construction loans 7,919 5,543 Real estate mortgage loans 30,841 30,212 Commercial and industrial loans 38,212 35,984 Loans to individuals 48,502 45,767 -------- -------- Total loans 125,474 117,506 Less unearned income on loans (1,811) (1,782) -------- -------- Loans, net of unearned income 123,663 115,724 Less allowance for loan losses (note 5) (2,105) (2,006) -------- -------- Loans, net 121,558 113,718 -------- -------- Bank premises and equipment, net 2,670 2,762 Accrued interest receivable 1,909 1,698 Other real estate owned, net (note 6) 946 1,083 Other assets (notes 7 and 8) 2,329 2,523 -------- -------- Total assets $206,680 199,727 ======== ======== -3- LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits 24,507 23,816 Interest-bearing deposits 57,446 59,794 Savings deposits 16,038 19,257 Time deposits (note 9) 85,161 75,769 -------- -------- Total deposits 183,152 178,636 -------- -------- Accrued interest payable 242 225 Other liabilities 1,029 729 -------- -------- Total liabilities 184,423 179,590 -------- -------- Stockholders' equity: Preferred stock of no par value. Authorized 5,000,000 shares; none issued and outstanding --- --- Common stock of $2.50 par value. Authorized 5,000,000 shares; issued and outstanding 1,714,152 4,285 4,285 Surplus 1,187 1,187 Undivided profits 16,722 14,791 Net unrealized gains (losses) on securities available for sale 63 (126) -------- -------- Total stockholders' equity 22,257 20,137 Commitments and contingent liabilities (note 10) -------- -------- Total liabilities and stockholders' equity $206,680 199,727 ======== ======== See accompanying notes to consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF INCOME NATIONAL BANKSHARES, INC. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) SEPTEMBER SEPTEMBER ($ in thousands, except per share data) 30, 1995 30, 1994 ========= ========= INTEREST INCOME Interest and fees on loans $3,079 2,655 Interest on federal funds sold 57 4 Interest on securities-taxable 676 799 Interest on securities-nontaxable 326 333 ------ ------ Total interest income 4,138 3,791 ------ ------ INTEREST EXPENSE Interest on time certificates of deposit of $100,000 or more 145 107 Interest on other deposits 1,607 1,303 Interest on federal funds purchased 2 15 ------ ------ Total interest expense 1,754 1,425 ------ ------ Net interest income 2,384 2,366 Provision for loan losses (note 5) 85 150 ------ ------ Net interest income after provision for loan losses 2,299 2,216 ------ ------ NONINTEREST INCOME Service charges on deposit accounts 175 162 Other service charges and fees 43 49 Credit card fees 117 90 Trust income 95 81 Other income 13 4 Realized securities gains (losses), net --- 2 ------ ------ Total noninterest income 443 388 ------ ------ -5- NONINTEREST EXPENSE Salaries and employee benefits 789 765 Occupancy and furniture and fixtures 132 138 Data processing and ATM 87 83 FDIC assessment 71 97 Credit card processing 104 86 Goodwill amortization 7 7 Net costs of other real estate owned 54 3 Other operating expense 395 386 ------ ------ Total noninterest expense 1,639 1,565 ------ ------ Income before income tax expense 1,103 1,039 Income tax expense (note 7) 276 236 ------ ------ Net income $827 803 ====== ====== Net income per share $0.48 0.47 ====== ====== Average shares (in thousands) 1,714 1,710 ====== ====== See accompanying notes to consolidated financial statements. -6- CONSOLIDATED STATEMENTS OF INCOME NATIONAL BANKSHARES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) SEPTEMBER SEPTEMBER ($ in thousands, except per share data) 30, 1995 30, 1994 ========= ========= INTEREST INCOME Interest and fees on loans $ 8,754 7,532 Interest on federal funds sold 152 115 Interest on securities-taxable 2,014 2,204 Interest on securities-nontaxable 988 904 ------- ------ Total interest income 11,908 10,755 ------- ------ INTEREST EXPENSE Interest on time certificates of deposit of $100,000 or more 387 320 Interest on other deposits 4,550 3,822 Interest on federal funds purchased 4 15 ------- ------ Total interest expense 4,941 4,157 ------- ------ Net interest income 6,967 6,598 Provision for loan losses (note 5) 225 380 ------- ------ Net interest income after provision for loan losses 6,742 6,218 ------- ------ NONINTEREST INCOME Service charges on deposit accounts 528 495 Other service charges and fees 118 123 Credit card fees 330 275 Trust income 271 325 Other income 31 17 Realized securities gains (losses), net (1) 7 ------- ------ Total noninterest income 1,277 1,242 ------- ------ -7- NONINTEREST EXPENSE Salaries and employee benefits 2,359 2,204 Occupancy and furniture and fixtures 400 421 Data processing and ATM 272 244 FDIC assessment 271 290 Credit card processing 306 250 Goodwill amortization 22 12 Net costs of other real estate owned 85 29 Other operating expense 1,106 1,069 ------- ------ Total noninterest expense 4,821 4,519 ------- ------ Income before income tax expense 3,198 2,941 Income tax expense (note 7) 753 672 ------- ------ Net income $ 2,445 2,269 ======= ====== Net income per share $1.43 1.33 ======= ====== Average shares (in thousands) 1,714 1,710 ======= ====== See accompanying notes to consolidated financial statements. -8- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NATIONAL BANKSHARES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) Net Unrealized Gains (Losses) on Securities Common Undivided Available ($ in thousands) Stock Surplus Profits For Sale Total ======= ======= ========= =========== ======= Balances, December 31, 1993 $4,274 1,112 12,868 --- 18,254 Cumulative effect of change in accounting for securities available for sale at January 1, 1994, net of income taxes of $141 --- --- --- 273 273 Net income --- --- 2,269 --- 2,269 Cash dividends ($.27 per share) --- --- (462) --- (462) Change in net unrealized (losses) on securities available for sale, net of income tax benefit of $160 --- --- --- (310) (310) ------ ------ ------ ----- ------ Balances, September 30, 1994 $4,274 1,112 14,675 (37) 20,024 ====== ====== ====== ===== ====== Balances, December 31, 1994 $4,285 1,187 14,791 (126) 20,137 Net income --- --- 2,445 --- 2,445 Cash dividends ($.30 per share) --- --- (514) --- (514) Change in net unrealized gains on securities available for sale, net of income taxes of $97 --- --- --- 189 189 ------ ------ ------ ----- ------ Balances, September 30, 1995 $4,285 1,187 16,722 63 22,257 ====== ====== ====== ===== ====== See accompanying notes to consolidated financial statements. -9- CONSOLIDATED STATEMENTS OF CASH FLOWS NATIONAL BANKSHARES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994 (UNAUDITED) SEPTEMBER SEPTEMBER ($ in thousands) 30, 1995 30, 1994 ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES (note 11) Net Income $2,445 2,269 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 225 380 Provision for deferred income taxes (119) --- Depreciation of bank premises and equipment 288 300 Amortization of intangibles 116 83 Amortization of premiums and accretion of discounts, net 42 113 Gain on bank premises and equipment disposals (8) --- Loss on maturities of securities available for sale, net 3 --- Gain on calls of securities held to maturity, net (2) (7) Net decrease (increase) in mortgage loans held for sale (926) 1,491 Losses and writedowns on other real estate owned 49 5 (Increase) decrease in: Accrued interest receivable (211) (367) Other assets 100 (264) Increase (decrease) in: Accrued interest payable 17 (6) Other liabilities 300 (72) ------ ------ Net cash provided by operating activities 2,319 3,925 ------ ------ -10- CASH FLOWS FROM INVESTING ACTIVITIES (note 11) Net increase (decrease) in money market investments (3,210) 1,725 Proceeds from calls and maturities of securities available for sale 4,021 5,293 Proceeds from calls and maturities of securities held to maturity 10,183 2,926 Purchases of securities available for sale (4,492) (988) Purchases of securities held to maturity (5,925) (18,616) Net increase in loans made to customers (8,118) (3,063) Proceeds from disposal of other real estate owned 88 62 Recoveries on loans charged off 53 38 Bank premises and equipment expenditures (197) (406) Proceeds from sale of bank premises and equipment 9 1 ------ ------ Net cash used in investing activities (7,588) (13,028) ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES (note 11) Deposits assumed, net of premium paid --- 13,159 Net increase in time deposits 9,392 3,283 Net decrease in other deposits (4,876) (6,059) Cash dividends paid (514) (462) ------ ------ Net cash provided by financing activities 4,002 9,921 ------ ------ Net increase (decrease) in cash and due from banks (1,267) 818 Cash and due from banks at beginning of year 6,648 4,177 ------ ------ Cash and due from banks at end of period $5,381 4,995 ====== ====== See accompanying notes to consolidated financial statements. -11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATIONAL BANKSHARES, INC. SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND DECEMBER 31, 1994 ($ in thousands, except per share data) 1. GENERAL The consolidated financial statements of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiary, The National Bank of Blacksburg (NBB), conform to generally accepted accounting principles and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three months and nine months ended September 30, 1995 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and notes included herein should be read in conjunction with the notes to consolidated financial statements included in the Corporation's 1994 Annual Report to Stockholders. 2. CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. -12- 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for sale by major security type as of September 30, 1995 and December 31, 1994 are as follows: September 30, 1995 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR ($ in thousands) COSTS GAINS LOSSES VALUES ========= ========== ========== ======== Available for sale: U.S. Treasury $2,502 10 (7) 2,505 U.S. Government agencies and corporations 7,690 99 (3) 7,786 Mortgage-backed securities 240 5 --- 245 Other securities 2,327 20 (29) 2,318 ------- ---- ---- ------ Total securities available for sale $12,759 134 (39) 12,854 ======= ==== ==== ====== December 31, 1994 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR ($ in thousands) COSTS GAINS LOSSES VALUES ========= ========== ========== ======== Available for sale: U.S. Treasury $3,516 1 (61) 3,456 U.S. Government agencies and corporations 6,936 7 (68) 6,875 Mortgage-backed securities 261 --- (15) 246 Other securities 1,592 --- (55) 1,537 ------- ---- ---- ------ Total securities available for sale $12,305 8 (199) 12,114 ======= ==== ==== ====== -13- The amortized costs and fair values of securities available for sale at September 30, 1995 and December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 1995 December 31, 1994 AMORTIZED FAIR AMORTIZED FAIR ($ in thousands) COSTS VALUES COSTS VALUES ========= ========== ========== ======== Due in one year or less $ 5,505 5,521 3,553 3,513 Due in one year through five years 3,990 4,008 6,985 6,845 Due in five years through ten years 3,048 3,109 1,552 1,541 Due after ten years 85 85 82 82 No maturity 131 131 133 133 ------- ------ ------ ------ Total securities held to maturity $12,759 12,854 12,305 12,114 ======= ====== ====== ====== The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities held to maturity by major security type as of September 30, 1995 and December 31, 1994 are as follows: September 30, 1995 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR ($ in thousands) COSTS GAINS LOSSES VALUES ========= ========== ========== ======== Held to maturity: U.S. Treasury $ 6,757 47 (40) 6,764 U.S. Government agencies and corporations 10,116 179 (8) 10,287 States and political subdivisions 28,345 576 (77) 28,844 Mortgage-backed securities 1,017 31 --- 1,048 Other 6,870 57 (38) 6,889 ------- ---- ---- ------ Total securities held to maturity $53,105 890 (163) 53,832 ======= ==== ==== ====== -14- December 31, 1994 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR ($ in thousands) COSTS GAINS LOSSES VALUES ========= ========== ========== ======== Held to maturity: U.S. Treasury $ 9,722 44 (219) 9,547 U.S. Government agencies and corporations 14,073 20 (296) 13,797 States and political subdivisions 26,073 212 (1,091) 25,194 Mortgage-backed securities 1,147 8 (17) 1,138 Other 6,374 14 (248) 6,140 ------- ---- ------ ------ Total securities held to maturity $57,389 298 (1,871) 55,816 ======= ==== ====== ====== The amortized costs and fair values of securities held to maturity at September 30, 1995 and December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 1995 December 31, 1994 AMORTIZED FAIR AMORTIZED FAIR ($ in thousands) COSTS VALUES COSTS VALUES ========= ========== ========== ======== Due in one year or less $10,847 10,898 10,998 11,006 Due in one year through five years 22,716 23,022 28,749 28,085 Due in five years through ten years 17,354 17,670 15,645 14,820 Due after ten years 2,188 2,242 1,997 1,905 ------- ------ ------ ------ Total securities held to maturity $53,105 53,832 57,389 55,816 ======= ====== ====== ====== -15- 4. MORTGAGE BANKING ACTIVITIES NBB originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. Every contract with each investor contains certain recourse language. In general, NBB may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, NBB may have an obligation to repurchase a loan if the mortgagor has defaulted early in the loan term. This potential default period ranges from four to sixteen months after sale of a loan to the investor. Mortgage loans held for sale are carried at the lower of cost or fair value. For the nine months ended September 30, 1995, NBB originated $11,475 and sold $10,549 in mortgage loans to investors. 5. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows: Three months ended Nine months ended September 30, September 30, ($ in thousands) 1995 1994 1995 1994 ======= ====== ======= ====== Balance, beginning of period $ 2,084 2,098 2,006 2,038 Provision for loan losses 85 150 225 380 Recoveries 17 11 53 38 Loans charged off (81) (207) (179) (404) ------- ------ ------- ------ Balance, end of period $ 2,105 2,052 2,105 2,052 ======= ====== ======= ====== 6. IMPAIRED LOANS AND NONPERFORMING ASSETS Effective January 1, 1995, Bankshares adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114 requires that certain loans which have been determined to be impaired be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS No. 114 also required creditors to evaluate the collectibility of both contractual interest and contractual principal of all receivables when assessing the need for a loss accrual. In addition, SFAS No. 114 eliminates the requirement that a creditor account for certain loans as foreclosed assets prior to the time the creditor has taken possession of the underlying collateral, resulting in the reclassification of in-substance foreclosures from foreclosed properties to loans. -16- SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. To accomplish that, SFAS No. 118 eliminates the provisions in SFAS No. 114 that described how a creditor should report income on an impaired loan. SFAS No. 118 does not change the provisions in SFAS No. 114 that required a creditor to measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS No. 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. For Bankshares, loans collectively reviewed for impairment include all consumer loans, single family loans and performing multi-family and nonresidential real estate loans, excluding loans which have entered into the "workout process." Bankshares considers a loan to be impaired when, based upon current information and events, it believes it is probable that Bankshares will be unable to collect all amounts due according to the contractual terms of the loan agreement. Bankshares' impaired loans within the scope of SFAS No. 114 include nonaccrual loans (excluding those collectively reviewed for impairment), troubled debt restructurings and certain other nonperforming loans. For collateral dependent loans, Bankshares based the measurement of these impaired loans on the fair value of the loan's underlying collateral. For all other loans, Bankshares bases the measurement of these impaired loans on the more readily determinable of the present value of expected future cash flows discounted at the loan's effective interest rate or the observable market price. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of impaired loans' underlying collateral are included in the provision for loan losses. When an impaired loan is either sold, transferred to foreclosed properties or written down, any related valuation allowance is charged off against the allowance for loan losses. The adoption of SFAS No. 114, as amended by SFAS No. 118, did not have a material impact on Bankshares' consolidated financial statements due to Bankshares' continuing policy of measuring loan impairment based on the fair value of the underlying collateral which is consistent with the methods prescribed in SFAS No. 114. In addition, Bankshares had previously reclassified in-substance foreclosures from other real estate owned to loans as of December 31, 1993 as prescribed by SFAS No. 114; therefore, no further reclassification from other real estate owned to loans was required upon adoption. As of September 30, 1995, the recorded investment in impaired loans was $420 and the amount of the related allowance for loan losses was $263 for a net investment of $157. During the nine months ended September 30, 1995, the average recorded investment in impaired loans was $420, and there was no related amount of interest income recognized during the time within that period that the loans were impaired. The following table presents information concerning nonperforming assets. -17- SEPTEMBER 30, DECEMBER 31, ($ in thousands) 1995 1994 ============= ============== Nonaccrual loans $ 420 420 Restructured loans --- 229 ------ ----- Total nonperforming loans 420 649 Other real estate owned, net 946 1,083 ------ ----- Total nonperforming assets $1,366 1,732 ====== ===== Loans contractually past due 90 days or more (excludes non- accrual loans) $ 191 219 ====== ===== Loans are generally placed in nonaccrual status when the collection of principal or interest is 90 days or more past due, unless the obligation is both well-secured and in the process of collection. -18- The following table shows the interest that would have been earned on nonaccrual and restructured loans if they had been current in accordance with their original terms and the recorded interest that was earned and included in income on these loans: Nine Months Ended September 30, ($ in thousands) 1995 1994 ==== ==== Scheduled interest: Nonaccrual loans $ 32 28 Restructured loans --- 14 ---- ---- Total scheduled interest $ 32 42 ==== ==== Recorded interest: Nonaccrual loans $--- --- Restructured loans --- 3 ---- ---- Total recorded interest $--- 3 ==== ==== Other real estate, acquired through foreclosure or deed in lieu of foreclosure, is carried at the lower of the recorded investment or its fair value, less estimated costs to sell (net realizable value). When the property is acquired, any excess of the loan balance over net realizable value is charged to the allowance for loan losses. Increases or decreases in the net realizable value of such properties are credited or charged to income by adjusting the valuation allowance for other real estate owned. Net costs of maintaining or operating foreclosed properties are expensed as incurred. Changes in the valuation allowance for other real estate owned are as follows: Three Months EndedNine Months Ended September 30, September 30, ($ in thousands) 1995 1994 1995 1994 ==== ==== ==== ==== Balances, beginning of period $ 49 49 49 49 Provision for other real estate owned 49 --- 49 --- ---- ---- ---- ---- Balances, end of period $ 98 49 98 49 ==== ==== ==== ==== -19- 7. INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1995 are presented below: SEPTEMBER 30, ($ in thousands) 1995 ============== Deferred Tax Assets: Loans, principally due to allowance for loan losses $ 545 Other real estate owned, principally due to valuation allowance 26 Deferred compensation, due to accrual for financial reporting purpose 169 Deposit intangibles and goodwill 26 Nonaccrual interest on loans 4 ----- Total gross deferred tax assets 770 Less valuation allowance --- ----- Net deferred tax assets 770 ----- Deferred tax liabilities: Net unrealized gains on securities available for sale (32) Bank premises and equipment, principally due to differences in depreciation (17) Securities, due to differences in discount accretion (31) Prepaid expenses and other assets (28) ----- Total gross deferred liabilities (108) ----- Net deferred tax asset included in other assets $ 662 ===== The effective tax rate and the components of income tax expense do not differ significantly from such amounts disclosed in prior periods. Bankshares has determined that a valuation allowance for the gross deferred tax assets is not necessary at September 30, 1995 due to the fact that the realization of the entire gross deferred tax assets can be supported by the amount of taxes paid during the carryback period available under current tax laws. -20- Total income taxes are allocated as follow: Nine Months Ended September 30, ($ in thousands) 1995 1994 ==== ==== Income $753 672 Stockholders' equity, for net unrealized gains (losses) on securities available for sale recognized for financial reporting purposes 97 (19) ---- ---- Total income taxes $850 653 ==== ==== 8. INTANGIBLE ASSETS Included in other assets are deposit intangibles, net of amortization, of $778 and $872 at September 30, 1995 and December 31, 1994, respectively, and goodwill, net of amortization, of $405 and $427 at September 30, 1995 and December 31, 1994 respectively. Deposit intangibles are being amortized on a straight-line basis over a ten-year period and goodwill is being amortized on a straight-line basis over a fifteen-year period. 9. TIME DEPOSITS Included in time deposits are certificates of deposit and other time deposits of $100,000 or more in the aggregate amounts of $12,659 at September 30, 1995, and $10,726 at December 31, 1994. 10.COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are various commitments and contingent liabilities such as commitments to extend credit which are not reflected in the accompanying consolidated financial statements. No losses are anticipated by management as a result of these transactions. Commitments under standby letters of credit at September 30, 1995, were $1,943 and at December 31, 1994, $3,117. 11.SUPPLEMENTAL CASH FLOW INFORMATION Bankshares paid $4,924 and $4,163 for interest and $671 and $859 for income taxes, net of refunds, at September 30, 1995 and September 30, 1994, respectively. Noncash investing activities consisted of $179 and $404 of loans charged against the allowance for loan losses for the periods ended September 30, 1995 and September 30, 1994, respectively, and $95 of net unrealized gains included in securities available for sale for the period ended September 30, 1995 and $56 of net unrealized losses included in securities available for sale for the period ended September 30, 1994. There were no foreclosed loans transferred into other real estate owned for the period ended September 30, 1995 as compared to $297 transferred for the period ended September 30, 1994. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended September 30, 1995 Compared to Three Months Ended September 30, 1994 ($ in thousands) PERFORMANCE SUMMARY Net income for the current quarter amounted to $827, an increase of $24 or 3.0% over the corresponding quarter in 1994. This increase resulted from a decrease in the provision for loan losses, an increase in noninterest income and an increase in noninterest expense. NET INTEREST INCOME Net interest income increased $18 or 7.6% in the current quarter over the corresponding quarter in 1994. Interest income increased $347 or 9.2% due to an increase in loans. Interest expense increased $329 or 23.1% due to an increase in deposits. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses decreased $65 or 43.3% in the current quarter over the corresponding quarter in 1994 due to a decline in net charge offs and a stabilization of past due and nonaccrual loans. Management considers the allowance adequate. NONINTEREST INCOME Noninterest income increased $55 or 14.2% in the current quarter over the corresponding quarter in 1994 due to an increase in service charges on deposit accounts, credit card fees, and trust income. NONINTEREST EXPENSE Noninterest expense increased $74 or 4.7% in the current quarter over the corresponding quarter in 1994 due principally to increases in salaries and employee benefits, credit card processing and net costs of other real estate owned. INCOME TAXES Bankshares effective tax rate for the current quarter of 25.0% is comparable to the 22.7% effective rate in the corresponding quarter of 1994. Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1994 ($ in thousands) PERFORMANCE SUMMARY Net income for the nine months ended September 30, 1995 increased $176 or 7.8% compared to the corresponding period of the previous year. This compared to a $321 or 16.5% increase for the September 30, 1994 period compared to September 30, 1993. The increase in net income for the nine months ended September 30, 1995 was attributable principally to an increase in net interest income, a -22- decrease in the provision for loan losses and an increase in noninterest expense. NET INTEREST INCOME Net interest income increased $369 or 5.6% from 1994 to 1995 compared to an increase of $211 or 3.3% from 1993 to 1994. Interest income increased $1,153 over 1994 due to increases in the loan portfolio and changes in the yields on other earning assets. Interest expense increased $784 from 1994 to 1995 due to growth in total deposits and changes in the mix of deposit liabilities to time deposits. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses decreased $155 or 40.8% in 1995 compared to 1994 because past due and nonaccrual loans have stabilized. The allowance for loan losses to period end loans, net of unearned income, approximated 1.70% at September 30, 1995 compared to 1.73% at December 31, 1994. Management considers the allowance adequate. NONINTEREST INCOME During the first nine months of 1995 total noninterest income rose $35 or 2.8% over the same period last year. This increase was due primarily to increases in service charges on deposit accounts, credit card fees and other income. NONINTEREST EXPENSE Noninterest expense increased $302 or 6.7% for the nine months ended September 30, 1995 compared to a $206 or 4.8% increase for the 1993 to 1994 period. The largest component of the increase was due to the increased cost of salaries and employee benefits. Fringe benefit costs for pension, medical and dental coverage have increased in the past year. Other operating expense increases were in the areas of data processing, credit card processing and net costs of other real estate owned. Net costs of other real estate owned increased $56 due mainly to writedowns of OREO property. The FDIC assessment decreased by $19 reflecting a decrease in the FDIC rate charged for deposits. INCOME TAXES Bankshares' effective tax rate of 23.5% for the nine months ended September 30, 1995 is comparable to 22.8% for the nine months ended September 30, 1994. BALANCE SHEET Total assets have risen $6,953 since year end 1994. This increase is the result of stronger loan demand for all categories of loans. Total deposits increased $4,516 since year end 1994 with time deposits increasing $9,392. This increase was a result of higher rates paid on time deposits compared to rates paid on interest-bearing and savings deposits. Bankshares' stockholders' equity was $22,257 at September 30, 1995 compared to $20,137 at year end 1994. The increase of $2,120 resulted from earnings retention and a turnaround in net unrealized gains on securities available for sale. LIQUIDITY Bankshares maintained an adequate level of liquidity during the first nine months of 1995 and 1994. The liquidity ratio was 23.8% at September 30, 1995 -23- and 27% at September 30, 1994. Certain assets are maintained on a short-term basis to meet liquidity demands anticipated by management. CAPITAL RESOURCES Bankshares continues to maintain a strong capital position with the increase in total capital attributable to retained earnings and the adoption of SFAS No. 115. Both Bankshares' and NBB's capital adequacy ratios exceed regulatory requirements and they provide added flexibility to take advantage of business opportunities as they arise. CAPITAL ANALYSIS ($ in thousands) September 30, 1995 Capital Components Consolidated NBB ================== ============ ======== Tier 1 capital $19,560 19,417 Risk-adjusted tier 2 capital 1,713 2,105 ------- ------- Total risk-adjusted capital $21,273 21,522 ======= ======== Asset Components Consolidated NBB ================ ============ ======== Adjusted risk-weighted assets $136,635 136,652 Year-to-date adjusted average assets 198,858 198,978 Capital Ratios Required Consolidated NBB ============== ======== ============ ======== Common stockholders' equity 10.78% 10.32% Regulatory capital 6% 10.88% 10.42% Risk-weighted capital: Tier 1 4% 14.91% 14.21% Tier 1 + tier 2 8% 16.16% 15.46% Leverage ratio 3%-5% 10.25% 9.76% -24- NATIONAL BANKSHARES, INC. PART II OTHER INFORMATION Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior Securities None for the period ended September 30, 1995. Item 4. Submission of Matters to a Vote of Security Holders None for the period ended September 30, 1995. Item 5. Other Information None for the period ended September 30, 1995. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 10(a) - Agreement and Plan of Merger dated as of the 28th day of August, 1995, by and among National Bankshares, Inc. and the Bank of Tazewell County (incorporated herein by reference to Exhibit 2.1 to the Company's Report on Form 8-K dated August 28, 1995) Exhibit 27 - Financial Data Schedule (b) Form 8-K dated August 28, 1995 Item 5. Other Events Item 7. Financial Statements and Exhibits -25- NATIONAL BANKSHARES, INC. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Bankshares, Inc. (Registrant) Date: 11/09/95 /s/ James G. Rakes -------- ----------------------------------- James G. Rakes, President and Chief Executive Officer Date: 11/09/95 /s/ Joan C. Nelson -------- ----------------------------------- Joan C. Nelson, Treasurer -26- EX-27 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 9-MOS DEC-31-1995 JUL-01-1995 SEP-30-1995 5,381 0 4,610 0 12,854 53,105 55,816 124,981 2,105 206,680 183,152 0 1,029 0 4,285 0 0 17,972 206,680 8,754 3,002 152 11,908 4,937 4,941 6,967 225 (1) 4,821 3,198 3,198 0 0 2,445 1.43 1.43 0 420 191 0 0 2,006 179 53 2,105 1,014 0 1,091
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