-----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, RtUuA1SNon1x1Su3XpDbg/1BgoGDN9vZ2QmXa3utbOFzZIoTUI9Ztea1VmpdhDV0 dEph27rm6MEw2Pm3FQJTJQ== 0000796534-97-000012.txt : 19971117 0000796534-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000796534-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 000-15204 FILM NUMBER: 97720802 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 THIRD QUARTER SEPTEMBER 30,1997 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, 1997 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 4, 1997 - ------------------------------- --------------------------------- Common Stock, $2.50 Par Value 3,792,833 (This report contains 25 pages) National Bankshares, Inc. and Subsidiaries Form 10-Q Index Page ---- Part I Financial Information - -------------------------------- Item 1 - Financial Statements Consolidated Balance Sheets, September 30, 1997 and December 31, 1996 4-5 Consolidated Statements of Income, Nine Months Ended September 30, 1997 and 1996 6 Consolidated Statements of Income, Three Months Ended September 30, 1997 and 1996 7 Consolidated Statements of Changes in Stockholders' Equity, Nine Months Ended September 30, 1997 and 1996 8 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 9-10 Selected Consolidated Financial Data 11-16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-23 Part II Other Information - ---------------------------- Items 1 - 3 - Legal Proceedings; Changes in Securities; Defaults upon Senior Securities 24 Item 4 - Submission of Matters to a Vote of Security Holders 24 Item 5 - Other Information 24 Item 6 - Exhibits and Reports on Form 8-K 24 Signatures 25 -2- National Bankshares, Inc. and Subsidiaries Part I ------ Financial Information --------------------- Item 1. Financial Statements The consolidated financial statements of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County (BTC), (the Company), 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 nine months ended September 30, 1997 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and financial information included herein should be read in conjunction with the notes to consolidated financial statements included in the Company's 1996 Annual Report to Stockholders and additional information supplied in the 1996 Form 10-K. -3- National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 1997 and December 31, 1996 (Unaudited) September December ($000's, except share and per share data) 30, 1997 31, 1996 ========= ============ Assets Cash and due from banks $ 12,919 9,989 Interest-bearing deposits 6,628 91 Federal funds sold 4,585 1,910 Securities available for sale 60,986 62,534 Securities held to maturity (fair value $91,695 in 1997 and $108,755 in 1996) 91,314 108,710 Mortgage loans held for sale 562 516 Loans: Real estate construction loans 8,286 6,295 Real estate mortgage loans 43,439 43,917 Commercial and industrial loans 99,516 87,519 Loans to individuals 65,407 60,991 -------- ------- Total loans 216,648 198,722 Less unearned income and deferred fees (2,587) (2,549) -------- ------- Loans, net of unearned income and deferred fees 214,061 196,173 Less allowance for loan losses (2,419) (2,575) -------- ------- Loans, net 211,642 193,598 -------- ------- Bank premises and equipment, net 5,097 5,037 Accrued interest receivable 3,583 3,510 Other real estate owned, net 417 474 Other assets 2,432 2,481 -------- ------- Total assets $400,165 388,850 ======== ======= Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $ 45,922 44,096 Interest-bearing demand deposits 73,834 73,804 Savings deposits 47,373 48,164 Time deposits 175,217 168,520 -------- ------- Total deposits 342,346 334,584 -------- ------- Other borrowed funds 484 627 Accrued interest payable 681 700 Other liabilities 1,380 1,495 -------- ------- Total liabilities 344,891 337,406 -------- ------- Common stock subject to ESOP put option 1,783 1,643 -------- ------- -4- 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 3,792,833 shares 9,482 9,482 Retained earnings 45,777 42,210 Net unrealized gains (losses) on securities available for sale 15 (248) Common stock subject to ESOP put option (1,783) (1,643) -------- ------- Total stockholders' equity 53,491 49,801 Commitments and contingent liabilities --- --- -------- ------- Total liabilities and stockholders' equity $400,165 388,850 ======== ======= -5- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Nine Months Ended September 30, 1997 and 1996 (Unaudited) September September ($000's, except per share data) 30, 1997 30, 1996 ========= ========= Interest Income Interest and fees on loans $ 14,418 12,729 Interest on interest-bearing deposits 136 48 Interest on federal funds sold 323 376 Interest on securities taxable 5,922 6,731 Interest on securities nontaxable 1,353 1,496 -------- ------ Total interest income 22,152 21,380 -------- ------ Interest Expense Interest on time deposits of $100,000 or more 1,715 1,532 Interest on other deposits 8,024 8,217 Interest on borrowed funds 32 23 -------- ------ Total interest expense 9,771 9,772 -------- ------ Net interest income 12,381 11,608 Provision for loan losses 303 216 -------- ------ Net interest income after provision for loan losses 12,078 11,392 -------- ------ Noninterest Income Service charges on deposit accounts 801 843 Other service charges and fees 204 175 Credit card fees 449 376 Trust income 559 399 Other income 53 32 Realized securities gains, net 25 6 -------- ------ Total noninterest income 2,091 1,831 -------- ------ Noninterest Expense Salaries and employee benefits 4,088 3,711 Occupancy and furniture and fixtures 843 765 Data processing and ATM 268 257 FDIC assessment 29 2 Credit card processing 423 348 Goodwill amortization 22 22 Net costs of other real estate owned 9 10 Other operating expense 1,845 1,846 -------- ------ Total noninterest expense 7,527 6,961 -------- ------ Income before income tax expense 6,642 6,262 Income tax expense 1,824 1,708 -------- ------ Net income $ 4,818 4,554 ======== ====== Net income per share $ 1.27 1.20 ======== ====== -6- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended September 30, 1997 and 1996 (Unaudited) September September ($000's, except per share data) 30, 1997 30, 1996 ========= ========= Interest Income Interest and fees on loans $ 4,996 4,439 Interest on interest-bearing deposits 55 16 Interest on federal funds sold 92 131 Interest on securities taxable 1,939 2,086 Interest on securities nontaxable 435 452 -------- ------ Total interest income 7,517 7,124 -------- ------ Interest Expense Interest on time deposits of $100,000 or more 612 509 Interest on other deposits 2,707 2,721 Interest on borrowed funds 1 10 -------- ------ Total interest expense 3,320 3,240 -------- ------ Net interest income 4,197 3,884 Provision for loan losses 94 106 -------- ------ Net interest income after provision for loan losses 4,103 3,778 -------- ------ Noninterest Income Service charges on deposit accounts 240 284 Other service charges and fees 69 52 Credit card fees 161 131 Trust income 179 139 Other income 41 27 Realized securities gains, net 11 2 -------- ------ Total noninterest income 701 635 -------- ------ Noninterest Expense Salaries and employee benefits 1,386 1,247 Occupancy and furniture and fixtures 274 256 Data processing and ATM 99 82 FDIC assessment 15 1 Credit card processing 152 128 Goodwill amortization 7 7 Net costs of other real estate owned 7 4 Other operating expense 635 556 -------- ------ Total noninterest expense 2,575 2,281 -------- ------ Income before income tax expense 2,229 2,132 Income tax expense 612 567 -------- ------ Net income $ 1,617 1,565 ======== ====== Net income per share $ 0.43 0.41 ======== ====== -7- National Bankshares, Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 1997 and 1996 (Unaudited) Net Unrealized Gains Common (Losses) Stock on Subject Securities To ESOP ($000's, except per Common Retained Available Put share data) Stock Earnings For Sale Option Total ====== ========= ========== ====== ===== Balances, December 31, 1995 $9,482 38,390 282 --- 48,154 Net income --- 4,554 --- --- 4,554 Cash dividends ($.30 per share) --- (571) --- --- (571) Cash dividends of BTC prior to merger --- (510) --- --- (510) Change in net unrealized gains (losses) on securities available for sale, net of income tax benefit of $582 --- --- (1,129) --- (1,129) ------ ------ ------ ------ ------ Balances, September 30, 1996 $9,482 41,863 (847) --- 50,498 ====== ====== ====== ====== ====== Balances, December 31, 1996 $9,482 42,210 (248) (1,643) 49,801 Net income --- 4,818 --- --- 4,818 Cash dividend ($.33 per share) --- (1,251) --- --- (1,251) Change in net unrealized gains (losses) on securities available for sale, net of income tax expense of $135 --- --- 263 --- 263 Change in common stock subject to ESOP put option --- --- --- (140) (140) ------ ------ ------ ------ ------ Balances, September 30, 1997 $9,482 45,777 15 (1,783) 53,491 ====== ====== ====== ====== ====== -8- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 (Unaudited) September September ($000's) 30, 1997 30, 1996 ========= ========= Cash Flows From Operating Activities Net Income $ 4,818 4,554 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 303 216 Provision for deferred income taxes (127) 582 Depreciation of bank premises and equipment 408 351 Amortization of intangibles 22 22 Amortization of premiums and accretion of discounts, net 3 39 (Gains) losses on bank premises and equipment disposals (2) --- (Gains)losses on sales and calls of securities available for sale, net --- (4) (Gains) losses on calls of securities held to maturity, net (25) --- Net (increase) decrease in mortgage loans held for sale (46) 743 (Increase) decrease in: Accrued interest receivable (73) (130) Other assets 18 (509) Increase (decrease) in: Accrued interest payable (19) (862) Other liabilities (115) (86) ------- ------ Net cash provided by operating activities 5,165 4,916 ------- ------ Cash Flows From Investing Activities Net (increase) decrease in federal funds sold (2,675) 4,062 Net (increase) decrease in interest-bearing deposits (6,537) 2,343 Proceeds from calls and maturities of securities available for sale 6,795 13,860 Proceeds from calls and maturities of securities held to maturity 25,425 35,830 Purchases of securities available for sale (4,844) (9,397) Purchases of securities held to maturity (8,012) (28,457) Purchases of loan participations (1,515) (1,853) Collections of loan participations 1,365 1,040 Net (increase) decrease in loans made to customers (18,293) (23,620) Proceeds from disposal of other real estate owned 83 29 Recoveries on loans charged off 71 111 Bank premises and equipment expenditures (475) 3 Proceeds from sale of bank premises and equipment 9 (587) ------- ------ Net cash used in investing activities (8,603) (6,636) ------- ------ -9- Cash Flows From Financing Activities Net increase (decrease) in time deposits 6,697 1,710 Net increase (decrease) in other deposits 1,065 3,728 Net increase (decrease) in other borrowed funds (143) 1,301 Cash dividends paid (1,251) (1,081) ------- ------ Net cash provided by financing activities 6,368 5,658 ------- ------ Net increase (decrease) in cash and due from banks 2,930 3,938 Cash and due from banks at beginning of period 9,989 10,055 ------- ------ Cash and due from banks at end of period $12,919 13,993 ======= ====== Supplemental Cash Flow Information Unrealized gains (losses) on securities available for sale (gross) $ 398 (1,711) Deferred income tax benefit (expense) (135) 582 ------- ------ Net unrealized gains (losses) on securities available for sale $ 263 (1,129) ======= ====== Loans charged to the allowance for loan losses $ 530 364 ======= ====== Interest paid $ 9,790 9,858 ======= ====== Cash paid for income taxes $ 2,276 1,839 ======= ====== Investments charged to the allowance for securities losses $ 272 --- ======= ====== -10- National Bankshares, Inc. and Subsidiaries Selected Balance Sheet Data September December ($000's) 30, 1997 31, 1996 ========= ======== Selected Data at Period-end Loans, net $211,642 193,598 Total securities 152,300 171,244 Total assets 400,165 388,850 Total deposits 342,346 334,584 Stockholders' equity 53,491 49,801 Selected Data Daily Averages Loans, net $201,849 177,419 Total securities 159,121 177,403 Total assets 393,909 388,045 Total deposits 337,740 335,938 Stockholders' equity (1) 51,354 49,459 (1) Includes amount related to common stock subject to ESOP put option. The effect is immaterial. -11- National Bankshares, Inc. and Subsidiaries Selected Income Statement Data For the periods ended September 30, December 31, ($000's, except per share data) 1997 1996 1996 ======== ======== ============ Selected Income Statement Data Interest income $22,152 21,380 28,647 Interest expense 9,771 9,772 13,036 Net interest income 12,381 11,608 15,611 Provision for loan losses 303 216 331 Noninterest income 2,091 1,831 2,693 Noninterest expense 7,527 6,961 9,515 Income taxes 1,824 1,708 2,341 Net income 4,818 4,554 6,117 Selected Ratios and Per Share Data Return on average assets (1) 1.64% 1.57% 1.58% Return on average equity (1) 12.13% 12.45% 12.37% Net income per share $ 1.27 1.20 1.61 Book value per share $ 14.57 13.31 13.56 Note - Return on average equity and book value per share has been computed including common stock subject to ESOP put option as a part of stockholders' equity. At September 30, 1997 and December 31, 1996, the return on average equity and book value per share, excluding the common stock subject to ESOP put option from stockholders' equity, were 12.54% and 12.74%, and $14.38 and $13.36, respectively. (1) Calculated on an annualized basis. -12- National Bankshares, Inc. and Subsidiaries Average Balances and Interest Rates For the periods ended
September 30, 1997 September 30, 1996 December 31, 1996 Average Yield/ Average Yield/ Average Yield/ ($000's) Balance Cost Balance Cost Balance Cost ======= ======= ======= ======= ======= ======= Interest-earning assets(1) $372,605 8.24% 365,350 8.14% 364,575 8.16% Interest-bearing liabilities 295,175 4.43% 294,175 4.44% 294,374 4.43% ----- ----- ----- Net interest spread 3.81% 3.70% 3.73% ===== ===== ===== Net interest margin 4.73% 4.55% 4.59% ===== ===== ===== (1) The yield on interest-earning assets is shown on a fully tax equivalent basis.
-13- National Bankshares, Inc. and Subsidiaries Interest Rate Sensitivity ($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years ========= ======== ========= ========= ======== Interest-earning assets $ 85,972 25,941 51,104 135,986 79,133 Interest-bearing liabilities 156,942 43,596 51,837 44,210 323 -------- ------- ------- ------- ------- Gap (70,970) (17,655) (733) 91,776 78,810 ======== ======= ======= ======= ======= Cumulative gap (70,970) (88,625) (89,358) 2,418 81,228 ======== ======= ======= ======= ======= NOTE: Data shown reflects the earliest of the next repricing opportunity or maturity. -14- National Bankshares, Inc. and Subsidiaries Loan Loss Data For the periods ended September September December ($000's) 30, 1997 30, 1996 31, 1996 ========= ========= ========== Balance at beginning of period $ 2,575 2,625 2,625 Provision for loan losses 303 216 331 Loans charged off (530) (364) (506) Recoveries 71 111 125 ------- ------ ------ Balance at end of period $ 2,419 2,588 2,575 ======= ====== ====== Ratio of allowance for loan losses to loans, net of unearned income and deferred fees 1.13% 1.36% 1.31% ======= ====== ====== Ratio of net charge-offs to average loans, net of unearned income and deferred fees (1) .30% .19% .21% ======= ====== ====== Ratio of allowance for loan losses to nonperforming loans (2) 675.70% 412.10% 418.02% ======= ====== ====== (1) Net charge-offs are calculated on an annualized basis. (2) The Company defines nonperforming loans as total nonaccrual and restructured loans. Loans 90 days past due and still accruing are excluded from nonperforming loans. -15- National Bankshares, Inc. and Subsidiaries Nonperforming Assets, Past Due Loans and Impaired Loans September September December ($000's) 30, 1997 30, 1996 31, 1996 ========= ========= ========== Nonperforming Assets Nonaccrual loans $ 358 628 616 Restructured loans --- --- --- ------- ------ ------ Total nonperforming loans 358 628 616 ------- ------ ------ Nonaccrual securities (net of valuation allowance) --- --- 80 Foreclosed property 417 731 474 Other repossessed property 11 6 27 ------- ------ ------ Total foreclosed and repossessed properties 428 737 501 ------- ------ ------ Total nonperforming assets $ 786 1,365 1,197 ======= ====== ====== Ratio of nonperforming assets to loans, net of unearned income and deferred fees and foreclosed/ repossessed assets .37% .72% .57% ======= ====== ====== Accruing Loans Past Due 90 Days or More $ 546 329 458 ======= ====== ====== Ratio of loans past due 90 days or more to loans, net of unearned income and deferred fees .26% .17% .23% ======= ====== ====== Impaired Loans Total impaired loans $ 424 1,053 725 ======= ====== ====== Impaired loans with a valuation allowance 382 736 371 Valuation allowance (140) (655) (290) ------- ------ ------ Impaired loans, net of allowance $ 242 81 81 ======= ====== ====== Impaired loans with no valuation allowance $ 42 317 354 ======= ====== ====== Average recorded investment in impaired loans $ 519 1,036 800 ======= ====== ====== Income recognized on impaired loans $ 8 18 33 ======= ====== ====== Amount of income recognized on a cash basis $ 9 --- 23 ======= ====== ====== -16- National Bankshares, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to set forth information about the financial condition and results of operations of National Bankshares, Inc. and its wholly-owned subsidiaries (the Company), which are not otherwise apparent from the consolidated financial statements and other information included in this report. Reference should be made to the financial statements and other information included in this report as well as the 1996 Annual Report and Form 10-K for an understanding of the following discussion and analysis. Results of Operations Nine Months Ended September 30, 1997 vs September 30, 1996 - ------------------------------------------------------------- Net income for the nine months ended September 30, 1997 was $4,818,000 which represents an increase of $264,000 or 5.80% over the first nine months of 1996. The return on average assets as of September 30, 1997 and September 30, 1996 were 1.64% and 1.57%, respectively. The return on average equity was 12.13% and 12.45% at September 30, 1997 and 1996, respectively. Earnings per share at the end of the third quarter was $1.27 per share, an increase of $0.07 per share over the third quarter of 1996. The overall improvement in performance was attributable to continued loan growth and growth in noninterest income. These increases were offset to a degree by increases in the provision for loan losses and noninterest expense. Income tax expense increased as a result of the higher level of taxable income. Net Interest Income - ------------------- Net interest income at the end of the first nine months of 1997 was $12,381,000 an increase of $773,000 or 6.66% over the same period in 1996. The net interest margin increased to 4.73% from 4.55%. The yield on earning assets rose from 8.14% at the end of the first nine months of 1996 to 8.24% at the end of the first nine months of 1997, primarily due to continued loan growth. The cost to fund earning assets was 3.51% at September 30, 1997, an eight basis point decline from the same period the previous year. During the current period, the Company funded the majority of its loan growth from the maturities and calls of investment securities and the remainder with deposit growth. Provision for Loan Losses - ------------------------- The provision for loan losses for the period ended September 30, 1997 was $303,000, an increase of $87,000 or 40.28%. The increased level of the provision in 1997 was primarily due to loan growth and the need to maintain a satisfactory ratio of the allowance for loan losses to loans. Net charge-offs, which bear directly on the amount of the provision, were up $206,000 when the first nine months of 1997 and 1996 are compared. This increased level of net charge-offs reflects the write-off of previously identified and allocated credits and does not reflect an overall deterioration of asset quality or the initial stages of a declining trend. -17- Management anticipates that additional provisions will be needed in future periods to ensure an adequate allowance for loan losses, due in most part to future loan growth. Since the amount of the provision is largely dependent on loan growth, the level of which is difficult to ascertain, management is unable to precisely determine the amount of provisions that may ultimately be necessary. Noninterest Income - ------------------ Noninterest income for the period ended September 30, 1997 was $2,091,000, an increase of $260,000 or 14.20% when compared to the same period the prior year. Service charges on deposit accounts declined by $42,000 or 4.98%. A significant portion of these fees consists of charges for checks returned for insufficient funds and overdrafts. The level of income derived from these charges is directly dependent on the willingness of the customer to bear such charges. Accordingly, bank income in this area may vary. Trust income exhibited the most significant increase in the noninterest income category, rising $160,000 or 40.10%. Trust income is dependent on the market value of assets managed, types of services performed and new business. The increase in 1997 income was the result of a combination of these factors. Credit card fees for the third quarter of 1997 were $449,000, an increase of 19.41% over the first nine months of 1996. This increase was primarily due to increases in transaction volume. Other noninterest income categories showed only nominal increases in dollar volume and were associated with normal increases in business activity. Noninterest Expense - ------------------- Noninterest expense for the first nine months of 1997 was $7,527,000 which represents an increase of $566,000 or 8.13% from the same period the previous year. Salary and benefits expense, along with occupancy expense, include additional expenses related to the opening of a new branch office in Rich Creek, Virginia in April 1997. Credit card processing expense increased by $75,000, which was attributable to a general increase in business volume, and was in turn offset by certain types of credit card fees included in noninterest income. FDIC expense increased due to the imposition of a new assessment. This assessment affects all banks and is being used to fund interest payments on bonds issued to resolve the savings and loan crisis. Management has scheduled a major upgrade of its information systems for the last quarter of 1997. A second major project has also been approved which involves the building of a new facility to house various banking departments, for which office space is currently leased. These projects have and are expected to continue to increase the Company's noninterest expense. These additional expenses will in part be offset by the elimination of lease payments for space presently utilized for banking operations. -18- Results of Operations Three Months Ended September 1997 vs September 1996 - ---------------------------------------------------------------------------- Net income for the quarter ending September 30, 1997 was $1,617,000 which represents an increase of $52,000 or 3.32% over the quarter ending September 30, 1996. Earnings per share for the third quarter of 1997 was $0.43, an increase of $0.02 per share over the third quarter of 1996. Net Interest Income - ------------------- Third quarter 1997 net interest income was $4,197,000 an increase of $313,000 or 8.06% over the third quarter of 1996. This increase was due to increased net interest income associated with loan growth. Provision for Loan Losses - ------------------------- The provision for loan losses for the third quarter of 1997 was $94,000, compared to $106,000 for the same period in 1996. Continuing loan growth and the necessity to maintain an adequate allowance for loan losses prompted the current year's addition. The provision does not represent a change in the trend of asset quality. Noninterest Income - ------------------ Overall, total noninterest income for the third quarter of 1997 increased $66,000 or 10.39% over the same quarter of the previous year. Service charges on deposit accounts declined by $44,000 or 15.49%, the result of a lower volume of charges. Other service charge income increased by $17,000 or 32.69%. This category contains various miscellaneous items which can vary from time to time. Trust income rose $40,000 or 28.78%, and credit card fees increased $30,000 or 22.90%, when the third quarter of 1997 and 1996 are compared. The increase in trust income was due to a combination of factors, including the acquisition of new business, types of services provided and market value of assets managed. The remaining categories, other income and net realized gains and losses on securities, also increased. The other income category contains miscellaneous income items which may vary in amount from time to time. Net realized gains and losses on securities levels are generally governed in large part by securities called or sold. In the third quarter of 1997, the sale of certain bonds resulted in a $10,000 gain. Noninterest Expense - ------------------- Total noninterest expense for the third quarter of 1997 was $2,575,000, an increase of $294,000 or 12.89%. Salaries and benefit costs included in this category increased $139,000 or 11.15%. Normal merit increases and the opening of a new branch office in Rich Creek, Virginia contributed to this increase. -19- Occupancy expense also increased, related to costs associated with a new branch office, lease expenses for additional office space and the acquisition of other fixed assets. FDIC expense increased due to the previously mentioned new assessment related to the resolution of the savings and loan crisis. Other expenses increased $79,000 or 14.21%. This increase was attributable in part to increases in supplies, training costs and other expenses. Balance Sheet - ------------- Total assets at September 30, 1997 were $400,165,000, an increase of $11,315,000 or 2.91% when compared to December 31, 1996. Total average daily assets at September 30, 1997 were $393,909,000, which represents an increase of $5,864,000 or 1.51% from December 31, 1996. Total investments at September 30, 1997 were $152,300,000, a decline of $18,944,000 or 11.06%. Daily average investments at September 30, 1997 were $159,121,000 a decrease of $18,282,000 or 10.31% from December 31, 1996. Net loans at period-end increased $18,044,000 or 9.32% with average net loans rising to $201,849,000, an increase of $24,430,000 or 13.77%. The decrease in investments and increase in loans reflects the continued use of internal funds, to the extent possible, to fund new loans. Because the Company has had a limited need to attract new deposits or utilize other external funding sources to fund loan growth, it has in the past avoided to a degree the higher costs associated with these sources. However, there is an indication that recent market conditions may necessitate higher rates to retain and procure deposits, which can be expected to increase the Company's interest expense. Growth in average daily deposits for the first nine months of 1997 was less than 1%. Asset Quality - ------------- Nonperforming loans, which include nonaccrual loans and restructured loans, but which exclude loans past due 90 days and still accruing, totaled $358,000 at September 30, 1997 and $616,000 at December 31, 1996. Total other real estate owned, net was $417,000 and $474,000 at September 30, 1997 and December 31, 1996, respectively. The net charge-off ratio at September 30, 1997 was .30% compared to .21% at December 31, 1996. This increase largely reflects the charge-off of previously identified and allocated credits and does not represent a negative change in the asset quality trend. The ratio of allowance for loan losses to loans, net of unearned income and fees, was 1.13% at September 30, 1997 compared to 1.31% at December 31, 1996. This decline was due in part to loan growth and to the charge-off of the previously identified credits mentioned above. -20- Liquidity - --------- Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. As mentioned previously, the Company has, and will continue, to fund loan growth and other cash needs through excess liquidity in the investment portfolio, acquiring external funds, through its deposit gathering activities to meet additional funding needs. In order to provide the best possible service to its customers, the Company for the last quarter of 1997 has scheduled a substantial upgrade to its information systems. In addition, management is planning for the construction of a new office building, which is intended to replace currently leased office space. It is expected that neither project will have a material impact on the Company's liquidity. Management is not aware of any other trend, commitment or event that will result in or that is reasonably likely to result in a decrease in liquidity that would be adverse and to a degree that operations would be materially affected. Interest Rate Sensitivity - ------------------------- Interest rate sensitivity is the ability to adjust interest rates in periods of rising and falling interest rates. A positive cumulative gap indicates that in periods of rising rates interest-earning assets will reprice faster than interest-bearing liabilities. This in turn has a positive effect on earnings. The opposite would be true in a falling rate environment in which interest-earning assets would reprice downward at a faster rate than interest- bearing liabilities, compressing the interest rate spread and having a negative effect on profitability. At September 30, 1997, the Company is negatively gapped into the one to five year time period. In the event interest rates rise, the Company's profitability would be negatively affected, as its interest sensitive liabilities would reprice at a faster rate than its interest sensitive assets. The ultimate effect, however, would depend on the degree of increase in rates and the period of time at the higher rate level and subsequent changes in interest rates. The Company regularly quantifies interest rate risk and the resultant effect on earnings and capital. If necessary, its asset/liability management strategy is adjusted to accommodate changing conditions. Capital Resources - ----------------- Total stockholders' equity at September 30, 1997 was $53,491,000, an increase of $3,690,000 or 7.41% from December 31, 1996. This increase was primarily the result of current period net income less dividends paid. The following table sets forth the various ratios by which bank capital is measured. The Company and each of its subsidiaries continue to be well capitalized. -21- Capital Ratios September 30, 1997 December 31, 1996 -------------- ------------------ ----------------- Total capital (to risk weighted assets) 23.58% 23.00% Tier 1 capital (to risk weighted assets) 22.57% 21.89% Tier 1 capital (to average assets, leverage ratio) 13.76% 12.96% Accounting Considerations - ------------------------- The Company adopted the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" on January 1, 1997. Statement 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of Statement 125 did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". Statement 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. Statement 128 simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other controls to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. Statement 128 requires restatement of all prior-period EPS data presented. It is not anticipated that Statement 128 will have any effect on current or prior year's EPS data presented by the Company. In June 1997, the Securities and Exchange Commission issued guidelines related to the disclosure of derivatives and other financial instruments. These guidelines require the Company to make certain disclosures related to accounting policy, as they apply to derivatives and other financial instruments. It further requires additional quantitative disclosures for fiscal year-end 1997. -22- To date, the Company's involvement in derivative products has been limited to mortgage-backed securities, CMO's, structured notes and other similar instruments that have less complex risk factors. Management investment strategy does not provide for the use of off-balance sheet instruments except for loan commitments and standby letters of credit. Furthermore, management does not plan any future involvement in high risk derivative products. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Statement 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It does not, however, specify when to recognize or how to measure items that make up comprehensive income. Statement 130 was issued to address concerns over the practice of reporting elements of comprehensive income directly in equity. This Statement requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. It does not require per share amounts of comprehensive income to be disclosed. Statement 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. Publicly traded enterprises that issue condensed financial statements for interim periods are required to report a total for comprehensive income in those financial statements. The Company plans to implement Statement 130 at the effective date. -23- National Bankshares, Inc. and Subsidiaries Part II Other Information Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Form 8-K None -24- National Bankshares, Inc. and Subsidiaries 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: 11/14/97 /s/James G. Rakes ------------- ----------------------------- James G. Rakes, President and Chief Executive Officer Date: 11/14/97 /s/Joan C. Nelson ------------- ----------------------------- Joan C. Nelson, Treasurer (principal financial officer) -25- EX-27 2
9 THIS SCHEDULE FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 9-MOS DEC-31-1997 SEP-30-1997 12,919 6,628 4,585 0 60,986 91,314 91,695 214,061 2,419 400,165 342,346 484 3,844 0 0 0 9,482 44,009 400,165 14,418 7,275 459 22,152 9,739 9,771 12,881 303 25 7,527 6,642 0 0 0 4,818 1.29 1.29 0 0 0 0 0 0 0 0 0 0 0 0
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