-----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, FD+7mODAau8b6ykRYlOiNIja637mwF3fKzMHjNQ/91wAszgRkGW6t+m0o2HYjakI LnqoIPcuOMyVf4o7BTXhwQ== 0000796534-98-000013.txt : 19980817 0000796534-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000796534-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98688347 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 SECOND QUARTER JUNE 30,1998 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: June 30, 1998 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 July 31, 1998 - ------------------------------- --------------------------------- Common Stock, $2.50 Par Value 3,792,833 (This report contains 26 pages) National Bankshares, Inc. and Subsidiaries Form 10-Q Index Page ---- PART I FINANCIAL INFORMATION - -------------------------------- Item 1 - Financial Statements Consolidated Balance Sheets, June 30, 1998 and December 31, 1997 4-5 Consolidated Statements of Income and Comprehensive Income, Three Months Ended June 30, 1998 and 1997 6-7 Consolidated Statements of Income and Comprehensive Income, Six Months Ended June 30, 1998 and 1997 8-9 Consolidated Statements of Changes in Stockholders' Equity, Six Months Ended June 30, 1998 and 1997 10 Consolidated Statements of Cash Flows, Six Months Ended June 30, 1998 and 1997 11-12 Selected Consolidated Financial Data 13-17 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 18-23 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 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- 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 six months ended June 30, 1998 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 1997 Annual Report to Stockholders and additional information supplied in the 1997 Form 10-K. In June 1997, the Financial Accounting Standards Board (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 (revenues, expenses, gains and losses) in a full set of general purpose financial statements. 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 accumulated balance of other comprehensive income separately from retained earnings and additional paid-in- capital in the equity section of the balance sheet. It does not require per share amounts of comprehensive income to be disclosed. The Company adopted Statement 130 on January 1, 1998. Other comprehensive income at present arises from unrealized gains (losses) on securities available for sale. The following table shows other comprehensive income arising from unrealized gains (losses) on securities available for sale and the related income tax effects: Six Months Ended June 30, ($000's) 1998 1997 ---- ---- Before tax amount $ 117 36 Tax (expense) benefit at 34% (40) (12) ----- ---- Other comprehensive income, net of taxes $ 77 24 ===== ==== -3- National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 1998 and December 31, 1997 (Unaudited) June 30, December ($000's, except share and per share data) 1998 31, 1997 ========= ========== ASSETS Cash and due from banks $ 11,347 12,435 Interest-bearing deposits 15,908 9,728 Federal funds sold 7,420 4,300 Securities available for sale 88,515 65,582 Securities held to maturity (fair value $61,322 in 1998 and $85,005 in 1997) 60,673 84,392 Mortgage loans held for sale 864 405 Loans: Real estate construction loans 11,611 8,510 Real estate mortgage loans 46,352 42,969 Commercial and industrial loans 105,994 101,379 Loans to individuals 69,551 66,635 -------- ------- Total loans 233,508 219,493 Less unearned income and deferred fees (2,535) (2,503) -------- ------- Loans, net of unearned income and deferred fees 230,973 216,990 Less allowance for loan losses (2,544) (2,438) -------- ------- Loans, net 228,429 214,552 -------- ------- Bank premises and equipment, net 5,909 5,739 Accrued interest receivable 3,622 3,445 Other real estate owned, net 286 421 Other assets 2,507 1,908 -------- ------- Total assets $425,480 402,907 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing demand deposits $ 50,397 45,093 Interest-bearing demand deposits 81,316 77,863 Savings deposits 47,892 46,773 Time deposits 185,463 175,138 -------- ------- Total deposits 365,068 344,867 -------- ------- Other borrowed funds 478 485 Accrued interest payable 754 722 Other liabilities 1,291 966 -------- ------- Total liabilities 367,591 347,040 -------- ------- Common stock subject to ESOP put option 2,195 1,838 -------- ------- -4- (Continued) 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 48,136 46,191 Accumulated other comprehensive income 271 194 Common stock subject to ESOP put option (2,195) (1,838) -------- ------- Total stockholders' equity 55,694 54,029 Commitments and contingent liabilities -------- ------- Total liabilities and stockholders' equity $425,480 402,907 ======== ======= -5- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income Three Months Ended June 30, 1998 and 1997 (Unaudited) June 30, June 30, ($000's, except per share data) 1998 1997 ========= ========= INTEREST INCOME Interest and fees on loans $ 5,443 4,820 Interest on interest-bearing deposits 163 61 Interest on federal funds sold 109 149 Interest on securities - taxable 1,765 1,985 Interest on securities - nontaxable 443 455 ------- ------ Total interest income 7,923 7,470 ------- ------ INTEREST EXPENSE Interest on time deposits of $100,000 or more 592 570 Interest on other deposits 2,863 2,674 Interest on borrowed funds 3 6 ------- ------ Total interest expense 3,458 3,250 ------- ------ Net interest income 4,465 4,220 Provision for loan losses 73 100 ------- ------ Net interest income after provision for loan losses 4,392 4,120 ------- ------ NONINTEREST INCOME Service charges on deposit accounts 308 283 Other service charges and fees 46 49 Credit card fees 180 168 Trust income 177 198 Other income 43 8 Realized securities gains, net 72 6 ------- ------ Total noninterest income 826 712 ------- ------ NONINTEREST EXPENSE Salaries and employee benefits 1,459 1,330 Occupancy and furniture and fixtures 245 280 Data processing and ATM 210 140 FDIC assessment 6 11 Credit card processing 163 151 Goodwill amortization 10 8 Net costs of other real estate owned --- 1 Other operating expense 757 590 ------- ------ Total noninterest expense 2,850 2,511 ------- ------ Income before income tax expense 2,368 2,321 Income tax expense 666 650 ------- ------ Net income 1,702 1,671 -6- (Continued) Other comprehensive income, net of taxes: Unrealized gains (losses) on securities available for sale (10) 452 ------- ------ Comprehensive income $ 1,692 $2,123 ======= ====== Net income per share $ .45 $ .44 ======= ====== -7- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income Six Months Ended June 30, 1998 and 1997 (Unaudited) June 30, June 30, ($000's, except per share data) 1998 1997 ========= ========= INTEREST INCOME Interest and fees on loans $10,597 9,422 Interest on interest-bearing deposits 337 81 Interest on federal funds sold 178 231 Interest on securities - taxable 3,514 3,983 Interest on securities - nontaxable 868 918 ------- ------ Total interest income 15,494 14,635 ------- ------ INTEREST EXPENSE Interest on time deposits of $100,000 or more 1,188 1,103 Interest on other deposits 5,560 5,317 Interest on borrowed funds 6 31 ------- ------ Total interest expense 6,754 6,451 ------- ------ Net interest income 8,740 8,184 Provision for loan losses 94 209 ------- ------ Net interest income after provision for loan losses 8,646 7,975 ------- ------ NONINTEREST INCOME Service charges on deposit accounts 583 561 Other service charges and fees 99 99 Credit card fees 318 288 Trust income 353 380 Other income 54 48 Realized securities gains, net 85 14 ------- ------ Total noninterest income 1,492 1,390 ------- ------ NONINTEREST EXPENSE Salaries and employee benefits 2,858 2,702 Occupancy and furniture and fixtures 491 485 Data processing and ATM 406 253 FDIC assessment 15 14 Credit card processing 291 271 Goodwill amortization 17 15 Net costs of other real estate owned 26 2 Other operating expense 1,442 1,210 ------- ------ Total noninterest expense 5,546 4,952 ------- ------ Income before income tax expense 4,592 4,413 Income tax expense 1,282 1,212 ------- ------ Net income 3,310 3,201 -8- (Continued) Other comprehensive income, net of taxes: Unrealized gains (losses) on securities available for sale 77 24 ------- ------ Comprehensive income $ 3,387 3,225 ======= ====== Net income per share $ .87 .84 ======= ====== -9- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Six Months Ended June 30, 1998 and 1997 (Unaudited) Common Stock Accumulated Subject Other To ESOP ($000's, except for per Common Retained Comprehensive Put share data) Stock Earnings Income Option Total ====== ========= ========== ====== ===== Balances, December 31, 1996 $9,482 42,210 (248) (1,643) 49,801 Net income --- 3,201 --- --- 3,201 Unrealized gains (losses) on securities available for sale, net of tax --- --- 24 --- 24 Dividend ($.33 per share) --- (1,251) --- --- (1,251) Change in common stock subject to ESOP put option --- --- --- (250) (250) ------ ------ ----- ------ ------ Balances, June 30, 1997 $9,482 44,160 (224) (1,893) 51,525 ====== ====== ===== ====== ====== Balances, December 31, 1997 $9,482 46,191 194 (1,838) 54,029 Net income --- 3,310 --- --- 3,310 Unrealized gains (losses) on securities available for sale, net of tax --- --- 77 --- 77 Dividend ($.36 per share) --- (1,365) --- --- (1,365) Change in common stock subject to ESOP put option --- --- --- (357) (357) ------ ------ ----- ------ ------ Balances, June 30, 1998 $9,482 48,136 271 (2,195) 55,694 ====== ====== ===== ====== ====== -10- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997 (Unaudited) June 30, June 30, ($000's) 1998 1997 ========= ========= CASH FLOWS FROM OPERATING ACTIVITIES Net Income $3,310 3,201 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 94 209 Provision for deferred income taxes (28) (127) Depreciation of bank premises and equipment 383 265 Amortization of intangibles 68 29 Amortization of premiums and accretion of discounts, net 28 (11) Gains on bank premises and equipment disposals --- (2) Gains on calls of securities held to maturity, net (85) (14) Net gains on other real estate owned (19) --- (Increase) decrease in: Mortgage loans held for sale (459) 301 Accrued interest receivable (177) (19) Other assets (449) 93 Increase (decrease) in: Accrued interest payable 32 (32) Other liabilities 325 (576) ------- ------- Net cash provided by operating activities 3,023 3,317 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in federal funds sold (3,120) 1,910 Net increase in interest-bearing deposits (6,180) (2,746) Proceeds from calls and maturities of securities available for sale 14,936 4,741 Proceeds from calls and maturities of securities held to maturity 23,775 18,370 Purchases of securities available for sale (37,747) (2,852) Purchases of securities held to maturity --- (6,816) Purchases of loan participations (2,910) (1,149) Collections of loan participations 3,853 1,070 Net increase in loans made to customers (15,159) (15,222) Proceeds from disposal of other real estate owned 194 29 Recoveries on loans charged off 205 56 Bank premises and equipment expenditures (553) (350) Proceeds from sale of bank premises and equipment --- --- Net cash used in investing activities (22,706) (2,959) ------- ------- -11- (Continued) CASH FLOWS FROM FINANCING ACTIVITIES Deposits assumed, net of premium paid 7,025 --- Net increase in time deposits 5,541 2,104 Net increase in other deposits 7,401 881 Net increase(decrease) in other borrowed funds (7) 757 Cash dividends paid (1,365) (1,251) ------- ------- Net cash provided by financing activities 18,595 2,491 ------- ------- Net increase(decrease) in cash and due from banks (1,088) 2,849 Cash and due from banks at beginning of period 12,435 9,989 ------- ------- Cash and due from banks at end of period $11,347 12,838 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 6,722 $ 6,483 ======= ======= Cash paid for income taxes $ 1,233 $ 1,585 ======= ======= Loans charged to the allowance for loan losses $ 193 $ 402 ======= ======= Loans transferred to other real estate owned $ 40 --- ======= ======= -12- National Bankshares, Inc. and Subsidiaries Selected Balance Sheet Data June 30, 1998 and December 31, 1997 June 30, December 31, ($000's) 1998 1997 ========= ============ SELECTED PERIOD-END DATA Loans, net $228,429 214,552 Total securities 149,188 149,974 Total assets 425,480 402,907 Total deposits 365,068 344,867 Stockholders' equity 55,694 54,029 SELECTED DAILY AVERADES DATA Loans, net $220,437 204,540 Total securities 146,456 157,179 Total assets 408,837 395,932 Total deposits 349,106 339,439 Stockholders' equity 54,821 53,712 -13- National Bankshares, Inc. and Subsidiaries Selected Income Statement, Ratios and Per Share Data Six Months Ended June 30, 1998 and 1997 And Year Ended December 31, 1997 June 30, December 31, ($000's, except per share data) 1998 1997 1997 ====== ====== ============ Interest income $15,494 14,635 29,797 Interest expense 6,754 6,451 13,106 Net interest income 8,740 8,184 16,691 Provision for loan losses 94 209 435 Noninterest income 1,492 1,390 2,834 Noninterest expense 5,546 4,952 10,031 Income taxes 1,282 1,212 2,499 Net income 3,310 3,201 6,560 Return on average assets 1.63% 1.65% 1.66% Return on average equity (1) 11.75% 12.29% 12.21% Net income per share $ .87 .84 1.73 Book value per share (1) $15.26 14.08 14.73 (1) Includes amount related to common stock subject to ESOP put option excluded from stockholders' equity on the Consolidated Balance Sheets. -14- National Bankshares, Inc. and Subsidiaries Average Balances and Interest Yields/Rates Six Months Ended June 30, 1998 and 1997 and Year Ended December 31, 1997
($000's) June 30, 1998 June 30, 1997 December 31, 1997 Average Yield/ Average Yield/ Average Yield/ Balance Rate Balance Rate Balance Rate ======= ======= ======= ======= ======= ======= Interest-earning assets(1) $ 386,664 8.35% 370,857 8.25% 374,478 8.24% Interest-bearing liabilities 302,392 4.50% 294,720 4.41% 295,565 4.43% ------- ------- ----- Net interest spread 3.85% 3.84% 3.81% ======= ======= ===== Net interest margin 4.83% 4.74% 4.74% ======= ======= ===== (1) The yield on interest-earning assets is shown on a fully tax equivalent basis.
-15- National Bankshares, Inc. and Subsidiaries Nonperforming Assets, Past Due Loans and Impaired Loans June 30, 1998 and 1997 and December 31, 1997 June 30, June 30, December 31, ($000's) 1998 1997 1997 ========= ========= ============ NONPERFORMING ASSETS Nonaccrual loans $ 42 $ 359 87 Restructured loans --- --- --- ------ ------ ------ Total nonperforming loans 42 359 87 ------ ------ ------ Foreclosed property 286 447 421 ------ ------ ------ Total nonperforming assets $ 328 806 508 ====== ====== ====== Ratio of nonperforming assets to loans, net of unearned income and deferred fees and foreclosed properties (excludes nonaccrual securities) .14% .21% .23% ====== ====== ====== ACCRUING LOANS PAST DUE 90 DAYS OR MORE Past due 90 days or more and still accruing $ 962 504 672 ====== ====== ====== Ratio of loans past due 90 days or more to loans, net of unearned income and deferred fees .42% .24% .31% ====== ====== ====== IMPAIRED LOANS Total impaired loans $ 572 464 177 ====== ====== ====== Impaired loans with a valuation allowance 284 188 53 Valuation allowance (52) (106) (53) ------ ------ ------ Impaired loans net of allowance $ 232 82 --- ====== ====== ====== Impaired loans with no valuation allowance $ 288 276 124 ====== ====== ====== Average recorded investment in impaired loans $ 279 551 458 ====== ====== ====== Income recognized on impaired loans $ 26 6 23 ====== ====== ====== Amount of income recognized on a cash basis $ --- 6 12 ====== ====== ====== -16- National Bankshares, Inc. and Subsidiaries Allowance for Loan Losses and Loan Loss Data June 30, 1998 and 1997 and December 31, 1997 For the periods ended June 30, June 30, December 31, ($000's) 1998 1997 1997 ========= ========= ============ Balance at beginning of period $ 2,438 2,575 2,575 Provision for loan losses 94 209 435 Loans charged off (193) (402) (679) Recoveries 205 56 107 -------- ------- -------- Balance at end of period $ 2,544 2,438 2,438 ======== ======= ======== Ratio of allowance for loan losses to end of period loans, net of unearned income and deferred fees 1.10% 1.16% 1.12% ======== ======= ======== Ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees (1) (.01%) .35% .23% ======== ======= ======== Ratio of allowance for loan losses to nonperforming loans (2) 6,204.88% 679.11% 2,802.30% ======== ======= ======== (1) Net charge-offs are on an annualized basis. (2) The Company defines nonperforming loans as total nonaccrual and restructured loans. Excluded are loans 90 days past due and still accruing. -17- National Bankshares, Inc. and Subsidiaries Item 2. 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 1997 Annual Report and Form 10-K for an understanding of the following discussion and analysis. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Results of Operations - for the six months ended June 30,1998 - ------------------------------------------------------------- Net income for the six months ended June 30, 1998 was $3,310,000 which represents an increase of $109,000 or 3.41% over the first six months of 1997. The return on average assets as of June 30, 1998 and June 30, 1997 was 1.63% and 1.65%, respectively. The return on average equity was 11.75% and 12.29% at June 30, 1998 and 1997, respectively. Earnings per share at the end of the second quarter of 1998 was $0.87 per share, an increase of $0.03 per share over the second quarter of 1997. The overall improvement in net income was primarily the result of continued growth in net interest income and a decline in the provision for loan losses. These factors were offset to a degree by increased costs associated with data processing. Net Interest Income - ------------------- Net interest income at the end of the first six months of 1998 was $8,740,000, an increase of $556,000 or 6.79% over the same period in 1997. The net interest margin increased to 4.83% from 4.74% as a result of an increase in the yield on interest-earning assets of 10 basis points during that period while the cost to fund interest-earning assets increased by 1 basis point. Continued strong loan growth was the primary cause of the net increase in the interest margin. Provision for Loan Losses - ------------------------- The provision for loan losses for the period ended June 30, 1998 was $94,000, a decrease of $115,000 from the same period the previous year. The net charge-off (recovery) ratio at June 30, 1998 was (.01%). Loans charged off at June 30, 1998 were $193,000 compared to $402,000 at June 30, 1997. Recoveries of loans previously charged off at the end of the first six months of 1998 were $205,000 compared to $56,000 for the same period in 1997. -18- Management anticipates that additional provisions will be needed in future periods to ensure an adequate allowance for loan losses, due in part to future loan growth and factors related to portfolio composition. Overall asset quality remains satisfactory as indicated by nonperforming asset data shown elsewhere in this report. Noninterest Income - ------------------ Noninterest income for the period ended June 30, 1998 was $1,492,000, an increase of $102,000 or 7.34%. The primary cause of the increase was net securities gains which were related to calls on securities held to maturity. Credit card fees increased by 10.42%. The increase for 1998 reflects a full six months income from this activity whereas 1997 reflects a partial period. Trust income was down by $27,000 or 7.11%. Trust income is governed by the types and volume of activities in which it engages. This can result in income variances from time to time. Other categories, service charges or on deposits, other service charges and other income displayed lesser variances. Noninterest Expense - ------------------- Noninterest expense for the first six months of 1998 was up 12.00% when compared to the same period in 1997. Salaries and employee benefits were up $156,000 or 5.77% when the first six months of 1998 and 1997 are compared. A substantial portion of this increase was due to the acquisition of the Galax branch discussed elsewhere in this report. Data processing expense increased by $153,000 over the first six months of 1997. In the fourth quarter of 1997, the Company upgraded its data processing equipment and software which increased depreciation and maintenance costs. Also, in anticipation of a data processing upgrade at BTC, depreciation was accelerated on certain data processing equipment that would become obsolete upon conversion later in 1998. OREO expense was up $24,000 the primary result of an increase in the valuation allowance for other real estate owned. The valuation allowance for other real estate is periodically adjusted to reflect market conditions which may affect net realizable values. Other expenses at June 30, 1998 were $1,442,000, an increase of $232,000 over the same period in 1997. This was due to normal increases in the various categories. This category contains various cash basis expenses such as office supplies and postage which may vary due to the timing and amount of purchases. The addition of the Galax Branch also contributed to the increase. Results of Operations - for the three months ended June 30,1998 - --------------------------------------------------------------- Net income for the three months ended June 30, 1998 was $1,702,000 and increase of $31,000 or 1.86% over the same period in 1997. Earnings per share for the second quarter of 1998 was $0.45 compared to $0.44 for the second quarter of 1997. -19- Net Interest Income - ------------------- Net interest income for the second quarter of 1998 was $4,465,000 which represents an increase of $245,000 or 5.81% over the same period in 1997. While interest expense rose $208,000, interest income rose by $453,000. The increase in interest income was largely attributable to loan growth. Provision for Loan Losses - ------------------------- The provision for loan losses for the second quarter of 1998 was $73,000, a decrease of $27,000 when compared to the same period the previous year. Reference is made to the year-to-date discussion of this category for management plans concerning this area. Noninterest Income - ------------------ Noninterest Income for the second quarter of 1998 was $826,000 an increase of $114,000 when compared to the second quarter of 1997. Net securities gains and losses which increased $66,000 accounted for a significant portion of the increase. Also, included in other income is approximately $45,000 in gains on the sale of other real estate owned. Service charges on deposit increased by $25,000 while trust income declined by $21,000 partially off setting that increase. Refer to comments related to trust income in the year-to-date analysis for further information related to the trust business in general. Credit card fees were up partially due to volume and in part due to the debit card program mentioned previously. Noninterest Expense - ------------------- Total noninterest expenses for the second quarter of 1998 was $2,850,000, up $339,000 over the same period in 1997. Salaries and fringe benefits increased by $129,000 or 9.70%. A substantial portion of the current quarter's increase was due to the acquisition of the Galax branch. The remainder was due to normal salary increases and other normal increases. Data processing expense increased by $70,000 in the second quarter of 1998. In late 1997 the Company undertook a major upgrade of its data processing system. Increases in expense were largely associated with this project. Other expenses increased $167,000 when the second quarter of 1998 and 1997 are compared. Many of the accounts included in the category are on cash basis such as stationary and supplies, postage, and correspondent bank fees, etc. and will vary from quarter to quarter. Also included in this category are franchise taxes which increase yearly as they are tied to growth in capital. Costs associated with the Galax branch such as additional supplies and core deposit expense also contributed to the increase. -20- Balance Sheet - ------------- Total assets at June 30, 1998 were $425,480,000, an increase of $22,573,000 or 5.60% over year-end 1997. Total deposits at June 30, 1998 were $365,068,000 an increase of $20,201,000 from year-end 1997. At June 30, 1998, the newly added Galax branch had approximately $10,011,000 in deposits, the majority of which were acquired upon purchase of the branch. At June 30, 1998, total loans net of unearned income were $230,973,000, an increase of $13,983,000 or 6.44% over total loans at December 31, 1997. Growth as can be seen on the balance sheet occurred in all areas of real estate construction and commercial loans, real estate loans and loans to individuals also continued to increase. Asset Quality - ------------- Nonperforming loans, which include nonaccrual loans and restructured loans but exclude loans past due 90 days and still accruing, totaled $42,000 at June 30, 1998 compared to $87,000 at December 31, 1997. Total foreclosed properties were $286,000 at June 30, 1998 a decline of $135,000 from December 31, 1997. The ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees was (.01%) at June 30, 1998. At year-end December 31, 1997, the ratio was .23%. While asset quality trends are generally favorable at present, management cannot predict the duration of the current trend as it can be affected by changes in the local and national economic conditions, the impact of which cannot be precisely determined. Liquidity - --------- Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. Net cash provided by operating activities was $3,023,000 for the three months ended June 30, 1998. Net cash used in investing activities was $22,706,000 with the majority of that cash invested in securities and loans. Net cash from in financing activities was $18,595,000. Net cash decreased $1,088,000 from December 31, 1997. The Company actively manages its liquidity position through its investing activities. At June 30, 1998, overnight funds which includes Federal Funds sold and funds on deposit with the Federal Home Loan Bank totaled $23,328,000. In addition, securities with a remaining maturity of less than one year totaled $22,670,000. Liquidity is also managed through the management of deposit liabilities in particular, volatile funds such as time deposits over $100,000. The amount of such deposits is largely dependent on the rate of interest offered. The Company had approximately $31,987,000 in such deposits due within twelve months. Other types of deposits such as interest-bearing demand, savings and time deposits less than $100,000 are less volatile and less rate dependent historically. Short term liquidity needs can also be satisfied by way of credit facilities established with correspondent banks, the Federal Home Loan Bank and Federal Reserve. Longer term borrowings, if necessary can be obtained through the Federal Home Loan Bank. -21- Management is not aware of any trend, commitment or events that will result in or that are reasonably likely to result in a decrease in liquidity that would be adverse and to a degree that operations would be materially impaired. Capital Resources - ----------------- Total stockholders' equity increased $1,665,000 or 3.08% from December 31, 1997. During the first half of 1998, retained earnings grew by $1,945,000. Accumulated comprehensive income increased stockholders' equity by $77,000. This category is comprised solely of changes in the net unrealized gains (losses) on securities available for sale. Common stock subject to put option increased by $357,000. The common stock subject to put option is affected by the current market price of Bankshares' common stock as well as the number of shares outstanding. The following table sets forth the various ratios by which bank capital is measured. Bankshares and its subsidiaries continue to be well capitalized. June 30, December 31, 1998 1997 ========= ============ Consolidated Capital Ratios --------------------------- Total capital (to risk weighted assets) 22.56% 23.30% Tier 1 Capital (to risk weighted assets) 21.58% 22.30% Tier 1 capital (to average assets, leverage ratio) 13.57% 13.70% Acquisition - ----------- On December 26, 1997, NBB entered into an agreement to purchase the assets, including real estate and improvements, and assume the liabilities of the Galax, Virginia, branch office of First American Federal Savings Bank. Settlement of this purchase agreement occurred on April 3, 1998 and did not have a material impact on the Company's results of operations or liquidity. Year 2000 - --------- The Company is cognizant of the risks and challenges presented by the impact of the century date change on information processing and other computer controlled systems. The Year 2000 presents two related but distinct issues for financial institutions. The Company's internal information processing and computer controlled systems must be Year 2000 compliant, and the subsidiary banks' compliance efforts are subject to regulatory review. In addition, banks face credit risk should their commercial loans customers suffer significant business disruptions as a result of the impact of computer failures in their own operations or in those of their suppliers or customers. As a normal part of business operations, the Company's subsidiaries are currently in the process of upgrading information processing systems which will include the acquisition of new information processing hardware and software. -22- The primary goal of this project is to provide a shared information processing system for affiliates, additional capacity and the ability to use the most advanced software available from vendors. While the overall costs associated with the upgrade are substantial, it is not anticipated that the Year 2000 component of this upgrade will have a material effect on the Company's consolidated financial statements. Future Accounting Considerations - -------------------------------- In March 1998, the AICPA Accounting Standards Executive Committee (AcSEC) issued Statement of Position 98-1,"Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is applicable to all nongovernmental entities and provides guidance on accounting for the costs of computer software developed or obtained for internal use. The SOP requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage (as defined in SOP 98-1) is an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for financial statements issued for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. Initial application should be as of the beginning of the fiscal year in which the SOP is first adopted and applied to costs incurred for all projects during that fiscal year, including those in progress upon initial application. Costs incurred prior to initial application of the SOP, whether capitalized or not, should not be adjusted to the amounts that would have been capitalized had the SOP been in effect when those costs were incurred. In late 1998, BTC plans to complete an upgrade of information system hardware and software and expand its microcomputer network. However, the Company does not plan to adopt SOP 98-1 until January 1, 1999, therefore it is not anticipated SOP 98-1 will have a material effect on the consolidated financial position, results of operations or liquidity of the Company. There have been no other recent accounting pronouncements issued that would have a material effect on the consolidated financial position, results of operations or liquidity of the Company. -23- National Bankshares, Inc. and Subsidiaries Item 3. Quantitative and Qualitative Disclosures About Market Risk Derivatives The Company is not a party to derivative financial instruments with off- balance sheet risks such as futures, forwards, swaps and options. The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. Management does not plan any future involvement in high risk derivative products. The Company has investments in mortgage-backed securities, collateralized mortgage obligations, structured notes and other similar instruments which are included in securities available for sale and securities held to maturity. The fair value of these investments at June 30, 1998 approximated $8,606,000. Interest Rate Sensitivity The Company's securities and loans and its deposits are subject to interest rate risk. The Company's profitability in the near term may temporarily be affected, either positively by a falling interest rate scenario or negatively by a period of rising rates. The table below sets forth, as of June 30, 1998, the distribution of repricing opportunities of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest rate sensitive liabilities), and the cumulative interest rate sensitivity gap. The table sets forth the time periods during which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contracted terms. Certain shortcomings are inherent in the method of analysis presented in the following table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees and at different times to changes in market interest rates. Also, loan prepayments and early withdrawals of certificates of deposit could cause the interest sensitivities to vary from those which appear on the table. ($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years ========= ======== ========= ========= ======== Interest-earning assets $ 86,983 22,836 45,080 128,563 120,891 Interest-bearing liabilities 164,299 28,725 54,884 45,211 22,030 -------- ------- ------- ------- ------- Gap (77,316) (5,889) (9,804) 83,352 98,861 ======== ======= ======= ======= ======= Cumulative gap $(77,316) (83,205) (93,009) (9,657) 89,204 ======== ======= ======= ======= ======= -24- National Bankshares, Inc. and Subsidiaries PART II OTHER INFORMATION Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior Securities None for the three months ended June 30, 1998. Item 4. Submission of Matters to a Vote of Security Holders Three Class 2 Directors of the Company were elected by a vote of the security holders for a term of three years each. (a) This matter was submitted to a vote at the Company's Annual Meeting of Stockholders held on April 14, 1998. (b) The name of each director elected at the meeting follows: Alonzo A. Crouse James G. Rakes Jeffery R. Stewart The name of each director whose term of office continued after the meeting is listed: Charles L. Boatwright T.C. Bowen, Jr. Robert E. Christopher, Jr. Paul A. Duncan William T. Peery (c) The number of votes cast for or against each nominee is provided below. There were no abstaining votes and no broker non-votes. Election of Directors Director Votes For Votes Against ======== ========= ============= Alonzo A. Crouse 3,273,006 14,912 James G. Rakes 3,285,276 2,642 Jeffrey R. Stewart 3,265,458 22,460 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K filed during the three months ended June 30, 1998: None -25- National Bankshares, Inc. and Subsidiaries SIGNATURES Pursuant to the requirements 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. National Bankshares, Inc. (Registrant) Date: 08/14/98 /s/James G. Rakes ------------- ----------------------------- James G. Rakes, President and Chief Executive Officer Date: 08/14/98 /s/J. Robert Buchanan ------------- ----------------------------- J. Robert Buchanan, Treasurer (principal financial officer) -26- EX-27 2
9 THIS SCHEDULE OF FINANCIAL INFORMATION IS EXTRACTED FROM THE JUNE 30,1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 6-MOS DEC-31-1998 JUN-30-1998 11,347 15,908 7,420 0 88,515 60,673 61,322 230,973 2,544 425,480 365,068 478 4,240 0 0 0 9,482 46,212 425,480 10,597 4,382 515 15,494 6,748 6,754 8,740 94 85 5,546 4,592 0 0 0 3,310 .87 .87 0 0 0 0 0 0 0 0 0 0 0 0
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