-----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, MX4pdrXcmtw2hWavYKiVUw23vO2mEh9wfiYkmYY5B8kMnaYLc37THAl+7lZmLEEQ BN9o4QbPTv//b93+6AFzXg== 0000796534-99-000010.txt : 19990510 0000796534-99-000010.hdr.sgml : 19990510 ACCESSION NUMBER: 0000796534-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990507 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: 99614027 BUSINESS ADDRESS: STREET 1: 100 SOUTH MAIN ST CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 BUSINESS PHONE: 5405522011 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET STREET 2: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 10-Q 1 FIRST QUARTER 1999 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: March 31, 1999 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 May 3, 1999 - ------------------------------- --------------------------------- Common Stock, $2.50 Par Value 3,792,833 (This report contains 28 pages) National Bankshares, Inc. and Subsidiaries Form 10-Q Index Page ---- Part I Financial Information - -------------------------------- Item 1 - Financial Statements Consolidated Balance Sheets, March 31, 1999 and December 31, 1998 4 - 5 Consolidated Statements of Income and Comprehensive Income, Three Months Ended March 31, 1999 and 1998 6 - 7 Consolidated Statements of Changes in Stockholders' Equity, Three Months Ended March 31, 1999 and 1998 8 Consolidated Statements of Cash Flows, Three Months Ended March 31, 1999 and 1998 9 - 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 23 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 24 - 25 Part II Other Information - ---------------------------- Items 1 - 3 - Legal Proceedings; Changes in Securities; Defaults Upon Senior Securities 26 Item 4 - Submission of Matters to a Vote of Security Holders 26 - 27 Item 5 - Other Information 27 Item 6 - Exhibits and Reports on Form 8 - K 27 Signatures 28 - ---------- -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 three months ended March 31, 1999 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 1998 Annual Report to Stockholders and additional information supplied in the 1998 Form 10-K. -3- National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 1999 and December 31, 1998 (Unaudited) March 31, December 31, ($000's, except share and per share data) 1999 1998 ========= ============ Assets Cash and due from banks $ 13,815 14,421 Interest-bearing deposits 14,130 7,027 Federal funds sold 2,500 5,090 Securities available for sale 130,305 136,078 Securities held to maturity (fair value $27,821 in 1999 and $31,151 in 1998) 27,471 30,676 Mortgage loans held for sale 516 2,180 Loans: Real estate construction loans 12,726 12,827 Real estate mortgage loans 50,292 48,724 Commercial and industrial loans 123,056 110,509 Loans to individuals 68,473 69,493 -------- ------- Total loans 254,547 241,553 Less unearned income and deferred fees (2,123) (2,296) -------- ------- Loans, net of unearned income and deferred fees 252,424 239,257 Less allowance for loan losses (2,849) (2,679) -------- ------- Loans, net 249,575 236,578 -------- ------- Bank premises and equipment, net 6,960 6,657 Accrued interest receivable 3,875 3,777 Other real estate owned, net 628 628 Other assets 2,499 2,054 -------- ------- Total assets $452,274 445,166 ======== ======= Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $ 56,116 55,479 Interest-bearing demand deposits 85,608 84,319 Savings deposits 47,806 46,387 Time deposits 198,665 196,511 -------- ------- Total deposits 388,195 382,696 -------- ------- Other borrowed funds 127 214 Accrued interest payable 697 647 Other liabilities 1,774 926 -------- ------- Total liabilities 390,793 384,483 -------- ------- Common stock subject to ESOP put option 2,194 2,180 -------- ------- -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 51,861 50,182 Accumulated other comprehensive income 138 1,019 Common stock subject to ESOP put option (2,194) (2,180) -------- ------- Total stockholders' equity 59,287 58,503 Commitments and contingent liabilities -------- ------- Total liabilities and stockholders' equity $452,274 445,166 ======== ======= -5- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income Three Months Ended March 31, 1999 and 1998 (Unaudited) March 31, March 31, ($000's, except per share data) 1999 1998 ========= ========= Interest Income Interest and fees on loans $ 5,535 5,154 Interest on interest-bearing deposits 53 174 Interest on federal funds sold 29 69 Interest on securities - taxable 1,877 1,749 Interest on securities - nontaxable 595 425 -------- -------- Total interest income 8,089 7,571 -------- -------- Interest Expense Interest on time deposits of $100,000 or more 666 596 Interest on other deposits 2,768 2,697 Interest on borrowed funds 2 3 -------- -------- Total interest expense 3,436 3,296 -------- -------- Net interest income 4,653 4,275 Provision for loan losses 232 21 -------- -------- Net interest income after provision for loan losses 4,421 4,254 -------- -------- Noninterest Income Service charges on deposit accounts 261 275 Other service charges and fees 48 53 Credit card fees 163 138 Trust income 231 176 Other income 43 11 Realized securities gains, net 20 13 -------- -------- Total noninterest income 766 666 -------- -------- Noninterest Expense Salaries and employee benefits 1,559 1,399 Occupancy and furniture and fixtures 257 246 Data processing and ATM 199 196 FDIC assessment 16 9 Credit card processing 156 128 Goodwill amortization 9 7 Net costs of other real estate owned 3 26 Other operating expense 727 685 -------- -------- Total noninterest expense 2,926 2,696 -------- -------- Income before income tax expense 2,261 2,224 Income tax expense 582 616 -------- -------- Net income 1,679 1,608 -------- -------- -6- (Continued) Other comprehensive income, net of taxes: Unrealized gains (losses) on securities available for sale (881) 87 -------- -------- Comprehensive Income $ 798 1,695 ======== -------- Net income per share $ .44 0.42 ======== ======== -7- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholder's Equity Three Months Ended March 31, 1999 and 1998 (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, 1997 $9,482 46,191 194 (1,838) 54,029 Net income --- 1,608 --- --- 1,608 Unrealized gains (losses) on securities available for sale, net of tax --- --- 87 --- 87 Change in common stock subject to ESOP put option --- --- --- (357) (357) ------ ------ ----- ------ ------ Balances, March 31, 1998 $9,482 47,799 281 (2,195) 55,367 ====== ====== ===== ====== ====== Balances, December 31, 1998 $9,482 50,182 1,019 (2,180) 58,503 Net income --- 1,679 --- --- 1,679 Unrealized gains (losses) on securities available for sale, net of tax (1) --- --- (881) --- (881) Change in common stock subject to ESOP put option --- --- --- (14) (14) ------ ------ ----- ------ ------ Balances, March 31, 1999 $9,482 51,861 138 (2,194) 59,287 ====== ====== ===== ====== ====== (1) Net unrealized holding loss for quarter $(1,288) plus reclassification adjustment of $(47) unrealized gain for quarter and less income tax benefit of $454 -8- National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998 (Unaudited) March 31, March 31, ($000's) 1999 1998 ========= ========= Cash Flows from Operating Activities Net Income $ 1,679 1,608 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 232 21 Depreciation of bank premises and equipment 217 188 Amortization of intangibles 38 30 Amortization of premiums and accretion of discounts, net 125 13 Gains on sales and calls of securities available for sale, net (20) --- Gains on calls of securities held to maturity, net --- (13) Losses and writedowns on other real estate owned --- 21 (Increase) decrease in: Mortgage loans held for sale 1,664 120 Accrued interest receivable (98) 77 Other assets (29) (336) Increase in: Accrued interest payable 50 14 Other liabilities 848 845 ------- ------- Net cash provided by operating activities 4,706 2,588 ------- ------- Cash Flows from Investing Activities Net (increase) decrease in federal funds sold 2,590 (2,055) Net increase in interest-bearing deposits (7,103) (1,840) Proceeds from calls and maturities of securities available for sale 11,363 9,134 Proceeds from calls and maturities of securities held to maturity 3,198 11,788 Purchases of securities available for sale (7,023) (12,615) Purchase of loan participations (4,800) --- Collections of loan participations 1,991 1,533 Net increase in loans made to customers (10,453) (7,946) Proceeds from disposal of other real estate owned --- 44 Recoveries on loans charged off 33 194 Bank premises and equipment expenditures (520) (81) ------- ------- Net cash used in investing activities (10,724) (1,844) ------- ------- -9- (Continued) Cash Flows from Financing Activities Net increase in time deposits 2,154 (2,263) Net increase in other deposits 3,345 1,989 Net (decrease) in other borrowed funds (87) (166) ------- ------- Net cash provided by (used in) financing activities 5,412 (440) ------- ------- Net increase (decrease) in cash and due from banks (606) 304 Cash and due from banks at beginning of period 14,421 12,435 ------- ------- Cash and due from banks at end of period $13,815 12,739 ======= ======= Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 3,386 3,282 ======= ======= Cash paid for income taxes $ 20 15 ======= ======= Loans charged to the allowance for loan losses $ 95 67 ======= ======= Loans transferred to other real estate owned $ --- 41 ======= ======= -10- 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 provide 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 1998 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 three months ended March 31,1999 - ---------------------------------------------------------------- Net income for the three months ended March 31, 1999 was $1,679,000 which represents an increase of $71,000 or 4.42% over the first three months of 1998. The return on average assets for the quarter-ended March 31, 1999 was 1.54% and 1.63% as of March 31, 1998. The return on average equity was 11.12% for the period ended March 31, 1999 and 11.49% as of March 31, 1998. Earnings per share for the first quarter of 1999 was $0.44 per share, an increase of $.02 per share over the first quarter of 1998. The following table provides selected consolidated dates. March 31, December 31, ($000's, except per share and percent data) 1999 1998 1998 1997 ====== ====== ============ ============ Interest income $8,089 7,571 31,828 29,797 Interest expense 3,436 3,296 13,928 13,106 Net interest income 4,653 4,275 17,900 16,691 Provision for loan losses 232 21 624 435 Noninterest income 766 666 3,174 2,834 Noninterest expense 2,926 2,696 11,061 10,031 Income taxes 582 616 2,591 2,499 Net income $1,679 1,608 6,798 6,560 Return on average assets 1.54% 1.63% 1.61% 1.66% Return on average equity (1) 11.12% 11.49% 11.66% 12.21% Basic net income per share $ .44 .42 1.79 1.73 Book value per share (1) $16.21 15.18 16.00 14.73 (1) Includes amount related to common stock subject to ESOP put option excluded from stockholders' equity on the Consolidated Balance Sheets. -11- Net Interest Income - ------------------- Net interest income at the end of the first three months of 1999 was $4,653,000, an increase of $378,000 or 8.84% over the same period in 1998. The net interest margin is one of the primary ratios used by banks to measure net interest income. The net interest margin is composed of the yield on earning assets on a fully tax equivalent basis less the cost to fund earning assets. The funding cost factor in interest bearing deposits as well as capital and demand deposits. The following table sets forth the Company's net interest margin for the period specified. March 31, December 31, 1999 1998 1998 1997 --------- --------- ----------- ----------- Yield on earning assets 8.18% 8.38% 8.25% 8.24% Cost to fund earning assets 3.33% 3.53% 3.50% 3.50% -------- ------- ------- ------- Net interest margin 4.85% 4.85% 4.75% 4.74% ======== ======= ======= ======= A second measure of net interest income is the net interest spread. The ratio consists of the yield on earning assets on a fully tax equivalent basis less the cost of interest bearing liabilities. It does not reflect the benefit received from "free funds" such demand deposits and capital. The following table sets forth the company's net interest spread for the periods shown. March 31, December 31, 1999 1998 1998 1997 --------- --------- ----------- ----------- Yield on earning assets 8.18% 8.38% 8.25% 8.24% Cost of interest-bearing liabilities 4.26% 4.50% 4.48% 4.43% -------- ------- ------- ------- Net interest spread 3.92% 3.88% 3.77% 3.81% ======== ======= ======= ======= As can be seen by the table shown above, the yield on earning assets for the first quarter of 1999 has declined by seven basis points from the year- ended 1998. The cost to fund earning assets declined by seventeen basis points. These elements combined to produce a ten basis point improvement in the net interest margin. The decline in the yield on earning assets and the cost of interest bearing liabilities is due in part to a declining rate environment. The cost of interest bearing liabilities which declined to a greater degree was directly affected by certain management efforts to contain interest expense. Provision and Allowance for Loan Losses - --------------------------------------- The adequacy of the allowance for loan losses is based on management's judgement and analysis of current and historical loss experience, risk characteristics of the loan portfolio, concentrations of credit and asset quality, as well as other internal and external factors such as general economic conditions. -12- An internal credit review department performs pre-credit analyses of large credits and also conducts credit review activities that provide management with an early warning of asset quality deterioration. Changing trends in the loan mix are also evaluated in determining the adequacy of the allowance for loan losses. Loan loss and other industry indications related to asset quality are presented in the following table. For the periods ended March 31, December 31, 1999 1998 1998 1997 ($000's) ========= ========= =========== ============ Balance at beginning of period $ 2,679 2,438 2,438 2,575 Provision for loan losses 232 21 624 435 Loans charged off (95) (67) (638) (679) Recoveries 33 194 255 107 -------- -------- --------- --------- Balance at the end of period $ 2,849 2,586 2,679 2,438 ======== ======== ========= ========= Ratio of allowance for loan losses to end of period loans, net of unearned income and deferred fees 1.13% 1.16% 1.12% 1.12% ======== ======== ========= ========= Ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees(1) .10% (.24)% .17% .28% ======== ======== ========= ========= Ratio of allowance for loan losses to nonperforming loans(2) 1,656.40% 6,157.14% 9,567.86% 2,802.30% ======== ======== ========= ========= (1) Net charge-offs are 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. March 31, December 31, ($000's) 1999 1998 1998 1997 ======== ======== ======== ======== Nonperforming Assets Nonaccrual loans $ 172 42 28 87 Restructured loans --- --- --- --- ------ ------ ------ ------ Total nonperforming loans 172 42 28 87 Foreclosed property 628 397 628 421 ------ ------ ------ ------ Total nonperforming assets $ 800 439 656 508 ====== ====== ====== ====== -13- Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned .32% .20% .27% .23% ====== ====== ====== ====== Accruing Loans Past Due 90 Days or More --------------------------------------- Past due 90 days or more and still accruing $2,153 921 550 672 ====== ====== ====== ====== Ratio of loans past due 90 days or more to loans, net of unearned income and deferred fees .85% .41% .23% .31% ====== ====== ====== ====== Impaired Loans -------------- Total impaired loans $ 268 89 373 177 ====== ====== ====== ====== Impaired loans with a valuation allowance 145 --- 145 53 Valuation allowance 145 --- 145 53 ------ ------ ------ ------ Impaired loans net of allowance $ --- --- --- --- ====== ====== ====== ====== Impaired loans with no valuation allowance $ 123 89 228 124 ====== ====== ====== ====== Average recorded investment in impaired loans $ 268 89 387 458 ====== ====== ====== ====== Income recognized on impaired loans $ 4 2 32 23 ====== ====== ====== ====== Amount of income recognized on a cash basis $ --- --- --- 12 ====== ====== ====== ====== As can be seen by the preceding table, the provision for loan losses was $232,000 for the first quarter of 1999, up $211,000 over the same period the prior year. The ratio of the allowance for loan losses to loans net of unearned income has remained relatively stable. The net charge-offs ratio for the first quarter of 1999 was lower than most of the other periods shown. It should be noted that loans past due 90 days or more have risen when compared to prior period data. As mentioned in the Company's 1998 Form 10-K, the Company has two additional credits totaling approximately $1.7 million which are experiencing collection problems. These loans are at present 90 days or more past due. Management believes, at present, that these credits can be recovered without loss. At March 31, 1999 both loans were on an accrual basis. Overall, it is expected that provisions for loan loss expense will be higher in 1999. Such expense will be required by strong loan growth and the need to maintain an adequate overall reserve. Further additions could be made necessary by unforeseen losses and/or a change in the circumstances surrounding the two credits mentioned above. -14- The total amount of foreclosed properties at March 31, 1999 and December 31, 1998 was $628,000. At March 31, 1999 approximately $267,000 of that amount was held by the Company's NBB affiliate. The property consists of undeveloped real estate originally intended to be a residential subdivision. The property has been held for a period in excess of five years. Three other properties are being held by the Company's BTC affiliate. With the exception of one property, which is being carried for approximately $20,000, these properties are relatively recent acquisitions and timely disposal is expected. Noninterest Income - ------------------ Noninterest income is an important source of the company's income. This category is comprised of service charges on deposit accounts, other service charges and fees, credit card fees, trust income and other income. Net securities gains and losses are also included in this category. Noninterest income for the period ended March 31, 1999 was $766,000, an increase of $100,000 or 15.02% over the same period in 1998. Service charges on deposit accounts were $261,000 at March 31, 1999, a decrease of $14,000 or 5.09% from the same period in 1998. Other service charges declined by $5,000 when March 31, 1999 and 1998 are compared. Credit card fees grew by $25,000 or 18.12% when the first three months of 1999 and 1998 are compared. Continued growth in volume was the primary cause of this increase. Trust income increased by 31.25% when compared to the first three months of 1998. Trust income is dependent on market conditions as well as the types of accounts being handled at any given point in time. The level of estate business, for example, cannot be predicted with any degree of preciseness. Other income, which is comprised of various miscellaneous types of income, increased by $32,000 for the first three months of 1999. Included in other income in 1999 was approximately $12,000 which represented a recovery of principal for a bond charged-off in prior year and $9,000 for gains on the sale of repossessed autos. Net securities gains and losses decreased $7,000 when 1999 and 1998 are compared. The income in this category reflects securities called prior to maturity. Noninterest Expense - ------------------- Noninterest expenses for the first three months of 1999 were $2,926,000, an increase of $230,000 or 8.53% over the first three months of 1998. Salaries and fringe benefits were $1,559,000 at the end of the first three months of 1999. This represents an increase of $160,000 or 11.44% over the first three months of 1998. A portion of this increase was due to the acquisition of the Galax branch. This facility was acquired in the second quarter of 1998. Accordingly, 1998 data contains no salaries expense associated with the acquisition. The remainder of the increase was due to normal merit increases and other personnel related costs. -15- Occupancy expenses increased by $11,000 or 4.47% when the first three months of 1999 and 1998 are compared. Acquisition of the previously mentioned Galax Branch contributed to this increase. Data processing expense increased by $3,000 or 1.53%. Credit card expense rose by $28,000 of 21.88% in the first three months of 1999. Increases in overall volume also contributed to this increase. Included in the category was approximately $4,000 in expense related to the reissuance of debit cards. The next scheduled reissuance will be in four years. Other expenses at March 31, 1999 were $727,000, which represents an increase of $42,000 or 6.13% over the same period in 1998. Other expenses include various types of costs. Examples of expense accounts included are telephone, franchise taxes, stationary and supplies, market expense, correspondent charges and numerous others. Some expenses included in this area represent accrued expense for anticipated expenditures, while others are on a cash or pay as incurred basis. Some categories are within management's ability to control while others can only be controlled to a degree. Balance Sheet - ------------- The following table sets forth selected consolidated balance sheet data. March 31, December 31, 1999 1998 1998 1997 ======== ========= ============ ============ ($000's) Selected Period-End Data - ------------------------ Loans, net $ 249,575 220,709 236,578 214,552 Total Securities 157,776 141,799 166,754 149,974 Total Assets 452,274 405,021 445,166 402,907 Total Deposits 388,195 344,593 382,696 344,867 Stockholders' Equity 59,287 55,367 58,503 54,029 Selected Daily Averages Data - ---------------------------- Loans, net $ 241,776 215,980 225,613 204,540 Total securities 167,674 144,285 152,432 157,179 Interest-earning assets 417,885 379,134 398,340 374,478 Total assets 442,801 401,010 420,988 395,932 Total deposits 379,511 341,736 359,970 339,439 Interest-bearing liabilities 326,942 296,789 310,634 295,565 Stockholders' equity 59,029 54,772 58,282 53,712 -16- Total average assets at March 31, 1999 were $442,801,000, an increase of $41,791,000 or 10.42% from March 31, 1998. A portion of this increase was due to the acquisition of the Galax branch in the second quarter of 1998. The Company also continues to experience satisfactory growth in deposits from nonacquisition related sources. The following table sets forth selected balance sheet caption as a percentage of total assets at the dates shown. March 31, December 31, 1999 1998 1998 1997 ========= ========= =========== =========== Assets - ------ Interest bearing deposits 3.12% 2.86% 1.58% 2.41% Federal funds sold .55% 1.57% 1.14% 1.07% Securities available for sale 28.81% 17.09% 30.57% 16.28% Securities held to maturity 6.07% 17.93% 6.89% 20.95% Mortgage loans held for sale .11% .07% .49% .10% Real estate construction loans 2.81% 2.89% 2.88% 2.11% Real estate mortgage loans 11.12% 10.73% 10.95% 10.66% Commercial and industrial loans 27.21% 25.67% 24.82% 25.16% Loans to individuals 15.14% 16.48% 15.61% 16.54% Liabilities - ----------- Noninterest bearing demand deposits 12.41% 11.79% 12.46% 11.19% Interest bearing demand deposits 18.93% 18.89% 18.94% 19.33% Savings deposits 10.57% 11.71% 10.42% 11.61% Time deposit 43.93% 42.68% 44.14% 43.47% Other borrowed funds .03% .08% .05% .12% As shown by the above table, management has shifted a substantial portion of its investment portfolio to the available for sale category. A portion of this shift was accomplished through calls, maturities of bonds and their subsequent reinvestment. In the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and hedging Activities". The statement allowed, upon adoption, the transfer of securities from the held to maturity classification to the available for sale without calling into question management's intent to hold -17- its remaining securities until maturity. The Company used this opportunity to transfer approximately $20,516,000 in securities to held for sale category. This shift will increase the Company's flexibility to deal with liquidity and interest rate sensitivity. The overall mix of loan and deposits has remained roughly the same. 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 $4,706,000 for the three months ended March 31, 1999. Net cash used in investing activities was $10,724,000 with the majority of that cash invested in securities and loans. Net cash provided by financing activities was $5,412,000. Net cash decreased $606,000 from December 31, 1998. The Company actively manages its liquidity position through its investing activities. At March 31, 1999, overnight funds which includes Federal Funds sold and funds on deposit with the Federal Home Loan Bank totaled $16,630,000. In addition, securities with a remaining maturity of less than one year totaled $33,644,000. 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 $72,427,000 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. NBB is in process of constructing a new building. This facility will provide additional office space to replace existing leased properties and also add a branch facility. This project is not expected to have a material impact on the Company's liquidity. On March 15, 1999, the Company announced a tender offer in which it sought to repurchase up to 200,000 shares of its stock at $28.00 per share. The impact of this offer is not expected to materially impact the Company's liquidity. The Year 2000 also has liquidity implications. Management is fully aware of customer apprehension associated with the Year 2000 date change. Accordingly, it is management's plan to provide for additional liquidity as part of its contingency planning processes. Please refer to the above information related to the establishment of credit facilities and the Year 2000 discussion which follows for the steps the Company is taking to allay unwarranted customer concerns. Management is not aware of any other 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. -18- Capital Resources - ----------------- Total stockholders' equity increased $784,000 or 1.34% from December 31, 1998. During the first three months of 1999, retained earnings grew by $1,679,000. Accumulated comprehensive income decreased stockholders' equity by $881,000. 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 $14,000. 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. March 31, December 31, 1999 1998 1998 1997 ========= ========= ========== ============ Consolidated Capital Ratios --------------------------- Total capital (to risk weighted assets) 22.2% 23.7% 22.4% 23.3% Tier 1 Capital (to risk weighted assets) 21.2% 22.7% 21.5% 22.3% Tier 1 capital (to average assets, leverage ratio) 13.7% 14.2% 13.4% 13.7% Tender Offer - ------------ On March 15, 1999, the Company announced a stock tender offer. The Company sought to repurchase 200,000 shares, but reserved the right to purchase up to two percent of its outstanding shares of common stock. The tender off closed on April 30, 1999. The offer resulted in the repurchase of 275,856 shares. The Company's Form 13E-4 filed March 15, 1999 and amended 13E-4 filed March 31, 1999 are incorporated herein. Selected Affiliate Bank Data - ---------------------------- The following table sets forth selected data for NBB and BTC: March 31, 1999 -------------- (000's, except for % data) NBB BTC --- --- Assets $271,482 178,216 Deposits 238,798 149,422 Shareholders Equity 30,974 27,946 Net Income 1,101 547 Return on Average Assets 1.69% 1.25% Return on Average Equity 14.51% 7.95% Tier 1 Capital Rates 15.90% 29.74% Total Risk Based Capital Rates 16.95% 30.70% Tier 1 Leverage Ratio 11.32% 15.86% -19- Year 2000 - --------- The Company recognizes the risks and challenges presented by the impact of the century date change on information processing and other microchip controlled systems. The Year 2000 ("Y2K") involves several issues for financial institutions. The Company's own internal information processing and microchip controlled systems, as well as those of its major service vendors, must be Y2K compliant. Banks face credit, earnings and liquidity risk should commercial loan customers or large depositors 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. Banks could encounter temporary funding shortages if customers withdraw unusually large sums of cash because they are unduly concerned about the effects of Y2K. And, although management believes the level of counterpart trading risk is low, there could be a temporary or permanent effect on the investment portfolio resulting from the negative impact of Y2K on the underlying entities. Both of the Company's bank subsidiaries have established Y2K project management teams that have developed Y2K plans with assessment, testing, and remediation phases. The internal audit department is conducting Y2K audits, and both banks are subject to the guidelines promulgated by the Federal Financial Institutions Examination Counsel (FFIEC) and to regular Year 2000 compliance examinations by their respective federal regulators. The assessment phase outlined in both NBB's and BTC's Y2K plans has been completed. The banks have identified all internal mission critical information technology and microchip controlled systems. Outside vendors that provide mission critical service to the institutions have also been identified. Because of their importance to daily business operations, substantial attention has been focused on the banks' customer information processing hardware and software. In 1997, in the normal course of business, NBB purchased a new Unisys host computer and peripherals and installed the latest version of its Information Technology, Inc. (ITI) software. In the last quarter of 1998, BTC converted from its previous in-house information processing system. BTC is now processed using NBB's hardware and software. The NBB system has been tested, including century date rollover and other critical dates, and validation of the ITI application is complete. Each bank has identified as mission critical independent information technology systems in their Trust Departments. NBB has successfully completed proxy testing of its external service provider, and BTC has successfully tested its internal system. Microchip controlled bank security systems are also mission critical. Testing of these systems at both banks determined that minor renovations were necessary at three offices. Those renovations are now complete. The Federal Reserve Bank of Richmond has provided comprehensive procedures and instructions for interface testing. During the first quarter of 1999, NBB and BTC successfully tested all utilized services, including wire transfer, automated clearing house and savings bonds. Both NBB and BTC deal with outside vendors that provide mission critical support for bank card processing and ATM servicing. The banks are monitoring these vendors' progress to assure their Y2K readiness. The vendors regularly provide status reports and testing criteria. In the first quarter of 1999, both BTC and NBB converted to a new ATM servicer. Testing of that application was successfully concluded. -20- Each bank has developed and implemented programs to assess the level of Y2K risk among large loan customers. NBB's Credit Review department performs a precredit analysis of all new large loans made by both banks. An assessment of the potential effects of the Year 2000 on the credit-worthiness of borrowers is a part of this analysis. BTC is asking new commercial borrowers to sign an agreement to insure compliance with minimum standards with regard to Y2K issues. That bank is also following up with these borrowers to insure that promised deadlines are met. Both NBB and BTC have also completed assessments of Year 2000 preparedness among existing large commercial loan customers. The banks have ongoing initiatives designed to educate customers about Y2K issues and to allay any unwarranted concerns about the safety and soundness of the institutions. Leaflets discussing the topic were sent to all customers, and the banks have posted information on their Web sites. NBB held a public forum directed at small businesses and has established a toll free information hotline. Employee training and awareness campaigns have been completed. Additional employee training and public education efforts are planned throughout the rest of 1999. Contingency plans have been drafted by NBB and BTC to 1) identify alternatives if mission critical applications do not meet the banks' readiness plan, and 2) develop a course of action to assure business continuity in the event there are system failures on critical dates. Both institutions are providing their Boards of Directors with regular reports on Y2K initiatives and preparedness. At this time, National Bankshares, Inc. believes that in the most likely worst-case scenarios, Y2K will not have a material effect on the Company's operations, liquidity or financial condition. Although contingency plans address multiple alternative scenarios, the Company believes it is impossible for any business to address the potentially unlimited number of possible circumstances relating to Y2K issues. Even though it is highly unlikely, National Bankshares recognizes that if its Y2K assessment, remediation or contingency plans prove to be inadequate, this could have a material impact on its operations and therefore result in a material adverse effect on the Company's results of operations and financial condition. The Company's recently completed upgrade of internal processing systems does enhance Y2K preparedness. However, the major goals of the upgrade were to provide a shared information processing system for affiliates and to provide additional processing capacity and the ability to use the most advanced version of software available. The costs of the upgrade were substantial, but the total of costs of the upgrade directly related to the Y2K component was not material. -21- Banking Terms Basis Point - a Earnings Per Share- assets. measurement unit Basic - net income, defined as one reduced by dividends on Nonperforming Assets - hundredth of one preferred stock, the sum of loans on percent; it usually divided by the average which interest income refers to an interest number of common shares is not being accrued; rate. outstanding in the restructured loans on period. which the interest Book Value Per Share - rates or terms of the value of a share of Equity Capital/Share- repayment have been common stock determined holders' Equity - a materially revised and b y d i v i d i n g balance sheet amount real estate that has shareholders' equity at that represents the been acquired through the end of a period, total investment in the foreclosure. excluding preferred corporation by holders stock, by the number of of common and preferred Rate-Sensitive Assets/ common shares stock; it includes Liabilities - earning outstanding at the end amounts added through assets and interest- of the same period. the retention of bearing liabilities earnings. that can be repriced Core Deposits - demand or replaced at a deposits, savings Interest-Bearing different interest accounts, interest Liabilities - deposits rate, within a checking accounts, and borrowed funds on specific period, due insured money market which the corporation to rate changes or a c c o u n t s a n d pays interest; includes maturity. certificates of deposit interest checking under $100,000. This accounts, money market Return on Average is a more stable source accounts, certificates Assets (ROA) - net of funds than funds of deposit, short-term income as a percentage purchased on the basis borrowings and long- of average total of rate only. term debt. assets. It is a key profitability ratio Cost of Funds - Leverage Capital that indicates how interest on deposits Ratio - the total of effectively a bank has and borrowed funds Tier 1 capital less used its total divided by the average certain intangible resources. balance of such funds. assets such as goodwill, divided by Return on Average Comprehensive Income - quarterly average Equity (ROE) - net net income plus the assets. A key income as a percentage change in unrealized regulatory capital of total average gains and losses, net requirement with the shareholders' equity. of tax, on securities minimum amount allowed Provides a measure of available for sale for of 4%. how productively a the period. bank's equity has been Net Interest Income - employed. Earning Assets - loans the difference between (net of unearned income from earning Risk-Based Assets - a income), investment assets and interest regulatory method of securities, money paid on deposits and classifying assets market investments and borrowed funds. based on their interest-bearing potential risk of deposits in other Net Interest Margin - loss, used in banks. net taxable-equivalent calculating various interest income divided capital ratios. by average earning Assets are classified -22- in one of four Tier 1 Risk-Based Capi- categories based tal Ratio - common primarily on credit shareholders' equity risk and are adjusted less certain intangible to reflect the relative assets, such as riskiness of that goodwill, divided by category. risk-based assets. Current regulatory Securities Available minimum requires that for Sale - securities at least a 4% ratio be that will be held for maintained. indefinite periods of time and that may be Total Risk-Based sold as part of the Capital Ratio - total bank's asset/liability capital divided by strategy. These risk-based assets. securities are recorded Total capital consists at their current market of common shareholders' value rather than at equity, the allowance their historical for loan losses, amortized cost. certain components of nonpermanent preferred Securities Held to stock and subordinated Maturity - securities debt less certain that the bank has the intangible assets, such ability and the intent as goodwill. Current to hold to maturity. regulatory minimum These securities are requires that at least recorded at their an 8% ratio be original cost, adjusted maintained. for amortization of premium or discount Yield on Earning Assets accretion. - total taxable- equivalent interest Spread or Interest-Rate income dividend by the Differential - the average balance of difference between the earnings assets. average interest rates received on earning assets and the average interest rates paid for interest-bearing liabilities. Taxable-Equivalent In- come - income that has been adjusted by increasing tax-exempt interest income to an equivalent pretax amount of taxable income. This adjustment allows corporations to compare the effective pretax yields on different mixes of taxable and tax-exempt assets. -23- 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 March 31, 1999 approximated $23,518,000. 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 March 31, 1999, 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. The method of analysis presented in the following table has certain inherent shortcomings. 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. In addition, loan prepayments and early withdrawals of certificates of deposit could cause the interest sensitivities to vary from those which appear on the table. The classification of securities as held to maturity or available for sale also effects rate sensitivity. Available for sale securities which may be sold can be used to adjust the Company's interest rate sensitivity position. Finally, call features in the investment portfolio can have a considerable effect. Since the call decision is dependent on interest rate levels at a future point in time, the ultimate effect on interest rate sensitivity cannot be precisely determined. A substantial number of bonds in the investment portfolio contain these features. ($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years ========= ======== ========= ========= ======== Interest-earning assets $ 65,456 20,670 43,732 155,454 139,185 Interest-bearing liabilities 179,198 36,195 74,691 42,122 --- --------- -------- -------- -------- -------- Gap (113,742) (15,525) (30,959) 113,332 139,185 ========= ======== ======== ======== ======== Cumulative gap $(113,742) (129,267) (160,226) (46,894) 92,291 ========= ======== ======== ======== ======== Cumulative gap ratio .37 .40 .45 .86 1.28 ========= ======== ======== ======== ======== -24- The Company also uses simulation analysis to forecast its balance sheet and monitor interest rate sensitivity. One test used by the Company is shock analysis, which measures the effect of a hypothetical, immediate and parallel shift in interest rates. The following table shows the results of a rate shock of 100, 200, and 300 basis points and the effects on net income and return on average assets and return on average equity at March 31, 1999. ($000's, except for percent data) Return on Return on Rate Shift Net Income Average Equity Average Assets ========== ========== ============== ============== 300 $5,215 7.63% .98% 200 5,991 8.95% 1.17% 100 6,763 10.23% 1.35% (-)100 8,527 13.11% 1.76% (-)200 9,330 14.38% 1.95% (-)300 9,629 14.90% 2.03% Simulation analysis allows the Company to test asset and liability management strategies under rising and falling rate conditions. As a part of simulation process, certain estimates and assumptions must be made dealing with, but not limited to, asset growth, the mix of assets and liabilities, rate environment, local and national economic conditions. Asset growth and the mix of assets can to a degree be influenced by management. Other areas such as the rate environment and economic factors cannot be controlled. For this reason actual results may vary materially from any particular forecast or shock analysis. This shortcoming is offset to a degree by the periodic re-forecasting of the balance sheet to reflect current trends and economic conditions. Shock analysis must also be updated periodically as a part of the asset and liability management process. -25- 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 March 31, 1999. Item 4. Submission of Matters to a Vote of Security Holders Two proposals were submitted to a vote of security holders at the Company's Annual Meeting of Stockholders held on April 13, 1999. Proposal No. 1 - Election of Directors -------------------------------------- Three Class Three Directors were elected for a term of three years each. Two Class One Directors were elected for a term of one year each. The name of each Director elected at the meeting follows: Class Three Directors Class One Directors --------------------- ------------------- Charles L. Boatwright L. Allen Bowman James A. Deskins, Sr. Cameron L. Forrester William T. Peery The name of each Director whose term of office continued after the meeting is listed: Alonzo A. Crouse Paul A. Duncan James G. Rakes Jeffrey R. Stewart The number of votes cast for and against each nominee is provided below. There were no abstaining votes and no broker non-votes. Election of Directors Director Votes For Votes Against -------- --------- ------------- Charles L. Boatwright 2,899,273 19,294 James A. Deskins, Sr. 2,909,815 8,752 William T. Peery 2,909,929 8,638 L. Allen Bowman 2,911,849 6,718 Cameron L. Forrester 2,909,932 8,635 -26- Proposal No. 2 - Approval of the 1999 Stock Option Plan ------------------------------------------------------- The 1999 Stock Option Plan, which makes available up to 250,000 shares of Common Stock for awards to key employees of the Company and its subsidiaries in the form of stock options, was approved by the stockholders. The number of shares cast for and against approval of the 1999 Stock Option Plan, and the number of votes abstaining, is listed below. There were 282,563 broker non-votes. Votes For Votes Against Votes Abstaining --------- ------------- ---------------- 2,400,281 183,336 52,387 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 March 31, 1999: -- Press release dated March 17, 1999 related to Tender Offer -- Announcement of Amendment to Tender Offer dated March 31, 1999 The aforementioned Form 8-K's are incorporated by reference. -27- 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: May 7, 1999 /s/James G. Rakes ------------- ------------------------------------- James G. Rakes, Chairman President and Chief Executive Officer Date: May 7, 1999 /s/J. Robert Buchanan ------------- ------------------------------------- J. Robert Buchanan, Treasurer (principal financial officer) -28- EX-27 2
9 THIS SCHEDULE OF FINANCIAL INFORMATION IS EXTRACTED FROM THE MARCH 31,1999 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1,000 3-MOS DEC-31-1999 MAR-31-1999 13,815 14,130 2,500 0 130,305 27,471 27,821 252,424 2,849 452,274 388,195 127 4,665 0 0 0 9,482 49,805 452,274 5,535 2,472 82 8,089 3,434 3,436 4,653 232 20 2,926 2,261 0 0 0 1,679 .44 .44 0 0 0 0 0 0 0 0 0 0 0 0
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