UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission File Number:
September 30, 1996 0-15204
NATIONAL BANKSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1375874
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(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 October 21, 1996
- ------------------------------- ---------------------------------
COMMON STOCK, $2.50 PAR VALUE 3,792,833
(This report contains 24 pages)
NATIONAL BANKSHARES, INC.
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1996
AND DECEMBER 31, 1995 4-5
CONSOLIDATED STATEMENTS OF INCOME,
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 6
CONSOLIDATED STATEMENTS OF INCOME,
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 7
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY, NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 9-10
SELECTED CONSOLIDATED FINANCIAL DATA 11-16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17-20
PART II OTHER INFORMATION
- ----------------------------
ITEMS 1 - 3 - LEGAL PROCEEDINGS; CHANGES IN
SECURITIES; DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 5 - OTHER INFORMATION 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
-2-
PART I
------
FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of National Bankshares, Inc. (NBI) and
its wholly-owned subsidiaries, 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. All financial statements
have been restated to reflect the acquisition of The Bank of Tazewell County
which was effected in the second quarter of 1996. The results of operations
for the nine months ended September 30, 1996 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 Corporation's 1995 Annual Report to
Stockholders and additional information supplied in the 1995 Form 10-K, as well
as the Form 8-K containing merger-related financial statements filed on August
10, 1996.
-3-
CONSOLIDATED BALANCE SHEETS
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
SEPTEMBER DECEMBER
($000's) 30, 1996 31, 1995
========= ========
ASSETS
Cash and due from banks $ 13,993 10,055
Federal funds sold 1,320 7,725
Securities available for sale, at fair value 69,693 75,870
Securities held to maturity (fair value
$103,427 in 1996 and $112,778 in 1995) 104,361 111,765
Mortgage loans held for sale 137 880
Loans:
Real estate construction loans 7,011 6,007
Real estate mortgage loans 44,278 45,589
Commercial and industrial loans 82,441 59,609
Loans to individuals 58,927 56,920
-------- --------
Total loans 192,657 168,125
Less unearned income on loans (2,548) (2,307)
-------- --------
Loans, net of unearned income 190,109 165,818
Less allowance for loan losses (2,588) (2,625)
-------- --------
Loans, net 187,521 163,193
-------- --------
Bank premises and equipment, net 4,826 4,679
Accrued interest receivable 3,751 3,621
Other real estate owned, net 731 762
Other assets 3,018 2,507
-------- --------
Total assets $389,351 381,057
======== ========
LIABILITIES' AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 41,820 39,816
Interest-bearing demand deposits 75,960 73,101
Savings deposits 49,414 50,548
Time deposits 168,558 166,848
-------- --------
Total deposits 335,752 330,313
-------- --------
Other borrowed money 1,462 261
Accrued interest payable 658 744
Other liabilities 981 1,585
-------- --------
Total liabilities 338,853 332,903
-------- --------
-4-
Stockholders' equity:
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 9,482 9,482
Retained earnings 41,863 38,390
Net unrealized gains (losses) on
securities available for sale (847) 282
-------- --------
Total stockholders' equity 50,498 48,154
Commitments and contingent liabilities
-------- --------
Total liabilities and
stockholders' equity $389,351 381,057
======== ========
-5-
CONSOLIDATED STATEMENTS OF INCOME
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
SEPTEMBER SEPTEMBER
($000's) 30, 1996 30, 1995
========= =========
INTEREST INCOME
Interest and fees on loans $ 12,729 11,760
Interest on federal funds sold 424 488
Interest on securities-taxable 6,731 7,309
Interest on securities-nontaxable 1,496 1,428
-------- -------
Total interest income 21,380 20,985
-------- -------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,532 1,376
Interest on other deposits 8,217 7,980
Interest on short-term borrowings 23 29
-------- -------
Total interest expense 9,772 9,385
-------- -------
Net interest income 11,608 11,600
Provision for loan losses 216 225
-------- -------
Net interest income after provision
for loan losses 11,392 11,375
-------- -------
NONINTEREST INCOME
Service charges on deposit accounts 868 731
Other service charges and fees 175 148
Credit card fees 376 330
Trust income 399 326
Other income 7 39
Realized securities gains (losses), net 6 (86)
-------- -------
Total noninterest income 1,831 1,488
-------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,711 3,550
Occupancy and furniture and fixtures 765 714
Data processing and ATM 257 293
FDIC assessment 2 429
Credit card processing 348 306
Goodwill amortization 22 22
Net costs of other real estate owned 10 85
Other operating expense 1,846 1,731
-------- -------
Total noninterest expense 6,961 7,130
-------- -------
Income before income tax expense 6,262 5,733
Income tax expense 1,708 1,489
-------- -------
Net income $ 4,554 4,244
======== =======
Net income per share $ 1.20 1.12
======== =======
-6-
CONSOLIDATED STATEMENTS OF INCOME
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
SEPTEMBER SEPTEMBER
($000's) 30, 1996 30, 1995
========= =========
INTEREST INCOME
Interest and fees on loans $ 4,439 4,063
Interest on federal funds sold 147 145
Interest on securities-taxable 2,086 2,452
Interest on securities-nontaxable 452 462
-------- -------
Total interest income 7,124 7,122
-------- -------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 509 468
Interest on other deposits 2,721 2,862
Interest on federal funds purchased 10 14
-------- -------
Total interest expense 3,240 3,344
-------- -------
Net interest income 3,884 3,778
Provision for loan losses 106 93
-------- -------
Net interest income after provision
for loan losses 3,778 3,685
-------- -------
NONINTEREST INCOME
Service charges on deposit accounts 309 246
Other service charges and fees 52 55
Credit card fees 131 109
Trust income 139 117
Other income 2 5
Realized securities gains (losses), net 2 5
-------- -------
Total noninterest income 635 537
-------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 1,247 1,191
Occupancy and furniture and fixtures 256 268
Data processing and ATM 82 52
FDIC assessment 1 62
Credit card processing 128 104
Goodwill amortization 7 (9)
Net costs of other real estate owned 4 78
Other operating expense 556 603
-------- -------
Total noninterest expense 2,281 2,349
-------- -------
Income before income tax expense 2,132 1,873
Income tax expense 567 493
-------- -------
Net income $ 1,565 1,380
======== =======
Net income per share $ 0.41 0.36
======== =======
-7-
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NET
UNREALIZED
GAINS
(LOSSES) ON
SECURITIES
COMMON RETAINED AVAILABLE
($000's) STOCK SURPLUS EARNINGS FOR SALE TOTAL
====== ======= ======== =========== ========
Balances, December 31,
1994 as previously
reported $ 4,285 1,187 14,791 (126) 20,137
.11129 for one stock
split, 190,472
additional shares issued 476 (476) --- --- ---
Adjustment in connection
with pooling of interests 4,721 (711) 20,136 (1,625) 22,521
------- ------ ------ ------ ------
Balances, December 31,
1994 as restated $ 9,482 --- 34,927 (1,751) 42,658
Net income --- --- 4,244 --- 4,244
Cash dividends --- --- (986) --- (986)
Change in net unrealized
gains on securities
available for sale, net
of income taxes of $698 --- --- --- 1,354 1,354
------- ------ ------ ------ ------
Balances, September 30, 1995 $ 9,482 --- 38,185 (397) 47,270
======= ====== ====== ====== ======
Balances, December 31,
1995 as previously
reported $ 4,285 1,187 16,967 115 22,554
.11129 for one stock
split, 190,472
additional shares issued 476 (476) --- --- ---
Adjustment in connection
with pooling of interests 4,721 (711) 21,423 167 25,600
------- ------ ------ ------ ------
Balances, December 31,
1995 as restated $ 9,482 --- 38,390 282 48,154
Net income --- --- 4,554 --- 4,554
Cash dividends --- --- (1,081) --- (1,081)
Change in net unrealized
gains on securities
available for sale, net
of income tax benefit of
$582 --- --- --- (1,129) (1,129)
------- ------ ------- ------ ------
Balances, September 30, 1996 $ 9,482 --- 41,863 (847) 50,498
======= ====== ======= ====== ======
-8-
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
SEPTEMBER SEPTEMBER
($000's) 30, 1996 30, 1995
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,554 4,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes 582 (119)
Provision for loan losses 216 225
Provision for bond losses --- 90
Depreciation of bank premises and equipment 351 412
Amortization of intangibles 22 116
Write-offs of other real estate --- 50
Amortization of premiums and accretion of
discounts, net 39 (33)
Gains on bank premises and equipment
disposals --- (8)
Losses on sale of other real estate 2 ---
Gains on maturities of securities available
for sale, net (4) (2)
Gains on calls and maturities of securities
held to maturity, net --- (2)
Net increase in mortgage loans held for sale 743 (926)
(Increase) decrease in:
Accrued interest receivable (130) (161)
Other assets (511) 759
Increase (decrease) in:
Accrued interest payable (862) 97
Other liabilities (86) (335)
------- -------
Net cash provided by operating
activities $ 4,916 4,407
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold 6,405 (3,335)
Proceeds from calls and maturities of securities
available for sale 13,860 5,540
Proceeds from calls and maturities of securities
held to maturity 35,830 19,414
Purchases of securities available for sale (9,397) (7,816)
Purchases of securities held to maturity (28,457) (15,778)
Net increase in loans made to customers (24,433) (6,651)
Proceeds from disposal of other real estate owned 29 88
Recoveries on loans charged-off 111 62
Bank premises and equipment expenditures 3 9
Proceeds from sale of bank premises and equipment (587) (324)
------- -------
Net cash used in investing
activities (6,636) (8,791)
------- -------
-9-
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in time deposits 1,710 9,940
Net increase (decrease) in other deposits 3,728 (3,806)
Other borrowed money 1,301 528
Cash dividends paid (1,081) (986)
------- -------
Net cash provided by financing
activities 5,658 5,676
------- -------
Net increase in cash and due from banks 3,938 1,292
Cash and due from banks at beginning of year 10,055 11,409
------- -------
Cash and due from banks at end of nine months $13,993 12,701
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Unrealized gains/losses in securities available
for sale (gross) $(1,283) (602)
Deferred taxes 436 205
------- -------
Net unrealized gains (losses) on securities
available for sale $ (847) (397)
======= =======
Loans charged to the allowance for loan losses $ 364 180
======= =======
Interest paid $ 9,858 9,288
======= =======
-10-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED
FINANCIAL DATA
SEPTEMBER 30, DECEMBER 31,
($000s except for % data) 1996 1995 1995
======== ======== ============
Selected Ratios and Per Share Data:
----------------------------------
Net income $ 4,554 4,244 5,525
Return on average assets 1.57 1.51 1.44
Return on average equity 12.45 12.60 11.70
Net income per share 1.20 1.12 1.46
Book value per share 13.31 12.46 12.70
Selected Balance Sheet Data:
---------------------------
Securities $174,054 184,283 187,635
Loans, net 187,521 162,680 163,193
Total assets 389,351 384,168 381,057
Total deposits 335,752 333,820 330,313
Stockholders' equity 50,498 47,270 48,154
-11-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
SELECTED BALANCE SHEET
DAILY AVERAGES
SEPTEMBER SEPTEMBER
($000's) 30, 1996 30, 1995
========= ============
Federal funds sold $ 9,800 11,210
Securities 179,202 183,947
Loans, net (1) 175,065 159,880
Total assets 386,821 376,905
Noninterest-bearing deposits 41,604 37,009
Interest-bearing deposits 293,666 292,415
Stockholders' equity 48,898 45,044
(1) Total includes mortgage loans held for sale
-12-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
AVERAGE BALANCES AND INTEREST RATES
($000 except for % data) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 DECEMBER 31, 1995
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST(1) BALANCE COST(1) BALANCE COST(1)
======= ======= ======= ======= ======= =======
Interest-earning assets $365,350 8.14% 355,037 8.21% 360,563 8.11%
Interest-bearing
liabilities 294,175 4.44% 293,072 4.28% 293,700 4.33%
------ ------ ------
Net interest spread 3.70% 3.93% 3.78%
====== ====== ======
Net interest margin 4.55% 4.68% 4.59%
====== ====== ======
(1) Fully taxable equivalent basis. Yields on securities held for sale included in these yields are
calculated based on historical cost.
-13-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
LOAN LOSS DATA
For the periods ended
SEPTEMBER SEPTEMBER DECEMBER 31,
($000's except for % data) 30, 1996 30, 1995 1995
========= ========= ============
Balance at beginning of period $ 2,625 2,551 2,551
Provision 216 225 282
Loans charged-off (364) (180) (291)
Recoveries 111 62 83
-------- ------- ------
Balance at end of period $ 2,588 2,658 2,625
======== ======= ======
Ratio of allowance for loan
losses to loans net of
unearned income 1.36% 1.61% 1.58%
======== ======= ======
Ratio of net charge-offs to
average loans net of unearned
income (1) .19% .10% .13%
======== ======= ======
Ratio of allowance for loan
losses to nonperforming loans
(2) 270.4% 182.6% 365.6%
======== ======= ======
(1) Net charge-offs are on an annualized basis.
(2) Bankshares defines nonperforming loans as total nonaccrual and restructured
loans. Excluded are loans 90 days past due and still accruing.
-14-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
NONPERFORMING ASSETS, PAST DUE AND IMPAIRED LOANS
SEPTEMBER DECEMBER 31, SEPTEMBER
($000's except for % data) 30, 1996 1995 30, 1995
========= ============ =========
Nonperforming Assets
-------------------
Nonaccrual loans $ 991 933 719
Restructured loans --- --- ---
------- ------ ------
Total nonperforming loans 991 933 719
------- ------ ------
Foreclosed property 731 762 979
Other repossessed property 6 11 19
------- ------ ------
Total foreclosed and
repossessed properties 737 773 998
------- ------ ------
Total nonperforming assets $ 1,728 1,706 1,717
======= ====== ======
Ratio of nonperforming assets to
loans net of unearned income and
foreclosed/repossessed assets .90% .90% 1.02%
======= ====== ======
Accruing Loans Past Due 90 Days or More
---------------------------------------
Past due 90 days or more and
still accruing (1) $ 329 574 737
======= ====== ======
Ratio of loans past due 90
days or more to loans, net
of unearned income (1) .17% .35% 0.45%
======= ====== ======
Impaired Loans
--------------
Total impaired loans $ 1,053 1,035 1,480
======= ====== ======
Impaired loans with a
valuation allowance 736 690 1,211
Valuation allowance (655) (345) (792)
------- ------ ------
Impaired loans net of allowance 81 345 419
======= ====== ======
Impaired loans with no
valuation allowance 317 690 269
======= ====== ======
Average recorded investment
in impaired loans 1,036 1,288 1,424
======= ====== ======
Income recognized on impaired loans 18 47 47
======= ====== ======
Amount of income recognized
on a cash basis --- 5 11
======= ====== ======
(1) Calculated ratios exclude impaired debt securities for all periods shown.
-15-
Business Combination
- --------------------
On June 1, 1996, NBI issued 1,888,209 shares of its common stock in a one
for one exchange for all the outstanding common stock of the Bank of Tazewell
County, Tazewell Virginia. This business combination has been accounted for as
a pooling-of-interest combination and, accordingly, the consolidated financial
statements for the periods prior to the combination have been restated to
include the accounts and results of operations of the Bank of Tazewell County.
There were no adjustments of a material amount resulting from Bank of Tazewell
County's adoption of NBI accounting policies.
In May 1996, NBI declared a stock split of .11129 per share effected in
the form of a stock split to the holders of NBI common stock just prior to the
merger effective date to facilitate the one-for-one common stock exchange
ratio. All stockholders' equity accounts, share and per share data have been
adjusted retroactively to reflect the stock split.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying financial statements are
summarized below:
Nine Months Years Ended
Ended December 31,
($000's) September
30, 1996 1995 1994
============= ====== ======
Revenues:
National Bankshares, Inc. $14,072 17,448 16,169
Bank of Tazewell County 9,139 12,846 11,941
------- ------ ------
Combined $23,211 30,294 28,110
======= ====== ======
Net Income:
National Bankshares, Inc. $ 2,921 3,256 2,916
Bank of Tazewell County 1,633 2,269 2,387
------- ------ ------
Combined $ 4,554 5,525 5,303
======= ====== ======
-16-
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to set forth information about National
Bankshares, Inc. (NBI) financial condition and results of operations which is
not otherwise apparent from the consolidated financial statements and other
information included in this report. Reference should be to the financial
statements and other information included in this report.
Results of Operations
- ---------------------
Net income for the nine months ended September 30, 1996 was $4,554,000
which represents an increase of $310,000 or 7.30% over the first nine months of
1995. The improvement in net income was also reflected by the return on
average assets which was 1.57% and 1.51% for the periods ended September 30,
1996 and September 30, 1995. The return on average equity declined slightly
due to the rising level of internally generated capital.
Earnings per share at the end of the third quarter of 1996 was $1.20 per
share, an increase of $0.08 per share over the third quarter of 1995.
The overall improvement shown in 1996 was primarily due to a substantial
increase in service charges on deposit accounts coupled with a reduction in
federal deposit insurance expense.
Net Interest Income
- -------------------
Net interest income for the first nine months of 1996 remained virtually
unchanged when compared to the same period in 1995. Underlying this result
were changes in asset mix, the yield on interest-earning assets and funding
costs. These changes produced a seven basis point decline in the yield on
interest-earning assets. The cost to fund interest-earning assets rose by six
basis points due to the rising rate environment. The combined result was a
thirteen basis point drop in the net interest margin.
This erosion in the net interest margin is expected to continue if
increases in interest rates occur. However, this will be offset to some extent
by the repricing assets and by growth in interest-earning assets, particularly
loans. Any decline in the net interest margin will be further tempered by
NBI's excess liquidity position which permits it to take a less aggressive
deposit rate posture in the marketplace.
As the course of interest rates is largely unknown, the extent of any
further decrease in the net interest margin cannot be determined.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the period ended September 30, 1996 was
$216,000, a decrease of $9,000 from the same period the previous year.
Management, based on information currently available, anticipates that only
nominal provisions will be made in order to prevent any deterioration in the
ratio of the allowance for loan losses to loans net of unearned income
resulting from loan charge-offs and/or loan portfolio growth.
-17-
Noninterest Income
- ------------------
Noninterest income at the end of the third quarter of 1996 was $1,831,000
an increase of $343,000 or 23.1% over the same period the previous year.
Service charges on deposit accounts rose by $137,000 or 18.7% and was the
result of improved performance in both of NBI's affiliates. Other service
charges, credit card fees and trust income improved steadily with the increased
level of business. Realized securities losses were $86,000 in 1995 with
securities gains of $6,000 in 1996.
Noninterest Expenses
- --------------------
Noninterest expenses at the end of the first nine months of 1996 were
$6,961,000, a decrease of $169,000 or 2.4% from the same period in 1995.
Salaries and employee benefits increased $161,000 or 4.5% with the remainder of
the categories also experiencing routine increases, except for deposit
insurance. In September of 1995, the Bank Insurance Fund announced that the
mandate insurance fund level had been reached, which prompted premiums to be
reduced to nominal amounts. NBI's affiliates qualified for the minimum premium
of $2,000 per bank per year.
In October 1996, The Deposit Insurance Fund Act of 1996 became law. It
provided that banks that had acquired certain failed savings and loan
associations deposits pay a one time special assessment. While NBI was not
affected by that assessment, all banks including NBI's affiliates will be
required to participate in the funding of interest costs for bonds, issued as a
part of the savings and loan bailout in the 1980's.
Assessments for this purpose will begin in 1997 and continue until years
2018-2019 when the bonds mature, ending the assessment.
Precise rates are not presently available, hence, NBI cannot determine its
exact future costs. Management, based upon information available to it,
believes the annual liability will range from $40,000 to $100,000 annually
based on current deposit levels. Since future deposit growth attained by
either normal growth of existing affiliates or new acquisitions is unknown, the
ultimate liability over the covered period cannot be accurately determined. It
is not anticipated that the overall effect of this legislation will have a
material impact on NBI in any year the assessment is in effect.
Balance Sheet
- -------------
Total assets at the end of the first nine months of 1996 increased 2.2%
from December 31, 1995. Deposits during this period grew 1.6%. Noninterest-
bearing deposits grew by 5.0%, and interest-bearing deposits by 1.2%. Savings
deposits declined by 2.2% due to the higher rates offered for time deposits.
Asset Quality
- -------------
Nonperforming loans, which include nonaccrual loans and restructured loans
but exclude loans past due 90 days or more and still accruing, totaled $991,000
at September 30, 1996 and $933,000 and $719,000 at December 31, 1995 and
September 30, 1995, respectively. Total foreclosed properties and other
repossessed property which totaled $737,000 at September 30, 1996 have remained
essentially unchanged. The overall composition of nonperforming assets at
-18-
September 30, 1996 did not change materially from December 31, 1995. The ratio
of net charge-offs to loans net of unearned income was .19% at September 30,
1996. At year-end December 31, 1995, the ratio was .13% and .10% for the
period ended September 30, 1995. While on an annualized basis net charge-offs
year-to-date 1996 are higher than those disclosed at December 31, 1995,
management, based on information currently available, does not believe this
slight uptick is the beginning of a significant downward trend in asset
quality.
While asset quality trend is generally favorable at present, management
cannot predict the duration of such as it can be affected by changes in local
and national economic conditions, the future 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 from operating activities was $4,916,000. Net cash used in investing
activities was $6,636,000 with the majority of that cash invested in securities
and loans. Net cash from financing activities was $5,658,000 due to an
increase in other deposits. Cash and due from banks increased $3,938,000 in
1996 as result of the net effect of the aforementioned activities.
Management is not aware of any trend, commitment or events that will
result in or that are reasonably likely to result in a material increase or
decrease in liquidity. The merger discussed below had a positive impact on
NBI's liquidity.
Capital Resources and Stockholder Information
- ---------------------------------------------
Total stockholder equity increased $2,344,000 or 4.9% from December 31,
1995. The following table sets forth various ratios that bank capital is
measured. NBI continues to be well capitalized.
September December 31, September
30, 1996 1995 30, 1995
========= ============ =========
Capital Ratios
--------------
Common stockholders' equity 12.97% 12.65% 12.30%
Regulatory capital 13.49% 12.91% 12.73%
Risk weighted capital:
Tier 1 22.26% 23.53% 23.34%
Tier 2 23.41% 24.78% 24.54%
Leverage ratio 13.07% 12.39% 12.38%
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Accounting Considerations
- -------------------------
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
SFAS No. 121 requires companies to review long-lived assets and certain
identifiable intangibles to be held, used or disposed of for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The adoption of this statement as of
January 1, 1996 did not have a significant effect on NBI's consolidated
financial statements.
Merger
- ------
In August of 1995, NBI and the Bank of Tazewell County (BTC) entered into
an affiliation agreement whereby NBI and BTC would merge. Stockholders of NBI
would receive an additional .11129 share of common stock for each of their
shares, and stockholders of BTC would receive one share of NBI's common stock
for each of their shares.
The merger became effective after the close of business May 31, 1996.
Information contained in the company's Form 8-k filings listed in Part II Item
6(b) are incorporated by reference herein.
Third Quarter 1996 vs. 1995
- ---------------------------
Net Income
----------
Net Income for the third quarter of 1996 was $1,565,000 an increase of
$185,000 or 13.4% over the third quarter of 1995. Earnings per share was
$0.41 and $0.36 for the third quarter of 1996 and 1995, respectively.
Net Interest Income
-------------------
Net interest income increased by $106,000 or 2.9% over the third quarter
of 1995. The improvement was the result of reductions in interest
expense.
Noninterest Income
------------------
Noninterest income for the three months ended September 30, 1996 was
$635,000 which represents a $98,000 or 18.2% increase over the same
quarter in 1995. Increases in service charges on deposits, credit card
fees and trust income accounted for the majority of the overall increase
and were due to general increase in business activity.
Noninterest Expense
-------------------
Noninterest expense was down $68,000 from the third quarter of 1995. This
decrease was primarily attributable to reduction in deposit insurance
expense.
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NATIONAL BANKSHARES, INC.
PART II
OTHER INFORMATION
Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior
Securities
None for the period ended
September 30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
None for the period ended
September 30, 1996.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) 8-K Merger-related Financial Statements August 10, 1996
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NATIONAL BANKSHARES, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bankshares, Inc.
(Registrant)
Date:
--------------- -----------------------------
James G. Rakes, President and
Chief Executive Officer
Date:
--------------- -----------------------------
Joan C. Nelson, Treasurer
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