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, 1997 0-15204
National Bankshares, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (540)552-2011
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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, 1997
- ------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,792,833
(This report contains 25 pages)
National Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Page
----
Part I Financial Information
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Item 1 - Financial Statements
Consolidated Balance Sheets, June 30, 1997
and December 31, 1996 4-5
Consolidated Statements of Income, Six
Months Ended June 30, 1997 and 1996 6
Consolidated Statements of Income,
Three Months Ended June 30, 1997 and 1996 7
Consolidated Statements of Changes in
Stockholders' Equity, Six Months Ended
June 30, 1997 and 1996 8
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 9-10
Selected Consolidated Financial Data 11-16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
Part II Other Information
- ----------------------------
Items 1 - 3 - Legal Proceedings; Changes in
Securities; Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of
Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
National Bankshares, Inc. and Subsidiaries
Part I
------
Financial Information
---------------------
Item 1. Financial Statements
The consolidated financial statements of National Bankshares, Inc. (Bankshares)
and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and
Bank of Tazewell County (BTC), (the Company), conform to generally accepted
accounting principles and to general practices within the banking industry.
The accompanying interim period consolidated financial statements are
unaudited; however, in the opinion of management, all adjustments consisting of
normal recurring adjustments which are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the six months ended June 30, 1997 are not necessarily
indicative of results of operations for the full year or any other interim
period. The interim period consolidated financial statements and financial
information included herein should be read in conjunction with the notes to
consolidated financial statements included in the Company's 1996 Annual Report
to Stockholders and additional information supplied in the 1996 Form 10-K.
-3-
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
(Unaudited)
June 30, December 31,
($000's, except share and per share data) 1997 1996
========= ============
Assets
Cash and due from banks $ 12,838 9,989
Interest-bearing deposits 2,837 91
Federal funds sold --- 1,910
Securities available for sale 60,684 62,534
Securities held to maturity (fair value
$97,186 in 1997 and $108,755 in 1996) 97,176 108,710
Mortgage loans held for sale 215 516
Loans:
Real estate construction loans 10,226 6,295
Real estate mortgage loans 43,318 43,917
Commercial and industrial loans 96,934 87,519
Loans to individuals 63,131 60,991
-------- -------
Total loans 213,609 198,722
Less unearned income and deferred fees (2,537) (2,549)
-------- -------
Loans, net of unearned income and
deferred fees 211,072 196,173
Less allowance for loan losses (2,438) (2,575)
-------- -------
Loans, net 208,634 193,598
-------- -------
Bank premises and equipment, net 5,124 5,037
Accrued interest receivable 3,529 3,510
Other real estate owned, net 447 474
Other assets 2,474 2,481
-------- -------
Total assets $393,958 388,850
======== =======
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 44,786 44,096
Interest-bearing demand deposits 74,312 73,804
Savings deposits 47,847 48,164
Time deposits 170,624 168,520
-------- -------
Total deposits 337,569 334,584
-------- -------
Other borrowed funds 1,384 627
Accrued interest payable 668 700
Other liabilities 919 1,495
-------- -------
Total liabilities 340,540 337,406
-------- -------
Common stock subject to ESOP put option 1,893 1,643
-------- -------
-4-
Stockholders' equity:
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and
outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 shares 9,482 9,482
Retained earnings 44,160 42,210
Net unrealized losses on securities available
for sale (224) (248)
Common stock subject to ESOP put option (1,893) (1,643)
-------- -------
Total stockholders' equity 51,525 49,801
Commitments and contingent liabilities --- ---
-------- -------
Total liabilities and
stockholders' equity $393,958 388,850
======== =======
-5-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1996
(Unaudited)
June 30, June 30,
($000's, except per share data) 1997 1996
========= =========
Interest Income
Interest and fees on loans $ 9,422 8,290
Interest on interest-bearing deposits 81 7
Interest on federal funds sold 231 270
Interest on securities - taxable 3,983 4,645
Interest on securities - nontaxable 918 1,044
------- ------
Total interest income 14,635 14,256
------- ------
Interest Expense
Interest on time deposits of $100,000 or more 1,103 1,023
Interest on other deposits 5,317 5,496
Interest on borrowed funds 31 13
------- ------
Total interest expense 6,451 6,532
------- ------
Net interest income 8,184 7,724
Provision for loan losses 209 110
------- ------
Net interest income after provision
for loan losses 7,975 7,614
------- ------
Noninterest Income
Service charges on deposit accounts 561 559
Other service charges and fees 135 123
Credit card fees 288 260
Trust income 380 245
Other income 12 5
Realized securities gains 14 4
------- ------
Total noninterest income 1,390 1,196
------- ------
Noninterest Expense
Salaries and employee benefits 2,702 2,464
Occupancy and furniture and fixtures 569 509
Data processing and ATM 169 175
FDIC assessment 14 1
Credit card processing 271 220
Goodwill amortization 15 15
Net costs of other real estate owned 2 6
Other operating expense 1,210 1,290
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Total noninterest expense 4,952 4,680
------- ------
Income before income tax expense 4,413 4,130
Income tax expense 1,212 1,141
------- ------
Net income $ 3,201 2,989
======= ======
Net income per share $ 0.84 0.79
======= ======
-6-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended June 30, 1997 and 1996
(Unaudited)
June 30, June 30,
($000's, except per share data) 1997 1996
========= =========
Interest Income
Interest and fees on loans $ 4,820 4,308
Interest on interest-bearing deposits 61 7
Interest on federal funds sold 149 107
Interest on securities - taxable 1,985 2,306
Interest on securities - nontaxable 455 543
------- ------
Total interest income 7,470 7,271
------- ------
Interest Expense
Interest on time deposits of $100,000 or more 570 508
Interest on other deposits 2,674 2,734
Interest on borrowed funds 6 8
------- ------
Total interest expense 3,250 3,250
------- ------
Net interest income 4,220 4,021
Provision for loan losses 100 65
------- ------
Net interest income after provision
for loan losses 4,120 3,956
------- ------
Noninterest Income
Service charges on deposit accounts 283 301
Other service charges and fees 51 68
Credit card fees 168 150
Trust income 198 113
Other income 6 3
Realized securities gains 6 ---
------- ------
Total noninterest income 712 635
------- ------
Noninterest Expense
Salaries and employee benefits 1,330 1,262
Occupancy and furniture and fixtures 325 246
Data processing and ATM 95 96
FDIC assessment 11 1
Credit card processing 151 123
Goodwill amortization 8 7
Net costs of other real estate owned 1 3
Other operating expense 590 654
------- ------
Total noninterest expense 2,511 2,392
------
-------
Income before income tax expense 2,321 2,199
Income tax expense 650 605
------- ------
Net income $ 1,671 1,594
======= ======
Net income per share $ 0.44 0.42
======= ======
-7-
National Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 1997 and 1996
(Unaudited)
Net
Unrealized
Gains Common
(Losses) Stock
on Subject
Securities To ESOP
($000's, except per Common Retained Available Put
share data) Stock Earnings For Sale Option Total
====== ========= ========== ====== =====
Balances, December 31,
1995 $9,482 38,390 282 --- 48,154
Net income --- 2,989 --- --- 2,989
Cash dividends ($.30 per
share) --- (572) --- --- (572)
Cash dividends of BTC
prior to merger --- (510) --- --- (510)
Change in net unrealized
gains (losses) on
securities available
for sale, net of income
tax benefit of $750 --- --- (1,456) --- (1,456)
------ ------ ------ ------ ------
Balances, June 30, 1996 $9,482 40,297 (1,174) --- 48,605
====== ====== ====== ====== ======
Balances, December 31,
1996 $9,482 42,210 (248) (1,643) 49,801
Net income --- 3,201 --- --- 3,201
Cash dividend ($.33 per
share) --- (1,251) --- --- (1,251)
Change in net unrealized
gains (losses) on
securities available
for sale, net of income
tax expense of $12 --- --- 24 --- 24
Change in common stock
subject to ESOP put
option --- --- --- (250) (250)
------ ------ ------ ------ ------
Balances, June 30, 1997 $9,482 44,160 (224) (1,893) 51,525
====== ====== ====== ====== ======
-8-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
(Unaudited)
June 30, June 30,
($000's) 1997 1996
========= =========
Cash Flows From Operating Activities
Net Income $ 3,201 2,989
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 209 110
Provision for deferred income taxes (127) (146)
Depreciation of bank premises and equipment 265 252
Amortization of intangibles 29 15
Amortization of premiums and accretion of
discounts, net (11) 9
Gains on bank premises and equipment
disposals (2) ---
Losses on sales and calls of securities
available for sale, net --- 4
Gains on calls of securities held to
maturity, net (14) ---
Net (increase) decrease in mortgage loans
held for sale 301 (46)
(Increase) decrease in:
Accrued interest receivable (19) (168)
Other assets 93 281
Increase (decrease) in:
Accrued interest payable (32) (81)
Other liabilities (576) (966)
------- ------
Net cash provided by operating
activities 3,317 2,253
------- ------
Cash Flows From Investing Activities
Net (increase) decrease in federal funds sold 1,910 (225)
Net (increase) decrease in interest-bearing
deposits (2,746) (151)
Proceeds from calls and maturities of securities
available for sale 4,741 8,036
Proceeds from calls and maturities of securities
held to maturity 18,370 22,953
Purchases of securities available for sale (2,852) (6,708)
Purchases of securities held to maturity (6,816) (13,206)
Purchases of loan participations (1,149) (4,496)
Collections of loan participations 1,070 484
Net (increase) decrease in loans made to
customers (15,222) (13,614)
Proceeds from disposal of other real estate owned 29 21
Recoveries on loans charged off 56 31
Bank premises and equipment expenditures (350) (228)
Proceeds from sale of bank premises and equipment --- 3
------- ------
Net cash used in investing
activities (2,959) (7,100)
------- ------
-9-
Cash Flows From Financing Activities
Net increase (decrease) in time deposits 2,104 330
Net increase (decrease) in other deposits 881 5,830
Net increase (decrease) in other borrowed funds 757 918
Cash dividends paid (1,251) (1,082)
------- ------
Net cash provided by financing
activities 2,491 5,996
------- ------
Net increase (decrease) in cash and due from
banks 2,849 1,149
Cash and due from banks at beginning of period 9,989 10,041
------- ------
Cash and due from banks at end of period $12,838 11,190
======= ======
Supplemental Cash Flow Information
Unrealized gains (losses) in securities available
for sale (gross) $ (339) (1,779)
Deferred income tax benefit 115 605
------- ------
Net unrealized gains (losses) on securities
available for sale $ (224) (1,174)
======= ======
Loans charged to the allowance for loan losses $ 402 191
======= ======
Interest paid $ 6,483 6,613
======= ======
Cash paid for income taxes $ 1,585 989
======= ======
-10-
National Bankshares, Inc. and Subsidiaries
Selected Balance Sheet Data
June 30, December 31,
($000's) 1997 1996
========= ============
Selected Data at Period-end
Loans, net $208,634 193,598
Total securities 157,860 171,244
Total assets 393,958 388,850
Total deposits 337,569 334,584
Stockholders' equity 51,525 49,801
Selected Data Daily Averages
Loans, net $198,482 177,419
Total securities 160,822 177,403
Total assets 392,171 388,045
Total deposits 336,150 335,938
Stockholders' equity 50,779 49,459
-11-
National Bankshares, Inc. and Subsidiaries
Selected Income Statement Data
For the periods ended
June 30, December 31,
($000's, except per share data) 1997 1996 1996
====== ====== ============
Selected Income Statement Data
Interest income $14,635 14,256 28,647
Interest expense 6,451 6,532 13,036
Net interest income 8,184 7,724 15,611
Provision for loan losses 209 110 331
Noninterest income 1,390 1,196 2,693
Noninterest expense 4,952 4,680 9,515
Income taxes 1,212 1,141 2,341
Net income 3,201 2,989 6,117
Selected Ratios and Per Share Data
Return on average assets 1.65% 1.55% 1.58%
Return on average equity 12.29% 12.29% 12.37%
Net income per share $ 0.84 0.79 1.61
Book value per share 14.08 12.81 13.56
Note - Return on average equity and book value per share has been computed
including common stock subject to ESOP put option as a part of
stockholders' equity. At June 30, 1997 and December 31, 1996, the
return on average equity and book value per share, excluding the common
stock subject to ESOP put option from stockholders' equity, were 12.71%
and 12.74%, and $13.85 and $13.36, respectively.
-12-
National Bankshares, Inc. and Subsidiaries
Average Balances and Interest Rates
For the periods ended
June 30, 1997 June 30, 1996 December 31, 1996
Average Yield/ Average Yield/ Average Yield/
($000's) Balance Cost Balance Cost Balance Cost
======= ======= ======= ======= ======= =======
Interest-earning
assets(1) $370,857 8.25% 367,910 8.09% 364,575 8.16%
Interest-bearing
liabilities 294,720 4.41% 294,738 4.44% 294,374 4.43%
----- ----- -----
Net interest spread 3.84% 3.65% 3.73%
===== ===== =====
Net interest margin 4.74% 4.53% 4.59%
===== ===== =====
(1) The yield on interest earning assets is shown on a fully tax equivalent basis.
-13-
National Bankshares, Inc. and Subsidiaries
Interest Rate Sensitivity
($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years
========= ======== ========= ========= ========
Interest-earning
assets $ 71,865 21,155 46,695 149,771 80,060
Interest-bearing
liabilities 160,490 33,409 57,195 42,509 564
Gap (88,625) (12,254) (10,500) 107,262 79,496
Cumulative gap (88,625) (100,879) (111,379) (4,117) 75,379
NOTE: Data shown reflects the earliest of the next repricing
opportunity or maturity.
-14-
National Bankshares, Inc. and Subsidiaries
Loan Loss Data
For the periods ended
June 30, June 30, December 31,
($000's) 1997 1996 1996
========= ========= ============
Balance at beginning of period $ 2,575 2,625 2,625
Provision for loan losses 209 110 331
Loans charged off (402) (191) (506)
Recoveries 56 31 125
------- ------ ------
Balance at end of period $ 2,438 2,575 2,575
======= ====== ======
Ratio of allowance for loan
losses to loans, net of
unearned income and deferred
fees 1.16% 1.40% 1.31%
======= ====== ======
Ratio of net charge-offs to
average loans, net of
unearned income and deferred
fees (1) .35% .18% .21%
======= ====== ======
Ratio of allowance for loan
losses to nonperforming loans
(2) 679.11% 368.90% 418.02%
======= ====== ======
(1) Net charge-offs are calculated on an annualized basis.
(2) The Company defines nonperforming loans as total nonaccrual and
restructured loans. Loans 90 days past due and still accruing are
excluded from nonperforming loans.
-15-
National Bankshares, Inc. and Subsidiaries
Nonperforming Assets, Past Due Loans and Impaired Loans
June 30, June 30, December 31,
($000's) 1997 1996 1996
========= ========= ============
Nonperforming Assets
Nonaccrual loans $ 359 698 616
Restructured loans --- --- ---
------ ------ ------
Total nonperforming loans 359 698 616
------ ------ ------
Nonaccrual securities
(Net of valuation allowance) --- 215 80
Foreclosed property 447 741 474
Other repossessed property --- 17 27
------ ------ ------
Total foreclosed and
repossessed properties 447 758 501
------ ------ ------
Total nonperforming assets $ 806 1,671 1,197
====== ====== ======
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees and foreclosed/
repossessed assets .21% .79% .57%
====== ====== ======
Accruing Loans Past Due 90 Days or More
Past due 90 days or more and
still accruing $ 504 436 458
====== ====== ======
Ratio of loans past due 90 days or
more to loans, net of unearned
income and deferred fees .24% .24% .23%
====== ====== ======
Impaired Loans
Total impaired loans $ 464 786 725
====== ====== ======
Impaired loans with a
valuation allowance $ 188 376 371
Valuation allowance (106) (294) (290)
------ ------ ------
Impaired loans, net of allowance $ 82 82 81
====== ====== ======
Impaired loans with no
valuation allowance $ 276 410 354
====== ====== ======
Average recorded investment
in impaired loans $ 551 812 800
====== ====== ======
Income recognized on impaired loans $ 6 16 33
====== ====== ======
Amount of income recognized
on a cash basis $ 6 --- 23
====== ====== ======
-16-
National Bankshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The purpose of this discussion is to set forth information about the
financial condition and results of operations of National Bankshares, Inc. and
its wholly-owned subsidiaries (the Company), which are not otherwise apparent
from the consolidated financial statements and other information included in
this report. Reference should be made to the financial statements and other
information included in this report as well as the 1996 Annual Report and Form
10-K for an understanding of the following discussion and analysis.
Results of Operations 1997 vs 1996
- -------------------------------------
Net Income for the six months ended June 30, 1997 was $3,201,000 which
represents an increase of $212,000 or 7.09% over the first six months of 1996.
The return on average assets as of June 30, 1997 and June 30, 1996 were 1.65%
and 1.55%, respectively. The return on average equity was 12.71% and 12.29% at
June 30, 1997 and 1996, respectively.
Earnings per share at the end of the second quarter was $0.84 per share,
an increase of $0.05 per share over the second quarter of 1996.
The overall improvement in performance was attributable to continued loan
growth. Noninterest expense categories reflected controlled increases. Income
tax expense increased as a result of the higher level of taxable income.
Net Interest Income
- -------------------
Net interest income at the end of the first six months of 1997 was
$8,184,000 an increase of $460,000 or 5.96% over the same period in 1996.
The net interest margin increased to 4.74% from 4.53%. The yield on
earning assets rose from 8.09% at the end of the second quarter of 1996 to
8.25% at the end of the first six months of 1997, primarily due to continued
loan growth. The cost to fund earning assets was 3.51% at June 30, 1997, a
five basis point decline from the same period the previous year. During the
period, the Company funded its loan growth from the maturities and calls of
investment securities. The absorption of existing excess funds allowed the
Company to exercise a greater degree of control over interest expense.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the period ended June 30, 1997 was
$209,000, an increase of $99,000 or 90.00%. The increased level of the
provision in 1997 was primarily due to loan growth and the need to maintain a
satisfactory ratio of the allowance for loan losses to loans. Net charge-offs,
which bear directly on the amount of the provision, were up $186,000 when the
first half of 1997 and 1996 are compared. This increased level of net charge-
offs reflects the write-off of previously identified and allocated credits and
does not reflect an overall deterioration of asset quality or the initial
stages of a declining trend.
-17-
Management anticipates that additional provisions will be needed in future
periods to ensure an adequate allowance for loan losses, due in most part to
future loan growth.
Since the amount of the provision is largely dependent on loan growth, the
level of which is difficult to ascertain, management is unable to precisely
determine the amount of provisions that may ultimately be necessary.
Noninterest Income
- ------------------
Noninterest income for the period ended June 30, 1997 was $1,390,000 an
increase of $194,000 or 16.22% when compared to the same period the prior year.
In this category, trust income exhibited the most significant increase
rising $135,000 or 55.10%. Trust income is dependent on the market value of
assets managed, types of services performed and new business. The increase in
1997 income was the result of a combination of these factors.
Credit card fees for the first half of 1997 were $288,000, an increase of
10.77% over the first six months of 1996. This increase was primarily due to
increases in the volume of activity.
Other noninterest income categories showed only nominal increases in
dollar volume.
Noninterest Expense
- -------------------
Noninterest expense for the first six months of 1997 was $4,952,000 which
represents an increase of $272,000 or 5.81% from the same period the previous
year. This increase was primarily the result of the absence of merger related
expenses incurred in 1996, offset to a degree by normal increases in other
expenses included in this category. Salary and benefits expense, along with
occupancy expense, contained additional expenses related to the opening of a
new branch office.
Credit card processing expense increased by $51,000, which was
attributable to a general increase in business volume. FDIC expense increased
due to the imposition of a new assessment. This assessment affects all banks
and is being used to fund interest payments on bonds issued to resolve the long
term effects of the savings and loan crisis.
In a recent decision, management has elected to go forward with a major
upgrade of its data processing systems. A second major project has also been
approved which involves the building of a new facility to house various banking
departments, for which office space is currently leased.
These projects are expected to increase the Company's noninterest expense.
These additional expenses will in part be offset by the elimination of lease
payments for space presently utilized for banking operations.
-18-
Results of Operations Three Months Ended June 1997 vs June 1996
- ------------------------------------------------------------------
Net income for the quarter ending June 30, 1997 was $1,671,000 which
represents an increase of $77,000 or 4.83% over the quarter ending June 30,
1996.
Earnings per share for the second quarter of 1997 were $0.44, an increase
of $.02 per share over the second quarter of 1996.
Net Interest Income
- -------------------
Second quarter 1997 net interest income was $4,220,000 an increase of
$199,000 or 4.95% over the second quarter of 1996. This increase was due to
increased interest income associated with loan growth.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the second quarter of 1997 was $100,000
and $65,000 for the same period in 1996. Continuing loan growth and the
necessity to maintain an adequate allowance for loan losses prompted the
increase. The increase does not represent a change in the trend of asset
quality.
Noninterest Income
- ------------------
Overall, total noninterest income for the second quarter of 1997 increased
$77,000 or 12.13% over the same quarter of the previous year.
Service charges on deposit accounts declined by $18,000 or 5.98%, the
result of a lower volume of charges. Other service charge income declined by
$17,000 or 25.00%. This category contains various miscellaneous items which
can vary from time to time.
Offsetting these declines was trust income, which rose $85,000 or 75.22%,
and credit card fees which increased $18,000 or 12.00%, when the second quarter
of 1997 and 1996 are compared.
The increase in trust income was due to a combination of factors including
the acquisition of new business, types of services provided during the quarter
and market value of assets managed.
The remaining categories, other income and net realized gains and losses,
increased slightly.
Noninterest Expense
- -------------------
Total noninterest expense for the second quarter of 1997 was $2,511,000,
an increase of $119,000 or 4.97%.
-19-
Salaries and benefit costs included in this category increased $68,000 or
5.39%. Normal merit increases and the opening of a new branch office in Rich
Creek, Virginia contributed to this increase.
Occupancy expense also increased, attributable to costs associated with a
new branch office, lease expenses for additional office space and the
acquisition of other fixed assets.
FDIC expense increased due to the previously mentioned new assessment
related to the resolution of the savings and loan crisis.
Other expenses decreased $64,000 or 9.79%. This was due primarily to the
absence of 1996 merger expenses, reduced to a degree by normal operating cost
increases.
Balance Sheet
- -------------
Total assets at June 30, 1997 were $393,958,000, an increase of $5,108,000
or 1.31% when compared to December 31, 1996. Total average daily assets at
June 30, 1997 were $392,171,000, which represents an increase of $4,126,000 or
1.06% from December 31, 1996.
Total investments at June 30, 1997 were $157,860,000, a decline of
$13,384,000 or 7.82%. Daily average investments at June 30, 1997 were
$160,822,000 a decrease of $16,581,000 or 9.35% from December 31, 1996.
Net loans at period-end increased $15,036,000 or 7.77% with average net
loans rising to $198,482,000, an increase of $21,063,000 or 11.87%.
The decrease in investments and increase in loans reflects the continuing
reliance on internal funds, rather than new deposits, to fund new loans.
Because the Company has not needed to attract new deposits or utilize other
external funding sources to fund loan growth, it has avoided to a degree the
higher costs associated with these sources. Growth in average daily deposits
for the first six months of 1997 was less than 1%.
This trend is expected to continue until excess liquidity is fully
absorbed.
Asset Quality
- -------------
Nonperforming loans, which include nonaccrual loans and restructured loans
but exclude loans past due 90 days and still accruing, totaled $359,000 at June
30, 1997 and $616,000 at December 31, 1996. Total other real estate owned was
$447,000 and $474,000 at June 30, 1997 and December 31, 1996, respectively.
The net charge-off ratio at June 30, 1997 was .35% compared to .21% at
December 31, 1996. This increase largely reflects the charge-off of previously
identified and allocated credits and does not represent a negative change in
the asset quality trend.
The ratio of allowance for loan losses to loans, net of unearned income
and fees, was 1.16% at June 30, 1997 compared to 1.31% at December 31, 1996.
This decline was due in part to loan growth and to the charge-off of the
previously identified credits mentioned above.
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Liquidity
- ---------
Liquidity is the ability to provide sufficient cash levels to meet
financial commitments and to fund loan demand and deposit withdrawals. As
mentioned previously, the Company has, and will continue to, fund loan growth
and other cash needs through excess liquidity in the investment portfolio.
In order to provide the best possible service to its customers, the
Company has elected to make a substantial upgrade to its data processing
systems. In addition, management is planning for the construction of a new
office building, which is intended to replace currently leased office space.
It is expected that neither project will have a material impact on the
Company's liquidity. Management is not aware of any other trend, commitment or
event that will result in or that are reasonably likely to result in a decrease
in liquidity that would be adverse and to a degree that operations would be
materially affected.
Interest Rate Sensitivity
- -------------------------
Interest rate sensitivity is the ability to adjust interest rates in
periods of rising and falling interest rates. A positive cumulative gap
indicates that in periods of rising rates interest-earning assets will reprice
faster than interest-bearing liabilities. This in turn has a positive effect
on earnings. The opposite would be true in a falling rate environment in which
interest-earning assets would reprice downward at a faster rate than interest-
bearing liabilities, compressing the interest rate spread and having a negative
effect on profitability.
At June 30, 1997, the Company is negatively gapped into the one to five
year time period. In the event interest rates rise, the Company's
profitability would be negatively affected, as its interest sensitive
liabilities would reprice at a faster rate than its interest sensitive assets.
The ultimate effect, however, would depend on the degree of increase in rates
and the period of time at the higher rate level and subsequent shifts.
The Company regularly quantifies interest rate risk and, if necessary,
adjusts its asset/liability management strategy to accommodate changing
conditions.
Capital Resources
- -----------------
Total stockholders' equity at June 30, 1997 was $51,525,000, an increase
of $1,724,000 or 3.46% from December 31, 1996. This increase was primarily the
result of current period net income less dividends paid.
The following table sets forth the various ratios by which bank capital is
measured. The Company and its subsidiaries continue to be well capitalized.
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Capital Ratios June 30, 1997 December 31, 1996
-------------- ------------- -----------------
Total capital (to risk
weighted assets) 23.41% 23.00%
Tier 1 capital (to risk
weighted assets) 22.37% 21.89%
Tier 1 capital (to average
assets, leverage ratio) 13.44% 12.96%
Accounting Considerations
- -------------------------
The Company adopted the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
on January 1, 1997. This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. Adoption of this
Statement did not have a material impact on the Company's consolidated
financial position, results of operations or liquidity.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Statement 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. Statement 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings per
Share", and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other controls to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Statement 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. Statement 128 requires restatement of all prior-period EPS
data presented. It is not anticipated that Statement 128 will have any effect
on current or prior year's EPS data presented by the Company.
In June 1997, the Securities and Exchange Commission issued guidelines
related to the disclosure of derivatives and other financial instruments.
These guidelines require the Company to make certain disclosures related to
accounting policy, as they apply to derivatives and other financial
instruments. It further requires additional quantitative disclosures for
fiscal year-end 1997.
-22-
To date, the Company's involvement in derivative products has been limited
to mortgage-backed securities, CMO's, structured notes and other similar
instruments that have less complex risk factors. Management investment
strategy does not provide for the use of off balance sheet instruments except
for loan commitments and standby letters of credit. Further management does
not plan any future involvement in high risk derivative products.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income"(Statement 130). Statement 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. It does not, however, specify when to recognize
or how to measure items that make up comprehensive income. Statement 130 was
issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity.
This Statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises
are required to classify items of "other comprehensive income" (see the Summary
for the definition of and items that make up "other comprehensive income") by
their nature in the financial statement and display the balance of other
comprehensive income separately in the equity section of a statement of
financial position. It does not require per share amounts of comprehensive
income to be disclosed.
Statement 130 is applicable to all entities that provide a full set of
financial statements consisting of a statement of financial position, results
of operations and cash flows. Enterprises that have no items of other
comprehensive income in any period presented or not-for-profit organizations
required to follow the provisions of FASB Statement No. 117, "Financial
Statements of Not-for-Profit Organizations", are excluded from the scope of
this Statement.
Statement 130 is effective for both interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. Publicly traded
enterprises that issue condensed financial statements for interim periods are
required to report a total for comprehensive income in those financial
statements.
The Company plans to implement Statement 130 at the effective date.
-23-
National Bankshares, Inc. and Subsidiaries
Part II
Other Information
Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior
Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K
None
-24-
National Bankshares, Inc. and Subsidiaries
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bankshares, Inc.
(Registrant)
Date: 08/14/97 /s/James G. Rakes
------------- -----------------------------
James G. Rakes, President and
Chief Executive Officer
Date: 08/14/97 /s/Joan C. Nelson
------------- -----------------------------
Joan C. Nelson, Treasurer
(principal financial officer)
-25-