United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number:
September 30, 1997 0-15204
National Bankshares, Inc.
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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 November 4, 1997
- ------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,792,833
(This report contains 25 pages)
National Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Page
----
Part I Financial Information
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Item 1 - Financial Statements
Consolidated Balance Sheets, September 30, 1997
and December 31, 1996 4-5
Consolidated Statements of Income, Nine
Months Ended September 30, 1997 and 1996 6
Consolidated Statements of Income,
Three Months Ended September 30, 1997 and 1996 7
Consolidated Statements of Changes in
Stockholders' Equity, Nine Months Ended
September 30, 1997 and 1996 8
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 9-10
Selected Consolidated Financial Data 11-16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
Part II Other Information
- ----------------------------
Items 1 - 3 - Legal Proceedings; Changes in
Securities; Defaults upon Senior Securities 24
Item 4 - Submission of Matters to a Vote of
Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
National Bankshares, Inc. and Subsidiaries
Part I
------
Financial Information
---------------------
Item 1. Financial Statements
The consolidated financial statements of National Bankshares, Inc. (Bankshares)
and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and
Bank of Tazewell County (BTC), (the Company), conform to generally accepted
accounting principles and to general practices within the banking industry.
The accompanying interim period consolidated financial statements are
unaudited; however, in the opinion of management, all adjustments consisting of
normal recurring adjustments which are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of results of operations for the full year or any other interim
period. The interim period consolidated financial statements and financial
information included herein should be read in conjunction with the notes to
consolidated financial statements included in the Company's 1996 Annual Report
to Stockholders and additional information supplied in the 1996 Form 10-K.
-3-
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996
(Unaudited)
September December
($000's, except share and per share data) 30, 1997 31, 1996
========= ============
Assets
Cash and due from banks $ 12,919 9,989
Interest-bearing deposits 6,628 91
Federal funds sold 4,585 1,910
Securities available for sale 60,986 62,534
Securities held to maturity (fair value
$91,695 in 1997 and $108,755 in 1996) 91,314 108,710
Mortgage loans held for sale 562 516
Loans:
Real estate construction loans 8,286 6,295
Real estate mortgage loans 43,439 43,917
Commercial and industrial loans 99,516 87,519
Loans to individuals 65,407 60,991
-------- -------
Total loans 216,648 198,722
Less unearned income and deferred fees (2,587) (2,549)
-------- -------
Loans, net of unearned income
and deferred fees 214,061 196,173
Less allowance for loan losses (2,419) (2,575)
-------- -------
Loans, net 211,642 193,598
-------- -------
Bank premises and equipment, net 5,097 5,037
Accrued interest receivable 3,583 3,510
Other real estate owned, net 417 474
Other assets 2,432 2,481
-------- -------
Total assets $400,165 388,850
======== =======
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 45,922 44,096
Interest-bearing demand deposits 73,834 73,804
Savings deposits 47,373 48,164
Time deposits 175,217 168,520
-------- -------
Total deposits 342,346 334,584
-------- -------
Other borrowed funds 484 627
Accrued interest payable 681 700
Other liabilities 1,380 1,495
-------- -------
Total liabilities 344,891 337,406
-------- -------
Common stock subject to ESOP put option 1,783 1,643
-------- -------
-4-
Stockholders' equity:
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and
outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 shares 9,482 9,482
Retained earnings 45,777 42,210
Net unrealized gains (losses) on securities
available for sale 15 (248)
Common stock subject to ESOP put option (1,783) (1,643)
-------- -------
Total stockholders' equity 53,491 49,801
Commitments and contingent liabilities --- ---
-------- -------
Total liabilities and
stockholders' equity $400,165 388,850
======== =======
-5-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
September September
($000's, except per share data) 30, 1997 30, 1996
========= =========
Interest Income
Interest and fees on loans $ 14,418 12,729
Interest on interest-bearing deposits 136 48
Interest on federal funds sold 323 376
Interest on securities taxable 5,922 6,731
Interest on securities nontaxable 1,353 1,496
-------- ------
Total interest income 22,152 21,380
-------- ------
Interest Expense
Interest on time deposits of $100,000 or more 1,715 1,532
Interest on other deposits 8,024 8,217
Interest on borrowed funds 32 23
-------- ------
Total interest expense 9,771 9,772
-------- ------
Net interest income 12,381 11,608
Provision for loan losses 303 216
-------- ------
Net interest income after provision
for loan losses 12,078 11,392
-------- ------
Noninterest Income
Service charges on deposit accounts 801 843
Other service charges and fees 204 175
Credit card fees 449 376
Trust income 559 399
Other income 53 32
Realized securities gains, net 25 6
-------- ------
Total noninterest income 2,091 1,831
-------- ------
Noninterest Expense
Salaries and employee benefits 4,088 3,711
Occupancy and furniture and fixtures 843 765
Data processing and ATM 268 257
FDIC assessment 29 2
Credit card processing 423 348
Goodwill amortization 22 22
Net costs of other real estate owned 9 10
Other operating expense 1,845 1,846
-------- ------
Total noninterest expense 7,527 6,961
-------- ------
Income before income tax expense 6,642 6,262
Income tax expense 1,824 1,708
-------- ------
Net income $ 4,818 4,554
======== ======
Net income per share $ 1.27 1.20
======== ======
-6-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended September 30, 1997 and 1996
(Unaudited)
September September
($000's, except per share data) 30, 1997 30, 1996
========= =========
Interest Income
Interest and fees on loans $ 4,996 4,439
Interest on interest-bearing deposits 55 16
Interest on federal funds sold 92 131
Interest on securities taxable 1,939 2,086
Interest on securities nontaxable 435 452
-------- ------
Total interest income 7,517 7,124
-------- ------
Interest Expense
Interest on time deposits of $100,000 or more 612 509
Interest on other deposits 2,707 2,721
Interest on borrowed funds 1 10
-------- ------
Total interest expense 3,320 3,240
-------- ------
Net interest income 4,197 3,884
Provision for loan losses 94 106
-------- ------
Net interest income after provision
for loan losses 4,103 3,778
-------- ------
Noninterest Income
Service charges on deposit accounts 240 284
Other service charges and fees 69 52
Credit card fees 161 131
Trust income 179 139
Other income 41 27
Realized securities gains, net 11 2
-------- ------
Total noninterest income 701 635
-------- ------
Noninterest Expense
Salaries and employee benefits 1,386 1,247
Occupancy and furniture and fixtures 274 256
Data processing and ATM 99 82
FDIC assessment 15 1
Credit card processing 152 128
Goodwill amortization 7 7
Net costs of other real estate owned 7 4
Other operating expense 635 556
-------- ------
Total noninterest expense 2,575 2,281
-------- ------
Income before income tax expense 2,229 2,132
Income tax expense 612 567
-------- ------
Net income $ 1,617 1,565
======== ======
Net income per share $ 0.43 0.41
======== ======
-7-
National Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Net
Unrealized
Gains Common
(Losses) Stock
on Subject
Securities To ESOP
($000's, except per Common Retained Available Put
share data) Stock Earnings For Sale Option Total
====== ========= ========== ====== =====
Balances, December 31,
1995 $9,482 38,390 282 --- 48,154
Net income --- 4,554 --- --- 4,554
Cash dividends ($.30 per
share) --- (571) --- --- (571)
Cash dividends of BTC
prior to merger --- (510) --- --- (510)
Change in net unrealized
gains (losses) on
securities available
for sale, net of income
tax benefit of $582 --- --- (1,129) --- (1,129)
------ ------ ------ ------ ------
Balances, September 30,
1996 $9,482 41,863 (847) --- 50,498
====== ====== ====== ====== ======
Balances, December 31,
1996 $9,482 42,210 (248) (1,643) 49,801
Net income --- 4,818 --- --- 4,818
Cash dividend ($.33 per
share) --- (1,251) --- --- (1,251)
Change in net unrealized
gains (losses) on
securities available
for sale, net of income
tax expense of $135 --- --- 263 --- 263
Change in common stock
subject to ESOP put
option --- --- --- (140) (140)
------ ------ ------ ------ ------
Balances, September 30,
1997 $9,482 45,777 15 (1,783) 53,491
====== ====== ====== ====== ======
-8-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
September September
($000's) 30, 1997 30, 1996
========= =========
Cash Flows From Operating Activities
Net Income $ 4,818 4,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 303 216
Provision for deferred income taxes (127) 582
Depreciation of bank premises and equipment 408 351
Amortization of intangibles 22 22
Amortization of premiums and accretion of
discounts, net 3 39
(Gains) losses on bank premises and equipment
disposals (2) ---
(Gains)losses on sales and calls of
securities available for sale, net --- (4)
(Gains) losses on calls of securities held to
maturity, net (25) ---
Net (increase) decrease in mortgage loans
held for sale (46) 743
(Increase) decrease in:
Accrued interest receivable (73) (130)
Other assets 18 (509)
Increase (decrease) in:
Accrued interest payable (19) (862)
Other liabilities (115) (86)
------- ------
Net cash provided by operating
activities 5,165 4,916
------- ------
Cash Flows From Investing Activities
Net (increase) decrease in federal funds sold (2,675) 4,062
Net (increase) decrease in interest-bearing
deposits (6,537) 2,343
Proceeds from calls and maturities of securities
available for sale 6,795 13,860
Proceeds from calls and maturities of securities
held to maturity 25,425 35,830
Purchases of securities available for sale (4,844) (9,397)
Purchases of securities held to maturity (8,012) (28,457)
Purchases of loan participations (1,515) (1,853)
Collections of loan participations 1,365 1,040
Net (increase) decrease in loans made to
customers (18,293) (23,620)
Proceeds from disposal of other real estate owned 83 29
Recoveries on loans charged off 71 111
Bank premises and equipment expenditures (475) 3
Proceeds from sale of bank premises and equipment 9 (587)
------- ------
Net cash used in investing
activities (8,603) (6,636)
------- ------
-9-
Cash Flows From Financing Activities
Net increase (decrease) in time deposits 6,697 1,710
Net increase (decrease) in other deposits 1,065 3,728
Net increase (decrease) in other borrowed funds (143) 1,301
Cash dividends paid (1,251) (1,081)
------- ------
Net cash provided by financing
activities 6,368 5,658
------- ------
Net increase (decrease) in cash and due from
banks 2,930 3,938
Cash and due from banks at beginning of period 9,989 10,055
------- ------
Cash and due from banks at end of period $12,919 13,993
======= ======
Supplemental Cash Flow Information
Unrealized gains (losses) on securities available
for sale (gross) $ 398 (1,711)
Deferred income tax benefit (expense) (135) 582
------- ------
Net unrealized gains (losses) on securities
available for sale $ 263 (1,129)
======= ======
Loans charged to the allowance for loan losses $ 530 364
======= ======
Interest paid $ 9,790 9,858
======= ======
Cash paid for income taxes $ 2,276 1,839
======= ======
Investments charged to the allowance for
securities losses $ 272 ---
======= ======
-10-
National Bankshares, Inc. and Subsidiaries
Selected Balance Sheet Data
September December
($000's) 30, 1997 31, 1996
========= ========
Selected Data at Period-end
Loans, net $211,642 193,598
Total securities 152,300 171,244
Total assets 400,165 388,850
Total deposits 342,346 334,584
Stockholders' equity 53,491 49,801
Selected Data Daily Averages
Loans, net $201,849 177,419
Total securities 159,121 177,403
Total assets 393,909 388,045
Total deposits 337,740 335,938
Stockholders' equity (1) 51,354 49,459
(1) Includes amount related to common stock subject to ESOP
put option. The effect is immaterial.
-11-
National Bankshares, Inc. and Subsidiaries
Selected Income Statement Data
For the periods ended
September 30, December 31,
($000's, except per share data) 1997 1996 1996
======== ======== ============
Selected Income Statement Data
Interest income $22,152 21,380 28,647
Interest expense 9,771 9,772 13,036
Net interest income 12,381 11,608 15,611
Provision for loan losses 303 216 331
Noninterest income 2,091 1,831 2,693
Noninterest expense 7,527 6,961 9,515
Income taxes 1,824 1,708 2,341
Net income 4,818 4,554 6,117
Selected Ratios and Per Share Data
Return on average assets (1) 1.64% 1.57% 1.58%
Return on average equity (1) 12.13% 12.45% 12.37%
Net income per share $ 1.27 1.20 1.61
Book value per share $ 14.57 13.31 13.56
Note - Return on average equity and book value per share has been computed
including common stock subject to ESOP put option as a part of
stockholders' equity. At September 30, 1997 and December 31, 1996,
the return on average equity and book value per share, excluding the
common stock subject to ESOP put option from stockholders' equity,
were 12.54% and 12.74%, and $14.38 and $13.36, respectively.
(1) Calculated on an annualized basis.
-12-
National Bankshares, Inc. and Subsidiaries
Average Balances and Interest Rates
For the periods ended
September 30, 1997 September 30, 1996 December 31, 1996
Average Yield/ Average Yield/ Average Yield/
($000's) Balance Cost Balance Cost Balance Cost
======= ======= ======= ======= ======= =======
Interest-earning
assets(1) $372,605 8.24% 365,350 8.14% 364,575 8.16%
Interest-bearing
liabilities 295,175 4.43% 294,175 4.44% 294,374 4.43%
----- ----- -----
Net interest spread 3.81% 3.70% 3.73%
===== ===== =====
Net interest margin 4.73% 4.55% 4.59%
===== ===== =====
(1) The yield on interest-earning assets is shown on a fully tax equivalent basis.
-13-
National Bankshares, Inc. and Subsidiaries
Interest Rate Sensitivity
($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years
========= ======== ========= ========= ========
Interest-earning
assets $ 85,972 25,941 51,104 135,986 79,133
Interest-bearing
liabilities 156,942 43,596 51,837 44,210 323
-------- ------- ------- ------- -------
Gap (70,970) (17,655) (733) 91,776 78,810
======== ======= ======= ======= =======
Cumulative gap (70,970) (88,625) (89,358) 2,418 81,228
======== ======= ======= ======= =======
NOTE: Data shown reflects the earliest of the next repricing
opportunity or maturity.
-14-
National Bankshares, Inc. and Subsidiaries
Loan Loss Data
For the periods ended
September September December
($000's) 30, 1997 30, 1996 31, 1996
========= ========= ==========
Balance at beginning of period $ 2,575 2,625 2,625
Provision for loan losses 303 216 331
Loans charged off (530) (364) (506)
Recoveries 71 111 125
------- ------ ------
Balance at end of period $ 2,419 2,588 2,575
======= ====== ======
Ratio of allowance for loan
losses to loans, net of
unearned income and deferred
fees 1.13% 1.36% 1.31%
======= ====== ======
Ratio of net charge-offs to
average loans, net of
unearned income and deferred
fees (1) .30% .19% .21%
======= ====== ======
Ratio of allowance for loan
losses to nonperforming loans
(2) 675.70% 412.10% 418.02%
======= ====== ======
(1) Net charge-offs are calculated on an annualized basis.
(2) The Company defines nonperforming loans as total nonaccrual and
restructured loans. Loans 90 days past due and still accruing are
excluded from nonperforming loans.
-15-
National Bankshares, Inc. and Subsidiaries
Nonperforming Assets, Past Due Loans and Impaired Loans
September September December
($000's) 30, 1997 30, 1996 31, 1996
========= ========= ==========
Nonperforming Assets
Nonaccrual loans $ 358 628 616
Restructured loans --- --- ---
------- ------ ------
Total nonperforming loans 358 628 616
------- ------ ------
Nonaccrual securities
(net of valuation allowance) --- --- 80
Foreclosed property 417 731 474
Other repossessed property 11 6 27
------- ------ ------
Total foreclosed and
repossessed properties 428 737 501
------- ------ ------
Total nonperforming assets $ 786 1,365 1,197
======= ====== ======
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees and foreclosed/
repossessed assets .37% .72% .57%
======= ====== ======
Accruing Loans Past Due 90 Days or More $ 546 329 458
======= ====== ======
Ratio of loans past due 90 days or
more to loans, net of unearned
income and deferred fees .26% .17% .23%
======= ====== ======
Impaired Loans
Total impaired loans $ 424 1,053 725
======= ====== ======
Impaired loans with a
valuation allowance 382 736 371
Valuation allowance (140) (655) (290)
------- ------ ------
Impaired loans, net of allowance $ 242 81 81
======= ====== ======
Impaired loans with no
valuation allowance $ 42 317 354
======= ====== ======
Average recorded investment
in impaired loans $ 519 1,036 800
======= ====== ======
Income recognized on impaired loans $ 8 18 33
======= ====== ======
Amount of income recognized
on a cash basis $ 9 --- 23
======= ====== ======
-16-
National Bankshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The purpose of this discussion is to set forth information about the
financial condition and results of operations of National Bankshares, Inc. and
its wholly-owned subsidiaries (the Company), which are not otherwise apparent
from the consolidated financial statements and other information included in
this report. Reference should be made to the financial statements and other
information included in this report as well as the 1996 Annual Report and Form
10-K for an understanding of the following discussion and analysis.
Results of Operations Nine Months Ended September 30, 1997
vs September 30, 1996
- -------------------------------------------------------------
Net income for the nine months ended September 30, 1997 was $4,818,000
which represents an increase of $264,000 or 5.80% over the first nine months of
1996. The return on average assets as of September 30, 1997 and September 30,
1996 were 1.64% and 1.57%, respectively. The return on average equity was
12.13% and 12.45% at September 30, 1997 and 1996, respectively.
Earnings per share at the end of the third quarter was $1.27 per share, an
increase of $0.07 per share over the third quarter of 1996.
The overall improvement in performance was attributable to continued loan
growth and growth in noninterest income. These increases were offset to a
degree by increases in the provision for loan losses and noninterest expense.
Income tax expense increased as a result of the higher level of taxable income.
Net Interest Income
- -------------------
Net interest income at the end of the first nine months of 1997 was
$12,381,000 an increase of $773,000 or 6.66% over the same period in 1996.
The net interest margin increased to 4.73% from 4.55%. The yield on
earning assets rose from 8.14% at the end of the first nine months of 1996 to
8.24% at the end of the first nine months of 1997, primarily due to continued
loan growth. The cost to fund earning assets was 3.51% at September 30, 1997,
an eight basis point decline from the same period the previous year. During
the current period, the Company funded the majority of its loan growth from the
maturities and calls of investment securities and the remainder with deposit
growth.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the period ended September 30, 1997 was
$303,000, an increase of $87,000 or 40.28%. The increased level of the
provision in 1997 was primarily due to loan growth and the need to maintain a
satisfactory ratio of the allowance for loan losses to loans. Net charge-offs,
which bear directly on the amount of the provision, were up $206,000 when the
first nine months of 1997 and 1996 are compared. This increased level of net
charge-offs reflects the write-off of previously identified and allocated
credits and does not reflect an overall deterioration of asset quality or the
initial stages of a declining trend.
-17-
Management anticipates that additional provisions will be needed in future
periods to ensure an adequate allowance for loan losses, due in most part to
future loan growth.
Since the amount of the provision is largely dependent on loan growth, the
level of which is difficult to ascertain, management is unable to precisely
determine the amount of provisions that may ultimately be necessary.
Noninterest Income
- ------------------
Noninterest income for the period ended September 30, 1997 was $2,091,000,
an increase of $260,000 or 14.20% when compared to the same period the prior
year.
Service charges on deposit accounts declined by $42,000 or 4.98%. A
significant portion of these fees consists of charges for checks returned for
insufficient funds and overdrafts. The level of income derived from these
charges is directly dependent on the willingness of the customer to bear such
charges. Accordingly, bank income in this area may vary.
Trust income exhibited the most significant increase in the noninterest
income category, rising $160,000 or 40.10%. Trust income is dependent on the
market value of assets managed, types of services performed and new business.
The increase in 1997 income was the result of a combination of these factors.
Credit card fees for the third quarter of 1997 were $449,000, an increase
of 19.41% over the first nine months of 1996. This increase was primarily due
to increases in transaction volume.
Other noninterest income categories showed only nominal increases in
dollar volume and were associated with normal increases in business activity.
Noninterest Expense
- -------------------
Noninterest expense for the first nine months of 1997 was $7,527,000 which
represents an increase of $566,000 or 8.13% from the same period the previous
year.
Salary and benefits expense, along with occupancy expense, include
additional expenses related to the opening of a new branch office in Rich
Creek, Virginia in April 1997.
Credit card processing expense increased by $75,000, which was
attributable to a general increase in business volume, and was in turn offset
by certain types of credit card fees included in noninterest income. FDIC
expense increased due to the imposition of a new assessment. This assessment
affects all banks and is being used to fund interest payments on bonds issued
to resolve the savings and loan crisis.
Management has scheduled a major upgrade of its information systems for
the last quarter of 1997. A second major project has also been approved which
involves the building of a new facility to house various banking departments,
for which office space is currently leased.
These projects have and are expected to continue to increase the Company's
noninterest expense. These additional expenses will in part be offset by the
elimination of lease payments for space presently utilized for banking
operations.
-18-
Results of Operations Three Months Ended September 1997 vs September 1996
- ----------------------------------------------------------------------------
Net income for the quarter ending September 30, 1997 was $1,617,000 which
represents an increase of $52,000 or 3.32% over the quarter ending September
30, 1996.
Earnings per share for the third quarter of 1997 was $0.43, an increase of
$0.02 per share over the third quarter of 1996.
Net Interest Income
- -------------------
Third quarter 1997 net interest income was $4,197,000 an increase of
$313,000 or 8.06% over the third quarter of 1996. This increase was due to
increased net interest income associated with loan growth.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the third quarter of 1997 was $94,000,
compared to $106,000 for the same period in 1996. Continuing loan growth and
the necessity to maintain an adequate allowance for loan losses prompted the
current year's addition. The provision does not represent a change in the
trend of asset quality.
Noninterest Income
- ------------------
Overall, total noninterest income for the third quarter of 1997 increased
$66,000 or 10.39% over the same quarter of the previous year.
Service charges on deposit accounts declined by $44,000 or 15.49%, the
result of a lower volume of charges. Other service charge income increased by
$17,000 or 32.69%. This category contains various miscellaneous items which
can vary from time to time.
Trust income rose $40,000 or 28.78%, and credit card fees increased
$30,000 or 22.90%, when the third quarter of 1997 and 1996 are compared. The
increase in trust income was due to a combination of factors, including the
acquisition of new business, types of services provided and market value of
assets managed.
The remaining categories, other income and net realized gains and losses
on securities, also increased. The other income category contains
miscellaneous income items which may vary in amount from time to time. Net
realized gains and losses on securities levels are generally governed in large
part by securities called or sold. In the third quarter of 1997, the sale of
certain bonds resulted in a $10,000 gain.
Noninterest Expense
- -------------------
Total noninterest expense for the third quarter of 1997 was $2,575,000, an
increase of $294,000 or 12.89%.
Salaries and benefit costs included in this category increased $139,000 or
11.15%. Normal merit increases and the opening of a new branch office in Rich
Creek, Virginia contributed to this increase.
-19-
Occupancy expense also increased, related to costs associated with a new
branch office, lease expenses for additional office space and the acquisition
of other fixed assets.
FDIC expense increased due to the previously mentioned new assessment
related to the resolution of the savings and loan crisis.
Other expenses increased $79,000 or 14.21%. This increase was
attributable in part to increases in supplies, training costs and other
expenses.
Balance Sheet
- -------------
Total assets at September 30, 1997 were $400,165,000, an increase of
$11,315,000 or 2.91% when compared to December 31, 1996. Total average daily
assets at September 30, 1997 were $393,909,000, which represents an increase of
$5,864,000 or 1.51% from December 31, 1996.
Total investments at September 30, 1997 were $152,300,000, a decline of
$18,944,000 or 11.06%. Daily average investments at September 30, 1997 were
$159,121,000 a decrease of $18,282,000 or 10.31% from December 31, 1996.
Net loans at period-end increased $18,044,000 or 9.32% with average net
loans rising to $201,849,000, an increase of $24,430,000 or 13.77%.
The decrease in investments and increase in loans reflects the continued
use of internal funds, to the extent possible, to fund new loans. Because the
Company has had a limited need to attract new deposits or utilize other
external funding sources to fund loan growth, it has in the past avoided to a
degree the higher costs associated with these sources. However, there is an
indication that recent market conditions may necessitate higher rates to retain
and procure deposits, which can be expected to increase the Company's interest
expense. Growth in average daily deposits for the first nine months of 1997
was less than 1%.
Asset Quality
- -------------
Nonperforming loans, which include nonaccrual loans and restructured
loans, but which exclude loans past due 90 days and still accruing, totaled
$358,000 at September 30, 1997 and $616,000 at December 31, 1996. Total other
real estate owned, net was $417,000 and $474,000 at September 30, 1997 and
December 31, 1996, respectively.
The net charge-off ratio at September 30, 1997 was .30% compared to .21%
at December 31, 1996. This increase largely reflects the charge-off of
previously identified and allocated credits and does not represent a negative
change in the asset quality trend.
The ratio of allowance for loan losses to loans, net of unearned income
and fees, was 1.13% at September 30, 1997 compared to 1.31% at December 31,
1996. This decline was due in part to loan growth and to the charge-off of the
previously identified credits mentioned above.
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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,
acquiring external funds, through its deposit gathering activities to meet
additional funding needs.
In order to provide the best possible service to its customers, the
Company for the last quarter of 1997 has scheduled a substantial upgrade to its
information systems. In addition, management is planning for the construction
of a new office building, which is intended to replace currently leased office
space. It is expected that neither project will have a material impact on the
Company's liquidity. Management is not aware of any other trend, commitment or
event that will result in or that is reasonably likely to result in a decrease
in liquidity that would be adverse and to a degree that operations would be
materially affected.
Interest Rate Sensitivity
- -------------------------
Interest rate sensitivity is the ability to adjust interest rates in
periods of rising and falling interest rates. A positive cumulative gap
indicates that in periods of rising rates interest-earning assets will reprice
faster than interest-bearing liabilities. This in turn has a positive effect
on earnings. The opposite would be true in a falling rate environment in which
interest-earning assets would reprice downward at a faster rate than interest-
bearing liabilities, compressing the interest rate spread and having a negative
effect on profitability.
At September 30, 1997, the Company is negatively gapped into the one to
five year time period. In the event interest rates rise, the Company's
profitability would be negatively affected, as its interest sensitive
liabilities would reprice at a faster rate than its interest sensitive assets.
The ultimate effect, however, would depend on the degree of increase in rates
and the period of time at the higher rate level and subsequent changes in
interest rates.
The Company regularly quantifies interest rate risk and the resultant
effect on earnings and capital. If necessary, its asset/liability management
strategy is adjusted to accommodate changing conditions.
Capital Resources
- -----------------
Total stockholders' equity at September 30, 1997 was $53,491,000, an
increase of $3,690,000 or 7.41% from December 31, 1996. This increase was
primarily the result of current period net income less dividends paid.
The following table sets forth the various ratios by which bank capital is
measured. The Company and each of its subsidiaries continue to be well
capitalized.
-21-
Capital Ratios September 30, 1997 December 31, 1996
-------------- ------------------ -----------------
Total capital (to risk
weighted assets) 23.58% 23.00%
Tier 1 capital (to risk
weighted assets) 22.57% 21.89%
Tier 1 capital (to average
assets, leverage ratio) 13.76% 12.96%
Accounting Considerations
- -------------------------
The Company adopted the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
on January 1, 1997. Statement 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. Adoption of Statement
125 did not have a material impact on the Company's consolidated financial
position, results of operations or liquidity.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
Statement 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. Statement 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings per
Share", and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other controls to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Statement 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. Statement 128 requires restatement of all prior-period EPS
data presented. It is not anticipated that Statement 128 will have any effect
on current or prior year's EPS data presented by the Company.
In June 1997, the Securities and Exchange Commission issued guidelines
related to the disclosure of derivatives and other financial instruments.
These guidelines require the Company to make certain disclosures related to
accounting policy, as they apply to derivatives and other financial
instruments. It further requires additional quantitative disclosures for
fiscal year-end 1997.
-22-
To date, the Company's involvement in derivative products has been limited
to mortgage-backed securities, CMO's, structured notes and other similar
instruments that have less complex risk factors. Management investment
strategy does not provide for the use of off-balance sheet instruments except
for loan commitments and standby letters of credit. Furthermore, management
does not plan any future involvement in high risk derivative products.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". Statement 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. It does not, however, specify when to
recognize or how to measure items that make up comprehensive income. Statement
130 was issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity.
This Statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises
are required to classify items of "other comprehensive income" by their nature
in the financial statement and display the balance of other comprehensive
income separately in the equity section of a statement of financial position.
It does not require per share amounts of comprehensive income to be disclosed.
Statement 130 is effective for both interim and annual periods beginning
after December 15, 1997. Earlier application is permitted. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this statement. Publicly traded
enterprises that issue condensed financial statements for interim periods are
required to report a total for comprehensive income in those financial
statements.
The Company plans to implement Statement 130 at the effective date.
-23-
National Bankshares, Inc. and Subsidiaries
Part II
Other Information
Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior
Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K
None
-24-
National Bankshares, Inc. and Subsidiaries
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bankshares, Inc.
(Registrant)
Date: 11/14/97 /s/James G. Rakes
------------- -----------------------------
James G. Rakes, President and
Chief Executive Officer
Date: 11/14/97 /s/Joan C. Nelson
------------- -----------------------------
Joan C. Nelson, Treasurer
(principal financial officer)
-25-