United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number:
June 30, 1998 0-15204
National Bankshares, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1375874
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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, 1998
- ------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,792,833
(This report contains 26 pages)
National Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Page
----
PART I FINANCIAL INFORMATION
- --------------------------------
Item 1 - Financial Statements
Consolidated Balance Sheets, June 30, 1998
and December 31, 1997 4-5
Consolidated Statements of Income and
Comprehensive Income, Three Months Ended
June 30, 1998 and 1997 6-7
Consolidated Statements of Income and
Comprehensive Income, Six Months Ended
June 30, 1998 and 1997 8-9
Consolidated Statements of Changes in
Stockholders' Equity, Six Months Ended
June 30, 1998 and 1997 10
Consolidated Statements of Cash Flows,
Six Months Ended June 30, 1998 and 1997 11-12
Selected Consolidated Financial Data 13-17
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-23
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 24
PART II OTHER INFORMATION
- ----------------------------
Items 1 - 3 - Legal Proceedings; Changes in
Securities; Defaults Upon Senior Securities 25
Item 4 - Submission of Matters to a Vote of
Security Holders 25
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
SIGNATURES 26
- ----------
-2-
National Bankshares, Inc. and Subsidiaries
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg
(NBB) and Bank of Tazewell County (BTC), (the Company), conform to generally
accepted accounting principles and to general practices within the banking
industry. The accompanying interim period consolidated financial statements
are unaudited; however, in the opinion of management, all adjustments
consisting of normal recurring adjustments which are necessary for a fair
presentation of the consolidated financial statements have been included. The
results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results of operations for the full year or any other
interim period. The interim period consolidated financial statements and
financial information included herein should be read in conjunction with the
notes to consolidated financial statements included in the Company's 1997
Annual Report to Stockholders and additional information supplied in the 1997
Form 10-K.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. Statement 130 was
issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity.
This Statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. Enterprises
are required to classify items of "other comprehensive income" by their nature
in the financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of the balance sheet. It does not require per
share amounts of comprehensive income to be disclosed. The Company adopted
Statement 130 on January 1, 1998.
Other comprehensive income at present arises from unrealized gains
(losses) on securities available for sale. The following table shows other
comprehensive income arising from unrealized gains (losses) on securities
available for sale and the related income tax effects:
Six Months Ended
June 30,
($000's) 1998 1997
---- ----
Before tax amount $ 117 36
Tax (expense) benefit at 34% (40) (12)
----- ----
Other comprehensive income, net of taxes $ 77 24
===== ====
-3-
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
(Unaudited)
June 30, December
($000's, except share and per share data) 1998 31, 1997
========= ==========
ASSETS
Cash and due from banks $ 11,347 12,435
Interest-bearing deposits 15,908 9,728
Federal funds sold 7,420 4,300
Securities available for sale 88,515 65,582
Securities held to maturity (fair value
$61,322 in 1998 and $85,005 in 1997) 60,673 84,392
Mortgage loans held for sale 864 405
Loans:
Real estate construction loans 11,611 8,510
Real estate mortgage loans 46,352 42,969
Commercial and industrial loans 105,994 101,379
Loans to individuals 69,551 66,635
-------- -------
Total loans 233,508 219,493
Less unearned income and deferred fees (2,535) (2,503)
-------- -------
Loans, net of unearned income and
deferred fees 230,973 216,990
Less allowance for loan losses (2,544) (2,438)
-------- -------
Loans, net 228,429 214,552
-------- -------
Bank premises and equipment, net 5,909 5,739
Accrued interest receivable 3,622 3,445
Other real estate owned, net 286 421
Other assets 2,507 1,908
-------- -------
Total assets $425,480 402,907
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 50,397 45,093
Interest-bearing demand deposits 81,316 77,863
Savings deposits 47,892 46,773
Time deposits 185,463 175,138
-------- -------
Total deposits 365,068 344,867
-------- -------
Other borrowed funds 478 485
Accrued interest payable 754 722
Other liabilities 1,291 966
-------- -------
Total liabilities 367,591 347,040
-------- -------
Common stock subject to ESOP put option 2,195 1,838
-------- -------
-4- (Continued)
Stockholders' equity:
Preferred stock of no par value.
Authorized 5,000,000 shares; none issued
and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 shares 9,482 9,482
Retained earnings 48,136 46,191
Accumulated other comprehensive income 271 194
Common stock subject to ESOP put option (2,195) (1,838)
-------- -------
Total stockholders' equity 55,694 54,029
Commitments and contingent liabilities
-------- -------
Total liabilities and
stockholders' equity $425,480 402,907
======== =======
-5-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Three Months Ended June 30, 1998 and 1997
(Unaudited)
June 30, June 30,
($000's, except per share data) 1998 1997
========= =========
INTEREST INCOME
Interest and fees on loans $ 5,443 4,820
Interest on interest-bearing deposits 163 61
Interest on federal funds sold 109 149
Interest on securities - taxable 1,765 1,985
Interest on securities - nontaxable 443 455
------- ------
Total interest income 7,923 7,470
------- ------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 592 570
Interest on other deposits 2,863 2,674
Interest on borrowed funds 3 6
------- ------
Total interest expense 3,458 3,250
------- ------
Net interest income 4,465 4,220
Provision for loan losses 73 100
------- ------
Net interest income after provision
for loan losses 4,392 4,120
------- ------
NONINTEREST INCOME
Service charges on deposit accounts 308 283
Other service charges and fees 46 49
Credit card fees 180 168
Trust income 177 198
Other income 43 8
Realized securities gains, net 72 6
------- ------
Total noninterest income 826 712
------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 1,459 1,330
Occupancy and furniture and fixtures 245 280
Data processing and ATM 210 140
FDIC assessment 6 11
Credit card processing 163 151
Goodwill amortization 10 8
Net costs of other real estate owned --- 1
Other operating expense 757 590
------- ------
Total noninterest expense 2,850 2,511
------- ------
Income before income tax expense 2,368 2,321
Income tax expense 666 650
------- ------
Net income 1,702 1,671
-6- (Continued)
Other comprehensive income, net of taxes:
Unrealized gains (losses) on securities
available for sale (10) 452
------- ------
Comprehensive income $ 1,692 $2,123
======= ======
Net income per share $ .45 $ .44
======= ======
-7-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Six Months Ended June 30, 1998 and 1997
(Unaudited)
June 30, June 30,
($000's, except per share data) 1998 1997
========= =========
INTEREST INCOME
Interest and fees on loans $10,597 9,422
Interest on interest-bearing deposits 337 81
Interest on federal funds sold 178 231
Interest on securities - taxable 3,514 3,983
Interest on securities - nontaxable 868 918
------- ------
Total interest income 15,494 14,635
------- ------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 1,188 1,103
Interest on other deposits 5,560 5,317
Interest on borrowed funds 6 31
------- ------
Total interest expense 6,754 6,451
------- ------
Net interest income 8,740 8,184
Provision for loan losses 94 209
------- ------
Net interest income after provision
for loan losses 8,646 7,975
------- ------
NONINTEREST INCOME
Service charges on deposit accounts 583 561
Other service charges and fees 99 99
Credit card fees 318 288
Trust income 353 380
Other income 54 48
Realized securities gains, net 85 14
------- ------
Total noninterest income 1,492 1,390
------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 2,858 2,702
Occupancy and furniture and fixtures 491 485
Data processing and ATM 406 253
FDIC assessment 15 14
Credit card processing 291 271
Goodwill amortization 17 15
Net costs of other real estate owned 26 2
Other operating expense 1,442 1,210
------- ------
Total noninterest expense 5,546 4,952
------- ------
Income before income tax expense 4,592 4,413
Income tax expense 1,282 1,212
------- ------
Net income 3,310 3,201
-8- (Continued)
Other comprehensive income, net of taxes:
Unrealized gains (losses) on securities
available for sale 77 24
------- ------
Comprehensive income $ 3,387 3,225
======= ======
Net income per share $ .87 .84
======= ======
-9-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1998 and 1997
(Unaudited)
Common
Stock
Accumulated Subject
Other To ESOP
($000's, except for per Common Retained Comprehensive Put
share data) Stock Earnings Income Option Total
====== ========= ========== ====== =====
Balances, December 31,
1996 $9,482 42,210 (248) (1,643) 49,801
Net income --- 3,201 --- --- 3,201
Unrealized gains
(losses) on securities
available for sale,
net of tax --- --- 24 --- 24
Dividend ($.33 per
share) --- (1,251) --- --- (1,251)
Change in common stock
subject to ESOP put
option --- --- --- (250) (250)
------ ------ ----- ------ ------
Balances, June 30, 1997 $9,482 44,160 (224) (1,893) 51,525
====== ====== ===== ====== ======
Balances, December 31,
1997 $9,482 46,191 194 (1,838) 54,029
Net income --- 3,310 --- --- 3,310
Unrealized gains
(losses) on securities
available for sale,
net of tax --- --- 77 --- 77
Dividend ($.36 per
share) --- (1,365) --- --- (1,365)
Change in common stock
subject to ESOP put
option --- --- --- (357) (357)
------ ------ ----- ------ ------
Balances, June 30, 1998 $9,482 48,136 271 (2,195) 55,694
====== ====== ===== ====== ======
-10-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
(Unaudited)
June 30, June 30,
($000's) 1998 1997
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $3,310 3,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 94 209
Provision for deferred income taxes (28) (127)
Depreciation of bank premises and equipment 383 265
Amortization of intangibles 68 29
Amortization of premiums and accretion of
discounts, net 28 (11)
Gains on bank premises and equipment
disposals --- (2)
Gains on calls of securities held to
maturity, net (85) (14)
Net gains on other real estate owned (19) ---
(Increase) decrease in:
Mortgage loans held for sale (459) 301
Accrued interest receivable (177) (19)
Other assets (449) 93
Increase (decrease) in:
Accrued interest payable 32 (32)
Other liabilities 325 (576)
------- -------
Net cash provided by operating
activities 3,023 3,317
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (3,120) 1,910
Net increase in interest-bearing deposits (6,180) (2,746)
Proceeds from calls and maturities of securities
available for sale 14,936 4,741
Proceeds from calls and maturities of securities
held to maturity 23,775 18,370
Purchases of securities available for sale (37,747) (2,852)
Purchases of securities held to maturity --- (6,816)
Purchases of loan participations (2,910) (1,149)
Collections of loan participations 3,853 1,070
Net increase in loans made to customers (15,159) (15,222)
Proceeds from disposal of other real estate owned 194 29
Recoveries on loans charged off 205 56
Bank premises and equipment expenditures (553) (350)
Proceeds from sale of bank premises and equipment --- ---
Net cash used in investing
activities (22,706) (2,959)
------- -------
-11- (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits assumed, net of premium paid 7,025 ---
Net increase in time deposits 5,541 2,104
Net increase in other deposits 7,401 881
Net increase(decrease) in other borrowed funds (7) 757
Cash dividends paid (1,365) (1,251)
------- -------
Net cash provided by
financing activities 18,595 2,491
------- -------
Net increase(decrease) in cash and due from banks (1,088) 2,849
Cash and due from banks at beginning of period 12,435 9,989
------- -------
Cash and due from banks at end of period $11,347 12,838
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 6,722 $ 6,483
======= =======
Cash paid for income taxes $ 1,233 $ 1,585
======= =======
Loans charged to the allowance for loan losses $ 193 $ 402
======= =======
Loans transferred to other real estate owned $ 40 ---
======= =======
-12-
National Bankshares, Inc. and Subsidiaries
Selected Balance Sheet Data
June 30, 1998 and December 31, 1997
June 30, December 31,
($000's) 1998 1997
========= ============
SELECTED PERIOD-END DATA
Loans, net $228,429 214,552
Total securities 149,188 149,974
Total assets 425,480 402,907
Total deposits 365,068 344,867
Stockholders' equity 55,694 54,029
SELECTED DAILY AVERADES DATA
Loans, net $220,437 204,540
Total securities 146,456 157,179
Total assets 408,837 395,932
Total deposits 349,106 339,439
Stockholders' equity 54,821 53,712
-13-
National Bankshares, Inc. and Subsidiaries
Selected Income Statement, Ratios and Per Share Data
Six Months Ended June 30, 1998 and 1997
And Year Ended December 31, 1997
June 30, December 31,
($000's, except per share data) 1998 1997 1997
====== ====== ============
Interest income $15,494 14,635 29,797
Interest expense 6,754 6,451 13,106
Net interest income 8,740 8,184 16,691
Provision for loan losses 94 209 435
Noninterest income 1,492 1,390 2,834
Noninterest expense 5,546 4,952 10,031
Income taxes 1,282 1,212 2,499
Net income 3,310 3,201 6,560
Return on average assets 1.63% 1.65% 1.66%
Return on average equity (1) 11.75% 12.29% 12.21%
Net income per share $ .87 .84 1.73
Book value per share (1) $15.26 14.08 14.73
(1) Includes amount related to common stock subject to ESOP put option excluded
from stockholders' equity on the Consolidated Balance Sheets.
-14-
National Bankshares, Inc. and Subsidiaries
Average Balances and Interest Yields/Rates
Six Months Ended June 30, 1998 and 1997 and
Year Ended December 31, 1997
($000's) June 30, 1998 June 30, 1997 December 31, 1997
Average Yield/ Average Yield/ Average Yield/
Balance Rate Balance Rate Balance Rate
======= ======= ======= ======= ======= =======
Interest-earning
assets(1) $ 386,664 8.35% 370,857 8.25% 374,478 8.24%
Interest-bearing
liabilities 302,392 4.50% 294,720 4.41% 295,565 4.43%
------- ------- -----
Net interest spread 3.85% 3.84% 3.81%
======= ======= =====
Net interest margin 4.83% 4.74% 4.74%
======= ======= =====
(1) The yield on interest-earning assets is shown on a fully tax equivalent basis.
-15-
National Bankshares, Inc. and Subsidiaries
Nonperforming Assets, Past Due Loans and Impaired Loans
June 30, 1998 and 1997 and December 31, 1997
June 30, June 30, December 31,
($000's) 1998 1997 1997
========= ========= ============
NONPERFORMING ASSETS
Nonaccrual loans $ 42 $ 359 87
Restructured loans --- --- ---
------ ------ ------
Total nonperforming loans 42 359 87
------ ------ ------
Foreclosed property 286 447 421
------ ------ ------
Total nonperforming assets $ 328 806 508
====== ====== ======
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees and foreclosed
properties (excludes
nonaccrual securities) .14% .21% .23%
====== ====== ======
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Past due 90 days or more and
still accruing $ 962 504 672
====== ====== ======
Ratio of loans past due 90 days or
more to loans, net of unearned
income and deferred fees .42% .24% .31%
====== ====== ======
IMPAIRED LOANS
Total impaired loans $ 572 464 177
====== ====== ======
Impaired loans with a
valuation allowance 284 188 53
Valuation allowance (52) (106) (53)
------ ------ ------
Impaired loans net of allowance $ 232 82 ---
====== ====== ======
Impaired loans with no
valuation allowance $ 288 276 124
====== ====== ======
Average recorded investment
in impaired loans $ 279 551 458
====== ====== ======
Income recognized on impaired loans $ 26 6 23
====== ====== ======
Amount of income recognized
on a cash basis $ --- 6 12
====== ====== ======
-16-
National Bankshares, Inc. and Subsidiaries
Allowance for Loan Losses and Loan Loss Data
June 30, 1998 and 1997 and December 31, 1997
For the periods ended
June 30, June 30, December 31,
($000's) 1998 1997 1997
========= ========= ============
Balance at beginning of period $ 2,438 2,575 2,575
Provision for loan losses 94 209 435
Loans charged off (193) (402) (679)
Recoveries 205 56 107
-------- ------- --------
Balance at end of period $ 2,544 2,438 2,438
======== ======= ========
Ratio of allowance for loan
losses to end of period
loans, net of unearned income
and deferred fees 1.10% 1.16% 1.12%
======== ======= ========
Ratio of net charge-offs
(recoveries) to average
loans, net of unearned
income and deferred
fees (1) (.01%) .35% .23%
======== ======= ========
Ratio of allowance for loan
losses to nonperforming loans
(2) 6,204.88% 679.11% 2,802.30%
======== ======= ========
(1) Net charge-offs are on an annualized basis.
(2) The Company defines nonperforming loans as total nonaccrual and restructured
loans. Excluded are loans 90 days past due and still accruing.
-17-
National Bankshares, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of this discussion is to set forth information about the
financial condition and results of operations of National Bankshares, Inc. and
its wholly-owned subsidiaries (the Company), which are not otherwise apparent
from the consolidated financial statements and other information included in
this report. Reference should be made to the financial statements and other
information included in this report as well as the 1997 Annual Report and Form
10-K for an understanding of the following discussion and analysis.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. The Company's actual results could
differ materially from those set forth in the forward-looking statements.
Results of Operations - for the six months ended June 30,1998
- -------------------------------------------------------------
Net income for the six months ended June 30, 1998 was $3,310,000 which
represents an increase of $109,000 or 3.41% over the first six months of 1997.
The return on average assets as of June 30, 1998 and June 30, 1997 was 1.63%
and 1.65%, respectively. The return on average equity was 11.75% and 12.29% at
June 30, 1998 and 1997, respectively.
Earnings per share at the end of the second quarter of 1998 was $0.87 per
share, an increase of $0.03 per share over the second quarter of 1997.
The overall improvement in net income was primarily the result of
continued growth in net interest income and a decline in the provision for loan
losses. These factors were offset to a degree by increased costs associated
with data processing.
Net Interest Income
- -------------------
Net interest income at the end of the first six months of 1998 was
$8,740,000, an increase of $556,000 or 6.79% over the same period in 1997. The
net interest margin increased to 4.83% from 4.74% as a result of an increase in
the yield on interest-earning assets of 10 basis points during that period
while the cost to fund interest-earning assets increased by 1 basis point.
Continued strong loan growth was the primary cause of the net increase in the
interest margin.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the period ended June 30, 1998 was
$94,000, a decrease of $115,000 from the same period the previous year. The
net charge-off (recovery) ratio at June 30, 1998 was (.01%). Loans charged off
at June 30, 1998 were $193,000 compared to $402,000 at June 30, 1997.
Recoveries of loans previously charged off at the end of the first six months
of 1998 were $205,000 compared to $56,000 for the same period in 1997.
-18-
Management anticipates that additional provisions will be needed in future
periods to ensure an adequate allowance for loan losses, due in part to future
loan growth and factors related to portfolio composition.
Overall asset quality remains satisfactory as indicated by nonperforming
asset data shown elsewhere in this report.
Noninterest Income
- ------------------
Noninterest income for the period ended June 30, 1998 was $1,492,000, an
increase of $102,000 or 7.34%. The primary cause of the increase was net
securities gains which were related to calls on securities held to maturity.
Credit card fees increased by 10.42%. The increase for 1998 reflects a full
six months income from this activity whereas 1997 reflects a partial period.
Trust income was down by $27,000 or 7.11%. Trust income is governed by the
types and volume of activities in which it engages. This can result in income
variances from time to time.
Other categories, service charges or on deposits, other service charges
and other income displayed lesser variances.
Noninterest Expense
- -------------------
Noninterest expense for the first six months of 1998 was up 12.00% when
compared to the same period in 1997. Salaries and employee benefits were up
$156,000 or 5.77% when the first six months of 1998 and 1997 are compared. A
substantial portion of this increase was due to the acquisition of the Galax
branch discussed elsewhere in this report. Data processing expense increased
by $153,000 over the first six months of 1997. In the fourth quarter of 1997,
the Company upgraded its data processing equipment and software which increased
depreciation and maintenance costs. Also, in anticipation of a data processing
upgrade at BTC, depreciation was accelerated on certain data processing
equipment that would become obsolete upon conversion later in 1998.
OREO expense was up $24,000 the primary result of an increase in the
valuation allowance for other real estate owned. The valuation allowance for
other real estate is periodically adjusted to reflect market conditions which
may affect net realizable values.
Other expenses at June 30, 1998 were $1,442,000, an increase of $232,000
over the same period in 1997. This was due to normal increases in the various
categories. This category contains various cash basis expenses such as office
supplies and postage which may vary due to the timing and amount of purchases.
The addition of the Galax Branch also contributed to the increase.
Results of Operations - for the three months ended June 30,1998
- ---------------------------------------------------------------
Net income for the three months ended June 30, 1998 was $1,702,000 and
increase of $31,000 or 1.86% over the same period in 1997. Earnings per share
for the second quarter of 1998 was $0.45 compared to $0.44 for the second
quarter of 1997.
-19-
Net Interest Income
- -------------------
Net interest income for the second quarter of 1998 was $4,465,000 which
represents an increase of $245,000 or 5.81% over the same period in 1997.
While interest expense rose $208,000, interest income rose by $453,000. The
increase in interest income was largely attributable to loan growth.
Provision for Loan Losses
- -------------------------
The provision for loan losses for the second quarter of 1998 was $73,000,
a decrease of $27,000 when compared to the same period the previous year.
Reference is made to the year-to-date discussion of this category for
management plans concerning this area.
Noninterest Income
- ------------------
Noninterest Income for the second quarter of 1998 was $826,000 an increase
of $114,000 when compared to the second quarter of 1997.
Net securities gains and losses which increased $66,000 accounted for a
significant portion of the increase. Also, included in other income is
approximately $45,000 in gains on the sale of other real estate owned.
Service charges on deposit increased by $25,000 while trust income
declined by $21,000 partially off setting that increase. Refer to comments
related to trust income in the year-to-date analysis for further information
related to the trust business in general. Credit card fees were up partially
due to volume and in part due to the debit card program mentioned previously.
Noninterest Expense
- -------------------
Total noninterest expenses for the second quarter of 1998 was $2,850,000,
up $339,000 over the same period in 1997.
Salaries and fringe benefits increased by $129,000 or 9.70%. A
substantial portion of the current quarter's increase was due to the
acquisition of the Galax branch. The remainder was due to normal salary
increases and other normal increases.
Data processing expense increased by $70,000 in the second quarter of
1998. In late 1997 the Company undertook a major upgrade of its data
processing system. Increases in expense were largely associated with this
project.
Other expenses increased $167,000 when the second quarter of 1998 and 1997
are compared. Many of the accounts included in the category are on cash basis
such as stationary and supplies, postage, and correspondent bank fees, etc. and
will vary from quarter to quarter. Also included in this category are
franchise taxes which increase yearly as they are tied to growth in capital.
Costs associated with the Galax branch such as additional supplies and core
deposit expense also contributed to the increase.
-20-
Balance Sheet
- -------------
Total assets at June 30, 1998 were $425,480,000, an increase of
$22,573,000 or 5.60% over year-end 1997. Total deposits at June 30, 1998 were
$365,068,000 an increase of $20,201,000 from year-end 1997. At June 30, 1998,
the newly added Galax branch had approximately $10,011,000 in deposits, the
majority of which were acquired upon purchase of the branch.
At June 30, 1998, total loans net of unearned income were $230,973,000, an
increase of $13,983,000 or 6.44% over total loans at December 31, 1997. Growth
as can be seen on the balance sheet occurred in all areas of real estate
construction and commercial loans, real estate loans and loans to individuals
also continued to increase.
Asset Quality
- -------------
Nonperforming loans, which include nonaccrual loans and restructured loans
but exclude loans past due 90 days and still accruing, totaled $42,000 at June
30, 1998 compared to $87,000 at December 31, 1997. Total foreclosed properties
were $286,000 at June 30, 1998 a decline of $135,000 from December 31, 1997.
The ratio of net charge-offs (recoveries) to average loans, net of unearned
income and deferred fees was (.01%) at June 30, 1998. At year-end December 31,
1997, the ratio was .23%.
While asset quality trends are generally favorable at present, management
cannot predict the duration of the current trend as it can be affected by
changes in the local and national economic conditions, the impact of which
cannot be precisely determined.
Liquidity
- ---------
Liquidity is the ability to provide sufficient cash levels to meet
financial commitments and to fund loan demand and deposit withdrawals. Net
cash provided by operating activities was $3,023,000 for the three months ended
June 30, 1998. Net cash used in investing activities was $22,706,000 with the
majority of that cash invested in securities and loans. Net cash from in
financing activities was $18,595,000. Net cash decreased $1,088,000 from
December 31, 1997.
The Company actively manages its liquidity position through its investing
activities. At June 30, 1998, overnight funds which includes Federal Funds
sold and funds on deposit with the Federal Home Loan Bank totaled $23,328,000.
In addition, securities with a remaining maturity of less than one year totaled
$22,670,000. Liquidity is also managed through the management of deposit
liabilities in particular, volatile funds such as time deposits over $100,000.
The amount of such deposits is largely dependent on the rate of interest
offered. The Company had approximately $31,987,000 in such deposits due within
twelve months. Other types of deposits such as interest-bearing demand,
savings and time deposits less than $100,000 are less volatile and less rate
dependent historically.
Short term liquidity needs can also be satisfied by way of credit
facilities established with correspondent banks, the Federal Home Loan Bank and
Federal Reserve. Longer term borrowings, if necessary can be obtained through
the Federal Home Loan Bank.
-21-
Management is not aware of any trend, commitment or events that will
result in or that are reasonably likely to result in a decrease in liquidity
that would be adverse and to a degree that operations would be materially
impaired.
Capital Resources
- -----------------
Total stockholders' equity increased $1,665,000 or 3.08% from December 31,
1997. During the first half of 1998, retained earnings grew by $1,945,000.
Accumulated comprehensive income increased stockholders' equity by $77,000.
This category is comprised solely of changes in the net unrealized gains
(losses) on securities available for sale. Common stock subject to put option
increased by $357,000. The common stock subject to put option is affected by
the current market price of Bankshares' common stock as well as the number of
shares outstanding.
The following table sets forth the various ratios by which bank capital is
measured. Bankshares and its subsidiaries continue to be well capitalized.
June 30, December 31,
1998 1997
========= ============
Consolidated Capital Ratios
---------------------------
Total capital (to risk
weighted assets) 22.56% 23.30%
Tier 1 Capital (to risk
weighted assets) 21.58% 22.30%
Tier 1 capital (to average
assets, leverage ratio) 13.57% 13.70%
Acquisition
- -----------
On December 26, 1997, NBB entered into an agreement to purchase the
assets, including real estate and improvements, and assume the liabilities of
the Galax, Virginia, branch office of First American Federal Savings Bank.
Settlement of this purchase agreement occurred on April 3, 1998 and did not
have a material impact on the Company's results of operations or liquidity.
Year 2000
- ---------
The Company is cognizant of the risks and challenges presented by the
impact of the century date change on information processing and other computer
controlled systems. The Year 2000 presents two related but distinct issues for
financial institutions. The Company's internal information processing and
computer controlled systems must be Year 2000 compliant, and the subsidiary
banks' compliance efforts are subject to regulatory review. In addition, banks
face credit risk should their commercial loans customers suffer significant
business disruptions as a result of the impact of computer failures in their
own operations or in those of their suppliers or customers.
As a normal part of business operations, the Company's subsidiaries are
currently in the process of upgrading information processing systems which will
include the acquisition of new information processing hardware and software.
-22-
The primary goal of this project is to provide a shared information processing
system for affiliates, additional capacity and the ability to use the most
advanced software available from vendors.
While the overall costs associated with the upgrade are substantial, it is
not anticipated that the Year 2000 component of this upgrade will have a
material effect on the Company's consolidated financial statements.
Future Accounting Considerations
- --------------------------------
In March 1998, the AICPA Accounting Standards Executive Committee (AcSEC)
issued Statement of Position 98-1,"Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is applicable to
all nongovernmental entities and provides guidance on accounting for the costs
of computer software developed or obtained for internal use. The SOP requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. The SOP also requires that costs related to the preliminary project
stage and the post-implementation/operations stage (as defined in SOP 98-1) is
an internal-use computer software development project be expensed as incurred.
SOP 98-1 is effective for financial statements issued for fiscal years
beginning after December 15, 1998. Earlier application is encouraged in fiscal
years for which annual financial statements have not been issued. Initial
application should be as of the beginning of the fiscal year in which the SOP
is first adopted and applied to costs incurred for all projects during that
fiscal year, including those in progress upon initial application. Costs
incurred prior to initial application of the SOP, whether capitalized or not,
should not be adjusted to the amounts that would have been capitalized had the
SOP been in effect when those costs were incurred.
In late 1998, BTC plans to complete an upgrade of information system
hardware and software and expand its microcomputer network.
However, the Company does not plan to adopt SOP 98-1 until January 1,
1999, therefore it is not anticipated SOP 98-1 will have a material effect on
the consolidated financial position, results of operations or liquidity of the
Company.
There have been no other recent accounting pronouncements issued that
would have a material effect on the consolidated financial position, results of
operations or liquidity of the Company.
-23-
National Bankshares, Inc. and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Derivatives
The Company is not a party to derivative financial instruments with off-
balance sheet risks such as futures, forwards, swaps and options. The Company
is a party to financial instruments with off-balance sheet risks such as
commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of its
customers. Management does not plan any future involvement in high risk
derivative products. The Company has investments in mortgage-backed
securities, collateralized mortgage obligations, structured notes and other
similar instruments which are included in securities available for sale and
securities held to maturity. The fair value of these investments at June 30,
1998 approximated $8,606,000.
Interest Rate Sensitivity
The Company's securities and loans and its deposits are subject to
interest rate risk. The Company's profitability in the near term may
temporarily be affected, either positively by a falling interest rate scenario
or negatively by a period of rising rates. The table below sets forth, as of
June 30, 1998, the distribution of repricing opportunities of the Company's
interest-earning assets and interest-bearing liabilities, the interest rate
sensitivity gap (i.e., interest rate sensitive assets less interest rate
sensitive liabilities), and the cumulative interest rate sensitivity gap. The
table sets forth the time periods during which interest-earning assets and
interest-bearing liabilities will mature or may reprice in accordance with
their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in
the following table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear on the table.
($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years
========= ======== ========= ========= ========
Interest-earning
assets $ 86,983 22,836 45,080 128,563 120,891
Interest-bearing
liabilities 164,299 28,725 54,884 45,211 22,030
-------- ------- ------- ------- -------
Gap (77,316) (5,889) (9,804) 83,352 98,861
======== ======= ======= ======= =======
Cumulative gap $(77,316) (83,205) (93,009) (9,657) 89,204
======== ======= ======= ======= =======
-24-
National Bankshares, Inc. and Subsidiaries
PART II
OTHER INFORMATION
Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior
Securities
None for the three months ended
June 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
Three Class 2 Directors of the Company were elected by a vote
of the security holders for a term of three years each.
(a) This matter was submitted to a vote at the Company's Annual
Meeting of Stockholders held on April 14, 1998.
(b) The name of each director elected at the meeting follows:
Alonzo A. Crouse
James G. Rakes
Jeffery R. Stewart
The name of each director whose term of office continued
after the meeting is listed:
Charles L. Boatwright
T.C. Bowen, Jr.
Robert E. Christopher, Jr.
Paul A. Duncan
William T. Peery
(c) The number of votes cast for or against each nominee is
provided below. There were no abstaining votes and no
broker non-votes.
Election of Directors
Director Votes For Votes Against
======== ========= =============
Alonzo A. Crouse 3,273,006 14,912
James G. Rakes 3,285,276 2,642
Jeffrey R. Stewart 3,265,458 22,460
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended June
30, 1998:
None
-25-
National Bankshares, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bankshares, Inc.
(Registrant)
Date: 08/14/98 /s/James G. Rakes
------------- -----------------------------
James G. Rakes, President and
Chief Executive Officer
Date: 08/14/98 /s/J. Robert Buchanan
------------- -----------------------------
J. Robert Buchanan, Treasurer
(principal financial officer)
-26-