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, 1995 0-15204
NATIONAL BANKSHARES, INC.
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1375874
- ---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 South Main Street
P.O. Box 90002
Blacksburg, Virginia 24062-9002
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (540)552-2011
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 9, 1995
- ------------------------------- ---------------------------------
COMMON STOCK, $2.50 PAR VALUE 1,714,152
(This report contains 26 pages) <PAGE>
NATIONAL BANKSHARES, INC.
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
- --------------------------------
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS, SEPTEMBER 30, 1995
AND DECEMBER 31, 1994 3-4
CONSOLIDATED STATEMENTS OF INCOME,
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 5-6
CONSOLIDATED STATEMENTS OF INCOME,
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 7-8
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY, NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 10-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12-21
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 22-24
PART II OTHER INFORMATION
- ----------------------------
ITEMS 1 - 3 - LEGAL PROCEEDINGS; CHANGES IN
SECURITIES; DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 25
ITEM 5 - OTHER INFORMATION 25
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K 25
SIGNATURES 26
-2-<PAGE>
CONSOLIDATED BALANCE SHEETS
NATIONAL BANKSHARES, INC.
SEPTEMBER 30, 1995 (UNAUDITED) AND DECEMBER 31, 1994
SEPTEMBER DECEMBER
30, 1995 31, 1994
($ in thousands) ========= ============
ASSETS
Cash and due from banks (note 2) $ 5,381 6,648
Federal funds sold 4,610 1,400
Securities available for sale, at fair 12,854 12,114
value (note 3)
Securities held to maturity at amortized cost
(fair value $53,832 in 1995 and $55,816 in
1994) (note 3) 53,105 57,389
Mortgage loans held for sale (note 4) 1,318 392
Loans:
Real estate construction loans 7,919 5,543
Real estate mortgage loans 30,841 30,212
Commercial and industrial loans 38,212 35,984
Loans to individuals 48,502 45,767
-------- --------
Total loans 125,474 117,506
Less unearned income on loans (1,811) (1,782)
-------- --------
Loans, net of unearned income 123,663 115,724
Less allowance for loan losses (note 5) (2,105) (2,006)
-------- --------
Loans, net 121,558 113,718
-------- --------
Bank premises and equipment, net 2,670 2,762
Accrued interest receivable 1,909 1,698
Other real estate owned, net (note 6) 946 1,083
Other assets (notes 7 and 8) 2,329 2,523
-------- --------
Total assets $206,680 199,727
======== ========
-3-<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits 24,507 23,816
Interest-bearing deposits 57,446 59,794
Savings deposits 16,038 19,257
Time deposits (note 9) 85,161 75,769
-------- --------
Total deposits 183,152 178,636
-------- --------
Accrued interest payable 242 225
Other liabilities 1,029 729
-------- --------
Total liabilities 184,423 179,590
-------- --------
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
1,714,152 4,285 4,285
Surplus 1,187 1,187
Undivided profits 16,722 14,791
Net unrealized gains (losses) on
securities available for sale 63 (126)
-------- --------
Total stockholders' equity 22,257 20,137
Commitments and contingent liabilities
(note 10) -------- --------
Total liabilities and
stockholders' equity $206,680 199,727
======== ========
See accompanying notes to consolidated financial statements.
-4-<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
NATIONAL BANKSHARES, INC.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
SEPTEMBER SEPTEMBER
($ in thousands, except per share data) 30, 1995 30, 1994
========= =========
INTEREST INCOME
Interest and fees on loans $3,079 2,655
Interest on federal funds sold 57 4
Interest on securities-taxable 676 799
Interest on securities-nontaxable 326 333
------ ------
Total interest income 4,138 3,791
------ ------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more 145 107
Interest on other deposits 1,607 1,303
Interest on federal funds purchased 2 15
------ ------
Total interest expense 1,754 1,425
------ ------
Net interest income 2,384 2,366
Provision for loan losses (note 5) 85 150
------ ------
Net interest income after provision
for loan losses 2,299 2,216
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 175 162
Other service charges and fees 43 49
Credit card fees 117 90
Trust income 95 81
Other income 13 4
Realized securities gains (losses), net --- 2
------ ------
Total noninterest income 443 388
------ ------
-5-<PAGE>
NONINTEREST EXPENSE
Salaries and employee benefits 789 765
Occupancy and furniture and fixtures 132 138
Data processing and ATM 87 83
FDIC assessment 71 97
Credit card processing 104 86
Goodwill amortization 7 7
Net costs of other real estate owned 54 3
Other operating expense 395 386
------ ------
Total noninterest expense 1,639 1,565
------ ------
Income before income tax expense 1,103 1,039
Income tax expense (note 7) 276 236
------ ------
Net income $827 803
====== ======
Net income per share $0.48 0.47
====== ======
Average shares (in thousands) 1,714 1,710
====== ======
See accompanying notes to consolidated financial statements.
-6-<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
NATIONAL BANKSHARES, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
SEPTEMBER SEPTEMBER
($ in thousands, except per share data) 30, 1995 30, 1994
========= =========
INTEREST INCOME
Interest and fees on loans $ 8,754 7,532
Interest on federal funds sold 152 115
Interest on securities-taxable 2,014 2,204
Interest on securities-nontaxable 988 904
------- ------
Total interest income 11,908 10,755
------- ------
INTEREST EXPENSE
Interest on time certificates of deposit
of $100,000 or more 387 320
Interest on other deposits 4,550 3,822
Interest on federal funds purchased 4 15
------- ------
Total interest expense 4,941 4,157
------- ------
Net interest income 6,967 6,598
Provision for loan losses (note 5) 225 380
------- ------
Net interest income after provision
for loan losses 6,742 6,218
------- ------
NONINTEREST INCOME
Service charges on deposit accounts 528 495
Other service charges and fees 118 123
Credit card fees 330 275
Trust income 271 325
Other income 31 17
Realized securities gains (losses), net (1) 7
------- ------
Total noninterest income 1,277 1,242
------- ------
-7-<PAGE>
NONINTEREST EXPENSE
Salaries and employee benefits 2,359 2,204
Occupancy and furniture and fixtures 400 421
Data processing and ATM 272 244
FDIC assessment 271 290
Credit card processing 306 250
Goodwill amortization 22 12
Net costs of other real estate owned 85 29
Other operating expense 1,106 1,069
------- ------
Total noninterest expense 4,821 4,519
------- ------
Income before income tax expense 3,198 2,941
Income tax expense (note 7) 753 672
------- ------
Net income $ 2,445 2,269
======= ======
Net income per share $1.43 1.33
======= ======
Average shares (in thousands) 1,714 1,710
======= ======
See accompanying notes to consolidated financial statements.
-8-<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NATIONAL BANKSHARES, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
Net
Unrealized
Gains
(Losses) on
Securities
Common Undivided Available
($ in thousands) Stock Surplus Profits For Sale Total
======= ======= ========= =========== =======
Balances, December 31, 1993 $4,274 1,112 12,868 --- 18,254
Cumulative effect of change
in accounting for
securities available for
sale at January 1, 1994,
net of income taxes of
$141 --- --- --- 273 273
Net income --- --- 2,269 --- 2,269
Cash dividends ($.27 per
share) --- --- (462) --- (462)
Change in net unrealized
(losses) on securities
available for sale, net of
income tax benefit of $160 --- --- --- (310) (310)
------ ------ ------ ----- ------
Balances, September 30,
1994 $4,274 1,112 14,675 (37) 20,024
====== ====== ====== ===== ======
Balances, December 31, 1994 $4,285 1,187 14,791 (126) 20,137
Net income --- --- 2,445 --- 2,445
Cash dividends ($.30 per
share) --- --- (514) --- (514)
Change in net unrealized
gains on securities
available for sale, net
of income taxes of $97 --- --- --- 189 189
------ ------ ------ ----- ------
Balances, September 30,
1995 $4,285 1,187 16,722 63 22,257
====== ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
-9-<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL BANKSHARES, INC.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
(UNAUDITED)
SEPTEMBER SEPTEMBER
($ in thousands) 30, 1995 30, 1994
========= =========
CASH FLOWS FROM OPERATING ACTIVITIES (note 11)
Net Income $2,445 2,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 225 380
Provision for deferred income taxes (119) ---
Depreciation of bank premises and equipment 288 300
Amortization of intangibles 116 83
Amortization of premiums and accretion of
discounts, net 42 113
Gain on bank premises and equipment
disposals (8) ---
Loss on maturities of securities available
for sale, net 3 ---
Gain on calls of securities held to
maturity, net (2) (7)
Net decrease (increase) in mortgage loans
held for sale (926) 1,491
Losses and writedowns on other real estate
owned 49 5
(Increase) decrease in:
Accrued interest receivable (211) (367)
Other assets 100 (264)
Increase (decrease) in:
Accrued interest payable 17 (6)
Other liabilities 300 (72)
------ ------
Net cash provided by operating
activities 2,319 3,925
------ ------
-10-<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES (note 11)
Net increase (decrease) in money market
investments (3,210) 1,725
Proceeds from calls and maturities of securities
available for sale 4,021 5,293
Proceeds from calls and maturities of securities
held to maturity 10,183 2,926
Purchases of securities available for sale (4,492) (988)
Purchases of securities held to maturity (5,925) (18,616)
Net increase in loans made to customers (8,118) (3,063)
Proceeds from disposal of other real estate owned 88 62
Recoveries on loans charged off 53 38
Bank premises and equipment expenditures (197) (406)
Proceeds from sale of bank premises and equipment 9 1
------ ------
Net cash used in investing
activities (7,588) (13,028)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES (note 11)
Deposits assumed, net of premium paid --- 13,159
Net increase in time deposits 9,392 3,283
Net decrease in other deposits (4,876) (6,059)
Cash dividends paid (514) (462)
------ ------
Net cash provided by financing
activities 4,002 9,921
------ ------
Net increase (decrease) in cash and due from
banks (1,267) 818
Cash and due from banks at beginning of year 6,648 4,177
------ ------
Cash and due from banks at end of period $5,381 4,995
====== ======
See accompanying notes to consolidated financial statements.
-11-<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL BANKSHARES, INC.
SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND DECEMBER 31, 1994
($ in thousands, except per share data)
1. GENERAL
The consolidated financial statements of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiary, The National Bank of
Blacksburg (NBB), conform to generally accepted accounting principles and
to general practices within the banking industry. The accompanying interim
period consolidated financial statements are unaudited; however, in the
opinion of management, all adjustments consisting of normal recurring
adjustments which are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the
three months and nine months ended September 30, 1995 are not necessarily
indicative of results of operations for the full year or any other interim
period. The interim period consolidated financial statements and notes
included herein should be read in conjunction with the notes to
consolidated financial statements included in the Corporation's 1994 Annual
Report to Stockholders.
2. CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
-12-<PAGE>
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
September 30, 1995 and December 31, 1994 are as follows:
September 30, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COSTS GAINS LOSSES VALUES
========= ========== ========== ========
Available for sale:
U.S. Treasury $2,502 10 (7) 2,505
U.S. Government agencies and
corporations 7,690 99 (3) 7,786
Mortgage-backed securities 240 5 --- 245
Other securities 2,327 20 (29) 2,318
------- ---- ---- ------
Total securities available
for sale $12,759 134 (39) 12,854
======= ==== ==== ======
December 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COSTS GAINS LOSSES VALUES
========= ========== ========== ========
Available for sale:
U.S. Treasury $3,516 1 (61) 3,456
U.S. Government agencies and
corporations 6,936 7 (68) 6,875
Mortgage-backed securities 261 --- (15) 246
Other securities 1,592 --- (55) 1,537
------- ---- ---- ------
Total securities available
for sale $12,305 8 (199) 12,114
======= ==== ==== ======
-13-<PAGE>
The amortized costs and fair values of securities available for sale at
September 30, 1995 and December 31, 1994, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
September 30, 1995 December 31, 1994
AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES
========= ========== ========== ========
Due in one year or less $ 5,505 5,521 3,553 3,513
Due in one year through five years 3,990 4,008 6,985 6,845
Due in five years through ten years 3,048 3,109 1,552 1,541
Due after ten years 85 85 82 82
No maturity 131 131 133 133
------- ------ ------ ------
Total securities held to
maturity $12,759 12,854 12,305 12,114
======= ====== ====== ======
The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities held to maturity by major security type as of September
30, 1995 and December 31, 1994 are as follows:
September 30, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COSTS GAINS LOSSES VALUES
========= ========== ========== ========
Held to maturity:
U.S. Treasury $ 6,757 47 (40) 6,764
U.S. Government agencies
and corporations 10,116 179 (8) 10,287
States and political subdivisions 28,345 576 (77) 28,844
Mortgage-backed securities 1,017 31 --- 1,048
Other 6,870 57 (38) 6,889
------- ---- ---- ------
Total securities held to
maturity $53,105 890 (163) 53,832
======= ==== ==== ======
-14-<PAGE>
December 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
($ in thousands) COSTS GAINS LOSSES VALUES
========= ========== ========== ========
Held to maturity:
U.S. Treasury $ 9,722 44 (219) 9,547
U.S. Government agencies
and corporations 14,073 20 (296) 13,797
States and political subdivisions 26,073 212 (1,091) 25,194
Mortgage-backed securities 1,147 8 (17) 1,138
Other 6,374 14 (248) 6,140
------- ---- ------ ------
Total securities held to
maturity $57,389 298 (1,871) 55,816
======= ==== ====== ======
The amortized costs and fair values of securities held to maturity at September
30, 1995 and December 31, 1994, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 1995 December 31, 1994
AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES
========= ========== ========== ========
Due in one year or less $10,847 10,898 10,998 11,006
Due in one year through five years 22,716 23,022 28,749 28,085
Due in five years through ten years 17,354 17,670 15,645 14,820
Due after ten years 2,188 2,242 1,997 1,905
------- ------ ------ ------
Total securities held to
maturity $53,105 53,832 57,389 55,816
======= ====== ====== ======
-15-<PAGE>
4. MORTGAGE BANKING ACTIVITIES
NBB originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. Every
contract with each investor contains certain recourse language. In
general, NBB may be required to repurchase a previously sold mortgage loan
if there is major noncompliance with defined loan origination or
documentation standards, including fraud, negligence or material
misstatement in the loan documents. Repurchase may also be required if
necessary governmental loan guarantees are canceled or never issued, or if
an investor is forced to buy back a loan after it has been resold as a part
of a loan pool. In addition, NBB may have an obligation to repurchase a
loan if the mortgagor has defaulted early in the loan term. This potential
default period ranges from four to sixteen months after sale of a loan to
the investor.
Mortgage loans held for sale are carried at the lower of cost or fair
value. For the nine months ended September 30, 1995, NBB originated
$11,475 and sold $10,549 in mortgage loans to investors.
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Three months ended Nine months ended
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
======= ====== ======= ======
Balance, beginning of period $ 2,084 2,098 2,006 2,038
Provision for loan losses 85 150 225 380
Recoveries 17 11 53 38
Loans charged off (81) (207) (179) (404)
------- ------ ------- ------
Balance, end of period $ 2,105 2,052 2,105 2,052
======= ====== ======= ======
6. IMPAIRED LOANS AND NONPERFORMING ASSETS
Effective January 1, 1995, Bankshares adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 114 requires that certain loans which have been determined to be
impaired be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 114 also required
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all receivables when assessing the need for a loss
accrual. In addition, SFAS No. 114 eliminates the requirement that a
creditor account for certain loans as foreclosed assets prior to the time
the creditor has taken possession of the underlying collateral, resulting
in the reclassification of in-substance foreclosures from foreclosed
properties to loans.
-16-<PAGE>
SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that, SFAS No. 118 eliminates the provisions in SFAS No. 114 that described
how a creditor should report income on an impaired loan. SFAS No. 118 does
not change the provisions in SFAS No. 114 that required a creditor to
measure impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of
the collateral if the loan is collateral dependent. SFAS No. 118 amends
the disclosure requirements in SFAS No. 114 to require information about
the recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. For Bankshares,
loans collectively reviewed for impairment include all consumer loans,
single family loans and performing multi-family and nonresidential real
estate loans, excluding loans which have entered into the "workout
process."
Bankshares considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Bankshares will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Bankshares' impaired loans within the scope of SFAS No.
114 include nonaccrual loans (excluding those collectively reviewed for
impairment), troubled debt restructurings and certain other nonperforming
loans. For collateral dependent loans, Bankshares based the measurement of
these impaired loans on the fair value of the loan's underlying collateral.
For all other loans, Bankshares bases the measurement of these impaired
loans on the more readily determinable of the present value of expected
future cash flows discounted at the loan's effective interest rate or the
observable market price. Impairment losses are recognized through an
increase in the allowance for loan losses and a corresponding charge to the
provision for loan losses. Adjustments to impairment losses due to changes
in the fair value of impaired loans' underlying collateral are included in
the provision for loan losses. When an impaired loan is either sold,
transferred to foreclosed properties or written down, any related valuation
allowance is charged off against the allowance for loan losses.
The adoption of SFAS No. 114, as amended by SFAS No. 118, did not have a
material impact on Bankshares' consolidated financial statements due to
Bankshares' continuing policy of measuring loan impairment based on the
fair value of the underlying collateral which is consistent with the
methods prescribed in SFAS No. 114. In addition, Bankshares had previously
reclassified in-substance foreclosures from other real estate owned to
loans as of December 31, 1993 as prescribed by SFAS No. 114; therefore, no
further reclassification from other real estate owned to loans was required
upon adoption.
As of September 30, 1995, the recorded investment in impaired loans was
$420 and the amount of the related allowance for loan losses was $263 for a
net investment of $157.
During the nine months ended September 30, 1995, the average recorded
investment in impaired loans was $420, and there was no related amount of
interest income recognized during the time within that period that the
loans were impaired.
The following table presents information concerning nonperforming assets.
-17-<PAGE>
SEPTEMBER 30, DECEMBER 31,
($ in thousands) 1995 1994
============= ==============
Nonaccrual loans $ 420 420
Restructured loans --- 229
------ -----
Total nonperforming loans 420 649
Other real estate owned, net 946 1,083
------ -----
Total nonperforming assets $1,366 1,732
====== =====
Loans contractually past due 90
days or more (excludes non-
accrual loans) $ 191 219
====== =====
Loans are generally placed in nonaccrual status when the collection of
principal or interest is 90 days or more past due, unless the obligation is
both well-secured and in the process of collection.
-18-<PAGE>
The following table shows the interest that would have been earned on
nonaccrual and restructured loans if they had been current in accordance
with their original terms and the recorded interest that was earned and
included in income on these loans:
Nine Months Ended
September 30,
($ in thousands) 1995 1994
==== ====
Scheduled interest:
Nonaccrual loans $ 32 28
Restructured loans --- 14
---- ----
Total scheduled interest $ 32 42
==== ====
Recorded interest:
Nonaccrual loans $--- ---
Restructured loans --- 3
---- ----
Total recorded interest $--- 3
==== ====
Other real estate, acquired through foreclosure or deed in lieu of
foreclosure, is carried at the lower of the recorded investment or its fair
value, less estimated costs to sell (net realizable value). When the
property is acquired, any excess of the loan balance over net realizable
value is charged to the allowance for loan losses. Increases or decreases
in the net realizable value of such properties are credited or charged to
income by adjusting the valuation allowance for other real estate owned.
Net costs of maintaining or operating foreclosed properties are expensed as
incurred.
Changes in the valuation allowance for other real estate owned are as
follows:
Three Months EndedNine Months Ended
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
==== ==== ==== ====
Balances, beginning of period $ 49 49 49 49
Provision for other real estate
owned 49 --- 49 ---
---- ---- ---- ----
Balances, end of period $ 98 49 98 49
==== ==== ==== ====
-19-<PAGE>
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1995 are presented below:
SEPTEMBER 30,
($ in thousands) 1995
==============
Deferred Tax Assets:
Loans, principally due to allowance for loan losses $ 545
Other real estate owned, principally due to valuation
allowance 26
Deferred compensation, due to accrual for financial
reporting purpose 169
Deposit intangibles and goodwill 26
Nonaccrual interest on loans 4
-----
Total gross deferred tax assets 770
Less valuation allowance ---
-----
Net deferred tax assets 770
-----
Deferred tax liabilities:
Net unrealized gains on securities available for sale (32)
Bank premises and equipment, principally due to
differences in depreciation (17)
Securities, due to differences in discount accretion (31)
Prepaid expenses and other assets (28)
-----
Total gross deferred liabilities (108)
-----
Net deferred tax asset included in other assets $ 662
=====
The effective tax rate and the components of income tax expense do not
differ significantly from such amounts disclosed in prior periods.
Bankshares has determined that a valuation allowance for the gross deferred
tax assets is not necessary at September 30, 1995 due to the fact that the
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current
tax laws.
-20-<PAGE>
Total income taxes are allocated as follow:
Nine Months Ended
September 30,
($ in thousands) 1995 1994
==== ====
Income $753 672
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial reporting
purposes 97 (19)
---- ----
Total income taxes $850 653
==== ====
8. INTANGIBLE ASSETS
Included in other assets are deposit intangibles, net of amortization, of
$778 and $872 at September 30, 1995 and December 31, 1994, respectively,
and goodwill, net of amortization, of $405 and $427 at September 30, 1995
and December 31, 1994 respectively. Deposit intangibles are being
amortized on a straight-line basis over a ten-year period and goodwill is
being amortized on a straight-line basis over a fifteen-year period.
9. TIME DEPOSITS
Included in time deposits are certificates of deposit and other time
deposits of $100,000 or more in the aggregate amounts of $12,659 at
September 30, 1995, and $10,726 at December 31, 1994.
10.COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various commitments and
contingent liabilities such as commitments to extend credit which are not
reflected in the accompanying consolidated financial statements. No losses
are anticipated by management as a result of these transactions.
Commitments under standby letters of credit at September 30, 1995, were
$1,943 and at December 31, 1994, $3,117.
11.SUPPLEMENTAL CASH FLOW INFORMATION
Bankshares paid $4,924 and $4,163 for interest and $671 and $859 for income
taxes, net of refunds, at September 30, 1995 and September 30, 1994,
respectively. Noncash investing activities consisted of $179 and $404 of
loans charged against the allowance for loan losses for the periods ended
September 30, 1995 and September 30, 1994, respectively, and $95 of net
unrealized gains included in securities available for sale for the period
ended September 30, 1995 and $56 of net unrealized losses included in
securities available for sale for the period ended September 30, 1994.
There were no foreclosed loans transferred into other real estate owned for
the period ended September 30, 1995 as compared to $297 transferred for the
period ended September 30, 1994.
-21-<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1995
Compared to Three Months Ended September 30, 1994
($ in thousands)
PERFORMANCE SUMMARY
Net income for the current quarter amounted to $827, an increase of $24 or 3.0%
over the corresponding quarter in 1994. This increase resulted from a decrease
in the provision for loan losses, an increase in noninterest income and an
increase in noninterest expense.
NET INTEREST INCOME
Net interest income increased $18 or 7.6% in the current quarter over the
corresponding quarter in 1994. Interest income increased $347 or 9.2% due to
an increase in loans. Interest expense increased $329 or 23.1% due to an
increase in deposits.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses decreased $65 or 43.3% in the current quarter
over the corresponding quarter in 1994 due to a decline in net charge offs and
a stabilization of past due and nonaccrual loans. Management considers the
allowance adequate.
NONINTEREST INCOME
Noninterest income increased $55 or 14.2% in the current quarter over the
corresponding quarter in 1994 due to an increase in service charges on deposit
accounts, credit card fees, and trust income.
NONINTEREST EXPENSE
Noninterest expense increased $74 or 4.7% in the current quarter over the
corresponding quarter in 1994 due principally to increases in salaries and
employee benefits, credit card processing and net costs of other real estate
owned.
INCOME TAXES
Bankshares effective tax rate for the current quarter of 25.0% is comparable to
the 22.7% effective rate in the corresponding quarter of 1994.
Nine Months Ended September 30, 1995
Compared to Nine Months Ended September 30, 1994
($ in thousands)
PERFORMANCE SUMMARY
Net income for the nine months ended September 30, 1995 increased $176 or 7.8%
compared to the corresponding period of the previous year. This compared to a
$321 or 16.5% increase for the September 30, 1994 period compared to September
30, 1993. The increase in net income for the nine months ended September 30,
1995 was attributable principally to an increase in net interest income, a
-22-<PAGE>
decrease in the provision for loan losses and an increase in noninterest
expense.
NET INTEREST INCOME
Net interest income increased $369 or 5.6% from 1994 to 1995 compared to an
increase of $211 or 3.3% from 1993 to 1994. Interest income increased $1,153
over 1994 due to increases in the loan portfolio and changes in the yields on
other earning assets. Interest expense increased $784 from 1994 to 1995 due to
growth in total deposits and changes in the mix of deposit liabilities to time
deposits.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses decreased $155 or 40.8% in 1995 compared to 1994
because past due and nonaccrual loans have stabilized. The allowance for loan
losses to period end loans, net of unearned income, approximated 1.70% at
September 30, 1995 compared to 1.73% at December 31, 1994. Management
considers the allowance adequate.
NONINTEREST INCOME
During the first nine months of 1995 total noninterest income rose $35 or 2.8%
over the same period last year. This increase was due primarily to increases
in service charges on deposit accounts, credit card fees and other income.
NONINTEREST EXPENSE
Noninterest expense increased $302 or 6.7% for the nine months ended September
30, 1995 compared to a $206 or 4.8% increase for the 1993 to 1994 period. The
largest component of the increase was due to the increased cost of salaries and
employee benefits. Fringe benefit costs for pension, medical and dental
coverage have increased in the past year. Other operating expense increases
were in the areas of data processing, credit card processing and net costs of
other real estate owned. Net costs of other real estate owned increased $56
due mainly to writedowns of OREO property. The FDIC assessment decreased by
$19 reflecting a decrease in the FDIC rate charged for deposits.
INCOME TAXES
Bankshares' effective tax rate of 23.5% for the nine months ended September 30,
1995 is comparable to 22.8% for the nine months ended September 30, 1994.
BALANCE SHEET
Total assets have risen $6,953 since year end 1994. This increase is the
result of stronger loan demand for all categories of loans. Total deposits
increased $4,516 since year end 1994 with time deposits increasing $9,392.
This increase was a result of higher rates paid on time deposits compared to
rates paid on interest-bearing and savings deposits. Bankshares' stockholders'
equity was $22,257 at September 30, 1995 compared to $20,137 at year end 1994.
The increase of $2,120 resulted from earnings retention and a turnaround in net
unrealized gains on securities available for sale.
LIQUIDITY
Bankshares maintained an adequate level of liquidity during the first nine
months of 1995 and 1994. The liquidity ratio was 23.8% at September 30, 1995
-23-<PAGE>
and 27% at September 30, 1994. Certain assets are maintained on a short-term
basis to meet liquidity demands anticipated by management.
CAPITAL RESOURCES
Bankshares continues to maintain a strong capital position with the increase in
total capital attributable to retained earnings and the adoption of SFAS No.
115. Both Bankshares' and NBB's capital adequacy ratios exceed regulatory
requirements and they provide added flexibility to take advantage of business
opportunities as they arise.
CAPITAL ANALYSIS
($ in thousands) September 30, 1995
Capital Components Consolidated NBB
================== ============ ========
Tier 1 capital $19,560 19,417
Risk-adjusted tier 2 capital 1,713 2,105
------- -------
Total risk-adjusted capital $21,273 21,522
======= ========
Asset Components Consolidated NBB
================ ============ ========
Adjusted risk-weighted assets $136,635 136,652
Year-to-date adjusted average assets 198,858 198,978
Capital Ratios Required Consolidated NBB
============== ======== ============ ========
Common stockholders' equity 10.78% 10.32%
Regulatory capital 6% 10.88% 10.42%
Risk-weighted capital:
Tier 1 4% 14.91% 14.21%
Tier 1 + tier 2 8% 16.16% 15.46%
Leverage ratio 3%-5% 10.25% 9.76%
-24-<PAGE>
NATIONAL BANKSHARES, INC.
PART II
OTHER INFORMATION
Items 1-3. Legal Proceedings; Changes in Securities; Defaults Upon Senior
Securities
None for the period ended
September 30, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
None for the period ended
September 30, 1995.
Item 5. Other Information
None for the period ended
September 30, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10(a) - Agreement and Plan of Merger dated as of the
28th day of August, 1995, by and among
National Bankshares, Inc. and the Bank of
Tazewell County (incorporated herein by
reference to Exhibit 2.1 to the Company's
Report on Form 8-K dated August 28, 1995)
Exhibit 27 - Financial Data Schedule
(b) Form 8-K dated August 28, 1995
Item 5. Other Events
Item 7. Financial Statements and Exhibits
-25-<PAGE>
NATIONAL BANKSHARES, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bankshares, Inc.
(Registrant)
Date: 11/09/95 /s/ James G. Rakes
-------- -----------------------------------
James G. Rakes, President and
Chief Executive Officer
Date: 11/09/95 /s/ Joan C. Nelson
-------- -----------------------------------
Joan C. Nelson, Treasurer
-26-<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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