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:
March 31, 1999 0-15204
National Bankshares, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 South Main Street
P.O. Box 90002
Blacksburg, Virginia 24062-9002
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (540)552-2011
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 3, 1999
- ------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,792,833
(This report contains 28 pages) <PAGE>
National Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Page
----
Part I Financial Information
- --------------------------------
Item 1 - Financial Statements
Consolidated Balance Sheets, March 31, 1999
and December 31, 1998 4 - 5
Consolidated Statements of Income and
Comprehensive Income, Three Months Ended
March 31, 1999 and 1998 6 - 7
Consolidated Statements of Changes in
Stockholders' Equity, Three Months Ended
March 31, 1999 and 1998 8
Consolidated Statements of Cash Flows,
Three Months Ended March 31, 1999 and 1998 9 - 10
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 23
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 24 - 25
Part II Other Information
- ----------------------------
Items 1 - 3 - Legal Proceedings; Changes in
Securities; Defaults Upon Senior Securities 26
Item 4 - Submission of Matters to a Vote of
Security Holders 26 - 27
Item 5 - Other Information 27
Item 6 - Exhibits and Reports on Form 8 - K 27
Signatures 28
- ----------
-2-<PAGE>
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 three months ended March 31, 1999 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 1998
Annual Report to Stockholders and additional information supplied in the 1998
Form 10-K.
-3-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(Unaudited)
March 31, December 31,
($000's, except share and per share data) 1999 1998
========= ============
Assets
Cash and due from banks $ 13,815 14,421
Interest-bearing deposits 14,130 7,027
Federal funds sold 2,500 5,090
Securities available for sale 130,305 136,078
Securities held to maturity (fair value
$27,821 in 1999 and $31,151 in 1998) 27,471 30,676
Mortgage loans held for sale 516 2,180
Loans:
Real estate construction loans 12,726 12,827
Real estate mortgage loans 50,292 48,724
Commercial and industrial loans 123,056 110,509
Loans to individuals 68,473 69,493
-------- -------
Total loans 254,547 241,553
Less unearned income and deferred fees (2,123) (2,296)
-------- -------
Loans, net of unearned income and
deferred fees 252,424 239,257
Less allowance for loan losses (2,849) (2,679)
-------- -------
Loans, net 249,575 236,578
-------- -------
Bank premises and equipment, net 6,960 6,657
Accrued interest receivable 3,875 3,777
Other real estate owned, net 628 628
Other assets 2,499 2,054
-------- -------
Total assets $452,274 445,166
======== =======
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 56,116 55,479
Interest-bearing demand deposits 85,608 84,319
Savings deposits 47,806 46,387
Time deposits 198,665 196,511
-------- -------
Total deposits 388,195 382,696
-------- -------
Other borrowed funds 127 214
Accrued interest payable 697 647
Other liabilities 1,774 926
-------- -------
Total liabilities 390,793 384,483
-------- -------
Common stock subject to ESOP put option 2,194 2,180
-------- -------
-4- (Continued)<PAGE>
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 51,861 50,182
Accumulated other comprehensive income 138 1,019
Common stock subject to ESOP put option (2,194) (2,180)
-------- -------
Total stockholders' equity 59,287 58,503
Commitments and contingent liabilities
-------- -------
Total liabilities and
stockholders' equity $452,274 445,166
======== =======
-5-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, 1999 and 1998
(Unaudited)
March 31, March 31,
($000's, except per share data) 1999 1998
========= =========
Interest Income
Interest and fees on loans $ 5,535 5,154
Interest on interest-bearing deposits 53 174
Interest on federal funds sold 29 69
Interest on securities - taxable 1,877 1,749
Interest on securities - nontaxable 595 425
-------- --------
Total interest income 8,089 7,571
-------- --------
Interest Expense
Interest on time deposits of $100,000 or more 666 596
Interest on other deposits 2,768 2,697
Interest on borrowed funds 2 3
-------- --------
Total interest expense 3,436 3,296
-------- --------
Net interest income 4,653 4,275
Provision for loan losses 232 21
-------- --------
Net interest income after provision
for loan losses 4,421 4,254
-------- --------
Noninterest Income
Service charges on deposit accounts 261 275
Other service charges and fees 48 53
Credit card fees 163 138
Trust income 231 176
Other income 43 11
Realized securities gains, net 20 13
-------- --------
Total noninterest income 766 666
-------- --------
Noninterest Expense
Salaries and employee benefits 1,559 1,399
Occupancy and furniture and fixtures 257 246
Data processing and ATM 199 196
FDIC assessment 16 9
Credit card processing 156 128
Goodwill amortization 9 7
Net costs of other real estate owned 3 26
Other operating expense 727 685
-------- --------
Total noninterest expense 2,926 2,696
-------- --------
Income before income tax expense 2,261 2,224
Income tax expense 582 616
-------- --------
Net income 1,679 1,608
-------- --------
-6- (Continued)<PAGE>
Other comprehensive income, net of taxes:
Unrealized gains (losses) on securities
available for sale (881) 87
-------- --------
Comprehensive Income $ 798 1,695
======== --------
Net income per share $ .44 0.42
======== ========
-7-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Three Months Ended March 31, 1999 and 1998
(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,
1997 $9,482 46,191 194 (1,838) 54,029
Net income --- 1,608 --- --- 1,608
Unrealized gains
(losses) on securities
available for sale,
net of tax --- --- 87 --- 87
Change in common stock
subject to ESOP put
option --- --- --- (357) (357)
------ ------ ----- ------ ------
Balances, March 31, 1998 $9,482 47,799 281 (2,195) 55,367
====== ====== ===== ====== ======
Balances, December 31,
1998 $9,482 50,182 1,019 (2,180) 58,503
Net income --- 1,679 --- --- 1,679
Unrealized gains
(losses) on securities
available for sale,
net of tax (1) --- --- (881) --- (881)
Change in common stock
subject to ESOP put
option --- --- --- (14) (14)
------ ------ ----- ------ ------
Balances, March 31, 1999 $9,482 51,861 138 (2,194) 59,287
====== ====== ===== ====== ======
(1) Net unrealized holding loss for quarter $(1,288) plus
reclassification adjustment of $(47) unrealized gain for quarter and
less income tax benefit of $454
-8-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited)
March 31, March 31,
($000's) 1999 1998
========= =========
Cash Flows from Operating Activities
Net Income $ 1,679 1,608
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 232 21
Depreciation of bank premises and equipment 217 188
Amortization of intangibles 38 30
Amortization of premiums and accretion of
discounts, net 125 13
Gains on sales and calls of securities
available for sale, net (20) ---
Gains on calls of securities held to
maturity, net --- (13)
Losses and writedowns on other real estate
owned --- 21
(Increase) decrease in:
Mortgage loans held for sale 1,664 120
Accrued interest receivable (98) 77
Other assets (29) (336)
Increase in:
Accrued interest payable 50 14
Other liabilities 848 845
------- -------
Net cash provided by operating
activities 4,706 2,588
------- -------
Cash Flows from Investing Activities
Net (increase) decrease in federal funds sold 2,590 (2,055)
Net increase in interest-bearing deposits (7,103) (1,840)
Proceeds from calls and maturities of securities
available for sale 11,363 9,134
Proceeds from calls and maturities of securities
held to maturity 3,198 11,788
Purchases of securities available for sale (7,023) (12,615)
Purchase of loan participations (4,800) ---
Collections of loan participations 1,991 1,533
Net increase in loans made to customers (10,453) (7,946)
Proceeds from disposal of other real estate owned --- 44
Recoveries on loans charged off 33 194
Bank premises and equipment expenditures (520) (81)
------- -------
Net cash used in investing
activities (10,724) (1,844)
------- -------
-9- (Continued)<PAGE>
Cash Flows from Financing Activities
Net increase in time deposits 2,154 (2,263)
Net increase in other deposits 3,345 1,989
Net (decrease) in other borrowed funds (87) (166)
------- -------
Net cash provided by (used in)
financing activities 5,412 (440)
------- -------
Net increase (decrease) in cash and due from banks (606) 304
Cash and due from banks at beginning of period 14,421 12,435
------- -------
Cash and due from banks at end of period $13,815 12,739
======= =======
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 3,386 3,282
======= =======
Cash paid for income taxes $ 20 15
======= =======
Loans charged to the allowance for loan losses $ 95 67
======= =======
Loans transferred to other real estate owned $ --- 41
======= =======
-10-<PAGE>
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 provide 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 1998 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 three months ended March 31,1999
- ----------------------------------------------------------------
Net income for the three months ended March 31, 1999 was $1,679,000 which
represents an increase of $71,000 or 4.42% over the first three months of 1998.
The return on average assets for the quarter-ended March 31, 1999 was 1.54% and
1.63% as of March 31, 1998. The return on average equity was 11.12% for the
period ended March 31, 1999 and 11.49% as of March 31, 1998.
Earnings per share for the first quarter of 1999 was $0.44 per share, an
increase of $.02 per share over the first quarter of 1998.
The following table provides selected consolidated dates.
March 31, December 31,
($000's, except per share and
percent data) 1999 1998 1998 1997
====== ====== ============ ============
Interest income $8,089 7,571 31,828 29,797
Interest expense 3,436 3,296 13,928 13,106
Net interest income 4,653 4,275 17,900 16,691
Provision for loan losses 232 21 624 435
Noninterest income 766 666 3,174 2,834
Noninterest expense 2,926 2,696 11,061 10,031
Income taxes 582 616 2,591 2,499
Net income $1,679 1,608 6,798 6,560
Return on average assets 1.54% 1.63% 1.61% 1.66%
Return on average equity (1) 11.12% 11.49% 11.66% 12.21%
Basic net income per share $ .44 .42 1.79 1.73
Book value per share (1) $16.21 15.18 16.00 14.73
(1) Includes amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets.
-11-<PAGE>
Net Interest Income
- -------------------
Net interest income at the end of the first three months of 1999 was
$4,653,000, an increase of $378,000 or 8.84% over the same period in 1998.
The net interest margin is one of the primary ratios used by banks to
measure net interest income. The net interest margin is composed of the yield
on earning assets on a fully tax equivalent basis less the cost to fund earning
assets. The funding cost factor in interest bearing deposits as well as
capital and demand deposits. The following table sets forth the Company's net
interest margin for the period specified.
March 31, December 31,
1999 1998 1998 1997
--------- --------- ----------- -----------
Yield on earning assets 8.18% 8.38% 8.25% 8.24%
Cost to fund earning assets 3.33% 3.53% 3.50% 3.50%
-------- ------- ------- -------
Net interest margin 4.85% 4.85% 4.75% 4.74%
======== ======= ======= =======
A second measure of net interest income is the net interest spread. The
ratio consists of the yield on earning assets on a fully tax equivalent basis
less the cost of interest bearing liabilities. It does not reflect the benefit
received from "free funds" such demand deposits and capital. The following
table sets forth the company's net interest spread for the periods shown.
March 31, December 31,
1999 1998 1998 1997
--------- --------- ----------- -----------
Yield on earning assets 8.18% 8.38% 8.25% 8.24%
Cost of interest-bearing
liabilities 4.26% 4.50% 4.48% 4.43%
-------- ------- ------- -------
Net interest spread 3.92% 3.88% 3.77% 3.81%
======== ======= ======= =======
As can be seen by the table shown above, the yield on earning assets for
the first quarter of 1999 has declined by seven basis points from the year-
ended 1998. The cost to fund earning assets declined by seventeen basis
points. These elements combined to produce a ten basis point improvement in
the net interest margin.
The decline in the yield on earning assets and the cost of interest
bearing liabilities is due in part to a declining rate environment. The cost
of interest bearing liabilities which declined to a greater degree was directly
affected by certain management efforts to contain interest expense.
Provision and Allowance for Loan Losses
- ---------------------------------------
The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general
economic conditions.
-12-<PAGE>
An internal credit review department performs pre-credit analyses of large
credits and also conducts credit review activities that provide management with
an early warning of asset quality deterioration. Changing trends in the loan
mix are also evaluated in determining the adequacy of the allowance for loan
losses. Loan loss and other industry indications related to asset quality are
presented in the following table.
For the periods ended
March 31, December 31,
1999 1998 1998 1997
($000's) ========= ========= =========== ============
Balance at beginning of period $ 2,679 2,438 2,438 2,575
Provision for loan losses 232 21 624 435
Loans charged off (95) (67) (638) (679)
Recoveries 33 194 255 107
-------- -------- --------- ---------
Balance at the end of period $ 2,849 2,586 2,679 2,438
======== ======== ========= =========
Ratio of allowance for loan
losses to end of period loans,
net of unearned income and
deferred fees 1.13% 1.16% 1.12% 1.12%
======== ======== ========= =========
Ratio of net charge-offs
(recoveries) to average loans,
net of unearned income and
deferred fees(1) .10% (.24)% .17% .28%
======== ======== ========= =========
Ratio of allowance for loan
losses to nonperforming
loans(2) 1,656.40% 6,157.14% 9,567.86% 2,802.30%
======== ======== ========= =========
(1) Net charge-offs are 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.
March 31, December 31,
($000's) 1999 1998 1998 1997
======== ======== ======== ========
Nonperforming Assets
Nonaccrual loans $ 172 42 28 87
Restructured loans --- --- --- ---
------ ------ ------ ------
Total nonperforming loans 172 42 28 87
Foreclosed property 628 397 628 421
------ ------ ------ ------
Total nonperforming assets $ 800 439 656 508
====== ====== ====== ======
-13-<PAGE>
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees, plus other real
estate owned .32% .20% .27% .23%
====== ====== ====== ======
Accruing Loans Past Due 90 Days or More
---------------------------------------
Past due 90 days or more and
still accruing $2,153 921 550 672
====== ====== ====== ======
Ratio of loans past due 90 days or
more to loans, net of unearned
income and deferred fees .85% .41% .23% .31%
====== ====== ====== ======
Impaired Loans
--------------
Total impaired loans $ 268 89 373 177
====== ====== ====== ======
Impaired loans with a
valuation allowance 145 --- 145 53
Valuation allowance 145 --- 145 53
------ ------ ------ ------
Impaired loans net of allowance $ --- --- --- ---
====== ====== ====== ======
Impaired loans with no
valuation allowance $ 123 89 228 124
====== ====== ====== ======
Average recorded investment
in impaired loans $ 268 89 387 458
====== ====== ====== ======
Income recognized on impaired
loans $ 4 2 32 23
====== ====== ====== ======
Amount of income recognized
on a cash basis $ --- --- --- 12
====== ====== ====== ======
As can be seen by the preceding table, the provision for loan losses was
$232,000 for the first quarter of 1999, up $211,000 over the same period the
prior year. The ratio of the allowance for loan losses to loans net of
unearned income has remained relatively stable. The net charge-offs ratio for
the first quarter of 1999 was lower than most of the other periods shown.
It should be noted that loans past due 90 days or more have risen when
compared to prior period data. As mentioned in the Company's 1998 Form 10-K,
the Company has two additional credits totaling approximately $1.7 million
which are experiencing collection problems. These loans are at present 90 days
or more past due. Management believes, at present, that these credits can be
recovered without loss. At March 31, 1999 both loans were on an accrual basis.
Overall, it is expected that provisions for loan loss expense will be
higher in 1999. Such expense will be required by strong loan growth and the
need to maintain an adequate overall reserve. Further additions could be made
necessary by unforeseen losses and/or a change in the circumstances surrounding
the two credits mentioned above.
-14-<PAGE>
The total amount of foreclosed properties at March 31, 1999 and December
31, 1998 was $628,000. At March 31, 1999 approximately $267,000 of that amount
was held by the Company's NBB affiliate. The property consists of undeveloped
real estate originally intended to be a residential subdivision. The property
has been held for a period in excess of five years. Three other properties are
being held by the Company's BTC affiliate. With the exception of one property,
which is being carried for approximately $20,000, these properties are
relatively recent acquisitions and timely disposal is expected.
Noninterest Income
- ------------------
Noninterest income is an important source of the company's income. This
category is comprised of service charges on deposit accounts, other service
charges and fees, credit card fees, trust income and other income. Net
securities gains and losses are also included in this category.
Noninterest income for the period ended March 31, 1999 was $766,000, an
increase of $100,000 or 15.02% over the same period in 1998.
Service charges on deposit accounts were $261,000 at March 31, 1999, a
decrease of $14,000 or 5.09% from the same period in 1998.
Other service charges declined by $5,000 when March 31, 1999 and 1998 are
compared.
Credit card fees grew by $25,000 or 18.12% when the first three months of
1999 and 1998 are compared. Continued growth in volume was the primary cause
of this increase.
Trust income increased by 31.25% when compared to the first three months
of 1998. Trust income is dependent on market conditions as well as the types
of accounts being handled at any given point in time. The level of estate
business, for example, cannot be predicted with any degree of preciseness.
Other income, which is comprised of various miscellaneous types of income,
increased by $32,000 for the first three months of 1999.
Included in other income in 1999 was approximately $12,000 which
represented a recovery of principal for a bond charged-off in prior year and
$9,000 for gains on the sale of repossessed autos.
Net securities gains and losses decreased $7,000 when 1999 and 1998 are
compared. The income in this category reflects securities called prior to
maturity.
Noninterest Expense
- -------------------
Noninterest expenses for the first three months of 1999 were $2,926,000,
an increase of $230,000 or 8.53% over the first three months of 1998.
Salaries and fringe benefits were $1,559,000 at the end of the first three
months of 1999. This represents an increase of $160,000 or 11.44% over the
first three months of 1998. A portion of this increase was due to the
acquisition of the Galax branch. This facility was acquired in the second
quarter of 1998. Accordingly, 1998 data contains no salaries expense
associated with the acquisition. The remainder of the increase was due to
normal merit increases and other personnel related costs.
-15-<PAGE>
Occupancy expenses increased by $11,000 or 4.47% when the first three
months of 1999 and 1998 are compared. Acquisition of the previously mentioned
Galax Branch contributed to this increase.
Data processing expense increased by $3,000 or 1.53%.
Credit card expense rose by $28,000 of 21.88% in the first three months of
1999. Increases in overall volume also contributed to this increase. Included
in the category was approximately $4,000 in expense related to the reissuance
of debit cards. The next scheduled reissuance will be in four years.
Other expenses at March 31, 1999 were $727,000, which represents an
increase of $42,000 or 6.13% over the same period in 1998. Other expenses
include various types of costs. Examples of expense accounts included are
telephone, franchise taxes, stationary and supplies, market expense,
correspondent charges and numerous others. Some expenses included in this area
represent accrued expense for anticipated expenditures, while others are on a
cash or pay as incurred basis. Some categories are within management's ability
to control while others can only be controlled to a degree.
Balance Sheet
- -------------
The following table sets forth selected consolidated balance sheet data.
March 31, December 31,
1999 1998 1998 1997
======== ========= ============ ============
($000's)
Selected Period-End Data
- ------------------------
Loans, net $ 249,575 220,709 236,578 214,552
Total Securities 157,776 141,799 166,754 149,974
Total Assets 452,274 405,021 445,166 402,907
Total Deposits 388,195 344,593 382,696 344,867
Stockholders' Equity 59,287 55,367 58,503 54,029
Selected Daily Averages Data
- ----------------------------
Loans, net $ 241,776 215,980 225,613 204,540
Total securities 167,674 144,285 152,432 157,179
Interest-earning assets 417,885 379,134 398,340 374,478
Total assets 442,801 401,010 420,988 395,932
Total deposits 379,511 341,736 359,970 339,439
Interest-bearing liabilities 326,942 296,789 310,634 295,565
Stockholders' equity 59,029 54,772 58,282 53,712
-16-<PAGE>
Total average assets at March 31, 1999 were $442,801,000, an increase of
$41,791,000 or 10.42% from March 31, 1998. A portion of this increase was due
to the acquisition of the Galax branch in the second quarter of 1998. The
Company also continues to experience satisfactory growth in deposits from
nonacquisition related sources.
The following table sets forth selected balance sheet caption as a
percentage of total assets at the dates shown.
March 31, December 31,
1999 1998 1998 1997
========= ========= =========== ===========
Assets
- ------
Interest bearing deposits 3.12% 2.86% 1.58% 2.41%
Federal funds sold .55% 1.57% 1.14% 1.07%
Securities available for sale 28.81% 17.09% 30.57% 16.28%
Securities held to maturity 6.07% 17.93% 6.89% 20.95%
Mortgage loans held for sale .11% .07% .49% .10%
Real estate construction
loans 2.81% 2.89% 2.88% 2.11%
Real estate mortgage loans 11.12% 10.73% 10.95% 10.66%
Commercial and industrial
loans 27.21% 25.67% 24.82% 25.16%
Loans to individuals 15.14% 16.48% 15.61% 16.54%
Liabilities
- -----------
Noninterest bearing demand
deposits 12.41% 11.79% 12.46% 11.19%
Interest bearing demand
deposits 18.93% 18.89% 18.94% 19.33%
Savings deposits 10.57% 11.71% 10.42% 11.61%
Time deposit 43.93% 42.68% 44.14% 43.47%
Other borrowed funds .03% .08% .05% .12%
As shown by the above table, management has shifted a substantial portion
of its investment portfolio to the available for sale category. A portion of
this shift was accomplished through calls, maturities of bonds and their
subsequent reinvestment. In the fourth quarter of 1998, the Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and hedging Activities". The statement allowed, upon adoption, the
transfer of securities from the held to maturity classification to the
available for sale without calling into question management's intent to hold
-17-<PAGE>
its remaining securities until maturity. The Company used this opportunity to
transfer approximately $20,516,000 in securities to held for sale category.
This shift will increase the Company's flexibility to deal with liquidity
and interest rate sensitivity.
The overall mix of loan and deposits has remained roughly the same.
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 $4,706,000 for the three months ended
March 31, 1999. Net cash used in investing activities was $10,724,000 with the
majority of that cash invested in securities and loans. Net cash provided by
financing activities was $5,412,000. Net cash decreased $606,000 from December
31, 1998.
The Company actively manages its liquidity position through its investing
activities. At March 31, 1999, overnight funds which includes Federal Funds
sold and funds on deposit with the Federal Home Loan Bank totaled $16,630,000.
In addition, securities with a remaining maturity of less than one year totaled
$33,644,000. 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 $72,427,000 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.
NBB is in process of constructing a new building. This facility will
provide additional office space to replace existing leased properties and also
add a branch facility. This project is not expected to have a material impact
on the Company's liquidity.
On March 15, 1999, the Company announced a tender offer in which it sought
to repurchase up to 200,000 shares of its stock at $28.00 per share. The
impact of this offer is not expected to materially impact the Company's
liquidity.
The Year 2000 also has liquidity implications. Management is fully aware
of customer apprehension associated with the Year 2000 date change.
Accordingly, it is management's plan to provide for additional liquidity as
part of its contingency planning processes. Please refer to the above
information related to the establishment of credit facilities and the Year 2000
discussion which follows for the steps the Company is taking to allay
unwarranted customer concerns.
Management is not aware of any other 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.
-18-<PAGE>
Capital Resources
- -----------------
Total stockholders' equity increased $784,000 or 1.34% from December 31,
1998. During the first three months of 1999, retained earnings grew by
$1,679,000. Accumulated comprehensive income decreased stockholders' equity by
$881,000. 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 $14,000. 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.
March 31, December 31,
1999 1998 1998 1997
========= ========= ========== ============
Consolidated Capital Ratios
---------------------------
Total capital (to risk
weighted assets) 22.2% 23.7% 22.4% 23.3%
Tier 1 Capital (to risk
weighted assets) 21.2% 22.7% 21.5% 22.3%
Tier 1 capital (to average
assets, leverage ratio) 13.7% 14.2% 13.4% 13.7%
Tender Offer
- ------------
On March 15, 1999, the Company announced a stock tender offer. The
Company sought to repurchase 200,000 shares, but reserved the right to purchase
up to two percent of its outstanding shares of common stock. The tender off
closed on April 30, 1999. The offer resulted in the repurchase of 275,856
shares. The Company's Form 13E-4 filed March 15, 1999 and amended 13E-4 filed
March 31, 1999 are incorporated herein.
Selected Affiliate Bank Data
- ----------------------------
The following table sets forth selected data for NBB and BTC:
March 31, 1999
--------------
(000's, except for % data) NBB BTC
--- ---
Assets $271,482 178,216
Deposits 238,798 149,422
Shareholders Equity 30,974 27,946
Net Income 1,101 547
Return on Average Assets 1.69% 1.25%
Return on Average Equity 14.51% 7.95%
Tier 1 Capital Rates 15.90% 29.74%
Total Risk Based Capital
Rates 16.95% 30.70%
Tier 1 Leverage Ratio 11.32% 15.86%
-19-<PAGE>
Year 2000
- ---------
The Company recognizes the risks and challenges presented by the impact of
the century date change on information processing and other microchip
controlled systems. The Year 2000 ("Y2K") involves several issues for
financial institutions. The Company's own internal information processing and
microchip controlled systems, as well as those of its major service vendors,
must be Y2K compliant. Banks face credit, earnings and liquidity risk should
commercial loan customers or large depositors 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. Banks could encounter
temporary funding shortages if customers withdraw unusually large sums of cash
because they are unduly concerned about the effects of Y2K. And, although
management believes the level of counterpart trading risk is low, there could
be a temporary or permanent effect on the investment portfolio resulting from
the negative impact of Y2K on the underlying entities.
Both of the Company's bank subsidiaries have established Y2K project
management teams that have developed Y2K plans with assessment, testing, and
remediation phases. The internal audit department is conducting Y2K audits,
and both banks are subject to the guidelines promulgated by the Federal
Financial Institutions Examination Counsel (FFIEC) and to regular Year 2000
compliance examinations by their respective federal regulators.
The assessment phase outlined in both NBB's and BTC's Y2K plans has been
completed. The banks have identified all internal mission critical information
technology and microchip controlled systems. Outside vendors that provide
mission critical service to the institutions have also been identified.
Because of their importance to daily business operations, substantial
attention has been focused on the banks' customer information processing
hardware and software. In 1997, in the normal course of business, NBB
purchased a new Unisys host computer and peripherals and installed the latest
version of its Information Technology, Inc. (ITI) software. In the last
quarter of 1998, BTC converted from its previous in-house information
processing system. BTC is now processed using NBB's hardware and software.
The NBB system has been tested, including century date rollover and other
critical dates, and validation of the ITI application is complete.
Each bank has identified as mission critical independent information
technology systems in their Trust Departments. NBB has successfully completed
proxy testing of its external service provider, and BTC has successfully tested
its internal system. Microchip controlled bank security systems are also
mission critical. Testing of these systems at both banks determined that minor
renovations were necessary at three offices. Those renovations are now
complete.
The Federal Reserve Bank of Richmond has provided comprehensive procedures
and instructions for interface testing. During the first quarter of 1999, NBB
and BTC successfully tested all utilized services, including wire transfer,
automated clearing house and savings bonds.
Both NBB and BTC deal with outside vendors that provide mission critical
support for bank card processing and ATM servicing. The banks are monitoring
these vendors' progress to assure their Y2K readiness. The vendors regularly
provide status reports and testing criteria. In the first quarter of 1999,
both BTC and NBB converted to a new ATM servicer. Testing of that application
was successfully concluded.
-20-<PAGE>
Each bank has developed and implemented programs to assess the level of
Y2K risk among large loan customers. NBB's Credit Review department performs a
precredit analysis of all new large loans made by both banks. An assessment of
the potential effects of the Year 2000 on the credit-worthiness of borrowers is
a part of this analysis. BTC is asking new commercial borrowers to sign an
agreement to insure compliance with minimum standards with regard to Y2K
issues. That bank is also following up with these borrowers to insure that
promised deadlines are met. Both NBB and BTC have also completed assessments
of Year 2000 preparedness among existing large commercial loan customers.
The banks have ongoing initiatives designed to educate customers about Y2K
issues and to allay any unwarranted concerns about the safety and soundness of
the institutions. Leaflets discussing the topic were sent to all customers,
and the banks have posted information on their Web sites. NBB held a public
forum directed at small businesses and has established a toll free information
hotline. Employee training and awareness campaigns have been completed.
Additional employee training and public education efforts are planned
throughout the rest of 1999.
Contingency plans have been drafted by NBB and BTC to 1) identify
alternatives if mission critical applications do not meet the banks' readiness
plan, and 2) develop a course of action to assure business continuity in the
event there are system failures on critical dates. Both institutions are
providing their Boards of Directors with regular reports on Y2K initiatives and
preparedness.
At this time, National Bankshares, Inc. believes that in the most likely
worst-case scenarios, Y2K will not have a material effect on the Company's
operations, liquidity or financial condition. Although contingency plans
address multiple alternative scenarios, the Company believes it is impossible
for any business to address the potentially unlimited number of possible
circumstances relating to Y2K issues. Even though it is highly unlikely,
National Bankshares recognizes that if its Y2K assessment, remediation or
contingency plans prove to be inadequate, this could have a material impact on
its operations and therefore result in a material adverse effect on the
Company's results of operations and financial condition.
The Company's recently completed upgrade of internal processing systems
does enhance Y2K preparedness. However, the major goals of the upgrade were to
provide a shared information processing system for affiliates and to provide
additional processing capacity and the ability to use the most advanced version
of software available. The costs of the upgrade were substantial, but the
total of costs of the upgrade directly related to the Y2K component was not
material.
-21-<PAGE>
Banking Terms
Basis Point - a Earnings Per Share- assets.
measurement unit Basic - net income,
defined as one reduced by dividends on Nonperforming Assets -
hundredth of one preferred stock, the sum of loans on
percent; it usually divided by the average which interest income
refers to an interest number of common shares is not being accrued;
rate. outstanding in the restructured loans on
period. which the interest
Book Value Per Share - rates or terms of
the value of a share of Equity Capital/Share- repayment have been
common stock determined holders' Equity - a materially revised and
b y d i v i d i n g balance sheet amount real estate that has
shareholders' equity at that represents the been acquired through
the end of a period, total investment in the foreclosure.
excluding preferred corporation by holders
stock, by the number of of common and preferred Rate-Sensitive Assets/
common shares stock; it includes Liabilities - earning
outstanding at the end amounts added through assets and interest-
of the same period. the retention of bearing liabilities
earnings. that can be repriced
Core Deposits - demand or replaced at a
deposits, savings Interest-Bearing different interest
accounts, interest Liabilities - deposits rate, within a
checking accounts, and borrowed funds on specific period, due
insured money market which the corporation to rate changes or
a c c o u n t s a n d pays interest; includes maturity.
certificates of deposit interest checking
under $100,000. This accounts, money market Return on Average
is a more stable source accounts, certificates Assets (ROA) - net
of funds than funds of deposit, short-term income as a percentage
purchased on the basis borrowings and long- of average total
of rate only. term debt. assets. It is a key
profitability ratio
Cost of Funds - Leverage Capital that indicates how
interest on deposits Ratio - the total of effectively a bank has
and borrowed funds Tier 1 capital less used its total
divided by the average certain intangible resources.
balance of such funds. assets such as
goodwill, divided by Return on Average
Comprehensive Income - quarterly average Equity (ROE) - net
net income plus the assets. A key income as a percentage
change in unrealized regulatory capital of total average
gains and losses, net requirement with the shareholders' equity.
of tax, on securities minimum amount allowed Provides a measure of
available for sale for of 4%. how productively a
the period. bank's equity has been
Net Interest Income - employed.
Earning Assets - loans the difference between
(net of unearned income from earning Risk-Based Assets - a
income), investment assets and interest regulatory method of
securities, money paid on deposits and classifying assets
market investments and borrowed funds. based on their
interest-bearing potential risk of
deposits in other Net Interest Margin - loss, used in
banks. net taxable-equivalent calculating various
interest income divided capital ratios.
by average earning Assets are classified
-22-<PAGE>
in one of four Tier 1 Risk-Based Capi-
categories based tal Ratio - common
primarily on credit shareholders' equity
risk and are adjusted less certain intangible
to reflect the relative assets, such as
riskiness of that goodwill, divided by
category. risk-based assets.
Current regulatory
Securities Available minimum requires that
for Sale - securities at least a 4% ratio be
that will be held for maintained.
indefinite periods of
time and that may be Total Risk-Based
sold as part of the Capital Ratio - total
bank's asset/liability capital divided by
strategy. These risk-based assets.
securities are recorded Total capital consists
at their current market of common shareholders'
value rather than at equity, the allowance
their historical for loan losses,
amortized cost. certain components of
nonpermanent preferred
Securities Held to stock and subordinated
Maturity - securities debt less certain
that the bank has the intangible assets, such
ability and the intent as goodwill. Current
to hold to maturity. regulatory minimum
These securities are requires that at least
recorded at their an 8% ratio be
original cost, adjusted maintained.
for amortization of
premium or discount Yield on Earning Assets
accretion. - total taxable-
equivalent interest
Spread or Interest-Rate income dividend by the
Differential - the average balance of
difference between the earnings assets.
average interest rates
received on earning
assets and the average
interest rates paid for
interest-bearing
liabilities.
Taxable-Equivalent In-
come - income that has
been adjusted by
increasing tax-exempt
interest income to an
equivalent pretax
amount of taxable
income. This
adjustment allows
corporations to compare
the effective pretax
yields on different
mixes of taxable and
tax-exempt assets.
-23-<PAGE>
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 March 31,
1999 approximated $23,518,000.
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
March 31, 1999, 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.
The method of analysis presented in the following table has certain
inherent shortcomings. 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.
In addition, loan prepayments and early withdrawals of certificates of deposit
could cause the interest sensitivities to vary from those which appear on the
table. The classification of securities as held to maturity or available for
sale also effects rate sensitivity. Available for sale securities which may be
sold can be used to adjust the Company's interest rate sensitivity position.
Finally, call features in the investment portfolio can have a considerable
effect. Since the call decision is dependent on interest rate levels at a
future point in time, the ultimate effect on interest rate sensitivity cannot
be precisely determined. A substantial number of bonds in the investment
portfolio contain these features.
($000's) <3 Months 6 Months 12 Months 1-5 Years >5 Years
========= ======== ========= ========= ========
Interest-earning
assets $ 65,456 20,670 43,732 155,454 139,185
Interest-bearing
liabilities 179,198 36,195 74,691 42,122 ---
--------- -------- -------- -------- --------
Gap (113,742) (15,525) (30,959) 113,332 139,185
========= ======== ======== ======== ========
Cumulative gap $(113,742) (129,267) (160,226) (46,894) 92,291
========= ======== ======== ======== ========
Cumulative gap
ratio .37 .40 .45 .86 1.28
========= ======== ======== ======== ========
-24-<PAGE>
The Company also uses simulation analysis to forecast its balance sheet
and monitor interest rate sensitivity. One test used by the Company is shock
analysis, which measures the effect of a hypothetical, immediate and parallel
shift in interest rates. The following table shows the results of a rate shock
of 100, 200, and 300 basis points and the effects on net income and return on
average assets and return on average equity at March 31, 1999.
($000's, except for percent data)
Return on Return on
Rate Shift Net Income Average Equity Average Assets
========== ========== ============== ==============
300 $5,215 7.63% .98%
200 5,991 8.95% 1.17%
100 6,763 10.23% 1.35%
(-)100 8,527 13.11% 1.76%
(-)200 9,330 14.38% 1.95%
(-)300 9,629 14.90% 2.03%
Simulation analysis allows the Company to test asset and liability
management strategies under rising and falling rate conditions. As a part of
simulation process, certain estimates and assumptions must be made dealing
with, but not limited to, asset growth, the mix of assets and liabilities, rate
environment, local and national economic conditions. Asset growth and the mix
of assets can to a degree be influenced by management. Other areas such as the
rate environment and economic factors cannot be controlled. For this reason
actual results may vary materially from any particular forecast or shock
analysis.
This shortcoming is offset to a degree by the periodic re-forecasting of
the balance sheet to reflect current trends and economic conditions. Shock
analysis must also be updated periodically as a part of the asset and liability
management process.
-25-<PAGE>
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
March 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
Two proposals were submitted to a vote of security holders at
the Company's Annual Meeting of Stockholders held on April 13,
1999.
Proposal No. 1 - Election of Directors
--------------------------------------
Three Class Three Directors were elected for a term of three
years each. Two Class One Directors were elected for a term of
one year each.
The name of each Director elected at the meeting follows:
Class Three Directors Class One Directors
--------------------- -------------------
Charles L. Boatwright L. Allen Bowman
James A. Deskins, Sr. Cameron L. Forrester
William T. Peery
The name of each Director whose term of office continued
after the meeting is listed:
Alonzo A. Crouse
Paul A. Duncan
James G. Rakes
Jeffrey R. Stewart
The number of votes cast for and against each nominee is
provided below. There were no abstaining votes and no broker
non-votes.
Election of Directors
Director Votes For Votes Against
-------- --------- -------------
Charles L. Boatwright 2,899,273 19,294
James A. Deskins, Sr. 2,909,815 8,752
William T. Peery 2,909,929 8,638
L. Allen Bowman 2,911,849 6,718
Cameron L. Forrester 2,909,932 8,635
-26-<PAGE>
Proposal No. 2 - Approval of the 1999 Stock Option Plan
-------------------------------------------------------
The 1999 Stock Option Plan, which makes available up to
250,000 shares of Common Stock for awards to key employees of
the Company and its subsidiaries in the form of stock options,
was approved by the stockholders.
The number of shares cast for and against approval of the
1999 Stock Option Plan, and the number of votes abstaining, is
listed below. There were 282,563 broker non-votes.
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
2,400,281 183,336 52,387
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
March 31, 1999:
-- Press release dated March 17, 1999 related to Tender
Offer
-- Announcement of Amendment to Tender Offer dated March
31, 1999
The aforementioned Form 8-K's are incorporated by reference.
-27-<PAGE>
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: May 7, 1999 /s/James G. Rakes
------------- -------------------------------------
James G. Rakes, Chairman
President and Chief Executive Officer
Date: May 7, 1999 /s/J. Robert Buchanan
------------- -------------------------------------
J. Robert Buchanan, Treasurer
(principal financial officer)
-28-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE OF FINANCIAL INFORMATION IS EXTRACTED FROM THE MARCH 31,1999
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,815
<INT-BEARING-DEPOSITS> 14,130
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,305
<INVESTMENTS-CARRYING> 27,471
<INVESTMENTS-MARKET> 27,821
<LOANS> 252,424
<ALLOWANCE> 2,849
<TOTAL-ASSETS> 452,274
<DEPOSITS> 388,195
<SHORT-TERM> 127
<LIABILITIES-OTHER> 4,665
<LONG-TERM> 0
0
0
<COMMON> 9,482
<OTHER-SE> 49,805
<TOTAL-LIABILITIES-AND-EQUITY> 452,274
<INTEREST-LOAN> 5,535
<INTEREST-INVEST> 2,472
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 8,089
<INTEREST-DEPOSIT> 3,434
<INTEREST-EXPENSE> 3,436
<INTEREST-INCOME-NET> 4,653
<LOAN-LOSSES> 232
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 2,926
<INCOME-PRETAX> 2,261
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,679
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
