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, 2000 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.)
101 Hubbard 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 April 28, 2000
- ------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,516,977
(This report contains 30 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, 2000
and December 31, 1999 3-4
Consolidated Statements of Income and
Comprehensive Income, Three Months Ended
March 31, 2000 and 1999 5-6
Consolidated Statements of Changes in
Stockholders' Equity, Three Months Ended
March 31, 2000 and 1999 7
Consolidated Statements of Cash Flows,
Three Months Ended March 31, 2000 and 1999 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-25
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 26-28
Part II Other Information
- ----------------------------
Items 1 - 3 - Legal Proceedings; Changes in
Securities and Use of Proceeds;
Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of
Security Holders 29
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
- ----------
-2-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
(Unaudited)
March 31, December 31,
($000's, except share and per share data) 2000 1999
============= ============
Assets
Cash and due from banks $ 13,053 13,311
Interest-bearing deposits 6,073 9,219
Federal funds sold 10,455 2,800
Securities available for sale 118,450 113,845
Securities held to maturity (fair value
$22,215 in 2000 and $23,496 in 1999) 22,421 23,647
Mortgage loans held for sale 695 229
Loans:
Real estate construction loans 15,211 14,669
Real estate mortgage loans 60,387 58,829
Commercial and industrial loans 152,844 149,386
Loans to individuals 74,715 73,825
-------- -------
Total loans 303,157 296,709
Less unearned income and deferred fees (2,008) (1,916)
-------- -------
Loans, net of unearned income
and deferred fees 301,149 294,793
Less allowance for loan losses (3,452) (3,231)
-------- -------
Loans, net 297,697 291,562
-------- -------
Bank premises and equipment, net 8,521 8,506
Accrued interest receivable 4,055 4,014
Other real estate owned, net 415 447
Other assets 4,509 4,554
-------- -------
Total assets $486,344 472,134
======== =======
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $ 56,538 54,748
Interest-bearing demand deposits 88,541 88,385
Savings deposits 44,216 44,834
Time deposits 229,926 219,220
-------- -------
Total deposits 419,221 407,187
-------- -------
Other borrowed funds 177 10,460
Long-term debt 10,000 ---
Accrued interest payable 660 651
Other liabilities 1,635 1,113
-------- -------
Total liabilities 431,693 419,411
-------- -------
-3- (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 3,516,977 shares in 2000 and
3,792,833 in 1999 8,792 8,792
Retained earnings 49,236 47,384
Accumulated other comprehensive (loss) (3,377) (3,453)
-------- -------
Total stockholders' equity 54,651 52,723
Commitments and contingent liabilities
-------- -------
Total liabilities and
stockholders' equity $486,344 472,134
======== =======
See accompanying notes to unaudited consolidated financial statements.
-4- <PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Three Months Ended March 31, 2000 and 1999
(Unaudited)
March 31, March 31,
($000's, except per share data) 2000 1999
============ ==============
Interest Income
Interest and fees on loans $ 6,539 5,535
Interest on interest-bearing deposits 46 29
Interest on federal funds sold 51 53
Interest on securities - taxable 1,660 1,877
Interest on securities - nontaxable 548 595
---------- ---------
Total interest income 8,844 8,089
---------- ---------
Interest Expense
Interest on time deposits of $100,000 or more 641 666
Interest on other deposits 3,079 2,768
Interest on other borrowed funds 41 2
Interest on long-term debt 125 ---
---------- ---------
Total interest expense 3,886 3,436
---------- ---------
Net interest income 4,958 4,653
Provision for loan losses 353 232
---------- ---------
Net interest income after provision
for loan losses 4,605 4,421
---------- ---------
Noninterest Income
Service charges on deposit accounts 362 261
Other service charges and fees 59 48
Credit card fees 219 163
Trust income 210 231
Other income 75 43
Realized securities gains, net --- 20
---------- ---------
Total noninterest income 925 766
---------- ---------
Noninterest Expense
Salaries and employee benefits 1,558 1,559
Occupancy and furniture and fixtures 299 257
Data processing and ATM 218 199
FDIC assessment 21 16
Credit card processing 214 156
Goodwill amortization 9 9
Net costs of other real estate owned 3 3
Other operating expense 669 727
---------- ---------
Total noninterest expense 2,991 2,926
---------- ---------
Income before income tax expense 2,539 2,261
Income tax expense 687 582
---------- ---------
Net income 1,852 1,679
-5- (Continued)<PAGE>
Other comprehensive income (loss), net of
taxes:
Unrealized gains (losses) on securities
available for sale 76 (881)
---------- ---------
Comprehensive Income $ 1,928 798
========== =========
Net income per share $ 0.53 0.44
========== =========
Weighted average number of common
shares outstanding 3,516,977 3,792,833
========== =========
See accompanying notes to unaudited consolidated financial statements.
-6-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2000 and 1999
(Unaudited)
Common
Stock
Accumulated Subject
Other To ESOP
($000's, except for per Common Retained Comprehensive Put
share data) Stock Earnings Income (Loss) Option Total
====== ====================== ====== =====
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
====== ====== ===== ====== ======
Balances, December 31,
1999 $8,792 47,384 (3,453) --- 52,723
Net income --- 1,852 --- --- 1,852
Unrealized gains
(losses) on securities
available for sale,
net of tax (1) --- --- 76 --- 76
------ ------ ----- ------ ------
Balances, March 31, 2000 $8,792 49,236 (3,377) --- 54,651
====== ====== ===== ====== ======
(1) Tax expense of $39 in 2000 and tax benefit of $454 for 1999.
See accompanying notes to unaudited consolidated financial statements.
-7- (Continued)<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
(Unaudited)
March 31, March 31,
($000's) 2000 1999
=========== ===========
Cash Flows from Operating Activities
Net income $ 1,852 1,679
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 353 232
Depreciation of bank premises and equipment 250 217
Amortization of intangibles 38 38
Amortization of premiums and accretion of
discounts, net 38 125
Gains on sales and calls of securities
available for sale, net --- (20)
Losses on other real estate owned 1 ---
(Increase) decrease in:
Mortgage loans held for sale (466) 1,664
Accrued interest receivable (41) (98)
Other assets (32) (29)
Increase in:
Accrued interest payable 9 50
Other liabilities 522 848
------- -------
Net cash provided by operating
activities 2,524 4,706
------- -------
Cash Flows from Investing Activities
Net (increase) decrease in federal funds sold (7,655) 2,590
Net (increase) decrease in interest-bearing
deposits 3,146 (7,103)
Proceeds from calls and maturities of securities
available for sale 4,149 11,363
Proceeds from sales of securities available for
sale 355 ---
Proceeds from calls and maturities of securities
held to maturity 1,218 3,198
Purchases of securities available for sale (9,024) (7,023)
Purchases of loan participations --- (4,800)
Collections of loan participations 14 1,991
Net increase in loans made to customers (6,519) (10,453)
Proceeds from disposal of other real estate owned 31 ---
Recoveries on loans charged off 17 33
Bank premises and equipment expenditures (265) (520)
------- -------
Net cash used in investing
activities (14,533) (10,724)
------- -------
-8- (Continued)<PAGE>
Cash Flows from Financing Activities
Net increase in time deposits 10,706 2,154
Net increase in other deposits 1,328 3,345
Net decrease in other borrowed funds (283) (87)
------- -------
Net cash provided by financing
activities 11,751 5,412
------- -------
Net decrease in cash and due from banks (258) (606)
Cash and due from banks at beginning of period 13,311 14,421
------- -------
Cash and due from banks at end of period $13,053 13,815
======= =======
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 3,877 3,386
======= =======
Cash paid for income taxes $ --- 20
======= =======
Loans charged to the allowance for loan losses $ 149 95
======= =======
Other borrowed funds converted to long-term debt $10,000 ---
======= =======
See accompanying notes to unaudited consolidated financial statements.
-9-<PAGE>
National Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
Note (1)
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, 2000 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 1999 Annual Report to
Stockholders and additional information supplied in the 1999 Form 10-K.
-10-<PAGE>
Note (2) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended
March 31, December 31,
2000 1999 1999 1998
($000's, except for % data) ========= ========= =========== ============
Balance at beginning of period $ 3,231 2,679 2,679 2,438
Provision for loan losses 353 232 1,400 624
Loans charged off (149) (95) (978) (638)
Recoveries 17 33 130 255
-------- -------- --------- ---------
Balance at the end of period $ 3,452 2,849 3,231 2,679
======== ======== ========= =========
Ratio of allowance for loan
losses to end of period loans,
net of unearned income and
deferred fees 1.15% 1.13% 1.10% 1.12%
======== ======== ========= =========
Ratio of net charge-offs
(recoveries) to average loans,
net of unearned income and
deferred fees(1) .18% .10% .31% .17%
======== ======== ========= =========
Ratio of allowance for loan
losses to nonperforming
loans(2) 2,348.30% 1,656.40% 1,691.62% 9,567.86%
======== ======== ========= =========
(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, except for % data) 2000 1999 1999 1998
======== ======== ======== ========
Nonperforming Assets
Nonaccrual loans $ 147 172 151 28
Restructured loans --- --- 40 ---
------ ------ ------ ------
Total nonperforming loans 147 172 191 28
Foreclosed property 415 628 447 628
------ ------ ------ ------
Total nonperforming assets $ 562 800 638 656
====== ====== ====== ======
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees, plus other real
estate owned .19% .32% .22% .27%
====== ====== ====== ======
-11-<PAGE>
Accruing Loans Past Due 90 Days or More
---------------------------------------
Past due 90 days or more and
still accruing $ 942 2,153 1,077 550
====== ====== ====== ======
Ratio of loans past due 90 days or
more to loans, net of unearned
income and deferred fees .31% .85% .37% .23%
====== ====== ====== ======
Impaired Loans
--------------
Total impaired loans $ 732 268 317 373
====== ====== ====== ======
Impaired loans with a
valuation allowance $ 221 145 222 145
Valuation allowance (93) (145) (154) (145)
------ ------ ------ ------
Impaired loans net of allowance $ 128 --- 68 ---
====== ====== ====== ======
Impaired loans with no
valuation allowance $ 511 123 95 228
====== ====== ====== ======
Average recorded investment
in impaired loans $ 524 268 292 387
====== ====== ====== ======
Income recognized on impaired
loans $ 13 4 13 32
====== ====== ====== ======
Amount of income recognized
on a cash basis $ --- --- --- ---
====== ====== ====== ======
-12-<PAGE>
Note (3) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of March
31, 2000 are as follows:
March 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 6,245 --- 104 6,141
U.S. Government
agencies and
corporations 53,813 8 2,724 51,097
States and political
subdivisions 34,271 99 1,223 33,147
Mortgage-backed
securities 13,025 15 369 12,671
Corporate debt
securities 14,346 --- 819 13,527
Federal Home Loan
Bank stock 1,328 --- --- 1,328
Other securities 539 --- --- 539
-------- -------- -------- --------
Total securities
available for sale $123,567 122 5,239 118,450
======== ======== ======== ========
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of March
31, 2000 are as follows:
March 31, 2000
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Government
agencies and
corporations $ 5,500 --- 240 5,260
States and political
subdivisions 16,571 84 54 16,601
Mortgage-backed
securities 350 5 1 354
-------- -------- -------- -------
Total securities
held to maturity $ 22,421 89 295 22,215
======== ======== ======== =======
-13-<PAGE>
Note (4) Restrictions on Dividend Payments and Capital Requirements
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2000:
Total capital(1)
Bankshares
consolidated $60,544 18.5% 26,183 8.00% N/A N/A
NBB 30,570 14.4% 16,963 8.00% 21,204 10.00%
BTC 27,455 23.8% 9,243 8.00% 11,553 10.00%
Tier I capital(1)
Bankshares
consolidated $57,092 17.4% 13,092 4.00% N/A N/A
NBB 28,380 13.4% 8,482 4.00% 12,722 6.00%
BTC 26,193 22.7% 4,621 4.00% 6,932 6.00%
Tier I capital(2)
Bankshares
consolidated $57,092 12.2% 18,778 4.00% N/A N/A
NBB 28,380 10.2% 11,151 4.00% 13,939 5.00%
BTC 26,193 13.1% 7,972 4.00% 9,965 5.00%
(1) To Risk Weighted Assets
(2) To Average Assets
-14-<PAGE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999:
Total capital(1)
Bankshares
consolidated $58,433 18.3% 25,552 8.0% N/A N/A
NBB 29,320 14.1% 16,682 8.0% 20,853 10.0%
BTC 26,630 23.7% 8,998 8.0% 11,247 10.0%
Tier I capital(1)
Bankshares
consolidated $55,502 17.3% 12,776 4.0% N/A N/A
NBB 27,222 13.1% 8,341 4.0% 12,512 6.0%
BTC 25,497 22.7% 4,499 4.0% 6,748 6.0%
Tier I capital(2)
Bankshares
consolidated $55,502 11.7% 18,957 4.0% N/A N/A
NBB 27,222 9.8% 11,135 4.0% 13,919 5.0%
BTC 25,497 12.7% 8,019 4.0% 10,023 5.0%
(1) To Risk Weighted Assets
(2) To Average Assets
Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At March 31, 2000,
retained net income from the Company's NBB affiliate which was free of such
restriction amounted to approximately $1,298.
At present, no dividends are available from the Company's BTC affiliate
without prior regulatory approval. BTC remains well capitalized and management
does not believe that such approvals will be withheld.
Note (5) Long-Term Debt
On February 4, 2000, the Company's NBB affiliate converted $10,000 in
short-term borrowings with the Federal Home Loan Bank to long-term debt. Terms
of the long-term debt provide for a 7% fixed rate of interest until maturity on
August 4, 2001.
-15-<PAGE>
National Bankshares, Inc. and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (In thousands, except for per share data)
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 1999 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.
Analysis of Financial Condition and Results of Operations for the Three Months
Ended March 31, 2000
- --------------------------------------------------------------------------------
Net income for the three months ended March 31, 2000 was $1,852 which
represents an increase of $173 or 10.30% over the first three months of 1999.
The return on average assets for the three months ended March 31, 2000 was 1.58%
and 1.54% for the period ended March 31, 1999. The return on average equity was
13.98% for the period ended March 31, 2000 and 11.12% for the period ended March
31, 1999.
Earnings per share for the period ended March 31, 2000 was $0.53 per share,
an increase of $0.09 per share over the same period in 1999.
The following table provides selected consolidated financial data.
March 31, December 31,
($000's, except per share and 2000 1999 1999 1998
percent data) ====== ====== ============ ============
Interest income $ 8,844 8,089 33,603 31,828
Interest expense 3,886 3,436 14,203 13,928
Net interest income 4,958 4,653 19,400 17,900
Provision for loan losses 353 232 1,400 624
Noninterest income 925 766 3,512 3,174
Noninterest expense 2,991 2,926 11,868 11,061
Income taxes 687 582 2,556 2,591
Net income $ 1,852 1,679 7,088 6,798
Return on average assets 1.58% 1.54% 1.56% 1.61%
Return on average equity (1) 13.98% 11.12% 12.61% 11.66%
Basic net income per share $ .53 .44 1.96 1.79
Book value per share (1) $ 15.54 16.21 14.99 16.00
(1) Includes amount related to common stock subject to ESOP put option excluded
from stockholders' equity on the Consolidated Balance Sheets for the year
ended December 31, 1998 and three month period ended March 31, 1999.
-16-<PAGE>
Net Interest Income
- -------------------
Net interest income at the end of the first three months of 2000 was
$4,958, an increase of $305 or 6.55% over the same period in 1999.
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 factors 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,
2000 1999 1999 1998
--------- --------- ------------ ------------
Yield on earning assets 8.27% 8.18% 8.18% 8.25%
Cost to fund earning assets 3.51% 3.33% 3.33% 3.50%
-------- ------- ------- -------
Net interest margin 4.76% 4.85% 4.85% 4.75%
======== ======= ======= =======
As can be seen by the table shown above, the yield on earning assets for
the three months ended March 31, 2000 has increased by 9 basis points from the
year-ended December 31, 1999. The cost to fund earning assets increased by 18
basis points. These elements combined to produce a 9 basis point decrease in
the net interest margin.
The yield on earning assets increased in part due to earning assets that
repriced upward as a result of the rising interest rate environment. The cost
to fund earning assets also increased due to rising rates and a decrease in free
funds in the form of capital. This was primarily due to the company's
repurchase of its own common stock for approximately $7.8 million in mid 1999.
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" provided by demand deposits and capital. The
following table sets forth the Company's net interest spread for the periods
shown.
March 31 December 31,
2000 1999 1999 1998
--------- --------- ------------ ------------
Yield on earning assets 8.27% 8.18% 8.18% 8.25%
Cost of interest-bearing
liabilities 4.31% 4.26% 4.18% 4.48%
-------- ------- ------- -------
Net interest spread 3.96% 3.92% 4.00% 3.77%
======== ======= ======= =======
As previously mentioned, the yield on earning assets increased due to
upward reprice of earning assets. The cost of interest bearing liabilities
increased by 13 basis points and directly reflects increased funding costs.
-17-<PAGE>
Based on the information currently available to management, it is
anticipated that deposit costs will continue upward as the rising rate
environment is expected to continue. It is the consensus of management that the
Federal Reserve Bank will press interest rates higher to avert inflation.
Competitive factors in the Company's market area, the continued need for
funds and the higher rate environment will result in higher funding costs. The
effects of increased funding costs will be offset to a degree by the upward
repricing of earning assets.
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.
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.
The ratio of the allowance for loan losses to loans net of unearned income
was 1.15% at March 31, 2000. This compares to 1.13% at March 31, 1999. The
provision for the first three months of 2000 was $353 up $121 over the same
period the prior year. It is anticipated that the provision for 2000 will
exceed that of 1999. The increase over 1999 is due to loan growth.
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, 2000 was $925, an
increase of $159 or 20.76% over the same period in 1999.
Service charges on deposit accounts were $362 at March 31, 2000, an
increase of $101 or 38.70% from the same period in 1999. The change was due to
an increased level of volume, more aggressive collections and certain changes in
service charge structure.
Other service charges increased by $11 when March 31, 2000 and 1999 are
compared.
Credit card fees increased by $56 or 34.36% when the first three months of
2000 and 1999 are compared. Continued growth in volume was the primary cause of
this increase.
Trust income decreased by 9.09% when compared to the first three months of
1999. 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.
-18-<PAGE>
Other income, which is comprised of various miscellaneous types of income,
increased by $32 for the first three months of 2000.
Net securities gains and losses decreased $20 when 2000 and 1999 are
compared. The income in this category primarily reflects gains and losses on
securities called prior to maturity.
Noninterest Expense
- -------------------
Noninterest expenses for the first three months of 2000 were $2,991, an
increase of $65 or 2.22% over the first three months of 1999. This nominal
increase was due in part to management's efforts to contain controllable
expenses.
Salaries and fringe benefits were $1,558 at the end of the first three
months of 2000. This represents a decrease of $1 or 0.06% over the first three
months of 1999.
Occupancy expenses increased by $42 or 16.34% when the first three months
of 2000 and 1999 are compared. This increase was in part due to expenses
related to the new corporate office and banking facility open in the third
quarter of 1999.
Data processing expense increased by $19 or 9.55%.
Credit card expense increased by $58 or 37.18% in the first three months of
2000. Increases in overall volume contributed to this increase.
Other expenses at March 31, 2000 were $669, which represents a decrease of
$58 or 7.98% over the same period in 1999. Other expenses include various types
of costs. Examples of expense accounts included are telephone, franchise taxes,
stationary and supplies, marketing expense, correspondent charges and numerous
others.
The decrease experienced so far in 2000 was due to a reduction in
controllable expenses such as marketing and business development. Franchise
taxes, normally considered to be a noncontrollable expense also decreased
significantly. In mid 1999 capital was dividended to NBI for the purpose of
repurchasing its own common stock. Accordingly, franchise taxes, which are
based on bank capital, decreased.
-19-<PAGE>
Balance Sheet
- -------------
The following table sets forth selected consolidated balance sheet data.
March 31, December 31,
2000 1999 1999 1998
========= ========= ============ ============
($000's)
Selected Period-End Data
- ------------------------
Loans, net $297,697 249,575 291,562 236,578
Total securities 140,871 157,776 137,492 166,754
Total assets 486,344 452,274 472,134 445,166
Total deposits 419,221 388,195 407,187 382,696
Stockholders' equity 54,651 59,287 52,723 58,503
Selected Daily Averages Data
- ----------------------------
Loans, net $293,287 241,776 266,431 225,613
Total securities 139,350 167,674 151,424 152,432
Interest-earning assets 444,518 417,885 426,753 398,340
Total assets 470,378 442,801 454,189 420,988
Total deposits 404,746 379,511 391,583 359,970
Interest-bearing liabilities 361,853 326,942 340,111 310,634
Stockholders' equity 53,142 59,029 56,196 58,282
Total average assets at March 31, 2000 were $470,378, an increase of
$27,577 or 6.23% from March 31, 1999.
In the third quarter of 1999, the Office of the Controller Currency
announced the closure of a national banking institution in Keystone, West
Virginia. As a result of the closure, depositors in that area were forced to
seek banking relationships with other institutions in the general area. The
Company's BTC affiliate was a benefactor of this event.
Deposits have also increased when compared to December 31, 1999. This is
the direct result of intensified deposit procurement activities. Deposit
gathering activities will continue to receive special attention in the coming
months, in order to satisfy various needs for liquidity.
-20-<PAGE>
Liquidity
- ---------
Liquidity is the ability to provide sufficient cash levels to meet
financial commitments and to fund loan demand and deposit withdrawals. Cash
from operating activities was $2,524 primarily due to earnings. Cash used in
investing activities totaled $14,533. Primary uses were federal funds sold,
purchases of securities available for sale and net loans to customers.
Offsetting funds used were reduction in interest-bearing deposits and maturities
and calls of securities.
Cash from financing activities was $11,751. This balance was comprised of
the previously mentioned efforts to obtain deposits.
While efforts to secure additional deposits have been successful, liquidity
continues to be negatively affected by the securities available for sale
portfolio. At present the portfolio contains a substantial amount of callable
securities. Originally anticipated calls have not occurred due to interest rate
levels. It remains unknown as to when interest rate levels may be such that
call features would activate.
In the meantime, the Company has utilized several credit facilities such as
the Federal Home Loan Bank, Federal Reserve discount window and federal funds
lines available to meet liquidity needs.
Capital Resources
- -----------------
Total stockholders' equity increased $1,928 or 3.66% from December 31,
1999. The principal reason for the increase was net income. Accumulated
comprehensive loss decreased $76 during the quarter to $(3,377).
Selected Affiliate Bank Data
- ----------------------------
The following table sets forth selected data for NBB and BTC:
March 31, 2000
--------------
($000's, except for % data) NBB BTC
--- ---
Assets $285,045 198,882
Deposits 245,923 173,366
Net Income 1,120 696
Return on Average Assets 1.62% 1.42%
Return on Average Equity 16.69% 11.73%
Year 2000
- ---------
The Company was cognizant of the risks posed by the Year 2000 issue for
Bank operations and borrowers. Subsequent to December 31, 1999, the Company was
not aware of any information that indicates a significant vendor or service
provider may be unable to sell goods or provide services to the Company because
of Year 2000 issues. Further, the Company has not received any notifications
from borrowers or regulatory agencies to which it is subject, nor is it aware of
-21-<PAGE>
any such information which indicates that (1) a borrower has experienced
significant issues which may impact its ability to service its loan or which may
impact its borrowing agreement terms or covenants or (2) significant regulatory
action is being or may be taken against the Company, as a result of Year 2000
issues.
The Company has not experienced any significant disruptions to financial or
operating activities caused by failure in computerized systems resulting from
Year 2000 issues. Management does not expect Year 2000 issues to have a
material adverse effect on the Company's operations or financial results in
2000.
The Company was prepared for the millennium change and continues to
successfully operate and handle the transactions of customers subsequent to
December 31, 1999.
-22-<PAGE>
<TABLE>
The following table sets forth selected quarterly consolidated financial data.
<CAPTION>
For the Quarter-Ended
($000's, except per share March 31, December 31, September 30, June 30, March 31,
and percent data) 2000 1999 1999 1999 1999
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Interest income $ 8,844 8,928 8,416 8,170 8,089
Interest expense 3,886 3,869 3,506 3,392 3,436
Net interest income 4,958 5,059 4,910 4,778 4,653
Provision for loan loss 353 560 371 237 232
Noninterest income 925 934 956 856 766
Noninterest expense 2,991 2,971 3,025 2,946 2,926
Income taxes 687 657 666 651 582
Net income $ 1,852 1,805 1,804 1,800 1,679
Return on average assets 1.58% 1.53% 1.60% 1.61% 1.54%
Return on average equity 13.98% 13.50% 13.64% 12.55% 11.12%
Basic net income per share $ 0.53 0.51 0.51 0.50 0.44
<CAPTION>
Daily Averages for the Quarter Ended
($000's, except per share March 31, December 31, September 30, June 30, March 31,
and percent data) 2000 1999 1999 1999 1999
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Loans, net $293,287 288,045 277,588 260,077 241,788
Total securities 139,350 140,066 145,064 153,227 167,828
Total assets 470,378 445,384 452,176 447,683 442,926
Total deposits 404,746 408,803 392,710 385,610 379,465
Stockholders' equity 53,142 53,468 52,908 57,361 61,338
</TABLE>
-23-<PAGE>
Banking Terms
Basis Point - a banks. Net Interest Margin -
measure-ment unit net taxable-equivalent
defined as one interest income divided
hundredth of one Earnings Per Share- by average earning
percent; it usually Basic - net income, assets.
refers to an interest reduced by dividends on
rate. preferred stock, Nonperforming Assets -
divided by the weighted the sum of loans on
Book Value Per Share - average number of which interest income
the value of a share of common shares is not being accrued,
common stock determined outstanding in the restructured loans on
b y d i v i d i n g period. which the interest
shareholders' equity at rates or terms of
the end of a period, Equity Capital/Share- repayment have been
excluding preferred holders' Equity - a materially revised and
stock, by the number of balance sheet amount real estate that has
common shares that represents the been acquired through
outstanding at the end total investment in the foreclosure.
of the same period. corporation by holders
of common and preferred Rate-Sensitive Assets/
Core Deposits - demand stock; it includes Liabilities - earning
deposits, savings amounts added through assets and interest-
accounts, interest the retention of bearing liabilities
checking accounts, earnings. that can be repriced or
insured money market replaced at a different
a c c o u n t s a n d Interest-Bearing interest rate, within a
certificates of deposit Liabil-ities - deposits specific period, due to
under $100,000. This and borrowed funds on rate changes or
is a more stable source which the corporation maturity.
of funds than funds pays interest; includes
purchased on the basis interest checking Return on Average
of rate only. accounts, money market Assets (ROA) - net
accounts, certificates income as a percentage
Cost of Funds - of deposit, short-term of average total
interest on deposits borrowings and long- assets. It is a key
and borrowed funds term debt. profitability ratio
divided by the average that indicates how
balance of such funds. Leverage Capital effectively a bank has
Ratio - the total of used its total
Comprehensive Income - Tier 1 capital less resources.
net income plus the certain intangible
change in unrealized assets such as Return on Average
gains and losses, net goodwill, divided by Equity (ROE) - net
of tax, plus certain quarterly average income as a percentage
reclassification assets. A key of total average
adjustments on regulatory capital shareholders' equity.
securities available requirement with the Provides a measure of
for sale for the minimum amount allowed how productively a
period. of 4%. bank's equity has been
employed.
Earning Assets - loans Net Interest Income -
(net of unearned the difference between Risk-Based Assets - a
income), investment income from earning regulatory method of
securities, money assets and interest classifying assets
market investments and paid on deposits and based on their
interest-bearing borrowed funds. potential risk of loss,
deposits in other used in calculating
-24-<PAGE>
various capital ratios. tax-exempt assets.
Assets are classified
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
-25-<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, 2000
approximated $3,901.
Interest Rate Sensitivity
The Company's securities and loans and its deposits are subject to interest
rate risk. The Company's profitability in the near term may temporarily be
affected, either positively by a falling interest rate scenario or negatively by
a period of rising rates. The table below sets forth, as of March 31, 2000, the
distribution of repricing opportunities of the Company's interest-earning assets
and interest-bearing liabilities, the interest rate sensitivity gap (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities), and
the cumulative interest rate sensitivity gap. The table sets forth the time
periods during which interest-earning assets and interest-bearing liabilities
will mature or may reprice in accordance with their contracted terms.
The method of analysis presented in the following table has certain
inherent shortcomings. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. In
addition, loan prepayments and early withdrawals of certificates of deposit
could cause the interest sensitivities to vary from those which appear on the
table. The classification of securities as held to maturity or available for
sale also effects rate sensitivity. Available for sale securities which may be
sold can be used to adjust the Company's interest rate sensitivity position.
Finally, call features in the investment portfolio can have a considerable
effect. Since the call decision is dependent on interest rate levels at a
future point in time, the ultimate effect on interest rate sensitivity cannot be
precisely determined. A substantial number of bonds in the investment portfolio
contain these features.
-26-<PAGE>
<TABLE>
<CAPTION>
Interest Rate March 31, 2000
Sensitivity Table (1) Interest-sensitive (days) 1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
-------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $ 56,150 11,548 30,328 136,029 67,094 301,149
Federal funds sold 10,455 --- --- --- --- 10,455
Interest bearing deposits 6,073 --- --- --- --- 6,073
Securities available for sale (3) 1,056 3,198 1,635 27,086 85,475 118,450
Securities held to maturity (3) 1,044 1,165 4,380 13,539 2,293 22,421
Mortgage loans held for sale 695 --- --- --- --- 695
Total interest-earning assets $ 75,473 15,911 36,343 176,654 154,862 459,243
Interest-bearing liabilities:
Interest-bearing demand deposits $ 88,541 --- --- --- --- 88,541
Savings deposits 44,216 --- --- --- --- 44,216
Time deposits 30,907 34,713 92,945 71,361 --- 229,926
Other borrowed funds 177 --- --- 10,000 --- 10,177
Total interest-bearing liabilities $163,841 34,713 92,945 81,361 --- 372,860
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .46 .46 .44 .82 1.23 ---
Cumulative interest-sensitivity gap $(88,368) (107,170) (163,772) (68,479) 86,383 ---
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or mature
before interest-earning assets. The above gap table reflects the Company's rate-sensitive
position at March 31, 2000, and is not necessarily reflective of its position throughout the
year. The carrying amounts of interest-rate sensitive assets and liabilities are presented in
the periods in which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
(3) Call features on certain securities, if exercised could have the effect of materially shortening the
average life of the investment portfolio. The exercise of a call feature is dependent upon the rate
environment. The call decision is at the issuer's discretion and ultimate benefit. Securities
available for sale are shown at amortized cost.
</TABLE>
-27-<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 for the three months ended March 31,
2000.
($000's, except for percent data)
Return on Return on
Rate Shift Net Income Average Equity Average Assets
========== ========== ============== ==============
300 $5,022 7.64% 0.90%
200 5,782 9.22% 1.10%
100 6,537 10.76% 1.29%
(-)100 8,034 13.68% 1.67%
(-)200 8,776 15.08% 1.86%
(-)300 9,140 15.88% 1.97%
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, and 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.
-28-<PAGE>
National Bankshares, Inc. and Subsidiaries
Part II
Other Information
Items 1-3. Legal Proceedings; Changes in Securities and Use of Proceeds;
Defaults Upon Senior Securities
None for the three months ended
March 31, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended March
31, 2000:
None
-29-<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 12, 2000 /s/James G. Rakes
------------- -------------------------------------
James G. Rakes, Chairman
President and Chief Executive Officer
Date: May 12, 2000 /s/J. Robert Buchanan
------------- -------------------------------------
J. Robert Buchanan, Treasurer
(principal financial officer)
-30-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE OF FINANCIAL INFORMATION IS EXTRACTED FROM THE MARCH 31,2000
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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,053
<INT-BEARING-DEPOSITS> 6,073
<FED-FUNDS-SOLD> 10,455
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 118,450
<INVESTMENTS-CARRYING> 22,421
<INVESTMENTS-MARKET> 22,215
<LOANS> 301,149
<ALLOWANCE> 3,452
<TOTAL-ASSETS> 486,344
<DEPOSITS> 419,221
<SHORT-TERM> 177
<LIABILITIES-OTHER> 2,295
<LONG-TERM> 10,000
0
0
<COMMON> 8,792
<OTHER-SE> 45,859
<TOTAL-LIABILITIES-AND-EQUITY> 486,344
<INTEREST-LOAN> 6,539
<INTEREST-INVEST> 2,208
<INTEREST-OTHER> 97
<INTEREST-TOTAL> 8,844
<INTEREST-DEPOSIT> 3,720
<INTEREST-EXPENSE> 3,886
<INTEREST-INCOME-NET> 4,958
<LOAN-LOSSES> 353
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,991
<INCOME-PRETAX> 2,539
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,852
<EPS-BASIC> .53
<EPS-DILUTED> .53
<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>
