-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ISW4TyjzvNsyC7VTdhYE15HUWgfc8M6jPdzhgY8wzttTpuM/P6895VJwolXY8KlN Fu2PmLpcIOOkRTBBOhfxcg== 0000796534-05-000014.txt : 20050510 0000796534-05-000014.hdr.sgml : 20050510 20050510120257 ACCESSION NUMBER: 0000796534-05-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000796534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541375874 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15204 FILM NUMBER: 05814805 BUSINESS ADDRESS: STREET 1: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 BUSINESS PHONE: 5405522011 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET STREET 2: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 10-Q 1 f10q_q12005.txt - -------------------------------------------------------------------------------- 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 March 31, 2005 Commission file number 0-15204 NATIONAL BANKSHARES, INC. (Exact name of registrant as specified in its charter) State or other jurisdiction of incorporation or organization - Virginia Internal Revenue Service - Employer Identification No. 54-1375874 101 Hubbard Street, P.O. Box 90002, Blacksburg, VA 24062-9002 (540) 951-6300 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 requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b - 2 of the Exchange Act) 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 30, 2005 ----- ----------------------------- Common Stock, $2.50 Par Value 3,519,502 (This report contains 31 pages) 31 NATIONAL BANKSHARES, INC. AND SUBSIDIARIES Form 10-Q Index Part I Financial Information Page - ---------------------------- Item 1 Financial Statements Consolidated Balance Sheets, March 31, 2005 (Unaudited) and December 31, 2004 3-4 Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited) 5-6 Consolidated Statements of Changes in Stockholders' Equity, Three Months Ended March 31, 2005 and 2004 (Unaudited) 7 Consolidated Statements of Cash Flows, Three Months Ended March 31, 2005 and 2004 (Unaudited) 8-9 Notes to Consolidated Financial Statements 10-14 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15-25 Item 3 Quantitative and Qualitative Disclosures about Market Risk 25 Item 4 Controls and Procedures 25 Part II Other Information - ------------------------- Item 1 Legal Proceedings 25 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25-26 Item 3 Defaults Upon Senior Securities 26 Item 4 Submission of Matters to a Vote of Security Holders 26 Item 5 Other Information 26 Item 6 Exhibits 26 Signatures 26 - ---------- Index of Exhibits 27-28 - ----------------- 2 Part I Financial Information Item 1. Financial Statements National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2005 and December 31, 2004
(Unaudited) March 31, December 31, ($ In thousands, except share and per share data) 2005 2004 ==================== =================== Assets Cash and due from banks $14,043 $12,493 Interest-bearing deposits 11,603 22,463 Securities available for sale, at fair value 152,805 145,323 Securities held to maturity (fair value $110,029 in 2005 and $107,697 in 2004) 109,399 105,385 Mortgage loans held for sale 190 1,003 Loans: Real estate construction loans 25,826 25,009 Real estate mortgage loans 116,983 115,388 Commercial and industrial loans 260,980 248,523 Loans to individuals 91,566 89,889 -------------------- ------------------- Total loans 495,355 478,809 Less unearned income and deferred fees (908) (881) -------------------- ------------------- Loans, net of unearned income and deferred fees 494,447 477,928 Less: allowance for loan losses (5,712) (5,729) -------------------- ------------------- Loans, net 488,735 472,199 -------------------- ------------------- Bank premises and equipment, net 12,837 12,104 Accrued interest receivable 5,351 4,870 Other real estate owned, net 715 895 Intangible assets and goodwill, net 17,964 16,924 Other assets 3,346 2,495 -------------------- ------------------- Total assets $816,988 $796,154 ==================== =================== Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $119,228 $106,189 Interest-bearing demand deposits 199,215 198,897 Savings deposits 59,889 62,817 Time deposits 345,541 338,029 -------------------- ------------------- Total deposits 723,873 705,932 -------------------- ------------------- Other borrowed funds 431 297 Accrued interest payable 557 483 Other liabilities 3,334 2,354 -------------------- ------------------- Total liabilities 728,195 709,066 ==================== =================== 3 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 10,000,000 shares; issued and outstanding 3,520,752 shares in 2005 and 3,519,002 in 2004 8,802 8,797 Retained earnings 80,770 77,735 Accumulated other comprehensive income(loss), net (779) 556 -------------------- ------------------- Total stockholders' equity 88,793 87,088 -------------------- ------------------- Total liabilities and stockholders' equity $816,988 $796,154 ==================== ===================
See accompanying notes to the consolidated financial statements. 4 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, 2005 and 2004 (Unaudited)
March 31, March 31, ($ In thousands, except share and per share data) 2005 2004 ================== ================= Interest income: Interest and fees on loans $8,067 $6,945 Interest on interest-bearing deposits 81 64 Interest on securities - taxable 1,591 1,445 Interest on securities - nontaxable 1,296 1,343 ------------------ ----------------- Total interest income 11,035 9,797 ------------------ ----------------- Interest expense: Interest on time deposits $100,000 or more 873 693 Interest on other deposits 2,165 1,906 Interest on borrowed funds 5 --- ------------------ ----------------- Total interest expense 3,043 2,599 ------------------ ----------------- Net interest income 7,992 7,198 Provision for loan losses 190 288 ------------------ ----------------- Net interest income after provision for loan losses 7,802 6,910 ------------------ ----------------- Noninterest income: Service charges on deposit accounts 675 675 Other service charges and fees 87 72 Credit card fees 494 386 Trust income 408 509 Other income 137 103 Realized securities (losses), net (33) (6) ------------------ ----------------- Total noninterest income 1,768 1,739 ------------------ ----------------- Noninterest expense: Salaries and employee benefits 2,862 2,518 Occupancy, furniture and fixtures 479 438 Data processing and ATM 467 279 Credit card processing 376 314 Intangibles amortization 266 238 Net costs of other real estate owned 108 59 Other operating expenses 1,131 974 ------------------ ----------------- Total noninterest expense 5,689 4,820 ------------------ ----------------- Income before income tax expense 3,881 3,829 Income tax expense 888 869 ------------------ ----------------- Net income $2,993 $2,960 ================== ================= 5 Net income per share - basic $0.85 $0.84 ================== ================== - diluted 0.85 0.84 ================== ================== Weighted average number of common shares outstanding - basic 3,519,060 3,515,377 ================== ================== - diluted 3,538,885 3,542,583 ================== ================== Dividends declared per share $--- $--- ================== ==================
See accompanying notes to consolidated financial statements. 6 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Three Months Ended March 31, 2005 and 2004 (Unaudited)
Accumulated Other ($ In thousands) Common Retained Comprehensive Comprehensive Stock Earnings Income Income Total ============ ============== ================ ================ =========== Balances, December 31, 2003 $8,788 70,063 1,790 --- $80,641 Net income --- 2,960 --- 2,960 2,960 Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of income tax $619 --- --- --- 1,149 --- Reclass adjustment net of tax $2 --- --- --- 4 --- ------------ -------------- ---------------- ---------------- ----------- Other comprehensive income --- --- 1,153 1,153 1,153 ------------ -------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- $4,113 --- ============ ============== ================ ================ =========== ============ ============== ================ ================ =========== Balances, March 31, 2004 $8,788 73,023 2,943 --- $84,754 ============ ============== ================ ================ =========== Balances, December 31, 2004 $8,797 77,735 556 --- $87,088 Net income --- 2,993 --- 2,993 2,993 Other comprehensive loss, net of tax: Unrealized losses on securities available for sale, net of income tax $(730) --- --- --- (1,356) --- Reclass adjustment net of income tax $12 --- --- --- 21 --- -- ------------ -------------- ---------------- ---------------- ----------- Other comprehensive loss --- --- (1,335) (1,335) (1,335) ------------ -------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- $1,658 --- ------------ -------------- ---------------- ---------------- ----------- Exercise of stock options 5 42 --- --- 47 ------------ -------------- ---------------- ---------------- ----------- Balances, March 31,2005 $8,802 80,770 (779) --- $88,793 ============ ============== ================ ================ ===========
See accompanying notes to consolidated financial statements. 7 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and 2004 (Unaudited)
March 31, March 31, ($In thousands) 2005 2004 =================== ================= Cash flows from operating activities Net income $2,993 $2,960 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 190 288 Depreciation of bank premises and equipment 247 231 Amortization of intangibles 266 238 Amortization of premiums and accretion of discount, net 125 (28) (Gains) on disposal of fixed assets (4) --- (Gains) Losses on sales and calls of securities available for sale, net (12) 25 (Gains) on calls of securities held to maturity (2) (19) Losses and writedowns on other real estate owned 43 52 (Increase) decrease in: Mortgage loans held for sale 813 403 Accrued interest receivable (481) (396) Other assets (1,439) (205) Increase (decrease) in: Accrued interest payable 74 (18) Other liabilities 980 1,003 ------------------- ----------------- Net cash provided by operating activities $3,793 $4,534 ------------------- ----------------- Cash flows from investing activities Net decrease in interest-bearing deposits 10,860 21,004 Proceeds from calls, principal payments, sales and maturities of securities available for sale 4,880 8,330 Proceeds from calls, principal payments and maturities of securities held to maturity 1,964 2,983 Proceeds from sale of securities held to maturity --- 281 Purchases of securities available for sale (14,496) (18,618) Purchases of securities held to maturity (6,008) (7,821) Purchases of loan participations (2,304) --- Collections of loan participations 1,285 6 Net (increase) in loans to customers (15,773) (5,808) Proceeds from disposal of other real estate owned 157 141 Recoveries on loans charged off 46 48 Purchase of bank premises and equipment (981) (303) Proceeds from disposal of bank premises and equipment 5 --- ------------------- ----------------- Net cash provided by (used in) investing activities $(20,365) $243 ------------------- ----------------- 8 Cash flows from financing activities Net increase in other deposits $10,429 $5,884 Net increase (decrease) in time deposits 7,512 (11,342) Net increase (decrease) in other borrowed funds 134 (58) Stock options exercised 47 --- ------------------- ----------------- Net cash provided by (used in) financing activities 18,122 (5,516) -------------------- ----------------- Net increase (decrease) in cash and due from banks 1,550 (739) Cash and due from banks at beginning of period 12,493 11,733 ------------------- ----------------- Cash and due from banks at end of period $14,043 $10,994 =================== ================= Supplemental disclosure of cash flow information: Cash paid for interest $2,969 $2,617 =================== ================= Cash paid for income taxes $180 $--- =================== ================= Loans charged to the allowance for loan losses $253 $285 =================== ================= Loans transferred to other real estate owned $20 $--- =================== ================= Unrealized gains(losses) on securities available for sale ($2,053) $1,774 =================== ================= Write downs in limited liability companies $47 $104 =================== ================= Transactions related to acquisition of branches: Increase in assets and liabilities: Loans $8,831 --- Deposits $22,009 --- Fixed Assets $311 ---
See accompanying notes to consolidated financial statements. 9 National Bankshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements March 31, 2005 (Unaudited) ($ In thousands) Note (1) The consolidated financial statements of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB), Bank of Tazewell County (BTC) and National Bankshares Financial Services, Inc. (NBFS), (the Company), conform to accounting principles generally accepted in the United States of America 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, 2005 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 2004 Form 10-K. Note (2) Stock-Based Compensation At March 31, 2005, the Company had a stock-based employee compensation plan, which is described more fully in the Company's Form 10-K dated December 31, 2004. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Three months ended March 31, - ---------------------------------------------------- -------------- ------------ ($ In thousands, except per share data) 2005 2004 -------------- ------------ Net income, as reported $2,993 $2,960 - ---------------------------------------------------- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (36) (25) - ---------------------------------------------------- -------------- ------------ Pro forma net income $2,957 $2,935 - ---------------------------------------------------- -------------- ------------ Earnings per share: - ---------------------------------------------------- -------------- ------------ Basic-as reported $0.85 $0.84 - ---------------------------------------------------- -------------- ------------ Basic-pro forma $0.84 $0.83 - ---------------------------------------------------- -------------- ------------ Diluted-as reported $0.85 $0.84 - ---------------------------------------------------- -------------- ------------ Diluted-pro forma $0.84 $0.83 - ---------------------------------------------------- -------------- ------------ Stock options for 1,750 shares were exercised in the first quarter of 2005. There were no stock options granted or forfeited in the quarter. 10 Note (3) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended --------------------- March 31, December 31, 2005 2004 2004 -------------- -------------- ----------------- ($In thousands, except for % data) Balance at beginning of period $5,729 $5,369 $5,369 Provision for loan losses 190 288 1,189 Loans charged off (253) (285) (1,550) Recoveries 46 48 223 Acquisition of Bank - CNB --- --- 498 -------------- -------------- ----------------- Balance at the end of period $5,712 $5,420 $5,729 ============== ============== ================= Ratio of allowance for loan losses to the end of period loans net of unearned income and deferred fees 1.16% 1.31% 1.20% ============== ============== ================= Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1) .17% .23% .30% ============== ============== ================= Ratio of allowance for loan losses to nonperforming loans(2) 1,646.11% 1,672.84% 1,454.06% ============== ============== =================
(1) Net charge-offs are on an annualized basis. (2) The Company defines nonperforming loans as total nonaccrual and restructured loans. Loans 90 days past due and still accruing are excluded.
March 31, December 31, 2005 2004 2004 ------------- ------------ ---------------- ($In thousands, except % data) Nonperforming Assets: Nonaccrual loans $347 $324 $394 Restructured loans --- --- --- ------------- ------------ ---------------- Total nonperforming loans 347 324 394 Foreclosed property 715 1,470 895 ------------- ------------ ---------------- Total nonperforming assets $1,062 $1,794 $1,289 ============= ============ ================ Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned .21% .43% .27% ============= ============ ================ 11 March 31, December 31, 2005 2004 2004 ------------- ------------ --------------- Loans Past due 90 days or more and still accruing $763 $1,085 $754 ============= ============ =============== Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees .15% .26% .16% ============= ============ =============== Impaired Loans: Total impaired loans $341 $763 $354 ============= ============ =============== Impaired loans with a valuation allowance --- $236 $79 Valuation allowance --- (86) (55) ------------- ------------ --------------- Impaired loans net of allowance --- $150 $24 ============= ============ =============== Impaired loans with no valuation allowance $341 $527 $275 ============= ============ =============== Average recorded investment in impaired loans $348 $817 $601 ============= ============ =============== Income recognized on impaired loans --- $8 $--- ============= ============ =============== Amount of income recognized on a cash basis --- --- --- ============= ============ ===============
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 at March 31, 2005 were $6. 12 Note (4) Securities The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for the sale by major security type as of March 31, 2005 are as follows:
March 31, 2005 Gross Gross Amortized Unrealized Unrealized Fair ($ In thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Available for sale: U.S. Treasury $4,039 $20 $142 $3,917 U.S. Government agencies and corporations 12,807 3 202 12,608 State and political subdivisions 75,468 1,463 605 76,326 Mortgage-backed securities 24,178 157 216 24,119 Corporate debt securities 33,127 315 1,144 32,298 Federal Reserve Bank stock- restricted 208 --- --- 208 Federal Home Loan Bank stock-restricted 1,645 --- --- 1,645 Other securities 1,531 153 --- 1,684 ----------------- ----------------- ----------------- ------------------ Total securities available for sale $153,003 $2,111 $2,309 $152,805 ================= ================= ================= ==================
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities held to maturity by major security type as of March 31, 2005 are as follows:
March 31, 2005 Gross Gross Amortized Unrealized Unrealized Fair ($ In thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Held to Maturity: U.S. Government agencies and corporations $20,963 $11 $493 $20,481 State and political subdivisions 56,822 1,281 174 57,929 Mortgage-backed securities 2,786 80 4 2,862 Corporate securities 28,828 587 658 28,757 ----------------- ----------------- ----------------- ------------------ Total securities held to maturity $109,399 $1,959 $1,329 $110,029 ================= ================= ================= ==================
13 Note (5) Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123R (revised 2004), "Share-Based Payment," (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on the Company's results of operations at the present time. In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB 107 expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC rules and regulations and provides the SEC staff's view regarding the valuation of share-based payment arrangements for public companies. SAB 107 does not impact the Company's results of operations at the present time. Note (6) Defined Benefit Plan Components of Net Periodic Benefit Cost Three months ended March 31, 2005 ($ in Thousands) Pension Benefits ---------------- 2005 2004 Service cost $ 140 $ 124 Interest cost 153 134 Expected return on plan assets (145) (125) Amortization of prior service cost 2 2 Recognized net actuarial loss 46 30 Amortization of transition cost (3) (3) ---------- ---------- Net periodic benefit cost $ 193 $ 162 ========== ========== Employer Contributions Bankshares previously disclosed in its financial statements for the year ended December 31, 2004, an estimated quarterly minimum contribution of $124 to its pension plan in 2005. That estimate has since been revised and Bankshares now expects to contribute a total of $610, paid in quarterly installments, to the pension plan for 2005. As of March 31, 2005, no contribution had yet been made. Bankshares anticipates making all required contributions prior to the end of 2005. Note (7) Acquisitions In February of 2005, the Company acquired two branches from Planters Bank and Trust Company of Virginia. The transaction added approximately $8,831 in loans and approximately $22,009 in deposits. A deposit intangible of approximately $1,304 arose as a result of the transaction. This intangible will amortize over twelve years. Approximately $311 in fixed assets were also acquired. 14 National Bankshares, Inc. and Subsidiaries (In thousands, except per share data) 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 2004 Annual Report on 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. Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors, whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. 15 Core deposit intangibles Effective January 1, 2002, the Corporation adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, Statement 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged and amortized over its estimated useful life. Branch acquisition transactions were outside the scope of the Statement and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The Company has determined that the acquisitions that generated the intangible assets and goodwill on the consolidated balance sheets in the amount of $9,958 and $10,912 at December 31, 2003 and 2002, respectively, did not constitute the acquisition of a business, and therefore will continue to be amortized. Overview National Bankshares, Inc. (NBI) is a financial holding company located in Southwest Virginia. It conducts operations primarily through two full-service banking affiliates, the National Bank of Blacksburg and Bank of Tazewell County. It also has one nonbanking affiliate, National Bankshares Financial Services, Inc., which offers investment and insurance products. Net income derived from the nonbanking affiliate is not significant at this time or for the foreseeable future. NBI is a community bank operation. Performance Summary The following table shows NBI's key performance ratios for the period ended March 31, 2005 and December 31, 2004 and 2003:
March 31, 2005 December 31, 2004 December 31, 2003 - ----------------------------------------------- ------------------- ---------------------- ----------------------- Return on average assets 1.51% 1.62% 1.64% - ----------------------------------------------- ------------------- ---------------------- ----------------------- Return on average equity 13.78% 14.48% 14.77% - ----------------------------------------------- ------------------- ---------------------- ----------------------- Net interest margin (1) 4.71% 4.69% 4.82% - ----------------------------------------------- ------------------- ---------------------- ----------------------- Noninterest margin (2) 1.96% 1.77% 1.81% - ----------------------------------------------- ------------------- ---------------------- ----------------------- Basic net earnings per share $0.85 $3.48 $3.26 - ----------------------------------------------- ------------------- ---------------------- ----------------------- Fully diluted net earnings per share $0.85 $3.46 $3.24 - ----------------------------------------------- ------------------- ---------------------- -----------------------
(1) Net Interest Margin - Year-to-date tax-equivalent net interest income divided by year-to-date average earning assets using a tax rate of 35%. (2) Noninterest Margin - Noninterest income (including securities gains and losses) less noninterest expense (excluding the provision for bad debts and income taxes) divided by average year-to-date assets. The Company undertook three acquisitions during the period from the second quarter of 2004 through the first quarter of 2005. These acquisitions resulted in substantial growth. 16 As shown above, the interest margin has remained stable during the period of expansion. Net interest income at March 31, 2005 was $7,992, an 11.03% increase when compared to the prior year. Noninterest income has remained essentially flat throughout the period. However, in large part because of the acquisitions, noninterest expense increased substantially. A comparison of the periods ended March 31, 2004 and 2005 shows an increase of $869 or 18.03%. Growth
The following table shows NBI's key growth indicators: March 31, 2005 December 31, 2004 December 31, 2003 - ----------------------- ---------------------- --------------------- ---------------------- Securities $262,204 $250,708 $230,154 - ----------------------- ---------------------- --------------------- ---------------------- Loans, net 488,735 472,199 401,428 - ----------------------- ---------------------- --------------------- ---------------------- Deposits 723,873 705,932 625,378 - ----------------------- ---------------------- --------------------- ---------------------- Total assets 816,988 796,154 708,560 - ----------------------- ---------------------- --------------------- ----------------------
At March 31, 2005 total assets were $816,988, a $20,834 increase from December 31, 2004. During the first quarter of 2005 the Company acquired approximately $22,009 in deposits from Planters Bank and Trust Company of Virginia. Also acquired in this transaction were $8,831 in loans. This transaction accounted for the majority of the deposit growth and roughly one-half of the growth observed in loans. Surplus funds acquired in the transaction also contributed to growth in the investment portfolio. No further acquisitions are contemplated at this time. Asset Quality Key asset quality indicators are shown below:
March 31, 2005 December 31,2004 December 31, 2003 - --------------------------------------------- ------------------- -------------------- ---------------------- Nonperforming loans $ 347 $ 394 $ 354 - --------------------------------------------- ------------------- -------------------- ---------------------- Loans past due over 90 days 763 754 931 - --------------------------------------------- ------------------- -------------------- ---------------------- Other real estate owned 715 895 1,663 - --------------------------------------------- ------------------- -------------------- ---------------------- Allowance for loan losses to loans 1.16% 1.20% 1.32% - --------------------------------------------- ------------------- -------------------- ---------------------- Net charge-off ratio .17% .30% .34% - --------------------------------------------- ------------------- -------------------- ----------------------
This data indicates that the level of nonperforming loans has remained stable, as has the level of loans past due 90 days or more. Other real estate owned continues to decline as properties are foreclosed upon and sold. Asset quality is excellent at one of the Company's subsidiary banks, and it is improving at the Company's second banking affiliate. Net Interest Income Net interest income for the period ended March 31, 2005 was $7,992, an increase of $794 or 11.03%, over the same period in 2004. As previously mentioned, the Company has been in a period of substantial growth, and this growth is the source of the increase in net interest income. Overall, the net interest margin has responded well to the acquisitions completed over the past year. At March 31, 2005 the net interest margin was 4.71%, and it was 4.77% at March 31, 2004. With the assets from the past year's acquisitions, some fluctuation in the net interest margin was expected. It was also expected that the acquired assets and liabilities would not be optimal from an asset and liability management perspective, and would require some adjustments going forward. 17 Net Interest Income - Trends and Future Expectations During 2004, the Federal Reserve Board initiated a series of interest rate increases. These increases were designed to restore interest rates to historically more typical levels and to prevent inflation. Rate increases have occurred at regular intervals, each at 25 basis points to date. Some economists have speculated that larger interest rate increases will be necessary to combat inflation, especially with recently rising energy prices. However, others theorize that rising energy costs restrict consumers' ability to spend on other goods, thus reducing demand. This, in turn, restricts the ability of manufacturers to raise the price of their products. As long as wages remain stable, inflation caused by rising energy costs is not seen as a substantial threat. In either case, if interest rates rise rapidly, the Company's performance could be negatively affected, as the Company is liability sensitive. (See "Interest Rate Sensitivity") In other words, interest-bearing liabilities re-price faster than interest-earning assets. In this scenario, interest expense grows at a faster rate than interest income and adversely affects profitability. Most banks are similarly affected to some degree. The general impact of a rising interest rate scenario on the Company's balance sheet follows. Federal Funds sold and Interest-bearing deposits - These are overnight funds used primarily for liquidity purposes. They mature daily and, accordingly, interest rates change daily, which is advantageous in a period of rising interest rates. However these funds yield low interest, making other investments more attractive from an earnings standpoint. Securities available for sale - This category provides a higher level of earnings than overnight funds and can under certain circumstances be a source of liquidity and also demonstrate the ability to re-price. While these securities technically can be sold to provide liquidity and for interest rate sensitivity purposes, temporary declines in fair market value due to rising interest rates may make it unprofitable to sell the securities. In addition, embedded call features may not be activated during periods of high rates, leaving the Company with a "hold" or "sell" decision. See page 19 of the Company's 2004 Form 10-K for re-pricing data, and see also "Interest Rate Sensitivity". Securities held to maturity - This category due to its nature is not necessarily structured to be a source of liquidity or to moderate interest rate sensitivity. These securities must be held to maturity except under the most extenuating circumstances. In a rising rate environment, the difference in the amount of interest-income earned and cost to fund the securities decreases. In other words net interest income from these investments declines. Embedded call features may not be activated during periods of high rates. The Company then only has the option to hold the securities until maturity. See the Company's 2004 Form 10-K for re-pricing data, and see also "Interest Rate Sensitivity". Mortgage loans held for sale - This category is primarily driven by volume. In periods of low interest rates, mortgage refinancing activity and home sales tend to accelerate and generate higher revenue levels than are experienced in times of high interest rates. In the last two years re-financing activity has been significant. Recently, however, despite the continuing low rate environment, activity has declined. This may signal the end to what many have characterized as a refinancing boom. Loans - While low rate environments are more conducive to loan production than periods of extremely high interest rates, interest rates that are unusually low are a sign of a weak or a recovering economy. Ideal volumes may in fact be achieved in a more robust economy in which more moderate rate levels exist. If the economy continues to recover as forecast, higher loan volumes will have a positive impact on net interest income. 18 Except for acquisitions, an underlying, concern is loans to individuals. A downward trend in the total of loans to individuals has existed for several quarters. Management believes the decline is due to several reasons. o General economic conditions and the lack of employment in portions of the Company's market area. o A decline in consumer requests for new car financing because of special incentives offered by automobile companies. o Consumers' use of credit cards and home equity lines with higher credit limits. o Consumers taking advantage of low mortgage rates to refinance home mortgages to obtain funds that might otherwise have been borrowed through a consumer loan. A reversal of this trend may occur to some extent as economic conditions change and higher interest rates make mortgage refinancing less appealing. However, management believes that the automotive related financing offers and competition from the credit card sector will remain. Since loans to individuals are generally higher yielding, this trend will not have a favorable effect on net interest income. Interest Expense Interest expense at March 31, 2005 was $3,043, an increase of $444 or 17.08% from the same period the prior year. As previously discussed, the Company has experienced a period of substantial growth. Interest bearing deposits during the period increased by $71,552 or 13.42%. Rising interest rates have also exerted some upward pressure in this area. During periods of rising interest rates, interest-bearing demand deposits, and to a lesser degree savings deposits, migrate to higher rate, longer-term time deposits. Generally, as rates climb, more migration occurs. Given their re-pricing characteristics, interest-bearing demand deposits readily respond to any interest rate movement. In other words, increases or decreases in interest expense can occur quite quickly. With a definite bias towards higher interest rates in the future, it is expected that the net interest margin will decline, at least temporarily, in response to rising interest rates. The ultimate impact of rising interest rates is dependent upon the number of rate increases, the amount of these rate increases and the level to which interest rates ultimately rise. Provision and Allowance for Loan Losses The provision for loan losses for the period ended March 31, 2005 was $190, a $98 decrease from the period ended March 31, 2004. The ratio of the allowance for loan losses to total loans at the end of the first quarter of 2005 was 1.16%, which compares to 1.31% at the same period last year. The net charge-off ratio at March 31, 2005 was .17%, and it was .23% at March 31, 2004. The Company regularly reviews asset quality and re-evaluates the allowance for loan losses. Reviews are conducted for each of the two bank subsidiaries, and an appropriate provision and allowance for loan losses is established for each bank, depending upon factors that are unique to that bank and the quality of its loan portfolio. Because of the continued excellent quality of the loan portfolio at one subsidiary bank and the improving quality of the loan portfolio at the second bank, it is management's judgement that the decrease in the provision for loan losses is justified and the allowance is appropriate and adequate. (See "Allowance for Loan Losses" under "Critical Accounting Policies".) 19
Noninterest Income March 31, 2005 March 31, 2004 March 31, 2003 - ----------------------------------- ----------------------- ------------------------ ------------------------ Service charges on deposits $675 $675 $526 - ----------------------------------- ----------------------- ------------------------ ------------------------ Other service charges and fees 87 72 75 - ----------------------------------- ----------------------- ------------------------ ------------------------ Credit card fees 494 386 346 - ----------------------------------- ----------------------- ------------------------ ------------------------ Trust fees 408 509 259 - ----------------------------------- ----------------------- ------------------------ ------------------------ Other income 137 103 172 - ----------------------------------- ----------------------- ------------------------ ------------------------ Realized securities gains/losses (33) (6) (9) - ----------------------------------- ----------------------- ------------------------ ------------------------
Noninterest income is made up of several categories. Following is a description of each, as well as the factors that influence each. Service charges on deposit accounts consist of a variety of charges imposed on demand deposits, interest-bearing deposits and savings deposit accounts. These include, but are not limited to, the following: o Demand deposit monthly activity fees o Service charges for checks for which there are non-sufficient funds or overdraft charges o ATM transaction fees The principal factors affecting current or future income are: o Internally generated growth o Acquisitions of other banks/branches or de novo branches o Adjustments to service charge structures As the above table demonstrates, there was no change in this category between 2004 and 2005. Other service charges and fees consist of several categories. The primary categories are listed below. o Fees for the issuance of official checks o Safe deposit box rent o Income from the sale of customer checks o Income from the sale of credit life and accident and health insurance Levels of income derived from these categories vary. Fees for the issuance of official checks and customer check sales tend to grow as the existing franchise grows and as new offices are added. Fee schedules, while subject to change, generally do not alone yield a significant or discernable increase in income when they change. The most significant growth in safe deposit box rent also comes with an expansion of offices. Safe deposit box fee schedules, which are already at competitive levels, are occasionally adjusted. Income derived from the sale of credit life insurance and accident and health insurance varies with loan volumes. Credit card fees consist of three types of revenues as follows. o Credit card transaction fees o Debit card transaction fees o Merchant fees In all three cases volume is critical to growth in income. For debit and credit cards the number of accounts, whether obtained from internal growth or by acquisition, is the key factor. Merchant fees also depend on the number of merchants in the Company's program, as well as the type of business and the level of transaction discounts associated with them. Trust income is somewhat dependent upon market conditions and the number of estate accounts being handled at any given point in time. Financial market conditions, which affect the value of trust assets managed, can vary, leading to fluctuations in the related income. Over the past few years and into 2005, 20 the financial markets have experienced a significant degree of volatility. Income from estates is also unpredictable, as the number of estates at any given time is impossible to predict. Trust income for the period ended March 31, 2005 was $408, down $101 from the same period in 2004. This decrease was almost exclusively caused by the unpredictable fluctuation in estate income. The other income category is used for types of income that cannot be classified with other forms of noninterest income. The category includes such things as: o Net gains on the sale of fixed assets o Rent on foreclosed property o Income from cash value life insurance o Other infrequent or minor forms of income o Revenue from investment and insurance sales Given the nature of the items included in this category, it is difficult to determine trends or patterns. Items warranting discussion are usually non-recurring in nature. Realized loss on securities was $(33). The majority of the loss was due to write-downs in certain investments in limited liability companies (LLC's) of which the Company is part owner. The LLC's are in the business of selling insurance, investment services and the sale of title insurance.
Noninterest Expense March 31, 2005 March 31, 2004 March 31, 2003 - ----------------------------- --------------------------- -------------------------- --------------------------- Salaries and employee benefits $2,862 $2,518 $2,405 - ----------------------------- --------------------------- -------------------------- --------------------------- Occupancy and furniture and fixtures 479 438 434 - ----------------------------- --------------------------- -------------------------- --------------------------- Data processing and ATM 467 279 252 - ----------------------------- --------------------------- -------------------------- --------------------------- Credit card processing 376 314 287 - ----------------------------- --------------------------- -------------------------- --------------------------- Intangibles and goodwill amortization 266 238 238 - ----------------------------- --------------------------- -------------------------- --------------------------- Net costs of other real estate owned 108 59 6 - ----------------------------- --------------------------- -------------------------- --------------------------- Other operating expenses 1,131 974 945 - ----------------------------- --------------------------- -------------------------- ---------------------------
Noninterest expense includes several categories. Following is a brief description of the factors that affect each. In addition to employee salaries, the salaries and benefits expense category includes the costs of employment taxes and employee fringe benefits. Certain of these are: o Health insurance o Employee life insurance o Dental insurance o Executive compensation plans (1) o Pension plans (1) o Employee stock option plan (1) o Employer FICA o Unemployment taxes (1) See the 2004 Form 10-K and the Proxy Statement for the 2005 Annual Stockholders meeting for further information 21 For the first quarter of 2005, salary and benefits expense was up by $344. A greater number of employees because of acquisitions, routine salary increases, pensions and health insurance cost increases contributed to the increase. At March 31, 2005 the Company employed 274 full time equivalent employees compared to 249 full time equivalent employees at March 31, 2004. Most of the 25 additional employees were hired because of the acquisitions, and it is estimated that approximately $147 of the $344 increase is due to those acquisitions. Occupancy costs include such items as depreciation expense, maintenance of the properties, repairs and real estate taxes. This category is most affected by new property acquisitions resulting from mergers, branch purchases or construction of new branch facilities. Conversely, expense can be lowered by branch office consolidations or closures, which though infrequent, have occurred. Occasionally, but not frequently, repairs and other expense items may be significant. This category increased $41 when the first quarters of 2005 and 2004 are compared. Included in the increase are depreciation of costs related to a new phone system and for fixed assets purchased in acquistions. The Company maintains its own data processing facility and has ATM's at twenty-five of the branch offices of its subsidiary banks and at three off-site locations. Costs to operate ATM's are reflected in this category and include depreciation, maintenance, communication lines and certain supplies. For the period ended March 31, 2005 data processing and ATM expenses were up $188 when compared to the same period in 2004. Included in this increase were costs related to the operations of five additional ATM's. Conversion costs associated with acquisitions was approximately $82. Also included in this category are out-sourced data processing fees of $44 for Community National Bank (CNB), which was acquired the second quarter of 2004. CNB's data processing was combined with NBB's during the first quarter. Credit card processing includes costs associated with the processing of credit cards, debit cards and merchant transactions. These expenses are related to credit card income previously discussed in "Noninterest Income", and the comments in that section are applicable. Intangibles amortized and goodwill increased by $28 due to acquisition activity. At March 31, 2005 the net cost of other real estate owned was $108. Of that amount, approximately $78 was losses on disposal of foreclosed properties and remaining $30 write-downs. Given the number of these properties, more losses are possible. The March 31, 2005 costs are not necessarily indicative of the full year for 2005. Other real estate owned at March 31, 2005 was $715, which compares to $895 at December 31, 2004. Other operating expenses include all other forms of expense not classified elsewhere in the Company's statement of income. Included in this category are such items as stationery and supplies, franchise taxes, contributions, telephone, postage and other operating costs. Many of the expenses included in this category are relatively stable or increase with inflation moderately from year-to-year. However, there are some items included in the category, such as other losses and charge-offs and repossession expense, which can vary from time to time. While many of the items in this category have identifiable trends, others may have frequent nonrecurring items or items that occur at no particular frequency. Overall costs for this category increased by 16.30%, when the periods ending March 31, 2005 and March 31, 2004 are compared. Included in the category is stationery and supplies, which increased approximately $32. 22 Postage expenses were also up $32. This was due to an increase in volume because of acquisitions, including two complete computer system conversions which required additional mailings. Balance Sheet Year-to-date daily averages for the major balance sheet categories are as follows: Assets March 31, 2005 December 31, 2004 - ---------------------------------------- ----------------- ------------------ Federal funds sold $ --- $ 276 Interest-bearing deposits 13,609 16,224 Securities available for sale 149,453 143,021 Securities held to maturity 106,664 107,284 Mortgage loans held for sale 497 626 Real estate construction loans 26,072 23,041 Real estate mortgage loans 115,876 107,189 Commercial and industrial loans 255,911 228,897 Loans to individuals 86,692 86,083 Total Assets $ 802,861 $ 753,730 Liabilities and stockholders equity - ---------------------------------------- Noninterest-bearing demand deposits $113,901 $93,320 Interest-bearing demand deposits 194,756 186,106 Savings deposits 59,751 58,899 Time deposits 338,846 327,302 Other borrowings 204 531 Shareholders' equity $88,109 $84,479 The mix of loan categories at March 31, 2005 and December 31, 2004 are shown in the following table. March 31, 2005 December 31, 2004 - --------------------------------- ---------------- ------------------- Construction loans (1) $25,826 $25,009 - --------------------------------- ---------------- ------------------- Real estate loans 116,983 115,388 - --------------------------------- ---------------- ------------------- Commercial and industrial loans 260,980 248,523 - --------------------------------- ---------------- ------------------- Loans to individuals 91,566 89,889 - --------------------------------- ---------------- ------------------- (1) All categories shown reflect gross loans at period-end. During the first quarter of 2005, the Company completed an acquisition of two branches from Planters Bank and Trust Company of Virginia. Included in the transaction was the purchase of approximately $8,831 in loans. This accounted for close to one-half of the loan growth experienced during the first quarter. The volume of mortgage loans held for sale is directly related to interest rate levels. Activity generally peaks during periods of low interest rates, declining as interest rates rise. Period-end balances are not indicative of volume, as loans are constantly being originated and sold. The balance shown at period-end reflects only loans held by NBB for which there are purchase commitments from investors, but which have not yet been funded. At March 31, 2005 there were approximately $1,591 in outstanding commitments to extend mortgage loans. Construction loans were $25,826 at March 31, 2005 and $25,009 at December 31, 2004, an increase of $817. This category tends to fluctuate because of demand and with the seasons. Demand may vary because of economic conditions. Completion of construction projects generally occurs within one year, at which time permanent financing through one of the Company's banking affiliates or another lender is obtained. Loans for which the Company retains permanent financing move into the commercial and industrial loan or mortgage loan categories. Real estate loans at March 31, 2005 were $116,983, which represents an 23 increase of $1,595 from December 31, 2004. Loans in this category are for one-to-four family housing and are loans the banking affiliates elected to retain rather than to sell on the secondary market. Commercial and industrial loans were $260,980 at March 31, 2005, which represents an increase of $12,457 from December 31, 2004. Included in this category are loans for working capital, equipment, commercial real estate and other loans for legitimate business needs. See Note 15 of the Company's 2004 Form 10-K for information related to "Concentrations of Credit". Historically, growth in this category has been satisfactory, and based on present knowledge, no adverse trends are anticipated. Loans to individuals increased by $1,677 when March 31, 2005 is compared to December 31, 2004. See the comments under "Net Interest Income". The increase in this category is entirely attributable to acquisitions. Total deposits at March 31, 2005 increased by $17,941 from December 31, 2004. Noninterest-bearing demand deposits increased by $13,039 when March 31, 2005 is compared to December 31, 2004. During the same period, interest-bearing demand deposits increased by $318, while savings deposits declined by $2,928. Time deposits increased by $7,512. The majority of the growth in deposits came from the acquisition of the two Planters Bank and Trust branches in the first quarter of 2005. Liquidity and Capital Resources Net cash provided by operating activities was $3,793 for the period ended March 31, 2005, which compares to $4,534 for the same period the previous year. Net cash used in investing activities was $20,365 for the period ended March 31, 2005, and $243 provided for the period ended March 31, 2004. Net cash provided by financing activities was $18,122 for the period ending March 31, 2005. Management is unaware of any commitment that would have a material and adverse effect on liquidity at March 31, 2005. Total shareholders' equity grew by $1,705 from December 31, 2004 to March 31, 2005. Earnings and the changes in unrealized gains and losses for securities available for sale accounted for the net increase. There were no dividends declared in the first quarter of 2005. The Tier I and Tier II risk-based capital ratios at March 31, 2005 were 12.50% and 13.51%, respectively. Interest Rate Sensitivity Following is a table showing repricing and maturity data for the Company's interest-earning assets and interest-bearing liabilities:
March 31, 2005 ----------------------------------------------- Assets < 1 Year 1-5 Years > 5 Years - ------------------------------------------- -------------- ---------------- --------------- Interest-bearing deposits $11,603 $--- $--- Securities available for sale 19,500 58,896 74,409 Securities held to maturity 17,871 33,622 57,906 Mortgage loans held for sale 190 --- --- Loans net of unearned income and deferred fees 153,603 277,588 63,256 -------------- ---------------- --------------- Total assets repricing /maturing 202,767 370,106 195,571 ============== ================ =============== Cumulative 202,767 572,873 768,444 ============== ================ =============== Liabilities Interest-bearing demand deposits 199,228 --- --- Savings deposits 59,889 --- --- Time deposits 175,753 167,675 2,113 Other borrowings 431 --- --- -------------- ---------------- --------------- Total liabilities/maturing 435,301 167,675 2,113 ============== ================ =============== Cumulative 435,301 602,976 605,089 ============== ================ =============== Cumulative repricing gap (232,534) (30,103) 163,355 ============== ================ =============== Cumulative gap ratio .47 .95 1.27 ============== ================ ===============
24 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 collateralized mortgage obligations, structured notes and other similar instruments that are included in securities available for sale and securities held to maturity. The fair value of these investments at March 31, 2005 was approximately $2,542. Amortized cost for these securities was approximately $2,507. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provides management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2004. (See "Interest Rate Sensitivity.") Item 4. Controls and Procedures Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company has conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2005. Based on that evaluation, the Company's principal executive officer and principal financial officer have concluded that these controls and procedures are effective to give reasonable assurance in alerting them in a timely fashion to material information relating to the Company that is required to be included in the reports the Company files under the Act. There were no changes in the Company's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Disclosure controls and procedures are the Company's controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to allow timely decisions regarding its required disclosure. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that all control issues have been detected. Part II Other Information Items 1. Legal Proceedings None for the three months ended March 31, 2005. Items 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table indicates that during the first quarter of 2005, there were no purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act. 25
- -------------------- ------------- ----------------- ----------------------- ------------------ Approximate Total Number of Dollar Value of Total Shares Purchased as Shares That May Number of Part of Publicly Yet Be Purchased Fiscal Period shares Average Price Announced Plans or Under the Plans Purchased Paid per Share Programs(1) or Programs - -------------------- ------------- ----------------- ----------------------- ------------------ Total for First Quarter of 2005 0 0 0 $783,250 - -------------------- ------------- ----------------- ----------------------- ------------------
(1) On May 12, 2004, the Board of Directors approved the repurchase of up to $1 million of the Company's common stock in a stock repurchase program that expires on May 31, 2005. At March 31, 2005, approximately $783,250 may yet be purchased. Item 3. Defaults upon Senior Securities None for the three months Ended March 31, 2005. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits See Index of Exhibits Signatures National Bankshares, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: May 9, 2005 NATIONAL BANKSHARES, INC. /s/ JAMES G. RAKES ----------------------------- James G. Rakes Chief Executive Officer /s/ J. ROBERT BUCHANAN ----------------------------- J. Robert Buchanan Chief Financial Officer 26
(1) Index of Exhibits Page No. in Exhibit No. Description Sequential System ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated herein by National Bankshares, Inc. reference to Exhibit 3(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 3(i) Articles of Amendment to Articles of (incorporated herein by Incorporation of National Bankshares, Inc., reference to exhibit 3(i) of dated April 8, 2003. The Annual Report on Form 10-K for the fiscal year ended December 31, 2003) 4(i) Specimen copy of certificate for National (incorporated herein by Bankshares, Inc. common stock, $2.50 par value reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 4(i) Article Four of the Articles of Incorporation of (incorporated herein by National Bankshares, Inc. included in Exhibit No. reference to Exhibit 4(b) of 3(a) the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated June (incorporated herein by , 18, 1990 by and between Information reference to Exhibit 10(e) of Technology, Inc. and The National Bank of the Annual Report on Form 10-K for fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 Stock Option Plan (incorporated herein by reference to Exhibit 4.3 of the Form S-8, filed as Registration No. 333-79979 with the Commission on June 4, 1999) *10(iii)(A) Employment Agreement dated January 2002 between (incorporated herein by National Bankshares, Inc. and James G. Rakes reference to Exhibit 10(iii)(A) of Form 10-Q for the period ended June 30, 2002) *10(iii)(A) Employment Lease Agreement dated August 14, 2002, (incorporated herein by between National Bankshares, Inc. and The reference to Exhibit 10(iii)(A) National Bank of Blacksburg of form 10-Q for the period ended September 30, 2002) *10(iii)(A) Change in Control Agreement dated January 5, (incorporated herein by 2003, between National Bankshares, Inc. and reference to Exhibit 10 iii (A) Marilyn B. Buhyoff of Form 10-K for the period ended December 31, 2002) *10(iii)(A) Change in Control Agreement dated January 8, (incorporated herein by 2003, between National Bankshares, Inc. and reference to Exhibit 10 iii (A) F. Brad Denardo of Form 10-K for the period ended December 31, 2002) 27 *10(iii)(A) Change in Control Agreement dated June 1, (incorporated herein by 1998, between Bank of Tazewell County and reference to Exhibit 10 iii (A) Cameron L. Forester of Form 10-K for the period ended December 31, 2002) 31(i) Section 302 Certification of Chief Executive Officer Page 32 31(ii) Section 302 Certification of Chief Financial Officer Page 32 32(i) 18 U.S.C. Section 1350 Certification of Chief Page 34 Executive Officer 32(ii) 18 U.S.C. Section 1350 Certification of Chief Page 34 Financial Officer
* Indicates a management contract or compensatory plan required to be filed herein. 28 Exhibit No. 31(i) CERTIFICATIONS UNDER SECTION 906 OF THE SARBANES OXLEY ACT OF 2002 I, James G. Rakes, Chairman, President and Chief Executive Officer of National Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ JAMES G. RAKES ------------------------- James G. Rakes Chairman President and Chief Executive Officer (Principal Executive Officer) 29 Exhibit 31(ii) I, J. Robert Buchanan, Treasurer (Chief Financial Officer) of National Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ J. ROBERT BUCHANAN ---------------------------- J. Robert Buchanan Treasurer (Principal Financial Officer) 30 Exhibit 32 (i) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended March 31, 2005, I, James G. Rakes, President and Chief Executive Officer of National Bankshares, Inc. (Principal Executive Officer), hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ JAMES G. RAKES - ------------------ James G. Rakes Chairman, President and Chief Executive Officer (Principal Executive Officer) Exhibit 32 (ii) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended March 31, 2005, I, J. Robert Buchanan, Treasurer (Principal Financial Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ J. ROBERT BUCHANAN - ----------------------- J. Robert Buchanan Treasurer (Principal Financial Officer) 31 EX-31 2 ex31a.txt Exhibit No. 31(i) CERTIFICATIONS UNDER SECTION 906 OF THE SARBANES OXLEY ACT OF 2002 I, James G. Rakes, Chairman, President and Chief Executive Officer of National Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ JAMES G. RAKES ------------------------- James G. Rakes Chairman President and Chief Executive Officer (Principal Executive Officer) EX-31 3 ex31b.txt Exhibit 31(ii) I, J. Robert Buchanan, Treasurer (Chief Financial Officer) of National Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /s/ J. ROBERT BUCHANAN ---------------------------- J. Robert Buchanan Treasurer (Principal Financial Officer) EX-32 4 ex32a.txt Exhibit 32 (i) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended March 31, 2005, I, James G. Rakes, President and Chief Executive Officer of National Bankshares, Inc. (Principal Executive Officer), hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ JAMES G. RAKES - ------------------ James G. Rakes Chairman, President and Chief Executive Officer (Principal Executive Officer) EX-32 5 ex32b.txt Exhibit 32 (ii) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended March 31, 2005, I, J. Robert Buchanan, Treasurer (Principal Financial Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended March 31, 2005, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended March 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ J. ROBERT BUCHANAN - ----------------------- J. Robert Buchanan Treasurer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----