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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
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Commission file number 0-15204
National Bankshares, Inc.
(Exact name of registrant as specified in its charter)
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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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 2001
- ------------------------------------------- ---------------------------------
Common Stock, $2.50 Par Value 3,511,377
(This report contains 26 pages)
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NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
Form 10-Q
Index
Page
====
Part I Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets, September 30, 2001 3-4
and December 31, 2000
Consolidated Statements of Income for the 5-6
Three Months Ended
September 30, 2001 and 2000
Consolidated Statements of Income for the 7-8
Nine Months Ended
September 30, 2001 and 2000
Consolidated Statements of Changes in 9
Stockholders' Equity, Nine Months Ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows, 10-11
Nine Months Ended September 30, 2001 and 2000
Item 2 - Management's Discussion and Analysis of 17-23
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about 24
Market Risk
Part II Other Information
Items 1 - 3 - Legal Proceedings; Changes in 25
Securities and Use of Proceeds;
Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of 25
Security Holders
Item 5 - Other Information 25
Item 6 - Exhibits and Reports on Form 8-K 25
Signatures 26
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2
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000
(Unaudited) (Audited)
September 30, December 31,
($000's except share and per share data) 2001 2000
=============== =================
Assets
Cash and due from banks $12,885 11,130
Interest-bearing deposits 12,517 13,579
Federal funds sold 8,769 29,090
Securities available for sale 102,217 123,785
Securities held to maturity (fair value
$88,178 in 2001 and $32,602 in 2000) 86,210 32,559
Mortgage loans held for sale 613 ---
Loans:
Real estate construction loans 20,405 16,726
Real estate mortgage loans 80,500 71,163
Commercial and industrial loans 179,821 163,929
Loans to individuals 115,731 110,176
------------- ---------------
Total loans 396,457 361,994
Less: unearned income and deferred fees (1,847) (2,313)
------------ ---------------
Loans, net of unearned income
and deferred fees 394,610 359,681
Less: allowance for loan losses (4,124) (3,886)
------------ ---------------
Loans, net 390,486 355,795
------------ ---------------
Bank premises and equipment, net 10,273 10,324
Accrued interest receivable 5,379 5,049
Other real estate owned, net 1,043 540
Intangible assets 12,104 9,038
Other assets 1,714 2,608
------------ ---------------
Total assets $ 644,210 593,497
============= ===============
Liabilities and stockholders' equity
Noninterest-bearing demand deposits $70,203 60,165
Interest-bearing demand deposits 120,287 101,257
Savings deposits 48,964 42,560
Time deposits 336,030 326,666
------------- ---------------
Total deposits 575,484 530,648
------------- ---------------
Other borrowed funds 470 270
Accrued interest payable 1,330 1,538
Other liabilities 1,276 1,207
------------- ---------------
Total liabilities 578,560 533,663
------------- ---------------
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 5,000,000 shares; issued
and outstanding 3,511,377 shares in
2001 and 3,511,877 in 2000 8,778 8,780
Retained earnings 55,319 51,629
Accumulated other comprehensive
income(loss) 1,553 (575)
------------ --------------
Total stockholders' equity 65,650 59,834
Commitments and contingent liabilities
------------- --------------
Total liabilities and
Stockholders' equity $ 644,210 593,497
============= ==============
See accompanying notes to the consolidated financial statements
4
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
($000's except share and per share data) 2001 2000
============== =============
Interest income
Interest and fees on loans $ 8,507 7,160
Interest on interest-bearing deposits 66 194
Interest on federal funds sold 100 2
Interest on securities - taxable 1,888 1,666
Interest on securities - nontaxable 885 564
-------------- -------------
Total interest income 11,446 9,586
-------------- -------------
Interest expense
Interest on time deposits $100,000 or more 1,139 899
Interest on other deposits 4,553 3,471
Interest on borrowed funds 3 180
-------------- -------------
Total interest expense 5,695 4,550
------------- -------------
Net interest income 5,751 5,036
Provision for loan losses 377 331
-------------- -------------
Net interest income after
provision for loan losses 5,374 4,705
------------- -------------
Noninterest income
Service charges on deposit accounts 554 423
Other service charges and fees 69 64
Credit card fees 321 256
Trust income 284 206
Other income 84 22
Realized securities losses, net --- 5
-------------- -------------
Total noninterest income 1,312 976
-------------- -------------
Noninterest expense
Salaries and employee benefits 2,040 1,548
Occupancy and furniture and fixtures 437 317
Data processing and ATM 305 241
FDIC assessment 27 32
Credit card processing 255 369
Intangibles and goodwill amortization 239 38
Net costs of other real estate owned 32 33
------------- -------------
Total noninterest expense 4,176 3,291
-------------- -------------
Income before income tax expense 2,510 2,390
Income tax expense (600) (639)
-------------- -------------
Net income $ 1,910 1,751
============== =============
Net income per share, basic and diluted $ 0.54 0.50
============== =============
5
Weighted average number of common
shares outstanding 3,511,377 3,512,615
Dividends declared per share $ --- ---
============== =============
See accompanying notes to consolidated financial statements.
6
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
($000's except share and per share data) 2001 2000
================ ================
Interest income
Interest and fees on loans $25,110 20,545
Interest on interest-bearing deposits 475 369
Interest on federal funds sold 606 128
Interest on securities - taxable 5,955 5,004
Interest on securities - nontaxable 2,363 1,670
---------------- ----------------
Total interest income 34,509 27,716
---------------- ----------------
Interest expense
Interest on time deposits $100,000 or more 3,562 2,351
Interest on other deposits 14,309 9,834
Interest on borrowed funds 7 525
---------------- ----------------
Total interest expense 17,878 12,710
---------------- ----------------
Net interest income 16,631 15,006
Provision for loan losses 1,041 997
---------------- ----------------
Net interest income after
provision for loan losses 15,590 14,009
---------------- ----------------
Noninterest income
Service charges on deposit accounts 1,639 1,184
Other service charges and fees 214 201
Credit card fees 917 760
Trust income 849 611
Other income 210 102
Realized securities losses, net (26) 5
---------------- ----------------
Total noninterest income 3,803 2,863
---------------- ----------------
Noninterest expense
Salaries and employee benefits 6,006 4,662
Occupancy and furniture and fixtures 1,280 938
Data processing and ATM 1,014 705
FDIC assessment 73 74
Credit card processing 757 805
Intangible assets and goodwill amortization 674 114
Net costs of other real estate owned 52 59
Other operating expenses 2,666 2,019
---------------- ----------------
Total noninterest expense 12,522 9,376
---------------- ----------------
Income before income tax expense 6,871 7,496
Income tax expense (1,664) (2,024)
---------------- ----------------
Net income $ 5,207 5,472
================ ================
Net income per share, basic and diluted $ 1.48 1.56
================ ================
7
Weighted average number of common
shares outstanding 3,511,381 3,515,337
Dividends declared per share $ 0.43 0.42
================ ================
See accompanying notes to consolidated financial statements.
8
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
Accumulated
Other
($000's, except for per Common Retained Comprehensive Comprehensive
share data) Stock Earnings Income (Loss) Income Total
=========== ============= ================ ================ ============
Balances, December 31, 1999 $ 8,792 47,384 (3,453) --- 52,723
Net income --- 5,472 --- 5,472 5,472
Dividend ($0.42 per share) --- (1,477) --- --- (1,477)
Dividend ($0.42 per share) (1,477)
Other comprehensive income,
net of tax:
Unrealized gains
on securities
Available for sale, net
of income tax expense $481 --- --- 933 933 933
----------- ------------- ---------------- ---------------- ------------
Comprehensive income --- --- --- 6,405 ---
----------- ------------- ---------------- ---------------- ------------
Stock repurchase (12) (70) --- --- (82)
----------- ------------- ----------------- --------------- ------------
Balances, September 30, 2000 $ 8,780 51,309 (2,520) --- 57,569
=========== ============= ================= =============== ============
Balances, December 31, 2000 $ 8,780 51,629 (575) --- 59,834
Net income --- 5,207 --- 5,207 5,207
Dividend ($0.43 per share) --- (1,511) --- --- (1,511)
Other comprehensive income,
Unrealized gains on
securities available for
sale, net of income tax
expense $9 --- --- 2,111 2,111 2,111
Re-class adjustment net of
--- --- 17 17 17
----------- ------------- ---------------- ---------------- -----------
Other comprehensive income --- --- --- 2,128 ---
----------- ------------- ---------------- ---------------- -----------
Comprehensive income --- --- --- 7,335 ---
----------- ------------- ---------------- ---------------- -----------
Stock repurchase (1) (2) (6) --- --- (8)
----------- -------------- --------------- ---------------- ------------
Balances, September 30,2001 $ 8,778 55,319 1,553 --- 65,650
=========== ============= ================ ================ ===========
(1) Represents the repurchase of 500 shares at $16.25 per share.
See accompanying notes to consolidated financial statements.
9
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
($000's) 2001 2000
================= ================
Cash flows from operating activities
Net income $ 5,207 5,472
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 1,041 997
Depreciation of bank premises and equipment 841 750
Amortization of intangibles 674 114
Amortization of premiums and accretion of
Discount, net 265 107
Gains on sales of bank premises and equipment (1) (6)
Losses on sales and calls of securities
Available for sale, net 26 4
Gains on calls of securities
Held to maturity, net --- (9)
Losses on other real estate owned 4 22
(Increase) decrease in:
Mortgage loans held for sale (613) 107
Accrued interest receivable (330) (289)
Other assets (194) (379)
Increase (decrease) in:
Accrued interest payable (208) 110
Other liabilities 69 (16)
---------------- -----------------
Net cash provided by operating
activities 6,781 6,984
---------------- ----------------
Cash flows from investing activities
Net decrease in federal funds sold 20,321 2,700
Net (increase) decrease in interest-bearing
Deposits 1,062 (8,784)
Proceeds from calls and maturities of securities
Available for sale 39,244 5,970
Proceeds from sales of securities available for
Sale --- 751
Proceeds from calls and maturities of securities
Held to maturity 12,736 2,498
Purchases of securities available for sale (14,609) (11,754)
Purchases of securities held to maturity (66,521) ---
Purchases of loan participations (3,401) (1,528)
Collections of loan participations 3,099 620
Purchase of loans from acquisition (9,255) ---
Net increase in loans to customers (27,044) (21,276)
Proceeds from disposal of other real estate owned 273 252
Recoveries on loans charged off 89 (79)
Purchase of bank premises and equipment (804) (638)
Proceeds from disposal of bank premises and equipment 15 10
---------------- ----------------
Net cash used in investing
activities (44,795) (31,258)
------------------ ----------------
10
Cash flows from financing activities
Deposits purchased net of premium paid 29,885 ---
Net increase (decrease) in time deposits (10,593) 29,320
Net increase (decrease)in other deposits 21,796 (7,235)
Net increase (decrease) in other borrowed funds 200 (262)
Dividends paid on common stock (1,511) (1,477)
Repurchase of common stock (8) (82)
---------------- ------------------
Net cash provided by financing
activities 39,769 20,264
---------------- -----------------
Net increase (decrease) in cash and due from banks 1,755 (4,010)
Cash and due from banks at beginning of period 11,130 13,311
---------------- ------------------
Cash and due from banks at end of period $12,885 9,301
================ ==================
Supplemental disclosure of cash flow information
Cash paid for interest $ 18,086 12,600
================ ==================
Cash paid for income taxes $ 1,713 2,395
================ ==================
Loans charged to the allowance for loan losses $ 892 575
================ ==================
Loans transferred to other real estate owned $ 780 294
================ ==================
Long-term debt $ --- 10,000
================ ==================
See accompanying notes to consolidated financial statements.
11
National Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30,2001
(Unaudited)
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
(NBFS), (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 nine months ended
September 30, 2001 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 2000 Annual Report to Stockholders and additional information supplied
in the 2000 Form 10-K.
12
Note (2) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended
September 30, December 31,
2001 2000 2000
============== ============= =============
($000's, except for % data)
Balance at beginning of period $ 3,886 3,231 3,231
Provision for loan losses 1,041 997 1,329
Loans charged off (892) (575) (770)
Recoveries 89 79 96
----------- ------------- -------------
Balance at the end of period $ 4,124 3,732 3,886
=========== ============== =============
Ratio of allowance for loan losses
to the end of period loans net of
unearned income and deferred fees 1.05% 1.18% 1.08%
============ ============== =============
Ratio of net charge-offs
(recoveries) to average loans,
net of unearned income and
deferred fees(1) .29% .22% .21%
============ ============== =============
Ratio of allowance for loan losses
to nonperforming loans(2) 930.93% 1,719.82% 4,415.91%
============ ============== =============
(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.
September 30,2001 December 31,
2001 2000 2000
============= ============ ================
($000's, except for % data)
Nonperforming Assets
Nonaccrual loans $443 217 88
Restructured loans --- --- ---
------------- ------------ ----------------
Total nonperforming loans 443 217 88
Foreclosed property 1,043 467 540
------------- ------------ ----------------
Total nonperforming assets $1,486 684 628
============= ============ ================
Ratio of nonperforming assets to
loans, net of unearned income and
deferred fees, plus other real
estate owned .38% .22% .17%
============= ============ ================
13
September 30, December 31,
2001 2000 2000
============= ============ ================
Accruing Loans Past Due 90 Days
or More
Past due 90 days or more and
still accruing $620 465 1,321
============= ============ ================
Ratio of loans past due 90 days
or more to loans, net of unearned
income and deferred fees .16% .15% .37%
============= ============ ================
Impaired Loans
Total impaired loans $811 603 456
============= ============ ================
Impaired loans with a
valuation allowance $191 267 135
Valuation allowance (114) (230) (135)
------------- ------------- ----------------
Impaired loans net of allowance $ 77 37 ---
============= ============ ================
Impaired loans with no
valuation allowance $620 336 321
============= ============ ================
Average recorded investment
in impaired loans $646 543 657
============= ============ ================
Income recognized on impaired
loans $ 31 31 43
============= ============ ================
Amount of income recognized
on a cash basis --- --- ---
============= ============ ================
14
Note (3) 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
September 30, 2001 are as follows:
September 30, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
----------------- ----------------- ----------------- ------------------
Available for sale:
U.S. Treasury $ 6,247 305 --- 6,552
U.S. Government
agencies and
corporations 23,230 136 --- 23,366
State and political
subdivisions 44,147 1,285 20 45,412
Mortgage-backed
securities 11,884 328 9 12,203
Corporate debt
securities 11,539 225 51 11,713
Federal Reserve Bank stock 209 --- --- 209
Federal Home Loan
Bank stock 1,411 --- --- 1,411
Other securities 1,196 155 --- 1,351
----------------- ----------------- ----------------- ------------------
Total securities
available for sale $ 99,863 2,434 80 102,217
================= ================= ================= ==================
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of
September 30, 2001 are as follows:
September 30, 2001
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
----------------- ----------------- ----------------- ------------------
Held to Maturity:
U.S. Government
agencies and
corporations $17,494 124 7 17,611
State and political
subdivisions 38,150 933 30 39,053
Mortgage-backed
securities 7,733 150 --- 7,883
Corporate securities 22,833 846 48 23,631
----------------- ----------------- ----------------- ------------------
Total securities
held to maturity $86,210 2,053 85 88,178
================= ================= ================= ==================
15
Note (4) Restrictions on Dividend Payments and Capital Requirements
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------- ------------- ------------- -------------
September 30, 2001:
Total capital(1)
Bankshares
Consolidated $56,252 12.7% 35,406 8.0% N/A N/A
NBB 30,869 12.1% 20,388 8.0% 25,485 10.0%
BTC 22,066 11.9% 14,833 8.0% 18,541 10.0%
Tier I capital(1)
Bankshares
Consolidated $52,129 11.8% 17,703 4.0% N/A N/A
NBB 28,347 11.1% 10,194 4.0% 15,291 6.0%
BTC 20,465 11.0% 7,416 4.0% 11,124 6.0%
Tier I capital(2)
Bankshares
Consolidated $52,129 8.3% 25,278 4.0% N/A N/A
NBB 28,347 8.2% 13,775 4.0% 17,219 5.0%
BTC 20,465 7.3% 11,257 4.0% 14,072 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 September 30,
2001, retained net income from the Company's NBB affiliate which was free of
such restriction amounted to approximately $3,539.
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, as dividends have been
paid to NBI in the past.
Note (5) Comprehensive Income
Effective January 1, 2001 the Company changed its method of presentation
concerning comprehensive income. Prior to 2001, comprehensive income was
reflected as part of the consolidated statement of income. Comprehensive income
is now presented as a separate component of the Company's consolidated statement
of changes in stockholders' equity.
16
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. Earnings for the nine months ended September 30, 2001 may not be
indicative of annualized earnings for 2001. Reference should be made to the
financial statements and other information included in this report as well as
the 2000 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 Nine
Months Ended September 30, 2001
Net income for the nine months ended September 30 2001 was $5,207, which
represents a decline of $265 or 4.8% when compared to the same period in 2000.
The annualized return on average assets for the nine months ended September 30,
2001 was 1.10% and 1.51% for September 30, 2000. The annualized return on
average equity was 11.13% for the period ended September 30, 2001 and 13.33% for
September 30, 2000.
Earnings per share for the period ended September 30, 2001 was $1.48 and
$1.56 in 2000 for the same period.
Net Interest Income
Net interest income at the end of the third quarter of 2001 was $16,631,
an increase of $1,625 or 10.8%. Interest income increased $6,793, or 24.5%, when
the period ended September 30, 2001 and 2000 are compared. Interest expense
increased $5,168, or 40.7%, when the two periods are compared. The yield on
earning assets was 8.02%, decreasing 33 basis points from September 30, 2000.
The cost to fund earning assets for the period ended September 30, 2001 was
4.00% or a 30 basis point increase from the same period in 2000.
The underlying cause of these results was the rising interest rate
environment that existed until January 2001. During the year 2000 rates remained
high and negatively affected loan growth while at the same time, deposit costs
were steadily increasing. Acquisition activity also played a role in the
decline. During the period from September 30, 2000 to September 30, 2001 the
Company acquired seven branches divested from other banks. This involved
approximately $128,000 in new deposits.
While assumption of the interest expense on these deposits was
immediate, it was not possible to channel the new funds into the loan portfolio
due to economic conditions. Surplus funds, instead, were placed in the lower
yielding investment portfolio. Accordingly, interest expense grew at a faster
rate than interest income. (For additional comments see the quarterly
discussion.)
While the short-term effects of the merger activities are deemed to be
slightly negative initially, management believes the intermediate and long term
effects to be very positive.
Overall, management believes that the prospects for improvement are
good, barring any unforeseen events and assuming that overall economic
conditions improve as expected.
17
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 1.05% at September 30, 2001 which, compares to 1.18% at September 30,
2000. The provision for the first nine months of 2001 was $1,041 up $44 over the
same period the prior year.
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 September 30, 2001 was $3,803,
an increase of $940 or 32.8%. All categories except realized gains/losses on
securities experienced increases when the period ended September 30, 2001 and
September 30, 2000 are compared.
Service charges on deposit accounts increased $455, accounting for 48.4%
of the total increase in noninterest income. This increase was primarily due to
an increase in volume caused by the acquisition of six branches in mid-November
2000 and to a single branch acquisition in March 2001.
Credit card fees increased $157 and 20.7%. This increase was in
part due to debit card income, which improved due to acquisition activity and
the introduction of the debit card service at BTC.
Trust income increased by 38.9% when compared to the first nine months
of 2000. 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 precision. So far, in 2001,
there has been a higher level of estate activity.
Realized securities gains/losses were $(26) for the quarter ended
September 30, 2001. Included is the write-down of the Company's portion of two
limited liability companies established for the sale of title insurance and
insurance services.
Noninterest Expense
Noninterest expense for the period ended September 30, 2001 was $12,522,
an increase of $3,146 or 33.6%. The majority of the increase as described below
was associated with acquisition activity.
Salaries and employee benefits increased by $1,344 or 28.8% when the
periods ended September 30, 2001 and 2000 are compared. This increase was
largely due to the acquisition of six branches in mid-November 2000 and a
seventh branch acquired in March of 2001. Routine merit increases also
contributed to the increase.
18
Occupancy expenses increased $342 when the third quarter of 2001 and
2000 are compared. The 36.5% increase was largely attributable to the branch
acquisitions referred to above, which increased, depreciation expense, real
estate taxes, insurance and other fixed asset costs.
Data processing costs increased $309 or 43.8%. Maintenance costs,
particularly on ATM's, increased as a result of the branch acquisitions.
Credit card processing expense decreased $48 or 6.0%. This decline was
due to a combination of a $156 nonrecurring loss experienced in 2000 and
increased volume in 2001.
Intangibles and goodwill amortization increased $560 or 491.0% as a
result of the previously mentioned acquisition activity.
Other operating costs increased $647 or 32.0% when the periods September
30, 2001 and 2000 are compared. The majority of these increases were caused by
acquisition activities, which increased expenses such as stationery and
supplies, telephone and courier services.
Balance Sheet
Total assets at September 30, 2001 were $644,210, an increase of $50,713
or 8.5% over period end assets at December 31, 2000.
Deposits purchased in a branch acquisition accounted for approximately
$34,000 of the increase of $44,836, the remainder was due to aggressive deposit
marketing activities.
Securities
While securities available for sale declined by 17.4%, securities held
to maturity increased $53,651 or 164.8%. This represents an investment of funds
generated by the acquisition activity previously mentioned. A greater emphasis
was placed on the held to maturity portfolio to moderate the fluctuations in
unrealized gains and losses that generally accompany securities classified as
available for sale
Loans
Loans net of unearned income grew by $34,929 or 9.7%. Loans purchased in
a branch acquisition accounted for the majority of the increase.
Fixed Assets
The Company's investment in fixed assets decreased $51 when September
30, 2001 and December 31, 2000 are compared. The net decrease included the
addition of fixed assets associated with a first quarter branch acquisition less
depreciation expense.
19
Deposits
Total deposits increased $44,836 or 8.4% when September 30, 2001 and
December 21, 2000 are compared. Branch acquisition accounted for the majority of
this increase.
Noninterest bearing deposits grew by 16.7% with interest bearing demand
deposits growing by 18.8%. Saving deposits increased by 15.0% and time deposits
grew by 2.9%.
Daily Averages
Daily averages for the major categories are as follows:
(000's) September 30, 2001 September 30,
2000
=================== ==================
Federal funds sold $16,793 3,422
FHLB deposits 13,394 7,953
Loans, net 375,538 301,836
Securities available for sale 114,789 118,378
Securities held to maturity 75,742 22,197
Total assets 633,032 482,966
Noninterest-bearing deposits 65,534 55,178
Interest-bearing deposits 501,982 360,862
Stockholders' equity 62,546 54,679
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 $6,781 primarily due to earnings. Cash used in
investing activities totaled $44,795. Primary uses were purchases of securities
held to maturity, loans purchased and interest-bearing deposits.
Capital Resources
Total stockholders' equity increased by $5,816 from December 31, 2000 to
September 30, 2001. Of that increase $2,128 was due to the change in unrealized
gains and losses on securities available for sale. Net income of $5,207, offset
by a dividend to shareholders of $1,511 accounted for the remainder of the
increase. During the first nine months of 2001, 500 shares of the Company's
common stock were repurchased at $16.25 per share.
Financial Services
On April 9, 2001 National Bankshares Financial Services Inc., a
wholly-owned subsidiary began offering non-deposit investment products and
insurance products for sale to the public. NBFS is working with Bankers
Insurance, LLC, a joint effort of Virginia banks originally sponsored by the
Virginia Bankers Association. In another cooperative effort, NBFS is working
with UVEST Financial Services Group, Inc. to offer investment services.
It is anticipated that these ventures will ultimately result in new and
substantial sources of noninterest income. Given the highly competitive
commercial banking market, management believes that diversity in revenue sources
will be critical to the ongoing success of the Company.
Acquisitions
In September of 2000 the Company's BTC affiliate announced that it would
acquire a branch in Bluefield Virginia from First Union Bank. The acquisition
20
resulted in the addition of approximately $34,000 in deposits and approximately
$9,200 in loans. The acquisition was completed in March 2001.
Comprehensive Income
Effective January 1, 2001 the Company changed its method of presentation
concerning comprehensive income. Prior to 2001, comprehensive income was
reflected as part of the consolidated statement of income. Comprehensive income
is now presented as a separate component of the Company's consolidated statement
of changes in stockholders' equity.
Recent Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement 142, Goodwill
and Other Intangible Assets, which will potentially impact the accounting for
goodwill and other intangible assets. Statement 141 eliminates the pooling
method of accounting for business combinations and requires that intangible
assets that meet certain criteria be reported separately from goodwill. The
Statement also requires negative goodwill arising from a business combination to
be recorded as an extraordinary gain. Statement 142 eliminates the amortization
of goodwill and other intangibles that are determined to have an indefinite
life. The Statement requires, at a minimum, annual impairment tests for goodwill
and other intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to
re-evaluate goodwill and other intangible assets that arose from business
combinations entered into before July 1, 2001. If the recorded other intangibles
assets do not meet the criteria for recognition, they should be classified as
goodwill. Similarly, if there are other intangible assets that meet the criteria
for recognition but were not separately recorded from goodwill, they should be
reclassified as goodwill. An organization also must reassess the useful lives of
intangible assets and adjust the remaining amortization periods accordingly. Any
negative goodwill must be written-off.
The Company has not yet completed its full assessment of the effects of
these new pronouncements on its financial statements and so is uncertain as to
the impact. The standards generally are required to be implemented by the
Company in its 2002 financial statements.
21
Analysis of the Financial Condition and Results of Operations for the Three
Months Ended September 30, 2001
Net income for the three months ended September 30, 2001 was $1,910, an
increase of $159 or 9.1% over the same period in 2000. The annualized return on
average assets or the third quarter of 2001 was 1.18% as compared to the third
quarter of 2000. The annualized return on average equity for the third quarter
of 2001 was 11.84%. This compares to 12.42% for the same period in 2000.
Basic earnings per share for the three months ended September 30,2001
was $0.54, an increase of $0.04 over the third quarter of 2000.
Net interest income
Net interest income for the quarter ended September 30, 2001 was $5,751
or a 14.2% increase over the same quarter in 2000. During the first half of 2001
and continuing into the third quarter interest rates declined sharply. In the
third quarter of 2001 total interest expense was $5,695 down $490 or 7.9% from
the second quarter of 2001. At the same time total interest income declined by
$236 or 2.0%. The net effect was to increase net interest income for the quarter
by $254. Management expects that net interest income will show more improvement,
provided that recent trends continue.
Provision for loan losses
The provision for loan losses for the third quarter of 2001 was $377.
This compares to $331 for the same period the prior year. During the third
quarter of 2001 the Company made a provision to the allowance for loan losses in
the amount of $377, up $45 from the second quarter. This increase was due
primarily to loan growth and the need to maintain an adequate allowance.
Noninterest income
Noninterest income for the third quarter of 2001 was $1,312,an increase
of $336 over the period ending September 30, 2000. This increase was due in part
to acquisition activity, expansion of debit card services and general increase
in volume.
Noninterest expense
Noninterest expense for the quarter ended September 30, 2001 was $4,176.
This represents an increase of $885 or 26.9% when compared to the quarter ended
September 30, 2000. Salaries and employee benefits were up $492, primarily due
to acquisition activity, as was occupancy expense, which increased $120. Credit
card expense was down $114. As previously discussed, the Company experienced a
one time loss in the third quarter of 2000 which inflated expense for that
period. Intangibles amortization expense was up $201, and the increase was
directly attributable to acquisition activity. Other expense was up $128 over
the third quarter of 2000. Acquisition activity was the primary cause of the
increase.
22
Balance Sheet
Total assets at September 30, 2001 were $644,210, which represents an
increase of $145,313 or 29.1% over total assets at September 30, 2000. A
comparison of selected quarterly average balance sheet categories follow.
($000) September 30, 2001 September 30, 2000 Percent change
------------------ ------------------ --------------
Federal funds sold $ 9,234 103 8,865.0 %
Federal Home Loan Bank deposits 11,555 12,817 9.8 %
Securities available for sale 109,332 120,247 (9.1)%
Securities held to maturity 88,583 21,287 317.4 %
Loans net of unearned income and fees 387,997 313,196 23.9 %
Noninterest-bearing deposits 69,489 56,556 22.9 %
Interest-bearing deposits 507,744 367,228 38.3 %
Borrowed money 276 10,174 (97.3)%
Stockholders' equity 63,995 56,390 13.5 %
23
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 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 September 30,2001 approximated $4,222.
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 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
affects 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.
At December 31, 2000 the Company reported its cumulative
interest-sensitivity gap to be ($172,742) at twelve months. At September 30,
2001 the cumulative interest-sensitivity gap declined to ($213,482). This change
was the result primarily of a Branch acquisition that closed in March 2001 and
changes in the investment portfolio. The Company, however, remains liability
sensitive to a large degree, which may prove to be advantageous in the current
falling rate environment, but could have a negative impact should interest rates
rise.
24
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 September 30, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
None for the three months ended September 30, 2001
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
25
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: 11/13/01 /s/James G. Rakes
------------ --------------------------------------------
James G. Rakes, Chairman
President and Chief Executive Officer
Date: 11/13/01 /s/J. Robert Buchanan
-------------- --------------------------------------------
J. Robert Buchanan, Treasurer
(principal financial officer)
26