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, 2001 ------------------ 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) 552-2011 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 1, 2001 - -------------------------------------------- -------------------------- Common Stock, $2.50 Par Value 3,511,377 (This report contains 21 pages)
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES Form 10-Q Index Page ------ Part I Financial Information Item 1 - Financial Statements Consolidated Balance Sheets, March 31, 2001 3-4 and December 31, 2000 Consolidated Statements of Income for the 5-6 Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Changes in 7 Stockholders' Equity, Three Months Ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows, 8-9 Three Months Ended March 31, 2001 and 2000 Item 2 - Management's Discussion and Analysis of 15-18 Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about 19 Market Risk Part II Other Information Items 1 - 3 - Legal Proceedings; Changes in 20 Securities and Use of Proceeds; Defaults Upon Senior Securities Item 4 - Submission of Matters to a Vote of 20 Security Holders Item 5 - Other Information 20 Item 6 - Exhibits and Reports on Form 8-K 20 Signatures 21 - ----------
2 National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets March 31, 2001 and December 31, 2000 (Unaudited) (Audited) March 31, December 31, ($000's except share and per share data) 2001 2000 ============= ============= Assets Cash and due from banks $12,133 11,130 Interest-bearing deposits 27,145 13,579 Federal funds sold 23,413 29,090 Securities available for sale 112,050 123,785 Securities held to maturity (fair value $78,075 in 2001 and $32,602 in 2000) 77,239 32,559 Mortgage loans held for sale 505 --- Loans: Real estate construction loans 16,960 16,726 Real estate mortgage loans 70,342 71,163 Commercial and industrial loans 167,918 163,929 Loans to individuals 118,023 110,176 ----------- ------------ Total loans 373,243 361,994 Less unearned income and deferred fees (2,193) (2,313) ---------- ----------- Loans, net of unearned income and deferred fees 371,050 359,681 Less: allowance for loan losses (3,990) (3,886) ---------- ----------- Loans, net 367,060 355,795 ---------- ----------- Bank premises and equipment, net 10,626 10,324 Accrued interest receivable 5,143 5,049 Other real estate owned, net 566 540 Other assets 14,434 11,646 ---------- ----------- Total assets $ 650,314 593,497 =========== ============ Liabilities and stockholders' equity Noninterest-bearing demand deposits $68,068 60,165 Interest-bearing demand deposits 117,706 101,257 Savings deposits 48,906 42,560 Time deposits 349,683 326,666 ----------- ------------ Total deposits 584,363 530,648 ----------- ------------ Other borrowed funds 133 270 Accrued interest payable 1,408 1,538 Other liabilities 1,535 1,207 ----------- ------------ Total liabilities 587,439 533,663 ----------- ------------
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 53,239 51,629 Accumulated other comprehensive (loss) 858 (575) ---------- ----------- Total stockholders' equity 62,875 59,834 Commitments and contingent liabilities ----------- ------------ Total liabilities and Stockholders' equity $ 650,314 593,497 =========== ============ See accompanying notes to the consolidated financial statements
4 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000 (Unaudited) March 31, March 31, ($000's except share and per share data) 2001 2000 ============ ============== Interest income Interest and fees on loans $ 8,232 6,539 Interest on interest-bearing deposits 369 51 Interest on federal funds sold 179 46 Interest on securities - taxable 1,987 1,660 Interest on securities - nontaxable 614 548 ----------- ------------- Total interest income 11,381 8,844 ----------- ------------- Interest expense Interest on time deposits $100,000 or more 1,200 641 Interest on other deposits 4,795 3,079 Interest on borrowed funds 3 166 ----------- ------------- Total interest expense 5,998 3,886 ----------- ------------- Net interest income 5,383 4,958 Provision for loan losses 332 353 ----------- ------------- Net interest income after provision for loan losses 5,051 4,605 ----------- ------------- Noninterest income Service charges on deposit accounts 510 362 Other service charges and fees 72 59 Credit card fees 261 219 Trust income 278 210 Other income 100 75 Realized securities losses, net (26) --- ----------- ------------- Total noninterest income 1,195 925 ----------- ------------- Noninterest expense Salaries and employee benefits 1,919 1,558 Occupancy and furniture and fixtures 416 299 Data processing and ATM 361 218 FDIC assessment 15 21 Credit card processing 237 214 Goodwill amortization 9 9 Net costs of other real estate owned 4 3 Other operating expenses 1,100 669 ----------- ------------- Total noninterest expense 4,061 2,991 ----------- ------------- Income before income tax expense 2,185 2,539 Income tax expense (569) (687) ------------ ------------- Net income $ 1,616 1,852 ============ =============
5 Net income per share, basic and diluted $ 0.46 0.53 ============ ============= Weighted average number of common shares outstanding 3,511,388 3,516,977 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, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> Accumulated Other ($000's, except for per Common Retained Comprehensive Comprehensive share data) Stock Earnings Income (Loss) Income Total =========== ============= ================ ================ =========== <S> <C> <C> <C> <C> <C> Balances, December 31, 1999 $ 8,792 47,384 (3,453) $52,723 Net income --- 1,852 --- 1,852 1,852 Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of income tax expense $39 --- --- 76 76 76 Reclass adjustment net of tax --- --- --- --- --- Other comprehensive income --- --- --- --- --- ----------- ------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- 76 --- ----------- ------------- ---------------- ---------------- ----------- Balances, March 31, 2000 $ 8,792 49,236 (3,377) 1,928 54,651 =========== ============= ================ ================ =========== Balances, December 31, 2000 $ 8,780 51,629 (575) 59,834 Net income --- 1,616 --- 1,616 1,616 Other comprehensive income, net of tax Unrealized gains on securities available for sale, net of income tax expense $729 --- --- 1,416 1,416 1,416 Reclass adjustment net of income tax expense $9 --- --- 17 17 17 Other comprehensive income --- --- --- --- --- ----------- ------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- 1,423 --- ----------- ------------- ---------------- ---------------- ----------- Stock repurchase (1) (2) (6) --- --- (8) ----------- -------------- --------------- ---------------- ------------ Balances, March 31,2001 $ 8,778 53,239 858 3,049 62,875 =========== ============= ================ ================ =========== (1) Represents the repurchase of 500 shares at $16.25 per share. See accompanying notes to consolidated financial statements. </TABLE>
7 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 (Unaudited) March 31, March 31, ($000's) 2001 2000 ============== =========== Cash flows from operating activities Net income $ 1,616 1,852 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 332 353 Depreciation of bank premises and equipment 280 250 Amortization of intangibles 197 38 Amortization of premiums and accretion of Discount, net 47 38 Gains on sales of bank premises and equipment (1) --- Losses on sales and calls of securities Available for sale, net 26 --- Losses on other real estate owned --- 1 (Increase) decrease in: Mortgage loans held for sale (505) (466) Accrued interest receivable (94) (41) Other assets 26 (32) Increase (decrease) in: Accrued interest payable (130) 9 Other liabilities 328 522 ------------ ----------- Net cash provided by operating activities 2,122 2,524 ------------ ----------- Cash flows from investing activities Net (increase) decrease in federal funds sold 5,677 (7,655) Net (increase) decrease in interest-bearing Deposits (13,566) 3,146 Proceeds from calls and maturities of securities Available for sale 17,229 4,149 Proceeds from sales of securities available for Sale --- 355 Proceeds from calls and maturities of securities Held to maturity 5,744 1,218 Purchases of securities available for sale (3,372) (9,024) Purchases of securities held to maturity (50,448) --- Purchases of loan participations (701) --- Collections of loan participations 1,295 14 Purchase of loans from acquisition (9,255) --- Net increase in loans to customers (2,998) (6,519) Proceeds from disposal of other real estate owned --- 31 Recoveries on loans charged off 36 17 Purchase of bank premises and equipment (593) (265) Proceeds from disposal of bank premises and equipment 12 --- ------------ ---------- Net cash used in investing activities (50,940) (14,533) ----------- ----------
8 Cash flows from financing activities Deposits purchased net of premium paid 29,885 --- Net increase in time deposits 3,060 10,706 Net increase in other deposits 17,021 1,328 Net decrease in other borrowed funds (137) (283) Repurchase of common stock (8) --- ------------ ----------- Net cash provided by financing activities 49,821 11,751 ------------ ---------- Net decrease in cash and due from banks 1,003 (258) Cash and due from banks at beginning of period 11,130 13,311 ------------ ----------- Cash and due from banks at end of period $12,133 13,053 ============ =========== Supplemental disclosure of cash flow information Cash paid for interest $ 6,128 3,877 ============ =========== Cash paid for income taxes $ --- --- ============ =========== Loans charged to the allowance for loan losses $ 263 149 ============ =========== Loans transferred to other real estate owned $ 26 10,000 ============ =========== See accompanying notes to consolidated financial statements.
9 National Bankshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements March 31, 2001 (Unaudited) Note (1) The consolidated financial statements of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County (BTC), (the Company), conform to generally accepted accounting principles and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three months ended March 31, 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.
10 Note (2) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans <TABLE> <CAPTION> For the periods ended March 31, December 31, 2001 2000 2000 =============== ============== ================ <S> <C> <C> <C> ($000's, except for % data) Balance at beginning of period $ 3,886 3,231 3,231 Provision for loan losses 332 353 1,329 Loans charged off (264) (149) (770) Recoveries 36 17 96 ------------- -------------- ---------------- Balance at the end of period $ 3,990 3,452 3,886 ============= ============== ================ Ratio of allowance for loan losses to the end of period loans net of unearned income and deferred fees 1.08% 1.15% 1.08% ============== ============== ================ Ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees(1) .26% .18% .21% ============== ============== ================ Ratio of allowance for loan losses to nonperforming loans(2) 1,697.87% 2,348.30% 4,415.91% ============== ============== ================ </TABLE> (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, 2001 2000 2000 ============= ============ ============ ($000's, except for % data) Nonperforming Assets Nonaccrual loans $236 147 88 Restructured loans --- --- --- --------- -------- ----------- Total nonperforming loans 236 147 88 Foreclosed property 566 415 540 --------- -------- ----------- Total nonperforming assets $802 562 628 ========= ======== =========== Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned .22% .19% .17% ========= ======== ===========
11 March 31, December 31, 2001 2000 2000 ============= ============ ============ Accruing Loans Past Due 90 Days or More Past due 90 days or more and still accruing $1,849 947 1,321 ============= ============ =========== Ratio of loans past due 90 days or more to loans, net of unearned income and deferred fees .50% .31% .37% ============= ============ =========== Impaired Loans Total impaired loans $596 732 456 ============= ============ =========== Impaired loans with a valuation allowance $242 221 135 Valuation allowance 242 (93) (135) ------------- ------------ ------------ Impaired loans net of allowance $--- 128 --- ============= ============ =========== Impaired loans with no valuation allowance $354 511 321 ============= ============ =========== Average recorded investment in impaired loans $526 524 657 ============= ============ =========== Income recognized on impaired loans $ 19 13 43 ============= ============ =========== Amount of income recognized on a cash basis --- --- --- ============= ============ ===========
12 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 March 31, 2001 are as follows: <TABLE> <CAPTION> March 31, 2001 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ <S> <C> <C> <C> <C> Available for sale: U.S. Treasury $ 6,247 209 --- 6,456 U.S. Government agencies and corporations 38,816 177 115 38,878 State and political subdivisions 36,547 865 52 37,360 Mortgage-backed securities 11,428 175 27 11,576 Corporate debt securities 14,881 148 81 14,948 Federal reserve bank stock 209 --- --- 209 Federal Home Loan Bank stock 1,411 --- --- 1,411 Other securities 1,212 --- --- 1,212 ----------------- ----------------- ----------------- ------------------ Total securities available for sale $ 110,751 1,574 275 112,050 ================= ================= ================= ================== </TABLE> 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, 2001 are as follows: <TABLE> <CAPTION> March 31, 2001 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ <S> <C> <C> <C> <C> Held to Maturity: U.S. Government agencies and corporations $11,494 62 44 11,512 State and political subdivisions 34,158 465 12 34,611 Mortgage-backed securities 9,769 43 12 9,800 Corporate securities 21,818 386 52 22,152 ----------------- ----------------- ----------------- ------------------ Total securities held to maturity $77,239 956 120 78,075 ================= ================= ================= ================== </TABLE>
13 Note (4) Restrictions on Dividend Payments and Capital Requirements Bankshares' and its subsidiaries' actual regulatory capital amounts and ratios are also presented in the following tables: <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Adequacy Purposes Action Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> March 31, 2001: Total capital(1) Bankshares Consolidated $53,456 12.8% 33,372 8.0% N/A N/A NBB 29,006 11.7% 19,853 8.0% 24,816 10.0% BTC 21,267 12.8% 13,270 8.0% 16,587 10.0% Tier I capital(1) Bankshares Consolidated $49,466 11.9% 16,686 4.0% N/A N/A NBB 26,553 10.7% 9,926 4.0% 14,890 6.0% BTC 19,730 11.9% 6,635 4.0% 9,952 6.0% Tier I capital(2) Bankshares Consolidated $49,466 8.3% 23,739 4.0% N/A N/A NBB 26,553 7.8% 13,546 4.0% 16,933 5.0% BTC 19,730 7.8% 10,074 4.0% 12,593 5.0% (1) To Risk Weighted Assets (2) To Average Assets </TABLE> Substantially all of Bankshares' retained earnings are undistributed earnings of its banking subsidiaries, which are restricted by various regulations administered by federal and state bank regulatory agencies. Bank regulatory agencies restrict, without prior approval, the total dividend payments of a bank in any calendar year to the bank's retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any required transfers to surplus. At March 31, 2001, retained net income from the Company's NBB affiliate which was free of such restriction amounted to approximately $1,968. At present, no dividends are available from the Company's BTC affiliate without prior regulatory approval. BTC remains well capitalized and management does not believe that such approvals will be withheld. Note (5) 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.
14 National Bankshares, Inc. and Subsidiaries (In 000's, except for % data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except for per share data) The purpose of this discussion is to provide information about the financial condition and results of operations of National Bankshares, Inc. and its wholly-owned subsidiaries (the Company), which are not otherwise apparent from the consolidated financial statements and other information included in this report. Reference should be made to the financial statements and other information included in this report as well as the 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 Three Months Ended March 31, 2001 - -------------------------------------------------------------------------------- Net income for the three months ended March 31, 2001 was $1,616 which represents a decline of $236 or 12.7% when compared to the same period in 2000. The annualized return on average assets for the three months ended March 31, 2001 was 1.06% and 1.58% for March 31, 2000. The annualized return on average equity was 10.54% for the period ended March 31, 2001 and 13.94% for March 31, 2000. Earnings per share for the period ended March 31, 2001 was $0.46 and $0.53 in 2000 for the same period. Other comprehensive income net of reclass adjustments was $1,433 for the first quarter of 2001 as shown in the Statement of Stockholders' Equity. Net Interest Income - ------------------- Net interest income at the end of the first quarter of 2001 was $5,383, an increase of $425 or 8.6%. Interest income increased $2,537 or 28.7%, when the period ended March 31, 2001 and 2000 are compared. The yield on earning assets was 8.33%, increasing 6 basis points from March 31, 2000. Interest expense increased $2,112, or 54.4%, when the two periods are compared. The cost to fund earning assets for the period ended March 31, 2001 was 4.26% or a 75 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 March 31, 2000 to March 31, 2001 the Company acquired seven branches divested from other bank holding companies. 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. 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. First, the rising rate environment ended in the first quarter with a series of substantial cuts in rates effected by the Federal Reserve, which in managements' opinion should stimulate loan growth. Second, as a result of the acquisition activities the Company has gained the liquidity needed to take advantage of the anticipated loan opportunities management believes will occur.
15 Overall, management believes that the prospects for improvement are good, barring any unforeseen events and assuming that overall economic conditions improve as expected. 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 1.08% at March 31, 2001. This compares to 1.15% at March 31, 2000. The provision for the first three months of 2001 was $332, down $21 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 March 31, 2001 was $1,195, an increase of $270 or 29.2%. All categories except realized gains/losses on securities experienced substantial increases when the period ended March 31, 2001 and March 31, 2000 are compared. Service charges on deposit accounts increased, accounting for $148 or 54.8% 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 lesser extent a single branch acquisition in March 2001. Other service charges and fees increased by $13 when March 31, 2001 and March 31, 2000 are compared. Credit card fees increased $42 and 19.2%. This increase were primarily due to volume. Trust income increased by 32.38% when compared to the first three 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. Realized securities gains/losses were $(26) for the first quarter of 2001. Included in that amount is the write-down of the Company's portion of two partnerships established for the sale of title insurance and insurance services. Noninterest Expense - ------------------- Noninterest expense for the period ended March 31, 2001 was $4,061, an increase of $1,070 or 35.8%. The majority of the increase as described below was associated with acquisition activity.
16 Salaries and employee benefits increased by $361 or 23.2% when the periods ended March 31, 2001 and 2000 are compared. This increase was largely due to the acquisition of six branches in mid-November 2000 and to a lesser extent a seventh branch acquired in March of 2001. Routine merit increases also contributed to the increase. Occupancy expenses increased $117 when the first quarter of 2001 and 2000 are compared. The 39.1% increase was largely attributable to the branch acquisition referred to above, which increased, depreciation costs, taxes, insurance and other fixed asset costs. Data processing costs increased $143 or 65.6%. Maintenance costs, particularly on ATM's, increased as a result of the branch acquisitions. Credit card processing increased $23 or 10.8% due to volume. Other operating costs increased $431 or 64.4% when the periods March 31, 2001 and 2000 are compared. Of this increase, amortization of intangibles expense account for 37% of the increase, telephone 12%, stationary and supplies 8%, courier and armored car service 6%. The majority of these increases were caused by acquisition activities. An additional 13% of the increase was related to franchise taxes which increase with capital generated by earnings. Balance Sheet - ------------- Total assets at March 31, 2001 were $650,314, an increase of $56,817 or 9.67% over period end assets at December 31, 2000. Loans net of unearned income grew by $11,369 or 3.2%. Loans purchased in a branch acquisition accounted for a majority of the increase. Deposits purchased in a branch acquisition accounted for approximately $34,000 of the increase of $53,715; the remainder of which was due to aggressive deposit marketing activities. Securities - ---------- While securities available for sale declined by 9.5%, securities held to maturity increased $44,680 on 137.2%. This represents an investment of funds generated by the acquisition activity previously mentioned. Loans - ----- As previously mentioned the majority of loan growth was achieved by purchasing a branch. The category experiencing the largest growth was loans to individuals, which increased $7,847, or 7.1%, followed by commercial and industrial loans, which increased $3,989 or 2.4%. Real estate construction loan increased by $234 or 1.4%. Fixed Asset - ----------- The Company's investment in fixed assets increased $302 or 2.9% when March 31, 2001 and December 31, 2000 are compared.
17 Deposits - -------- Total deposits increase $53,715 or 10.1% when March 31, 2001 and December 21, 2000 are compared. Branch acquisition accounted for the majority of this increase. Noninterest bearing deposits grew by 2.9% with interest bearing demand deposits growing by 1.9%. Saving deposits increased by 4.8% with the largest increase occurring in time deposits, which grew by 23.9%. Daily Averages - -------------- Daily averages for the major categories are as follows: (000's) March 31, 2001 March 31, 2000 =================== ================== Loans, net $358,565 293,287 Securities 143,914 139,350 Total assets 607,733 470,378 Total deposits 543,265 404,746 Stockholders' equity 61,328 53,142 Liquidity - --------- Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. Cash from operating activities was $2,122 primarily due to earnings. Cash used in investing activities totaled $50,940. Primary uses were purchases of securities held to maturity and loans purchased and interest-bearing deposits. Capital Resources - ----------------- Total Stockholders' equity increased by $3,041 from December 31, 2000 to March 31, 2001. Of that increase $1,433 was due to the change in unrealized gains and losses on securities available for sale. Net income of $1,616 accounted for the remainder of the increase. During the first quarter of 2001, 500 shares of the Company's common stock were repurchased at $16.25 per share. 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 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.
18 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 March 31, 2001 approximated $4,140. 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 effects rate sensitivity. Available for sale securities which may be sold can be used to adjust the Company's interest rate sensitivity position. Finally, call features in the investment portfolio can have a considerable effect. Since the call decision is dependent on interest rate levels at a future point in time, the ultimate effect on interest rate sensitivity cannot be precisely determined. A substantial number of bonds in the investment portfolio contain these features. At December 31, 2000 the Company reported its cumulative interest-sensitivity gap to be ($172,742) at twelve months. At March 31, 2001 the cumulative interest-sensitivity gap declined to ($151,073) a decline of $21,669 or 12.5%. This change was the result primarily of a Branch acquisition that closed in March 2001. The Company, however, remains liability sensitive to a large degree, which may prove to be advantageous in the current falling rate environment.
19 National Bankshares, Inc. and Subsidiaries Part II Other Information Items 1-3. Legal Proceedings; Changes in Securities and Use of Proceeds; Defaults upon Senior Securities None for the three months ended March 31, 2001. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None
20 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Bankshares, Inc. (Registrant) Date: May 14, 2001 /s/James G. Rakes ------------- --------------------------------------------- James G. Rakes, Chairman President and Chief Executive Officer Date: May 14, 2001 /s/J. Robert Buchanan ------------- ------------------------------------ J. Robert Buchanan, Treasurer (principal financial officer)
21