--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Quarterly Period Ended March 31, 2007.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ________.
Commission file number 0-15204
NATIONAL BANKSHARES, INC.
(Exact name of Registrant as specified in its Charter)
Virginia 54-1375874
(State of incorporation) (I.R.S. Employer Identification No.)
101 Hubbard Street
P.O. Box 90002
Blacksburg, VA 24062-9002
(540) 951-6300
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b - 2 of the Exchange
Act.
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b - 2 of the Exchange Act). Yes |_| No |X|
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, 2007
----- -----------------------------
Common Stock, $1.25 Par Value 6,982,334
(This report contains 29 pages)
NATIONAL BANKSHARES, INC. AND SUBSIDIARIES
Form 10-Q
Index
Part I Financial Information Page
----------------------------
Item 1 Financial Statements
Consolidated Balance Sheets, March 31, 2007 (Unaudited) 3-4
and December 31, 2006
Consolidated Statements of Income for the Three Months Ended 5-6
March 31, 2007 and 2006 (Unaudited)
Consolidated Statements of Changes in 7
Stockholders' Equity, Three Months Ended
March 31, 2007 and 2006 (Unaudited)
Consolidated Statements of Cash Flows, 8-9
Three Months Ended March 31, 2007 and 2006 (Unaudited)
Notes to Consolidated Financial Statements 10-15
Item 2 Management's Discussion and Analysis of 15-23
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 23
Market Risk
Item 4 Controls and Procedures 23
Part II Other Information
--------------------------
Item 1 Legal Proceedings 23
Item 1A Risk Factors 24
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits 24
Signatures 24
----------
Index of Exhibits 25-26
-----------------
2
Part I
Financial Information
Item 1. Financial Statements
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
($ In thousands, except share and per share data) 2007 2006
================== ===================
Assets
Cash and due from banks $13,626 $15,283
Interest-bearing deposits 29,501 19,617
Securities available for sale, at fair value 166,167 169,735
Securities held to maturity (fair value
approximates $121,638 at March 31, 2007 and $115,561
at December 31, 2006) 121,838 115,754
Mortgage loans held for sale 1,303 808
Loans:
Real estate construction loans 39,768 33,840
Real estate mortgage loans 127,454 126,302
Commercial and industrial loans 215,207 215,244
Loans to individuals 121,848 126,316
------------------ -------------------
Total loans 504,277 501,702
Less unearned income and deferred fees (1,103) (1,059)
------------------ -------------------
Loans, net of unearned income
and deferred fees 503,174 500,643
Less: allowance for loan losses (5,045) (5,157)
------------------ -------------------
Loans, net 498,129 495,486
------------------ -------------------
Bank premises and equipment, net 12,545 12,702
Accrued interest receivable 5,906 5,682
Other real estate owned, net 251 390
Intangible assets and goodwill, net 15,692 15,976
Other assets 16,957 16,770
------------------ -------------------
Total assets $881,915 $868,203
================== ===================
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits $110,605 $101,167
Interest-bearing demand deposits 234,643 233,023
Savings deposits 50,077 47,988
Time deposits 378,939 382,514
------------------ -------------------
Total deposits 774,264 764,692
------------------ -------------------
Other borrowed funds 71 73
Accrued interest payable 842 863
Other liabilities 6,915 5,820
------------------ -------------------
Total liabilities 782,092 771,448
------------------ -------------------
3
Stockholders' Equity Preferred stock of no par value.
Authorized 5,000,000 shares; none
issued and outstanding --- ---
Common stock of $1.25 par value.
Authorized 10,000,000 shares; issued and
outstanding 6,981,434 shares in 2007 and
6,980,234 in 2006 8,727 8,725
Retained earnings 94,182 91,123
Accumulated other comprehensive (loss), net (3,086) (3,093)
------------------ -------------------
Total stockholders' equity 99,823 96,755
------------------ -------------------
Total liabilities and
stockholders' equity $881,915 $868,203
================== ===================
See accompanying notes to the consolidated financial statements.
4
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended March 31, 2007 and 2006
(Unaudited)
March 31, March 31,
($ In thousands, except share and per share data) 2007 2006
================== =================
Interest income:
Interest and fees on loans $9,037 $8,361
Interest on interest-bearing deposits 274 158
Interest on securities - taxable 1,896 1,803
Interest on securities - nontaxable 1,323 1,261
------------------ -----------------
Total interest income 12,530 11,583
------------------ -----------------
Interest expense:
Interest on time deposits $100,000 or more 1,583 1,088
Interest on other deposits 3,832 3,148
Interest on borrowed funds 1 2
------------------ -----------------
Total interest expense 5,416 4,238
------------------ -----------------
Net interest income 7,114 7,345
Provision for (recovery of) loan losses (3) 17
------------------ -----------------
Net interest income after
provision for loan losses 7,117 7,328
------------------ -----------------
Noninterest income:
Service charges on deposit accounts 810 815
Other service charges and fees 83 109
Credit card fees 598 524
Trust income 373 380
Other income 264 267
Realized securities gains (losses), net 51 (36)
------------------ -----------------
Total noninterest income 2,179 2,059
------------------ -----------------
Noninterest expense:
Salaries and employee benefits 2,841 2,911
Occupancy, furniture and fixtures 485 533
Data processing and ATM 258 301
Credit card processing 447 413
Intangibles amortization 284 284
Net costs of other real estate owned 58 14
Other operating expenses 884 1,043
------------------ -----------------
Total noninterest expense 5,257 5,499
------------------ -----------------
Income before income tax expense 4,039 3,888
Income tax expense 923 885
------------------ -----------------
Net income $3,116 $3,003
================== =================
5
Net income per share - basic $0.45 $0.43
================= ===================
- diluted $0.45 $0.43
================= ===================
Weighted average number of common
shares outstanding - basic 6,979,094 7,015,061
================= ===================
- diluted 7,000,683 7,044,385
================= ===================
Dividends declared per share $--- $---
================= ===================
See accompanying notes to consolidated financial statements.
6
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2007 and 2006
(Unaudited)
Accumulated
Other
($ In thousands) Common Retained Comprehensive Comprehensive
Stock Earnings Income (Loss) Income Total
============ ============== ================ ================ ===========
Balances, December 31, 2005 $8,775 $84,610 $(1,446) $91,939
Net income --- 3,003 --- 3,003 $3,003
Other comprehensive loss, net of tax:
Unrealized loss
on securities
available for sale, net
of income tax $(265) --- --- --- (491) ---
Reclass adjustment, net
of tax $13 --- --- --- 23 ---
------------ -------------- ---------------- ---------------- -----------
Other comprehensive loss --- --- (468) (468) (468)
------------ -------------- ---------------- ---------------- -----------
Comprehensive income --- --- --- $2,535 ---
------------ -------------- ---------------- ---------------- -----------
Exercise of stock options 5 36 --- --- 41
------------ -------------- ---------------- ---------------- -----------
Stock repurchase (13) (242) --- (255)
------------ -------------- ---------------- ---------------- -----------
Balances, March 31, 2006 $8,767 $87,407 $(1,914) --- $94,260
============ ============== ================ ================ ===========
Balances, December 31, 2006 $8,725 $91,123 $(3,093) $96,755
Net income --- 3,116 --- 3,116 $3,116
Other comprehensive income,
net of tax
Unrealized gains on
securities available for
sale, net of income tax
$22 --- --- --- 40 ---
Reclass adjustment, net of
income tax $(18) --- --- --- (33) ---
------------ -------------- ---------------- ---------------- -----------
Other comprehensive income --- --- 7 7 7
------------ -------------- ---------------- ---------------- -----------
Comprehensive income --- --- --- $3,123 ---
------------ -------------- ---------------- ---------------- -----------
Exercise of stock options 8 52 --- --- 60
------------ -------------- ---------------- ---------------- -----------
Stock repurchase (6) (109) (115)
------------ -------------- ---------------- ---------------- -----------
Balances, March 31, 2007 $8,727 $94,182 $(3,086) $99,823
============ ============== ================ ================ ===========
See accompanying notes to consolidated financial statements.
7
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2007 and 2006
(Unaudited)
March 31, March 31,
($In thousands) 2007 2006
=================== =================
Cash flows from operating activities:
Net income $3,116 $3,003
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for (recovery of) loan losses (3) 17
Depreciation of bank premises and equipment 247 246
Amortization of intangibles 284 284
Amortization of premiums and accretion of
discount, net 55 61
(Gains) on disposal of fixed assets --- (2)
(Gains)losses on sales and calls of securities
available for sale, net (51) 36
Losses and writedowns on other real estate owned 37 10
(Increase) decrease in:
Mortgage loans held for sale (495) (493)
Accrued interest receivable (224) (353)
Other assets (191) (36)
Increase (decrease) in:
Accrued interest payable (21) (1)
Other liabilities 1,095 839
------------------- -----------------
Net cash provided by operating
activities $3,849 $3,611
------------------- -----------------
Cash flows from investing activities:
Net (increase) in interest-bearing deposits $(9,884) $(6,974)
Proceeds from calls, principal payments, sales and maturities of
securities available for sale 7,799 4,156
Proceeds from calls, principal payments and maturities of
securities held to maturity 130 3,880
Purchases of securities available for sale (4,198) (10,682)
Purchases of securities held to maturity (6,240) (1,458)
Purchases of loan participations --- (1,398)
Collections of loan participations 281 ---
Net (increase)decrease in loans to customers (3,076) 4,089
Proceeds from disposal of other real estate owned 230 ---
Recoveries on loans charged off 27 39
Purchase of bank premises and equipment (90) (196)
Proceeds from disposal of bank premises and equipment --- 3
------------------- -----------------
Net cash (used in) investing
activities $(15,021) $(8,541)
------------------- -----------------
8
Cash flows from financing activities:
Net increase in other deposits $13,147 $5,784
Net (decrease) in time deposits (3,575) (2,211)
Net (decrease) in other borrowed funds (2) (274)
Stock options exercised 60 41
Stock repurchased (115) (255)
Net cash provided by financing ------------------- -----------------
activities $9,515 $3,085
------------------- -----------------
Net (decrease) in cash and due from banks (1,657) (1,845)
Cash and due from banks at beginning of period 15,283 20,115
------------------- -----------------
Cash and due from banks at end of period $13,626 $18,270
=================== =================
Supplemental disclosure of cash flow information:
Cash paid for interest $5,437 $4,239
=================== =================
Cash paid for income taxes $44 $---
=================== =================
Loans charged to the allowance for loan losses $136 $87
=================== =================
Loans transferred to other real estate owned $128 $24
=================== =================
Unrealized gains (losses) on securities available for sale $11 $(720)
=================== =================
See accompanying notes to consolidated financial statements.
9
National Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2007
(Unaudited)
($ In thousands, except share and per share data)
Note (1)
The consolidated financial statements of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg
(NBB), 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, 2007 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 in this
Form 10-Q should be read in conjunction with the notes to consolidated financial
statements included in the Company's 2006 Form 10-K. The Company posts all
reports required to be filed under the Securities and Exchange Act of 1934 on
its web site at www.nationalbankshares.com.
Note (2) Stock-Based Compensation
The Company adopted the National Bankshares, Inc. 1999 Stock Option Plan
to give key employees of Bankshares and its subsidiaries an opportunity to
acquire shares of National Bankshares, Inc. common stock. The purpose of the
1999 Stock Option Plan is to promote the success of Bankshares and its
subsidiaries by providing an incentive to key employees that enhances the
identification of their personal interest with the long term financial success
of the Company and with growth in stockholder value. Under the 1999 Stock Option
Plan, up to 500,000 shares of Bankshares common stock may be granted. The 1999
Stock Option Plan is administered by the Stock Option Committee, which is the
NBI Board of Directors' Compensation Committee, made up entirely of independent
directors of National Bankshares, Inc. The Stock Option Committee may determine
whether options are incentive stock options or nonqualified stock options and
may determine the other terms of grants, such as number of shares, term, a
vesting schedule, and the exercise price. The 1999 Stock Option Plan limits the
maximum term of any option granted to ten years, states that options may be
granted at not less than fair market value on the date of the grant and contains
certain other limitations on the exercisability of incentive stock options. The
options generally vest 25% after one year, 50% after two years, 75% after three
years and 100% after four years. At the discretion of the Stock Option Committee
options may be awarded with the provision that they may be accelerated upon a
change of control, merger, consolidation, sale or dissolution of National
Bankshares, Inc. At March 31, 2007, there were 286,000 additional shares
available for grant under the plan.
Compensation expense is calculated using the Black-Scholes model and is
amortized over the requisite service period using the straight-line method.
Please refer to the Company's Form 10-K dated December 31, 2006 for assumptions
used. There have been no grants of stock options in 2007.
10
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term ($000)
------------------------------------------- ------------ ------------ --------------- ------------
Outstanding at January 1, 2007 161,790 $20.46
Granted ---
Exercised (6,000) 9.92
Forfeited or expired ---
---
Outstanding at March 31, 2007 155,790 $20.87 6.8 $443
======= ====== === ====
Exercisable at March 31, 2007 155,790 $20.87 6.8 $443
======= ====== === ====
Because no options were granted in 2007 and all options were fully
vested at December 31, 2006, there is no expense included in net income.
During the three months ended March 31, 2007, there were no stock
options granted and 6,000 stock options were exercised with an intrinsic value
of $83,000. For the three months ended March 31, 2006 there were no stock
options granted and 4,000 options were exercised with an intrinsic value of
$54,000.
Note (3) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended
March 31, December 31,
---------------------------- -----------------
2007 2006 2006
------------- -------------- -----------------
($ In thousands, except % data)
Balance at beginning of period $5,157 $5,449 $5,449
Provision for (recovery of) loan losses (3) 17 49
Loans charged off (136) (87) (459)
Recoveries 27 39 118
------------- -------------- -----------------
Balance at the end of period $5,045 $5,418 $5,157
============= ============== =================
Ratio of allowance for loan losses to
the end of period loans, net of
unearned income and deferred fees 1.00% 1.11% 1.03%
============= ============== =================
Ratio of net charge-offs to average
loans, net of unearned income and
deferred fees(1.) 0.09% 0.04% 0.07%
============= ============== =================
Ratio of allowance for loan losses to
nonperforming loans(2.) 445.76% 5,889.13% 1,322.31%
============= ============== =================
1. Net charge-offs are on an annualized basis.
2. The Company defines nonperforming loans as total nonaccrual and
restructured loans. Loans 90 days past due and still accruing are
excluded.
11
March 31, December 31,
-------------------------- ----------------
2007 2006 2006
------------- ------------ ----------------
($ In thousands, except % data)
Nonperforming Assets:
Nonaccrual loans $1,132 $92 $---
Restructured loans --- --- ---
------------- ------------ ----------------
Total nonperforming loans 1,132 92 ---
Foreclosed property 251 390 390
------------- ------------ ----------------
Total nonperforming assets $1,383 $482 $390
============= ============ ================
Ratio of nonperforming assets to loans, net of
unearned income and deferred fees, plus
other real estate owned 0.27% 0.10% 0.08%
============= ============ ================
March 31, December 31,
-------------------------- ---------------
2007 2006 2006
------------- ------------ ---------------
Loans Past due 90 days or more and
still accruing $327 $184 $681
============= ============ ===============
Ratio of loans past due 90 days or
more and still accruing to loans, net
of unearned income and deferred fees 0.06% 0.04% 0.14%
============= ============ ===============
Impaired loans
Total impaired loans $1,132 $92 ---
============= ============ ===============
Impaired loans with a
valuation allowance --- --- ---
Valuation allowance --- --- ---
------------- ------------ ---------------
Impaired loans, net of allowance --- --- ---
============= ============ ===============
Impaired loans with no
valuation allowance $1,132 $92 ---
============= ============ ===============
Average recorded investment
in impaired loans $818 $133 $140
============= ============ ===============
Income recognized on impaired
loans --- $2 ---
============= ============ ===============
Amount of income recognized
on a cash basis --- $2 ---
============= ============ ===============
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 at March
31, 2007 were $0.
12
Note (4) Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for the sale by major security type as of
March 31, 2007 are as follows:
March 31, 2007
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
----------------- ----------------- ----------------- ------------------
Available for sale:
U.S. Treasury $3,032 $--- $99 $2,933
U.S. Government
Agencies and
Corporations 21,810 2 180 21,632
State and political
subdivisions 76,852 763 545 77,070
Mortgage-backed
securities 30,425 18 259 30,184
Corporate debt
securities 31,509 84 924 30,669
Federal Reserve Bank stock-
restricted 92 --- --- 92
Federal Home Loan
Bank stock-restricted 1,704 --- --- 1,704
Other securities 1,763 120 --- 1,883
----------------- ----------------- ----------------- ------------------
Total securities
available for sale $167,187 $987 $2,007 $166,167
================= ================= ================= ==================
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of March
31, 2007 are as follows:
March 31, 2007
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
----------------- ----------------- ----------------- ------------------
Held to Maturity:
U.S. Government
Agencies and
Corporations $41,459 $12 $508 $40,963
State and political
subdivisions 61,405 737 179 61,963
Mortgage-backed
securities 2,355 10 18 2,347
Corporate securities 16,619 164 418 16,365
----------------- ----------------- ----------------- ------------------
Total securities
held to maturity $121,838 $923 $1,123 $121,638
================= ================= ================= ==================
13
Information pertaining to securities with gross unrealized losses at
March 31, 2007 and December 31, 2006, aggregated by investment category and
length of time that individual securities have been in a continuous loss
position, follows:
March 31, 2007
-------------------------------------------------------------
Less Than 12 Months 12 Months or More
-------------------------------- ----------------------------
($ In thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss
-------------- ----------------- -------------- -------------
U.S. Government agencies and
corporations $13,773 $(65) $44,743 $(721)
State and political subdivisions 18,675 (118) 34,041 (609)
Mortgage-backed securities 5,964 (17) 20,441 (259)
Corporate debt securities --- --- 35,589 (1,341)
-------------- ----------------- -------------- -------------
Total temporarily impaired
securities $38,412 $(200) $134,814 $(2,930)
============== ================= ============== =============
December 31, 2006
-------------------------------------------------------------
Less Than 12 Months 12 Months or More
-------------------------------- ----------------------------
($ In thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss
-------------- ----------------- -------------- -------------
U.S. Government agencies and
corporations $22,734 83 $38,234 831
State and political subdivisions 14,449 91 30,503 587
Mortgage-backed securities 13,533 46 16,268 296
Corporate debt securities --- --- 35,462 1,495
-------------- ----------------- -------------- -------------
Total temporarily impaired
securities $50,716 $220 $120,467 $3,209
============== ================= ============== =============
The Company had 233 securities with a fair value of $173,226 which were
temporarily impaired at March 31, 2007. The total unrealized loss on these
securities was $3,130. Losses are attributed to interest rate movements. Credit
quality of the securities portfolio is continuously monitored by management. The
Company has the ability and intent to hold these securities until maturity.
Therefore, the losses associated with these securities are considered temporary
at March 31, 2007. All securities shown are above investment grade.
Note (5) Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 does not require any
new fair value measurements but may change current practice for some entities.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those years. The
Company does not expect the implementation of SFAS 157 to have a material impact
on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS 159). This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
of this Statement is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
14
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157, "Fair Value Measurements". The Company is in the process
of evaluating the impact SFAS 159 may have on its consolidated financial
statements but does not intend to adopt the Statement early.
Note (6) Defined Benefit Plan
Components of Net Periodic Benefit Cost
Pension Benefits
-------------------------
Three Months Ended
March 31,
-------------------------
($ in Thousands)
2007 2006
Service cost $ 152 $ 143
Interest cost 175 161
Expected return on plan assets (159) (143)
Amortization of prior service cost 2 (3)
Amortization of net obligation at transition (3) 2
Recognized net actuarial (gain)/loss 45 53
------------- -----------
Net periodic benefit cost $ 212 $ 213
============= ===========
Employer Contributions
Bankshares' pension plan contribution for 2007 has not yet been finally
determined. The estimated contribution is $722. The contribution will be paid in
quarterly installments.
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 for the Three Months Ended March 31, 2007
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. Refer to the financial statements and other information included in
this report as well as the 2006 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
as described in 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
15
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 element 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 and certain
qualitative factors 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. 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.
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.
16
Overview
National Bankshares, Inc. (NBI) is a financial holding company located in
Southwest Virginia. It conducts operations primarily through its full-service
banking affiliate, the National Bank of Blacksburg, which does business as
National Bank. It also has a 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 in 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, 2007 and December 31, 2006 and 2005. Per share data has been adjusted
to reflect the effects of a March 31, 2006 2-for-1 stock split.
March 31, December 31, December 31,
2007 2006 2005
----------------------------------------------- ------------------- ---------------------- -----------------------
Return on average assets 1.46% 1.50% 1.52%
----------------------------------------------- ------------------- ---------------------- -----------------------
Return on average equity 12.90% 13.41% 13.73%
----------------------------------------------- ------------------- ---------------------- -----------------------
Net interest margin (1) 3.96% 4.13% 4.45%
----------------------------------------------- ------------------- ---------------------- -----------------------
Noninterest margin (2) 1.46% 1.54% 1.74%
----------------------------------------------- ------------------- ---------------------- -----------------------
Basic net earnings per share $0.45 $1.80 $1.77
----------------------------------------------- ------------------- ---------------------- -----------------------
Fully diluted net earnings per share $0.45 $1.80 $1.76
----------------------------------------------- ------------------- ---------------------- -----------------------
(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. This is a
non-GAAP financial measure of the level of noninterest income and
expense.
The return on average assets for the first quarter of 2007 was 1.46%, down
slightly from the 1.50% for the period ended December 31, 2006. The return on
average equity also experienced a decline.
The net interest margin declined by 17 basis points. This decrease was due
to rising interest rates. Interest expense has continued to grow at a faster
pace than interest income.
Growth
The following table shows NBI's key growth indicators:
March 31, 2007 December 31, 2006 December 31, 2005
------------------- ---------------------------- --------------------- ----------------------
Securities $288,005 $285,489 $272,541
------------------- ---------------------------- --------------------- ----------------------
Loans, net 498,129 495,486 487,162
------------------- ---------------------------- --------------------- ----------------------
Deposits 774,264 764,692 745,649
------------------- ---------------------------- --------------------- ----------------------
Total assets 881,915 868,203 841,498
------------------- ---------------------------- --------------------- ----------------------
At March 31, 2007 total assets were $881,915, an increase of $13,712 or
1.6%. If annualized, the growth rate would be approximately 6.4%. The level of
asset growth during the first quarter of 2007 reflects the effects of a
competitive loan market. Deposits grew by 1.3% in the first quarter of 2007.
17
Asset Quality
Key asset quality indicators are shown below:
March 31, 2007 December 31,2006 December 31, 2005
--------------------------------------------- ----------------------- --------------------- ----------------------
Nonperforming loans $ 1,132 $ --- $ 178
--------------------------------------------- ----------------------- --------------------- ----------------------
Loans past due over 90 days 327 681 546
--------------------------------------------- ----------------------- --------------------- ----------------------
Other real estate owned 251 390 376
--------------------------------------------- ----------------------- --------------------- ----------------------
Allowance for loan losses to loans 1.00% 1.03% 1.11%
--------------------------------------------- ----------------------- --------------------- ----------------------
Net charge-off ratio 0.09% 0.07% 0.17%
--------------------------------------------- ----------------------- --------------------- ----------------------
This data indicates that the level of nonperforming loans has increased,
while the level of loans past due 90 days or more has declined. The increase in
nonperforming loans is concentrated in a few credits. There has been no specific
allocation to the allowance for loan losses for the additional nonperforming
loans, as management believes that these credits are well collateralized.
Measures of asset quality remain good when viewed from a historical perspective
and when compared with peers. Other real estate owned continues to decline as
properties foreclosed upon are sold.
Net Interest Income
Net interest income for the period ending March 31, 2007 was $7,114, a
decline of $231 when compared to the same period in 2006.
Until the third quarter of 2006 interest rate levels were continuously
rising. During the period of rising interest rates the Company's
interest-bearing liabilities rose at a faster pace than interest earning assets
resulting in the compression in the interest rate spread. The Company continues
to experience this compression, a portion of which is attributable to the
increase in time deposits that was generated in 2006 by two special promotions
at the Company's bank subsidiary. If interest rates remain stable, the
compression of rates should improve as these time deposits mature.
The following chart shows trends in asset yields and cost of
liabilities.
For the period ended
March 31, 2007 December 31, 2006 December 31, 2005
-------------- ----------------- -----------------
Loans 7.35% 7.11% 6.78%
Taxable securities 4.95% 4.89% 4.80%
Non-taxable securities 6.36% 6.25% 6.33%
Interest-bearing deposits 5.47% 5.08% 3.43%
----- ----- -----
Total interest-bearing deposits 6.68% 6.51% 6.29%
===== ===== =====
Interest-bearing liabilities 2.00% 1.87% 1.31%
Saving deposits 0.50% 0.50% 0.45%
Time deposits 4.47% 3.94% 3.23%
Other borrowings 5.56% 6.19% 3.26%
----- ----- -----
Total interest-bearing liabilities 3.33% 2.94% 2.32%
===== ===== =====
Interest rate spread 3.35% 3.57% 3.97%
===== ===== =====
From December 31, 2005 to March 31, 2007, the yield on loans has
increased by 57 basis points. During the same period, the yield on taxable
securities has gone up by 15 basis points, with nontaxable securities increasing
a nominal 3 basis points. Among the asset categories interest-bearing deposits,
which reprice daily, experienced the highest level of increase.
Among the categories of liabilities, interest-bearing demand deposit
rates increased by 69 basis points from December 31, 2005 to March 31, 2007.
Time deposit rates increased by 124 basis points. This is significant, not only
because of the level of rate increases, but also because of the volume of
deposits in the category. Saving deposit rates have been essentially flat
throughout the period. Rate increases have occurred in the other borrowings
18
category, however because the dollar volume is not substantial, there is little
impact on the net interest spread.
There are three significant factors concerning net interest income.
First, overall interest rates have stabilized. If rates remain stable, the net
interest spread will improve. Second, the yield on nontaxable securities, which
declined in 2006, has rebounded. At present, management is uncertain how this
will affect portfolio yields. Third, during 2006 two time deposit promotions
with special higher interest rates were offered. Higher-rate deposits from the
first promotion began to mature in the first quarter of 2007. Deposits obtained
in the second promotion will begin to mature in September of 2007. This should
have the effect of decreasing the cost of time deposit costs, assuming that
overall interest rates remain stable and competitive factors allow these
deposits to reprice downward.
Provision and Allowance for Loan Losses
The provision for loan losses (net recovery) for the three-month period
ended March 31, 2007 was $(3). The ratio of the allowance for loan losses to
total loans at the end of the first three months of 2007 was 1.00%, which
compares to 1.03% at December 31, 2006. The net charge-off ratio at March 31,
2007 was .09%, and it was .07% at March 31, 2006.
The Company regularly reviews asset quality and re-evaluates the
allowance for loan losses. Reviews are conducted and an appropriate provision
and allowance for loan losses is established depending upon factors that are
unique to the subsidiary bank and the quality of its loan portfolio.
At present, management does not anticipate any significant additions to
the Provision for Loan Losses. Management's opinion of current asset quality,
evaluated in the context of historical experience, forms the basis of this
position, despite the reported increase in nonperforming loans. (See "Allowance
for Loan Losses" under "Critical Accounting Policies".)
Noninterest Income
March 31, 2007 March 31, 2006 March 31, 2005
---------------------------------------- ------------------- ------------------- ----------------------
Service charges on deposits $810 $815 $675
---------------------------------------- ------------------- ------------------- ----------------------
Other service charges and fees 83 109 87
---------------------------------------- ------------------- ------------------- ----------------------
Credit card fees 598 524 494
---------------------------------------- ------------------- ------------------- ----------------------
Trust fees 373 380 408
---------------------------------------- ------------------- ------------------- ----------------------
Other income 264 267 137
---------------------------------------- ------------------- ------------------- ----------------------
Realized securities gains (losses) 51 (36) (33)
---------------------------------------- ------------------- ------------------- ----------------------
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 levels of income from
this category are:
o Internally generated growth
o Acquisitions of other banks/branches or de novo branches
o Adjustments to service charge structures
Service charges on deposits were $810 at March 31, 2007, a decrease of
$5.
19
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 other service charges and fees 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 by themselves yield a significant 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 volume.
Other service charges and fees at March 31, 2007 were $83, as compared
with $109 for the same period the prior year. As indicated above, this
category, because of its nature varies from time to time.
Credit card fees consist of three types of revenues.
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.
Credit card fees increased by $74 or 14.1% when March 31, 2007 and March
31, 2006 are compared. The increase was attributable to volume.
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 2007,
the financial markets have experienced a degree of volatility. Income from
estates is also unpredictable. Trust income for the first three months of 2007
was $373, a decrease of $7 from the previous year.
Other income is used for types of income that cannot be classified with
other categories 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, trends or
patterns are not identifiable. Other income decreased $3 when March 31, 2007 and
March 31, 2006 are compared.
Realized net gains and (losses) on securities include equity adjustments
in certain investments in limited liability companies (LLC's) of which the
Company is part owner, as well as sales, maturities and calls of securities.
Realized net gains and (losses) were $51 for the period ended March 31,
2007. The majority of this gain was attributable to equity adjustments in
investments in limited liability companies (LLC's).
20
Noninterest Expense
March 31, 2007 March 31, 2006 March 31, 2005
----------------------------- --------------------------- -------------------------- ---------------------------
Salaries and employee
benefits $2,841 $2,911 $2,862
----------------------------- --------------------------- -------------------------- ---------------------------
Occupancy and furniture and
fixtures 485 533 479
----------------------------- --------------------------- -------------------------- ---------------------------
Data processing and ATM 258 301 467
----------------------------- --------------------------- -------------------------- ---------------------------
Credit card processing 447 413 376
----------------------------- --------------------------- -------------------------- ---------------------------
Intangibles and goodwill
amortization 284 284 266
----------------------------- --------------------------- -------------------------- ---------------------------
Net costs of other real
estate owned 58 14 108
----------------------------- --------------------------- -------------------------- ---------------------------
Other operating expenses 884 1,043 1,131
----------------------------- --------------------------- -------------------------- ---------------------------
Noninterest expense includes several categories. A brief description of
the factors that affect each follows.
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 Qualified Pension plans (1)
o Supplemental retirement plan (salary continuation agreements)
o Employer FICA
o Unemployment taxes
(1) See the 2006 Form 10-K and the Proxy Statement for the 2007 Annual
Meeting of Stockholders for further information.
Salaries and employee benefits for the period ending March 31, 2007 were
$2,841 a decline of $70 when compared to the same period in 2006. At March 31,
2007 the Company had 250 full time equivalent employees compared to 283 at March
31, 2006. The decline in salary expense came about from a drop in the number of
employees which was the result of attrition following the May 2006 merger of the
Company's two bank subsidiaries and the subsequent consolidation of several
support functions.
Occupancy expense for the first three months of 2007 was $485, down $48
from the same period in 2006. This category contains several types of expenses
including depreciation, maintenance, lease expense and taxes and insurance. The
net decrease from 2006 was primarily due to $35 in additional expense for
signage in 2006. This additional expense for signs in 2006 was related to the
merger of the Company's two banking affiliates.
Data processing and ATM expense at March 31, 2007 decreased by $43 from
the same period in 2006. Declines in data processing supplies, maintenance and
communications line expense account for the decrease.
Because of increases in volume, credit card processing expenses
increased by $34, as compared with March 31, 2007.
21
Comparing the first three months of 2007 with the same period in 2006,
net cost of other real estate owned increased by $44. Losses on the sale of OREO
property were $30, and $7 in write-downs was taken on properties in the first
quarter of 2007. Other foreclosure expense was $21.
Other operating expenses include all other types of expense not
classified elsewhere in the Company's statement of income.
Because of management's ongoing cost containment measures, other
operating expenses declined by $157 from March 31, 2006 to March 31, 2007.
Balance Sheet
Year-to-date daily averages for the major balance sheet categories are
as follows:
Assets March 31, 2007 December 31, 2006
------------------------------------- ------------------ ------------------
Interest-bearing deposits $ 20,319 $ 13,457
Securities available for sale 167,419 164,421
Securities held to maturity 117,370 106,645
Mortgage loans held for sale 583 543
Real estate construction loans 37,090 29,308
Real estate mortgage loans 127,787 121,912
Commercial and industrial loans 213,091 232,758
Loans to individuals 123,072 110,967
Total Assets $ 867,945 $ 840,080
Liabilities and stockholders equity
Noninterest-bearing demand deposits $ 102,982 $108,977
Interest-bearing demand deposits 227,740 221,927
Savings deposits 47,554 51,745
Time deposits 384,541 358,422
Other borrowings 73 420
Shareholders' equity $97,927 $94,194
Liquidity and Capital Resources
Net cash provided by operating activities was $3,849 for the period
ended March 31, 2007, which compares to $3,611 for the same period the previous
year.
Net cash used in investing activities was $15,021 for the period ended
March 31, 2007, and $8,541 used for the period ended March 31, 2006. Net cash
provided by financing activities was $9,515 for the period ending March 31,
2007.
Management is unaware of any commitment that would have a material and
adverse effect on liquidity at March 31, 2007.
Total shareholders' equity grew by $3,068 from December 31, 2006 to
March 31, 2007. Earnings and the changes in unrealized gains and losses for
securities available for sale accounted for the net increase. During the first
three months of 2007, the Company repurchased 4,800 shares of its own stock for
approximately $115 at an average price of $24.20 (including broker commission).
The Tier I and Tier II risk-based capital ratios at March 31, 2007 were 14.56%
and 15.41%, respectively. The Company's leverage capital ratio was 10.21%
Derivatives and Off Balance Sheet Items
The Company is not a party to derivative financial instruments with
off-balance sheet risks, such as futures, forwards, and swaps. The Company has
certain written options related to the origination and sale of mortgage loans.
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
22
customers. Management does not plan any future involvement in high- risk
derivative products.
The Company's banking affiliate extends lines of credit to its customers
in the normal course of business. Amounts drawn upon these lines vary at any
given time depending on the business needs of the customers.
Standby letters of credit are also issued to the bank's customers. There
are two types of standby letters of credit. The first is a guarantee of payment
to facilitate customer purchases. The second type is a performance letter of
credit that guarantees a payment if the customer fails to perform a specific
obligation.
While it would be possible for customers to draw in full on approved
lines of credit and letters of credit, historically this has not occurred. In
the event of a sudden and substantial draw on these lines, the Company has its
own lines of credit on which it could draw funds. Sale of the loans would also
be an option.
The Company also sells mortgages on the secondary market for which there
are recourse agreements should the borrower default.
During the first three months of 2007, there have been no significant or
unusual changes in this area.
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 provide
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, 2006 in the Company's Form 10-K.
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,
2007. 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
Item 1. Legal Proceedings
There were no material legal proceedings for the three months
ended March 31, 2007.
23
Item 1A. Risk Factors
No material changes from risk factors as previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our purchases
during the first quarter of 2007 of equity securities that are
registered by the Company pursuant to Section 12 of the Exchange
Act.
-------------------- -------------------- ----------------------- -------------------- -------------------------
Fiscal Period Total Number of Average Price Paid Total Number of Approximate Number of
Shares Purchased per Share(1) Shares Purchased Shares That May Yet Be
as Part of Purchased Under the
Publicly Announced Plans or Programs(2)
Plans or
Programs(2)
-------------------- -------------------- ----------------------- -------------------- -------------------------
January --- $--- --- 71,350
-------------------- -------------------- ----------------------- -------------------- -------------------------
February 3,900 24.21 3,900 67,450
-------------------- -------------------- ----------------------- -------------------- -------------------------
March 900 24.15 900 66,550
-------------------- -------------------- ----------------------- -------------------- -------------------------
1) Average price per share includes commissions.
2) On May 9, 2006 the Board approved the repurchase of up to 100,000
shares of common stock in the period from June 1, 2006 through May 31,
2007.
Item 3. Defaults upon Senior Securities
None for the three months ended March 31, 2007.
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
Pursuant to the requirements of the Securities Exchange Act of 1934, National
Bankshares, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: May 9, 2007 NATIONAL BANKSHARES, INC.
/s/ JAMES G. RAKES
-----------------------------
James G. Rakes
Chief Executive Officer
/s/ J. ROBERT BUCHANAN
-----------------------------
J. Robert Buchanan
Chief Financial Officer
24
(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 Incorporation (incorporated herein by
of National Bankshares, Inc., dated April 8, 2003. reference to exhibit 3(i) of
the Annual Report on Form
10-K for the fiscal year
ended December 31, 2003)
3(i) Amended and Restated Articles of Incorporation of (incorporated herein by
National Bankshares, Inc. reference to Exhibit 3.1 of
Form 8-K filed on March 16,
2006)
4(i) Specimen copy of certificate for National (incorporated herein by
Bankshares, Inc. common stock. 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 18, (incorporated herein by
1990, by and between Information Technology, Inc. reference to Exhibit 10(e) of
and The National Bank of Blacksburg 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 fo 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 National reference to Exhibit
Bank of Blacksburg 10(iii)(A)of form 10-Q for the
period ended September 30,
2002)
*10(iii)(A) Change in Control Agreement dated January 5, 2003, (incorporated herein by
between National Bankshares, Inc. and Marilyn B. reference to Exhibit 10 iii(A)
Buhyoff of Form 10-K for the
period ended December 31, 2002)
25
*10(iii)(A) Change in Control Agreement dated January 8, 2003, (incorporated herein by
between National Bankshares, Inc. and F. Brad reference to Exhibit 10 iii(A)
Denardo of Form 10-K for th period
ended December 31, 2002)
*10(iii)(A) Salary Continuation Agreement dated February 8, (incorporated herein by
2006, between the National Bank of Blacksburg and reference to Exhibit 10(iii)(A)
James G. Rakes of Form 8-K filed on February 8,
2006)
*10(iii)(A) Salary Continuation Agreement dated February 8, (incorporated herein by
2006, between the National Bank of Blacksburg and reference to Exhibit
F. Brad Denardo. 10(iii)(A) of Form 8-K
filed on February 8, 2006)
*10(iii)(A) Salary Continuation Agreement dated February 8, (incorporated herein by
2006, between Bank of Tazewell County and J. reference to Exhibit
Robert Buchanan. 10(iii)(A) of Form 8-K filed
on February 8, 2006)
*10(iii)(A) Salary Continuation Agreement dated February 8, (incorporated herein by
2006, between Bank of Tazewell County and Marilyn reference to Exhibit
B. Buhyoff. 10(iii)(A) of Form 8-K filed
on February 8, 2006)
31(i) Section 302 Certification of Chief Executive Officer Page 27
31(ii) Section 302 Certification of Chief Financial Officer Page 28
32(i) 18 U.S.C. Section 1350 Certification of Chief Page 29
Executive Officer
32(ii) 18 U.S.C. Section 1350 Certification of Chief Page 29
Financial Officer
* Indicates a management contract or compensatory plan required to be filed
herein.
26
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: May 9, 2007
/s/ JAMES G. RAKES
-------------------------
James G. Rakes
Chairman President and Chief Executive Officer
(Principal Executive Officer)
27
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: May 9, 2007
/s/ J. ROBERT BUCHANAN
-----------------------------------
J. Robert Buchanan
Treasurer
(Principal Financial Officer)
28
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, 2007, 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, 2007, 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, 2007, 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, 2007, 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, 2007, 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, 2007, 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)
29