UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

   For the fiscal year ended                  Commission file number
      December 31, 2001                                   O-152042002                             0-15204

                            National Bankshares, Inc.
   - ----------------------------------------------------------------------------------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

             Virginia                                 54-1375874
- -------------------------------          ------------------------------------------------------------------------                     -----------
(State or other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization)

      101 Hubbard Street
      Blacksburg, Virginia 24060
- ----------------------------------------
--------------------
(Address of principal executive offices)                  Zip Code

Registrant's telephone number, including area code      (540) 951-6300
                                                     --------------------

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $2.50 per Share
    - -----------------------------------------------------------------------------------------------------------------------------------------------------
                                (Title of Class)

Indicate by a 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 if  disclosure  of  delinquent  filers  pursuant to Item
405 of  Regulation  S-K is not contained  herein,  and will not be contained,
to the best of Registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by reference in Part III of this Form 10-K or any
amendment to this Form
10-K.     X
        --------

Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act).
Yes   X      No
    -----        -----

The aggregate market value of the voting stockcommon equity held by nonaffiliates of
the Registrant at $26.75, the price at which the common equity was sold as of
March 5,June 30, 2002, the last business day of Registrant's most recently completed
second quarter, was $74,094,317. (In determining this amount, the
registrant assumes that all of its Directors and principal Officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purposes.)$88,230,408.

                                     


Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

           Class                               Outstanding at March 5, 20023, 2003
- ------------------------------                ------------------------------
Common Stock, $2.50 Par Value                           3,511,377


                       DOCUMENTS INCORPORATED BY REFERENCE

Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 2001,2002, is incorporated by reference into Parts I and II
of this report.

Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 9, 20028, 2003 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.


                        (This report contains 4381 pages.)
                  (The Index of Exhibits are on pages 4247 & 43.48.)



                                       1


                                     



                                Table of Contents


                                                                            Page
Part I

----

Item 1.      Business                                                        3
Item 2.      Properties                                                      3132
Item 3.      Legal Proceedings                                               3132
Item 4.      Submission of Matters to a Vote of
              Security Holders                                               3132
             Executive Officers of the Registrant                            3233
Part II

Item 5.      Market for Registrant's Common
              Equity and Related Stockholder
              Matters                                                        3435
Item 6.      Selected Financial Data                                         3435
Item 7.      Management's Discussion and Analysis
              of Financial Condition and Results
              of Operations                                                  3435
Item 7A.     Quantitative and Qualitative
              Disclosures About Market Risk                                  3435
Item 8.      Financial Statements and
              Supplementary Data                                             3637
Item 9.      Changes in and Disagreements with
              Accountants on Accounting and
              Financial Disclosure                                           3738
Part III

Item 10.     Directors and Executive Officers of
               the Registrant                                                3738
Item 11.     Executive Compensation                                          3738
Item 12.     Security Ownership of Certain
               Beneficial Owners and Management                              3738
Item 13.     Certain Relationships and Related
               Transactions                                                  3738
Item 14.     Controls and Procedures                                         39

Part IV

Item 14.15.     Exhibits, Financial Statement
               Schedules, and Reports on Form 8-K                            3839

Signatures                                                                   4143

Index to Exhibits                                                          42-4347-48


                                       2
                                     






                                     Part I


($ In Thousands Except Per Share Data)

Item 1.  Business.
- -----------------

History and Business

  National Bankshares, Inc. (Bankshares) is a bankfinancial holding company
organized under the laws of Virginia in 1986 and registered under the Bank
Holding Company Act (BHCA). Bankshares conducts a good deal of its business
operations through its two wholly-owned bank subsidiaries, The National Bank of
Blacksburg (NBB), Bank of Tazewell County (BTC) and through National Bankshares
Financial Services, Inc. (NBFS) doing business as National Bankshares Investment
Services and National Bankshares FinancialInsurance Services, collectively referred to as
"The Company".

The National Bank of Blacksburg

  The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its thirteen
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business. Through its trust operation, NBB offers a variety of personal and
corporate trust services.

  NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.

  At December 31, 2001,2002, NBB had total assets of $358,009.$381,099. Total deposits at this
date were $322,711.$340,751. NBB's net income for 20012002 was $4,765$6,426 which produced a return
on average assets of 1.36%1.76% and a return on average stockholders' equity of
14.62%17.57%. Refer to footnote 1112 of the Company's 20012002 Annual Report to Stockholders
for NBB's risk-based capital ratios.

Bank of Tazewell County

  The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with

                                       3
                                     

Farmers Bank of Clinch Valley. BTC provides general retail and commercial
banking services to individuals, businesses and local government units. These
services include commercial, real estate and consumer loans. Deposit accounts
offered include demand deposit accounts, interest-bearing demand deposit
accounts, money market deposit accounts, savings accounts and certificates of
deposit. Other services include automatic funds transfer, collections, night
depository, safe deposit, travelers checks, savings bond sales and utility
payment services; and providing other miscellaneous services normally offered by
commercial banks. BTC also conducts a general trust business.

  At December 31, 20012002 BTC had total assets of $283,425.$300,347. Total deposits at this
same date were $254,060.$267,553. BTC's net income for 20012002 was $2,550$3,499 which produced a
return on average assets of 0.90%1.22% and a return on average stockholders' equity
of 9.21%11.68%. Refer to footnote 1112 of the Company's 20012002 Annual Report to
Stockholders for BTC's risk-based capital ratios.

National Bankshares Financial Services

  On April 9, 2001 National Bankshares Financial Services Inc., a wholly-owned
subsidiary began offering non-deposit investment products and insurance products
for sale to the public. NBFS is working with Bankers Insurance, LLC, a joint
effort of Virginia banksBanks originally sponsored by the Virginia Bankers
Association. In another cooperative effort, NBFS is working with UVEST Financial
Services Group, Inc. to offer investment services.

Commercial Loans

  NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported by
a satisfactory balance sheet and income statement. Collateralized business loans
may be secured by a security interest in marketable equipment, accounts
receivable, business equipment and/or general intangibles of the business. In
addition, or as an alternative, the loan may be secured by a deed of trust lien
on business real estate.

  The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.

Residential Real Estate Loans

  Loans secured by residential real estate are originated by both bank
subsidiaries. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis. There
are occasions when a borrower or the real estate do not qualify under secondary
market criteria, but the loan request represents a reasonable credit risk. Also,
an otherwise qualified borrower may choose not to have their mortgage loan sold.
On these occasions, if the loan meets NBB's internal underwriting criteria, the
loan will be closed and placed in NBB's portfolio. Some residential loans
originated by BTC are held in the bank's loan portfolio and others are sold in
the secondary market. In their secondary market operations, NBB and BTC
participate in insured loan programs sponsored by the Department of Housing and

                                       4
                                     

Urban Development, the Veterans Administration and the Virginia Housing
Development Authority.

  Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.

Construction Loans

  NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsiblyresponsible business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.

  In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who may
or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures.

Consumer Loans

  NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property.

  Negative changes in a customer's financial circumstances due to a large number
of factors, such as illness or loss of employment, can place the repayment of a
consumer loan at risk. In addition, deterioration in collateral value can add
risk to consumer loans.

Sales and Purchases of Loans

  NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market residential mortgage
loans regularly sold by NBB.

  Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.

  5
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)

                                       5
                                     

if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.

  The following table sets forth, for the three fiscal years ended December 31,
2002, 2001 2000 and 19992000 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.

                                                              Percentage of
Period                       Class of Service                Total Revenues
- ------                       ----------------                --------------
December 31, 2002            Interest and Fees on Loans          66.90%
                             Interest on Investments             20.65%
December 31, 2001            Interest and Fees on Loans          55.84%
                             Interest on Investments             21.37%
December 31, 2000            Interest and Fees on Loans          66.74%
                             Interest on Investments             21.22%
December 31, 1999       Interest and Fees on Loans               64.95%
                        Interest on Investments                  24.41%

Market Area

The National Bank of Blacksburg Market Area

  NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, all of Pulaski County, the City of Radford, the
City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia.
This area includes the towns of Blacksburg and Christiansburg in Montgomery
County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and
the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse
and is oriented toward higher education, retail and service, light manufacturing
and agriculture.

  Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment at
VPI & SU has remained relatively stable over the past three years, and it is not
expected to change materially in the next few years. A second state supported
university, Radford University, is located in NBB's service area. It too has
provided stable employment opportunities in the region. The State of Virginia
has announced significant cuts in financial support to both universities. To
date, these cuts have not translated into large reductions in employment.

  Giles County's primary employer is the Celanese Corp. plant, a manufacturer of
the material from which cigarette filters are made. Employment at this plant has
remained relatively stable over the past several years.

  Pulaski County's major employer is the Volvo Heavy Trucks production facility.
During 2000, the Volvo company laid off a significant number of workers, however
the company has recently consolidated manufacturing from another plant at the
Pulaski County location and has recalled a portion of the trend is likely to continue in the near term as the demand for heavy trucks
nationwide is very low.laid off employees.
The county also has several large furniture plants, most notably Pulaski
Furniture and Ethan Allen.

  Pulaski Furniture recently announced
a small work force reduction.


                                       6
The City of Galax is located in the Virginia-North Carolina

                                       6
                                     

furniture-manufacturing region. Three furniture companies, Vaughan Bassett
Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company
together employ the largest percentage of the area's work force. The Galax
economy is stable, but furniture manufacturing has been negatively affected in
the recent economic downturn.

  Several other small manufacturing concerns are located in Montgomery, Giles
and Pulaski Counties and in the City of Galax. These concerns manufacture
diverse products and are not dependent on one sector of the economy. Agriculture
and tourism are also important to the region, especially in Giles County and in
the area near Galax.

  Since 1988, Montgomery County has developed into a regional retail center,
with the construction of several large shopping areas. Two area hospitals, each
of which are affiliated with different large health care systems, have
constructed additional facilities attracting health care providers to Montgomery
County, making it a center for basic health care services. VPI & SU's Corporate
Research Center has brought small high tech companies to Blacksburg, and further
expansion is planned.

  NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and it
has had some recent success attracting retirees, particularly from the Northeast
and urban Northern Virginia. These marketing efforts are expected to continue.

Bank of Tazewell County Market Area

  Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell, Richlands and
Bluefield, Virginia and Bluefield, West Virginia. BTC has also recently addedhas offices located
in the Towns of Wytheville, Marion and Abingdon located in Wythe, Smyth and
Washington Counties, Virginia, respectively. BTC's primary market area has
largely depended on the coal mining industry and farming for its economic base.
In recent years, coal companies have mechanized reducing the number of
individuals required for the production of coal. However, there are still a
number of support industries for the coal mining business that continue to
provide employment in the area. Additionally, several new businesses have been
established in the area, and Bluefield, West Virginia has emerged as a regional
medical center. Real estate values remain stable and comparable to other areas
in southwestSouthwest Virginia. BTC's expanded market areas in Wythe, Smyth and
Washington Counties have a diverse economic base, with manufacturing,
agriculture, education and service industries all represented.


                                       7
                                     


Competition

  The banking and financial service business in Virginia, generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from
non-traditional financial services. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete, NBB and BTC rely upon service-based business
philosophies, personal relationships with customers, specialized services
tailored to meet customers' needs and the convenience of office locations. In
addition, the banks are generally competitive with other financial institutions
in their market areas with respect to interest rates paid on deposit accounts,
interest rates charged on loans and other service charges on loans and deposit
accounts.

Registrant's Organization and Employment

  Bankshares, NBB, BTC and NBFS are organized in a holding company/subsidiary
structure. Until January 1, 2002, Bankshares had no employees, except for
officers, and it conducted substantially all of its operations through its
subsidiaries. Until January 1, 2002, all compensation paid to Bankshares
officers was paid by the subsidiary banks, except for fees paid to Chairman,
President and Chief Executive Officer James G. Rakes and to Corporate Officer
Cameron L. Forrester for their service as directors of the Company. On January
1, 2002, several administrative functions that serve multiple subsidiaries were
moved to the holding company level. These functions include audit, compliance,
loan review and human resources. Employees performing these functions who were
formerly employed at the bank level willare now be employed at the holding company
level.

  At December 31, 2001,2002, NBB employed 140129.5 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 20012002
employed 102 full time equivalent employees in its various offices and
operational areas. Bankshares had 12 and NBFS had 3 full time employees at
December 31, 2002.

Certain Regulatory Considerations

  Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or

                                       8
                                     BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.


                                       8


National Bankshares, Inc.

  Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of
1999.

  The Bank Holding Company Act. The BHCA is administered by the Federal Reserve
Board, and Bankshares is required to file with the Federal Reserve Board an
annual report and any additional information the Federal Reserve Board may
require under the BHCA. The Federal Reserve Board also is authorized to examine
Bankshares and its subsidiaries. The BHCA requires every bank holding company to
obtain the approval of the Federal Reserve Board before (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets of any
bank; (ii) it acquires ownership or control of any voting shares of any bank if
after the acquisition it would own or control, directly or indirectly, more than
5% of the voting shares of the bank; or (iii) it merges or consolidates with any
other bank holding company.

  The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if a
person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.

  Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley
Act of 1999 (see below), any bank holding company, all the depository
institution subsidiaries of which are well-capitalized, well managed (as those
terms are defined in the BHCA) and have a satisfactory or better rating under
the Community Reinvestment Act as of their last examination, may file an
election with the Federal Reserve Board to become a Financial Holding Company. A
Financial Holding Company may engage in any activity that is (i) financial in
nature (ii) incidental to a financial activity or (iii) complementary to a
financial activity. The BHCA provides a long list of "financial activities",
including: insurance underwriting; securities dealing and underwriting;
providing financial, investment or economic arising services; and merchant
banking activities. Financial Holding Companies may also engage in other
activities that the Federal Reserve Board has determined are permissible under
the BHCA, by regulation or order.
  9
The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of

                                       9
                                     

"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and these loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.

  The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on
November 12, 1999, broadly rewrote financial services legislation. The GLBA
permits significant combinations among different sectors of the financial
services industry; allows for significant expansion of financial service
activities by Bank holding companies and provides for a regulatory framework by
various governmental authorities responsible for different financial activities;
and offers certain financial privacy protections to consumers. The GLBA repealed
affiliation and management interlock prohibitions of the Depression-era
Glass-Steagall Act and, by amending the Bank Holding Companies,Company Act, the GLBA added
new substantive provisions to the non-banking activities permitted under the
BHCA with the creation of the financial holding company. The GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance
activities. The GLBA permits affiliations between banks and securities firms
within the same holding company structure, and the Act permits financial holding
companies to directly engage in a broad range of securities and merchant banking
activities.

  The Gramm-Leach-Bliley Act has and will leadled to important changes in the manner in which
financial services are delivered in the United States. Bank holding companies
and their subsidiary banks are able to offer a much broader array of financial
services; however, there is greater competition in all sectors of the financial
services market.

  The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries. The Virginia Banking Act allows bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. The Virginia
Banking Act permits bank holding companies from throughout the United States to
enter the Virginia market, subject to federal and state approval.

10



NBB and BTC

  General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare quarterly
reports on NBB's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC. NBB also is required by the OCC to adopt internal control structures
and procedures in order to safeguard assets and monitor and reduce risk
exposure. While appropriate for safety and soundness of banks, these
requirements impact banking overhead costs.

  BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, these banks are prohibited from engaging in certain
tie-in-arrangements in connection with any extension of credit or the providing
of any property of service.

  The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.

Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to

                                       11
                                     

comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other fair lending laws, will face
ongoing government scrutiny and that costs associated with compliance will
continue to increase.

  NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".

Federal Deposit Insurance Corporation Improvement Act of 1991. The difficulties
encountered nationwide by financial institutions during 1990 and 1991 prompted
federal legislation designed to reform the banking industry and to promote the
viability of the industry and of the deposit insurance system. FDICIA, which
became effective on December 19, 1991, bolsters the deposit insurance fund,
tightens bank regulation and trims the scope of federal deposit insurance.

  The legislation bolsters the bank deposit insurance fund with $70 billion in
borrowing authority and increases to $30 billion from $5 billion the amount the
FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The
loans, plus interest, would be repaid by premiums that banks pay on domestic
deposits over the next fifteen years.

  Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect to banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized."

  If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An institution's
principal federal regulator may deem the institution to be engaging in an unsafe
or unsound practice if it receives a less than satisfactory rating for asset
quality, management, earnings or liquidity in its most recent examination.

  Among other possible sanctions, an undercapitalized depository institution may
not pay dividends and is required to submit a capital restoration plan to its
principal federal regulator. In addition, its holding company may be required to
guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.

                                       12
                                     


  In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual
on-site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety and
soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.

  FDICIA reduces the scope of federal deposit insurance. The most significant
change ended the "too big to fail" doctrine, under which the government protects
all deposits in most banks, including those exceeding the $100,000 insurance
limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000
and foreign deposits--has been sharply limited. Since December 1993, the Federal
Reserve Board's ability to finance undercapitalized banks with extended loans
from its discount window has been restricted. In addition, only the best
capitalized banks will be able to offer insured brokered deposits without FDIC
permission or to insure accounts established under employee pension plans.

Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.

  National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval of
the OCC, NBB canwill be able to acquire existing banking operations in Virginia. As
a state bank, BTC is subject to Virginia state branching laws. With BFIlaws, with state
banking regulatory and Federal Reserve Bank approval, BTC is able to acquire
existing banking operations in the state.

  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Act) allows bank holding companies to acquire banks in any state,
without regard to state law, except that if the state has a minimum requirement
for the amount of time a bank must be in existence, that law must be preserved.
Under the Virginia Banking Act, a Virginia bank or all of the subsidiaries of
Virginia holding companies sought to be acquired must have been in continuous
operation for more than two years before the date of such proposed acquisition.
The Interstate Act also permits banks to acquire out-of-state branches through
interstate mergers, if the state has not opted out of interstate branching. De
novo branching, where an out-of-state bank holding company sets up a new branch
in another state, requires a state's specific approval. An acquisition or merger
is not permitted under the Interstate Act if the bank, including its insured
depository affiliates, will control more than 10% of the total amount of
deposits of insured depository institutions in the United States, or will
control 30% or more of the total amount of deposits of insured depository
institutions in any state.


                                       13
                                     


  Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act. Under the Virginia statute, Virginia state banks may,
with the approval of the Virginia State Corporation Commission, establish and
maintain a de novo branch or acquire one or more branches in a state other than
Virginia, either separately or as part of a merger. Procedures also are
established to allow out-of-state domiciled banks to establish or acquire
branches in Virginia, provided the "home" state of the bank permits Virginia
banks to establish or acquire branches within its borders. The activities of
these branches are subject to the same laws as Virginia domiciled banks, unless
such activities are prohibited by the law of the state where the bank is
organized. The Virginia State Corporation Commission has the authority to
examine and supervise out-of-state state banks to ensure that the branch is
operating in a safe and sound manner and in compliance with the laws of
Virginia. The Virginia statute authorizes the Bureau of Financial Institutions
to enter into cooperative agreements with other state and federal regulators for
the examination and supervision of out-of-state banks with Virginia operations,
or Virginia domiciled banks with operations in other states. Likewise, national
banks, with the approval of the OCC, may branch into and out of the state of
Virginia. Any Virginia branch of an out-of-state national bank is subject to
Virginia law (enforced by the OCC) with respect to intrastate branching,
consumer protection, fair lending and community reinvestment as if it were a
branch of a Virginia bank, unless preempted by federal law.

  The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company has
increased as a result of the Interstate Act and the Virginia interstate banking
statutes.

  Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Beginning in 1997, all banks, including NBB
and BTC, were subject to an additional FDIC assessment which funds interest
payments for bank issues to resolve problems associated with the savings and
loan industry. This assessment will continue until 2018-2019. The assessment
will vary over the period from 1.29 cents to 2.43 cents per $100 of deposits.

  Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows
national banks, with OCC approval, to acquire financial subsidiaries to engage
in any activity that is financial in nature or incidental to a financial
activity, as defined in the Bank Holding Act, except (i) insurance underwriting,
(ii) merchant or insurance portfolio investments, and (iii) real estate
development or investment. Well-capitalized national banks are also given the
authority to engage in municipal bond underwriting.


                                       14
                                     


  To establish or acquire a financial subsidiary, a national bank must be
well-managed, and the consolidated assets of its financial subsidiary must not
exceed the lesser of 45% of the consolidated total assets of the bank or $50
billion. The relationship between a national bank and a financial subsidiary are
subject to a variety of supervisory enhancements from regulators. The GLBA also
provides that state banks that establish or acquire financial subsidiaries are
required to comply with the same safeguards imposed on the financial
subsidiaries of national banks.

  Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and credit
and interest rates in order to influence general economic conditions. These
policies have a significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.

  Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive
half-year periods (in the case of an annual dividend) or (ii) the preceding
half-year period (in the case of a quarterly or semi-annual dividend). The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus or to fund the retirement of preferred stock.

  The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.

  As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
15
greater than its undivided profits then on hand after deducting its losses and

                                       15
                                     

bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.

  In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.

  Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid in
must be restored to its initial level, and no dividend can be paid which could
impair the bank's paid in capital. The Bureau of Financial Institutions further
has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.

  The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.

  Capital Requirements. The Federal Reserve Board has adopted risk-based capital
guidelines which are applicable to Bankshares and BTC. The Federal Reserve Board
guidelines redefine the components of capital, categorize assets into different
risk classes and include certain off-balance sheet items in the calculation of
risk-weighted assets. The minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8.0%. At least half of the total capital must be comprised
of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-weighted assets
of 4.0%. The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves. The OCC has adopted similar regulations applicable to
NBB.

  In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total average assets less intangibles) guidelines that are
applicable to Bankshares and BTC. The OCC has adopted similar regulations
applicable to NBB. These guidelines provide for a minimum ratio of 4.0% for
banks that meet certain specified criteria, including that they have the highest
regulatory CAMELS rating and are not anticipating or experiencing significant
growth and have well-diversified risk. All other banks will be required to
maintain an additional cushion of at least 100 to 200 basis points, based upon
16
their particular circumstances and risk profiles. The guidelines also provide

                                       16
                                     

that banks experiencing internal growth or making acquisitions will be expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.

  Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.

Other Legislative and Regulatory Concerns

  Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted or how these
proposals would affect the Company.

Other Business Concerns

  The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.

Company Website

  National Bankshares maintains a website at www.nationalbankshares.com.
Beginning with this Form 10-K, the Company will make available through its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after the material is electronically filed with the Securities and
Exchange Commission.


                                       17
                                     


                         Statistical Disclosure by National Bankshares, Inc.
                                   and Subsidiaries (The Company)

  I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential

        A.     Average Balance Sheets

        The following table presents, for the years indicated, condensed daily
        average balance sheet information.
 
($ in thousands)
December 31, -------------------------------------------- Assets 2002 2001 2000 1999 =============================================================================================== Cash and due from banks $10,221 $11,355 $12,820$ 10,737 $ 10,221 $ 11,355 Interest - bearing deposits 17,765 10,986 10,683 5,263 Federal funds sold 2,644 18,419 6,149 2,926 Securities available for sale: Taxable 43,882 69,486 87,813 95,979 Nontaxable 52,995 40,196 31,302 29,286 Securities held to maturity: Taxable 48,815 46,043 9,029 8,940 Nontaxable 45,801 33,084 14,542 17,219 Mortgage loans held for sale 955 808 519 709 Loans, net 404,717 376,958 310,624 266,431 Other assets 27,472 29,491 18,365 14,616 -------------------------------------------- Total assets $635,692 $500,381 $454,189$ 655,783 $ 635,692 $ 500,381 =============================================================================================== Liabilities and Stockholders' Equity =============================================================================================== Noninterest-bearing demand $ 74,269 $ 66,793 $ 56,709 Deposits $66,793 $56,709 $55,700 Interest-bearing demand deposits 147,749 116,529 85,713 85,284 Savings deposits 49,151 47,175 43,138 46,792 Time deposits 312,129 338,642 248,113 203,807 -------------------------------------------- Total deposits $569,139 $433,673 $391,583$ 583,298 $ 569,139 $ 433,673 Short-term borrowings 311 295 9,011 4,228 Other liabilities 2,279 2,798 2,015 2,182 -------------------------------------------- Total liabilities $572,232 $444,699 $397,993$ 585,888 $ 572,232 $ 444,699 Stockholders' equity 69,895 63,460 55,682 56,196 -------------------------------------------- Total liabilities and Stockholders' equity $635,692 $500,381 $454,189$ 655,783 $ 635,692 $ 500,381 ===============================================================================================
18 B. Analysis of Net Interest Earnings The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest-earning assets for the years indicated.
------------------------------- ----------------------------- ----------------------------------------------------------------------------------------------------------------------------------------- December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999 ------------------------------- ----------------------------- ----------------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ ($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------------- ------------------------------ ----------------------------------------------------------------------------------------------------------------------------------------- Interest-earning Assets: Loans, net (1)(2)(3) $410,437 $32,556 7.93% $381,778 $33,584 8.80% $314,685 $28,454 9.04% $267,140 $24,244 9.08% Taxable securities 92,697 5,490 5.92% 115,529 7,501 6.56% 96,842 6,760 6.98% 104,919 6,820 6.50% Nontaxable Securities (1) 98,796 6,885 6.97% 73,280 5,091 6.49%6.95% 45,844 3,420 7.46% 46,505 3,414 7.34% Federal funds sold 2,644 42 1.59% 18,419 652 3.54% 6,149 338 5.50% 2,926 170 5.81% Interest bearing Deposits 17,765 276 1.55% 10,986 577 5.25% 10,683 689 6.45% 5,263 269 5.11% ------------------------------- ------------------------------ ----------------------------------------------------------------------------------------------------------------------------------------- Total interest- Earning assets $622,339 $45,249 7.27% $599,992 $47,405 7.90%7.91% $474,203 $39,661 8.36% $426,753 $34,917 8.18% =============================== ============================== ========================================================================================================================================= Interest-bearing Liabilities: Interest-bearing Demand deposits $147,749 $ 2,219 1.50% $116,529 $2,518$ 2,518 2.16% $85,713 $2,243$ 85,713 $ 2,243 2.62% $85,284 $2,129 2.50% Savings deposits 49,151 508 1.03% 47,175 919 1.95% 43,138 1,135 2.63% 46,792 1,212 2.59% Time deposits 312,129 13,032 4.18% 338,642 19,326 5.71% 248,113 14,157 5.71% 203,807 10,630 5.22% Short-term Borrowings 311 5 1.61% 295 8 2.71% 1,727 118 6.83% 4,228 232 5.49% Long-term debt --- --- --- --- --- --- 7,284 510 7.00% --- --- --- ------------------------------- ------------------------------ ----------------------------------------------------------------------------------------------------------------------------------------- Total interest- Bearing liabilities $509,340 $15,764 3.09% $502,641 $22,771 4.53% $385,975 $18,163 4.71% $340,111 $14,203 4.18% =============================== ============================== ========================================================================================================================================= Net interest income and interest rate spread $29,485 4.18% $24,634 3.37%3.38% $21,498 3.66% $20,714 4.00% ================================================================ ========================================================================================================================================= Net yield on average Interest-earning Assets 4.74% 4.11% 4.53% 4.85% ============================================================================================================================================================================================================
(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 34%. (2) Loan fees of $660 in 2002, $608 in 2001 and $381 in 2000 and $680 in 1999 are included in total interest income. (3) Nonaccrual loans are included in average balances for yield computations. 19 C. Analysis of Changes in Interest Income and Interest Expense The Company's primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).
======================================================================================================================================================================================== 2002 Over 2001 2001 Over 2000 2000 Over 1999 ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Changes Due To Changes Due To ----------------------------- ----------------------------------------------------------- ------------------------------- Net Dollar Net Dollar ($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change =================================================================================================================================== - -----------------------------------------------------------------------------------------------------------------------------------============================================================================================================================= Interest income:(1) Loans $(791) $5,921 $5,130 $(89) $4,299 $4,210$ (3,442) $ 2,414 $ (1,028) $ (791) $ 5,921 $ 5,130 Taxable securities (619) (1,392) (2,011) (430) 1,171 741 485 (545) (60) Nontaxable securities 16 1,778 1,794 (249) 1,920 1,671 55 (49) 6 Federal funds sold (239) (371) (610) (157) 471 314 (10) 178 168 Interest bearing deposits (540) 239 (301) (131) 19 (112) 85 335 420 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Increase(decrease) in income on interest- earning assets $(1,758) $9,502 $7,744 $526 $4,218 $4,744$ (4,824) $ 2,668 $ (2,156) $ 1,758 $ 9,502 $ 7,744 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest-bearing demand deposits $(437) $712 $275 $103 $11 $114$ (877) $ 578 $ (299) $ (437) $ 712 $ 275 Savings deposits (448) 37 (411) (315) 99 (216) 19 (96) (77) Time deposits (4,824) (1,421) (6,294) 3 5,166 5,169 1,065 2,462 3,527 Short-term borrowings (3) --- (3) (46) (64) (110) 47 (161) (114) Long-Term Borrowings --- --- --- --- (64) (510) (510) --- 510 510 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Increase(decrease) in expense of interest- bearinginterest-bearing liabilities $(795) $5,403 $4,608 $1,234 $2,726 $3,960$ (6,201) $ (806) $ (7,007) $ (795) $ 5,403 $ 4,608 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $(963) $4,099 $3,136 $(708) $1,492 $784 ===================================================================================================================================$ 1,377 $ 3,473 $ 4,851 $ (963) $ 4,099 $ 3,136 =============================================================================================================================
(1) Taxable equivalent basis using a Federal income tax rate of 34%. 20 (2) Variances caused by the change in rate times the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each. 20 II. Investment Portfolio A. Book Value of Investments The amortized costs and fair values of securities available for sale as of December 31, 2002, 2001 2000 and 19992000 were as follows:
=========================================================================================================================================== December 31, -------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Amortized Fair ($ in thousands) Costs Values Costs Values Costs Values ================================================================================================================================== - ----------------------------------------------------------------------------------------------------------------------------------======================================================================================================================== Available for sale: U.S. Treasury $3,748 $3,962 $6,248 $ 6,490$6,248 $6,246 $ 6,331 $ 6,244 $ 6,164$6,331 U.S. Government agencies and corporations 7,038 7,132 5,340 5,375 54,815 54,034 50,373 47,498 States and political subdivisions 68,876 70,692 51,030 51,189 35,456 35,606 32,903 31,617 Mortgage-backed securities (1) 16,244 16,809 13,178 13,415 11,818 11,776 13,464 13,176 Corporate debt securities 16,993 17,411 9,066 9,093 14,341 14,058 14,349 13,646 Federal Home Loan Bank stock 1,655 1,655 1,411 1,411 1,329 1,329 1,329 1,329 Federal Reserve Bank stock 209 209 209 209 247 247209 209 Other securities 1,670 1,864 1,328 1,485 442 442 168 168 ----------------------------------------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $87,810$116,433 $119,734 $ 87,810 $88,667 $124,656 $123,785 $119,077 $113,845 ==========================================================================================================================================================================================================================================================
The amortized costs of securities held to maturity as of December 31, 2002, 2001 2000 and 19992000 were as follows:
============================================================================================= December 31, ------------------------------------------------ --------------------------------------------------------------------------------------------- ($ in thousands) 2002 2001 2000 1999 ===================================================================================================== - -----------------------------------------------------------------------------------------------------========================================================================================= Held to maturity: U.S. Treasury $ --- $ --- $ 500--- U.S. Government agencies and corporations 10,013 17,025 8,500 5,500 States and political subdivisions 52,610 49,230 17,288 17,283 Mortgage-backed securities (1) 8,989 13,723 288 364 Corporate 27,948 22,831 6,483 --- --------------------------------------------------------------------------------------------- Total securities held to maturity $ 99,560 $ 102,809 $ 32,559 $ 3,647 ==============================================================================================================================================================================================
(1) The majority of mortgage-backed securities and collateralized mortgage obligations held at December 31, 20012002 were backed by U.S. agencies. Certain holdings are required to be periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and price sensitivity 21 which are the primary risks associated with this type of security. Such tests are usually subject to regulatory review. Except for U.S. Government securities, the Company has no securities with any issuer that exceeds 10% of stockholders' equity. 21 B. Maturities and Associated Yields The following table presents the maturities for those securities available for sale and held to maturity as of December 31, 20012002 and weighted average yield for each range of maturities.
=========================================================================================================================================================================== Maturities and Yields December 31, 2001 ------------------------------------------------------------------------------------2002 --------------------------------------------------------------------------------------- ($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total ========================================================================================================================================================================================================================================================== Available for SaleSale: - ------------------------------------- U.S. Treasury $2,553 $3,937$1,544 $2,418 $--- $--- $--- $3,962 5.44% 5.72% --- --- --- $6,490 6.23% 5.73% --- --- --- 5.93%5.61% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies --- 1,534 2,949 8922,548 2,741 1,843 --- 5,3757,132 --- 7.43% 7.01% 6.52%5.09% 4.82% 5.88% --- 7.05%5.19% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities --- 363 2,687 13,759 --- 2,133 11,28216,809 --- 13,4153.56% 3.68% 5.76% --- --- 3.92% 6.68% --- 6.24%5.38% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- States and Political 317 855 --- 1,6841,803 --- 1,285 --- 2,9692,975 Subdivision - taxable 7.02% 7.03% --- 7.15%7.33% --- 7.77% --- 7.42%7.21% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- States and Political Subdivision 921 8,706 17,981 20,6123,207 6,243 27,177 31,091 --- 48,22067,717 - nontaxable(1) 7.12% 6.82% 6.32% 6.50%6.75% 6.74% 6.08% 6.22% --- 6.50%6.24% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Corporate 1,025 4,969 11,417 --- 4,168 2,931 1,994 --- 9,09317,411 6.96% 5.90% 5.77% --- 6.74% 6.55% 6.59% --- 6.65%5.88% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank stock --- --- --- --- 1,411 1,4111,655 1,655 --- --- --- --- 5.75% 5.75%5.25% 5.25% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Federal Reserve Bank stock --- --- --- --- 209 209 --- --- --- --- 6.00% 6.00% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Other securities 18634 --- --- --- 1,467 1,485 2.03%1,230 1,864 1.10% --- --- --- 6.00% 5.95%1.30% 1.29% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total 3,492 20,029 25,994 36,065 3,087 88,667 6.44% 6.66% 6.23% 6.61% 3.04% 6.38%6,727 17,396 44,022 48,496 3,093 119,734 5.96% 6.02% 5.80% 6.12% 3.76% 5.92% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Held to Maturity - ---------------- U.S. Treasury --- --- --- --- --- --- --- --- --- --- --- --- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies 1,000 7,000 2,013 --- 3,000 10,030 3,995 --- 17,02510,013 7.86% 5.04% 4.41% --- 5.84% 5.17% 6.90%--- 5.19% - -------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities --- 40 3 8,946 --- 8,989 --- 7.64% 9.00% 5.95% --- 5.95% - -------------------------------------------------------------------------------------------------------------------------- States and Political --- 1,349 683 2,000 --- 4,032 Subdivision - taxable --- 6.11% 5.98% 5.32% --- 5.69% - -------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 1 28 52 13,642 --- 13,723 9.00% 7.80% 7.98% 6.00% --- 6.01% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- States and Political 165 1,057 6902,255 2,955 25,599 17,769 --- --- 1,912 Subdivision - taxable 6.88% 7.05% 5.99% --- --- 6.65% - -------------------------------------------------------------------------------------------------------------------------------- States and Political 2,426 5,308 18,625 20,959 --- 47,31848,578 Subdivision - nontaxable 6.78% 7.08% 6.17% 6.34%7.03% 7.06% 6.13% 6.27% --- 6.38%6.28% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 22 Corporate --- 11,488 11,343898 16,098 10,952 --- --- 22,831 --- 6.83% 6.80%27,948 6.66% 6.13% 6.72% --- --- 6.82%6.37% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Other securities --- --- --- --- --- --- --- --- --- --- --- --- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Total $2,592 $20,881 $40,740 $38,5964,153 27,442 39,250 28,715 --- $102,809 6.78% 6.77%99,560 7.15% 5.95% 6.21% 6.10% 6.28% --- 6.32% ================================================================================================================================6.15% ==========================================================================================================================
(1) Rates shown represent weighted average yield on a fully taxable basis. 2223 III. Loan Portfolio The Company concentrates its lending activities in commercial and industrial loans, real estate mortgage loans both residential and business, and loans to individuals. The following tables set forth (i) a comparison of the Company's loan portfolio by major category of loans as of the dates indicated and (ii) the maturities and interest rate sensitivity of the loan portfolio at December 31, 2001.2002. A. Types of Loans
============================================================================================================================== December 31, ------------------------------------------------------------------------------------------------------------------------------ ($ in thousands) 2002 2001 2000 1999 1998 1997 ======================================================================================================================================================================================================== Commercial and industrial loans $209,368 $189,764 $163,929 $149,386 $110,509 $101,379 Real estate mortgage loans 82,193 77,339 71,163 58,829 48,724 42,969 Real estate construction loans 22,294 19,573 16,726 14,669 12,827 8,510 Loans to individuals 96,762 113,413 110,176 73,825 69,493 66,635 ------------------------------------------------------------------------------------------------------------------------------ Total loans $410,617 $400,089 $361,994 $296,709 $241,553 $219,493 Less unearned income and deferred fees (1,278) (1,775) (2,313) (1,916) (2,296) (2,503) ------------------------------------------------------------------------------------------------------------------------------ Total loans, net of unearned income $409,339 $398,314 $359,681 $294,793 $239,257 $216,990 Less allowance for loans losses (5,092) (4,272) (3,886) (3,231) (2,679) (2,438) ------------------------------------------------------------------------------------------------------------------------------ Total loans, net $404,247 $394,042 $355,795 $291,562 $236,578 $214,552 ========================================================================================================================================================================================================
B. Maturities and Interest Rate Sensitivities
============================================================= December 31, 20012002 -------------- --------------- -------------- --------------- After ($ in thousands) <1 Year 1-5 Years 5 Years Total ======================================= ============== =============== ============== =============== Commercial and industrial $50,286 $83,466 $56,012 $189,764$50,675 $98,804 $59,889 $209,368 Real estate construction 19,57318,806 3,488 --- --- 19,57322,294 Less loans with predetermined interest 28,219 39,407 55,544 123,170 rates 10,847 22,631 19,896 53,374 -------------- --------------- -------------- --------------- Loans with adjustable rates $41,640 $44,059 $468 $86,167$58,634 $79,661 $39,993 $178,288 ======================================= ============== =============== ============== ===============
2324 C. Risk Elements 1. Nonaccrual, Past Due and Restructured Loans The following table presents aggregate amounts for nonaccrual loans, restructured loans, other real estate owned, net and accruing loans which are contractually past due ninety days or more as to interest or principal payments.
============================================================================================================== December 31, -------------------------------------------------------------------------------------------------------------- ($ in thousands) 2002 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Nonaccrual loans: Commercial and industrial $ 102 $ 175 $ 65 $ 65 $ --- $ 55$--- Real estate mortgage 152 11 5 33 28 32 Real estate construction --- --- --- --- --- Loans to individuals 34 168 18 53 --- --- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ $ 288 $ 354 $ 88 $ 151$151 $ 28 $ 87 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Restructured loans: Commercial and industrial --- --- --- 40 --- --- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Total nonperforming loans $ 288 $ 354 $ 88 $ 191$191 $ 28 $ 87 Other real estate owned, net 537 211 540 447 628 421 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 825 565 $ 628 $ 638 $ 656 $ 508 ======================================================$628 $638 $656 ======================================================== - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Accruing loans past due 90 days or more: Commercial and industrial Real estate mortgage $ 462 $ 303 $ 242$242 $ 99 $ 186 $ 82$186 Real estate construction 119 277 664 704 160 358 Loans to individuals --- --- --- --- --- 396 400 415 274 204 232 - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ $ 977 $ 980 $1,321 $1,077 $ 550 $ 672 =====================================================================================================$550 =======================================================================================================
24 The effect of nonaccrual and restructured loans on interest income is presented below: ===================================== ($ in thousands) 2002 2001 2000 1999 =========================================================================================================================================== Scheduled interest: Nonaccrual loans $ 16 $ 37 $ 11 $ 13 Restructured loans --- --- --- ------------------------------------- Total scheduled interest $ 16 $ 37 $ 11 $ 13 ------------------------------------- Recorded interest: Nonaccrual loans $ 7 $ --- $ ---7 $--- Restructured loans $ --- --- --- ------------------------------------- Total recorded interest $ 7 $ --- $ --- =====================================================================7 $--- ====================================================================== Interest is recognized on the cash basis for all loans carried in nonaccrual status. Loans generally are placed in nonaccrual status when the collection of principal or interest is ninety days or more past due, unless the obligation is both well-secured and in the process of collection. 2425 2. Potential Problem Loans At December 31, 2001,2002, management was unaware of any potential problem loans other than those presented in the table above. 3. Foreign Outstandings At December 31, 2002, 2001, 2000 and 1999,2000, there were no foreign outstandings. 4. Loan Concentrations The Company does a general banking business, serving the commercial, agricultural and personal banking needs of its customers. NBB's trade territory consists of the northern portion of Montgomery County, all of Giles County, all of Pulaski County, the City of Radford, the City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia. NBB's operating results are closely correlated with the economic trends within this area which are, in turn, influenced by the area's three largest employers, Virginia Polytechnic Institute and State University, Montgomery County Schools and Celco.Celanese Corp. Other industries include a wide variety of manufacturing, retail and service concerns. Much of BTC's business originates from the communities of Tazewell and Bluefield and other communities in Tazewell County, Virginia and in Mercer County, West Virginia. BTC also serves the counties of Wythe, Smyth and Washington in Virginia. BTC's primary service area has largely depended on the coal mining industry and farming for its economic base. In recent years, coal companies have mechanized and reduced the number of persons engaged in the production of coal. There are still a number of support industries for the coal mining business that continue to provide employment in the area. Additionally, several new businesses have been established in the area and Bluefield, West Virginia has emerged as a regional medical center. The ultimate collectibility of the loan portfolios and the recovery of the carrying amounts of repossessed property are susceptible to changes in the market conditions of these areas. At December 31, 2002 and 2001, and 2000, approximately $177$202 million and $151$177 million, respectively, of the loan portfolio were concentrated in commercial real estate. This represents approximately 44%49% and 42%44% of the loan portfolio at December 31, 20012002 and 2000,2001, respectively. Included in commercial real estate at December 31, 20012002 and 20002001 was approximately $101$97 million and $84$101 million, respectively, in loans for college housing and professional office 2526 buildings. Loans secured by residential real estate were approximately $119$116 million and $110$119 million at December 31, 20012002 and 2000,2001, respectively. This represents approximately 30%28% and 31%30% of the loan portfolio at December 31, 20012002 and 2000,2001, respectively. Loans secured by automobiles were approximately $32$24 million and $36$32 million at December 31, 20012002 and 2000,2001, respectively. This represents approximately 8%6% of the loan portfolio at December 31, 20012002 and 10%8% at December 31, 2000.2001. The Company has established operating policies relating to the credit process and collateral requirements in loan originations. Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property's total stated or appraised value. Credit approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information. 2627 IV. Summary of Loan Loss Experience A. Analysis of the Allowance for Loan Losses The following tabulation shows average loan balances at the end of each period; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category; and additions to the allowance which have been charged to operating expense:
============================================================================ December 31, ---------------------------------------------------------------------------- ($ in thousands) 2002 2001 2000 1999 1998 1997 ========================================================================================================================================================================================================================================= Average net loans outstanding $ 376,958 $ 310,624 $ 266,431 $ 225,613 $ 204,540$404,717 $380,970 $310,624 $266,431 $225,613 ============================================================================ - ------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 3,886 $ 3,231 $ 2,679 $ 438 $ 2,575$4,272 $3,886 $3,231 $2,679 $2,438 Charge-offs: Commercial and industrial loans 276 141 55 185 32 257 Real estate mortgage loans 61 32 --- 33 80 --- Real estate construction loans --- --- --- --- --- Loans to individuals 1,234 955 715 760 526 422 ---------------------------------------------------------------------------- Total loans charged off $1,571 1,128 $ 770 $ 978 $ 638 $ 679 ---------------------------------------------------------------------------- Recoveries: Commercial and industrial loans 13 8 3 51 --- 70 Real estate mortgage loans --- --- --- 1 2 --- Real estate construction loans --- --- --- --- 190 --- Loans to individuals 127 98 93 78 63 37 ---------------------------------------------------------------------------- Total recoveries $140 106 $ 96 $ 130 $ 255 $ 107 ---------------------------------------------------------------------------- Net loans charged off 1,431 1,022 674 848 383 572 ---------------------------------------------------------------------------- Additions charged to operations 2,251 1,408 1,329 1,400 624 435 ---------------------------------------------------------------------------- Balance at end of year $ 4,272 $ 3,886$5,092 $4,272 $3,886 $ 3,231 $ 2,679 $ 2,438$2,679 ============================================================================ - ------------------------------------------------------------------------------------------------------------------------ Net charge-offs to average net loans Outstanding 0.35% 0.27% 0.21% 0.32% 0.17% 0.28% ==========================================================================================================================================================================================================================================
Factors influencing management's judgment in determining the amount of the loan loss provision charged to operating expense include the quality of the loan portfolio as determined by management, the historical loan loss experience, diversification as to type of loans in the portfolio, the amount of secured as compared with unsecured loans and the value of underlying collateral, banking industry standards and averages, and general economic conditions. 2728 B. Allocation of the Allowance for Loan Losses The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans for the years indicated as follows:
=========================================================================================================================================================================================================================================== December 31, ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------ Percent Percent------------------------------------------------------------------------------------------------------------------- Percent Percent Percent of Percent of Percent of of of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Total Loans Total Loans Total Loans ($ in Allowance Category toTotal Loans Allowance Category toTotal Loans Allowance Category to Allowance Category to Allowance Category to thousands) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ====================================================================================================================================================================================================================================================================== Commercial and industrial loans $235 50.98% $557 47.43% $ 255$255 45.29% $ 555$555 50.35% $ 222$222 45.75% $ 213 46.18% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Real estate mortgage loans 911 20.01% 50 19.33% 120 19.66% 119 19.83% 73 20.17% 67 19.58% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Real estate construction loans --- 5.44% --- 4.89% --- 4.62% --- 4.94% --- 5.31% --- 3.88% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Loans to individuals 3,092 23.57% 2,909 28.35% 1,709 30.43% 978 24.88% 497 28.77% 416 30.36% - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Unallocated 854 756 1,802 1,579 1,887 1,742 - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- $5,092 100.00% $4,272 100.00% $ 3,886$3,886 100.00% $ 3,231$3,231 100.00% $ 2,679$2,679 100.00% $ 2,438 100.00% ===========================================================================================================================================================================================================================================
2829 Loan Loss Allowance 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 as well as other internal and external factors such as general economic conditions. The evaluation of the allowance for loan losses is performed by the internal credit review department. Guidance for the evaluations performed are established by the regulatory authorities who periodically review the results for compliance. As a part of this process, loans are grouped principally into principally two classes. The first involves loans that are individually reviewed and direct allocations made based on collateral values, financial statements of the borrower, their cash flow capabilities to repay, and other documentation. In addition, an estimate is made for losses inherent to this portfolio. The second class includes pools of loans. Allocations from this analysis are derived and based on historical loss averages. The unallocated portion of the allowance for loan losses is the residual amount after allocation to the above classes. An unallocated component is maintained to cover uncertainties that could affect management's estimate of possible losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general loss in the portfolio. As previously stated, adequacy of the allowance for loan losses is subject to periodic regulatory review. These reviews cover the allocation process and overall adequacy of the allowance for loan losses. Regulatory authorities at their discretion may set minimum levels for the allowance and/or require the charge-off of loans as a result of their examination. This independent grading process by regulators serves as a standard to gauge the effectiveness of the internal credit review. 29review process. 30 V. Deposits A. Average Amounts of Deposits and Average Rates Paid Average amounts and average rates paid on deposit categories in excess of 10% of average total deposits are presented below:
======================================================================= December 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 ----------------------------------------------------------------------- Average Average Average Average Rates Average Rates Average Rates Paid ($ in thousands) Amounts Paid Amounts Paid Amounts Paid - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand deposits $ 74,269 --- $ 66,793 --- $ 56,709 --- $55,700 --- Interest-bearing demand deposits 147,749 1.50% 116,529 2.16% 85,713 2.62% 85,284 2.50% Savings deposits 49,151 1.03% 47,175 1.95% 43,138 2.63% 46,792 2.59% Time deposits 312,129 4.18% 338,642 5.71% 248,113 5.71% 203,807 5.22% - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Average total deposits $583,298 3.10% $569,139 4.53% $433,673 4.64% $391,583 4.16% =================================================================================================================================================================================================
B. Time Deposits of $100,000 or More The following table sets forth time certificates of deposit and other time deposits of $100,000 or more:
========================================================================================================================================= December 31, 2001 =====================================================================2002 ==================================================================== Over 3 Months Over 6 Months 3 Months Through 6 Through 12 or Less Months Months Over 12 ($ in thousands) or Less Months Months Months Total =====================================================================================================- ---------------------------------------------------------------------------------------------------- Certificates of deposit $65,246 $81,198 $90,281 $85,085 $321,810 - ----------------------------------------------------------------------------------------------------- Other time deposits 49,764 59,665 69,060 66,107 244,596 - ----------------------------------------------------------------------------------------------------- Total time deposits of $100,000 or more $15,482 $21,533 $21,221 $18,978 $77,214 =====================================================================================================$18,641 $18,532 $22,494 $29,594 $89,261 ====================================================================================================
3031 VI. Return on Equity and Assets The ratio of net income to average stockholders' equity and to average total assets, and certain other ratios are presented below: ======================================== December 31, ---------------------------------------- 2002 2001 2000 1999 ========================================================================================================================================================= Return on average assets 1.53% 1.15% 1.46% 1.56% - --------------------------------------------------------------------------------------------------------------------------------------------------------- Return on average equity(1)equity 14.33% 11.53% 13.13% 12.61% - --------------------------------------------------------------------------------------------------------------------------------------------------------- Dividend payout ratio 34.01% 41.29% 40.87% 39.70% - --------------------------------------------------------------------------------------------------------------------------------------------------------- Average equity to average assets(1)assets 10.66% 9.98% 11.13% 12.37% ============================================================================ (1) Includes amount related to common stock subject to ESOP put option excluded from stockholders' equity on the Consolidated Balance Sheet for 1999.============================================================================= Item 2. Properties - ------------------- Bankshares' headquarters and one branch office of NBB isare located at 101 Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and the Hubbard Street branch office, NBB owns eleven branch offices in Virginia: fouroffices: Three in the Town of Blacksburg; one in the Town of Christiansburg; and three in the County of Giles, two in Pulaski County, one in the City of Radford and one in the City of Galax. An additional tract of land has been acquired for theA fourteenth branch office is under construction of a fourteenth branch.in Downtown Christiansburg in Montgomery County. This office is expected to open in Summer, 2003. Bank of Tazewell County owns the land and building of nineseven of its eleventen offices. The bank leases the land and building for twothree offices. The Main Office is located at 309 East Main Street, Tazewell, Virginia. Three additional branches are located in Tazewell, one in Richlands and threetwo are located in Bluefield, Virginia. The bank also has one branch offices in Richlands, Wytheville, Virginia, one branch in Abingdon, Virginia and one branch in Marion, Virginia. Management believes that its existing facilities are adequate to meet present needs and any anticipated growth. NBB owns all its computer and data processing hardware and is a licensee of the software it utilizes. BTC utilizes this same system for data processing. Item 3. Legal Proceedings - -------------------------- Bankshares, NBB, BTC, and NBFS are not currently involved in any material pending legal proceedings, other than routine litigation incidental to NBB's and BTC's banking business. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None 3132 Executive Officers of the Registrant Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 9, 2002.8,2003. The following is a list of names and ages of all executive officers of Bankshares; their terms of office as officers; the positions and offices within Bankshares held by each officer; and each person's principal occupation or employment during the past five years. ================================================================================ Year Elected an Name Age Offices and Positions Held Officer/Director ================================================================================- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- James G. Rakes 5758 Chairman, President and Chief Executive 1986 Executive Officer, National Bankshares, Inc.; and President and Chief Executive Officer of The National Bank of Blacksburg since 1983. President and Treasurer of National Bankshares Financial Services, Inc. since 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- J. Robert Buchanan 5051 Treasurer, National Bankshares, Inc.; 1998 Cashier and Senior Vice President/Chief Financial Officer of The National Bank of Blacksburg since January 1, 1998; prior thereto Senior Vice President, Treasurer and Chief Financial Officer, Premier Bankshares Corporation.1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Marilyn B. Buhyoff 5354 Secretary & Counsel, National 1989 Bankshares, Inc.; and Secretary & Counsel of the National Bank of Blacksburg since 1989 and Senior Vice President/ Administration, since 1992, of The National Bank of Blacksburg.1992. Secretary of National Bankshares Financial Services, Inc. since 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- F. Brad Denardo 4950 Corporate Officer, National Bankshares, 1989 Bankshares, Inc.; and Executive Vice President/ LoansChief Operating Officer of the National Bank of Blacksburg since 19892002; prior thereto Executive Vice President/Loans of The National Bank of Blacksburg.Blacksburg since 1989. - -------------------------------------------------------------------------------- 3233 - -------------------------------------------------------------------------------- Cameron L. Forrester 5354 Corporate Officer, National Bankshares, 2001 Bankshares, Inc.; and President and Chief Executive Officer of Bank of Tazewell County since 1998; prior thereto Vice President of First Virginia Bank, Clinch Valley (formerly Premier Bank, N. A.) ================================================================================ Except for J. Robert Buchanan and Cameron Forrester, each of the executive officers above have served Bankshares and/or its subsidiaries in the listed executive capacity for the past five years. 3334 Part II ------- Item 5. Market for Registrant's Common Equity and Related - ---------------------------------------------------------- Stockholder Matters - ------------------- Effective December 1, 1999, National Bankshares, Inc.'s common stock began trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December 1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis in the over-the-counter market and was not listed on any exchange or quoted on Nasdaq. As of December 31, 20012002 there were 1,0451,024 stockholders of Bankshares common stock. Information concerning Market Price and Dividend Data is set forth under "Common Stock Information and Dividends" on page 1112 of Bankshares' 20012002 Annual Report to Stockholders and is incorporated herein by reference. Prices prior to December 1, 1999 do not necessarily reflect the prices which would have prevailed had there been an active trading market, nor do they reflect unreported trades, which may have been at lower or higher prices. Item 6. Selected Financial Data - -------------------------------- The table entitled "Selected Consolidated Financial Data" on page 4 of Bankshares' 20012002 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations - ------------------------- The information contained under "Management's Discussion and Analysis" on pages 5 through 1112 of Bankshares' 20012002 Annual Report to Stockholders is incorporated herein by reference. Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company use historical loss factors as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from previously acceptable method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the transactions could change. 35 Allowance for the 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 an estimatable 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. The Company's 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 the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values in 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 either the formula or specific allowance. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- See "Analysis of Interest Rate Sensitivity" set forth below. Additional information is set forth under the section "Interest Rate Sensitivity" on pages 536 through 637 and the section "Derivatives and Market Risk Exposures"Exposure" on page 1011 of Bankshares' 20012002 Annual Report to Stockholders and is incorporated herein by reference. 3436 Analysis of Interest Rate Sensitivity The following discussion of interest rate sensitivity 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. 35 The Company uses simulation analysis to forecast its balance sheet and monitor interest rate sensitivity. One test used by Bankshares is shock analysis which measures the effect of a hypothetical, immediate and parallel shifts in interest rates. The following table shows the results of a rate shock of 100, 200, and 300 basis points and the effects on net income and return on average assets and return on average equity at December 31, 2001.2003.
($ in thousands, except for percent data) - ---------------------------- ------------------------ -------------------------- -------------------------------- Rate Shift Change in Net Income Return on Average Equity Return on Average Assets - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- 300 $8,501 12.24% 1.24%$ (3,927) 11.56% 1.28% - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- 200 9,766 13.95% 1.42%(2,507) 13.27% 1.48% - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- 100 10,904 15.47% 1.58%(1,239) 14.78% 1.66% - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- (-) 100 13,263 18.55% 1.93%1,193 17.61% 2.00% - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- (-) 200 13,616 19.01% 1.98%1,628 18.11% 2.06% - ---------------------------- ------------------------ -------------------------- -------------------------------- - ---------------------------- ------------------------ -------------------------- -------------------------------- (-) 300 1,199 17.61% 2.00% - ---------------------------- ------------------------ -------------------------- --------------------------------
Simulation analysis allows the Company to test asset and liability management strategies under rising and falling rate conditions. As a part of simulation process, certain estimates and assumptions must be made dealing with, but not limited to, asset growth, the mix of assets and liabilities, rate environment, local and national economic conditions. AssetsAsset growth and the mix of assets can to a degree be influenced by management. Other areas such as the rate environment and economic factors cannot be controlled. For this reason actual results may vary materially from any particular forecast or shock analysis. This shortcoming is offset to a degree by the periodic reforecasting of the balance sheet to reflect current trends and economic conditions. Shock analysis must also be updated periodically as a part of the asset and liability management process. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The following consolidated financial statements of the Registrant and the Independent Auditor's Report set forth on pages 1213 through 36 of Bankshares' 20012002 Annual Report to Stockholders are incorporated herein by reference: 3637 1. Independent Auditor's Report 2. Consolidated Balance Sheets - December 31, 20012002 and 20002001 3. Consolidated Statements of Income - Years ended December 31, 2002, 2001 2000 and 19992000 4. Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 2000 and 19992000 5. Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 2000 and 19992000 6. Notes to Consolidated Financial Statements - December 31, 2002, 2001 2000 and 19992000 Item 9. Changes In and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None Part III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Executive Officers of Bankshares as of December 31, 20012002 are listed on page 3233 and 34 herein. Information with respect to the directors of Bankshares is set out under the caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy Statement dated March 14, 200213, 2003 which information is incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information set forth under "Executive Compensation" on pages 46 through 610 of Bankshares' Proxy Statement dated March 14, 200213, 2003 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The information set forthAnd Related Stockholder Matters Certain responses to this Item will be included under "Voting Securities and Stock Ownership" on page 1 and under "Stock Ownership of Certain Beneficial Owners" andthe caption "Stock Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares' Proxy Statement datedfor the Annual Meeting of Stockholders to be held April 8, 2003, which was filed on March 14, 2002 is incorporated herein by reference.13, 2003. 38 The following table summarizes information concerning National Bankshares equity compensation plans at December 31, 2002:
Number of Shares Number of Shares to Remaining be Issued upon Weighted Average Available for Exercise of Exercise Price of Future Issuance Outstanding Options Outstanding Options Under Equity and Warrants and Warrants Compensation Plans (Excluding Shares Plan Category Reflected in First Column) - --------------------------------------- --------------------- --------------------- -------------------- Equity compensation plans approved by shareholders-1999 Stock Incentive Plan 51,500 $ 24.06 198,500 Equity compensation plans not approved by shareholders N/A N/A N/A --------------------- --------------------- -------------------- Total 51,500 $ 24.06 198,500 ===================== ===================== ====================
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information contained under "Certain Transactions With Officers and Directors" on page 1314 of Bankshares' Proxy Statement dated March 14, 200213, 2003 is incorporated herein by reference. 37 Item 14. Controls and Procedures Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing of this annual report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Part IV ------- Item 14.15. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as part of this report: 200139 2002 Annual Report 1. Financial Statements: To Stockholders Page(s)* -------------------- ------------------------ Independent Auditor's Report 1213 Consolidated Balance Sheets - 13 December 31, 2002 and 2001 14 Consolidated Statements of 15 Income - Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of 14 Income - Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes 15 in Stockholders' Equity - Years 16 ended December 31, 2002, 2001 2000 and 19992000 Consolidated Statements of Cash 1617 Flows - Years ended December 31, 2002, 2001 2000 and 19992000 Notes to Consolidated 17-35 Financial Statements - December 18-36 31, 2002, 2001 2000 and 19992000 2. Financial Statement Schedules: ----------------------------- None *Incorporated by reference from the indicated pages of the 20012002 Annual Report to Stockholders. 3. Exhibits: -------- Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10-K10K for Fiscal year ended December 31, 1993) 38 Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par herein by reference value reference to Exhibit 4(a) of the Annual Report on Form 10-K10K for Fiscal year ended December 31, 1993) 4(i) Article Four of the Articles of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a))No.3(a) reference to Exhibit 4(b) of the Annual Report on Form 10-K10K for Fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18, 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10-K10K for Fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 (incorporated herein Stock Option Plan 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 1, 1992,2002 (incorporated by andherein between National Bankshares, Inc. and herein by reference to James G. Rakes reference to Exhibit 10(a)10(iii)(A) of Form 10Q for the Annual Report on Form 10-K for Fiscal yearperiod ended December 31, 1992) *10(iii)(A) Capital Accumulation Plan (included in (incorporated Exhibit No. 10(a)) herein by reference to Exhibit 10(b) of the Annual Report on Form 10-K for Fiscal year ended December 31, 1992)June 30, 2002) *10(iii)(A) Employee Lease Agreement dated May 7, 1992,August 14, (incorporated by andherein 2002, between National Bankshares, Inc. herein by reference to and The National Bank of Blacksburg Exhibit 10 (iii)(A) of Form 10Q for the period ended September 30, 2002) *10(iii)(A) Change in Control Agreement dated Pages 51-59 January 5, 2003, between National Bankshares, Inc. and Marilyn B. Buhyoff *10(iii)(A) Change in Control Agreement dated Pages 60-68 2003, January 8, between National Bankshares, Inc. and F. Brad Denardo *10(iii)(A) Change in Control Agreement dated Pages 69-79 1998, June 1, between Bank of Tazewell County and Cameron L. Forester 41 13(i) 2002 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, to Exhibit 10(c)is being furnished for the information of the AnnualCommission only and is not deemed to be filed as part of this Report on Form 10-K) 21(i) Subsidiaries of National Bankshares, Inc. Page 80 23 Consent of Yount, Hyde & Barbour, P.C. to Page 81 incorporation by reference of independent auditor's report included in this Form 10-K, into registrant's registration statement on Form S-8. 99(a) Certification of Chief Executive Officer Page 82 Pursuant to 18 U.S.C. Section 1350 99(b) Certification of Chief Financial Officer Page 83 Pursuant to 18 U.S.C. Section 1350 *Indicates a management contract or compensatory plan required to be filed herein. (b) Reports on Form 8-K filed during the last quarter of the period covered by this report: None (c) Exhibits required by Item 601 of Regulation S-K: See Item 15(a)3 above. (d) Financial Statement Schedules required by Regulation S-X: See Item 15(a)2 above. 42 Signatures Pursuant to the requirements of Section 13 or 15(d) 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. National Bankshares, Inc. I, James G. Rakes,Chairman, President and Chief Executive Officer of National Bankshares, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of National Bankshares, Inc. 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, Fiscal year ended December 31, 1992) 39the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have: (a) designed such disclosure controls and procedures 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 annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, 43 summarize and report financial date and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. Date: 03-21-03 -------- /s/ James G. Rakes - --------------------------- James G. Rakes Chairman President and Chief Excutive Officer I, J. Robert Buchanan, Treasurer (Chief Financial Officer) of National Bankshares, Inc. certify that: 1. I have reviewed this annual report on Form 10-K of National Bankshares, Inc. 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have: (a) designed such disclosure controls and procedures 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 annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and 44 procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial date and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weakness. Date: 03-21-03 -------- /s/ J. Robert Buchanan - --------------------------- J. Robert Buchanan Treasurer (Chief Financial Officer) 45 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Name Date Title - ---- ---- ----- /s/ L. A .Bowman 03-12-03 Director - ----------------------- -------------- L. A. Bowman /s/ A. A. Crouse 03-24-03 Director - ----------------------- -------------- A. A. Crouse /s/ J. A. Deskings, Sr. 03-12-03 Director - ----------------------- -------------- J. A. Deskins, Sr. /s/ P. a. Duncan 03-12-03 Director - ----------------------- -------------- P. A. Duncan /s/ C. L. Forrester 03-12-03 Director - ----------------------- -------------- C. L. Forrester /s/ W. T. Peery 03-12-03 Director - ----------------------- -------------- W. T. Peery /s/ J. G. Rakes 03-12-03 Chairman of the - ----------------------- -------------- Board President J. G. Rakes and Chief Executive Officer - National Bankshares, Inc. /s/ J. M. Shuler 03-12-03 Director - ----------------------- -------------- J. M. Shuler /s/ J. R. Stewart 03-12-03 Director - ----------------------- -------------- J. R. Stewart 46 Index to Exhibits Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, (incorporated of National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par herein by value reference to Exhibit 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Article Fourth of the Articles of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a)) reference to Exhibit 4(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18, 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 Stock (incorporated Option (incorporated Plan 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 (incorporated between National Bankshares, Inc. and herein by James G. Rakes reference to Exhibit 10(iii)(A) of Form 10Q for the period ended June 30, 2002) 47 Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- *10(iii)(A) Employment Lease Agreement dated August (incorporated 14, 2002, between National Bankshares, herein by Inc. and The National Bank of Blacksburg reference to Exhibit 10(iii)(A) for the period ended September 30, 2002) *10(iii)(A) Change in Control Agreement dated January Pages 49-57 5, 2003, between National Bankshares, Inc. and Marilyn B. Buhyoff *10(iii)(A) Change in Control Agreement dated January 8, Pages 58-66 2003, between National Bankshares, Inc. and F. Brad Denardo *10(iii)(A) Change in Control Agreement dated June 1, Pages 67-77 1998, between Bank of Tazewell County and Cameron L. Forester 13(i) 2001 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not deemed to be filed as part of this Report on Form 10-K) 21(i) Subsidiaries of National Bankshares, Inc. 23.1Page 78 23 Consent of Yount, Hyde & Barbour, P.C. to Page 79 incorporation by reference of independent auditor's report included in this Form 10-K, into registrant's registration statement on Form S-8. 23.2 Consent99 (a) Certification of KPMG LLP to incorporation by reference of independent auditors' report included in this Form 10-K, into registrant's registration statement on Form S-8. 99 Independent Auditors' Report of KPMG LLP on consolidated financial statements of National Bankshares, Inc. and subsidiaries for the year ended December 31, 1999. *Indicates a management contract or compensatory plan required to be filed herein. (b) Reports on Form 8-K filed during the last quarter of the period covered by -------------------------------------------------------------------------- this report: ------------ None (c) Exhibits required by Item 601 of Regulation S-K: ----------------------------------------------- See Item 14(a)3 above. 40 (d) Financial Statement Schedules required by Regulation S-X: -------------------------------------------------------- See Item 14(a)2 above. 41 Signatures ---------- Pursuant to the requirements of Section 13 or 15(d) 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. National Bankshares, Inc. BY: /s/ James G. Rakes -------------------------------------- James G. Rakes, Chairman, President and Chief Executive Officer DATE: March 28, 2002 ------------------------------------- BY: /s/ J. Robert Buchanan ------------------------------------- J. Robert Buchanan Treasurer (Principal Financial Officer) DATE: March 28, 2002 -------------------------------------Page 80 Pursuant to the requirements18 U.S.C. Section 1350 99 (b) Certification of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Name Date Title - ---- ---- ----- /s/ L.A. Bowman March 13, 2002 Director - ------------------------ -------------- L. A. Bowman /s/ A. A. Crouse March 13, 2002 Director - ------------------------ -------------- A. A. Crouse /s/ J. A. Deskins, Sr. March 13, 2002 Director - ------------------------ -------------- J. A. Deskins, Sr. /s/ P. A. Duncan March 13, 2002 Director - ------------------------ -------------- P. A. Duncan /s/ C. L. Forrester March 13, 2002 Director - ------------------------ -------------- C. L. Forrester /s/ W. T. Peery March 13, 2002 Director - ------------------------ -------------- W. T. Peery /s/ J. G. Rakes March 13, 2002 Chairman of the Board - ------------------------ -------------- President and Chief J. G. Rakes ExecutiveFinancial Officer - National Bankshares, Inc. /s/ J. M. Shuler March 13, 2002 Director - ------------------------ -------------- J. M. Shuler /s/ J. R. Stewart March 13, 2002 Director - ------------------------ -------------- J. R. Stewart 43 IndexPage 81 Pursuant to Exhibits ----------------- Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par herein by value reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 4(i) Article Fourth of the Articles of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a)) reference to Exhibit 4(b) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10-K for fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated January 1, 1992, (incorporated by and between National Bankshares, Inc. and herein by James G. Rakes reference to Exhibit 10(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1992) *10(iii)(A) Capital Accumulation Plan (included in (incorporated Exhibit No. 10(a)) herein by reference to Exhibit 10(b) of the Annual Report on Form 10-K for fiscal year ended December 31, 1992) 44 Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- *10(iii)(A) Employee Lease Agreement dated May 7, 1992, (incorporated by and between National Bankshares, Inc. and herein by The National Bank of Blacksburg reference to Exhibit 10(c) of the Annual Report on Form 10-K for fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated Plan 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) 13(i) 2001 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not deemed to be filed as part of this Report on Form 10-K) 21(i) Subsidiaries of National Bankshares, Inc. 23.1 Consent of Yount, Hyde & Barbour, P.C. to incorporation by reference of independent auditor's report included in this Form 10-K, into registrant's registration statement on Form S-8. 23.2 Consent of KPMG LLP to incorporation by reference of independent auditors' report included in this Form 10-K, into registrant's registration statement on Form S-8. 99 Independent Auditor's Report of KPMG LLP on consolidated financial statements of National Bankshares, Inc. and subsidiaries for the year ended December 31, 1999.U.S.C. Section 1350 * Indicates a management contract or compensatory plan required to be filed herein. 4548