National Bankshares, Inc.
2002 Annual Report
National Bankshares, Inc. strives to be an exceptional community bank holding
company dedicated to providing shareholder value by offering financial services
to customers through subsidiary financial services to customers through
subsidiary financial institutions and affiliated companies in an efficient,
friendly, personalized, and cost-effective manner. We recognize that to do this,
our financial institutions must retain the ability to make decisions locally and
must actively participate in the communities they serve. We are committed to
offering competitive and fair employment opportunities and to maintaining the
highest standards in all aspects of our business.
Financial Highlights
$ In thousands, except per share data
2002 2001 2000
- ------------------------------------------------------------------------------
Net income $ 10,014 7,314 7,309
Basic and diluted net income per share 2.85 2.08 2.08
Cash dividends per share 0.97 0.86 0.85
Book value per share 20.82 18.59 17.04
Loans, net $ 404,247 394,042 355,795
Total securities 219,294 191,476 156,344
Total assets 684,935 644,623 593,497
Total deposits 608,271 576,618 530,648
Stockholders' equity 73,101 65,261 59,834
Graph of "Cash Dividends Per Share"
(dollars)
2000 2001 2002
- ---------------- --------------- ---------------
.85 .86 .97
Graph of "Book Value Per Share"
(dollars)
2000 2001 2002
- ---------------- --------------- ---------------
$17.04 $18.59 $20.82
Table of Contents
To Our Stockholders............................................................2
Selected Consolidated Financial Data...........................................4
Management's Discussion and Analysis...........................................5
Independent Auditor's Report..................................................13
Consolidated Financial Statements.............................................14
Notes to Consolidated Financial Statements....................................18
Selected Quarterly Data.......................................................37
Boards of Directors...........................................................38
Corporate Information.........................................................40
1
To Our Stockholders:
We are committed to community banking at National Bankshares, Inc. We
demonstrate this commitment every business day. Our subsidiary banks, The
National Bank and Bank of Tazewell County, have each been a strong presence in
their hometowns for more than a century. The banks have a long tradition of
exemplary corporate citizenship. Bank employees regularly take leadership roles
in civic, cultural, and charitable organizations, and the banks donate to many
worthy causes. As our two banks have expanded into new markets, our company's
civic involvement has followed. Whenever possible, we believe that bank office
managers should live in the area in which they do business. This allows them to
become personally familiar with the needs of their communities. And since their
customers are often also acquaintances from church or scouts, or neighbors, or
lifelong friends, our managers form long-term, personal relationships with the
people with whom they do business.
We know, however, that personal service is not enough. Our customers expect and
deserve service of the highest quality. We strive to provide this, with trained,
experienced, and dedicated employees at all levels of the organization. From the
newest teller, who completes rigorous training with excellent teller trainers,
to the loan officer with decades of experience, each of our employees
understands that the reputation of our company depends upon them doing their
very best every day. At National Bankshares and its subsidiaries, we hire good
people, and we support them with the training they need to do an outstanding
job.
Even though our business is built on the cornerstone of excellent personal
service, we believe that being committed to community banking also includes
offering our customers access to a full range of financial services utilizing
the most up-to-date technology. Many of our customers choose one or more
alternative methods of doing their banking. Those who wish to do so may access
their bank checking and savings accounts at ATM's, with debit cards, or by using
TeleBanc, our automated voice response system. The National Bank's customers
also have the option of worldwide access to their account information, account
transfers, and electronic bill payment by using Internet banking. Business
customers at both banks frequently take advantage of ACH electronic transfers to
automatically make payroll and other recurring payments.
As I mentioned, we think that community banking must include a full range of
financial services. Our customers should be able to stay in the National
Bankshares family for all of their financial needs. That is why we now offer
insurance and investments through National Bankshares Financial Services, Inc.
2
Both The National Bank and Bank of Tazewell County have Trust Departments to
assist customers with their trust, estate and financial planning needs. We issue
our own credit cards and debit cards, and our own employees are available
locally to answer merchants' and customers' questions and to resolve any
problems they might encounter.
Because National Bankshares and its subsidiaries is able to provide a full range
of financial services to our customers, and because they are free to choose from
a wide array of service delivery options, I believe that the future is bright
for community banking in general and for National Bankshares in particular. To
insure that future, The National Bank is building a new office in Downtown
Christiansburg, and we are looking forward to opening this summer. We have plans
for some exciting new bank products this year. The National Bank is currently in
the process of installing a new generation of host computer to support the core
banking operations at both banks. This will be followed later in the year by
enhancements to our computer network. This investment in hardware and software
will allow us to provide even better service to our customers. In the coming
year, we are looking forward to continuing and expanding our commitment to
community banking.
Although we are looking ahead to the future, I would like to take a moment to
share some highlights of 2002. As you know, the past year was a very good one
for National Bankshares, Inc. By taking advantage of the interest rate
environment to maximize net interest income, maintaining good levels of
non-interest income, and holding the line on non-interest expense, National
Bankshares, Inc. achieved record net income of over $10 million, an increase of
nearly 37% over 2001. We shared this success with our stockholders by increasing
cash dividends per share from $0.86 per share in 2001 to $0.97 per share in
2002. National Bankshares, Inc. ended the year with total assets of nearly $685
million up by almost 6.3% over total assets at December 31, 2001.
I would like to thank you, our stockholders, for your confidence and support. We
know that you share the commitment and enthusiasm of the directors and employees
of National Bankshares, Inc. and each of its subsidiaries to offering our
communities the very best in community banking.
Picture of /s/ James G. Rakes
"James G. Rakes"
James G. Rakes
Chairman of the Board
President and Chief Executive Officer
3
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data.
Years ended December 31,
2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Selected Interest income $ 42,747 45,527 38,358 33,603 31,828
Income Interest expense 15,764 22,771 18,163 14,203 13,928
Statement Net interest income 26,983 22,756 20,195 19,400 17,900
Data: Provision for loan losses 2,251 1,408 1,329 1,400 624
Noninterest income 5,712 5,204 4,082 3,512 3,174
Noninterest expense 17,427 16,953 12,876 11,868 11,061
Income taxes 3,003 2,285 2,763 2,556 2,591
Net income 10,014 7,314 7,309 7,088 6,798
Per Share Basic and diluted net income $ 2.85 2.08 2.08 1.96 1.79
Data: Cash dividends declared 0.97 0.86 0.85 0.80 0.74
Book value per share (1) 20.82 18.59 17.04 14.99 16.00
Selected Loans, net $ 404,247 394,042 355,795 291,562 236,578
Balance Sheet Total securities 219,294 191,476 156,344 137,492 166,754
Data at End Total assets 684,935 644,623 593,497 472,134 445,166
of Year: Total deposits 608,271 576,618 530,648 407,187 382,696
Stockholders' equity 73,101 65,261 59,834 52,723 58,503
Selected Loans, net $ 404,717 380,970 310,624 266,431 225,613
Balance Sheet Total securities 191,493 188,809 142,686 151,424 152,432
Daily Total assets 655,783 635,692 500,381 454,189 420,988
Averages: Total deposits 583,298 569,139 433,673 391,583 359,970
Stockholders' equity (1) 69,895 63,460 55,682 56,196 58,282
Selected Return on average assets 1.53% 1.15% 1.46% 1.56% 1.61%
Ratios Return on average equity (1) 14.33% 11.53% 13.13% 12.61% 11.66%
Dividend payout ratio 34.01% 41.29% 40.87% 39.70% 41.29%
Average equity to
average assets (1) 10.66% 9.98% 11.13% 12.37% 13.84%
(1) Includes the amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets in 1998.
4
Management's Discussion and Analysis
($ In Thousands, except per share data)
Performance Summary
Net income in 2002 for National Bankshares, Inc. (Bankshares) and its
wholly-owned subsidiaries, The National Bank of Blacksburg (NBB), Bank of
Tazewell County (BTC) and National Bankshares Financial Services (NBFS), (the
Company), was $10,014, an increase of $2,700 or 36.92% over the previous year.
This produced a return on average assets and a return on average equity of 1.53%
and 14.33%, respectively.
Net income for the Company for 2001 was $7,314, an increase of $5 or
0.07% over 2000. The return on average assets and return on average equity for
2001 were 1.15% and 11.53%, respectively. Basic and diluted net income per share
over the three-year period was $2.85 per share in 2002, compared to $2.08 in
2001 and 2000. The dividend payout ratio for 2002 was 34.01%, which compares to
41.29% in 2001 and 40.87% in 2000.
Graph of "Net Income"
($ in millions)
2000 2001 2002
- ---------------- --------------- ---------------
$7.3 $7.3 $10.0
Net Interest Income
Net interest income for 2002 was $26,983, an increase of $4,227 or
18.58% over 2001. This increase was primarily the result of the low interest
rate environment the Company experienced throughout all of 2002. The yield on
earning assets for 2002 was 7.27%, declining 63 basis points during the year.
During the same period, the cost to fund earning assets decreased by 127 basis
points. These combined to produce an increase in the net interest margin of 64
basis points. As can be seen by this data, the cost to fund earning assets
declined at a faster rate than the yield on earning assets.
While the current rate environment continues to be generally favorable
to the Company's overall profitability, it is the opinion of management that
current rate levels are not sustainable over a long period of time. It is
believed that, as the general economy recovers, interest rates can be expected
to increase to negate or control inflationary pressures. Rising interest rates
generally have a short to intermediate term adverse effect on the Company's net
interest income and profitability.
In the meantime, while interest rates remain at low levels, it is
expected that the Company's yield on earning assets will gradually decline as
older, higher rate loans and investments mature or are called. In particular,
longer-term investments purchased during the period to replace those matured or
called may ultimately have a negative impact on net interest income. As
indicated by the statement of cash flows, approximately $44,995 in securities
available for sale were purchased in 2002. These securities consisted
predominately of securities with maturities in excess of five years.
In purchasing these securities, the Company has increased the level of
interest rate risk in its balance sheet. While the securities have been
classified as available for sale, a future rising rate environment and the
accompanying decrease in asset value could make the sale of the securities
undesirable from a profitability perspective. (In addition, with callable
securities purchased during a period of low interest rate levels, the
expectation of the call feature being activated is somewhat diminished). Hence,
in a rising rate scenario the Company's ability to re-price these assets could
be limited and result in a negative impact on the Company's net interest margin.
Risk factors which affect interest rates and the general economy
include the pace and extent at which the economy recovers, the timing and extent
of interest rate increases, and other factors including, but not limited to,
future terrorist activities, potiential disruptions in oil supplies and
political problems in the Middle East.
Net interest income for 2001 was $22,756, an increase of $2,561 or
12.68%. The net interest margin for 2001 was 4.11%, a 42 basis point decrease
from 2000.
These results were caused in part by the rising interest rate
environment that existed throughout 2000, which steadily increased interest
expense until January 2001 when the Federal Reserve Bank initiated a series of
interest rate reductions to stimulate the faltering national economy. The
falling rate environment benefited the Company by the end of 2001.
Another factor that affected the interest rate margin was
acquisition activity. In late 2000, the Company purchased six branches from
AmSouth Bank. While the assumption of the interest expense was immediate, it was
not possible to channel the new funds immediately into the loan portfolio due to
economic conditions. Surplus funds, instead, were placed in the lower yielding
5
investment portfolio. Accordingly, interest expense grew at a faster rate than
interest income, adversely affecting the net interest margin.
Interest Rate Sensitivity
The Company considers interest rate risk to be a significant market risk
and has systems in place to measure the exposure of net interest income and fair
market values to movement in interest rates. Interest rate sensitivity analyses
provides management with information related to repricing opportunities, while
interest rate shock simulations indicate potential economic loss due to future
interest rate changes.
During 1999 and 2000, interest rates rose substantially. In
addition to the adverse effects on the net interest margin, the rising rates
reduced the Company's ability to respond to interest rate movements. At December
31, 2000, the Company's investment portfolio contained a substantial amount of
longer-term securities with call features. Due to the higher interest rate
levels, the securities were not called as anticipated. At the time, the net
unrealized losses made the sale of the securities impractical, thereby
restricting one of management's primary means of controlling the effects of
interest rate changes.
With the onset of the declining rate environment that began in
January 2001, both of the aforementioned problems began to abate. Interest
expense, which had been at high levels at the beginning of 2001, declined
rapidly and market values of the securities rebounded making the sale of the
securities feasible, if deemed necessary.
During 2002, the Company continued to benefit from the low interest
rate environment. While this favorable interest rate level is expected to
continue into 2003, it is not within management's ability to predict the timing
or extent of any future interest rate increases.
Risk factors and forward looking statements previously discussed
under "Net Interest Income" apply. As previously stated, the Company uses
simulation analysis to forecast its balance sheet and monitor interest rate
sensitivity. One test is a shock analysis that measures the effect of a
hypothetical, immediate and parallel shift in interest rates. The following
table shows the results of a rate shock and the effects on net income and return
on average assets and return on average equity projected at December 31, 2003.
For purpose of this analysis noninterest income and expenses are assumed
to be flat.
($ In thousands, except for percent data)
- --------------------- ------------------- -------------------- -----------------
Rate Shift Change In Net Return On Average Return On
( In basis points) Income Equity Average Assets
- --------------------- ------------------- -------------------- -----------------
300 (-) 3,927 11.56% 1.28%
200 (-) 2,507 13.27% 1.48%
100 (-) 1,239 14.78% 1.65%
(-) 100 1,193 17.61% 2.00%
(-) 200 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 the
simulation process, certain estimates and assumptions must be made. These
include, but are not limited to, asset growth, the mix of assets and
liabilities, rate environment, and local and national economic conditions. Asset
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 re-forecasting 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.
Provision and Allowance for Loan Losses
The adequacy of the allowance for loan losses is based on management's
judgment and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general economic
conditions.
An internal credit review department performs pre-credit analyses of
6
large credits and also conducts credit review activities that provide management
with an early warning of asset quality deterioration.
The internal credit review department also prepares regular analyses of
the adequacy of the provision for loans losses. These analyses include
calculations based upon a mathematical formula that considers identified
potential losses and makes pool allocations for historical losses for various
loan types. In addition an amount is allocated based upon such factors as
changing trends in the loan mix, the effects of changes in business conditions,
the effects of any changes in loan policies, and the effects of competition and
regulatory factors on the loan portfolio. The internal credit review department
has determined that the Company's provision for loan losses is sufficient.
Loan loss and other industry indicators related to asset quality are
presented in the Loan Loss Data table.
Loan Loss Data Table
($ In thousands)
2002 2001 2000
------------- --------------- ------------
Provision for loan losses $ 2,251 1,408 1,329
Net charge-offs to average
net loans 0.35% 0.27% 0.21%
Allowance for loan losses to
loans, net of unearned
income and deferred fees 1.24% 1.07% 1.08%
Allowance for loan losses to
nonperforming loans 1,768.06% 1,206.78% 4,415.91%
Allowance for loan losses to
nonperforming assets 617.21% 756.11% 618.79%
Nonperforming assets to
loans, net of unearned
income and deferred fees,
plus other real estate
owned 0.20% 0.14% 0.17%
Nonaccrual loans $ 288 354 88
Restructured loans --- --- ---
Other real estate owned, net 537 211 540
-------------- -------------- ------------
Total nonperforming assets $ 825 565 628
============== ============== ============
Accruing loans past due 90
days or more $ 977 980 1,321
============== ============== ============
Note: Nonperforming loans include nonaccrual loans and restructured loans, but
do not include accruing loans 90 days or more past due.
Several factors contributed to the Company's decision to increase the
provision for loan losses in 2002. While overall asset quality remained
satisfactory in 2002, the level of exposure to loss increased, particularly in
the loans to individuals' category. In addition, much of the growth in 2002 was
in the commercial loan category, which increased the Company's exposure to
losses resulting from defaults in large dollar loans. While the number of such
defaults would only constitute a small number of loans, the sizable dollar
amount of the individual credits tends to increase the possibility of greater
loss. Declining economic conditions in the Company's market area have also
contributed to a higher net charge-off ratio which rose from .26% in 2000 to
.27% in 2001 and .35% in 2002. In addition, total nonperforming assets were at
$825 on December 31, 2002, an increase of 46% from 2001. Declining economic
conditions in the Company's market area have also contributed to a higher net
charge-off ratio which rose from .26% in 2000 to .27% in 2001 and .35% in 2002.
In addition total nonperforming assets were at $825 on December 31, 2002, an
annual increase of 46% from 2001.
Nonperforming assets at December 31, 2001 were $565, a decrease of $63
or 10.03% from 2000. Net charge-offs to average net loans for 2001 was 0.27%.
The provision for loan losses for 2001 was $1,408, an increase of $79 or 5.94%
from 2000.
While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
existing and future problem assets will be resolved. Changing economic
conditions, the timing and extent of changes, and the ultimate impact on the
Company's asset quality is not within management's ability to predict with any
degree of precision. In addition, precise loss predictions may be difficult to
determine because of the complex circumstances that surround troubled debts.
Noninterest Income
Noninterest income for 2002 was $5,712, an increase of $508 or 9.76%.
The largest increase occurred in realized gains and losses on securities and
other income categories. Non-recurring income described below accounted for much
of the increase.
Noninterest income for 2001 was $5,204, an increase of $1,122 or 27.49%
from 2000. The increase for the most part was due to the acquisition of the six
AmSouth Bank branches in late 2000 and a seventh branch from First Union
National Bank in the first quarter of 2001.
7
The level of service charges on deposits is driven by demand deposit
volume, types of accounts opened, service charge rates in effect, the level of
charges such as overdraft fees, and the fee waiver policy for these fees.
Service charges on deposit accounts were $2,229 for 2002, a decrease of
$17 or 0.76% from 2001. There were no unusual factors that had a material impact
on this category in 2002.
Service charges on deposit accounts for 2001 were $2,246, an increase of
$563 or 33.45% from 2000. The increase was due primarily to the purchase of six
branches in late 2000 and a single purchase in the first quarter of 2001. An
increase in fee schedules also contributed to the increase, though to a lesser
extent.
Trust income for 2002 was $968, a decrease of $123 or 11.27% from 2001.
Trust income is dependent upon market conditions as well as the types of
accounts being handled at any given point in time. Market conditions, which
directly affect the value of trust assets managed and in turn trust fees, were
less favorable in 2002. Management believes that current market conditions will
continue to have a negative impact on trust fees for the foreseeable future.
In 2001 trust income was $1,091, an increase of $206 or 23.28% over
2000. This increase was mostly due to a higher level of estate business. Due to
its nature, estate business volume and the related income is not within
management's ability to predict and may fluctuate considerably from time to
time.
Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees, and
over-limit charges. Given the highly competitive market, which limits the amount
of set charges, revenue increases result from growth in the number of merchant
accounts processed and increases in the number of customer credit and debit card
accounts.
Credit card income for 2002 was $1,409, an increase of $182 or 14.83%
when compared to 2001, primarily due to increased volume. A portion of this
increase was due to reduced charges from the Company's credit card processor.
These charges are tiered and, having reached the next higher volume level, the
charges decreased accordingly. Increased income in this area was also in part
due to volume created by the addition of new merchants.
Credit card fees for 2001 were $1,227, an increase of $215 or 21.25%
over 2000. This increase was due in part to the purchase of six branches, which
expanded the company's service area and also to the introduction of the
Company's debit card service to BTC's trade area.
Other Income
Other income for the year ended December 31, 2002 was $500, an increase
of $170 or 51.52%. For 2002 other income contained several non-recurring items.
Included in this was nontaxable proceeds from a life insurance policy, which was
approximately $36 and a legal expense recovery of $14 from a prior year. Other
income also includes commissions from the sale of securities and insurance,
which totaled approximately $239 in 2002 and $99 in 2001.
Other Income for 2001 was $330, up 127.6% over 2000. Of this increase,
approximately $99 was due to income derived from securities and insurance
commissions generated by the Company's non-bank subsidiary National Bankshares
Financial Services.
Net realized gains and losses on securities was $346, an increase of
$342 over 2001. In the second and third quarter of 2002, the Company sold
investments at a total gain of approximately $335. The remainder of the net
increase was due to called securities and routine equity adjustments on certain
investments.
Net realized gains for 2001 of $4 were primarily due to the write down
of the Company's investment in two limited liability companies established for
the sale of title insurance and insurance services, offset by the call of a
single bond in late 2001.
Noninterest Expense
Noninterest expense for 2002 was $17,427, an increase of $474 or 2.80%
from 2001. The largest increase was in the salaries and employee benefits
category, which increased $827 or 10.23%. Net costs of other real estate owned
increased to $145 or 16.00%. These items are described in further detail below.
Noninterest expense for 2001 was $16,953, an increase of $4,077 or
31.66%. In November of 2000, the Company purchased six AmSouth Bank branches.
Since the acquisition was in late 2000, the impact on 2000 was minimal, with the
full effect not felt until 2001. Categories such as salaries and benefits,
occupancy, intangibles and other operating expense all increased due to these
acquisitions. Noninterest expense for 2001 also increased with the purchase of a
branch in March of 2001.
Salaries and employee benefits, as previously mentioned, increased at a
rate higher than average for the company for several reasons. In the first
quarter of 2001, the Company's BTC affiliate acquired a branch office in
Bluefield, Virginia. Salaries and employee benefits expense for this office were
8
included for nine months in 2001, as opposed to twelve months for 2002. For the
first time since it became a participating employer in the National Bankshares,
Inc. the Company's BTC affiliate had a contribution expense of $120 to the ESOP
in 2002. Additional costs associated with employee health insurance, executive
compensation and other benefits also experienced increases.
Occupancy expense was $1,692, a decrease from 2001 of $23. While this
category included new expenses in part associated with acquisition activity
previously mentioned, efforts to restrain expenditures produced an overall
decrease.
In the second quarter of 2002, the Company's NBB affiliate announced its
intent to open a new branch office in Christiansburg, Virginia. The office is
expected to open in the second quarter of 2003.
The Company's BTC affiliate consolidated two of its Bluefield, Virginia
offices into a single office during the fourth quarter of 2002.
Occupancy expense for 2001 was $1,715, an increase of $400 or 30.42%
over the year 2000. Acquisition activity accounted for a majority of the
increase.
Data processing expenses decreased by $247 or 18.39% when 2002 and 2001
are compared. This decline was primarily due to a reduction in maintenance costs
and the absence of conversion costs associated with the 2001 branch acquisition
that were previously discussed.
In 2002 the Company was advised by its host computer hardware provider
that operating system support would be terminated by the end of 2004. Given the
importance of this area, management initiated a project to determine the
appropriate course of action. Management has elected to upgrade its host
computer system in 2003.
Data processing expenses for 2001 were $1,343, an increase of $412 or
44.25% over 2000. The acquisition of six AmSouth Bank branches late in 2000 and
the purchase of one branch in March 2001 were the primary contributors to the
increase.
Credit card processing expenses were up $32 for 2002. An increase in
volume offset by two nonrecurring items totaling $52 combined to produce the
increase. Of the two nonrecurring items, one represented a refund of certain
processing charges. The second, for $10, consisted of a signing bonus connected
with acquiring a new vendor.
Credit card processing costs for 2001 were $1,004, a decrease of $21 or
2.05% from 2000. The cost decrease was primarily due to a combination of
factors. The previously mentioned branch acquisitions and the introduction of
debit card services at the company's BTC affiliate added to this expense. A
one-time loss experienced in 2000, offset the volume related increases to
produce a net decrease.
Expenses related to other real estate owned were $145 for 2002. The
primary cause of this increase was a $75 write-down of certain properties. These
properties had been held for a period of more than ten years. While several
sales had taken place over the past few years, they could best be characterized
as somewhat slow. This effort, which was designed to accelerate sales of the
properties, was in large part successful.
The net cost of other real estate owned includes expenses to acquire,
maintain and dispose of foreclosed properties. Net gains and losses on
disposition are also included. During 2001 these expenses were $125, an increase
of $42 or 50.60% over 2000.
Other operating expenses were $3,592 for 2002, a decrease of $175 or
4.65% from 2001 Other operating expenses for 2001 were $3,767, an
increase of $834 or 28.44%. The majority of the
increase was due to acquisition activities, which as expected, increased various
categories such as telephone, courier service, and stationery and supplies.
Income Taxes
Income tax expense increased in 2002 due to the increase in net income
and was offset to a degree by a higher level of investment in tax free
obligations.
Tax exempt interest income continues to be the primary difference
between the "expected" and reported income tax expense. The Company's effective
tax rates for 2002, 2001 and 2000 were 23.07%, 23.80% and 27.43%, respectively.
See Note 10 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.
Effects of Inflation
The Company's consolidated statements of income generally reflect the
effects of inflation. Since interest rates, loan demand, and deposit levels are
related to inflation, the resulting changes are included in net income. The most
significant item, which does not reflect the effects of inflation, is
depreciation expense, because historical dollar values used to determine this
expense do not reflect the effect of inflation on the market value of
depreciable assets after their acquisition.
9
Balance Sheet
Total assets for the Company at December 31, 2002 were $684,935. This
represents an increase of $40,312 or 6.25% when compared to 2001. Total daily
average assets were $655,783 for 2002, which compares to $635,692 for 2001.
Growth for 2002 was from the development of the Company's existing franchise as
there were no acquisitions in 2002.
Total assets for the Company were $644,623 at December 31, 2001. This
represents an increase of $51,126 or 8.61% over 2000. This increase was
primarily due to the acquisition of a branch from First Union National Bank in
March 2001. The transaction included the acquisition of approximately $34,000 in
deposits and approximately $9,200 in loans.
Graph of "Total Assets"
($ in millions)
2000 2001 2002
- ---------------- --------------- ---------------
$593.5 $644.6 $684.9
Loans
Loans net of unearned income and deferred fees grew by $11,025 or 2.77%
during 2002. As can be seen by the balance sheet, the composition of the loan
portfolio shifted toward the commercial category during 2002. Loans to
individuals have experienced a moderate decline. It is not known to what extent
loans to individuals will ultimately decline or when growth in this area will
resume. Loans to individuals generally produce higher yields than other types of
loans. A prolonged and substantial run-off of these loans could have a
measurable adverse impact on the Company's net interest margin.
Loans net of unearned income and deferred fees grew by $38,633 or 10.74%
in 2001. Of this amount, approximately $9,200 was due to the First Union
National Bank branch purchase referred to previously. Excluding purchased loans,
the Company experienced moderately strong growth in 2001.
The Company engages in the origination and sale of mortgage loans in the
secondary market. In 2002 and 2001, the Company originated $36,915 and $28,247,
respectively, and sold $37,214 and $27,102, respectively, of mortgage loans.
Graph of "Net Loans"
($ in millions)
2000 2001 2002
- ---------------- --------------- ---------------
$355.8 $394.0 $404.2
Securities
Securities available for sale at December 31, 2002 were $119,734, an
increase of $31,067 or 35.04% over 2001. Securities held to maturity totaled
$99,560 at December 31, 2002. These securities decreased by $3,249 or 3.16% from
the totals at December 31, 2001.
As can be seen in the consolidated statement of cash flows, $44,995 was
re-invested in securities available for sale and $16,953 in securities held to
maturity. Maturities for bonds purchased were generally longer term, with
maximization of yields being the primary objective.
Securities available for sale at December 31, 2001 were $88,667. This
represents a decrease of $35,118 or 28.37% from December 31, 2000. Securities
held to maturity increased $70,250 or 215.76% when the two periods are compared.
The increased emphasis on held to maturity represented an effort to manage the
level of unrealized gains and losses, which had fluctuated substantially in the
prior three years. New volume was the result of the branch acquisitions
previously discussed.
At December 31, 2002 and 2001, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.
Deposits
Total deposits at December 31, 2002 were $608,271, an increase of
$31,653 or 5.49% from December 31, 2001. Noninterest-bearing demand deposits
grew by 3.18%, while interest-bearing demand deposits grew by 23.08%. Savings
deposits increased by 0.26%, with time deposits declining by 0.54%. Management
believes that the increase in interest-bearing demand deposits is in part due to
customers' expectations of higher interest rates in the near to intermediate
term, which has created a reluctance to commit to longer term deposit
instruments. If this trend continues, it would have the effect of making the
Company increasingly liability sensitive, which in a rising rate scenario could
negatively affect the net interest margin.
At December 31, 2001, total deposits were $576,618, an increase of
$45,970 or 8.66% over December 31, 2000. Of this increase, approximately $34,000
was due to the purchase of the First Union National Bank branch referred to
previously.
10
Derivatives and Market Risk Exposures
The Company is not a party to derivative financial instruments with
off-balance sheet risks such as futures, forwards, swaps, and options. The
Company is a party to financial instruments with off-balance sheet risks such as
commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of its
customers. See note 14 of Notes to Consolidated Financial Statements for
additional information relating to financial instruments with off-balance sheet
risk. Management does not plan any future involvement in high risk derivative
products. The Company has investments in mortgage-backed securities, principally
GNMA's, with a fair value of approximately $26,199, which includes $2,006 of
structured notes. In addition, the Company has investments in
non-mortgage-backed structured notes with fair value of approximately $2,041.
See Note 3 of Notes to Consolidated Financial Statements for additional
information relating to securities.
The Company's securities and loans are subject to credit and interest
rate risk, and its deposits are subject to interest rate risk. Management
considers credit risk when a loan is granted and monitors credit risk after the
loan is granted. The Company maintains an allowance for loan losses to absorb
losses in the collection of its loans. See Note 5 of Notes to Consolidated
Financial Statements for information relating to the allowance for loan losses.
See Note 15 of Notes to Consolidated Financial Statements for information
relating to concentrations of credit risk. The Company has an asset/liability
program to manage its interest rate risk. This program provides management with
information related to the rate sensitivity of certain assets and liabilities
and the effect of changing rates on profitability and capital accounts. While
this planning process is designed to protect the Company over the long-term, it
does not provide near-term protection from interest rate shocks, as interest
rate sensitive assets and liabilities do not, by their nature, move up or down
in tandem in response to changes in the overall rate environment. The Company's
profitability in the near term may be temporarily affected either positively by
a falling interest rate scenario or negatively by a period of rising rates. See
Note 16 of Notes to Consolidated Financial Statements for information relating
to fair value of financial instruments and comments concerning interest rate
sensitivity.
Liquidity
Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demand or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities, and short-term
borrowings. The Company also has available a line of credit with the Federal
Home Loan Bank to provide for liquidity needs. The Company maintained an
adequate liquidity level during 2002 and 2001.
Cash flows from operating activities for 2002 were $14,244. The
principal source of cash was net income.
Net cash used in investment activities was $43,013. While the majority
of the called and maturing securities were re-invested in the securities
available for sale category, these funds may not be available in the future to
meet liquidity needs. Given the low interest rate environment currently being
experienced, a rising rate environment would tend to erode securities values
making their sale undesirable from a profitability perspective. A rising rate
scenario would further inhibit the activation of any call features. The company
experienced a similar situation in the last period of rising rates that occurred
in the 1999 and 2000 time periods. (See additional comments under "Interest Rate
Sensitivity").
Cash provided by financing activities was $28,792 compared to $39,133 in
2001. The majority of the difference between the two years was in deposits
purchased, which totaled $29,862 in 2001 and none in 2002. Time deposits
decreased by $1,743 in 2002 and $38,490 in 2001. Other deposits increased
$33,396 in 2002. Comments made under "Deposits" apply.
Net cash from operating activities for 2001 was $10,017, up from $9,691
in 2000.
Cash used in investing activities was $47,987, down from $113,774 in
2000. Purchases of loans and federal funds sold declined substantially from
2000. This corresponded to a substantial increase in cash provided by financing
activities in 2000, which was due to acquisition activity.
The Company's liquidity position remained satisfactory throughout 2001.
The acquisition of the First Union National Bank branch in March 2001 further
enhanced liquidity, which was already in satisfactory condition following the
late 2000 acquisition of the AmSouth branches. Securities purchases accounted
for the largest use of funds, with purchased deposits and an increase in the
other deposit category the primary sources.
Management is not aware of any other commitments or events that will
result in or are reasonably likely to result in a material and adverse decrease
in liquidity.
Capital Resources
Total shareholders' equity at December 31, 2002 was $73,101, an increase
of $7,840 or 12.01%. Total average capital to total average assets was 10.66%
for 2002, which compares to 9.98% in 2001. Of the increase, net income accounted
for $10,014, offset by dividends to shareholders in the amount of $3,406. Net
unrealized gains and losses from securities available for sale accounted for the
11
remainder of the increase. There were no shares repurchased by the Company in
2002. Management was authorized to repurchase up to 50,000 shares in 2002 as
deemed appropriate considering market conditions. The dividend payout ratio for
2002 was 34.01% and 41.29% for 2001.
Total stockholders' equity increased by $5,427 or 9.07% for the year
2001. Growth was the result of net income of $7,314, offset by dividends to
shareholders of $3,020. Stock in the amount of $8 was repurchased.
Banks are required to apply percentages to various assets, including
off-balance sheet assets, to reflect their perceived risk. Regulatory defined
capital is divided by risk weighted assets in determining the banks' risk-based
capital ratios. No regulatory authorities have advised NBI, NBB or BTC of any
specific leverage ratios applicable to them. NBI, NBB and BTC's capital adequacy
ratios exceed regulatory requirements and provide added flexibility to take
advantage of business opportunities as they arise. See Note 11 of Notes to
Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for information
relating to recent accounting pronouncements.
Branch Acquisitions
In a move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it would acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition involved the purchase of
approximately $34,000 in deposits and $9,200 in loans. The acquisition was
completed in the first quarter of 2001.
Common Stock Information and Dividends
National Bankshares, Inc.'s common stock is traded on the Nasdaq
SmallCap Market under the symbol "NKSH". As of December 31, 2002, there were
1,024 record stockholders of Bankshares common stock. The following is a summary
of the market price per share and cash dividend per share of the common stock of
National Bankshares, Inc. for 2002 and 2001.
Common Stock Market Prices
2002 2001 Dividends per share
--------------- --------------- --------------- --------------- --------------- ---------------
High Low High Low 2002 2001
--------------- --------------- --------------- --------------- --------------- ---------------
First Quarter $ 23.00 20.03 20.25 18.00 --- ---
Second Quarter 30.00 22.00 20.80 17.80 0.46 0.43
Third Quarter 28.45 26.00 24.60 20.00 --- ---
Fourth Quarter 31.15 26.75 23.00 20.10 0.51 0.43
NBI's primary source of funds for dividend payments is dividends from
its subsidiaries, NBB and BTC. Bank regulatory agencies restrict dividend
payments of the subsidiaries, as more fully disclosed in Note 11 of Notes to
Consolidated Financial Statements.
12
Independent Auditor's Report
To the Board of Directors and Stockholders
National Bankshares, Inc.
Blacksburg, Virginia
We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Bankshares,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years ended December 31, 2002, 2001 and
2000 in conformity with accounting principles generally accepted in the United
States of America.
Winchester, Virginia
January 23, 2003
13
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands, except share data. December 31, 2002 and 2001.
2002 2001
----------- -----------
Assets Cash and due from banks $ 12,316 12,293
Interest-bearing deposits 18,818 15,510
Federal funds sold 1,724 1,080
Securities available for sale, at fair value 119,734 88,667
Securities held to maturity (fair value approximates
$103,187 at December 31, 2002 and $103,234 at
December 31, 2001) 99,560 102,809
Mortgage loans held for sale 846 1,145
Loans:
Real estate construction loans 22,294 19,573
Real estate mortgage loans 82,193 77,339
Commercial and industrial loans 209,368 189,764
Loans to individuals 96,762 113,413
----------- -----------
Total loans 410,617 400,089
Less unearned income and deferred fees (1,278) (1,775)
----------- -----------
Loans, net of unearned income and deferred fees 409,339 398,314
Less allowance for loan losses (5,092) (4,272)
----------- -----------
Loans, net 404,247 394,042
----------- -----------
Premises and equipment, net 9,938 10,132
Accrued interest receivable 4,290 4,917
Other real estate owned 537 211
Intangible assets and goodwill, net 10,912 11,866
Other assets 2,013 1,951
----------- -----------
Total assets $ 684,935 644,623
=========== ===========
Liabilities and Noninterest-bearing demand deposits $ 74,032 71,751
Stockholders' Interest-bearing demand deposits 165,216 134,230
Equity Savings deposits 48,956 48,827
Time deposits 320,067 321,810
----------- -----------
Total deposits 608,271 576,618
----------- -----------
Other borrowed funds 748 203
Accrued interest payable 700 1,101
Other liabilities 2,115 1,440
----------- -----------
Total liabilities 611,834 579,362
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding,
3,511,377 shares 8,778 8,778
Retained earnings 62,525 55,917
Accumulated other comprehensive income, net 1,798 566
----------- -----------
Total stockholders' equity 73,101 65,261
----------- -----------
Total liabilities and stockholders equity $ 684,935 644,623
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
14
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
$ In thousands, except per share data. Years ended December 31, 2002, 2001 and
2000.
2002 2001 2000
------------ ------------- -------------
Interest Interest and fees on loans $ 32,420 33,456 28,326
Income Interest on federal funds sold 42 652 338
Interest on interest-bearing deposits 276 577 689
Interest on securities - taxable 5,490 7,501 6,760
Interest on securities - nontaxable 4,519 3,341 2,245
------------ ------------- -------------
Total interest income 42,747 45,527 38,358
------------ ------------- -------------
Interest Interest on time deposits of $100,000 or more 3,470 4,605 3,455
Expense Interest on other deposits 12,289 18,158 14,080
Interest on borrowed funds 5 8 628
------------ ------------- -------------
Total interest expense 15,764 22,771 18,163
------------ ------------- -------------
Net interest income 26,983 22,756 20,195
Provision for loan losses 2,251 1,408 1,329
------------ ------------- -------------
Net interest income after provision for loan losses 24,732 21,348 18,866
------------ ------------- -------------
Noninterest Service charges on deposit accounts 2,229 2,246 1,683
Income Other service charges and fees 260 306 348
Credit card fees 1,409 1,227 1,012
Trust income 968 1,091 885
Other income 500 330 145
Realized securities gains, net 346 4 9
------------ ------------- -------------
Total noninterest income 5,712 5,204 4,082
------------ ------------- -------------
Noninterest Salaries and employee benefits 8,912 8,085 6,360
Expense Occupancy and furniture and fixtures 1,692 1,715 1,315
Data processing and ATM 1,096 1,343 931
Credit card processing 1,036 1,004 1,025
Intangible assets and goodwill amortization 954 914 229
Net costs of other real estate owned 145 125 83
Other operating expenses 3,592 3,767 2,933
------------ ------------- -------------
Total noninterest expense 17,427 16,953 12,876
------------ ------------- -------------
Income before income taxes 13,017 9,599 10,072
Income tax expense 3,003 2,285 2,763
------------ ------------- -------------
Net income $ 10,014 7,314 7,309
============ ============= =============
Basic and diluted net income per share $ 2.85 2.08 2.08
============ ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
15
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
$ In thousands, except per share data.
Accumulated Other
Common Retained Comprehensive Income Comprehensive
Stock Earnings (Loss) Income Total
----------- ----------- -------------------- --------------- -----------
Balance at December 31, 1999 $ 8,792 47,384 (3,453) 52,723
Net income --- 7,309 --- 7,309 7,309
Other comprehensive income:
Unrealized holding gains on
available for sale securities net
of deferred taxes of $1,486 --- --- --- 2,884 ---
Less: reclassification adjustment,
net of income taxes of $3 --- --- --- (6) ---
---------------
Other comprehensive income, net of
tax of $1,483 --- --- 2,878 2,878 2,878
---------------
Total comprehensive income net of
tax of $4,246 --- --- --- 10,187 ---
===============
Common stock repurchased (12) (77) --- (89)
Cash dividends ($0.85 per share) --- (2,987) --- (2,987)
----------- ----------- -------------------- ------------
- -------------------------------------------------------------------------------------------------------------------
Balance at Decemeber 31,2000 $ 8,780 51,629 (575) 59,834
Net Income --- 7,314 --- 7,314 7,314
Other comprehensive income:
Unrealized holding gains on
available for sale securities net
of deferred taxes of $588 --- --- --- 1,144 ---
Less: reclassification adjustment,
net of income taxes of $1 --- --- --- (3) ---
---------------
Other comprehensive income, net of
tax of $587 --- --- 1,141 1,141 1,141
---------------
Total comprehensive income, net of
tax of $2,872 --- --- --- 8,455 ---
===============
Common stock repurchased (2) (6) --- (8)
Cash dividends ($0.86 per share) --- (3,020) --- (3,020)
----------- ----------- -------------------- ------------
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 8,778 55,917 566 65,261
Net income --- 10,014 --- 10,014 10,014
Other comprehensive income:
Unrealized holding gains on
available for sale securities net
of deferred, taxes of $948 --- --- --- 1,841 ---
Less: reclassification adjustment,
net of income taxes of $118 --- --- --- (228) ---
Minimum pension liability
adjustment, net of deferred taxes
of $235 --- --- --- (381) ---
Other comprehensive income, net of
tax of $596 --- --- 1,232 1,232 1,232
---------------
Total comprehensive income --- --- --- 11,246 ---
===============
Cash dividend ($0.97 per share) --- (3,406) --- (3,406)
----------- ------------
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 8,778 62,525 1,798 73,101
=========== =========== ==================== ============
The accompanying notes are an integral part of these consolidated financial
statements.
16
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years Ended December 31, 2002, 2001 and 2000.
2002 2001 2000
---------- --------- ----------
Cash Net income $ 10,014 7,314 7,309
Flows Adjustment to reconcile net income to net cash
from provided by operating activities:
Operating Provision for loan losses 2,251 1,408 1,329
Activities (Benefit) from deferred income taxes (551) (166) (253)
Depreciation of premises and equipment 977 1,106 1,015
Amortization of intangibles 954 914 229
Amortization of premiums and accretion of
discounts, net 392 367 132
(Gains) losses on sale and calls of
securities available for sale, net (331) (4) 4
(Gains) on calls of securities held to
maturity, net (15) --- (13)
Losses and writedowns on other real estate
owned 87 62 26
Originations of mortgage loans held for sale (36,915) (28,247) (20,129)
Sales of mortgage loans held for sale 37,214 27,102 20,358
(Gains) losses on sale of fixed assets (11) (2) (4)
Net change in:
Accured interest receivable 627 132 (1,035)
Other assets (34) 235 (258)
Accured interest payable (401) (437) 887
Other liabilities (14) 233 94
---------- --------- ----------
Net cash provided by operating activities 14,244 10,017 9,691
---------- --------- ----------
Cash Net change in federal funds sold (644) 28,010 (26,290)
Flows Net change in interest-bearing deposits (3,308) (1,931) (4,360)
from Proceeds from repayments of mortgage-backed
Investing securities available for sale 813 3,482 1,558
Activities Proceeds from sales of securities available for sale 11,042 --- 935
Proceeds from calls, maturities, and principal
repayments of securities available for sale 4,656 58,403 7,732
Proceeds from calls, maturities, and principal
repayments of securities held to maturity 20,017 24,160 3,192
Purchases of securities available for sale (44,995) (25,209) (15,914)
Purchases of securities held to maturity (16,953) (94,602) (12,117)
Purchases of loan participations (19,440) (4,296) 2,759)
Collections of loan participations 3,981 4,702 3,768
Loans purchased, including premium --- (9,255) (42,187)
Loan originations and principal collections, net 2,190 (31,740) (24,869)
Proceeds from disposal of other real estate owned 255 1,095 271
Recoveries on loans charged off 145 106 95
Additions to premises and equipment (805) (921) (2,839)
Proceeds from sale of premises and equipment 33 9 10
---------- --------- ----------
Net cash used by investing activities (43,013) (47,987) (113,774)
---------- --------- ----------
Cash Deposits acquired, net of premium --- 29,862 85,944
Flows Net change in time deposits (1,743) (38,460) 40,031
from Net change in other deposits 33,396 50,826 (10,807)
Financing Net change in other borrowed funds 545 (67) (10,190)
Activities Cash dividends paid (3,406) (3,020) (2,987)
Common stock repurchased on --- (8) (89)
---------- --------- ----------
Net cash provided by financing activities 28,792 39,133 101,902
---------- --------- ----------
Net change in cash and due from banks 23 1,163 (2,181)
Cash and due from banks at beginning of year 12,293 11,130 13,311
---------- --------- ----------
Cash and due from banks at end of year $ 12,316 12,293 11,130
========== ========= ==========
Supplemental Interest paid on deposits and borrowed funds $ 16,165 23,208 17,276
Disclosures of Income taxes paid 3,414 2,383 2,958
Cash Flow
Information
Supplemental Loans charged against the allowance for loan losses 1,576 1,129 770
Disclosures Loans transferred to other real estate owned 668 828 390
of Noncash Unrealized gain on securities available for sale 2,444 1,728 4,361
Activities Minimum pension liability adjustment 689 --- ---
The accompanying notes are an integral part of these consolidated financial
statements.
17
Notes to Consolidated Financial Statements
$ In thousands, except share data and per share data.
Note 1: Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of National
Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, the National
Bank of Blacksburg (NBB), Bank of Tazewell County (BTC), and National Bankshares
Financial Services (NBFS), (the Company). All significant intercompany balances
and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The following is a summary of the more
significant accounting policies.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks.
Securities
Debt securities that management has the positive intent and ability to
hold to maturity are classified as "held to maturity" and recorded at
amortized cost. Securities not classified as held to maturity or trading,
including equity securities with readily determinable fair values, are
classified as "available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income. The Company has no securities classified as trading
securities at December 31, 2002 or 2001.
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the fair
value of held to maturity and available for sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded on
the trade date and are determined using the specific identification method.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value on an individual loan
basis. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
Loans
The Company, through its banking subsidiaries, grants mortgage,
commercial, and consumer loans to customers. A substantial portion of the
loan portfolio is represented by mortgage loans. The ability of the
Company's debtors to honor their contracts is dependent upon the real estate
and general economic conditions in the Company's market area.
Loans that management has the intent and ability to hold for the
foreseeable future, or until maturity or payoff, generally are reported at
their outstanding unpaid principal balances adjusted for the allowance for
loan losses and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the credit is well-secured
and in process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or chargedoff at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash-basis or cost-recovery method
until qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
18
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience; the nature,
volume, and risk characteristics of the loan portfolio; adverse situations
that may affect the borrower's ability to repay; estimated value of any
underlying collateral; and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation is charged to expense over the estimated useful
lives of the assets on the straight-line basis. Depreciable lives include 40
years for premises, 3-10 years for furniture and equipment, and 5 years for
computer software. Costs of maintenance and repairs are charged to expense
as incurred and improvements are capitalized.
Other Real Estate
Real estate acquired through, or in lieu of, foreclosure is held for
sale and is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in other
operating expenses.
Intangible Assets
Included in other assets are deposit intangibles of $10,642 and $11,559
at December 31, 2002 and 2001, respectively, and goodwill of $270 and $307
at December 31, 2002 and 2001, respectively. Deposit intangibles are being
amortized on a straight-line basis over a ten or fifteen-year period and
goodwill is being amortized on a straight-line basis over a fifteen-year
period.
Stock-Based Compensation
At December 31, 2002, the Company had a stock-based employee
compensation plan which is described more fully in Note 9. The company
accounts for this plan under the recognition and measurement principles of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income, as all options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share if the company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
19
Years Ended December 31,
----------------------------------------------
2002 2001 2000
(In thousands, except per share data)
Net income, as reported $ 10,014 $7,314 $7,309
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards. (23) (10) (2)
-------------- ---------------- --------------
Pro forma net income $ 9,991 $7,304 $7,307
============== ================ ==============
Earnings per share:
Basic-as reported $ 2.85 $2.08 $2.08
============== ================ ==============
Basic-pro forma $ 2.85 $2.08 $2.08
============== ================ ==============
Diluted-as reported $ 2.85 $2.08 $2.08
============== ================ ==============
Diluted-pro forma $ 2.84 $2.08 $2.08
============== ================ ==============
Pension Plan
The Company sponsors a defined benefit pension plan, which covers
substantially all full-time officers and employees. The benefits are based
upon length of service and a percentage of the employee's compensation
during the final years of employment. Pension costs are computed based upon
the provisions of SFAS No. 87. The Company contributes to the pension plan
amounts deductible for federal income tax purposes.
Income Taxes
Deferred income tax assets and liabilities are determined using the
balance sheet method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet
assets and liabilities and gives current recognition to changes in tax rates
and laws.
Trust Assets and Income
Assets (other than cash deposits) held by the Trust Departments in a
fiduciary or agency capacity for customers are not included in the
consolidated financial statements since such items are not assets of the
Company. Trust income is recognized on the accrual basis.
Earnings Per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential common shares that
may be issued by the Company relate solely to outstanding stock options, and
are determined using the treasury stock method.
The following shows the weighted average number of shares used in
computing earnings per share and the effect on the weighted average number
of shares of dilutive potential common stock. Potential dilutive common
stock had no effect on income available to common shareholders.
2002 2001 2000
------------------ ------------------ -----------------
Average number of common shares outstanding 3,511,377 3,511,380 3,514,586
Effect of dilutive options 5,712 1,216 ---
------------------ ------------------ -----------------
Average number of common shares outstanding
used to calculate diluted earnings per share 3,517,089 3,512,596 3,514,586
================== ================== =================
20
In 2002, 2001 and 2000, stock options representing 9,750, 4,125 and
8,265 shares, respectively, were not included in the computation of diluted
net income per share because to do so would have been anti-dilutive.
Advertising
The Company practices the policy of charging advertising costs to
expenses as incurred.
Use of Estimates
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term
relate to the determination of the allowance for loan losses and the
valuation of foreclosed real estate and deferred tax assets.
Changing economic conditions, adverse economic prospects for borrowers,
as well as regulatory agency action as a result of examination, could cause
NBB and BTC to recognize additions to the allowance for loan losses and may
also affect the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans.
Comprehensive Income
Effective January 1, 2001, the Company changed its method of
presentation concerning comprehensive income. Prior to 2001, comprehensive
income was reflected as part of the consolidated statement of income.
Comprehensive income is now presented as a separate component of the
Company's consolidated statement of changes in stockholders' equity.
Recent Accounting Pronouncements
In December 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 01-6, Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry guides. This
Statement is effective for annual and interim financial statements issued
for fiscal years beginning after December 15, 2001, and did not have a
material impact on the Corporation's consolidated financial statements.
On March 13, 2002, the Financial Accounting Standard Board determined
that commitments for the origination of mortgage loans that will be held for
sale must be accounted for as derivatives instruments, effective for fiscal
quarters beginning after April 10, 2002. The Company enters into commitments
to originate loans whereby the interest rate on the loan is determined prior
to funding. Such rate lock commitments on mortgage loans to be sold in the
secondary market are considered derivatives. Accordingly, these commitments,
including any fees received from the potential borrower, are recorded at
fair value in derivative assets or liabilities, with changes in fair value
recorded in the net gain or loss on sale of mortgage loans. Fair value is
based on fees currently charged to enter into similar agreements, and for
fixed-rate commitments fair value also takes into consideration the
difference between current levels of interest rates and the committed rates.
The cumulative effect of adopting Statement No. 133 for rate lock
commitments as of December 31, 2002, was not material. The Corporation
originally adopted Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities on January 1, 2001.
In April 2002, the Financial Accounting Standards Board issued Statement
145, Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. The amendment to Statement 13 eliminates an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This Statement also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the recission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002. The provisions of this Statement related to
Statement 13 are effective for transactions occurring after May 15, 2002,
with early application encouraged.
In June 2002, the Financial Accounting Standards Board issued Statement
146, Accounting for Costs Associated with Exit or Disposal Activities. This
Statement requires recognition of a liability, when incurred, for costs
associated with an exit or disposal activity. The liability should be
measured at fair value. The provisions of the Statement are effective for
exit or disposal activities initiated after December 31, 2002.
21
The adoption of Statement No. 145 and 146 did not have a material impact
on the Company's consolidated financial statements.
Effective January 1, 2002, the Corporation adopted Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets.
Accordingly, goodwill is no longer subject to amortization over its
estimated useful life, but is subject to at least an annual assessment for
impairment by applying a fair value based test. Additionally, Statement 142
requires that acquired intangible assets (such as core deposit intangibles)
be separately recognized if the benefit of the asset can be sold,
transferred, licensed, rented, or exchanged, and amortized over its
estimated useful life. Branch acquisition transactions were outside the
scope of the Statement and therefore any intangible asset arising from such
transactions remained subject to amortization over their estimated useful
life.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, Acquisitions of Certain Financial Institutions. The
Statement amends previous interpretive guidance on the application of the
purchase method of accounting to acquisitions of financial institutions, and
requires the application of Statement No. 141, Business Combinations, and
Statement No. 142 to branch acquisitions if such transactions meet the
definition of a business combination. The provisions of the Statement do not
apply to transactions between two or more mutual enterprises. In addition,
the Statement amends Statement No. 144, Accounting for the Impairment of
Long-Lived Assets, to include in its scope core deposit intangibles of
financial institutions. Accordingly, such intangibles are subject to a
recoverability test based on undiscounted cash flows, and to the impairment
recognition and measurement provisions required for other long-lived assets
held and used. The Company has determined that the acquisitions that
generated the intangible assets and goodwill on the consolidated balance
sheets in the amounts of $10,912 and $11,866 at December 31, 2002 and 2001,
respectively, did not constitute the acquisition of a business, and
therefore will continue to be amortized.
The Financial Accounting Standards Board issued Statement No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of Statement No. 123, in December 2002. The Statement amends
Statement No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, the Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Finally, this Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about the effects of stock
options in interim financial information. The amendments to Statement No.
123 are effective for financial statements for fiscal years ending December
15, 2002. The amendment to APB No. 28 is effective for financial reports
containing condensed financial statements for interim periods beginning
after December 15, 2002. Early application is encouraged for both
amendments. The Company continues to record stock options under APB Opinion
No. 25, Accounting for Stock Issued to Employees, and has not adopted the
alternative methods allowable under Statement No. 148.
Note 2: Restriction on Cash
As members of the Federal Reserve System, the Company's subsidiary banks are
required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 2002 and 2001, the aggregate
amounts of daily average required balances approximated $2,092 and $2,458,
respectively.
22
Note 3: Securities
The amortized cost and fair value of securities available for sale, with
gross unrealized gains and losses, follows:
December 31, 2002
Gross Gross
Available for sale: Amortized Unrealized Unrealized
Costs Gains Losses Fair Value
------------- ------------ ------------- -----------
U.S. Treasury $ 3,748 214 ----- 3,962
U.S. Government agencies and corporations 7,038 94 ---- 7,132
States and political subdivisions 68,876 1,928 112 70,692
Mortgage-backed securities 16,244 565 ---- 16,809
Corporate debt securities 16,993 485 67 17,411
Federal Home Loan Bank stock-restricted 1,655 ---- ---- 1,655
Federal Reserve Bank stock-restricted 209 ---- ---- 209
Other securities 1,670 194 ---- 1,864
------------- ------------ ------------- -----------
Total securities available for sale $116,433 3,480 179 119,734
============= ============ ============= ===========
December 31, 2001
Gross Gross
Available for sale: Amortized Unrealized Unrealized
Costs Gains Losses Fair Value
------------- ------------ ------------- -----------
U.S. Treasury $ 6,248 242 --- 6,490
U.S. Government agencies and corporations 5,340 43 8 5,375
States and political subdivisions 51,030 605 446 51,189
Mortgage-backed securities 13,178 306 69 13,415
Corporate debt securities 9,066 143 116 9,093
Federal Home Loan Bank stock-restricted 1,411 --- --- 1,411
Federal Reserve Bank stock-restricted 209 --- --- 209
Other securities 1,328 157 --- 1,485
------------- ------------ ------------- -----------
Total securities available for sale $87,810 1,496 639 88,667
============= ============ ============= ===========
The amortized cost and fair value of single maturity securities available
for sale at December 31, 2002, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2002.
Amortized Costs Fair Values
--------------- ---------------
Due in one year or less $ 6,615 $ 6,727
Due after one year through five years 16,709 17,396
Due after five years through ten years 42,828 44,022
Due after ten years 47,382 48,496
No maturity 2,899 3,093
--------------- ---------------
$ 116,433 $ 119,734
=============== ===============
23
The amortized cost and fair value of securities held to maturity, with gross
unrealized gains and losses, follows:
December 31, 2002
Gross
Held to maturity: Amortized Unrealized Gross Unrealized
Costs Gains Losses Fair Value
------------- ---------------- ------------------- -----------------
U.S. Government agencies and corporations $ 10,013 193 ---- 10,206
States and political subdivisions 52,610 1,693 48 54,255
Mortgage-backed securities 8,989 399 --- 9,388
Corporate debt securities 27,948 1,473 83 29,338
------------- ---------------- ------------------- -----------------
Total securities held to maturity $ 99,560 3,758 131 103,187
============= ================ =================== =================
December 31, 2001
Gross
Held to maturity: Amortized Unrealized Gross Unrealized
Costs Gains Losses Fair Value
------------- ---------------- ------------------- -----------------
U.S. Government agencies and corporations $ 17,025 95 29 17,091
States and political subdivisions 49,230 319 381 49,168
Mortgage-backed securities 13,723 123 150 13,696
Corporate debt securities 22,831 579 131 23,279
------------- ---------------- ------------------- -----------------
Total securities held to maturity $ 102,809 1,116 691 103,234
============= ================ =================== =================
The amortized cost and fair value of single maturity securities held to
maturity at December 31, 2002, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2002.
Amortized Fair
Costs Values
---------------- -------------
Due in one year or less $ 4,153 $ 4,229
Due after one year through five years 27,442 28,572
Due after five years through ten years 39,250 40,840
Due after ten years 28,715 29,546
$ 99,560 $103,187
================ =============
At December 31, 2002 and 2001, securities with a carrying value of $31,170
and $30,800, respectively, were pledged to secure trust deposits and for other
purposes as required or permitted by law.
As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC are required to maintain certain minimum investments in the
common stock of those entities. Required levels of investment are based upon NBB
and BTC's capital and a percentage of qualifying assets. In addition, NBB and
BTC are eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans totaling approximately
$97,769, and NBB and BTC's capital stock investment in the FHLB.
24
Note 4: Loans to Officers and Directors
In the ordinary course of business, the Company, through its banking
subsidiaries, has granted loans to executive officers and directors of
Bankshares and its subsidiaries amounting to $5,505 at December 31, 2002 and
$5,782 at December 31, 2001. During the year ended December 31, 2002 total
principal additions were $4,769 and principal payments were $5,046.
Note 5: Allowance for Loan Losses
An analysis of the allowance for loan losses follows:
Years ended December 31,
2002 2001 2000
------------ ------------ ------------
Balance at beginning of year $ 4,272 3,886 3,231
Provision for loan losses 2,251 1,408 1,329
Loans charged-off (1,571) (1,128) (770)
Recoveries of loans previously charged-off 140 106 96
------------ ------------ ------------
Balance at end of year $ 5,092 4,272 3,886
============ ============ ============
The following is a summary of information pertaining to impaired loans:
December 31,
2002 2001
---------- ----------
Impaired loans without a valuation allowance $ 46 275
Impaired loans with a valuation allowance 93 65
---------- ----------
Total impaired loans $ 139 340
========== ==========
Valuation allowance related to impaired loans
$ 33 39
========== ==========
Years ended December 31,
2002 2001 2000
---------- ----------- ----------
Average investment in impaired loans $ 397 671 657
Interest income recognized on impaired loans 11 57 43
Interest income recognized on a cash basis on
impaired loans --- --- ---
---------- ----------- ----------
No additional funds are committed to be advanced in connection with impaired
loans. Nonaccrual loans excluded from impaired loan disclosure under FASB 114 at
December 31, 2002 and 2001 were $166 and $59, respectively. If interest on these
loans had been accrued, such income would have been $16 and $4 respectively. No
nonaccrual loans were excluded from impaired loans, disclosed under FASB 114, at
December 31, 2000. Loans past due greater than 90 days which continue to accrue
interest totaled $977 and $980 at December 31, 2002 and 2001, respectively.
25
Note 6: Premises and Equipment
A summary of the cost and accumulated depreciation of premises and equipment
follows:
December 31,
2002 2001
-------------- --------------
Premises $ 11,193 11,051
Furniture and equipment 7,772 7,435
Construction-in-progress 254 13
-------------- --------------
19,219 18,499
Accumulated depreciation (9,281) (8,367)
-------------- --------------
$ 9,938 10,132
============== ==============
Depreciation expense for the years ended December 2002, 2001 and 2000
amounted to $977, $1,106 and $1,015, respectively.
The Company leases branch facilities under noncancellable operating leases.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 2002 are as follows: $282
in 2003, $282 in 2004, $277 in 2005, $272 in 2006, $274 in 2007, and $1,269
thereafter.
Note 7: Deposits
The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2002 and 2001 was $89,261 and $77,214, respectively.
At December 31, 2002 the scheduled maturities of time deposits are as
follows:
-------------------------- ------------------------------
For the year
2003 $ 208,990
2004 52,483
2005 21,140
2006 7,452
2007 29,441
Thereafter 561
------------------------------
$ 320,067
==============================
At December 31, 2002 and 2001, overdraft demand deposits reclassified to
loans totaled $407 and $703, respectively.
Note 8: Employee Benefit Plans
Pension Plans
Effective January 1, 2002, the NBB plan was amended, restated, and
renamed The National Bankshares, Inc. Retirement Income Plan. At the same
time, the BTC plan was merged into it, and National Bankshares, Inc. and
National Bankshares Financial Services, Inc. were added as participating
employers in the pension plan. The merged NBI plan did not alter the
eligibility standards of the bank plans, and substantially all employees are
covered. The merged NBI plan benefit formula is still based upon the length
of service of retired employees and a percentage of qualified W-2
compensation during their final years of employment. The pension plan's
assets are invested principally in U.S. Government agency obligations (21%),
mutual funds (24%), corporate bonds (24%), equity securities (23%) and cash
(8%). Information pertaining to activity in the plans is as follows:
26
December 31,
2002 2001 2000
------------- ------------ --------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,014 5,668 5,694
Service cost 353 422 354
Interest cost 429 422 425
Actuarial (gain) loss 593 (53) (142)
(Gain) due to plan amendment (89) --- ---
Benefits paid (222) (445) (663)
------------- ------------ --------------
Benefit obligation at end of year 7,078 6,014 5,668
============= ============ ==============
Change in plan assets:
Fair value of plan assets at beginning of year 4,650 4,692 4,877
Actual return on plan assets (239) 55 202
Employer contribution 315 348 276
Benefits paid (222) (445) (663)
------------- ------------ --------------
Fair value of plan assets at end of year 4,504 4,650 4,692
------------- ------------ --------------
Funded status: (2,574) (1,364) (976)
Unrecognized net actuarial loss 2,177 931 610
Unrecognized prior service cost 73 171 186
Unrecognized transition asset (100) (114) (137)
------------- ------------ --------------
Net accrued pension cost (includes accrued) $ (424) (376) (317)
============= ============ ==============
Amounts recognized in the consolidated balance sheets:
Years ended December 31,
2002 2001 2000
-------------- --------------- ----------------
Accrued benefit liabilities $ (1,113) (376) (317)
Intangible asset 73 --- ---
Deferred tax asset 235 --- ---
Accumulated other comprehensive income 381 --- ---
-------------- --------------- ----------------
Net amount recognized $ (424) (376) (317)
============== =============== ================
The components of net periodic cost are as follows:
Years ended December 31,
2002 2001 2000
-------------- --------------- ---------------
Service cost $ 353 422 354
Interest cost 429 422 424
Expected return on plan assets (427) (434) (441)
Amortization of prior service cost 9 15 15
Recognized net actuarial loss 12 5 8
Amortization of transition asset (13) (23) (23)
-------------- --------------- ---------------
Net periodic benefit cost $ 363 407 337
============== =============== ===============
27
The actuarial assumptions are as follows:
2002 2001 2000
--------- --------- ---------
Weighted average assumptions as of December 31
Weighted average discount rate 7.00% 7.50% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 5.00% 5.00%
401(k) Plan
The Company has a Retirement Accumulation Plan qualifying under IRS Code
Section 401(k), in which Bankshares, NBB, BTC, and NSFS are participating
employers. Eligible participants in the plan can contribute up to 100% of
their total annual compensation to the plan. Employee contributions are
matched by the employer based on a percentage of an employee's total annual
compensation contributed to the plan. For the years ended December 31, 2002,
2001 and 2000 NBB and BTC contributed $227, $196 and $156 respectively to
the plan.
Employee Stock Ownership Plan
Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees of Bankshares and its subsidiaries who have one year of
service and who have attained the age of 21 prior to the plan's January 1 and
July 1 enrollment dates to own Bankshares common stock. Contributions to the
ESOP are determined annually by the Board of Directors. Contribution expense
amounted to $227, $179 and $162 for the years ended December 31, 2002, 2001 and
2000, respectively. Dividends on ESOP shares are charged to retained earnings.
As of December 31, 2002, the number of allocated shares held by the ESOP was
89,098 and the number of unallocated shares was 8,468. All shares held by the
ESOP are treated as outstanding in computing the Company's basic net income per
share. Upon reaching age 55 with ten years of plan participation, a vested
participant has the right to diversify 50% of his or her allocated ESOP shares
and Bankshares or the ESOP, with the agreement of the Trustee, would be
obligated to purchase those shares. The ESOP contains a put option which allows
a withdrawing participant to require Bankshares or the ESOP, if the plan
administrator agrees, to purchase his or her allocated shares if the shares are
not readily tradable on an established market at the time of its distribution.
Note 9: Stock Option Plan
The Company has adopted the National Bankshares, Inc. 1999 Stock Option Plan
to give key employees of Bankshares and its subsidiaries an opportunity to
acquire shares of National Bankshares, Inc. common stock. The purpose of the
1999 Stock Option Plan is to promote the success of Bankshares and its
subsidiaries by providing an incentive to key employees that enhances the
identification of their personal interest with the long term financial success
of the Company and with growth in stockholder value. Under the 1999 Stock Option
Plan, up to 250,000 shares of Bankshares common stock may be granted. The 1999
Stock Option Plan is administered by the Stock Option Committee, which is made
up of all of the non-employee, outside directors of National Bankshares, Inc.
The Stock Option Committee may determine whether options are incentive stock
options or nonqualified stock options and may determine the other terms of
grants, such as number of shares, term, a vesting schedule, and the exercise
price. The 1999 Stock Option Plan limits the maximum term of any option granted
to ten years, states that options may be granted at not less than fair market
value on the date of the grant and contains certain other limitations on the
exercisability of incentive stock options. The options vest 25% after one year,
50% after two years, 75% after three years and 100% after four years. At the
discretion of the Stock Option Committee, options may be awarded with the
provision that they may be accelerated upon a change of control, merger,
consolidation, sale or dissolution of National Bankshares, Inc. At December 31,
2002, there were 198,500 additional shares available for grant under the Plan.
28
A summary of the status of the Company's stock option plan is presented below:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
-------------- ------------ ------------ ------------ ---------- -----------
Outstanding, beginning of year 34,000 $ 21.18 18,000 $ 19.57 5,500 $ 22.00
Granted 17,500 29.65 16,000 23.00 12,500 18,50
Exercised --- --- --- --- --- ---
Forfeited --- --- --- --- --- ---
Expired --- --- --- --- --- ---
-------------- ------------ ------------ ------------ ---------- -----------
Outstanding, end of year 51,500 $ 24.06 34,000 $ 21.18 18,000 $ 19.57
============== ============ ============ ============ ========== ===========
Options exercisable at year-end 14,375 $ 20.76 5,875 $ 20.14 1,375 $ 22.00
Weighted-average fair value of
options granted during the year $ 5.97 $ 4.89 $ 3.90
-------------- ------------ ------------ ------------ ---------- -----------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31
2002 2001 2000
----------------- ----------------- -----------------
Dividend yield 1.88% 1.86% 1.79%
Expected life 10 years 10 years 10 years
Expected volatility 22.14% 22.77% 19.52%
Risk-free interest rate 4.31% 4.48% 5.12%
Information pertaining to options outstanding at December 31, 2002 is as
follows:
Options Outstanding Options Exercisable
Remaining Range of Number Weighted Average Number Weighted Average
Contractual Life Exercise Price Outstanding Exercise Price Exercisable Exercise Price
- ------------------ ----------------- ----------------- ------------------ ------------------ -----------------
9.83 years $ 29.65 17,500 $ 29.65 --- $ ---
8.83 years 23.00 16,000 23.00 4,000 23.00
7.83 years 18.50 12,500 18.50 6,250 18.50
6.83 years 22.00 5,500 22.00 4,125 22.00
- ------------------ ----------------- ----------------- ------------------ ------------------ -----------------
Note 10: Income Taxes
Allocation of income tax expense between current and deferred portions is as
follows:
Years ended December 31,
2002 2001 2000
----------- ----------- -----------
Current $ 3,554 $ 2,451 3,016
Deferred (551) (166) (253)
----------- ----------- -----------
Total income tax expense $ 3,003 $ 2,285 2,763
=========== =========== ===========
29
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:
Years ended December 31,
2002 2001 2000
------------ ---------- ----------
Computed "expected" income tax expense $ 4,426 $ 3,264 $3,424
Tax-exempt interest income (1,652) (1,239) (862)
Nondeductible interest expense 191 220 168
Other, net 38 40 33
------------ ---------- ----------
Reported income tax expense $ 3,003 $2,285 2,763
============ ========== ==========
The components of the net deferred tax asset, included in other assets, are
as follows:
December 31,
2002 2001
-------------- --------------
Deferred tax assets:
Allowance for loan losses and unearned fee income $ 1,514 $ 1,155
Valuation allowance on other real estate owned 14 21
Deferred compensation and other liabilities 349 119
Deposit intangibles and goodwill 87 78
Community development corporation related tax credit 8 11
Other --- 9
1,972 1,393
Deferred tax liabilities:
Net unrealized losses on securities available for sale (1,122) (292)
Fixed assets (71) (71)
Discount accretion on securities (94) (72)
Accrued late fee income --- (24)
Other (94) (64)
-------------- --------------
(1,381) (523)
-------------- --------------
Net deferred tax asset $ 591 $ 870
============== ==============
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 2002 and 2001 due to the
fact that the realization of the entire gross deferred tax assets can be
supported by the amount of taxes paid during the carryback period available
under current tax laws.
Note 11: Restrictions on Dividends
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 2002, 2001,
and 2000, dividends received from subsidiary banks were $3,406, $3,761 and
$2,987, respectively.
Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
2002, retained net income, which was free of such restriction, amounted to
approximately $14,410.
30
Note 12: Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and the Banks' financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002 and 2001, that the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 2002, the most recent notifications from the appropriate
regulatory authorities categorized the Company and the Banks as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, an institution must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following tables.
There are no conditions or events since these notifications that management
believes have changed the Company's and the Banks' category. The Company's and
the Banks' actual capital amounts and ratios as of December 31, 2002 and 2001
are also presented in the following tables.
To Be Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Requirement Provisions
---------------------- --------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ---------- ---------- ----------- ------------
December 31, 2002
Total capital (to risk weighted assets)
Bankshares consolidated $65,525 13.8% 37,980 8.0% N/A N/A
NBB 36,370 13.5% 21,518 8.0% 26,897 10.0%
BTC 25,808 12.8% 16,183 8.0% 20,229 10.0%
Tier 1 capital (to risk weighted assets)
Bankshares consolidated $60,433 12.7% 18,990 4.0% N/A N/A
NBB 33,398 12.4% 10,759 4.0% 16,138 6.0%
BTC 23,688 11.7% 8,092 4.0% 12,138 6.0%
Tier 1 capital (to average assets)
Bankshares consolidated $60,433 9.0% 26,791 4.0% N/A N/A
NBB 33,398 8.9% 14,924 4.0% 18,655 5.0%
BTC 23,688 8.1% 11,632 4.0% 14,541 5.0%
----------- ---------- ---------- ---------- ----------- ------------
31
To Be Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Requirement Provisions
---------------------- --------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ---------- ---------- ----------- ------------
December 31, 2001
Total capital (to risk weighted assets)
Bankshares consolidated $57,231 12.9% 35,511 8.0% N/A N/A
NBB 31,383 12.5% 20,150 8.0% 25,188 10.0%
BTC 22,567 11.9% 15,105 8.0% 18,881 10.0%
Tier 1 capital (to risk weighted assets)
Bankshares consolidated $52,959 11.9% 17,756 4.0% N/A N/A
NBB 28,781 11.4% 10,075 4.0% 15,113 6.0%
BTC 20,897 11.1% 7,553 4.0% 11,329 6.0%
Tier 1 capital (to average assets)
Bankshares consolidated $52,959 8.4% 25,160 4.0% N/A N/A
NBB 28,781 8.3% 13,927 4.0% 17,409 5.0%
BTC 20,897 7.5% 11,079 4.0% 13,849 5.0%
----------- ---------- ---------- ---------- ----------- ------------
Note 13: Condensed Financial Statements of Parent Company
Financial information pertaining only to Bankshares (Parent) is as follows:
Consolidated Balance Sheets
December 31,
2002 2001
-------------- -------------
Assets:
Cash due from subsidiaries $ 40 76
Securities available for sale 2,913 2,879
Investment in subsidiaries, at equity 70,298 62,428
Refundable income taxes due from subsidiaries --- 29
Other assets 59 29
-------------- -------------
Total assets 73,310 65,457
============== =============
Liabilities and Stockholders'Equity:
Other liabilities $ 209 196
Stockholders' equity 73,101 65,261
-------------- -------------
Total liabilities and stockholders' equity $ 73,310 65,457
============== =============
32
Condensed Statements of Income
Years Ended December 31,
2002 2001 2000
------------- ----------- ------------
Income:
Dividends from subsidiaries $ 3,406 3,761 2,987
Interest on securities - taxable 27 12 11
Interest on securities - nontaxable 86 91 99
Other income 462 --- 40
Securities gains (losses) 319 (13) (3)
------------- ----------- ------------
4,300 3,851 3,134
Expenses:
Other expenses 798 207 157
------------- ----------- ------------
Income before income tax benefit (expense) and
equity in undistributed net income of subsidiaries 3,502 3,644 2,977
Applicable income tax benefit (expense) (1) 69 36
------------- ----------- ------------
Income before equity in undistributed net income
of subsidiaries 3,501 3,713 3,013
Equity in undistributed net income of
subsidiaries 6,513 3,601 4,296
------------- ----------- ------------
Net income $ 10,014 7,314 7,309
============= =========== ============
Condensed Statements of Cash Flows
Years ended December 31,
2002 2001 2000
--------------- ------------- --------------
Cash Flows from Operating Activities:
Net income $ 10,014 $ 7,314 7,309
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (6,513) (3,601) (4,296)
Amortization of premiums and accretion of
discounts, net 5 5 6
Securities (gains) losses (319) 13 3
Net change in refundable income taxes
due from subsidiaries --- (18) 48
Net change in other assets (29) 3 (34)
Net change in other liabilities 12 102 10
--------------- ------------- --------------
Net cash provided by operating activities 3,170 3,818 3,046
--------------- ------------- --------------
Cash Flows from Investing Activities:
Purchases of securities available for sale (730) (777) (529)
Proceeds from sales of securities available for sale 827 --- 30
Calls of securities available for sale 103 25 562
--------------- ------------- --------------
Net cash provided by (used in) investing
activities 200 (752) 63
--------------- ------------- --------------
Cash Flows from Financing Activities:
Cash dividends paid (3,406) (3,020) (2,987)
Common stock repurchase --- (8) (89)
--------------- ------------- --------------
Net cash used in financing activities (3,406) (3,028) (3,076)
--------------- ------------- --------------
Net change in cash (36) 38 33
Cash due from subsidiaries at beginning of year 76 38 5
--------------- ------------- --------------
Cash due from subsidiaries at end of year $ 40 76 38
=============== ============= ==============
33
Note 14: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The Company
may require collateral or other security to support the following financial
instruments with credit risk.
At December 31, 2002, and 2001, financial instruments were outstanding
whose contract amounts represent credit risk:
December 31,
2002 2001
--------------- ---------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 64,788 78,749
Standby letters of credit 7,153 6,045
Mortgage loans sold with potential recourse 37,214 27,102
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit
lines, and overdraft protection agreements are commitments for possible future
extensions of credit. Some of these commitments are uncollateralized and do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
The Company originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In 2002, the
Company originated $36,915 and sold $37,214 to investors, compared to $28,247
originated and $27,102 sold in 2001. Every contract with each investor contains
certain recourse language. In general, the Company may be required to repurchase
a previously sold mortgage loan if there is major noncompliance with defined
loan origination or documentation standards, including fraud, negligence or
material misstatement in the loan documents. Repurchase may also be required if
necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced to buy back a loan after it has been resold as a part of a
loan pool. In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has defaulted early in the loan term. This potential default
period is approximately twelve months after sale of a loan to the investor.
The Company maintains cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 2002 that exceeded the
insurance limits of the Federal Deposit Insurance Corporation was $47.
Note 15: Concentrations of Credit Risk
The Company does a general banking business, serving the commercial and
personal banking needs of its customers. NBB's market area, commonly referred to
as Virginia's New River Valley and Mountain Empire, consists of Montgomery,
Giles and Pulaski Counties and the cities of Radford and Galax, together with
portions of adjacent counties. BTC's market area adjoins NBB's and includes the
counties of Tazewell, Wythe, Smyth and Washington in Virginia, as well as
contiguous portions of McDowell and Mercer Counties in West Virginia.
Substantially all of NBB's and BTC's loans are made within their market area.
34
The ultimate collectibility of the banks' loan portfolios and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely correlated with the economic trends within this area.
At December 31, 2002 and 2001, approximately $201,639 and $176,667,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 49% and 44% of the loan portfolio at December 31,
2002 and 2001, respectively. Included in commercial real estate at December 31,
2002 and 2001 was approximately $96,674 and $100,640, respectively, in loans for
college housing and professional office buildings. Loans secured by residential
real estate were approximately $116,337 and $119,437 at December 31, 2002 and
2001, respectively. This represents approximately 28% and 30% of the loan
portfolio at December 31, 2002 and 2001 respectively. Loans secured by
automobiles were approximately $23,526 and $32,373 at December 31, 2002 and
2001, respectively. This represents approximately 6% of the loan portfolio at
December 31, 2002 and 8 % at December 31, 2001.
The Company has established operating policies relating to the credit
process and collateral 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. Management considers the
concentration of credit risk to be minimal.
Note 16: Fair Value of Financial Instruments and Interest Rate Risk
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
fair discount rate and estimates of future cash flows. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented may not necessarily represent the
underlying fair value of the Company.
Loan commitments on which the committed interest rate is less than the
current market rate are insignificant at December 31, 2002 and 2001.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and Due from Banks, Interest-Bearing Deposits, and Federal Funds Sold
The carrying amounts approximate fair value.
Securities
The fair values of securities are determined by quoted market prices or
dealer quotes. The fair value of certain state and municipal securities is
not readily available through market sources other than dealer quotations,
so fair value estimates are based on quoted market prices of similar
instruments adjusted for differences between the quoted instruments and the
instruments being valued.
Loans Held for Sale
Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real
estate - commercial, real estate - construction, real estate - mortgage,
credit card and other consumer loans. Each loan category is further
35
segmented into fixed and adjustable rate interest terms and by performing
and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in
the loan, as well as estimates for prepayments. The estimate of maturity is
based on the Company's historical experience with repayments for loan
classification, modified, as required, by an estimate of the effect of
economic conditions on lending.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available
market information and specific borrower information.
Deposits
The fair value of demand and savings deposits is the amount payable on
demand. The fair value of fixed maturity term deposits and certificates of
deposit is estimated using the rates currently offered for deposits with
similar remaining maturities.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Other Borrowed Funds
Other borrowed funds, represents treasury tax and loan deposits, and
short-term borrowings from the Federal Home Loan Bank. The carrying amount
is a reasonable estimate of fair value because the deposits are generally
repaid within 120 days from the transaction date.
Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit, standby
letters of credit and financial guarantees written are the deferred fees
arising from these unrecognized financial instruments. These deferred fees
are not deemed significant at December 31, 2002 and 2001, and as such, the
related fair values have not been estimated.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
December 31,
2002 2001
----------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- -------------
Financial assets:
Cash and due from banks $ 12,316 12,316 12,293 12,293
Interest-bearing deposits 18,818 18,818 15,510 15,510
Federal funds sold 1,724 1,724 1,080 1,080
Securities 219,294 222,921 191,476 191,901
Mortgage loans held for sale 846 846 1,145 1,145
Loans, net 404,247 406,844 394,042 457,965
Accrued interest receivable 4,290 4,290 4,917 4,917
Financial liabilities:
Deposits $ 608,271 611,448 576,618 577,612
Other borrowed funds 748 748 203 203
Accrued interest payable 700 700 1,101 1,101
Note 17: Branch Acquisitions
In a move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it would acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition involved the purchase of
approximately $34,000 in deposits and $9,200 in loans. The acquisition was
completed in the first quarter of 2001.
36
Selected Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2002 and 2001:
2002
--------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- -------------- -------------
Income Statement Data:
Interest income $ 10,594 10,645 10,760 10,748
Interest expense 4,266 3,960 3,783 3,755
--------------- --------------- -------------- -------------
Net interest income 6,328 6,685 6,977 6,993
Provision for loan losses 646 546 519 540
Noninterest income 1,369 1,546 1,482 1,315
Noninterest expense 4,389 4,348 4,380 4,310
Income taxes 558 790 848 807
--------------- --------------- -------------- -------------
Net income $ 2,104 2,547 2,712 2,651
=============== =============== ============== =============
Per Share Data:
Basic net income per share $ 0.60 0.72 0.78 0.75
Cash dividends per share --- 0.46 --- 0.51
Book value per share $ 19.20 19.79 20.80 20.82
Selected Ratios:
Return on average assets 1.33% 1.58% 1.65% 1.56%
Return on average equity 12.90% 14.92% 15.30% 14.54%
Average equity to average assets 10.47% 10.53% 10.63% 10.66%
2001
--------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- -------------- -------------
Income Statement Data:
Interest income $ 11,381 11,682 11,446 11,018
Interest expense 5,998 6,185 5,695 4,893
--------------- --------------- -------------- -------------
Net interest income 5,383 5,497 5,751 6,125
Provision for loan losses 332 332 377 367
Noninterest income 1,195 1,296 1,312 1,401
Noninterest expense 4,061 4,285 4,176 4,431
Income taxes 569 495 600 621
--------------- --------------- -------------- -------------
Net income $ 1,616 1,681 1,910 2,107
=============== =============== ============== =============
Per Share Data:
Basic net income per share $ 0.46 0.48 0.54 0.60
Cash dividends per share --- 0.43 --- 0.43
Book value per share $ 17.91 17.94 18.70 18.59
Selected Ratios:
Return on average assets 1.06% 1.04% 1.18% 1.30%
Return on average equity 10.54% 10.83% 11.84% 12.69%
Average equity to average assets 10.09% 9.63% 9.94% 9.97%
37
Board of Directors
National Bankshares, Inc. Board of Directors
Picture of "National Bankshares Board of Directors"
From left: James G. Rakes, Chairman of the Board, President, Chief Executive
Officer, National Bankshares, Inc., President and Chief Executive Officer,
The National Bank; President and Treasurer, National Bankshares Financial
Services, Inc.; L. Allen Bowman, Vice-Chairman of the Board, Retired;
William T. Perry, Retired; Jeffery R. Stewart, Educational Consultant; Paul A.
Duncan, President, Holiday Motor Corp.; James A. Deskins, Sr., Retired; James
M. Shuler, Delegate, Virginia House of Representatives; Alonzo A. Crouse,
Executive Vice President, Secretary, Bank of Tazewell County; Cameron L.
Forrester, President and Chief Executive Officer Executive Officer, Bank of
Tazewell County.
The National Bank Board of Directors
Picture of "National Bank Board of Directors"
From left: Jeffery R. Stewart, Chairman of the Board, Educational Consultant;
L. Allen Bowman, Vice-Chairman of the Board, Retired; Paul A. Duncan,
President, Holiday Motor Corp.; James G. Rakes, Chairman, President and Chief
Executive Officer, National Bankshares, Inc., President and Chief Executive
Officer, The National Bank; President and Treasurer, National Bankshares
Financial Services, Inc.; James M. Shuler, Delegate, Virginia House of
Representatives; J. Lewis Webb, Jr., Dentist; Ellen G. Burnop, Co-Owner,
New River Office Supply; F. Brad Denardo, Executive Vice President/Chief
Operating Officer, The National Bank.
38
Bank of Tazewell County Board of Directors
Picture of "Bank of Tazewell County Board of Directors
Upper row, from left: William T. Perry, Chairman of the Board, Retired;
E.P. Greever, Retired; James G. Rakes, Chairman, President and Chief
Executive Officer, National Bankshares, Inc., President and Chief
Executive Officer, The National Bank; President and Treasurer, National
Bankshares Financial Services, Inc.; Jack Harry, President, Harry's
Enterprises, Inc.; James G. Gillespie, Jr., President, Jim Sam Gillespie Farm.
Lower row, from left: Cameron L. Forrester, President and Chief Executive
Officer Executive Officer, Bank of Tazewell County; William H. VanDyke, Vice
President, Secretary, Bank of Tazewell County; Charles E. Green, III,
Financial Planner, AXA Advisors, L.L.C.
The National Bank Adivisory Boards:
Montgomery County Advisory Board
Dan A. Dodson, W. Clinton Graves, Mary G. Miller, James J. Owens, Robert L.
Pack, Arlene A. Saari, James C. Stewart, T. Cooper Via
Giles County Adivsory Board
Paul B. Collins, John H. Givens, Jr., Robert C. McCracken, Ross E. Martin,
Kenneth L. Rakes, Scarlet B. Ratcliffe, Morris D. Reece, H.M. Scanland, Jr.
Galax Advisory Board
William T. Green, Sr., Jerry R. Mink, Kathy J. Price, James A. Williams, Jr.,
David F. Wilson
Radford/Pulaski County Advisory Board
William K. Cunningham, Gary C. Elander, Jack M. Lewis, Jack D. Nunley,
Laura B. Turk
Bank Of Tazewell County Advisory Boards:
Bluefield Advisory Board
Michael E. Dye, William H. King, Constance M. Saunders
Richlands Advisory Board
Steven R. Davis, Marvin D. Harman, Peter M. Mulkey
Interstate Advisory Board
David P. Carpenter, Andrew J. Hargroves, Keith A. Hungate, A. Susan Keen,
David S. Saliba, Steve A. Lester, II, Jimmy A. Stewart
39
Corporate Information
National Bankshares, Inc. Executive Officers
James G. Rakes, Chairman F. Brad Denardo
President and Chief Executive Officer Corporate Officer
J. Robert Buchanan Cameron L. Forrester
Treasurer Corporate Officer
Marilyn B. Buhyoff
Secretary and Counsel
Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 8, 2003 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.
Corporate Stock
National Bankshares, Inc. common stock trades on the Nasdaq Stock Market under
the symbol "NKSH"
Financial Information
Investors and analysts seeking financial information about National Bankshares,
Inc. should contact:
James G. Rakes
Chairman, President and Chief Executive Officer
(540) 951-6300 or (800) 552-4123
jrakes@nbbank.com
Or J. Robert Buchanan
Treasurer
(540) 951-6300 or (800) 552-4123
bbuchanan@nbbank.com
Written requests may be directed to: National Bankshares, Inc. P.O. Box 90002,
Blacksburg, VA 24062-9002
Stockholder Services and Stock Transfer Agent
Stockholders seeking information about National Bankshares, Inc. stock accounts
should contact:
Marilyn B. Buhyoff
Secretary and Counsel
(540) 951-6300 or (800) 552-4123
mbuhyoff@nbbank.com
The National Bank of Blacksburg serves as transfer agent National Bankshares,
Inc. stock.
Written requests and requests for stock transfers may be directed to:
National Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002
A copy of National Bankshares, Inc.'s annual report to the Securities and
Exchange Commission on Form 10-K will be furnished without charge to any
stockholder upon written request.
Corpporate Office
National Bankshares, Inc.
101 Hubbard Street
Blacksburg, Virginia 24060
P.O. Box 90002 Blacksburg, Virginia 24062-9002
www.nationalbankshares.com (540) 951-6300
40