National Bankshares Inc.
Annual Report 2006

Plain-text annual report

Annual Report 2006 Committed to Community Banking O u r M i s s i o n 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 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. C o n t e n t s Financial Highlights ............................................. 1 Letter to Stockholders ........................................... 2 Consolidated Balance Sheets ................................. 4 Consolidated Statements of Income ...................... 5 Boards of Directors ............................................... 6 Corporate Information ......................................... 8 United States Securities & Exchange Commission Form 10-K located in rear folder A Note On This Year’s Report This year we’ve chosen the works of local artists to reflect our wonderful and unique surroundings in the mountains and valleys of Southwest Virginia. Cover: Martha Dillard, Early in the Day II. Inside cover (left): Joni Pienkowski, Highland Over Ellett. F i n a n c i a l H i g h l i g h t s ($ In thousands, except per share data) 2006 2005 2004 Net income $ 12,632 12,424 12,230 Basic net income per share Diluted net income per share Cash dividends per share Book value per share 1.80 1.80 0.73 13.86 1.77 1.76 0.71 13.10 1.74 1.73 0.64 12.38 2003 11,442 1.63 1.62 0.57 11.47 2002 10,014 1.43 1.43 0.49 10.41 Loans, net Total securities Total assets Total deposits 495,486 487,162 472,199 401,428 404,247 285,489 272,541 250,708 230,154 219,294 868,203 841,498 796,154 708,560 684,935 764,692 745,649 705,932 625,378 608,271 Stockholders’ equity 96,755 91,939 87,088 80,641 73,101 Net Income dollars in millions $ 12.6 02 03 04 05 06 12 8 4 0 cash dividends dollars $ 0.73 0.8 0.6 0.4 0.2 0.0 Book Value dollars in millions $ 13.86 15 12 9 6 3 0 02 03 04 05 06 02 03 04 05 06 1 to our shareholders Carol Hoge, untitled Though mergers and computer upgrades are important, stockholder value is driven by financial performance. I am glad to be able to report that National Bankshares, Inc. completed another successful year in 2006. Last year when I wrote to you, we were anticipat- ing the second quarter merger of National Bank- shares, Inc.’s two subsidiary banks. With that chal- lenge behind us, I am pleased to report that the slo- gan that we used to guide the merger, “We’re better together”, has proven to be true. We now offer our customers the convenience of full-service banking from 26 National Bank locations throughout Southwest Vir- ginia. We have been able to consolidate several sup- port functions, and we anticipate continuing this pro- cess. Finally, the merger gave us the opportunity to rejuvenate National Bank’s brand image with new signs, a logo that stresses the connection with Na- tional Bankshares and a fresh slogan that puts cus- tomers first, “Your Future. Your Bank.” The merger was a significant undertaking that was accomplished with little impact on customers. However, all of our customers noticed the results of another major project that was completed in 2006, a computer upgrade that allows us to provide electronic check images instead of cancelled checks. This improvement makes check storage and retrieval much simpler for customers, and it allows the Bank to take advantage of the elec- tronic exchange of checks that is the focus of the 2 Net loans dollars in millions Federal Reserve Bank’s Check 21 legislation. 600 we shared our record performance with you by in- creasing dividends paid to stockholders from $0.71 per share in 2005 to $0.73 in 2006. 0 100 500 300 200 400 $ 495.5 02 03 04 05 06 Though mergers and com- puter upgrades are impor- tant, stockholder value is driven by financial perfor- mance. I am glad to be able to report that National Bankshares, Inc. completed another successful year in 2006. Your company posted record net income for the year of more than $12.63 million, up from $12.42 million in 2005. The pattern of interest rate increases started by the Fed- eral Reserve Bank in 2005 continued well into 2006. This compressed the net interest margin and kept the year-over-year increase in net income fairly small. However, in addition to higher earnings, there were several bright spots in the year’s financial reports. Net loans were up at year-end, from $487.16 million in 2005 to $495.49 in 2006. Because loan quality was excellent, there was no need to fund the provi- sion for loan losses above a minimal level. Total noninterest income, at $8.80 million, showed a healthy 15.62% increase over 2005. We worked hard to contain controllable expenses despite the costs associated with the bank subsidiary merger, and to- tal noninterest expense de- clined from nearly $21.90 million in 2005 to $21.67 million in 2006. National Bankshares, Inc. ended 2006 with total assets of just over $868.20 million, up from nearly $841.50 mil- lion in the prior year. As has been the tradition at National Bankshares, Inc., total assets dollars in millions 02 03 04 05 06 $ 868.2 1000 600 400 200 800 0 For 2007 we are focusing on the basics. We believe that our employees are the best in the business, but we want them to be even better. So, this year we are emphasizing employee training and professional de- velopment. Because community banking relies on personal relationships, it is essential to equip Na- tional Bank and National Bankshares Financial Ser- vices employees with the skills necessary to provide consistently excellent customer service. We also in- tend to spend a good deal of time introducing our products and services to our neighbors in Southwest Virginia. We understand that they can choose from among numerous local, national and even Internet- based competitors. We want to explain to them the unique advantages of consolidating all of their bank- ing, investments and insurance business with us. Since we are committed to community banking, this is a message that we can easily share. In closing, I would like to thank you for your invest- ment in National Bankshares, Inc. We appreciate your loyalty and sup- port. I also want to ac- knowledge the hard work of our dedicated Directors and employ- ees. It takes contribu- tions from all of us – stockholders, Board members and employ- ees – to produce success year after year at Na- tional Bankshares, Inc. James G. Rakes Chairman of the Board President and Chief Executive Officer 3 consolidated balance sheets $ In thousands, except share data Assets Cash and due from banks Interest-bearing deposits Securities available for sale, at fair value Securities held to maturity (fair value approximates $115,561 at December 31, 2006 and $109,513 at December 31, 2005) Mortgage loans held for sale Loans: Real estate construction loans Real estate mortgage loans Commercial and industrial loans Loans to individuals Total loans Less unearned income and deferred fees Loans, net of unearned income and deferred fees Less allowance for loan losses Loans, net Premises and equipment, net Accrued interest receivable Other real estate owned, net Intangible assets and goodwill Other assets Total assets Liabilities and Stockholders’ Equity Noninterest-bearing demand deposits Interest-bearing demand deposits Savings deposits Time deposits Total deposits Other borrowed funds Accrued interest payable Other liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding Common stock of $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,980,234 – 2006, and 7,019,874 in 2005 Retained earnings Accumulated other comprehensive (loss), net Total stockholders’ equity Total liabilities and stockholders’ equity 4 December 31, 2006 December 31, 2005 ) $ 15,283) 19,617) 169,735) ) 115,754) 808) ) 33,840) 126,302) 215,244) 126,316) 501,702) (1,059) 500,643) (5,157) 20,115) 10,279) 162,833) 109,708) ---) ) 27,116) 117,421) 206,389) 142,598) 493,524) (913) 492,611) (5,449) 495,486) 487,162) 12,702) 5,682) 390) 15,976) 16,770) $ 868,203) $ 101,167) 233,023) 47,988) 382,514) 764,692) 73) 863) 5,820) 12,808) 5,145) 376) 17,113) 15,959) 841,498) 112,445) 225,611) 54,505) 353,088) 745,649) 357) 725) 2,828) 771,448) 749,559) ) ) ---) ---) 8,725) 91,123) (3,093) 96,755) 8,775) 84,610) (1,446) 91,939) $ 868,203) 841,498) consolidated statements of income $ In thousands, except share per data Years ended December 31, Interest Income Interest and fees on loans Interest on federal funds sold Interest on interest-bearing deposits Interest on securities - taxable Interest on securities - nontaxable Total interest income Interest Expense Interest on time deposits of $100,000 or more Interest on other deposits Interest on borrowed funds Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest Income Service charges on deposit accounts Other service charges and fees Credit card fees Trust income Other income Realized securities gains, net Total noninterest income Noninterest Expense Salaries and employee benefits Occupancy and furniture and fixtures Data processing and ATM Credit card processing Intangible assets and goodwill amortization Net costs of other real estate owned Other operating expenses Total noninterest expense Income before income tax expense Income tax expense Net income Basic net income per share Fully diluted net income per share 5 2006 $ 34,879. ---. 684. 7,462. 4,876. 47,901. 4,912. 13,626. 26. 18,564. 29,337. 49. 29,288. 3,361. 370. 2,396. 1,528. 1,117. 30. 8,802. 11,466. 1,957. 1,234. 1,833. 1,137. 19. 4,024. 21,670. 16,420. 3,788. 12,632. 1.80. 3.241.80) $ $ $ 2005 33,234. ---. 508. 6,501. 5,137. 45,380. 3,942. 10,215. 23. 14,180. 31,200. 567. 30,633. 3,099. 347. 2,179. 1,398. 590. ---. 7,613. 11,265. 1,931. 1,455. 1,687. 1,117. 275. 4,168. 21,898. 16,348. 3,924. 12,424. 1.77. 1.76) 2004 29,812. 5. 196. 6,184. 5,295. 41,492. 3,138. 7,973. 14. 11,125. 30,367. 1,189. 29,178. 3,003. 280. 1,839. 1,436. 416. 168. 7,142. 10,498. 1,797. 1,302. 1,502. 967. 201. 4,069. 20,336. 15,984. 3,754. 12,230. 1.74. 1.73) National Bankshares, inc. board of directors From left: Dr. Jeffrey R. Stewart Educational Consultant Dr. James M. Shuler Delegate, Virginia House of Delegates Dr. Mary G. Miller President, Interactive Design and Development, Inc. Glenn P. Reynolds President, Reynolds Architects, Inc. William A. Peery President, Cargo Oil Co., Inc. Jack H. Harry President, Harry Enterprises, Inc. Dr. Jack M. Lewis President, New River Community College Lawrence J. Ball Vice President and General Manager, Moog Components Group James G. Rakes Chairman, President and Chief Executive Officer, National Bankshares, Inc. Chairman, President and Chief Executive Officer, National Bank Chairman, President and Treasurer, National Bankshares Financial Services, Inc. 6 National Bank board of directors From left: Charles E. Green, III, Financial Planner, AXA Advisors, L.L.C.; Dr. J. Lewis Webb, Jr., Dentist; Michael E. Dye, Pharmacist/Owner, New Graham Pharmacy; James C. Thompson, Chairman, Thompson & Litton; F. Brad Denardo, Executive Vice President/Chief Operating Officer, National Bank; James S. Gillespie, Jr., President, Jim Sam Gillespie Farm; Ellen G. Burnop, Co-Owner, New River Office Supply; James G. Rakes, Chairman, President and Chief Executive Officer, National Bankshares, Inc., Chairman, President and Chief Execu- tive Officer, National Bank, Chairman, President and Treasurer, National Bankshares Financial Services, Inc. Not pictured: Dr. James M. Shuler, Delegate, Virginia House of Delegates. National Bank Advisory Boards Montgomery County: Dan A. Dodson, W. Clinton Graves, Kathryn S. Oddo, James J. Owen, Arlene A. Saari, Ward W. Stevens, III, James C. Stewart, Marc A. Verniel, T. Cooper Via. Giles County: Paul B. Collins, John H. Givens, Jr., Dr. Robert C. McCracken, Ross E. Martin, Kenneth L. Rakes, Scarlet B. Ratcliffe, H. M. Scanland, Jr., James E. Tyler. Galax: Thomas L. McChesney, Dr. James A. Williams, Jr., David F. Wilson. Radford/Pulaski County: William K. Cunningham, Jack D. Nunley, Laura B. Turk. Christiansburg : Charles R. Beller, III, Gerard W. Higgins, Dr. Kenneth E. Jones, Dr. Peter J. McDonald, L. Scott Wade. Bluefield : Don E. Neal, Michael E. Neal, Constance M. Saunders. Richlands: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner. Interstate: A. Susan Keen, Stephen A. Lester, II. 7 corporate information National Bankshares, Inc. Executive Officers James G. Rakes Chairman, President and Chief Executive Officer F. Brad Denardo Corporate Officer J. Robert Buchanan Treasurer Marilyn B. Buhyoff Secretary and Counsel Annual Meeting The Annual Meeting of Stockholders will be held on Tuesday, April 10, 2007 at 3:00 p.m. at Custom Catering Center, 902 Patrick Henry Drive, Blacksburg, Virginia. Corporate Stock National Bankshares, Inc. common stock trades on the Nasdaq Capital 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 (276) 979-0341 or (800) 914-0516 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 stock transfer requirements, lost certificates, dividends and other stockholder matters should contact: Marilyn B. Buhyoff Secretary and Counsel (540) 951-6300 or (800) 552-4123 mbuhyoff@nbbank.com or Registrar and Transfer Company 10 Commerce Drive Crawford, NJ 07016-3572 (800) 368-5948 info@rtco.com 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. The Form 10-K and other corporate publications are also available at www.nationalbankshares.com. Corporate Office National Bankshares, Inc. 101 Hubbard Street Blacksburg, Virginia 24060 P.O. Box 90002 Blacksburg, Virginia 24062-9002 www.nationalbankshares.com (540) 951-6300 or (800) 552-4123 Jan Bos, Hillside Barns: Catawba Valley 8 

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