National Bankshares Inc.
Annual Report 2008

Plain-text annual report

SAFE AND SOUND SINCE 1891 NATIONAL BANKSHARES, INC. 2008 ANNUAL REPORT OUR MISSION 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. The unique vault door at National Bank’s Main Office in Blacksburg, built in 1962. FINANCIAL HIGHLIGHTS $ in thousands, except per share data 2008 2007 2006 2005 2004 Net income $ 13,593 12,675 12,632 12,424 12,230 Basic net income per share Diluted net income per share Cash dividends per share Book value per share Loans, net Total securities Total assets Total deposits Stockholders’ equity 1.96 1.96 0.80 15.89 569,699 264,999 935,374 817,848 110,108 1.82 1.82 0.76 15.07 518,435 273,343 887,647 776,339 104,800 1.80 1.80 0.73 13.86 495,486 285,489 868,203 764,692 96,755 1.77 1.76 0.71 13.10 487,162 272,541 841,498 745,649 91,939 1.74 1.73 0.64 12.38 472,199 250,708 796,154 705,932 87,088 NET INCOME (in millions) CASH DIVIDENDS BOOK VALUE $0.64 $0.71 $0.73 $0.76 $0.80 $12.2 $12.4 $12.6 $12.7 $13.6 12.8 9.6 6.4 3.2 0.0 1.0 0.8 0.6 0.4 0.2 0.0 20 15 10 5 0 $12.38 $13.10 $13.86 $15.07 $15.89 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 NET LOANS (in millions) TOTAL ASSETS (in millions) $472.2 $487.2 $495.5 $518.4 $569.7 700.0 612.5 525.0 437.5 350.0 262.5 175.0 87.5 0.0 $796.2 $841.5 $868.2 $887.6 $935.4 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Page 1 WE TAKE SERIOUSLY THE RESPONSIBILITY OF PRESERVING OUR CAREFUL AND CONSERVATIVE HERITAGE IN THE COMMUNITIES WE SERVE. WE FOCUS ON PROFITABILITY, RATHER THAN GROWTH FOR THE SAKE OF GROWTH. WHEN WE MAKE LOANS, WE KNOW OUR CUSTOMERS AND WE HAVE A CREDIT CULTURE THAT VALUES THOSE RELATIONSHIPS. WE THINK THAT SIMPLER IS BETTER, IN BOTH LOANS AND INVESTMENTS. AT TIMES, THIS APPROACH MAY SEEM A BIT OLD FASHIONED, BUT IT HAS SERVED US WELL. Page 2 MESSAGE TO OUR STOCKHOLDERS In a year that has been notable for a steady stream of bad financial news, it is particularly nice to report to you that National Bankshares, Inc. had record earnings in 2008. We achieved these results by sticking to the basics of community banking and doing only what we know we can do well. There were still good loans to be made in our southwest Virginia markets. Deposit totals grew, because depositors were confident that their hard- earned savings would remain safe in the 117 year-old National Bank. Finally, the professionals who work in National Bank’s Trust department and in National Bankshares Investment and Insur- ance Services offered personalized service and reassurance to their customers during this period of economic uncertainty. Net income for the year was over $13.59 million, 7.24% higher than the nearly $12.68 million earned in 2007. Basic net income per share increased from $1.82 last year to $1.96 in 2008. Total assets at December 31, 2008 were $935.37 million, up 5.38% from the $887.65 million we reported at December 31, 2007. Because we maintained solid levels of capital and liquidity through- out 2008, we were able to make loans in our communities all year long. This resulted in a 9.89% increase in net loans, from $518.44 million at the end of 2007 to nearly $569.70 million on December 31, 2008. Total deposits increased by 5.35%, from $776.34 million last year to $817.85 million at the end of 2008. The return on average assets for the year was 1.51%, and the return on average equity was 12.52%. Of particular interest to stockholders is the growth in stockholders’ equity, up from $104.80 million at December 31, 2007 to $110.11 million at the end of 2008. Perhaps of even greater interest is the fact that National Bankshares’ stockholders shared in this year’s good results, with cash dividends increasing from the $0.76 per share paid in 2007 to $0.80 per share in 2008. We ended 2008 with the ratio of nonperforming loans to total loans at a reasonable 0.23%. This compares with 0.22% at the end of 2007. In 2009, we anticipate that the weak economy will have a negative effect on the quality of the loan portfolio. Starting in the last half of 2008, we began to see increases in total nonperforming assets, particularly in the level of other real estate owned. In response to both the higher level of nonperforming assets and growth in the loan portfolio, the allowance for loan losses to total loans was increased to 1.02% by year-end, up from 1.00% at December 31, 2007. We will continue to carefully monitor loan quality. Our loan officers are staying in close con- tact with their customers so we can work with them during these challenging times. Despite the fact that the past year’s economic upheaval took a great deal of time and attention, we made a conscious effort to look beyond the near term. Your Board of Directors completed an extensive strategic planning initiative, the results of which should help National Bankshares, Inc. remain in control of its own future. During 2008, we expanded our technology infrastructure by de- ploying remote check capture in several of our more distant bank offices. This system permits checks and other paper items to be converted to electronic images right in the branch office. The images are then sent by secure connection to the bank’s central computer and are then sent on through the national check collec- tion system. So, a paper check never leaves the office where it was first negotiated. Remote check capture has created savings in both time and transportation costs. Looking ahead to 2009, we have plans to upgrade software and to replace a substantial number of personal computers throughout the organization. At National Bankshares, we do not aspire to stay ahead of the technology growth curve, but we do keep up with changes and invest for the future. As we attempt to adjust to rapidly changing economic circum- stances, we are fortunate to work for a company that offers us a historical model for dealing with current challenges. National Bank was founded in 1891. Through good times and bad, it has been a safe and sound bank for generations of depositors and borrowers. At National Bankshares, Inc., we take seriously the responsibility of preserving that careful and conservative heri- tage in the communities we serve. We focus on profitability, rather than growth for the sake of growth. When we make loans, we know our customers and we have a credit culture that values those relationships. We think that simpler is better, in both loans and investments. At times, this approach may seem a bit old fashioned, but it has served us well. We expect to continue to follow this course through the challenging days ahead. I would like to thank you for your investment in National Bank- shares, Inc. We very much appreciate your ongoing support. Our directors deserve thanks from each of us for their many efforts on behalf of all stockholders. Finally, we would not be able to achieve what we have without the hard work and dedication of over 200 talented employees. It takes all of us to insure National Bankshares’ success by continuing our 117 year-old tradition of committed community banking. James G. Rakes Chairman of the Board President and Chief Executive Officer Page 3 CONSOLIDATED BALANCE SHEETS $ in thousands, except per 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 $117,277 at December 31, 2008 and $115,463 at December 31, 2007) Mortgage loans held for sale 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, 6,929,474 in 2008, and 6,952,274 in 2007 Retained earnings Accumulated other comprehensive (loss), net Total stockholders’ equity Total liabilities and stockholders’ equity Page 4 December 31, 2008) 16,316) $ 29,656) 147,227) 117,772) 348) )) 60,798) 162,757) 246,218) 106,907) 576,680) (1,123) 575,557) (5,858) 569,699) 11,204) 5,760) 1,984) 13,719) 21,689) 935,374) 109,630) 256,416) 45,329) 406,473) 817,848) 54) 655) 6,709) 825,266) ---) ---) 8,662) 105,356) (3,910) 110,108) 935,374) $ $ ) $ December 31 ,2007) 16,324) 29,687) 158,594) 114,749) 220) )) 46,697) 145,542) 216,830) 115,704) 524,773) (1,119) 523,654) (5,219) 518,435) 12,016) 5,711) 263) 14,838) 16,810) 887,647) 113,361) 237,772) 44,349) 380,857) 776,339) 64) 792) 5,652) 782,847) ---) ---) 8,690) 97,810) (1,700) 104,800) 887,647) CONSOLIDATED STATEMENTS OF INCOME $ in thousands, except per share data Interest Income Interest and fees on loans 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 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 Years ended December 31, 2008 $ 37,108 449 6,816 5,738 50,111 6,004 12,802 1 2 18,818 31,293 1,119 30,174 3,425 326 2,808 1,231 1,122 175 9,087 2007 37,265 726 7,476 5,302 50,769 6,519 15,191 35 21,745 29,024 423 28,601 3,291 330 2,740 1,333 1,015 51 8,760 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 11,168 10,773 11,466 1,751 1,381 2,105 1,119 100 4,399 22,023 17,238 3,645 13,593 1.96 1.96 $ $ $ 1,743 1,149 2,146 1,138 81 3,926 20,956 16,405 3,730 12,675 1.82 1.82 1,957 1,234 1,833 1,137 19 4,024 21,670 16,420 3,788 12,632 1.80 1.80 Page 5 BOARDS OF DIRECTORS NATIONAL BANKSHARES, INC. BOARD OF DIRECTORS Standing, from left: Lawrence J. Ball, President, Moog Components Group; Jack H. Harry, President, Harry Enterprises, Inc.; William A. Peery, President, Cargo Oil Co., Inc.; Dr. James M. Shuler, Delegate, Virginia House of Delegates. Seated, from left: Jack W. Bowling, President, H.T. Bowling, Inc.; Glenn P. Reynolds, President, Reynolds Architects, Inc.; Dr. Mary G. Miller, President, Interactive Design and Development, Inc.; Dr. Jack M. Lewis, President, New River Community College; 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. Page 6 BOARDS OF DIRECTORS NATIONAL BANK BOARD OF DIRECTORS Standing, from left: Dr. J. Lewis Webb, Jr., Dentist; Carl M. McNeil, Realtor, Founder McNeil Real Estate, Inc.; Charles E. Green, III, Financial Planner, AXA Advisors, L.L.C.; James S. Gillespie, Jr., President, Jim Sam Gillespie Farm; Michael E. Dye, Pharmacist/ Owner, New Graham Pharmacy; James C. Thompson, Chairman, Thompson & Litton. Seated from left: Dr. James M. Shuler, Delegate, Virginia House of Delegates; F. Brad Denardo, Executive Vice President, National Bankshares, Inc., Executive Vice President/Chief Operating Officer, National Bank; Ellen G. Burnop, Co-Owner and President, New River Office Supply; 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. NATIONAL BANK ADVISORY BOARDS MONTGOMERY COUNTY: Dan A. Dodson, M. Scott Hill, Kathryn S. Oddo, James J. Owen, Arlene A. Saari, James C. Stewart, Marc A. Verniel, T. Cooper Via. GILES COUNTY: Dr. Terry E. Arbogast, Mark E. Collins, Lisa W. Epperly, Dr. Robert C. McCracken, Ross E. Martin, Kenneth L. Rakes, Scarlet B. Ratcliffe, 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: Constance M. Saunders. RICHLANDS: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner. INTERSTATE: A. Susan Keene, Stephen A. Lester, II. Page 7 CORPORATE INFORMATION NATIONAL BANKSHARES, INC. EXECUTIVE OFFICERS James G. Rakes Chairman, President and Chief Executive Officer David K. Skeens Treasurer and Chief Financial Officer 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. Proxy materials for the Annual Meeting of Stockholders are available at www.nationalbanksharesproxy.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 F. Brad Denardo Executive Vice President Marilyn B. Buhyoff Secretary and Counsel ANNUAL MEETING The Annual Meeting of Stockholders will be held on Tuesday, April 14, 2009 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 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 - Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 (800) 368-5948 info@rtco.com Page 8 

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