-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CTFimNCSuOwSPmcwkGD+/PP93nciUWlr2CUC3xxylzP70gx9kl6vkCsdfnwlm0EW de1T+l+k8IzOybi+nmQ/2w== 0000796534-03-000012.txt : 20031114 0000796534-03-000012.hdr.sgml : 20031114 20031114110837 ACCESSION NUMBER: 0000796534-03-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000796534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541375874 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15204 FILM NUMBER: 031001285 BUSINESS ADDRESS: STREET 1: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 BUSINESS PHONE: 5405522011 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET STREET 2: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 10-Q 1 form10q.txt FORM 10-Q 3RD QUARTER 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------ FORM 10-Q ------------------ Quarterly Report Pursuant to Section 13 or 15(d) Of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 Commission file number 0-15204 National Bankshares, Inc. (Exact name of registrant as specified in its charter) State or other jurisdiction of incorporation or organization - Virginia Internal Revenue Service - Employer Identification No. 54-1375874 101 Hubbard Street, P.O. Box 90002, Blacksburg, VA 24062-9002 (540) 951-6300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b - 2 of the Exchange Act) Yes _X_ No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 4, 2003 - ------------------------------ ------------------------------- Common Stock, $2.50 Par Value 3,515,377 (This report contains 32 pages) NATIONAL BANKSHARES, INC. AND SUBSIDIARIES Form 10-Q Index Page Part I Financial Information - ----------------------------- Item 1 - Financial Statements Consolidated Balance Sheets, September 30, 2003 (Unaudited) and December 31, 2002 3-4 Consolidated Statements of Income for the Three Months Ended September 30, 2003 and 2002 (Unaudited) 5-6 Consolidated Statements of Income for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) 7-8 Consolidated Statements of Changes in Stockholders' Equity, Nine Months Ended September 30, 2003 and 2002 (Unaudited) 9 Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2003 and 2002 (Unaudited) 10-11 Notes to Consolidated Financial Statements 12-16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 17-23 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 24 Item 4 - Controls and Procedures 24 Part II Other Information - ------------------------- Items 1 - 3 - Legal Proceedings; Changes in 25 Securities and Use of Proceeds; Defaults Upon Senior Securities Item 4 - Submission of Matters to a Vote of 25 Security Holders Item 5 - Other Information 25 Item 6 - Exhibits and Reports on Form 8-K 25 Signatures 26 - ---------- Index to Exhibits 27-28 - ----------------- 2 Part I Financial Information Item 1. Financial Statements National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets September 30, 2003 and December 31, 2002 (Unaudited) (Audited) September 30, December 31, ($ In thousands except share and 2003 2002 per share data) ============ ============== Assets: - ------- Cash and due from banks $13,045 $12,316 Interest-bearing deposits 18,330 18,818 Federal funds sold 133 1,724 Securities available for sale 125,808 119,734 Securities held to maturity (fair value $110,543 in 2003 and $103,187 in 2002) 106,719 99,560 Mortgage loans held for sale 90 846 Loans: Real estate construction loans 31,007 22,294 Real estate mortgage loans 87,907 82,193 Commercial and industrial loans 207,996 209,368 Loans to individuals 86,600 96,762 ------------ -------------- Total loans 413,510 410,617 Less unearned income and deferred fees (981) (1,278) ------------ -------------- Loans, net of unearned income and deferred fees 412,529 409,339 Less: allowance for loan losses (5,502) (5,092) ------------ -------------- Loans, net 407,027 404,247 ------------ -------------- Bank premises and equipment, net 10,133 9,938 Accrued interest receivable 5,049 4,290 Other real estate owned, net 940 537 Intangible assets and goodwill, net 10,197 10,912 Other assets 2,094 2,013 ------------ -------------- Total assets $699,565 $684,935 ============ ============== Liabilities and Stockholders' Equity: - ------------------------------------- Noninterest-bearing demand deposits $84,655 $74,032 Interest-bearing demand deposits 166,640 165,216 Savings deposits 53,897 48,956 Time deposits 312,578 320,067 ------------ -------------- Total deposits 617,770 608,271 ------------ -------------- Other borrowed funds 92 748 Accrued interest payable 516 700 Other liabilities 1,919 2,115 ------------ -------------- Total liabilities 620,297 611,834 ------------ -------------- 3 Stockholders' Equity Preferred stock of no par value. Authorized 5,000,000 shares; none issued and outstanding --- --- Common stock of $2.50 par value. Authorized 10,000,000 shares; issued and outstanding 3,512,877 shares in 2003 and 3,511,377 in 2002 8,782 8,778 Retained earnings 68,997 62,525 Accumulated other comprehensive income 1,489 1,798 ------------ -------------- Total stockholders' equity 79,268 73,101 ------------ -------------- Total liabilities and stockholders' equity $699,565 $684,935 ============ ============== See accompanying notes to the consolidated financial statements 4 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended September 30, 2003 and 2002 (Unaudited)
September 30, September 30, ($000's except share and per share data) 2003 2002 ================= ================= Interest income: ================ Interest and fees on loans $7,495 $8,196 Interest on interest-bearing deposits 43 82 Interest on federal funds sold 5 14 Interest on securities - taxable 1,377 1,338 Interest on securities - nontaxable 1,342 1,130 ----------------- ----------------- Total interest income 10,262 10,760 ----------------- ----------------- Interest expense: ================= Interest on time deposits $100,000 or more 710 818 Interest on other deposits 2,130 2,964 Interest on borrowed funds --- 1 ----------------- ----------------- Total interest expense 2,840 3,783 ----------------- ----------------- Net interest income 7,422 6,977 Provision for loan losses 435 519 ----------------- ----------------- Net interest income after provision for loan losses 6,987 6,458 ----------------- ----------------- Noninterest income: =================== Service charges on deposit accounts 704 574 Other service charges and fees 65 68 Credit card fees 416 357 Trust income 253 238 Other income 77 67 Realized securities gains, net 7 178 ------------------ ----------------- Total noninterest income 1,522 1,482 ------------------ ----------------- Noninterest expense: ==================== Salaries and employee benefits 2,396 2,237 Occupancy and furniture and fixtures 416 436 Data processing and ATM 310 263 Credit card processing 324 280 Intangibles and goodwill amortization 238 238 Net costs of other real estate owned 19 16 Other operating expenses 1,001 910 ----------------- ----------------- Total noninterest expense 4,704 4,380 ----------------- ----------------- Income before income tax expense 3,805 3,560 Income tax expense 894 848 ----------------- ----------------- Net income $2,911 $2,712 ================= ================= 5 Net income per share - basic $0.83 $0.78 ================= =================== - diluted 0.82 0.78 ================= =================== Weighted average number of common shares outstanding - basic 3,512,477 3,511,377 - diluted 3,534,615 3,518,691 Dividends declared per share $--- $--- ================= ===================
See accompanying notes to consolidated financial statements. 6 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Nine Months Ended September 30, 2003 and 2002 (Unaudited)
September 30, September 30, ($000's except share and per share data) 2003 2002 ================= ================= Interest income: ================ Interest and fees on loans $22,766 $24,362 Interest on interest-bearing deposits 180 180 Interest on federal funds sold 16 33 Interest on securities - taxable 4,177 4,110 Interest on securities - nontaxable 3,995 3,314 ----------------- ----------------- Total interest income 31,134 31,999 ----------------- ----------------- Interest expense: ================= Interest on time deposits $100,000 or more 2,325 2,605 Interest on other deposits 7,248 9,400 Interest on borrowed funds 1 4 ----------------- ----------------- Total interest expense 9,574 12,009 ----------------- ----------------- Net interest income 21,560 19,990 Provision for loan losses 1,277 1,711 ----------------- ----------------- Net interest income after provision for loan losses 20,283 18,279 ----------------- ----------------- Noninterest income: =================== Service charges on deposit accounts 1,877 1,678 Other service charges and fees 206 202 Credit card fees 1,210 1,040 Trust income 757 718 Other income 342 416 Realized securities gains, net 3 343 ----------------- ----------------- Total noninterest income 4,395 4,397 ----------------- ----------------- Noninterest expense: ==================== Salaries and employee benefits 7,161 6,680 Occupancy and furniture and fixtures 1,248 1,260 Data processing and ATM 851 849 Credit card processing 949 764 Intangibles and goodwill amortization 715 716 Net costs of other real estate owned 38 139 Other operating expenses 2,878 2,709 ----------------- ----------------- Total noninterest expense 13,840 13,117 ----------------- ----------------- Income before income tax expense 10,838 9,559 Income tax expense 2,494 2,196 ----------------- ----------------- Net income $8,344 $7,363 ================= ================= 7 Net income per share - basic $2.38 $2.10 ================= ================== - diluted 2.36 2.10 ================= ================== Weighted average number of common shares outstanding - basic 3,512,262 3,511,377 - diluted 3,531,819 3,515,902 Dividends declared per share $0.54 $0.46 ================= ==================
See accompanying notes to consolidated financial statements. 8 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 2003 and 2002 (Unaudited)
Accumulated Other ($000's, except for per Common Retained Comprehensive Comprehensive share data) Stock Earnings Income Income Total ============ ============== ================ ================ =========== Balances, December 31, 2001 $8,778 55,917 566 --- $65,261 Net income --- 7,363 --- 7,363 7,363 Dividend ($0.46 per share) --- (1,614) --- --- (1,614) Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of income expense tax $1,144 --- --- --- 2,220 --- Reclass adjustment net of tax $113 --- --- --- (218) --- ------- Other comprehensive income --- --- 2,002 2,002 2,002 ------------ -------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- 9,365 --- ============ ============== ================ ================ =========== Balances, September 30, 2002 $8,778 61,666 2,568 --- $73,012 ============ ============== ================ ================ =========== Balances, December 31, 2002 $8,778 62,525 1,798 --- $73,101 Net income --- 8,344 --- 8,344 8,344 Dividend ($0.54 per share) --- (1,897) --- --- (1,897) Exercise of stock options 4 25 --- --- 29 Other comprehensive income, net of tax Unrealized losses on securities available for sale, net of income tax $166 --- --- --- (307) --- Reclass adjustment net of income tax $1 --- --- --- (2) --- ---- Other comprehensive income --- --- (309) (309) (309) ------------ -------------- ---------------- ---------------- ----------- Comprehensive income --- --- --- 8,035 --- ============ ============== ================ ================ =========== Balances, September 30,2003 $8,782 68,997 1,489 --- $79,268 ============ ============== ================ ================ ===========
See accompanying notes to consolidated financial statements. 9 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and 2002 (Unaudited)
September 30, September 30, ($000's) 2003 2002 =================== ================= Cash flows from operating activities: - ------------------------------------- Net income $8,344 $7,363 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,277 1,711 Depreciation of bank premises and equipment 687 751 Amortization of intangibles 715 716 Amortization of premiums and accretion of discount, net 383 282 (Gains) on sales and calls of securities available for sale, net (1) (331) (Gains) on calls of securities held to maturity (2) (12) Losses and writedowns on other real estate owned 18 58 (Increase) decrease in: Mortgage loans held for sale 756 505 Accrued interest receivable (759) (86) Other assets 32 (599) Increase (decrease) in: Accrued interest payable (184) (395) Other liabilities (196) 323 ------------------- ----------------- Net cash provided by operating activities $11,070 $10,286 ------------------- ----------------- Cash flows from investing activities: - ------------------------------------- Net decrease in federal funds sold $1,591 $436 Net (increase) decrease in interest-bearing deposits 488 (1,334) Proceeds from calls, principal payment, sales and maturities of securities available for sale 19,825 13,086 Proceeds from calls principal payments and maturities of securities held to maturity 14,493 15,846 Purchases of securities available for sale (26,514) (30,252) Purchases of securities held to maturity (21,839) (249) Purchases of loan participations (2,051) (2,676) Collections of loan participations 1,292 3,527 Net (increase) in loans to customers (3,992) (19,220) Proceeds from disposal of other real estate owned 81 103 Recoveries on loans charged off 192 93 Purchase of bank premises and equipment (1,331) (413) Proceeds from disposal of bank premises and equipment 449 11 ------------------- ----------------- Net cash (used in) investing activities $(17,316) $(21,042) 10 Cash flows from financing activities: - ------------------------------------- Net (decrease)in time deposits $ (7,489) $(11,431) Net increase in other deposits 16,988 26,391 Net increase(decrease)in other borrowed funds (656) 384 Exercise of stock options 29 --- Dividends paid on common stock (1,897) (1,614) ------------------- ----------------- Net cash provided by financing activities 6,975 13,730 ------------------- ----------------- Net increase in cash and due from banks 729 2,974 Cash and due from banks at beginning of period 12,316 12,293 ------------------- ----------------- Cash and due from banks at end of period $13,045 $15,267 =================== ================= Supplemental disclosure of cash flow information: - ------------------------------------------------- Cash paid for interest $9,758 $12,404 =================== ================= Cash paid for income taxes $2,509 $2,464 =================== ================= Loans charged to the allowance for loan losses $1,059 $1,067 =================== ================= Loans transferred to other real estate owned $502 $219 =================== ================= Unrealized gains (losses)on securities available for sale $(476) $3,033 =================== =================
See accompanying notes to consolidated financial statements. 11 National Bankshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 2003 (Unaudited) Note (1) The consolidated financial statements 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, Inc. (NBFS), (the Company), conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and financial information included herein should be read in conjunction with the notes to consolidated financial statements included in the Company's 2002 Annual Report to Stockholders and additional information supplied in the 2002 Form 10-K. Note (2) Stock-Based Compensation At September 30, 2003, the Company had a stock-based employee compensation plan which is described more fully in the Company's Form 10-K dated December 31, 2002. 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.
Nine months ended Three months ended September 30, September 30, - ---------------------------------------------------- ------------------------------ ---------------------------- ($ In thousands, except per share data) 2003 2002 2003 2002 Net income, as reported $8,344 $7,363 $2,911 $2,712 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (30) (17) (10) (5) -------------- --------------- -------------- ------------- Pro forma net income $8,314 $7,346 $2,901 $2,707 - ---------------------------------------------------- -------------- --------------- -------------- ------------- Earnings per share: - ------------------- Basic-as reported $2.38 $2.10 $0.83 $0.78 - ---------------------------------------------------- -------------- --------------- -------------- ------------- Basic-pro forma $2.37 $2.09 $0.83 $0.77 - ---------------------------------------------------- -------------- --------------- -------------- ------------- Diluted-as reported $2.36 $2.10 $0.82 $0.78 - ---------------------------------------------------- -------------- --------------- -------------- ------------- Diluted-pro forma $2.35 $2.09 $0.82 $0.77 - ---------------------------------------------------- -------------- --------------- -------------- -------------
There were no stock options granted or forfeited in the first three quarters of 2003. The only stock options exercised during that period were 1,500 options exercised during the second quarter, 500 at an original grant price of $22.00 per share and 1,000 at $18.75 per share. 12 Note (3) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended September 30, December 31, 2003 2002 2002 ============== ============== ================= ($000's, except for % data) Balance at beginning of period $5,092 $4,272 $4,272 Provision for loan losses 1,277 1,711 2,251 Loans charged off (1,059) (1,067) (1,571) Recoveries 92 93 140 -------------- -------------- ----------------- Balance at the end of period $5,502 $5,009 $5,092 ============== ============== ================= Ratio of allowance for loan losses to the end of period loans net of unearned income and deferred fees 1.33% 1.21% 1.24% ============== ============== ================= Ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees(1) .28% .32% .35% Ratio of allowance for loan losses to nonperforming loans(2) 2,895.79% 1,361.14% 1,768.06% ============== ============== =================
(1) Net charge-offs are on an annualized basis. (2) The Company defines nonperforming loans as total nonaccrual and restructured loans. Loans 90 days past due and still accruing are excluded.
September 30, December 31, 2003 2002 2002 ============= ============ ================ ($000's, except for % data) Nonperforming Assets: - --------------------- Nonaccrual loans $190 $368 $288 Restructured loans --- --- --- ------------- ------------ ---------------- Total nonperforming loans 190 368 288 Foreclosed property 940 269 537 ------------- ------------ ---------------- Total nonperforming assets $1,130 $637 $825 ============= ============ ================ Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned .27% .15% .20% ============= ============ ================
13
September 30, December 31, 2003 2002 2002 ============= ============ =============== Accruing Loans Past Due 90 Days or More: - ---------------------------------------- Past due 90 days or more and still accruing $2,207 $895 $977 ============= ============ =============== Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees .53% .22% .24% ============= ============ =============== Impaired Loans: - -------------- Total impaired loans $380 $387 $139 ============= ============ =============== Impaired loans with a valuation allowance --- $43 $93 Valuation allowance --- (26) (33) ------------- ------------ --------------- Impaired loans net of allowance --- $17 $60 ============= ============ =============== Impaired loans with no valuation allowance $380 $344 $46 ============= ============ =============== Average recorded investment in impaired loans $224 $462 $397 ============= ============ =============== Income recognized on impaired loans $19 $11 $11 ============= ============ =============== Amount of income recognized on a cash basis --- --- --- ============= ============ ===============
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 at September 30, 2003 were $10. 14 Note (4) Securities The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for the sale by major security type as of September 30, 2003 are as follows:
September 30, 2003 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Available for sale: U.S. Treasury $2,247 $117 --- $2,364 U.S. Government agencies and corporations 5,639 31 5 5,665 State and political subdivisions 79,318 2,144 356 81,106 Mortgage-backed securities 10,032 355 --- 10,387 Corporate debt securities 22,623 752 303 23,072 Federal Reserve Bank stock- restricted 209 --- --- 209 Federal Home Loan Bank stock-restricted 1,646 --- --- 1,646 Other securities 1,219 140 --- 1,359 ----------------- ----------------- ----------------- ------------------ Total securities available for sale $122,933 $3,539 $664 $125,808 ================= ================= ================= ==================
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities held to maturity by major security type as of September 30, 2003 are as follows:
September 30, 2003 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Held to Maturity: U.S. Government agencies and corporations $10,996 $122 $70 $11,048 State and political subdivisions 56,806 1,912 155 58,563 Mortgage-backed securities 5,071 213 --- 5,284 Corporate securities 33,846 2,118 316 35,648 ----------------- ----------------- ----------------- ------------------ Total securities held to maturity $106,719 $4,365 $541 $110,543 ================= ================= ================= ==================
15 Recent Accounting Announcements In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a material impact on the Corporation's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporation's consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity's activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46 but the adoption of this Interpretation is not expected to have a material impact on the Corporation's consolidated financial statements. In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Company's consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Company's consolidated financial statements. 16 National Bankshares, Inc. and Subsidiaries (In 000's, except for per share data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to provide information about the financial condition and results of operations of National Bankshares, Inc. and its wholly-owned subsidiaries (the Company), which are not otherwise apparent from the consolidated financial statements and other information included in this report. Reference should be made to the financial statements and other information included in this report as well as the 2002 Annual Report and Form 10-K for an understanding of the following discussion and analysis. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic 17 events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. Core deposit intangibles Effective January 1, 2002, the Corporation adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, Statement 142 requires that acquired intangible assets (such as core deposit intangibles) be separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its estimated useful life. Branch acquisition transactions were outside the scope of the Statement and therefore any intangible asset arising from such transactions remained subject to amortization over their estimated useful life. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement amends previous interpretive guidance on the application of the purchase method of accounting to acquisitions of financial institutions, and requires the application of Statement No. 141, Business Combinations, and Statement No. 142 to branch acquisitions if such transactions meet the definition of a business combination. The provisions of the Statement do not apply to transactions between two or more mutual enterprises. In addition, the Statement amends Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to include in its scope core deposit intangibles of financial institutions. Accordingly, such intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The Company has determined that the acquisitions that generated the intangible assets and goodwill on the consolidated balance sheets in the amount of $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. Analysis of Financial Condition and Results of Operations for the Nine Months Ended June 30, 2003 - -------------------------------------------------------------------------------- Net income for the nine months ended September 30, 2003 was $8,344, which represents an increase of $981 or 13.32% when compared to the same period in 2002. The annualized return on average assets for the nine months ended September 30, 2003 was 1.60% and 1.52% for September 30, 2002. The annualized return on average equity was 14.55% for the period ended September 30, 2003 and 14.31% for September 30, 2002. Basic earnings per share for the period ended September 30, 2003 was $2.38 and $2.10 in 2002 for the same period. Net Interest Income Net interest income at the end of the third quarter of 2003 was $21,560, an increase of $1,570 or 7.85% over the same period in 2002. Interest income decreased $865 or 2.70%, when the periods ending September 30, 2003 and 2002 are compared. Interest expense decreased $2,435, or 20.28%, when the two periods are compared. The yield on earning assets was 6.77%, decreasing 60 basis points from September 30, 2002. The cost to fund earning assets for the period ending September 30, 2003 was 1.94% or a 68 basis point decrease from the same period in 2002. This resulted in an increase in the net interest margin of 8 basis points. Substantially lower funding costs due to the low interest rate environment accounted for most of the improvement in net interest income. 18 Following is a table showing the quarter-to-date average balances for interest-earning assets, interest-bearing liabilities and the related yield and cost.
Average Balance Interest Yield Cost ----------------- ---------------- ------------- Loans, net (1) $416,382 $7,522 7.17% Taxable securities 107,060 1,377 5.10% Nontaxable securities (1) 125,166 2,034 6.45% Federal funds sold 1,315 5 1.51% Interest-bearing deposits 18,549 43 0.92% ----------------- ---------------- ------------- Total interest-earning assets $668,472 $10,981 6.52% ================= ================ ============= Interest-bearing demand deposits $168,281 $356 0.84% Savings deposits 52,920 59 0.44% Time deposits 314,098 2,425 3.06% Short-term borrowings 181 --- --- ================= ================ ============= Total interest-bearing liabilities $535,480 $2,840 2.10% ================= ================ ============= Net interest income/interest spread $8,141 4.42% ================ ============= Net interest margin (2) 4.83% ================ =============
(1) Yield is on a tax equivalent basis. (2) The net interest margin consists of annualized net interest income on a fully tax equivalent basis divided by average earnings assets. Risk factors and forward looking statements apply as discussed in the Company's 2002 Form 10-K in the Security, Liquidity, Interest Rate Sensitivity, Securities and Net Interest Income sections. Provision and Allowance for Loan Losses The adequacy of the allowance for loan losses is based on management's judgement and analysis of current and historical loss experience, risk characteristics of the loan portfolio, concentrations of credit 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 large credits and also conducts periodic credit reviews. Changing trends in the loan mix are also evaluated in determining the adequacy of the allowance for loan losses. The ratio of the allowance for loan losses to loans net of unearned income was 1.33% at September 30, 2003. This compares to 1.21% at September 30, 2002. The provision for the first nine months of 2003 was $1,277, down $434 over the same period the prior year. While management continues to believe that overall credit quality remains satisfactory, the level of exposure to loss has increased, particularly in the loans to individuals category. In addition, much of the growth recently experienced has been in the commercial loan category. While the number of possible 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. Loans past due ninety days or more increased by $1,230 since December 31, 2002. Noninterest Income Noninterest income is an important source of the Company's income. This category is comprised of service charges on deposit accounts, other service 19 charges and fees, credit card fees, trust income and other income. Net securities gains and losses are also included in this category. Noninterest income for the period ending September 30, 2003 and 2002 was $4,395 and $4,397, respectively. Service charges on deposit accounts increased by $199 or 11.86%, when compared to the same period in 2002. A portion of this increase was due to modifications in the terms of certain demand deposit products and the associated service charges. Other service charges and fees increased $4 when September 30, 2003 and September 30, 2002 are compared. Credit card fees increased $170, or 16.35%. This increase was primarily the result of an increased volume of merchant and interchange fees. Trust income increased by $39 in 2003, when compared to the first nine months of 2002. Trust income is dependent on market conditions as well as the types of accounts being handled at any given point in time. The level of estate business, for example, cannot be predicted with any degree of precision. Realized securities gains were $3 for the first nine months of 2003. The net gains were primarily associated with the adjustment of the Company's investment in certain limited liability companies offset by gains on called securities. Previous year net gains were associated with the sale of equity securities by Bankshares. Noninterest Expense Noninterest expense for the period ended September 30, 2003 was $13,840, an increase of $723 or 5.51%. Salaries and employee benefits increased by $481 or 7.20%, at September 30, 2003 as compared with the same period. Rising pension costs and normal salary adjustments accounted for the majority of the increase. Occupancy expenses decreased $12 or .95%, when the first nine months of 2003 and 2002 are compared. Data processing costs increased $2 or .24%. Credit card processing increased $185 or 24.21% due to volume. As previously noted credit card income was also up for the year because of volume in the merchant and debit card areas. Intangibles expense for the first nine months of 2003 and 2002 was $715 and $716. There were no impairment write downs during the period. Other operating costs increased by $169 or 6.24%, when the periods September 30, 2003 and 2002 are compared. Included in this category are franchise taxes, which increased by $71, and repossession expense, which increased by $50. Income Taxes In the third quarter of 2003, the Company's level of profits resulted in an increase from 34% to 35% in the federal income tax rate applicable to the Company. In addition to the actual taxes paid to the government, this change affects other areas, including the book tax provisions, deferred taxes, and tax equivalency calculations. 20 Balance Sheet Total assets at September 30, 2003 were $699,565, an increase of $14,630 or 2.14% from period end assets at December 31, 2002. This increase was primarily due to deposit growth, which was $9,499 or 1.56%. Securities Securities available for sale increased by 5.07%, while securities held to maturity increased 7.19%. (Refer to the table previously presented for portfolio composition.) Funds for these increases came primarily from deposit growth. Loans Loans net of unearned income grew by $3,190 or .78% from December 31, 2002. Since December 31, 2002, construction loans increased by $8,713 or 39.08%, with real estate mortgage loans increasing $5,714 or 6.95%. The commercial loan category decreased by $1,372 or .66% due to demand. Loans to individuals declined by $10,162 or 10.50%. It is not known to what extent loans to individuals will ultimately decline or when growth in this area will resume, the general economic conditions. In addition, because of the many financing alternatives available to customers, it is unknown whether percentage of loans to individuals to total loans will return to previous levels. Deposits Total deposits at September 30, 2003 increased $9,499 or 1.56%, as compared with total deposits at December 31, 2002 are compared. Noninterest-bearing demand deposits increased $10,623 or 14.35% when September 30, 2003 and December 31, 2002 are compared. During the same period, interest-bearing demand deposits increased by .86%, while savings deposits were up 10.09%. Time deposits declined by $7,489 or 2.34%. This data indicates that depositors continue to gravitate toward liquid short-term deposit instruments. This trend is expected to continue until rising rates make longer term time deposits a more attractive investment. Daily Averages Daily averages for the major categories are as follows: (000's) September 30, 2003 December 31,2002 -------------------------- --------------------- Loans, net $405,903 $404,717 Securities available for sale 123,387 96,877 Securities held to maturity 103,305 94,616 Total assets 695,291 655,783 Total deposits 615,958 583,298 Stockholders' equity 76,648 69,895 Liquidity Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. Cash from operating activities was $11,070. The primary sources were net income and net sales of real estate loans held for sale. Cash from investing activities was $(17,316). The cash flow statement shows that the principal use of cash was for securities. Financing activities during the period produced $6,975 in cash, mainly due to an increase in deposits. 21 Management is not aware of any commitments that will result in, or are likely to result in, a material and adverse impact on liquidity. Capital Resources Total stockholders' equity increased by $6,167 from December 31, 2002 to September 30, 2003. Net income of $8,344 accounted for most of the increase, offset by a dividend to shareholders in the amount of $1,897. The Company's risk based capital ratios at September 30, 2003 are as follows. Total capital 14.90% Tier I 13.77% Leverage ratio 9.84% The Company's banking affiliates continue to meet the regulatory criteria for well capitalized. Analysis of Financial Condition and Results of Operations for the Three Months Ended September 30, 2003 - -------------------------------------------------------------------------------- Net income for the third quarter of 2003 was $2,911 an increase of $199 or 7.34% over the same period in 2002. The return on average assets for the three months ended September 30, 2003 was 1.66%, which compared to 1.65% for the same quarter in 2002. The return on average equity for the third quarter of 2003 was 14.78%, a slight decrease from 2002, when the return or average equity was 15.30%, or an annualized basis. Net Interest Income Net interest income for the third quarter of 2003 was $7,422 an increase of 6.38% over the same period in 2002. Because of the continuation of the low interest rate environment, previously established trends persisted during the third quarter. Higher rate earning assets continued to mature and/or reprice and move into lower rate earning assets. At the same time, interest bearing liabilities also continued to mature and/or reprice into liabilities with lower rates. The net interest margin for the third quarter of 2003 was 4.83%, compared to 4.87% for the same period in 2002. Provision for Loan Losses The provision for loan losses for the third quarter of 2003 was $435, a decrease of $84 from the third quarter of 2002. Management continues to expect net charge-off levels to be higher in 2003, particularly in the area of loans to individuals. Noninterest Income Service charges for the third quarter were up $130, when compared to the third quarter of 2002. During the second quarter the Company made certain modifications to its demand deposit products that have so far resulted in an increase in service charge income. It is not known whether this level of income will be sustainable, as the ongoing acceptance of product changes by the Company's customer base is as yet uncertain. 22 Other Service Charges This category shows a decline of $3 when compared to the same quarter in 2002. This category is comprised of various miscellaneous types of income which vary from period to period. Credit Card Income Credit card income for the quarter ended September 30, 2003 was $416, an increase of $59 or 16.53%. The majority of the increase was due to the volume of business in merchant and debit cards. Trust Income Trust income increased by $15 or 6.30% when the third quarter of 2003 and 2002 are compared. Trust income varies due to the nature of the business. Estate income, for example, is unpredictable. Market values of trust assets, which can vary widely, also affect the level of income. Realized Gains or Losses on Securities Realized Gains or Losses on Securities Net securities gains were $7 in the third quarter of 2003. In 2002 the Company sold certain stock owned by Bankshares for a substantial gain, resulting in $178 in net gains for that quarter. Salaries and Wages Salaries and wages are up $159 or 7.11% at September 30, 2003 when compared with the same period last year. As previously mentioned, rising pension costs and normal salary reviews accounted for most of the increase. Other Expense Other expenses, including occupancy, data processing, and other expense, normally fluctuate to a degree. Credit card processing expenses were up $44 due primarily to increase in volume related to merchant and debit cards. Daily Averages Following are quarterly averages for selected categories: Major Categories September 30, 2003 September 30, 2002 - ---------------- ------------------ ------------------ Loan, net $409,307 $409,413 Securities available for sale 124,683 96,937 Securities held to maturity 104,111 89,474 Total assets 697,216 657,504 Total deposits 616,574 583,937 Stockholders equity 78,143 71,104 Loans and Deposits September 30,2003 September 30, 2002 - ------------------ ----------------- ------------------ Construction loans $31,754 $23,018 Real estate loans 84,776 80,060 Commercial loans 210,433 208,318 Loan to individuals 88,855 104,372 Noninterest bearing demand deposits 81,275 75,223 Interest bearing demand deposits 168,281 153,472 Saving deposits 52,920 48,495 Time deposits 314,098 306,747 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivatives 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. Management does not plan any future involvement in high risk derivative products. The Company has investments in collateralized mortgage obligations, structured notes and other similar instruments that are included in securities available for sale and securities held to maturity. The fair value of these investments at September 30, 2003 was approximately $2,208. Amortized cost for these securities was approximately $2,289. 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 to adverse movement in interest rates. Interest rate shock analyses provides management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2002. Item 4. Controls and Procedures Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. 24 National Bankshares, Inc. and Subsidiaries Part II Other Information Items 1-3. Legal Proceedings; Changes in Securities and Use of Proceeds; Defaults upon Senior Securities None for the three months ended September 30, 2003. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K Form 8K dated July 11, 2003 - Press release announcing earnings for the second quarter of 2003, incorporated by reference herein. Form 8K dated July 21, 2003 - Press release announcing the Company's inclusion in the Russell (R) 3000 Index, incorporated by reference herein. 25 Signatures National Bankshares, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: November 14, 2003 NATIONAL BANKSHARES, INC. /s/ JAMES G. RAKES ----------------------------- James G. Rakes Chief Executive Officer /s/ J. ROBERT BUCHANAN ----------------------------- J. Robert Buchanan Chief Financial Officer 26 Index to Exhibits Page No. In Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, (incorporated herein of National Bankshares, Inc. by reference to Exhibit 3(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for (incorporated herein by National Bankshares, Inc. common stock, reference to Exhibit $2.50 par value 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Article Four of the Articles of (incorporated herein by Incorporation of National Bankshares, reference to Exhibit Inc. 4(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement (incorporated herein by dated June 18, 1990, by and between reference to Exhibit Information Technology, Inc. and The 10(e) of the Annual National Bank of Blacksburg Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 (incorporated herein by Stock Option Plan of the reference to Exhibit 4.3 Form S-8, filed as Registration No. 333-79979 with the Commission on June 4, 1999) *10(iii)(A) Employment Agreement dated January (incorporated herein by 2002 between National Bankshares, Inc. reference to Exhibit and James G. Rakes 10(iii)(A) of Form 10Q for the period ended June 30, 2002) *10(iii)(A) Employee Lease agreement dated August (incorporated herein by 14, 2002, by and between National reference to Exhibit Bankshares and The National Bank of 10(iii)(A) of Form 10Q Blacksburg for the period ended September 30, 2002) *10(iii)(A) Change in Control Agreement dated (incorporated herein by January 5, 2003, between National reference to Exhibit Bankshares, Inc. and Marilyn B. 10(iii) on Form 10K for Buhyoff. the Fiscal Year ended December 31, 2002) *10(iii)(A) Change in Control Agreement dated (incorporated herein by January 8, 2003, between National reference to Exhibit Bankshares, Inc. and F. Brad Denardo 10(iii) on Form 10K for the Fiscal Year ended December 31, 2002) *10(iii)(A) Change in Control Agreement dated (incorporated herein by June 1, 1998, between Bank of Tazewell reference to Exhibit County and Cameron L. Forester 10(iii) on Form 10K for the Fiscal Year ended December 31, 2002) 27 31(a) Section 302 Certification of Chief Executive Officer Page 30 31(b) Section 302 Certification of Chief Financial Officer Page 31 32(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 350 Page 32 32(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 350 Page 33 28 EX-31 2 ex31a.txt Section 302 Certifications Exhibit 31 (a) I, James G. Rakes, certify that: 1. I have reviewed this report on Form 10-Q of National Bankshares, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ JAMES G. RAKES - ----------------------------- James G. Rakes Chief Executive Officer EX-31 3 ex31b.txt Section 302 Certifications Exhibit 31 (b) I, J. Robert Buchanan, certify that: 1. I have reviewed this report on Form 10-Q of National Bankshares, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 (e) and 15d - 15 (e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ J. ROBERT BUCHANAN - ----------------------------- J. Robert Buchanan Chief Financial Officer EX-32 4 ex32a.txt Exhibit 32 (a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended September 30, 2003, I, James G. Rakes, President and Chief Executive Officer of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended September 30, 2003, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended September 30, 2003, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. _/s/ JAMES G. RAKES_ ------------------ James G. Rakes Chairman President and Chief Executive Officer EX-32 5 ex32b.txt Exhibit 32 (b) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended September 30, 2003, I, J. Robert Buchanan, Treasurer (Chief Financial Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended September 30, 2003, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2)the information contained in such Form 10-Q for the quarter ended September 30, 2003, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. _/s/ J. ROBERT BUCHANAN_ ---------------------- J. Robert Buchanan Treasurer (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----