<PAGE>
As filed with the Securities and Exchange Commission on December 13, 1995
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NATIONAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 6712 54-1375874
(State or other (Primary Standard (IRS Employer
jurisdiction Industrial Identification No.)
of incorporation or Classification Code)
organization)
100 South Main Street
Blacksburg, Virginia 24060
(540) 552-2011
(Address, including zip code, and telephone number,
including area code, of registrant's principal office)
----------------------
JAMES G. RAKES
Chief Executive Officer
100 South Main Street
Blacksburg, Virginia 24060
(540) 552-2011
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
Copies to:
Faith M. Wilson, Esq. John F. Stuart, Esq.
Woods, Rogers & Hazlegrove, P.L.C. 1730 K Street, N.W.
First Union Tower, Suite 1400 11th Floor
10 S. Jefferson Street Washington, DC 20006
Roanoke, Virginia 24011
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
----------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
----------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================
Proposed Proposed
maximum maximum
Title of each offering aggregate Amount of
class of securities Amount to price per offering registration
to be registered be registered unit* price* fee
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $2.50 per share 1,888,209 $24.00 $45,317,016 $15,627
============================================================================================
</TABLE>
*Estimated solely for purposes of calculating the registration fee and
calculated pursuant to Rule 457(f)(1) and based on the average of the bid and
asked price for registrant's common stock on December 7, 1995.
----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
NATIONAL BANKSHARES, INC. PROSPECTUS
Cross-reference sheet pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Form S-4 Item Location in Prospectus
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<C> <S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus........................... Outside front cover page; facing page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................. AVAILABLE INFORMATION; TABLE OF
CONTENTS
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.. SUMMARY
4. Terms of the Transaction.............. SUMMARY; GENERAL INFORMATION; THE
MERGER; DESCRIPTION OF NBI CAPITAL
STOCK; CERTAIN DIFFERENCES IN RIGHTS
OF BTC AND NBI STOCKHOLDERS; ANNEX A;
ANNEX B; ANNEX C
5. Pro Forma Financial Information....... PRO FORMA FINANCIAL INFORMATION
6. Material Contracts with the Company
Being Acquired....................... THE MERGER; ADDITIONAL MATTERS
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............ *
8. Interests of Named Experts and Counsel LEGAL OPINION; TAX OPINION; EXPERTS
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... *
10. Information with Respect to S-3
Registrants.......................... *
11. Incorporation of Certain Information
by Reference......................... *
12. Information with Respect to S-2 or
S-3 Registrants...................... SUMMARY; BUSINESS OF NBI; NBI
SELECTED FINANCIAL INFORMATION; NBI
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; NBI STATISTICAL DATA;
CERTAIN REGULATORY CONSIDERATIONS
13. Incorporation of Certain Information
by Reference......................... INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE
14. Information with Respect to
Registrants Other Than S-3 or S-2
Registrants.......................... *
15. Information with Respect to S-3
Companies............................ *
16. Information with Respect to S-2 or
S-3 Companies........................ *
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies...... SUMMARY; BUSINESS OF BTC; BTC
SELECTED FINANCIAL INFORMATION; BTC
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; BTC STATISTICAL DATA;
CERTAIN REGULATORY CONSIDERATIONS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-4 Item Location in Prospectus
- ------------- ----------------------
<C> <S> <C>
18. Information if Proxies, Consents or
Authorizations are to be Solicited... INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE; SUMMARY; GENERAL
INFORMATION; THE MERGER; BUSINESS OF
BTC; BUSINESS OF NBI; BTC DIRECTORS
AND OFFICERS COMPENSATION; EXPERTS;
ATTACHMENT D
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited, or in an Exchange Offer... *
</TABLE>
_______________
*Not applicable
<PAGE>
BANK OF TAZEWELL COUNTY
309 East Main Street
P. O. Box 687
Tazewell, Virginia 24651
(540) 988-5566
________________, 1995
Dear Stockholder:
On behalf of the Board of Directors, I want to extend to you a cordial
invitation to attend a Special Meeting of Stockholders (the "Special Meeting")
of the Bank of Tazewell County ("BTC"). The meeting will be held at ________
a.m., local time, on ___________________, 1996, at __________________.
The purpose of the Special Meeting is to vote on a proposal to approve an
Agreement and Plan of Merger, dated as of August 28, 1995 (the "Merger
Agreement"), among BTC and National Bankshares, Inc. ("NBI"), pursuant to which
NBI Interim Bank ("NBI Interim"), a wholly owned subsidiary of NBI, will merge
(the "Merger") with and into BTC, together with an amendment and restatement of
BTC's Articles of Incorporation eliminating the preemptive rights of holders of
BTC common stock and conforming the BTC Articles of Incorporation to certain
provisions of the Articles of Incorporation of NBI Interim (the "BTC Charter
Amendment"). BTC stockholders will vote on the Merger Agreement, the related
Plan of Merger and the BTC Charter Amendment as one, unified proposal (the
"Proposal") and will not vote on each of the components separately.
Upon consummation of the Merger each outstanding share of BTC common stock
will be converted into the right to receive one share of NBI common stock, with
cash in lieu of the issuance of any fractional share interest, in a transaction
that is generally tax-free for federal income tax purposes, all as more fully
discussed in the accompanying Prospectus/Proxy Statement.
Consummation of the Merger is subject to certain conditions, including
approval of the Proposal by the affirmative vote of more than two-thirds of the
votes entitled to be cast at the Special Meeting by the holders of BTC common
stock and approval of the Merger by various regulatory agencies.
The accompanying Notice of Special Meeting and Prospectus/Proxy Statement
contain information about the Merger. I urge you to carefully review such
information, the information in NBI's 1994 Annual Report on Form 10-K, 1995
Annual Meeting Proxy Statement and 1995 Third Quarter Report on Form 10-Q,
copies of which are available as indicated in the accompanying Prospectus/Proxy
Statement under "AVAILABLE INFORMATION."
The Board of Directors of BTC has unanimously adopted the Merger Agreement,
the related Plan of Merger and the BTC Charter Amendment and recommends that the
stockholders of BTC approve the Proposal. Every stockholder's vote is
important. A failure to vote, either by not returning the enclosed proxy or by
checking the ABSTAIN box thereon, will have the same effect as a vote against
approval of the Proposal. Even if you plan to attend the Special Meeting in
person, please complete the enclosed proxy and mail it promptly in the enclosed
postage-paid, return addressed envelope.
Yours very truly,
R. E. Dodson
President and
Chief Executive Officer
<PAGE>
BANK OF TAZEWELL COUNTY
309 East Main Street
P. O. Box 687
Tazewell, Virginia 24651
(540) 988-5566
--------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON _________, 1996
--------------------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of the Bank of Tazewell County ("BTC") will be held at ___________,
local time, on _________________, 1996, for the following purposes, as more
fully set forth in the accompanying Prospectus/Proxy Statement:
1. To consider and vote upon a proposal to approve an Agreement and Plan of
Merger, dated as of August 28, 1995 (the "Merger Agreement"), among BTC
and National Bankshares, Inc. ("NBI"), pursuant to which (i) NBI Interim
Bank, a wholly owned subsidiary of NBI, will merge (the "Merger") with
and into BTC, and (ii) each outstanding share of BTC common stock
(excluding any shares held by dissenting stockholders and certain shares
held by NBI or BTC) will be converted into the right to receive one share
of NBI common stock, with cash in lieu of the issuance of any fractional
share interest, all on and subject to the terms and conditions contained
therein, together with an amendment to and restatement of the BTC
Articles of Incorporation eliminating the preemptive rights of holders of
BTC common stock and conforming the BTC Articles of Incorporation to
certain provisions of the Articles of Incorporation of NBI Interim (the
"BTC Charter Amendment").
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or adjournments thereof.
BTC stockholders will vote on the Merger Agreement, the related Plan of Merger
and the BTC Charter Amendment as one, unified proposal (the "Proposal") and will
not vote on each of the components separately.
A copy of the Merger Agreement, including the related Plan of Merger that is
set forth in Annex 1 thereto, is set forth as Attachment A to the
Prospectus/Proxy Statement, and a copy of the BTC Charter Amendment is set forth
as Attachment B to the accompanying Prospectus/Proxy Statement.
The Board of Directors of BTC has fixed __________, 1995, as the record date
for the determination of stockholders entitled to notice of and to vote at the
Special Meeting and, accordingly, only holders of record of BTC common stock at
the close of business on that date will be entitled to notice of and to vote at
the Special Meeting.
Approval of the Proposal by the holders of BTC common stock requires the
affirmative vote of more than two-thirds of the votes entitled to be cast at the
Special Meeting by the holders of BTC common stock.
Pursuant to the Virginia Stock Corporation Act, holders of BTC common stock
have the right to dissent from the Merger and to demand payment of the fair
value of each such holder's shares of BTC common stock in the event the Merger
is consummated. A holder of BTC common stock who wishes to assert such holder's
dissenters' rights must (i) deliver to BTC, before such vote is taken on the
Proposal, written notice of such holder's intent to demand payment for such
shares if the Merger is consummated, (ii) not vote such shares in favor of
approval of the Proposal, and (iii) comply with the further provisions of the
Virginia Stock Corporation Act in order to be entitled to receive in cash, if
the Merger is consummated, the fair value of such holder's BTC common stock. A
vote against approval of the Proposal will not constitute written notice of an
intent to demand payment nor will a failure to vote against such approval
constitute a waiver of dissenters'
<PAGE>
rights. A copy of the applicable provisions of the Virginia Stock Corporation
Act referred to above is set forth in Attachment D to the accompanying
Prospectus/Proxy Statement and a summary of such provisions is set forth under
"THE MERGER--Dissenters' Rights."
The Board of Directors of BTC recommends that stockholders vote FOR approval
of the Proposal.
By Order of the Board of Directors of BTC
T. C. Bowen, Jr.
Chairman of the Board
- --------------------------------------------------------------------------------
STOCKHOLDERS ARE URGED TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN
THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF A STOCKHOLDER RECEIVES MORE THAN ONE PROXY FOR ANY REASON, EACH
PROXY SHOULD BE COMPLETED AND RETURNED. YOUR COOPERATION WILL BE APPRECIATED.
YOUR PROXY WILL BE VOTED WITH RESPECT TO THE MATTERS IDENTIFIED THEREON IN
ACCORDANCE WITH ANY SPECIFICATIONS ON THE PROXY. IF NO SPECIFICATION IS MADE,
SUCH SHARES WILL BE VOTED IN FAVOR OF APPROVAL OF THE PROPOSAL. A FAILURE TO
VOTE, EITHER BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING THE ABSTAIN BOX
THEREON, WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE PROPOSAL.
- --------------------------------------------------------------------------------
<PAGE>
Prospectus Proxy Statement
----------------- -------------------
National Bankshares, Inc. Bank of Tazewell County
-------------------- -------------------------
Common Stock Special Meeting of Stockholders to
(Par Value $2.50 Per Share) be Held on ___________, 1996
---------------------------
This Prospectus/Proxy Statement is being furnished by the Bank of Tazewell
County ("BTC"), a Virginia banking corporation, to the holders of BTC's common
stock, par value $1.00 per share ("BTC Common Stock"), as a Proxy Statement in
connection with the solicitation of proxies by the BTC Board of Directors for
use at a Special Meeting of Stockholders of BTC to be held at ______, local
time, on_______________, 1996, at_____________________________ (the "Special
Meeting"), and at any adjournment or adjournments thereof.
This Prospectus/Proxy Statement, the accompanying Notice of Special Meeting
and the form of proxy enclosed herewith are first being mailed to the
stockholders of BTC on or about __________, 1995. The date of this
Prospectus/Proxy Statement is __________, 1995.
The purpose of the Special Meeting is to consider and vote upon a proposal to
approve an Agreement and Plan of Merger, dated as of August 28, 1995 (the
"Merger Agreement"), among BTC and National Bankshares, Inc. ("NBI"), a Virginia
corporation, and the related Plan of Merger, which provide, among other things,
for the merger of NBI Interim Bank ("NBI Interim"), a wholly owned subsidiary of
NBI, with and into BTC (the "Merger"), together with an amendment and
restatement of the BTC Articles of Incorporation to eliminate the preemptive
rights of holders of BTC Common Stock and conform the BTC Articles of
Incorporation to certain provisions of the Articles of Incorporation of NBI
Interim (the "BTC Charter Amendment"). See "SUMMARY," "THE MERGER" and
Attachment A and Attachment B to this Prospectus/Proxy Statement. BTC
stockholders will vote on the Merger Agreement, the related Plan of Merger and
the BTC Charter Amendment as one, unified proposal (the "Proposal") and will not
vote on each of the components separately.
Upon consummation of the Merger each outstanding share of BTC Common Stock
will be converted into the right to receive one share of NBI common stock, par
value $2.50 per share (the "Common Stock Exchange Ratio"), with cash in lieu of
the issuance of any fractional share interest.
This Prospectus/Proxy Statement also constitutes a Prospectus of NBI relating
to the shares (the "NBI Common Shares") of NBI common stock that are issuable to
the holders of BTC Common Stock upon consummation of the Merger. This
Prospectus of NBI also relates to any NBI Common Shares that may be held by any
benefit or compensation plans of BTC following consummation of the Merger. See
"DESCRIPTION OF NBI CAPITAL STOCK," and "CERTAIN DIFFERENCES IN THE RIGHTS OF
BTC AND NBI STOCKHOLDERS."
Based on the 1,888,209 shares of BTC Common Stock outstanding on the Record
Date (as hereinafter defined) and the Common Stock Exchange Ratio, approximately
1,888,209 NBI Common Shares will be issuable upon consummation of the Merger.
The common stock of each of NBI and BTC is traded on a very limited basis in
the over-the-counter market and is not listed on any exchange or quoted on the
Nasdaq Stock Market ("Nasdaq"). Trading of NBI common stock and BTC Common
Stock each is presently reflected in the Over the Counter Electronic Bulletin
Board of the National Association of Securities Dealers, Inc. (the "NASD"). On
August 28, 1995, the last business day prior to public announcement of the
execution of the Merger Agreement, the last known sales price per share of NBI
common
<PAGE>
stock was $25.00. There were no known sales of BTC Common Stock on
August 28, 1995. The last known sales price of BTC Common Stock prior to August
28, 1995, was $15.00 on July 6, 1995. There were no known sales of NBI or BTC
common stock on August 29, 1995, the day such announcement was made. On August
30, 1995, the day after announcement of the execution of the Merger Agreement,
the last known sales price of NBI common stock was $24.50. There were no known
sales of BTC Common Stock on August 30, 1995. The last known sales price of NBI
common stock was $25.25 on December 4, 1995, and the last known sales price of
BTC Common Stock was $21.80 on or about September 29, 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE NBI COMMON SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK
OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
2
<PAGE>
AVAILABLE INFORMATION
NBI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by NBI can be inspected
and copied at Room 1024 of the Commission's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices in New York (7
World Trade Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661), and
copies of such materials can be obtained, at the prescribed rates, from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement on Form S-4, of which this Prospectus/Proxy
Statement is a part, and the exhibits thereto (together with any amendments or
supplements thereto, the "Registration Statement"), which has been filed by NBI
with the Commission under the Securities Act of 1933, as amended, and the rules
and regulations thereunder (the "Securities Act"), certain portions of which
have been omitted pursuant to the rules and regulations of the Commission and to
which portions reference is hereby made for further information.
This Prospectus/Proxy Statement incorporates NBI documents by reference which
are not presented herein or delivered herewith. These documents are available
from NBI without charge (other than certain exhibits to such documents) upon
request from: National Bankshares, Inc., P. O. Box 90002, Blacksburg, Virginia
24062-9002, Attention: Marilyn B. Buhyoff, Secretary (telephone number (540)
552-2011). In order to ensure timely delivery of such documents, any such
request should be made by _________, 1995.
All information contained or incorporated by reference in this
Prospectus/Proxy Statement with respect to NBI was supplied by NBI, and all
information contained in this Prospectus/Proxy Statement with respect to BTC was
supplied by BTC.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus/Proxy Statement
and, if given or made, such information or representations must not be relied
upon as having been authorized by NBI or BTC. Neither the delivery of this
Prospectus/Proxy Statement nor any distribution of the securities to which this
Prospectus/Proxy Statement relates shall, under any circumstances, create any
implication that there has been no change in the affairs of NBI or BTC since the
date hereof or that the information contained herein is correct as of any time
subsequent to its date. This Prospectus/Proxy Statement does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates or an offer to sell or solicitation of an offer
to buy such securities in any circumstances in which such an offer or
solicitation is not lawful.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by NBI with the Commission (File No. 0-15204)
under Section 13(a) or 15(d) of the Exchange Act are hereby incorporated by
reference in this Prospectus/Proxy Statement:
(i) NBI's Annual Report on Form 10-K for the year ended December 31, 1994;
(ii) NBI's Quarterly Reports on Form 10-Q for the periods ended March 31,
1995, June 30, 1995 and September 30, 1995; and
(iii) NBI's Current Report on Form 8-K dated August 28, 1995.
3
<PAGE>
All documents filed by NBI pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date hereof and prior to the Special Meeting
are hereby incorporated by reference into this Prospectus/Proxy Statement
and shall be deemed a part hereof from the date of filing of such documents.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus/Proxy Statement to the extent that a statement contained herein, in
any supplement hereto or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Prospectus/Proxy Statement or any supplement hereto.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
AVAILABLE INFORMATION....................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 3
SUMMARY..................................................................... 7
GENERAL INFORMATION......................................................... 20
General.................................................................. 20
Record Date; Votes Required.............................................. 20
THE MERGER.................................................................. 21
General.................................................................. 21
Merger Effective Date.................................................... 21
Exchange of BTC Certificates............................................. 22
Background of the Merger................................................. 22
Recommendation of the Board of Directors of BTC; Reasons for the Merger.. 24
Opinions of BTC's Financial Adviser...................................... 25
NBI Reasons for the Merger............................................... 27
Management and Operations of NBI and BTC after the Merger................ 28
Interests of Certain Persons............................................. 29
Certain Federal Income Tax Consequences.................................. 29
Business Pending Consummation............................................ 30
Regulatory Approvals..................................................... 31
Conditions to Consummation; Termination.................................. 31
Waiver; Amendment........................................................ 32
Dissenters' Rights....................................................... 32
Accounting Treatment..................................................... 34
Expenses................................................................. 34
Market Prices............................................................ 35
Dividends................................................................ 36
BTC Charter Amendment.................................................... 37
NBI Share Dividend....................................................... 41
PRO FORMA FINANCIAL INFORMATION............................................. 41
NOTES TO PRO FORMA FINANCIAL INFORMATION.................................... 43
BUSINESS OF NBI............................................................. 44
General.................................................................. 44
History and Business..................................................... 44
Market Area and Competition.............................................. 45
Principal Holders of NBI Common Stock.................................... 46
NBI SELECTED FINANCIAL INFORMATION.......................................... 47
NBI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 49
NBI STATISTICAL DATA........................................................ 55
BUSINESS OF BTC............................................................. 67
History and Business..................................................... 67
Banking Services......................................................... 67
Trust Department......................................................... 68
Employees................................................................ 69
Properties............................................................... 69
Legal Proceedings........................................................ 69
Competition.............................................................. 69
</TABLE>
5
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<TABLE>
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Page No.
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BTC SELECTED FINANCIAL INFORMATION.......................................... 69
BTC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 71
BTC STATISTICAL DATA........................................................ 76
BTC MANAGEMENT AND OWNERSHIP OF EQUITY SECURITIES........................... 87
Security Ownership of Certain Beneficial Owners of BTC Common Stock...... 87
Security Ownership of Management of BTC.................................. 87
Background of Directors and Executive Officers........................... 88
Committees of the BTC Board.............................................. 89
BTC DIRECTORS AND OFFICERS COMPENSATION..................................... 90
Remuneration and Other Information with Respect to Executive Officers.... 90
Summary Compensation Table............................................... 90
Director Compensation.................................................... 91
Pension Plan............................................................. 91
Certain Relationships and Related Transactions Regarding BTC............. 91
CERTAIN REGULATORY CONSIDERATIONS........................................... 92
NBI...................................................................... 92
NBB and BTC.............................................................. 93
Legislative Developments................................................. 97
Accounting Changes....................................................... 99
DESCRIPTION OF NBI CAPITAL STOCK............................................ 100
Authorized Capital....................................................... 100
NBI Common Stock......................................................... 100
NBI Preferred Stock...................................................... 100
Change in Control Provisions............................................. 101
State Anti-Takeover Statutes............................................. 101
CERTAIN DIFFERENCES IN RIGHTS OF BTC AND NBI STOCKHOLDERS................... 102
General.................................................................. 102
Authorized Capital....................................................... 102
Preemptive Rights of Stockholders........................................ 103
Amendment of Charter or Bylaws........................................... 103
Size and Classification of Board of Directors............................ 104
Removal of Directors..................................................... 104
Director Exculpation..................................................... 105
Indemnification.......................................................... 105
Director Nominations and Stockholder Proposals........................... 106
Required Stockholder Vote for Certain Actions............................ 106
Voluntary Dissolution.................................................... 107
RESALE OF NBI COMMON SHARES................................................. 107
ADDITIONAL MATTERS.......................................................... 107
LEGAL OPINIONS.............................................................. 108
TAX OPINION................................................................. 108
EXPERTS..................................................................... 108
OTHER MATTERS............................................................... 108
INDEX TO FINANCIAL STATEMENTS............................................... F-1
ATTACHMENT A -- Agreement and Plan of Merger, including the Related Plan of
Merger and form of NBI Interim Bank Articles of Incorporation............ A-1
ATTACHMENT B -- BTC Charter Amendment....................................... B-1
ATTACHMENT C -- Opinion of Baxter, Fentriss & Company....................... C-1
ATTACHMENT D -- Article 15 of Virginia Stock Corporation Act Relating to
Dissenters' Rights....................................................... D-1
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The following is a brief summary of certain information relating to the Merger
contained elsewhere in this Prospectus/Proxy Statement. This summary is not
intended to be a summary of all material information contained elsewhere in this
Prospectus/Proxy Statement, including the Attachments hereto, and in the
documents incorporated by reference in this Prospectus/Proxy Statement. Copies
of the Merger Agreement (including the related Plan of Merger) and the BTC
Charter Amendment are set forth in Attachment A and Attachment B to this
Prospectus/Proxy Statement and reference is made thereto for a complete
description of the terms of the Merger and the BTC Charter Amendment.
Stockholders are urged to read carefully the entire Prospectus/Proxy Statement,
including the Attachments. As used in this Prospectus/Proxy Statement, the
terms "NBI" and "BTC" refer to such corporations, respectively, and, where the
context requires, such corporations and their respective subsidiaries.
Parties to the Merger
National Bankshares, Inc.
NBI is a bank holding company organized under the laws of Virginia in 1986 and
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").
NBI currently conducts its operations through its sole wholly owned subsidiary,
The National Bank of Blacksburg ("NBB"), which was originally chartered in 1891.
NBB operates a full-service banking business from its headquarters in
Blacksburg, Virginia, and its six area branch offices. NBB offers general
retail and commercial banking products and services to individuals, businesses,
local government units and institutional customers. NBB also conducts a general
trust business in Blacksburg near its principal office. As of September 30,
1995, NBI had consolidated assets of approximately $207 million, consolidated
net loans of approximately $122 million, consolidated deposits of approximately
$183 million and consolidated stockholders' equity of approximately $22 million.
NBI's principal office is located at 100 Main Street, Blacksburg, Virginia
24060, and its telephone number is (540) 552-2011. See "BUSINESS OF NBI."
Bank of Tazewell County
BTC is a Virginia state-chartered commercial bank which traces its origins to
1889. BTC operates a full-service banking business from its headquarters office
in Tazewell, Virginia, and its six branch offices. BTC is engaged in
substantially all of the business operations customarily conducted by
independent commercial banks in Virginia, including the acceptance of checking,
savings and time deposits, and the making of commercial, real estate and
installment loans. BTC also provides trust services. At September 30, 1995,
BTC had approximately $177 million in assets, $41 million in net loans, $150
million in deposits and $25 million in stockholders' equity. BTC's principal
office is located at 309 East Main Street, Tazewell, Virginia 24651-1029 and its
telephone number is (540) 988-5566. See "BUSINESS OF BTC."
NBI Interim Bank
NBI Interim was organized by NBI solely for the purpose of facilitating the
Merger. Upon consummation of the Merger, NBI Interim will merge into BTC, the
separate existence of NBI Interim will cease, and BTC will be the surviving
corporation and will continue operations as a wholly owned subsidiary of NBI.
Special Meeting; Record Date
The Special Meeting will be held on ___________, 1996, at ______ a.m., local
time, at _________________________, for the purpose of BTC stockholders
considering and voting upon a proposal to approve the Merger Agreement, the
related Plan of Merger and the BTC Charter Amendment. BTC stockholders will
vote on the Merger Agreement, the related Plan of Merger and the BTC Charter
Amendment as one, unified proposal (the "Proposal") and will not vote on each of
the components separately.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
The Board of Directors of BTC has fixed ____________, 1995, as the record date
for stockholders entitled to notice of and to vote at the Special Meeting (the
"Record Date"). As of such date, there were 1,888,209 shares of BTC Common
Stock outstanding and entitled to be voted at the Special Meeting. See "GENERAL
INFORMATION."
The Merger; Common Stock Exchange Ratio
Under the terms of the Merger Agreement, NBI Interim will merge with and into
BTC, and BTC will continue its operations as a wholly owned subsidiary of NBI.
Upon consummation of the Merger (i) each outstanding share of BTC Common Stock
(excluding any shares as to which holders have perfected their dissenters'
rights ("Dissenting Shares") and excluding any shares held by NBI or BTC or
their respective subsidiaries, other than in a fiduciary capacity or in
satisfaction of a debt previously contracted ("NBI/BTC Held Shares")), will be
converted into the right to receive one share of NBI common stock, with cash in
lieu of the issuance of any fractional share interest. The Common Stock
Exchange Ratio takes into account the NBI Share Dividend (as defined below).
See "THE MERGER--General" and "--NBI Share Dividend," "DESCRIPTION OF NBI
CAPITAL STOCK" and "CERTAIN DIFFERENCES IN THE RIGHTS OF BTC AND NBI
STOCKHOLDERS."
Vote Required
Approval of the Proposal requires the affirmative vote of more than two-thirds
of the votes entitled to be cast by the holders of BTC Common Stock at the
Special Meeting.
The directors and executive officers of BTC (including certain of their
related interests) beneficially owned, as of the Record Date, and are entitled
to vote at the Special Meeting approximately 378,806 shares of BTC Common Stock,
which is approximately 20.06 percent of the outstanding shares of BTC Common
Stock entitled to be voted. As of the Record Date, BTC, acting as fiduciary,
custodian or agent, had sole or shared voting power over 81,350 shares of BTC
Common Stock (constituting approximately 4.3 percent of the outstanding shares).
All such shares will be voted in accordance with the governing agreements or
instruments and applicable laws and regulations. See "GENERAL INFORMATION--
Record Date; Votes Required."
Every stockholder's vote is important. A failure to vote, either by not
returning the enclosed proxy or by checking the ABSTAIN box thereon, will have
the same effect as a vote against approval of the Proposal.
Merger Effective Date
Subject to the conditions to the obligations of the parties to effect the
Merger, the Merger will become effective at 11:59 p.m. (the "Merger Effective
Date") on the date that the Virginia Commission issues a certificate of merger
evidencing the effectiveness of the Merger. Unless otherwise agreed by NBI and
BTC, and subject to the conditions to the obligations of the parties to effect
the Merger, the parties have agreed to use their reasonable efforts to cause the
Merger Effective Date to occur as soon as practicable following the satisfaction
of: (i) approval of the Proposal by the requisite vote of the BTC stockholders;
(ii) issuance of a certificate of effectiveness for the BTC Charter Amendment by
the Virginia Commission, procurement of the charter of NBI Interim (the "Interim
Approval") and procurement of the approval of the Merger by (a) the Federal
Deposit Insurance Corporation (the "FDIC") under the Bank Merger Act of 1960
(the "FDIC Approval"), (b) the Virginia Bureau of Financial Institutions (the
"BFI") pursuant to Virginia Code (S) 6.1-44 (the "State Bank Merger Approval"),
(c) the Board of Governors of the Federal Reserve Board (the "Federal Reserve
Board") under the BHCA (the "FRB Approval"), and (d) the BFI, to the extent
necessary, under Chapter 13 of Title 6.1 of the Code of Virginia (the "State
Holding Company Approval"), and expiration of any statutory waiting periods
relating thereto (the Interim Approval, the FDIC Approval, the State Bank Merger
Approval, the FRB Approval and the State Holding Company Approval are
collectively referred to herein as the "Required Regulatory Approvals"); and
(iii) procurement of all other regulatory consents and approvals and
satisfaction of all other requirements prescribed by law which are necessary to
consummate the Merger;
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
provided, however, that no approval or consent in paragraph (ii) or (iii) above
shall have imposed any condition or requirement which would materially adversely
impact the economic or business benefits of the transactions contemplated by the
Merger Agreement and the related Plan of Merger so as to render inadvisable the
consummation of the Merger. Subject to the foregoing, it is currently
anticipated that the Merger will be consummated in the first quarter of 1996.
See "THE MERGER--Conditions to Consummation; Termination."
Recommendation of BTC's Board of Directors
The Board of Directors of BTC has unanimously adopted the Proposal as being
in the best interests of BTC and its stockholders and recommends approval of the
Proposal by BTC's stockholders.
The conclusions of the BTC Board of Directors are based upon a number of
factors, including the fairness opinion of its financial adviser concerning the
Common Stock Exchange Ratio, the expected increase in the market liquidity of a
stockholder's investment and the tax-free nature of the Merger to the BTC
stockholders. The BTC Board of Directors also believes that the combined
resources of BTC and NBI will provide a realistic alternative to larger
financial institutions which are resulting from consolidation within the banking
industry. It is also anticipated that central management and certain economies
of scale will eventually increase the efficiency and profitability of both
institutions. See "THE MERGER--Background and Reasons--BTC."
Opinions of BTC's Financial Adviser
Baxter, Fentriss & Company ("Baxter Fentriss") has advised BTC's Board of
Directors that, in its opinion, the terms of the Merger are fair to the holders
of BTC Common Stock from a financial point of view. The full text of Baxter
Fentriss' opinion, dated as of the date of this Prospectus/Proxy Statement is
set forth in Attachment C to this Prospectus/Proxy Statement and should be read
in its entirety by BTC stockholders. For further information regarding the
opinions of Baxter Fentriss and a discussion of the qualifications of Baxter
Fentriss and the method of their selection, see "THE MERGER--Background of the
Merger" and "--Opinions of BTC's Financial Adviser."
Management and Operations of NBI and BTC after the Merger
At the Merger Effective Date, BTC will become a wholly owned subsidiary of
NBI, but will maintain its separate name, identity and operations. No change in
the Board of Directors or executive officers of BTC will result from the Merger.
It is also contemplated that BTC will maintain all of its current offices.
After the Merger Effective Date, the Board of Directors of NBI will be
comprised of nine persons, one of whom will be Mr. James G. Rakes, President of
NBI and NBB, four of whom will be persons selected by BTC from among its current
Board of Directors (the "BTC Board Representatives") and four of whom will be
persons currently members of the Board of Directors of NBI. No change in the
executive officers of NBI will result from the Merger.
The Board of BTC has selected T. C. Bowen, Jr., A. A. Crouse, R. E. Dodson and
William T. Peery as the initial BTC Board Representatives. NBI has agreed to
take certain actions, including amendments to its Bylaws, in order to assure
that certain changes affecting BTC will not be initiated by NBI without the
consent of at least one of the BTC Board Representatives before January 1, 2001.
See "THE MERGER--Management and Operations of NBI and BTC after the Merger."
Interests of Certain Persons
NBI has agreed that, for six years following the Merger Effective Date, NBI
will cause BTC and any successor thereto or any subsidiary thereof, to indemnify
any person who has rights to indemnification from BTC, to the same extent and on
the same conditions as such person is entitled to indemnification pursuant to
BTC's Articles of Incorporation as in
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
effect on the date of the Merger Agreement, to the extent legally permitted to
do so, with respect to matters occurring on or prior to the Merger Effective
Date. The adoption of the BTC Charter Amendment will not affect any person's
right, if any, to such indemnification. NBI has agreed to use its reasonable
best efforts to provide coverage to the officers and directors of BTC under NBI
policy or policies of directors and officers liability insurance on the same or
substantially similar terms then in effect for the directors and officers of
NBB, and BTC shall reimburse NBI for the additional premium incurred by NBI in
connection with providing such coverage. See "THE MERGER--Interests of Certain
Persons."
Certain Federal Income Tax Consequences
KPMG Peat Marwick LLP ("KPMG"), NBI's independent auditors, has advised NBI
and BTC that, in its opinion, no gain or loss will be recognized for federal
income tax purposes by stockholders of BTC who receive in the Merger NBI Common
Shares, other than in respect of cash received by holders of BTC Common Stock in
lieu of fractional share interests. The exchange of BTC Common Stock for cash
pursuant to the exercise of dissenters' rights will be a taxable transaction.
See "THE MERGER--Certain Federal Income Tax Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, IT IS RECOMMENDED THAT BTC
STOCKHOLDERS CONSULT THEIR TAX ADVISERS CONCERNING THE FEDERAL (AND ANY STATE
AND LOCAL) TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Business Pending Consummation
BTC and NBI have agreed in the Merger Agreement not to take certain actions
relating to their respective operations pending consummation of the Merger
without the prior written consent of the other party, except as otherwise
permitted by the Merger Agreement. These actions include, without limitation:
(i) paying any dividends, other than common stock cash dividends consistent with
past practice and in an amount not greater than the last previous cash dividend
paid prior to execution of the Merger Agreement, subject to certain limited
exceptions; (ii) redeeming or otherwise acquiring any shares of capital stock,
or issuing any additional shares of capital stock or giving any person the right
to acquire any such shares, or issuing any long-term debt; (iii) entering into
any employment agreements with, increasing the rate of compensation of or paying
any bonus to any director, officer or employee, except in accordance with plans
or agreements existing and as in effect on the date of the Merger Agreement and
previously disclosed; (iv) entering into or modifying any directors' or
employees' benefit plans; (v) disposing of or granting an encumbrance against
any material portion of assets or merging or consolidating with, or acquiring
any substantial portion of the business or property of, any other entity; or
(vi) taking any other action not in the ordinary course of business. See "THE
MERGER--Business Pending Consummation."
Regulatory Approvals
The Merger transaction is subject to the prior approval of the FDIC, the
Federal Reserve Board, the BFI and the Virginia Commission, as required by
applicable law. Applications have been filed with each of such regulatory
authorities for approval of the transaction. There can be no assurance that the
Required Regulatory Approvals will be obtained or as to the timing or conditions
of such approvals.
Conditions to Consummation; Termination
Consummation of the Merger is subject, among other things, to: (i) approval
of the Proposal by the requisite vote of the stockholders of BTC; (ii) receipt
of the Required Regulatory Approvals referred to above without any restrictions
or conditions which would so materially adversely impact the economic or
business benefits of the transactions contemplated by the Merger Agreement so as
to render inadvisable the consummation of the Merger; (iii) there being in
effect no order, decree or injunction of any court or governmental or regulatory
authority prohibiting the Merger; (iv) the Registration Statement being
effective and receipt of all state securities law approvals; (v) receipt by NBI
and BTC of an opinion from KPMG to the effect that the acquisition of BTC Common
Stock by NBI and the Merger generally constitutes a tax-free
- --------------------------------------------------------------------------------
10
<PAGE>
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reorganization under Section 368 of the Internal Revenue Code; (vi) receipt by
NBI and BTC of a letter, satisfactory to NBI and BTC, from KPMG that the Merger
will qualify for pooling-of-interests accounting treatment; (vii) receipt by
each party of an opinion from its financial adviser that the terms of the Merger
are fair to its stockholders from a financial point of view; and (viii) receipt
by each party of a letter from the other party's independent certified public
accountant to the effect that it is not aware of any facts or circumstances
relating to actions taken by such party or actions that such party has failed to
take that might cause the Merger not to qualify for pooling-of-interests
accounting treatment.
The Merger Agreement may be terminated prior to the Merger Effective Date by
mutual consent of the Boards of Directors of NBI and BTC. The Merger Agreement
may also be terminated by the Board of Directors of either NBI or BTC if (i) the
Merger does not occur on or before June 30, 1996; (ii) certain conditions set
forth in the Merger Agreement are not met; (iii) there is a breach by the other
party of a representation, warranty, covenant or agreement in the Merger
Agreement which has not been cured within a certain time period; or (iv) the
Board of Directors of NBI recommends to NBI stockholders approval of a sale of
all or substantially all of the assets of NBI or the merger or consolidation of
NBI with and into another entity with the effect that NBI will not be the
surviving corporation in such merger or consolidation. See "THE MERGER--
Conditions to Consummation; Termination."
Expenses
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by the
party incurring the same, except (i) that printing expenses for this
Prospectus/Proxy Statement will be shared equally by NBI and BTC and (ii) in the
circumstances below.
In the event that the Merger Agreement is terminated otherwise than on account
of a breach by NBI or because NBI recommends to NBI stockholders approval of a
sale of all or substantially all of the assets of NBI or the merger or
consolidation of NBI with or into another entity with the effect that NBI will
not be the surviving corporation in such merger or consolidation (see "THE
MERGER--Conditions to Consummation; Termination"), the total documented out-of-
pocket costs, expenses and fees incurred by BTC and NBI in connection with and
arising out of the Merger and the other transactions contemplated by the Merger
Agreement (including, without limitation, amounts paid or payable to investment
bankers, to counsel and accountants and to governmental and regulatory agencies)
shall be aggregated and each party shall be responsible for paying one-half of
the same.
To compensate NBI or BTC, as the case may be, for entering into the Merger
Agreement, taking action to consummate the transactions contemplated thereunder
and incurring the costs and expenses relating thereto, including, but not
limited to, the forgoing of other opportunities and other damages which would be
sustained but also would be difficult to ascertain, NBI or BTC, as the case may
be, will pay the other party unconditionally and absolutely the sum of
$2,500,000 as the other party's exclusive remedy if, prior to the termination of
the Merger Agreement, certain events relating to another acquisition transaction
occur. See "THE MERGER--Expenses."
Dissenters' Rights
Holders of BTC Common Stock entitled to vote on approval of the Proposal have
the right to dissent from the Merger and, upon consummation of the Merger and
the satisfaction of certain specified procedures, to receive cash in respect of
the fair value of each such holder's shares of BTC Common Stock in accordance
with the applicable provisions of the Virginia Stock Corporation Act (the
"Virginia Act"). The procedures to be followed by a dissenting stockholder are
summarized under "THE MERGER--Dissenters' Rights," and a copy of the applicable
provisions of the Virginia Act is set forth in Attachment D to this
Prospectus/Proxy Statement. Failure to follow such provisions precisely may
result in loss of such dissenters' rights.
In general, any dissenting stockholder who perfects such holder's statutory
dissenters' rights to be paid in cash the fair value of such holder's BTC Common
Stock will recognize gain or loss for federal income tax purposes upon receipt
of such cash. See "THE MERGER--Certain Federal Income Tax Consequences."
- --------------------------------------------------------------------------------
11
<PAGE>
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BTC Charter Amendment
As part of the Merger transaction, the BTC Board of Directors has recommended
that its stockholders approve an amendment and restatement of BTC's Articles of
Incorporation to, among other things, (i) eliminate the preemptive rights of
holders of shares of BTC Common Stock; (ii) conform the Articles of
Incorporation of BTC precisely to certain provisions of the Articles of
Incorporation of NBI Interim relating to the limitation of liability and
indemnification of BTC directors and officers and the number of directors
constituting the Board of Directors of BTC; and (iii) eliminate existing
provisions of BTC's Articles of Incorporation with respect to the issuance of
shares of BTC Common Stock by the Board and repeal any other provisions which
are contrary, inconsistent or similar to (ii) above. The amendments are
intended to facilitate the Merger transaction and integrate BTC into NBI's
holding company structure. See "THE MERGER--BTC Charter Amendment."
NBI Share Dividend
NBI will, prior to the Merger Effective Date, increase the number of shares of
NBI common stock issued and outstanding by means of a stock dividend (the "NBI
Share Dividend") totaling 190,768 shares of NBI common stock; provided, however,
that NBI shall not be required to declare such NBI Share Dividend until (i)
approval of the Proposal by the requisite vote of BTC stockholders; (ii)
issuance of a certificate of effectiveness for the BTC Charter Amendment by the
Virginia Commission and receipt of the Required Regulatory Approvals and
expiration of any statutory waiting periods relating thereto; and (iii) such
time as BTC acknowledges in writing that all conditions to its obligations to
consummate the Merger (and BTC's right to terminate the Merger Agreement) have
been waived or satisfied. The Common Stock Exchange Ratio takes into account
the NBI Share Dividend. See "THE MERGER--General" and "--NBI Share Dividend."
Resale of NBI Common Shares
The NBI Common Shares will be freely transferrable by the holders of such
shares, except for those shares held by those holders who may be deemed to be
"affiliates" (generally including directors, certain executive officers and
certain large stockholders) of BTC or NBI under applicable federal securities
laws. See "RESALE OF NBI COMMON SHARES." NBI has agreed that it will use its
best efforts, after consummation of the Merger, to cause the NBI common stock,
including, but not limited to, the NBI Common Shares to be issued to the holders
of shares of BTC Common Stock in connection with consummation of the Merger, to
be listed on Nasdaq. The Nasdaq listing criteria require NBI to, among other
things, satisfy certain minimum requirements with respect to its total assets,
capital and surplus, the number of holders of record of NBI common stock, the
number of shares of NBI common stock outstanding and its market value in the
trading market for the common stock. NBI believes that it currently meets the
Nasdaq listing requirements; however, there can be no assurance whether or when
the NBI common stock will be accepted for listing on Nasdaq nor of the effect
that such listing, if accomplished, would have on the trading market for NBI's
common stock. See "THE MERGER--Market Prices."
Comparison of Certain Unaudited Per Share Data
The following unaudited information, adjusted for stock dividends and stock
splits, reflects, where applicable, certain comparative per common share data
related to book value, cash dividends declared, income and market value: (i) on
a historical basis for NBI and BTC; (ii) on a pro forma combined basis for NBI
adjusted for the NBI Share Dividend; (iii) on a pro forma combined basis per
share for NBI common stock reflecting consummation of the Merger at the Common
Stock Exchange Ratio; and (iv) on an equivalent pro forma basis per share of BTC
Common Stock reflecting consummation of the Merger at the Common Stock Exchange
Ratio. Such information has been prepared giving effect to the Merger, on a
pooling-of-interests accounting basis. See "THE MERGER--Accounting Treatment."
The information shown below should be read in conjunction with the historical
financial statements of NBI and BTC, including the respective notes thereto, and
with the unaudited pro forma financial information appearing elsewhere in this
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12
<PAGE>
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Prospectus/Proxy Statement, including the notes thereto. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "PRO FORMA
FINANCIAL INFORMATION" and "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Book value per common share:
Historical:
NBI $12.98 11.75
BTC 13.25 11.93
Pro forma NBI per common share adjusted for stock
dividend (1) 11.68 10.57
Pro forma combined per NBI common share (2) 12.46 11.25
Equivalent pro forma per BTC common share (3) 12.46 11.25
- -------------
</TABLE>
(1) Pro forma NBI book value per common share adjusted for stock dividend has
been computed giving effect to the NBI Share Dividend of 0.11129 per share
to be declared and issued pro rata to holders of NBI common stock just
prior to the Merger to facilitate the one-for-one Common Stock Exchange
Ratio of NBI common stock for BTC Common Stock.
(2) Pro forma combined book value per NBI common share amounts represent the
sum of pro forma combined common stockholders' equity amounts, divided by
pro forma combined period-end common shares outstanding.
(3) Equivalent pro forma book value per BTC common share amounts represent the
pro forma combined book value per NBI common share amounts, multiplied by
the Common Stock Exchange Ratio. The equivalent pro forma book value per
BTC common share of $12.46 at September 30, 1995 compared to BTC's
historical book value per common share of $13.25 results in dilution of
approximately 6%.
----------------------------
<TABLE>
<CAPTION>
Years Ended
December 31,
Nine Months Ended -------------------------
September 30, 1995 1994 1993 1992
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Cash dividends declared per
common share:
Historical:
NBI $.30 .58 .50 .43
BTC .25 .52 .51 .47
Pro forma NBI per common
share adjusted for .27 .52 .45 .39
stock dividend (4)
Pro forma combined per NBI .26 .52 .48 .43
common share (5)
Equivalent pro forma per .27 .52 .45 .39
BTC common share (6)
- -------------
</TABLE>
(4) Pro forma NBI cash dividends declared per common share adjusted for stock
dividend has been computed giving effect to the NBI Share Dividend of
0.11129 per share to be declared and issued pro rata to holders of NBI
common stock just prior to the Merger to facilitate the one-for-one Common
Stock Exchange Ratio of NBI common stock for BTC Common Stock.
(5) Pro forma combined cash dividends declared per NBI common share amounts
represent pro forma combined cash dividends declared on common stock
outstanding, divided by pro forma combined average common shares
outstanding.
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13
<PAGE>
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(6) Equivalent pro forma cash dividends declared per BTC common share amounts
represent NBI historical dividends declared per common share, adjusted for
the NBI Share Dividend, multiplied by the Common Stock Exchange Ratio. The
current annual dividend rate per share for NBI common stock, based on the
dividend rates of $.30 per share paid on June 1, 1995 and $.33 per share
paid on December 1, 1995, adjusted for the 0.11129 per share NBI Share
Dividend to be paid just prior to the Merger, would be $.57. On an
equivalent pro forma basis, such current annual NBI dividend per BTC common
share would be $.57, based on the Common Stock Exchange Ratio. Future NBI
and BTC dividends are dependent upon their respective earnings and
financial conditions, government regulations and policies and other
factors. See "THE MERGER--Dividends" and "--Management and Operations of
NBI and BTC after the Merger," "CERTAIN REGULATORY CONSIDERATIONS--NBB and
BTC--Limits on Dividends and Other Payments" and "CERTAIN DIFFERENCES IN
THE RIGHTS OF BTC AND NBI STOCKHOLDERS--Dividends and Other Distributions."
----------------------------------
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------
Nine Months Ended
September 30, 1995 1994 1993 1992
------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Income per common share
before cumulative
effect of change in
accounting principle:
Historical:
NBI $1.43 1.70 1.54 1.37
BTC .95 1.26 1.57 1.27
Pro forma NBI common
share adjusted for 1.28 1.53 1.39 1.23
stock dividend (7)
Pro forma combined per 1.12 1.40 1.48 1.25
NBI common share (8)
Equivalent pro forma 1.12 1.40 1.48 1.25
per BTC common share
(9)
- -------------
</TABLE>
(7) Pro forma NBI income per common share before cumulative effect of change in
accounting principle adjusted for stock dividend gives effect to the NBI
Share Dividend of 0.11129 per share to be declared and issued pro rata to
holders of NBI common stock just prior to the Merger to facilitate the one-
for-one Common Stock Exchange Ratio of NBI common stock for BTC Common
Stock.
(8) Pro forma combined per NBI common share amounts represent pro forma
combined income before cumulative effect of change in accounting principle,
divided by pro forma combined average common shares outstanding.
(9) Equivalent pro forma per BTC common share amounts represent the pro forma
combined income before cumulative effect of change in accounting principle
per NBI common share, multiplied by the Common Stock Exchange Ratio.
----------------------------
<TABLE>
<CAPTION>
Equivalent Pro Forma
Historical Per BTC Common Share (10)
----------------------- ---------------------------
NBI BTC
---------- --------
<S> <C> <C> <C>
Market value per common
share:
August 28, 1995 $25.00 15.00 22.50
August 30, 1995 24.50 - 22.00
September 29, 1995 - 21.80 -
December 4, 1995 25.25 - 22.625
</TABLE>
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14
<PAGE>
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_____________
(10) Equivalent pro forma market values per BTC common share amounts represent
the historical market values per share of NBI common stock, adjusted to
give effect to the NBI Share Dividend of 0.11129 per share, rounded down to
the nearest one-eighth, and multiplied by the Common Stock Exchange Ratio.
The NBI and BTC historical market values per share represent the last known
sale prices per share on: (i) August 28, 1995, the day before the public
announcement of the Merger or the last known sale price prior to August 28,
1995; (ii) August 30, 1995, the day after the public announcement; and
(iii) the last known sales prices prior to the date of this
Prospectus/Proxy Statement. There were no sales of NBI or BTC common stock
on August 29, 1995, the day of the public announcement of the execution of
the Merger Agreement, nor were there any sales of BTC Common Stock on
August 30, 1995, the day after such public announcement. For additional
market prices and information as to the trading activity of NBI common
stock and BTC Common Stock, see "THE MERGER--Market Prices." Because the
market price of NBI common stock is subject to fluctuation, the market
value of the NBI Common Shares that holders of BTC Common Stock will
receive upon consummation of the Merger may increase or decrease prior to
the receipt of such shares following the Merger Effective Date.
Selected Financial Data
The following tables set forth certain unaudited historical selected
financial information for NBI and BTC and certain unaudited pro forma combined
selected financial data, giving effect to the Merger (with the one-for-one
Common Stock Exchange Ratio), on a pooling-of-interests accounting basis. See
"THE MERGER--Accounting Treatment." This information should be read in
conjunction with the historical financial statements of NBI and BTC, including
the respective notes thereto, and with the unaudited pro forma financial
information appearing elsewhere in this Prospectus/Proxy Statement, including
the notes thereto. See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE," "PRO FORMA FINANCIAL INFORMATION," and "FINANCIAL
STATEMENTS." Interim unaudited historical data reflect, in the respective
opinions of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. Historical results
for the nine months ended September 30, 1995 are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole. See "THE MERGER--Management and Operations of NBI and BTC after the
Merger."
NBI (Historical)
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------ ---------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data ($ in
thousands except per share data):
Interest income $11,908 10,755 14,562 14,428 16,047 17,732 17,475
Interest expense 4,941 4,157 5,655 5,823 8,048 10,886 10,904
------- ------ ------ ------ ------ ------ -------
Net interest income 6,967 6,598 8,907 8,605 7,999 6,846 6,571
Provision for loan losses 225 380 540 930 1,060 615 675
------- ------ ------ ------ ------ ------ -------
Net interest income after provision
for loan losses 6,742 6,218 8,367 7,675 6,939 6,231 5,896
Noninterest income 1,277 1,242 1,607 1,541 1,287 967 1,125
Noninterest expense 4,821 4,519 6,158 5,855 5,400 4,738 4,487
------- ------ ------ ------ ------ ------ -------
Income before income taxes and
cumulative effect of change in
accounting principle 3,198 2,941 3,816 3,361 2,826 2,460 2,534
Income taxes 753 672 900 717 498 416 443
------- ------ ------ ------ ------ ------ -------
Income before cumulative effect of
change in accounting principle 2,445 2,269 2,916 2,644 2,328 2,044 2,091
Cumulative effect at January 1, 1993
of change in accounting for income
taxes - - - 28 - - -
------- ------ ------ ------ ------ ------ -------
Net income $ 2,445 2,269 2,916 2,644 2,328 2,044 2,091
======= ====== ====== ====== ====== ====== =======
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------------- -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Income before cumulative effect of
change in accounting principle $ 1.43 1.33 1.70 1.54 1.37 1.21 1.24
Cumulative effect at January 1, 1993
of change in accounting for
income taxes - - - .02 - - -
--------- ------- ------- ------- ------- ------- --------
Net income $ 1.43 1.33 1.70 1.56 1.37 1.21 1.24
========= ======= ======= ======= ======= ======= ========
Cash dividends declared $ .30 .27 .58 .50 .43 .39 .36
Book value per share 12.98 11.71 11.75 10.68 9.61 8.67 7.84
Average shares (in thousands) 1,714 1,710 1,710 1,708 1,701 1,693 1,682
Selected Balance Sheet Data at
End of Period ($ in thousands):
Loans, net $ 121,558 112,565 113,718 110,217 106,040 114,214 118,899
Securities available for sale 12,854 12,969 12,114 - - - -
Securities held to maturity 53,105 60,772 57,389 62,518 60,442 59,054 38,845
Total assets 206,680 200,105 199,727 186,694 182,595 185,829 179,148
Total deposits 183,152 179,440 178,636 167,702 165,633 170,354 164,947
Stockholders' equity 22,257 20,024 20,137 18,254 16,375 14,714 13,222
Selected Ratios:
Return on average assets (1) 1.60% 1.56 1.51 1.45 1.26 1.12 1.23
Return on average equity (1) 15.38 15.81 15.19 15.43 14.98 14.63 16.82
Dividend payout ratio (1) (2) 28.03 27.15 34.05 32.00 31.49 32.14 29.22
Average equity to average assets 10.43 9.90 9.94 9.38 8.44 7.65 7.29
Allowance for loan losses to period
end:
Loans, net of unearned 1.70 1.79 1.73 1.82 1.65 1.43 1.37
Nonaccrual and restructured loans (3) 501 476 309 83 128 246 121
Nonperforming assets (3) 154 232 116 76 80 107 112
Net charge-offs to average net loans (1) .14 .44 .51 .63 .86 .52 .26
Nonperforming assets to period-end
loans, net of unearned income plus
foreclosed properties 1.10 .77 1.48 2.39 2.05 1.33 1.22
Leverage 10.25 9.55 9.62 9.98 - - -
Tier 1 risk-based capital 14.91 14.73 14.81 14.67 - - -
Total risk-based capital 16.16 15.98 16.06 15.93 - - -
Average loans to average deposits 65.03 64.18 63.32 65.44 64.93 69.06 72.94
</TABLE>
(1) Annualized for the nine months ended September 30, 1995 and 1994.
(2) Dividends paid for the nine months ended September 30, 1995 and 1994 are not
indicative of dividends paid on an annual basis. NBI has historically paid
semiannual dividends in June and December.
(3) Rounded to nearest whole percent.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
BTC (Historical)
Selected Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- ----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data ($ in
thousands except per share data):
Interest income $ 9,077 8,640 11,500 11,399 12,257 12,997 12,787
Interest expense 4,444 3,751 5,029 4,929 5,917 8,034 8,072
-------- ------- ------- ------- ------- ------- -------
Net interest income 4,633 4,889 6,471 6,470 6,340 4,963 4,715
Provision for loan losses - 6 13 23 148 25 112
-------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 4,633 4,883 6,458 6,447 6,192 4,938 4,603
Noninterest income 211 303 440 858 73 328 525
Noninterest expense 2,309 2,280 3,567 3,147 2,996 2,782 2,560
-------- ------- ------- ------- ------- ------- -------
Income before income taxes 2,535 2,906 3,331 4,158 3,269 2,484 2,568
Income taxes 736 858 944 1,186 878 471 556
-------- ------- ------- ------- ------- ------- -------
Net income $ 1,799 2,048 2,387 2,972 2,391 2,013 2,012
======== ======= ======= ======= ======= ======= =======
Per Share Data:
Net income $ .95 1.08 1.26 1.57 1.27 1.07 1.07
Cash dividends declared .25 .25 .52 .51 .47 .41 .41
Stock dividend (1) - - 200% 10% - - -
Book value per share $ 13.25 12.23 11.93 12.02 10.98 10.18 9.53
Average shares (in thousands) 1,888 1,888 1,888 1,888 1,888 1,888 1,888
Selected Balance Sheet Data at
End of Period ($ in thousands):
Loans, net $ 41,122 42,486 42,571 39,939 44,515 42,898 51,927
Securities available for sale 28,432 24,737 24,105 15,327 - - -
Securities held to maturity 89,892 92,062 90,623 97,119 104,400 98,527 80,399
Total assets 177,488 174,230 173,405 171,079 170,382 165,409 154,586
Total deposits 150,668 149,838 149,050 146,299 147,207 143,703 133,826
Stockholders' equity 25,013 23,089 22,521 22,697 20,731 19,227 17,986
Selected Ratios:
Return on average assets (2) 1.36% 1.58 1.38 1.76 1.43 1.24 1.37
Return on average equity (2) 10.08 11.93 10.41 13.38 11.80 10.69 11.55
Dividend payout ratio (2) (3) 35.09 30.86 41.27 32.48 37.00 38.32 38.32
Average equity to average assets 13.50 13.26 13.26 13.15 12.08 11.63 11.90
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- ------- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses to period end:
Loans, net of unearned 1.33 % 1.27 1.26 1.35 1.21 1.05 .87
Nonaccrual and restructured loans (4) 185 - - 3,206 5,450 1,824 1,060
Nonperforming assets (4) 167 813 813 940 736 592 317
Net charge-offs (recoveries) to average
net loans (2) (.03) .02 .03 .05 .14 .05 .23
Nonperforming assets to period-end
loans, net of unearned income plus
foreclosed properties .80 .12 .16 .14 .16 .18 .27
Leverage 14.46 14.10 14.09 13.44 - - -
Tier 1 risk-based capital 41.97 41.68 39.89 40.50 - - -
Total risk-based capital 42.88 42.62 40.79 41.47 - - -
Average loans to average deposits 27.46 27.83 28.00 29.75 30.11 32.97 38.46
</TABLE>
(1) 200% stock dividend in 1994 and 10% stock dividend in July 1993.
(2) Annualized for the nine months ended September 30, 1995 and 1994.
(3) Dividends paid for the nine months ended September 30, 1995 and
1994 are not indicative of dividends paid on an annual basis.
BTC has historically declared semiannual dividends in June and
December with payment being made in the following month.
(4) Rounded to nearest whole percent.
NBI and BTC
Pro Forma Combined
Selected Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- ------- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data ($ in
thousands except per share data):
Interest income $20,985 19,395 26,062 25,827 28,304 30,729 30,262
Interest expense 9,385 7,908 10,684 10,752 13,965 18,920 18,976
------- ------ ------ ------ ------ ------ ------
Net interest income 11,600 11,487 15,378 15,075 14,339 11,809 11,286
Provision for loan losses 225 386 553 953 1,208 640 787
------- ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 11,375 11,101 14,825 14,122 13,131 11,169 10,499
Noninterest income 1,488 1,545 2,047 2,399 1,360 1,295 1,650
Noninterest expense 7,130 6,799 9,725 9,002 8,396 7,520 7,047
------- ------ ------ ------ ------ ------ ------
Income before income taxes and
cumulative effect of change in
accounting principle 5,733 5,847 7,147 7,519 6,095 4,944 5,102
Income taxes 1,489 1,530 1,844 1,903 1,376 887 999
------- ------ ------ ------ ------ ------ ------
Income before cumulative
effect of change in
accounting principle 4,244 4,317 5,303 5,616 4,719 4,057 4,103
Cumulative effect at January 1,
1993 of change in accounting
for income taxes - - - 28 - - -
------- ------ ------ ------ ------ ------ ------
Net income $ 4,244 4,317 5,303 5,644 4,719 4,057 4,103
======= ====== ====== ====== ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------ ----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- ------ ----- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data:
Income before cumulative
effect of change in
accounting principle $ 1.12 1.14 1.40 1.49 1.25 1.08 1.09
Cumulative effect at January 1,
1993 of change in accounting
for income taxes - - - .01 - - -
---------- ----- ------ ------- ------ -------- ------
Net income $ 1.12 1.14 1.40 1.49 1.25 1.08 1.09
========== ===== ====== ======= ====== ======== ======
Cash dividends declared $ .26 .25 .52 .48 .43 .38 .37
Book value per share 12.46 11.38 11.25 10.81 9.81 8.99 8.30
Average shares (in thousands) 3,793 3,788 3,789 3,786 3,779 3,769 3,758
Selected Balance Sheet Data
at End of Period ($ in
thousands):
Loans, net $ 162,680 155,051 156,289 150,156 150,555 157,112 170,826
Securities available for sale 41,286 37,706 36,219 15,327 - - -
Securities held to maturity 142,997 152,834 148,012 159,637 164,842 157,581 119,244
Total assets 384,168 374,335 373,132 357,773 352,977 351,238 333,734
Total deposits 333,820 329,278 327,686 314,001 312,840 314,057 298,773
Stockholders' equity 47,270 43,113 42,658 40,951 37,106 33,941 31,208
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE>
GENERAL INFORMATION
General
This Prospectus/Proxy Statement is being furnished by BTC to its stockholders
as a Proxy Statement in connection with the solicitation of proxies by the Board
of Directors of BTC for use at the Special Meeting to be held on _____________,
1996, and any adjournment or adjournments thereof, to consider and vote upon:
(i) a proposal to approve the Merger Agreement, the related Plan of Merger and
the BTC Charter Amendment; and (ii) such other business as may come before the
Special Meeting or any adjournment or adjournments thereof. BTC stockholders
will vote on the Merger Agreement, the related Plan of Merger and the BTC
Charter Amendment as one, unified Proposal and will not vote on each of the
components separately.
This document is also furnished by NBI to the holders of BTC Common Stock as a
Prospectus in connection with the issuance by NBI of the NBI Common Shares upon
consummation of the Merger.
After having been submitted, the enclosed proxy may be revoked by the person
giving it, at any time before it is exercised, by: (i) submitting written
notice of revocation of such proxy to the Secretary of BTC; (ii) submitting a
proxy having a later date; or (iii) such person appearing at the Special Meeting
and requesting a return of the proxy. All shares represented by valid proxies
will be exercised in the manner specified thereon. If no specification is made,
such shares will be voted in favor of approval of the Proposal.
Directors, officers and employees of BTC and NBI may solicit proxies from BTC
stockholders, either personally or by telephone, telegraph or other form of
communication. Such persons will receive no additional compensation for such
services. All other expenses associated with the solicitation of proxies in the
form enclosed will be borne by the party incurring the same, except for printing
expenses, which will be shared equally between NBI and BTC.
The Board of Directors of BTC has unanimously adopted the Merger Agreement,
the related Plan of Merger and the BTC Charter Amendment as being in the best
interests of BTC and its stockholders and recommends approval of the Proposal by
BTC stockholders. See "THE MERGER--Recommendation of the Board of Directors of
BTC; Reasons for the Merger."
Record Date; Votes Required
The Board of Directors of BTC has fixed _________, 1995, as the Record Date
for stockholders entitled to notice of and to vote at the Special Meeting and,
accordingly, only holders of BTC Common Stock of record at the close of business
on that day will be entitled to notice of and to vote at the Special Meeting.
The number of shares of BTC Common Stock outstanding on the Record Date was
1,888,209, each such share being entitled to one vote.
The presence at the Special Meeting, in person or by proxy, of the holders of
a majority of the outstanding shares of BTC Common Stock entitled to vote at the
Special Meeting shall constitute a quorum. If a quorum is present, approval of
the Proposal requires the affirmative vote of more than two-thirds of all votes
entitled to be cast at the Special Meeting by the holders of BTC Common Stock.
Since approval of the Proposal requires the affirmative vote of stockholders
holding more than two-thirds of all the shares of BTC Common Stock entitled to
vote, abstentions will have the same effect as a vote against the Proposal.
Broker non-votes will be counted for purposes of determining the presence or
absence of a quorum and will have the same effect as a vote against the
Proposal.
The directors and executive officers of BTC (including certain of their
related interests) beneficially owned, as of the Record Date, and are entitled
to vote at the Special Meeting approximately 378,806 shares of BTC Common Stock,
which is approximately 20.06 percent of the outstanding shares of BTC Common
Stock entitled to be voted.
20
<PAGE>
As of the Record Date, BTC, acting as fiduciary, custodian or agent, had sole or
shared voting power of 81,350 shares of BTC Common Stock (constituting
approximately 4.3 percent of the outstanding shares). All such shares will be
voted in accordance with the governing agreements or instruments and applicable
laws and regulations.
Every stockholder's vote is important. A failure to vote, either by not
returning the enclosed proxy or by checking the ABSTAIN box thereon, will have
the same effect as a vote against approval of the Proposal.
THE MERGER
The following information relating to the Merger is not intended to be a
complete description of all material information relating to the Merger and is
qualified in its entirety by reference to more detailed information contained
elsewhere in this Prospectus/Proxy Statement, including the Attachments hereto,
and the documents incorporated herein by reference. Copies of the Merger
Agreement (including the related Plan of Merger) and the BTC Charter Amendment
are set forth in Attachment A and Attachment B to this Prospectus/Proxy
Statement and reference is made thereto for a complete description of the terms
of the Merger and the BTC Charter Amendment. Stockholders of BTC are urged to
read the Merger Agreement and the BTC Charter Amendment carefully.
General
Under the terms of the Merger Agreement, NBI Interim will merge with and into
BTC, and BTC will continue its operations as a wholly owned subsidiary of NBI.
Upon consummation of the Merger each outstanding share of BTC Common Stock
(excluding any Dissenting Shares and excluding any NBI/BTC Held Shares) will be
converted, by virtue of the Merger, automatically and without any action on the
part of the holder thereof, into the right to receive one share of NBI common
stock. The Common Stock Exchange Ratio takes into account the NBI Share
Dividend. See "--NBI Share Dividend." Each holder of BTC Common Stock who
would otherwise be entitled to a fractional share of NBI common stock will
receive cash in lieu thereof in an amount determined by multiplying (i) the
closing sale price per share of BTC common stock for the final bona fide trade
on the last day on which such stock has traded prior to the Merger Effective
Date, as reflected on the NASD Bulletin Board by (ii) the fraction of a share of
NBI common stock to which such holder would otherwise be entitled.
For a discussion of the rights of holders of BTC Common Stock who elect to
dissent from the Merger, see "--Dissenters' Rights."
Merger Effective Date
Subject to the conditions to the obligations of the parties to effect the
Merger, the Merger will become effective at 11:59 p.m. on the date that the
Virginia Commission issues a certificate of merger evidencing the effectiveness
of the Merger. Unless otherwise agreed upon in writing between NBI and BTC, and
subject to the conditions to the obligations of the parties to effect the
Merger, the parties have agreed to use their reasonable efforts to cause the
Merger Effective Date to occur as soon as practicable following the satisfaction
of: (i) approval of the Proposal by the requisite vote of the BTC stockholders;
(ii) receipt of the Required Regulatory Approvals and the expiration of any
statutory waiting periods relating thereto; and (iii) procurement of all other
regulatory consents and approvals and satisfaction of all other requirements
prescribed by law which are necessary to consummate the Merger; provided,
however, that no approval or consent of paragraph (ii) or (iii) above shall have
imposed any condition or requirement which would materially adversely impact the
economic or business benefits of the transactions contemplated by the Merger
Agreement and the related Plan of Merger so as to render inadvisable the
consummation of the Merger. Subject to the foregoing, it is currently
anticipated that the Merger will be consummated in the first quarter of 1996.
The Board of Directors of either NBI or BTC may terminate the Merger Agreement
if the Merger Effective Date does not occur on or before June 30, 1996. See
"--Conditions to Consummation; Termination."
21
<PAGE>
Exchange of BTC Certificates
As promptly as practicable after the Merger Effective Date, NBI will send or
cause to be sent to each holder of record of BTC Common Stock, transmittal
materials for use in exchanging all of such holder's certificates representing
BTC Common Stock (other than Dissenting Shares) for a certificate or
certificates representing the NBI Common Shares to which such holder is entitled
and a check for such holder's fractional share interest, as appropriate. The
transmittal materials will contain information and instructions with respect to
the surrender and exchange of such certificates.
BTC STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for BTC Common Stock registered in
the name of the holder of BTC Common Stock (or indemnity satisfactory to NBI, in
its judgment, after consultation with the President of BTC, if any of such
certificates are lost, stolen or destroyed), together with a properly completed
letter of transmittal, NBI, or an exchange agent selected by NBI, will mail to
such holder a certificate or certificates representing the number of NBI Common
Shares to which such holder is entitled, together with all undelivered dividends
or distributions in respect of such shares and, where applicable, a check for
the amount representing any fractional share interest (in each case, without
interest).
After the Merger Effective Date, to the extent permitted by law, former
holders of record of BTC Common Stock will be entitled to vote at any meeting of
holders of NBI common stock, the number of NBI Common Shares into which their
BTC Common Stock has been converted, regardless of whether they have surrendered
their BTC Common Stock certificates. Dividends declared by NBI after the Merger
Effective Date will include dividends on all NBI Common Shares issued in the
Merger, but no dividend or other distribution payable to the holders of record
of NBI Common Shares at or as of any time after the Merger Effective Date will
be paid to the holder of any BTC Common Stock certificates until such holder
physically surrenders all such certificates as hereinabove described. Promptly
after such surrender, all undelivered dividends and other distributions and,
where applicable, a check for the amount representing any fractional share
interest, will be delivered to such holder (without interest). After the Merger
Effective Date, the stock transfer books of BTC will be closed and there will be
no transfers on the transfer books of BTC of the shares of BTC Common Stock that
were issued and outstanding immediately prior to the Merger Effective Date.
Background of the Merger
From time to time, BTC conducted preliminary, exploratory discussions with
various financial institutions concerning some type of affiliation. None of
such discussions resulted in any binding agreement. BTC never conducted any
preliminary discussions with NBI until the ones which led to the Merger
Agreement.
In December 1994, during informal telephone conversations between James G.
Rakes, President and Chief Executive Officer of NBI, and A. A. Crouse, Executive
Vice President of BTC, the idea of a possible affiliation of BTC with NBI was
raised. Messrs. Dodson and Crouse thereafter reviewed available information
concerning NBI and NBB and concluded that there was a sufficient basis to
believe that discussions of some type of affiliation would be appropriate. In
particular, the similar size of the two institutions, their respective earnings
records and their similar business philosophies were considered by BTC
management to be positive factors.
In January, 1995, Mr. Rakes, NBI Board Chairman Robert E. Christopher, Jr. and
NBI Board Vice-Chairman Charles L. Boatwright met with Messrs. Dodson and Crouse
and BTC Board Chairman T.C. Bowen, Jr. to explore their interest in initiating a
process to determine if there might be a basis for holding definitive
negotiations on such an affiliation. It was decided at such meeting that the
executive officers would brief their respective Boards of Directors on the
course and status of discussions. It was also determined that a prudent way to
evaluate the desirability of proceeding with definitive negotiations and to
establish an initial basis for any such negotiations would
22
<PAGE>
be to retain an independent consultant to provide information relative to a fair
market valuation of 100% of the outstanding common stock of both entities and a
fair and equitable stock exchange ratio. On February 8, 1995, the NBI Board
heard a report from Mr. Rakes concerning the progress of negotiations and
authorized Mr. Rakes to engage in further discussions. At the meeting of the BTC
Board of Directors on February 14, 1995, Mr. Dodson made a presentation
regarding NBI and provided the Board with a status report of the discussions. At
such meeting, BTC's Board of Directors unanimously approved the continuation of
negotiations.
With their respective Board of Directors' approval, NBI and BTC jointly
engaged Alex Sheshunoff & Co. Investment Banking to provide a report on
preliminary valuation matters (the "Sheshunoff Report"). BTC and NBI agreed to
divide equally the $10,000 fee for the Sheshunoff Report. The Sheshunoff Report
was delivered to both NBI and BTC in April, 1995. Such Report included an
analysis of both institutions and a suggested exchange ratio of 0.900 shares of
NBI common stock for each share of BTC Common Stock, with the shareholders of
NBI and BTC owning 50.22% and 49.78%, respectively, of NBI after the Merger.
Subsequently, the suggested exchange ratio in the Sheshunoff Report was modified
to the current one-to-one Common Stock Exchange Ratio, after taking into account
the NBI Share Dividend.
At an NBI Board session on May 10, 1995, the Board reviewed the local and
national banking environment, NBI's current performance and business plan and
strategic issues related to NBI. In addition, a detailed presentation of the
Sheshunoff Report was made. At the BTC Board meeting on May 9, the Sheshunoff
Report was also presented to and discussed by the BTC Board of Directors. The
concept of the NBI Stock Dividend was also discussed. The Sheshunoff Report was
concluded to be fair and reasonable by the BTC Board of Directors, and the BTC
executive officers were authorized to continue negotiations on such basis.
Representatives of NBI and BTC met on May 18, 1995, to discuss the status of
negotiations. The principal result of such meeting was that both Messrs. Dodson
and Rakes would make recommendations to their respective Boards of Directors
that the Merger would be beneficial to both parties and that a confidentiality
agreement should be approved to protect further due diligence. It was also
decided that each of the parties would employ their own financial adviser to
issue a fairness opinion.
At the BTC Board of Directors meeting on June 13, 1995, Mr. Dodson made a
presentation on the status of negotiations with NBI and reviewed various aspects
of how the two institutions would be managed after the Merger. The advantages
and disadvantages of an affiliation between BTC and NBI were discussed. The BTC
Board decided to proceed further with discussions and authorized the execution
of a confidentiality agreement in connection with additional due diligence.
At a NBI Board of Directors meeting held on June 14, 1995, Mr. Rakes made a
detailed presentation concerning issues which the NBI Board might wish to
consider in evaluating the possible advantages and disadvantages of the proposed
Merger. This presentation focused on the preservation and enhancement of NBI
shareholder value. At this meeting there was also discussion of the best way to
continue discussions with BTC. It was determined that Mr. Rakes should hold
further conversations with Mr. Dodson, that the companies should begin an
exchange of more detailed information and that NBI should undertake preliminary
due diligence. To that end, Mr. Rakes was authorized to enter into a
confidentiality agreement.
During the latter part of June, the confidentiality agreement was executed and
the parties met to exchange and review information concerning all phases of each
institution which included loan, regulatory and financial reports. After such
review, it was agreed that the presidents of the respective institutions would
recommend to their Board of Directors that a written agreement reflecting the
Merger be prepared upon completion of further negotiations.
At its meeting on July 11, 1995, BTC's Board of Directors again discussed a
possible affiliation with NBI and unanimously approved the hiring of Baxter,
Fentriss as BTC's financial adviser in connection with the Merger and also
approved the hiring of special legal counsel to aid in the Merger.
23
<PAGE>
Beginning in late June and continuing through July and August of 1995, Mr.
Rakes and NBI's legal counsel were engaged in lengthy negotiations with Mr.
Dodson and BTC's legal counsel regarding the terms of a possible definitive
merger agreement. Mr. Rakes reported to the Board of Directors at a meeting
held on July 12, 1995, that discussions with BTC were progressing, and he
recommended that NBI retain McKinnon & Company, Inc., an investment banking firm
from Norfolk, Virginia ("McKinnon"), to serve as financial adviser to the Board
of Directors of NBI to determine from a financial point of view whether the
proposed exchange terms between NBI and BTC are fair to the stockholders of NBI.
A contract with McKinnon was entered into on July 20. Between July 20 and July
31, teams from McKinnon and NBI performed certain due diligence reviews at BTC.
BTC and its representatives likewise completed due diligence at NBI during this
period.
A special meeting of the Board of NBI was held on July 31, 1995. William J.
McKinnon, President of McKinnon, presented a preliminary fairness opinion to the
Board. At that same meeting, by unanimous agreement of all directors who were
present, it was decided that NBI should complete a final draft of a definitive
merger agreement.
At its meeting on August 8, 1995, BTC's Board of Directors reviewed the status
of discussions with NBI. A draft merger agreement and related documents were
presented and reviewed. Certain terms requiring final negotiations were
identified and discussed. Additionally, a preliminary fairness opinion from
Baxter, Fentriss to be dated the next day was presented and reviewed by the
directors. The BTC Board of Directors unanimously approved the Merger and
authorized Mr. Dodson to complete negotiations of certain final terms of the
Merger Agreement and to execute the Merger Agreement when it was completed to
his satisfaction.
At a NBI Board meeting held on August 9, 1995, Mr. Rakes and NBI's counsel
reviewed with the NBI Board members pertinent points of a draft merger agreement
and related documents. In addition, there was a lengthy discussion of the
benefits to NBI and its stockholders of the proposed Merger. At that meeting,
the Board unanimously voted in favor of the Merger, and Mr. Rakes was authorized
to negotiate certain final terms of the Merger Agreement and to execute the
Merger Agreement when it was completed to his satisfaction.
The Merger Agreement was signed by both parties on August 28, 1995.
Recommendation of the Board of Directors of BTC; Reasons for the Merger
The Board of Directors of BTC has determined that the Merger is in the best
interests of BTC and its stockholders. The Board was influenced by a number of
factors in arriving at this determination, though it did not assign any specific
or relative weight to these factors in its consideration. Among the factors
considered were:
(i) The Board of Directors of BTC believes that the Common Stock Exchange
Ratio provided for in the Merger Agreement will provide a fair price to its
stockholders for their shares of BTC Common Stock. See "THE MERGER--General."
Baxter Fentriss, BTC's financial adviser, also concluded that the Common Stock
Exchange Ratio was fair to the BTC stockholders from a financial point of
view. See "--Opinions of BTC's Financial Adviser."
(ii) The Merger is anticipated to be tax-free for federal income tax
purposes for the stockholders of BTC Common Stock (other than in respect to
cash paid in lieu of fractional shares or in respect to dissenting
stockholders).
(iii) The due diligence examination conducted by BTC indicated that NBI is
strong in capital, earnings and management.
(iv) The NBI common stock after the Merger is expected to afford greater
market liquidity as compared to the current minimal trading of BTC's Common
Stock. NBI's covenant to use its best efforts
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to seek listing of the NBI common stock after the Merger on Nasdaq was
considered especially important in this regard. See "THE MERGER--Market
Prices."
(v) The Board of Directors' review of the provisions of the Merger
Agreement, the related Plan of Merger and the BTC Charter Amendment.
(vi) The Merger may provide BTC's customers with expanded access to bank
services and facilities in the future.
(vii) The Merger provides a strategic market fit to BTC through a
combination with NBI. NBI's service areas are considered by BTC's Board of
Directors to be among the strongest in southwestern Virginia. With BTC's low
loan to deposit ratio, loan demand from these areas may provide an opportunity
for BTC, through loan participations or otherwise, to utilize its deposits on
a more profitable basis.
(viii) The combined resources of BTC and NBI will provide a realistic
alternative to larger financial institutions which are resulting from
consolidation within the banking industry, and BTC, after the Merger, is
expected to be in a better position to compete with the existing financial
institutions in BTC's market area. It is also anticipated that centralized
management and certain economies of scale will eventually increase the
efficiency and profitability of both institutions.
Based on these matters, and such other matters as the Board deemed relevant,
BTC's Board of Directors unanimously adopted the Merger Agreement, the related
Plan of Merger and the BTC Charter Amendment as being in the best interests of
BTC and its stockholders.
BTC'S BOARD OF DIRECTORS RECOMMENDS THAT BTC STOCKHOLDERS VOTE FOR APPROVAL OF
THE PROPOSAL.
Opinions of BTC's Financial Adviser
Baxter Fentriss has acted as financial adviser to BTC in connection with the
Merger. Baxter Fentriss did not assist BTC in identifying prospective parties
with which to affiliate. On August 7, 1995, Baxter Fentriss delivered to BTC
its initial opinion dated as of August 9, 1995, that, on the basis of matters
referred to therein, the Common Stock Exchange Ratio is fair, from a financial
point of view, to the holders of BTC Common Stock. In rendering its opinion,
Baxter Fentriss consulted with the managements of BTC and NBI, reviewed the
Merger Agreement and related documents and reviewed certain additional materials
made available by the managements of NBI and BTC.
In addition, Baxter Fentriss discussed with the managements of BTC and NBI
their respective businesses and outlook. Baxter Fentriss was not involved in
the negotiations with NBI and did not initiate merger discussions at the request
of BTC. No limitations were imposed by BTC's Board of Directors upon Baxter
Fentriss with respect to the investigation made or procedures followed by it in
rendering its opinion. The full text of Baxter Fentriss' written opinion as
reissued as of the date of this Prospectus/Proxy Statement (which is
substantially identical to is initial opinion, dated as of August 9, 1995), is
attached as Attachment C to this Prospectus/Proxy Statement and should be read
in its entirety with respect to the procedures followed, assumptions made,
matters considered, and qualification and limitations on the review undertaken
by Baxter Fentriss in connection therewith.
Baxter Fentriss' opinion is directed to BTC's Board of Directors only, and is
directed only to the fairness, from a financial point of view, of the Common
Stock Exchange Ratio. It does not address BTC's underlying business decision to
effect the Merger, nor does it constitute a recommendation to any BTC
stockholder as to how such stockholder should vote with respect to the Merger,
the related Plan of Merger and the BTC Charter Amendment at the Special Meeting
or as to any other matter.
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Baxter Fentriss' opinion was one of many factors taken into consideration by
BTC's Board of Directors in making its determination to approve the Merger
Agreement, the related Plan of Merger and the BTC Charter Amendment and the
receipt of Baxter Fentriss' opinion is a condition precedent to BTC's
consummating the Merger. The opinion of Baxter Fentriss does not address the
relative merits of the Merger as compared to any alternative business strategies
that might exist for BTC or the effect of any other business combination in
which BTC might engage.
Baxter Fentriss, as part of its investment banking business, is continually
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. Baxter Fentriss is a nationally recognized adviser to firms
in the financial services industry on mergers and acquisitions. BTC selected
Baxter Fentriss as its financial adviser because Baxter Fentriss is an
investment banking firm focusing on banking transactions, and because of the
firm's extensive experience in transactions similar to the Merger. Baxter
Fentriss is not affiliated with NBI or BTC.
In connection with rendering its opinion to BTC's Board of Directors, Baxter
Fentriss performed a variety of financial analyses. In conducting its analyses
and arriving at its opinion as expressed herein, Baxter Fentriss considered such
financial and other factors as it deemed appropriate under the circumstances,
including, among others, the following: (i) the historical and current financial
condition and results of operations of NBI and BTC, including interest income,
interest expense, interest sensitivity, noninterest income, noninterest expense,
earnings, book value, return on assets and equity, capitalization, the amount
and type of non-performing assets, the impact of holding certain non-earning
real estate assets, the reserve for loans losses and possible tax consequences
resulting from the Merger; (ii) the business prospects of NBI and BTC; (iii) the
economies of NBI's and BTC's respective market areas; (iv) the historical and
current market for BTC Common Stock and for NBI common stock; and (v) the nature
and terms of certain other merger transactions that it believed to be relevant.
Baxter Fentriss also considered its assessment of general economic, market,
financial and regulatory conditions and trends, as well as its knowledge of the
financial institutions industry, its experience in connection with similar
transactions, its knowledge of securities valuation generally, and its knowledge
of merger transactions in Virginia.
In connection with rendering its opinion as set forth in Attachment C, Baxter
Fentriss reviewed (i) the Merger Agreement and related documents; (ii) drafts of
this Prospectus/Proxy Statement; (iii) the Annual Reports to Stockholders of NBI
and BTC, as well as the audited financial statements of BTC and NBI for the year
ended December 31, 1994 and quarterly information of BTC and NBI for the nine
months ended September 30, 1995; (iv) pro forma combined unaudited condensed
balance sheets as of December 31, 1994 and September 30, 1995, as well as pro
forma combined unaudited statements of income for the years ended December 31,
1994, 1993 and 1992 and for the nine months ended September 30, 1995 and 1994;
and (v) certain additional financial and operating information with respect to
the business, operations and prospects of NBI and BTC as it deemed appropriate.
Baxter Fentriss also (i) held discussions with members of the senior management
of NBI and BTC regarding the historical and current business operation,
financial condition and future prospects of their respective companies; (ii)
reviewed the historical market prices and trading activity for BTC Common Stock
and NBI common stock; (iii) compared the results of operations of BTC with those
of certain banking companies that it deemed relevant; (iv) analyzed the pro
forma financial impact of the Merger on NBI; (v) analyzed the pro forma
financial impact of the Merger on BTC; and (vi) conducted such other studies,
analyses, inquiries and examinations as Baxter Fentriss deemed appropriate.
The following is a summary of selected analyses performed by Baxter Fentriss
in connection with its opinion:
1. Stock Price History. Baxter Fentriss studied the history of the trading
prices and volume for BTC Common Stock and NBI common stock and compared that to
publicly traded banks in Virginia and to the Common Stock Exchange Ratio offered
by NBI. As of September 30, 1995, BTC's book value was $25.0 million or $13.25
per share.
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2. Comparative Analysis. Baxter Fentriss compared the price to earnings
multiple, price to book multiple and price to assets multiple of the Common
Stock Exchange Ratio with other comparable merger transactions in Virginia after
considering BTC's non-performing assets and other variables. The comparative
multiples included both bank and thrift sales during the last three years.
3. Baxter Fentriss considered the pro forma impact of the Merger and
concluded the Merger should have a positive long-term impact on NBI.
4. Baxter Fentriss performed a discounted cash flow analysis to determine
hypothetical present values for a share of BTC Common Stock and NBI common stock
as long-term investments. Baxter Fentriss concluded that, based on the relative
present values of each company, the resultant ownership of NBI common stock
after the Merger was fair.
Using publicly available information on NBI and applying the capital
guidelines of banking regulators, Baxter Fentriss' analysis indicated that the
Merger would not seriously dilute the capital and earnings capacity of NBI and
would, therefore, likely not be opposed by the banking regulatory agencies from
a capital perspective. Furthermore, Baxter Fentriss considered the likely
market overlap and the Federal Reserve guidelines with regard to market
concentrations and did not believe there to be an issue with regard to possible
antitrust concerns.
Baxter Fentriss has relied, without any independent verification, upon the
accuracy and completeness of all financial and other information reviewed.
Baxter Fentriss has assumed that all estimates, including those as to possible
economies of scale, were reasonably prepared by management and reflect
management's best current judgments. Baxter Fentriss did not make an
independent appraisal of the assets or liabilities of either BTC or NBI and has
not been furnished such an appraisal.
Baxter Fentriss was paid an amount equal to $10,000 plus reasonable out-of-
pocket expenses for its services. BTC has agreed to indemnify Baxter Fentriss
against certain liabilities, including certain liabilities under the federal
securities laws.
NBI Reasons for the Merger
The Board of Directors of NBI believes that the terms of the Merger are fair
to and in the best interests of NBI and its stockholders. In unanimously
approving the Agreement, the Board of Directors considered a number of factors,
including the following:
(i) The Board of Directors believes that the Common Stock Exchange
Ratio provided for in the Merger Agreement represents fair consideration for
the BTC Common Stock. In addition, McKinnon, NBI's financial adviser,
concluded that the terms of the Merger are fair to the stockholders of NBI
from a financial point of view.
(ii) The Merger should assist NBI in retaining its local identity
and control.
(iii) It is anticipated that the Merger will increase the liquidity of
NBI's common stock by expanding the size of the stockholder base and because
of NBI's intention (as stated in the Merger Agreement) to use its best efforts
to list NBI common stock on the Nasdaq.
(iv) The Merger will allow NBI to nearly double its current size and
to expand into adjacent service areas with a long established subsidiary
community bank that is strong in capital, earnings and management.
(v) Because BTC has a relatively low loan to deposit ratio, it is
expected that the Merger will result in very close cooperation between the
subsidiary banks in funding loan demand in NBI's current service area.
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(vi) The Merger is expected to result in a stronger and deeper
management team that will allow NBI to effectively address changes in
technology, regulations, competition and products and services.
(vii) The additional capital brought to NBI by the Merger will allow
NBI to consider a wider range of future expansion opportunities.
Management and Operations of NBI and BTC after the Merger
At the Merger Effective Date, BTC will become a wholly owned
subsidiary of NBI, but will maintain its separate name, identity and operations.
No change in the Board of Directors or executive officers of BTC will result
from the Merger. It is also contemplated that BTC will maintain all of its
current offices.
After the Merger Effective Date, the Board of Directors of NBI will be
comprised of nine persons, one of whom will be Mr. James G. Rakes, President of
NBI and NBB, four of whom will be BTC Board Representatives and four of whom
will be persons currently members of the Board of Directors of NBI. No change
in the executive officers of NBI will result from the Merger.
The Board of BTC has selected T. C. Bowen, Jr., A. A. Crouse, R. E.
Dodson and William T. Peery as the initial BTC Board Representatives. NBI has
agreed to take certain actions described below, including amendments to its
Bylaws, in order to assure that certain changes affecting BTC will not be
initiated by NBI without the consent of at least one of the BTC Board
Representatives before January 1, 2001.
Effective as of the Merger Effective Date, NBI has agreed to cause its
Bylaws to be amended as follows: (i) the number of NBI directors shall be set
at nine; (ii) the affirmative vote of six out of nine NBI directors shall be
required to approve any of the following actions: (a) membership on the Board
of Directors of BTC (provided, however, that a director of BTC may be removed by
action of NBI as sole stockholder of BTC by the vote of a simple majority of NBI
directors in the event that such director commits a violation of law applicable
to his or her duties as a director of BTC which has a material adverse effect on
BTC or engages in any conduct in connection with his or her duties as a director
for which he or she would not be entitled to indemnification under the Articles
of Incorporation of BTC), (b) amendments to the Articles of Incorporation or
Bylaws of BTC, (c) the merger, consolidation or sale of all or substantially all
of the assets of BTC, or (d) a recommendation to the stockholders of NBI to
merge, consolidate or sell all or substantially all of the assets of NBI, where
such recommendation is required by law; (iii) to change the provisions requiring
that NBI directors also be NBB directors to permit directors of BTC to serve on
the NBI Board as well; and (iv) the Executive Committee shall not authorize or
approve any action on behalf of NBI described in (ii) above. NBI has agreed
that these Bylaws amendments shall not be amended or rescinded by action of its
Board of Directors without the affirmative vote of at least six directors until
January 1, 2001, on and after which time such Bylaw amendments may be amended or
rescinded by a simple majority vote of its Board of Directors as provided in the
Bylaws of NBI.
There currently are nine members and one vacancy on the NBI Board of
Directors. Effective as of the Merger Effective Date, NBI shall obtain the
resignations of four directors currently serving on the NBI Board of Directors,
spread as nearly equally as possible among the three classes of NBI directors,
thereby reducing the number of persons then serving on the NBI Board to five
and, in conjunction with an amendment of NBI's Bylaws, creating four vacancies
on the NBI Board of Directors (the "NBI Board Vacancies"). NBI has agreed that
the remaining five NBI directors will fill the NBI Board Vacancies with four BTC
Board Representatives by electing them to the NBI Board Vacancies until the next
following annual stockholders' meeting. Unless a BTC Board Representative's
service on the Board is terminated for cause in accordance with the provisions
of NBI's Articles of Incorporation, NBI has agreed to renominate the BTC Board
Representatives for reelection to the remaining terms of their respective
classes at the next annual stockholders' meeting following the Merger Effective
Date and shall continue to renominate for election by the NBI stockholders those
of the BTC Board Representatives who must stand for reelection as a result of
the expiration of their classes as of the NBI annual stockholders' meetings in
1997, 1998, 1999 and 2000, respectively. In the event of the death or
resignation of any BTC Board Representative creating a
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vacancy on the NBI Board of Directors, at any time before the NBI annual
stockholders' meeting in 2000, the Board of BTC shall be entitled to select a
replacement to fill such vacancy and the NBI Board shall elect such replacement
to fill the vacancy created by such death or resignation. The NBI Board of
Directors also shall, following consummation of the Merger, appoint an Executive
Committee consisting of five of its members, two of whom shall be BTC Board
Representatives.
Interests of Certain Persons
NBI has agreed that for six years after the Merger Effective Date, NBI
will cause BTC and any successor thereto or any subsidiary thereof, to indemnify
any person who has rights to indemnification from BTC, to the same extent and on
the same conditions as such person is entitled to indemnification pursuant to
BTC's Articles of Incorporation as in effect on the date of the Merger
Agreement, to the extent legally permitted to do so, with respect to matters
occurring on or prior to the Merger Effective Date. The adoption of the BTC
Charter Amendment will not affect any person's right, if any, to such
indemnification. NBI also has agreed to use its reasonable best efforts to
provide coverage to the existing directors and officers of BTC under NBI policy
or policies of directors and officers liability insurance on the same or similar
terms then in effect for directors and officers of NBB, and BTC shall reimburse
NBI for the additional premium incurred by it in connection with providing such
coverage.
It is the intention of NBI and BTC that, as soon as administratively
practicable following the Merger Effective Date, employees of BTC will be
entitled to participate in NBI's severance, benefit and similar plans (excluding
qualified retirement plans) on the same terms and conditions as employees of NBI
and its subsidiaries, giving effect to years of service and prior earnings with
BTC as if such service were with NBI. NBI and BTC have agreed to engage
experts, including, but not limited to, actuaries, to make recommendations as to
how the qualified retirement plans should be handled and shall use their best
efforts to come to an agreement regarding all benefit plans which shall be in
the form of an amendment to the Merger Agreement. To the extent possible, no
employee of BTC who elects coverage by NBI's medical insurance plans will be
excluded from coverage thereunder (for such employee or any other covered
person) on the basis of a pre-existing condition that was not also excluded
under BTC's medical insurance plans and that, if an NBI plan will not take the
place of a BTC plan pursuant to the Merger Agreement, such BTC benefit plan
shall remain in effect until the benefit plan of NBI is available for
participation by the officers and employees of BTC.
Certain Federal Income Tax Consequences
The following is a discussion of certain federal income tax
consequences of the Merger. The discussion is included for general information
purposes only, applies only to a BTC stockholder who holds BTC Common Stock as a
capital asset, and may not apply to special situations, such as BTC stockholders
that are insurance companies, securities dealers, financial institutions or
foreign persons.
Neither NBI nor BTC has requested a ruling from the Internal Revenue
Service in connection with the Merger. The following discussion summarizes the
opinion of KPMG, NBI's independent auditors, with respect to certain federal
income tax consequences of the Merger to BTC's stockholders.
KPMG has advised NBI and BTC that in its opinion:
(i) No gain or loss will be recognized for federal income tax
purposes by BTC stockholders upon the exchange in the Merger of shares
of BTC Common Stock solely for NBI Common Shares (except with respect
to cash received in lieu of a fractional share interest in NBI Common
Shares).
(ii) The basis of NBI Common Shares received in the Merger by BTC
stockholders will be the same as the basis of the shares of BTC
Common Stock surrendered in exchange therefor.
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(iii) The holding period of the NBI Common Shares received in the
Merger by a BTC stockholder will include the holding period during
which the shares of BTC Common Stock surrendered in exchange therefor
were held by the BTC stockholder, provided such shares of NBI Common
Stock were held as capital assets at the Merger Effective Date.
(iv) Cash received by a holder of BTC Common Stock in lieu of a
fractional share interest in NBI Common Shares will be treated as
received in exchange for such fractional share interest and, provided
the fractional share would have constituted a capital asset in the
hands of such holder, the holder will recognize a capital gain or loss
in an amount equal to the difference between the amount of cash
received and the portion of the adjusted tax basis in the BTC Common
Stock allocable to the fractional share interest.
The opinion of KPMG summarized above is based, among other things, on
assumptions relating to certain facts and circumstances of, and the intentions
of the parties to, the Merger, which assumptions have been made with the consent
of BTC and NBI.
The exchange of BTC Common Stock for cash pursuant to the exercise of
dissenters' rights will be a taxable transaction. Holders of BTC Common Stock
electing to exercise dissenters' rights should consult their own tax advisers as
to the tax treatment in their particular circumstances. See "--Dissenters'
Rights."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER AND OTHER FACTORS, EACH
STOCKHOLDER OF BTC IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISER TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX
LAWS).
Business Pending Consummation
BTC and NBI have agreed in the Merger Agreement not to take certain
actions relating to their respective operations pending consummation of the
Merger without the prior approval of the other party, except as otherwise
permitted in the Merger Agreement. These actions include, without limitation:
(i) paying any dividends, other than common stock cash dividends consistent with
past practice and in an amount not greater than the last previous cash dividend
paid prior to execution of the Merger Agreement (provided, however, that BTC
may, at its option, accelerate the record and payment dates of its semi-annual
cash dividend, if any, which would regularly in accordance with past practice be
payable in January 1996 or July 1996, so that the record and payment dates of
the BTC January or July cash dividend, as the case may be, occur prior to the
Merger Effective Date if the Merger Effective Date will occur: (a) after the
record date of the second semi-annual NBI cash dividend, if any, for 1995 which
would regularly in accordance with past practices be payable in December 1995,
but prior to the BTC January cash dividend if it is not so accelerated, or (b)
after the record date of the first semi-annual NBI cash dividend, if any, for
1996, which would regularly in accordance with past practices be payable in June
1996 but prior to the BTC July cash dividend if it were not so accelerated);
(ii) redeeming or otherwise acquiring any shares of capital stock, or issuing
any additional shares of its capital stock or giving any person the right to
acquire any such shares, or issuing any long-term debt; (iii) entering into any
employment agreements with, increasing the rate of compensation or paying any
bonus to, any director, officer or employee, except in accordance with plans or
agreements existing and as in effect on the date of the Merger Agreement and
previously disclosed; (iv) entering into or modifying any directors' or
employees' benefit plans; (v) disposing of or granting an encumbrance against
any material portion of assets or merging or consolidating with, or acquiring
any substantial portion of the business or property of, any other entity; or
(vi) taking any other action not in the ordinary course of business.
The Merger Agreement requires the Board of Directors of BTC to (i)
conform BTC's Bylaws to those of NBI Interim by adopting the Bylaws of NBI
Interim as those of BTC and (ii) use its best efforts to modify and change the
audit, investment, litigation, real estate valuation and trust department
policies and practices (including
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loan classifications and levels of reserves) prior to the Merger Effective Date
so as to be consistent on a mutually satisfactory basis with those of NBB and
generally accepted accounting principles. BTC is not required to modify or
change any such Bylaws, policies or practices, however, until (i) approval of
the Proposal by the requisite vote of the BTC stockholders; (ii) receipt of the
Required Regulatory Approvals, and expiration of any statutory waiting periods
relating thereto; (iii) procurement of all other regulatory consents and
approvals and satisfaction of all other requirements prescribed by law which are
necessary to consummate the Merger; (iv) such time as BTC and NBI shall
reasonably agree that the Merger Effective Date will occur prior to public
disclosure of such modifications or changes in regular periodic earnings
releases or periodic reports filed with the FDIC; and (v) such time as NBI
acknowledges in writing that all conditions to NBI's obligations to consummate
the Merger (and NBI's rights to terminate the Merger Agreement) have been waived
or satisfied. BTC must, in all circumstances, make such modifications and
changes not later than immediately prior to the Merger Effective Date. Such
modifications and changes, once implemented, shall not affect the Common Stock
Exchange Ratio.
Regulatory Approvals
The Merger transaction described in this Prospectus/Proxy Statement is
subject to the prior approval by the FDIC, the Federal Reserve Board, the BFI
and the Virginia Commission, as required by applicable law. There can be no
assurance that the Required Regulatory Approvals will be obtained or as to the
timing or conditions thereof. Applications have been filed with each of such
regulatory authorities for approval of the Merger transaction.
Conditions to Consummation; Termination
Consummation of the Merger is subject, among other things, to: (i)
approval of the Proposal by the requisite vote of the stockholders of BTC; (ii)
receipt of the Required Regulatory Approvals (see "--Regulatory Approvals"
above) without any restrictions or conditions which would so materially
adversely impact the economic or business benefits of the transactions
contemplated by the Merger Agreement so as to render inadvisable the
consummation of the Merger; (iii) there being in effect no order, decree or
injunction of any court or governmental or regulatory authority prohibiting the
Merger; (iv) the Registration Statement being effective and receipt of all
required state securities law approvals; (v) receipt of an opinion from KPMG to
the effect that the acquisition of BTC Common Stock by NBI and the Merger
generally constitutes a tax free reorganization under Section 368 under the
Internal Revenue Code; (vi) receipt by NBI and BTC of a letter, satisfactory to
NBI and BTC, from KPMG to the effect that the Merger will qualify for pooling-
of-interests accounting treatment; (vii) receipt by each party of an opinion
from its financial adviser that the terms of the Merger are fair to its
stockholders from a financial point of view; and (viii) receipt by each party of
a letter from the other party's independent certified public accountants to the
effect that they are not aware of any facts or circumstances relating to actions
taken by such party or actions that such party has failed to take that might
cause the Merger not to qualify for pooling-of-interests accounting treatment.
Consummation of the Merger is also subject to the satisfaction or waiver of
various other conditions specified in the Merger Agreement, including, among
others: (i) the delivery by BTC and NBI, each to the other, of opinions of
their respective counsel and certificates executed by their respective chief
executive officers and chief financial officers as to compliance with the Merger
Agreement; (ii) as of the Merger Effective Date, the accuracy of the
representations and warranties, and compliance in all material respects with the
agreements and covenants, of the parties to the Merger Agreement (except for
such representations and warranties made as of an earlier date, or as expressly
contemplated by the Merger Agreement or, with respect to certain representations
and warranties, except for any inaccuracy that would not exceed the materiality
standard established for such representation or warranty in the Merger
Agreement); and (iii) the receipt by NBI and BTC of letters from the other
party's independent certified public accountant with respect to the other
party's financial position.
The Merger Agreement provides that, whether before or after the Special
Meeting and notwithstanding the approval of the Proposal by the stockholders of
BTC, the Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Merger Effective Date: (i) by mutual consent of the Boards of
Directors of NBI and BTC; or (ii) by either the Board of Directors of NBI or the
Board of Directors of BTC (a) in the event of a
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breach by the other party of any representation or warranty contained in the
Merger Agreement, which breach exceeds the materiality standard established for
termination of the Merger Agreement and which cannot be or has not been cured
after thirty days written notice thereof is given to the party committing such
breach; (b) in the event of a material breach by the other party of any covenant
or agreement contained in the Merger Agreement that cannot be or has not been
cured within thirty days after the giving of written notice to the party
committing such breach; (c) if the Merger is not consummated on or before June
30, 1996; (d) if any Required Regulatory Approval, to the extent necessary to
consummate the Merger legally, is finally and unconditionally denied or imposes
any conditions or requirement which would materially adversely impact the
economic and business benefits of the transactions contemplated by the Merger
Agreement and the related Plan of Merger so as to render inadvisable the
consummation of the Merger; or (e) the Board of Directors of NBI recommends to
NBI stockholders approval of a sale of all or substantially all of the assets of
NBI or the merger or consolidation of NBI with and into another entity with the
effect that NBI will not be the surviving corporation in such merger or
consolidation.
Waiver; Amendment
Prior to the Merger Effective Date, any provision of the Merger Agreement
may be: (i) waived by the party benefitted by the provision; or (ii) amended or
modified at any time (including the structure of the transaction), by an
agreement in writing among the parties thereto approved by their respective
Boards of Directors and executed in the same manner as the Merger Agreement,
except that, after approval by the stockholders of BTC, the consideration to be
received by the stockholders of BTC may not thereby be decreased.
Dissenters' Rights
Holders of BTC Common Stock entitled to vote on approval of the Proposal
will be entitled to have the fair value of each such holder's shares of BTC
Common Stock immediately prior to the consummation of the Merger paid to such
holder in cash, together with interest, if any, by complying with the provisions
of Article 15 of the Virginia Act ("Article 15"). Under Article 15, the
determination of the fair value of a dissenter's shares would exclude any
appreciation or depreciation in the value of such shares in anticipation of the
Merger, unless such exclusion would be inequitable.
A holder of BTC Common Stock who desires to exercise such holder's
dissenters' rights must satisfy all of the following conditions. A written
notice of such holder's intent to demand payment for such holder's BTC Common
Stock must be delivered to BTC before the taking of the vote on approval of the
Proposal. This written notice must be in addition to and separate from voting
against, abstaining from voting, or failing to vote on approval of the Proposal.
Voting against, abstaining from voting or failing to vote on approval of the
Proposal will not constitute written notice of an intent to demand payment
within the meaning of Article 15.
A holder of BTC Common Stock electing to exercise such holder's dissenters'
rights under Article 15 must not vote for approval of the Proposal. Voting for
approval of the Proposal, or delivering a proxy in connection with the Special
Meeting (unless the proxy specifies a vote against, or abstaining from voting
on, approval of the Proposal), will constitute a waiver of such holder's
dissenters' rights and will nullify any written notice of an intent to demand
payment submitted by such holder.
A holder of record of BTC Common Stock may assert dissenters' rights as to
less than all of the shares registered in such holder's name only if such holder
dissents with respect to all shares beneficially owned by any one person and
notifies BTC in writing of the name and address of each person on whose behalf
such holder is asserting dissenters' rights. The rights of a partial dissenter
under Article 15 are determined as if the shares as to which the holder dissents
and the holder's other shares were registered in the names of different
stockholders.
A beneficial holder of BTC Common Stock may assert dissenters' rights as to
shares held on such holder's behalf only if such holder: (i) submits to BTC the
record holder's written consent to the dissent not later than the
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<PAGE>
time the beneficial holder asserts dissenters' rights; and (ii) does so with
respect to all shares of which such holder is the beneficial holder or over
which such holder has the power to direct the vote.
If the Merger is consummated, BTC will, within ten days after the Merger
Effective Date, deliver a dissenters' notice to all holders who satisfied the
foregoing requirements, which will: (i) state where payment demand is to be
sent and where and when certificates for Dissenting Shares are to be deposited;
(ii) supply a form for demanding payment that includes the date (August 29,
1995) of the first announcement to news media of the terms of the Merger, and
requires that the person asserting dissenters' rights certify whether or not
such person acquired beneficial ownership of such person's Dissenting Shares
before or after such date; (iii) set a date by which BTC must receive the
payment demand, which date may not be less than thirty nor more than sixty days
after the date of delivery of the dissenters' notice; and (iv) be accompanied by
a copy of Article 15.
A stockholder sent a dissenters' notice shall demand payment, certify that
such holder acquired beneficial ownership of such holder's Dissenting Shares
before, on or after August 29, 1995, and deposit the certificates representing
such holder's Dissenting Shares in accordance with the dissenters' notice. A
stockholder who deposits such holder's shares as described in the dissenters'
notice retains all other rights as a holder of BTC Common Stock except to the
extent such rights are cancelled or modified by the consummation of the Merger.
A stockholder who does not demand payment and deposit his share certificates
where required, each by the date set forth in the dissenters' notice, is not
entitled to payment for such holder's shares under Article 15.
Except as provided below with respect to after-acquired shares, within
thirty days after receipt of a payment demand, BTC shall pay the dissenter the
amount that BTC estimates to be the fair value of the dissenter's shares, plus
accrued interest. The obligation of BTC to make such payment may be enforced:
(i) by the Circuit Court for Tazewell County, Virginia; or (ii) at the election
of any dissenter residing or having its principal office in Virginia, by the
circuit court in the city or county where the dissenter resides or has such
office. The payment by BTC will be accompanied by: (i) BTC's balance sheet as
of the end of a fiscal year ended not more than sixteen months before the Merger
Effective Date, an income statement for that year, a statement of changes in
stockholders' equity for that year and the latest available interim financial
statements, if any; (ii) an explanation of how BTC estimated the fair value of
the Dissenting Shares and of how the interest was calculated; (iii) a statement
of the dissenter's right to demand payment as described below; and (iv) a copy
of Article 15.
BTC may elect to withhold payment from a dissenter unless the dissenter was
the beneficial owner of the Dissenting Shares on August 29, 1995, in which case
BTC will estimate the fair value of such after-acquired shares, plus
accrued interest, and will offer to pay such amount to each dissenter who agrees
to accept it in full satisfaction of such dissenter's demand. BTC will send
with such offer an explanation of how it estimated the fair value of the shares
and of how the interest was calculated, and a statement of the dissenter's right
to demand payment as described below.
Within thirty days after BTC makes or offers payment as described above, a
dissenter may notify BTC in writing of the dissenter's own estimate of the fair
value of the Dissenting Shares and the amount of interest due, and demand
payment of such estimate (less any payment by BTC) or reject BTC's offer and
demand payment of such estimate.
If any such demand for payment remains unsettled, within sixty days after
receiving the payment demand BTC will petition the Circuit Court for Tazewell
County, Virginia to determine the fair value of the shares and the accrued
interest and make all dissenters whose demands remain unsettled parties to such
proceeding, or pay each dissenter whose demand remains unsettled the amount
demanded. Each dissenter made a party to such proceeding is entitled to a
judgment for: (i) the amount, if any, by which the court finds that the fair
value of the Dissenting Shares, plus interest, exceeds the amount paid by BTC;
or (ii) the fair value, plus accrued interest, of the dissenter's after-acquired
shares for which BTC elected to withhold payment. The court will determine all
costs of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court and assess the
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<PAGE>
costs against BTC, or against all or some of the dissenters to the extent the
court finds the dissenters did not act in good faith in demanding payment.
The foregoing is only a summary of the rights of a dissenting holder of BTC
Common Stock. Any holder of BTC Common Stock who intends to dissent from the
Merger should carefully review the text of the applicable provisions of the
Virginia Act set forth in Attachment D to this Prospectus/Proxy Statement and
should also consult with such holder's attorney. The failure of a holder of BTC
Common Stock to follow precisely the procedures summarized above, and set forth
in Attachment D, may result in loss of dissenters' rights. No further notice of
the events giving rise to dissenters' rights or any steps associated therewith
will be furnished to holders of BTC Common Stock, except as indicated above or
otherwise required by law.
In general, any dissenting stockholder who perfects such holder's right to
be paid the fair value of such holder's BTC Common Stock in cash will recognize
taxable gain or loss for federal income tax purposes upon receipt of such cash.
See "--Certain Federal Income Tax Consequences."
Consummation of the Merger is conditioned upon the Merger being accounted
for on a pooling-of-interests basis. If the number of Dissenting Shares is
sufficiently large, accounting rules may preclude the Merger as being accounted
for on a pooling-of-interests basis. See "--Accounting Treatment" and
"--Conditions to Consummation; Termination."
Accounting Treatment
Consummation of the Merger is conditioned upon the Merger being accounted
for on a pooling-of-interests accounting basis and the receipt of NBI and BTC of
a letter from KPMG with respect thereto. See "--Conditions to Consummation;
Termination." Under this accounting treatment, as of the Merger Effective Date
the assets and liabilities of BTC would be added to those of NBI at their
recorded book values and the stockholders' equity accounts of BTC and NBI would
be combined on NBI's consolidated balance sheet. On a pooling-of-interests
accounting basis, income and other financial statements of NBI issued after
consummation of the Merger would be restated retroactively to reflect the
consolidated combined financial position and results of operations of NBI and
BTC as if the Merger had taken place prior to the periods covered by such
financial statements.
Expenses
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby will be borne by the
party incurring the same, except (i) that printing expenses for this
Prospectus/Proxy Statement will be shared equally by NBI and BTC and (ii) in the
circumstances below.
In the event that the Merger Agreement is terminated otherwise than on
account of a breach by NBI or because NBI recommends to NBI stockholders
approval of a sale of all or substantially all of the assets of NBI or the
merger or consolidation of NBI with or into another entity with the effect that
NBI will not be the surviving corporation in such merger or consolidation
(see "--Conditions to Consummation; Termination"), the total documented out-of-
pocket costs, expenses and fees incurred by BTC and NBI in connection with and
arising out of the Merger and the other transactions contemplated by the Merger
Agreement (including, without limitation, amounts paid or payable to investment
bankers, to counsel and accountants and to governmental and regulatory agencies)
shall be aggregated, and each party shall be responsible for paying one-half of
the same.
To compensate NBI or BTC, as the case may be, for entering into the Merger
Agreement, taking action to consummate the transactions contemplated thereunder
and incurring the costs and expenses relating thereto, including, but not
limited to, the forgoing of other opportunities and other damages which would be
sustained but also would be difficult to ascertain if the following events
occur, NBI or BTC, as the case may be (the "Subject Party"), will pay the other
party unconditionally and absolutely the sum of $2,500,000 as the other party's
exclusive remedy if, prior to the termination of the Merger Agreement, any of
the following shall occur: (i) without the consent of the
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<PAGE>
other party, the Subject Party shall have entered into an agreement to effect
(a) a merger, consolidation or similar transaction involving the Subject Party
or any of its significant subsidiaries, (b) the disposition, by sale, lease,
exchange or otherwise, of assets of the Subject Party or any of its significant
subsidiaries representing in either case 25% or more of the consolidated assets
or deposits of the Subject Party and its subsidiaries, or (c) the issuance, sale
or other disposition by the Subject Party of (including by way of merger,
consolidation, share exchange or any similar transaction) securities
representing 25% or more of the voting power of the Subject Party or any of its
significant subsidiaries (each of (a), (b) or (c), an "Acquisition
Transaction"); or (ii) any person shall have acquired beneficial ownership of,
or the right to acquire beneficial ownership of, or any group has been formed
which beneficially owns or has the right to acquire ownership of, 20% or more of
the voting power of the Subject Party or any of its significant subsidiaries
and, within one year from termination of the Merger Agreement, the Subject Party
enters into Acquisition Transaction with such person or group, as the case may
be.
Market Prices
The common stock of each of NBI and BTC is traded on a very limited basis
in the over-the-counter market and is not listed on any exchange or quoted on
Nasdaq. Trading of NBI common stock and BTC Common Stock is presently reflected
in the Over-the-Counter Electronic Bulletin Board of the NASD. As of September
30, 1995, there were 684 holders of record of NBI Common Stock and 475 holders
of record of BTC Common Stock.
The following is a summary of the market price per share of the common
stock of NBI and BTC for 1993, 1994 and 1995, respectively. Prices do not
necessarily reflect the prices which would have prevailed had their been an
active trading market, nor do they reflect unreported trades, which may have
been at lower or higher prices.
<TABLE>
<CAPTION>
Equivalent
Pro Forma
Per BTC
NBI (1) BTC (2) Common Share(3)
------- ------- ---------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1993
- ----
First quarter... $10.00 9.50 12.625 12.25 9.00 8.50
Second quarter.. 11.50 10.25 12.625 12.625 10.25 9.125
Third quarter... 12.75 11.50 13.00 13.00 11.375 10.25
Fourth quarter.. 14.25 13.125 12.00 12.00 12.75 11.75
1994
- ----
First quarter... 18.50 15.00 12.25 12.25 16.625 13.50
Second quarter.. 20.50 18.25 12.25 12.25 18.375 16.375
Third quarter... 21.50 20.00 12.625 12.625 19.25 18.00
Fourth quarter.. 25.50 22.50 13.25 13.25 22.875 20.25
1995
- ----
First quarter... 23.50 21.50 15.00 14.25 21.125 19.25
Second quarter.. 25.00 22.00 15.00 15.00 22.50 19.75
Third quarter... 25.00 23.00 15.00 15.00 22.50 20.625
Fourth quarter..
- -------------
</TABLE>
(1) Sales prices have been adjusted to reflect a four-for-one stock split
effective December 1, 1993, rounded down to the nearest one-eighth.
35
<PAGE>
(2) Sales prices have been adjusted to reflect a 10% stock dividend paid on
July 30, 1993 and a 200% stock dividend paid on February 1, 1995, rounded
down to the nearest one-eighth.
(3) Equivalent pro forma market values per BTC common share amounts represent
the high and low known sales prices per share of NBI common stock, adjusted
for the NBI Share Dividend of 0.11129 per share to be paid just prior to
the Merger, multiplied by the Common Stock Exchange Ratio, rounded down to
the nearest one-eighth.
On August 28, 1995, the last business day prior to public announcement
of the execution of the Merger Agreement, the last known sales price per share
of NBI common stock was $25.00. There were no known sales of BTC Common Stock on
August 28, 1995. The last known sales price of BTC Common Stock prior to August
28, 1995, was $15.00 on July 6, 1995. There were no known sales of NBI or BTC
common stock on August 29, 1995, the day such announcement was made. On August
30, 1995, the day after announcement of the execution of the Merger Agreement,
the last known sales price of NBI common stock was $24.50. There were no known
sales of BTC Common Stock on August 30, 1995. The last known sales price of NBI
common stock was $25.25 on December 4, 1995, and the last known sales price of
BTC Common Stock was $21.80 on or about September 29, 1995.
NBI has agreed that it will use its best efforts, after consummation
of the Merger, to cause the NBI common stock, including, but not limited to, the
NBI Common Shares to be issued to holders of shares of BTC Common Stock in
connection with consummation of the Merger, to be listed on Nasdaq. The Nasdaq
listing criteria require NBI to, among other things, satisfy certain minimum
requirements with respect to its total assets, capital and surplus, the number
of holders of record of NBI common stock, the number of shares of NBI common
stock outstanding and its market value in the trading market for the common
stock. NBI believes that it currently meets the Nasdaq listing requirements;
however, there can be no assurance whether or when the NBI common stock will be
accepted for listing nor of the effect that such listing, if accomplished, would
have on the trading market for NBI's common stock.
Dividends
The following table sets forth the cash dividends declared on NBI
common stock and BTC Common Stock with respect to each calendar quarter since
January 1, 1993, and the equivalent pro forma cash dividends declared per share
of BTC Common Stock, based on the Common Stock Exchange Ratio.
<TABLE>
<CAPTION>
Equivalent Pro Forma
NBI (1) BTC (2) Per BTC Common Share (3)
------- ------- ------------------------
<S> <C> <C> <C>
1993
- ----
First quarter............ $ - - -
Second quarter........... .22 .24 .20
Third quarter............ - - -
Fourth quarter........... .28 .27 .25
1994
- ----
First quarter............ - - -
Second quarter........... .27 .25 .24
Third quarter............ - - -
Fourth quarter........... .31 .27 .28
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Equivalent Pro Forma
NBI (1) BTC (2) Per BTC Common Share (3)
------- ------- ------------------------
<S> <C> <C> <C>
1995
- ----
First quarter............ - - -
Second quarter........... .30 .25 .27
Third quarter............ - - -
Fourth quarter........... .33 - .30
- -------------
</TABLE>
(1) Dividends per share have been adjusted to reflect a four-for-one stock
split effective December 1, 1993.
(2) Dividends per share have been adjusted to reflect a 10% stock dividend paid
on July 30, 1993 and a 200% stock dividend paid on February 1, 1995.
(3) Equivalent pro forma cash dividends declared per BTC common share amounts
represent NBI historical dividend rates declared per common share, adjusted
for the NBI Share Dividend, multiplied by the Common Stock Exchange Ratio.
The current annual dividend rate per share for NBI common stock, based upon
the dividend rates of $.30 per share paid on June 1, 1995 and $.33 per
share paid on December 1, 1995, adjusted for the 0.11129 per share NBI
Share Dividend to be paid just prior to the Merger, would be $.57. On an
equivalent pro forma basis, such current annual NBI dividend per BTC Common
Share would be $.57, based on the Common Stock Exchange Ratio. Future NBI
and BTC dividends are dependent upon their respective earnings and
financial conditions, government regulations and policies and other
factors.
NBI's primary source of funds for dividend payments is dividends from
NBB. Under applicable federal laws, the Comptroller of the Currency restricts
the total dividend payments of NBB, as more fully discussed below. See "CERTAIN
REGULATORY CONSIDERATIONS--NBB and BTC--Limits on Dividends and Other Payments,"
"DESCRIPTION OF NBI CAPITAL STOCK" and "CERTAIN DIFFERENCES IN THE RIGHTS OF BTC
AND NBI STOCKHOLDERS--Dividends and Other Distributions."
BTC Charter Amendment
As part of the Merger transaction, the BTC Board of Directors has
recommended that its stockholders approve the BTC Charter Amendment, which would
amend the Articles of Incorporation ("Articles") of BTC to (i) eliminate the
preemptive rights of holders of shares of BTC Common Stock; (ii) conform the
Articles of BTC precisely to the provisions of the Articles of NBI Interim
relating to the limitation of liability and indemnification of BTC directors and
officers and the number of directors constituting the Board of Directors of BTC,
respectively; and (iii) eliminate existing provisions of BTC's Articles with
respect to the issuance of shares of BTC Common Stock by the Board and repeal
any other provisions which are contrary, inconsistent or similar to (ii) above.
The amendments are intended to facilitate the Merger transaction and integrate
BTC into NBI's holding company structure.
The form of the BTC Charter Amendment is attached to this
Prospectus/Proxy Statement as Attachment B. In addition to the changes described
below, the BTC Charter Amendment modifies the format of the current BTC Articles
and deletes the provisions in the current BTC Articles establishing the initial
Board of Directors. The description of the BTC Charter Amendment set forth
herein is qualified in its entirety by reference to Attachment B.
Elimination of Preemptive Rights
Pursuant to Virginia law, each stockholder of BTC presently has a
preemptive right to purchase a percentage of the authorized but unissued Common
Stock of BTC, upon the Board of Directors' decision to issue additional shares
(excluding directors' qualifying shares), equal to such stockholder's then
current percentage ownership of the
37
<PAGE>
total outstanding shares of BTC Common Stock, before any such shares can be
offered to other parties. These statutory preemptive rights do not extend to
(i) shares issued to officers or employees of BTC pursuant to a plan approved by
stockholders, or (ii) shares sold other than for money. The Board of Directors
believes that the best interests of BTC will be served by amending the BTC
Articles to delete the preemptive rights of stockholders and thereby facilitate
the Merger. Further, upon consummation of the Merger, preemptive rights will no
longer serve a purpose because BTC will be a wholly owned subsidiary of NBI, and
NBI therefore will be its sole stockholder. The text of the proposed amendment
is set out in Attachment B hereto.
Number of Directors and Filling of Vacancies
BTC's current Articles establish that the number of directors
constituting the Board of Directors shall be not less than five and shall be
fixed in the Bylaws of BTC, or, if not fixed in the Bylaws shall be twenty-five.
The BTC Charter Amendment modifies this provision by providing that the Board of
Directors shall consist of not less than five nor more than twenty-five
stockholders of BTC or its holding company, with the exact number being fixed
and determined from time to time by resolution of a majority of the full Board
of Directors or by resolution of the stockholders at any annual or special
meeting of BTC. The BTC Charter Amendment further expressly provides that each
director is required to own at least the amount of capital stock in BTC or in a
bank holding company controlling BTC as may be required by law.
Upon consummation of the Merger, BTC will be a wholly owned subsidiary
of NBI. This amendment permits NBI, as the sole stockholder of BTC, to
determine, subject to certain restrictions (see "--Management and Operations of
NBI and BTC after the Merger"), the number of directors who will serve on the
BTC Board and requires that such directors be stockholders of NBI.
Currently, unless otherwise provided in the Articles, newly created
directorships and vacancies on the BTC Board of Directors may be filled by a
plurality vote of the stockholders or a majority vote of the remaining
directors. The BTC Charter Amendment provides that any vacancy on the Board of
Directors of BTC occurring during the course of the year may be filled by an
action of the Board of Directors. Directors so elected by the Board would, under
Virginia law, hold office until the next stockholders' meeting at which
directors are elected, when they will be subject to reelection by stockholders.
Proposed Liability Limitations of Directors and Officers
Section 13.1-692.1 of the Virginia Act limits the amount of monetary
damages which may be assessed against a director or officer of a Virginia
corporation in a direct or derivative action brought by stockholders. Section
13.1-692.1 provides that damages assessed against a director or officer arising
out of a single transaction, occurrence or course of conduct shall not exceed
the lesser of: (i) the amount specified in the Articles or a stockholder-adopted
Bylaw as a limitation on or elimination of liability of the director or officer;
or (ii) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the director or officer from the corporation during the twelve
months immediately preceding the act or omission giving rise to liability. This
statutory limit on damages does not apply in the event of willful misconduct or
a knowing violation of the criminal law or of any federal or state securities
law. The statute does not distinguish between liabilities based upon the
fiduciary duties of care and loyalty.
BTC's present Articles contain a provision eliminating the liability
of directors and officers of BTC, except in cases in which a director or officer
engaged in willful misconduct or a knowing violation of the criminal law or of
any federal or state securities law. The BTC Charter Amendment, in contemplation
of the Merger, deletes this provision. Accordingly, under the Virginia Act, the
liability of a director or officer of BTC for monetary damages would be the
greater of $100,000 or the amount of compensation received by the director in
the twelve months preceding the act or omission giving rise to the liability.
38
<PAGE>
Proposed Indemnification Provisions
Section 13.1-704 of the Virginia Act permits a Virginia corporation to
indemnify its directors and officers except for liability arising out of their
willful misconduct or knowing violation of the criminal law.
BTC's current Articles require indemnification of a director or
officer of BTC against liabilities, judgments, fines, penalties and claims which
may be asserted against or incurred by him or her in connection with any
threatened, actual, pending or appealed action, suit or proceeding to which he
or she may be made a party by reason of his or her being or having been a
director or officer of BTC, except for amounts (i) actually paid by BTC pursuant
to a settlement agreement or in satisfaction of a judgment arising out of
litigation that was brought by or in the right of BTC, or (ii) where he or she
was finally adjudged to be liable by reason of gross negligence, or willful
misconduct or criminal conduct in the performance of his or her duties. Any
reasonable costs or expenses actually incurred in connection with a claim may be
advanced to a director or officer prior to final disposition of the matter
provided that certain standards of conduct have been satisfied and an
appropriate written agreement has been executed by the director or officer.
Under the current Articles, BTC may choose to indemnify existing and former
employees as it deems appropriate and their heirs, executors and administrators.
The BTC Charter Amendment would require indemnification of any
director or officer who is a party to any proceeding instituted against him or
her by third parties or by or on behalf of BTC itself by reason of the fact that
he or she is or was a director or officer of BTC, or served as a director,
officer, employee or agent of another corporation or other entity at the request
of BTC, against any liabilities incurred by him or her in connection with such
proceeding, unless his or her acts or omissions constitute willful misconduct or
a knowing violation of the criminal law. The BTC Charter Amendment provides that
the Board of Directors, by majority vote of a quorum of disinterested directors,
may contract in advance to provide such indemnification, but the Board has no
present plans to do so. The principal changes that would be effected by the
indemnification provisions of the BTC Charter Amendment include, (i) absent
willful misconduct or a knowing violation of the criminal law, requiring BTC to
provide indemnification of amounts actually paid to BTC pursuant to a settlement
agreement or in satisfaction of a judgment arising out of litigation that was
brought by or in the right of BTC; (ii) establishing an express procedure for
determining whether indemnification is permissible; and (iii) requiring BTC to
provide indemnification for liability arising out of gross negligence.
Under paragraph (5) of the BTC Charter Amendment, the determination of
whether indemnification is permissible will be made (i) by a majority vote of a
quorum consisting of disinterested directors; (ii) if such quorum is not
available, by a majority vote of a committee duly designated by the Board of
Directors consisting solely of two or more disinterested directors; or (iii) by
special legal counsel selected by (a) the Board or its committee in the manner
prescribed in (i) or (ii) above, or (b) if a quorum of the Board cannot be
obtained under (i) and a committee cannot be designated under (ii), selected by
majority vote of the full Board (in which selection directors who are parties
may participate), or (iii) by the stockholders, but shares owned by or voted
under the control of directors who are at the time parties to the proceeding may
not be voted on the determination. Notwithstanding the foregoing, in the event
there has been a change in the composition of a majority of the Board after the
date of the alleged act or omission with respect to which indemnification is
claimed, any determination and advancement of expenses with respect to any claim
for indemnification shall be made by special legal counsel agreed upon by the
Board of Directors and the applicant.
Paragraph (6) of the BTC Charter Amendment provides that, to the
extent permitted by applicable banking laws and regulations, BTC shall pay for
or reimburse the reasonable expenses incurred by any applicant who is a party to
a proceeding in advance of final disposition of the proceeding or the making of
any determination on indemnification if the following conditions are met (i) the
Board, in good faith, determines in writing that (a) the director has a
substantial likelihood of prevailing on the merits; (b) in the event the
director does not prevail, he or she will have the financial capability to
reimburse BTC; and (c) payment of expenses by BTC will not adversely affect
BTC's safety and soundness. To the extent required by applicable banking laws
and regulations, if at any time the BTC Board of Directors believes that either
conditions (a), (b), or (c) are no longer met, BTC shall cease paying
39
<PAGE>
such expenses or premiums. The Board shall enter into a written agreement with
the director, specifying the conditions under which he or she will be required
to reimburse BTC, which agreement shall require reimbursement for expenses
already paid, if and to the extent the Board finds that the director willfully
misrepresented factors relevant to the Board's determination of conditions (a)
or (b), or if a final decision accessing penalties or requiring payments is
returned. BTC shall insure that it complies with all applicable laws and
regulations affecting loans to directors, officers and employees, in the event
reimbursement is required. Additionally, the applicant must furnish BTC (a) a
written statement of his or her good faith belief that he or she has met the
standard of conduct to receive indemnification; and (b) a written undertaking,
executed personally or on his or her behalf, to repay the advance if it is
ultimately determined that he or she did not meet such standard of conduct.
Paragraph (7) of the BTC Charter Amendment authorizes BTC, by a
majority vote of a quorum of disinterested directors, to provide indemnification
to other persons, including directors and officers of BTC's subsidiaries and
employees and agents of BTC and its subsidiaries, to the same extent as if such
person was a director or officer of BTC. BTC may, by a majority vote of a quorum
of disinterested directors, also contract in advance to provide such
indemnification, but has no present plans to do so. Whether stockholders would
be estopped from a claim that any such contract, or any contract with regard to
indemnity of directors or officers, is invalid or unenforceable due to the
approval of the BTC Charter Amendment would depend upon the facts and
circumstances relating to such claim.
Paragraph (8) of the BTC Charter Amendment authorizes BTC to purchase
and maintain insurance to indemnify it against all or part of the liability
assumed by it in accordance with the BTC Charter Amendment. Paragraph (8)
further authorizes BTC to purchase insurance for any director, officer, employee
or agent of another corporation or other entity who is serving at the request of
BTC, whether or not BTC would have the power to indemnify him against such
liability under the BTC Charter Amendment.
Scope and Application of the BTC Charter Amendment
Paragraph (11) of the BTC Charter Amendment provides that the BTC
Charter Amendment shall be applicable to only to conduct, actions or omissions
of any applicant occurring or arising after the Effective Date of the Merger.
Under the Merger Agreement, NBI has agreed that, for six years
following the Merger Effective Date, it will cause BTC to indemnify any person
who has rights to indemnification pursuant to BTC's Articles as in effect on the
date of the Merger Agreement, to the extent legally permitted to do so. With
respect to matters occurring on or prior to the Merger Effective Date, the
adoption of the BTC Charter Amendment will not affect any person's right, if
any, to such indemnification. See "--Interests of Certain Persons."
Other Effects of the BTC Charter Amendment
The approval of the Merger, the related Plan of Merger and the BTC
Charter Amendment could, as a result of the BTC Charter Amendment, increase the
costs to NBI in the future in the event that claims for indemnification were to
be asserted. All directors and officers of BTC will have an interest in and
could benefit from the provisions of the BTC Charter Amendment at the potential
expense of NBI's stockholders. The Board of Directors of NBI believes that the
foregoing risks are outweighed by the positive effect that the provisions will
have, namely, the enhancement of BTC's ability to attract and retain qualified
directors and officers, and that the provisions ultimately will inure to the
benefit of BTC, NBI and NBI's stockholders.
Insofar as indemnification for liability arising under federal
securities laws may be permitted to directors, officers and other persons
pursuant to the BTC Charter Amendment, BTC understands that it is the position
of the Commission that such indemnification is void as against public policy and
unenforceable.
40
<PAGE>
NBI Share Dividend
NBI will, prior to the Merger Effective Date, increase the number of
shares of NBI common stock issued and outstanding by means of a stock dividend
totaling 190,768 shares of NBI common stock; provided, however, that NBI shall
not be required to declare such stock dividend until (i) approval of the
Proposal by the requisite vote of BTC stockholders; (ii) receipt of the Required
Regulatory Approvals and expiration of any statutory waiting periods relating
thereto; and (iii) such time as BTC acknowledges in writing that all conditions
to its obligations to consummate the Merger (and BTC's right to terminate the
Merger Agreement) have been waived or satisfied. The Common Stock Exchange Ratio
takes into account the NBI Share Dividend.
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
OF NBI AND BTC
September 30, 1995
(Unaudited)
The following unaudited pro forma combined condensed balance sheet
combines the historical balance sheets of NBI and BTC on the assumption that the
Merger had been effective as of September 30, 1995, giving effect to the Merger
on a pooling-of-interests accounting basis. See "THE MERGER--Accounting
Treatment." This unaudited pro forma combined condensed balance sheet should be
read in conjunction with the historical financial statements of NBI and BTC,
including the respective notes thereto. See "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
NBI/BTC
Pro Forma Pro Forma
NBI BTC Adjustments Combined
--- --- ----------- ---------
<S> <C> <C> <C> <C>
($ in thousands)
Assets
Cash and due from banks $ 5,381 7,320 12,701
Federal funds sold 4,610 6,350 10,960
Securities available for sale 12,854 28,432 41,286
Securities held to maturity 53,105 89,892 142,997
Mortgage loans held for sale 1,318 - 1,318
Loans 125,474 42,408 167,882
Less unearned income on loans 1,811 733 2,544
-------- ------- -------
Loans, net of unearned income 123,663 41,675 165,338
Less allowance for loan losses 2,105 553 2,658
-------- ------- -------
Loans, net 121,558 41,122 162,680
-------- ------- -------
Bank premises and equipment, net 2,670 1,868 4,538
Accrued interest receivable 1,909 1,961 3,870
Other real estate owned, net 946 33 979
Other assets 2,329 510 2,839
-------- ------- ------ -------
Total assets $206,680 177,488 384,168
======== ======= ====== =======
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $ 24,507 16,588 41,095
Interest-bearing deposits 57,446 18,949 76,395
Savings deposits 16,038 36,371 52,409
Time deposits 85,161 78,760 163,921
-------- ------- -------
Total deposits 183,152 150,668 333,820
Accrued interest payable 242 429 671
Other liabilities 1,029 1,378 2,407
-------- ------- ------ -------
Total liabilities 184,423 152,475 336,898
-------- ------- ------ -------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NBI/BTC
Pro Forma Pro Forma
NBI BTC Adjustments Combined
--- --- ----------- ---------
<S> <C> <C> <C> <C>
($ in thousands)
Stockholders' equity:
Preferred stock - - -
Common stock 4,285 1,888 477 (4) 9,482
4,720 (3)
(1,888)(3)
Surplus 1,187 2,000 (2,832)(3) 4,361
4,006 (4)
Undivided profits 16,722 21,585 (4,483)(4) 33,824
Net unrealized gains (losses) on securities
available for sale 63 (460) (397)
------- ------- ------ -------
Total stockholder's equity 22,257 25,013 47,270
-------- ------- ------ -------
Total liabilities and stockholders' $206,680 177,488 384,168
======== ======= ====== =======
</TABLE>
See accompanying notes to pro forma financial information.
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
NBI and BTC
(Unaudited)
The following unaudited pro forma combined condensed statements of
income present the combined statements of income of NBI and BTC assuming the
companies had been combined for each period presented on a pooling-of-interests
accounting basis. See "THE MERGER--Accounting Treatment." These unaudited pro
forma combined condensed statements of income should be read in conjunction with
the historical financial statements of NBI and BTC, including the respective
notes thereto. See "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- --------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
($ in thousands except per share data):
Interest income $20,985 19,395 26,062 25,826 28,304
Interest expense 9,385 7,908 10,684 10,752 13,964
------- ------ ------ ------ ------
Net interest income 11,600 11,487 15,378 15,074 14,340
Provision for loan losses 225 386 553 953 1,208
------- ------ ------ ------ ------
Net interest income after provision for loan losses 11,375 11,101 14,825 14,121 13,132
Noninterest income 1,488 1,545 2,048 2,400 1,360
Noninterest expense 7,130 6,799 9,726 9,002 8,396
------- ------ ------ ------ ------
Income before income taxes and cumulative
effect of change in accounting principle 5,733 5,847 7,147 7,519 6,096
Income taxes 1,489 1,530 1,844 1,903 1,377
------- ------ ------ ------ ------
Income before cumulative effect of
change in accounting principle 4,244 4,317 5,303 5,616 4,719
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - 28 -
------- ------ ------ ------ ------
Net income $ 4,244 4,317 5,303 5,644 4,719
======= ====== ====== ====== ======
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- --------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
($ in thousands except per share data):
Pro forma per common share data (note 6):
Income before cumulative effect of
change in accounting principle $ 1.12 1.14 1.40 1.48 1.25
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - .01 -
------- ------ ------ ------ ------
Net income $ 1.12 1.14 1.40 1.49 1.25
======= ====== ====== ====== ======
Average common shares (in thousands) 3,793 3,788 3,789 3,786 3,779
======= ====== ====== ====== ======
Pro forma NBI per common share data
adjusted for stock dividend (note 7):
Income before cumulative effect of
change in accounting principle $ 1.28 1.19 1.53 1.39 1.23
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - .02 -
------- ------ ------ ------ ------
Net income $ 1.28 1.19 1.53 1.41 1.23
======= ====== ====== ====== ======
Average common shares (in thousands) 1,905 1,900 1,901 1,898 1,891
======= ====== ====== ====== ======
NBI historical per common share data:
Income before cumulative effect of
change in accounting principle $ 1.43 1.33 1.70 1.54 1.37
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - .02 -
------- ------ ------ ------ ------
Net income $ 1.43 1.33 1.70 1.56 1.37
======= ====== ====== ====== ======
Average common shares (in thousands) 1,714 1,710 1,710 1,708 1,701
======= ====== ====== ====== ======
</TABLE>
See accompanying notes to pro forma financial information.
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the Merger been consummated at the beginning of the periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
(2) It is assumed the Merger will be accounted for on a pooling-of-interests
accounting basis and, accordingly, the related pro forma adjustments herein
reflect the exchange of one share of common stock of NBI for one share of
common stock of BTC. It is also assumed that NBI will issue the NBI Share
Dividend (0.11129 per share) to the holders of NBI common stock just prior
to the Merger Effective Date to facilitate the one-for-one Common Stock
Exchange Ratio.
(3) Stockholders' equity was adjusted for the Merger by the (i) addition of
1,888,209 shares of NBI common stock of $2.50 par value amounting to
$4,720,522; (ii) elimination of 1,888,209 shares of BTC common stock of
$1.00 par value amounting to $1,888,209; and (iii) recordation of the
remaining amount of $2,832,313 as a decrease in surplus at September 30,
1995.
43
<PAGE>
(4) Stockholders' equity was also adjusted to reflect the NBI Share Dividend
(0.11129 per share) by (i) increasing NBI common stock $476,920; (ii)
decreasing undivided profits $4,483,048, the fair value of the stock
dividend ($23.50 per share); and (iii) increasing surplus $4,006,128 at
September 30, 1995.
(5) NBI Interim has been formed to facilitate the Merger. NBI has subscribed
to 2,000 shares of common stock ($1.00 par value) of NBI Interim for
$4,000,000 ($2,000,000 in common stock and $2,000,000 in surplus), and this
subscription is represented by a stock subscription receivable from NBI
(parent company only). The pro forma balance sheet adjustments do not
reflect the stock subscription receivable of $4,000,000 and the
simultaneous elimination of same to arrive at pro forma combined.
(6) Pro forma income per common share data has been computed based on the
combined historical net income of NBI and BTC using the historical weighted
average shares outstanding of NBI common stock giving effect to the 0.11129
per share NBI Share Dividend (see note 7) and the historical weighted
average outstanding shares of BTC common stock, adjusted to equivalent
shares of NBI common stock, as of the earliest period presented.
(7) Pro forma NBI income per common share data adjusted for stock dividend has
been computed giving effect to the NBI Share Dividend of 0.11129 per share
to be declared and issued pro rata to holders of NBI common stock just
prior to the Merger Effective Date to facilitate the one-for-one Common
Stock Exchange Ratio.
(8) Certain reclassifications have been included herein to conform statement
presentations. There are no intercompany transactions between NBI and BTC,
and therefore no intercompany eliminations are required.
(9) The unaudited pro forma financial information does not include any material
expenses related to the Merger. Estimated expenses related to the Merger of
$230,000 are expected to be incurred after September 30, 1995.
(10) As indicated by the foregoing unaudited pro forma financial information and
based solely on combined financial information as of September 30, 1995,
upon consummation of the Merger, NBI's historical net income per common
share for the year ended December 31, 1994, and for the nine months ended
September 30, 1995, adjusted for the NBI Share Dividend (see note 2), would
have been diluted 8.5 percent and 12.5 percent, respectively. At
September 30, 1995, BTC's historical book value per share would have been
diluted by 6%. It should not necessarily be assumed, however, that the
foregoing data will represent actual dilution upon consummation of the
Merger.
BUSINESS OF NBI
General
Financial and other information relating to NBI, including information
relating to NBI's directors and executive officers is set forth in NBI's 1994
Annual Report on Form 10-K, 1995 Annual Meeting Proxy Statement and 1995 Third
Quarter Report on Form 10-Q, copies of which may be obtained from NBI as
indicated under "AVAILABLE INFORMATION."
History and Business
NBI is a bank holding company organized under the laws of Virginia in
1986 and registered under the BHCA. NBI conducts its operations through its sole
wholly owned subsidiary, NBB, which was originally chartered in 1891. NBB
operates a full-service banking business from its headquarters in Blacksburg,
Virginia, and its six area branch offices. NBB offers general retail and
commercial banking services to individuals, businesses, local government units
and institutional customers. These products and services include accepting
deposits in the form
44
<PAGE>
of checking accounts, money market deposit accounts, NOW accounts, savings
accounts and time deposits; making real estate, commercial, revolving, consumer
and agricultural loans; offering letters of credit; providing other consumer
financial services, such as automatic funds transfer, collection, night
depository, safe deposit, money order, travelers check, savings bond sales and
utility payment services; and providing other miscellaneous services normally
offered by commercial banks. NBB also conducts a general trust business in
Blacksburg near its headquarters location. Through its trust operations, NBB
offers a variety of fiduciary, personal and corporate trust services.
The following table sets forth, for the three fiscal years ended
December 31, 1994 and for the nine months ended September 30, 1995 and 1994, the
percentage of total operating revenue contributed by each class of similar
services which contributed 15% or more of total operating revenues of NBB during
such periods.
<TABLE>
<CAPTION>
Percentage
Period Class of Service Total Revenues
- ------ ---------------- --------------
<S> <C> <C>
Nine months ended:
September 30, 1995 Interest and Fees on Loans 66.4%
Interest on Securities 22.8
September 30, 1994 Interest and Fees on Loans 62.8
Interest on Securities 25.9
Fiscal years ended:
December 31, 1994 Interest and Fees on Loans 63.1
Interest on Securities 26.0
December 31, 1993 Interest and Fees on Loans 64.3
Interest on Securities 25.3
December 31, 1992 Interest and Fees on Loans 65.3
Interest on Securities 26.2
</TABLE>
NBI believes that there is no single loan account, group of related
loan accounts, single deposit account, or group of related deposit accounts, the
withdrawal of which would have a material adverse effect on NBB's business. On
September 30, 1995, NBI had total consolidated assets of approximately $207
million and trust assets with a market value of approximately $63 million under
management or administration. As of that date, NBI had approximately $122
million in consolidated net loans, approximately $183 million in consolidated
deposits and approximately $22 million in consolidated stockholders' equity.
NBI's management will consider strategic acquisition opportunities in
businesses which complement or expand NBI's current operations. NBI currently
has no specific acquisition plans, other than the affiliation with BTC, and
there can be no assurance that any acquisitions will be made or what the terms
of such acquisitions, if any, may be.
Market Area and Competition
NBB's primary service area consists of the towns of Blacksburg and
Christiansburg and the northern portions of Montgomery County and Giles County.
The local economy is oriented toward higher education, light manufacturing and
agriculture.
The commercial banking industry is extremely competitive. Many other
commercial banks are headquartered or have offices in NBB's service area, some
of which do business at several locations. Regional financial institutions
headquartered elsewhere compete in NBB's service area and have substantially
greater resources than NBB.
45
<PAGE>
Although NBB's main competition is from other commercial banks, there is also
competition from credit unions, savings banks, savings and loan institutions,
consumer finance companies and commercial finance and leasing companies doing
business in the service area.
The principal methods of competition in the banking industry are rates
offered on loans and deposits and service and convenience of location. NBB is
generally competitive with other financial institutions in its service area with
respect to interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans. Management believes that
NBB is able to compete successfully in this environment because of its service-
based business philosophy, well trained and customer oriented staff, and the
convenience of its office locations.
The business of NBB and its competition with other banks and other
types of financial institutions will continue to be affected by legislative and
regulatory developments. Virginia's "opt in" to the Interstate Act (as defined
below) will allow financial institutions with much greater resources than those
in NBB's service area to establish business operations that will compete
directly with NBB. See "CERTAIN REGULATORY CONSIDERATIONS."
On September 30, 1995, NBB employed a total of 96 full-time and three
part-time employees in its main office and branch locations, and NBI had five
officer-employees. Employees are not represented by any union, and management
believes that employee relations are satisfactory.
NBI's principal offices are located at 100 Main Street, Blacksburg,
Virginia 24060.
Principal Holders of NBI Common Stock
As of September 30, 1995, NBI had 1,714,152 shares of common stock
($2.50 par value) issued and outstanding. The following table sets forth, as of
September 30, 1995, the shares of common stock beneficially owned by the only
person reporting ownership of more than 5% of NBI common stock. Other than as
set forth below, to the best of NBI's knowledge, no person owns more than 5% of
the outstanding NBI common stock.
<TABLE>
<CAPTION>
Amount of
Name and Address of Beneficial Percentage
Beneficial Owner Ownership of Class
- ---------------- ---------- ----------
<S> <C> <C>
J. D. Nicewonder 110,376 6.44
148-B Bristol East Road
Bristol, VA 24201
</TABLE>
The following table sets forth, as of September 30, 1995, certain
information regarding the beneficial ownership of NBI common stock by each
director and named executive officer and by all directors and executive officers
as a group. Unless otherwise noted in the footnotes to the table, the named
persons have sole voting and investment power with respect to all outstanding
shares of NBI common stock shown as beneficially owned by them.
46
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially
Name of Owned as of Percentage
Beneficial Owner September 30, 1995 of Class
- ---------------- ------------------- ----------
<S> <C> <C>
Charles L. Boatwright 11,512(1) *
L. Allen Bowman 10,000 *
Robert E. Christopher, Jr. 12,232(2) *
Paul A. Duncan 8,656(3) *
James G. Rakes 16,271(4) *
James M. Shuler 8,148(5) *
Jeffrey R. Stewart 20,800(6) 1.21
J. Lewis Webb, Jr. 2,580 *
Paul P. Wisman 400 *
Directors and Executive Officers
as a Group (12 Persons) 100,975 5.89
</TABLE>
- --------------------
* Less than 1%.
(1) Includes 3,048 shares owned jointly with spouse and 528 shares owned by
spouse jointly with children.
(2) Includes 900 shares owned by spouse.
(3) Includes 1,128 shares owned by spouse and 80 shares owned by spouse as
custodian.
(4) Includes 5,040 shares owned jointly with spouse, 400 shares owned by a
child, 400 shares owned as custodian, and 5,271 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan.
(5) Includes 192 shares owned jointly with spouse and 1,200 shares owned by a
child.
(6) Includes 6,729 shares owned jointly with spouse and 471 shares owned as
custodian.
NBI SELECTED FINANCIAL INFORMATION
The following table presents certain unaudited historical selected
financial data for NBI as of and for the five years in the period ended
December 31, 1994 and as of and for the nine months ended September 30, 1995 and
1994. The data as of and for the five years in the period ended December 31,
1994 is derived from the audited financial statements of NBI and the notes
thereto. The data as of and for the nine months ended September 30, 1995 and
1994 is derived from the unaudited financial statements of NBI. In the opinion
of management, such unaudited financial statements have been prepared on the
same basis as the audited financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited periods. Results for the nine
months ended September 30, 1995 should not be considered necessarily indicative
of the results to be expected for the full year. The information below is
qualified in its entirety by the detailed information and financial statements
included elsewhere herein, and should be read in conjunction with "NBI'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the financial statements of NBI and notes thereto included
elsewhere in this Prospectus/Proxy Statement.
47
<PAGE>
NBI (Historical)
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------- ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data ($ in
thousands except per share data):
Interest income $ 11,908 10,755 14,562 14,428 16,047 17,732 17,475
Interest expense 4,941 4,157 5,655 5,823 8,048 10,886 10,904
-------- ------- ------- ------- ------- ------- -------
Net interest income 6,967 6,598 8,907 8,605 7,999 6,846 6,571
Provision for loan losses 225 380 540 930 1,060 615 675
-------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses 6,742 6,218 8,367 7,675 6,939 6,231 5,896
Noninterest income 1,277 1,242 1,607 1,541 1,287 967 1,125
Noninterest expense 4,821 4,519 6,158 5,855 5,400 4,738 4,487
-------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 3,198 2,941 3,816 3,361 2,826 2,460 2,534
Income taxes 753 672 900 717 498 416 443
-------- ------- ------- ------- ------- ------- -------
Income before cumulative effect of
change in accounting principle 2,445 2,269 2,916 2,644 2,328 2,044 2,091
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - - - - -
-------- ----- ----- ----- ----- ----- -----
Net income $ 2,445 2,269 2,916 2,672 2,328 2,044 2,091
======== ======= ======= ======= ======= ======= =======
Per Share Data:
Income before cumulative effect of
change in accounting principle 1.43 1.33 1.70 1.56 1.37 1.21 1.24
Cumulative effect at January 1, 1993 of
change in accounting for income taxes - - - - - - -
------- ------- ------- ------- ------- ------- -------
Net income $ 1.43 1.33 1.70 1.56 1.37 1.21 1.24
======== ======= ======= ======= ======= ======= =======
Cash dividends declared $ .30 .27 .58 .50 .43 .39 .36
Book value per share 12.98 11.71 11.75 10.68 9.61 8.67 7.84
Average shares (in thousands) 1,714 1,710 1,710 1,708 1,701 1,693 1,682
Selected Balance Sheet Data at
End of Period ($ in thousands):
Loans, net $121,558 112,565 113,718 110,217 106,040 114,214 118,899
Securities available for sale 12,854 12,969 12,114 - - - -
Securities held to maturity 53,105 60,772 57,389 62,518 60,442 59,054 38,845
Total assets 206,680 200,105 199,727 186,694 182,595 185,829 179,148
Total deposits 183,152 179,440 178,636 167,702 165,633 170,354 164,947
Stockholders' equity 22,257 20,024 20,137 18,254 16,375 14,714 13,222
Selected Ratios:
Return on average assets (1) 1.60% 1.56 1.51 1.45 1.26 1.12 1.23
Return on average equity (1) 15.38 15.81 15.19 15.43 14.98 14.63 16.82
Dividend payout ratio (1) (2) 28.03 27.15 34.05 32.00 31.49 32.14 29.22
Average equity to average assets 10.43 9.90 9.94 9.38 8.44 7.65 7.29
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------- ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan losses to period end:
Loans, net of unearned 1.70% 1.79 1.73 1.82 1.65 1.43 1.37
Nonaccrual and restructured loans (3) 501 476 309 83 128 246 121
Nonperforming assets (3) 154 232 116 76 80 107 112
Net charge-offs to average net loans (1) .14 .44 .51 .63 .86 .52 .26
Nonperforming assets to period-end
loans, net of unearned income plus
foreclosed properties 1.10 .77 1.48 2.39 2.05 1.33 1.22
Leverage 10.25 9.55 9.62 9.98 - - -
Tier 1 risk-based capital 14.91 14.73 14.81 14.67 - - -
Total risk-based capital 16.16 15.98 16.06 15.93 - - -
Average loans to average deposits 65.03 64.18 63.32 65.44 64.93 69.06 72.94
</TABLE>
(1) Annualized for the nine months ended September 30, 1995 and 1994.
(2) Dividends paid for the nine months ended September 30, 1995 and 1994 are not
indicative of dividends paid on an annual basis. NBI has historically paid
semiannual dividends in June and December.
(3) Rounded to nearest whole percent.
NBI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of the financial condition and
results of operations of NBI for the years ended 1994, 1993 and 1992 and the
three months and nine months ended September 30, 1995 and 1994. The discussion
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this Prospectus/Proxy Statement. See
"FINANCIAL STATEMENTS."
Years Ended December 31, 1994, 1993 and 1992
Performance Summary. NBI's net income increased $244,000, or 9.1%, in
1994, as compared to an increase of $344,000, or 14.8%, in 1993. Net interest
income after provision for loan losses increased $692,000 in 1994 and $736,000
in 1993. Noninterest income increased $66,000 between 1993 and 1994 and $254,000
between 1992 and 1993. Noninterest expense increased $303,000 in 1994 and
$455,000 in 1993.
Net Interest Income. Net interest income is the main component of
NBI's earnings and reflects net profits realized from loan, investment and
deposit activities. For 1994, net interest income totaled $8,907,000, compared
to $8,605,000 earned in 1993 and $7,999,000 in 1992. Net interest income
increased in 1994 because interest expense declined more rapidly than interest
income during a period of declining interest rates. Interest expense on deposits
declined $182,000 in 1994, compared to a decline of $2,220,000 in 1993.
Investment income increased $192,000 in 1994, compared to a $573,000 decrease in
1993. At year-end 1994, market indicators lead management to expect a narrower
interest margin in 1995, and therefore, if the trend is not offset by other
factors, a reduction in net interest income. To maximize income potential,
minimize interest rate risk during periods of rate fluctuations and insure
adequate liquidity, NBI employs a formal asset/liability management strategy.
Provision and Allowance for Loan Losses. The level of allowance for
loan losses is based on management's judgment and analysis of current and
historical loss experience, risk characteristics of the portfolio,
49
<PAGE>
concentration risks and asset quality considerations, as well as other internal
and external factors, such as general economic conditions. During 1994,
management took a prudent approach to reserving for losses by allocating
$540,000 as a provision for loan losses, compared to $930,000 and $1,060,000 in
1993 and 1992, respectively. Net charge-offs for 1994 decreased $102,000,
following a decrease of $269,000 between 1992 and 1993. The decrease in net-
charge offs in 1994 was the result of improvement in the loan portfolio
attributable largely to improvement in the local economy. The decrease in net
charge-offs allowed management to lower the provision while still maintaining a
ratio of the allowance for loan losses to loans, net of unearned income, of
1.73% at December 31, 1994. NBB's Credit Review Department performs pre-credit
reviews of large credits and, on an ongoing basis, conducts analyses to
systematically evaluate loan quality, detect problems and provide early warning
of asset deterioration.
Noninterest Income. Noninterest income was $1,607,000 in 1994,
compared to $1,541,000 in 1993 and $1,287,000 in 1992. Continuing a trend of
steady growth in 1992 and 1993, increases of $73,000 in service charges on
deposit accounts, $44,000 in trust income and $38,000 in credit card fees in
1994 contributed to the overall 4.3% increase in noninterest income.
Noninterest Expense. Noninterest expense increased $303,000 in 1994, a
33.4% decline from the $455,000 increase between 1992 and 1993. Because of NBB's
strong capital position and low risk profile, NBB now pays and expects to
continue paying a favorable FDIC insurance premium rate. This is demonstrated by
an expense increase of only $18,000 in 1994 despite an increase in total
deposits of $10,934,000 between 1993 and 1994. In late 1993, the acquisition of
NBB's credit card processor, Atlantic States Bankcard Association, by First Data
Resources ("FDR") necessitated a conversion to FDR's computer system. An
increase in credit card expense of $69,000 in 1994 reflects FDR's higher fee
structure. Net costs of other real estate owned were $37,000 in 1994, compared
to $287,000 in 1993, due to decreased losses and write-downs and lower
maintenance and administrative carrying expenses on the properties. The timing
of acquisition and liquidation of foreclosed assets, as well as the nature of
the properties, affect the expenses incurred.
Income Taxes. Higher taxable earnings in 1994 resulted in a $183,000
increase in federal income tax expense in 1994, as compared to $219,000 in 1993.
NBI's effective tax rate was 23.6% in 1994, 21.3% in 1993, and 17.6% in 1992.
NBI has determined that a valuation allowance for the gross deferred
tax assets is not necessary due to the fact that the realization of the entire
gross deferred tax assets can be supported by the amount of taxes paid during
the carryback period available under current tax laws.
Effects of Inflation. NBI's consolidated income statements generally
reflect the effects of inflation. Since interest rates, loan demand and deposit
levels are related to inflation, the resulting changes are included in net
interest income. The most significant item which does not reflect the effects of
inflation is depreciation expense, because historical dollar values used to
determine this expense do not reflect the effect of inflation on the market
value of depreciable assets after their acquisition.
Balance Sheet. In 1994, total assets increased $13,033,000, after an
increase of $4,099,000 in 1993. Total loans increased $4,059,000 in 1994,
compared to a $5,141,000 increase in 1993, and total deposits increased
$10,934,000 in 1994, compared to a $2,069,000 increase in 1993. Management
currently expects future improvement in the local economy, which should continue
to positively impact asset growth.
Loans. Total loans increased 3.6%, following an increase of 4.7%
between 1992 and 1993. Management continued to emphasize expansion of the
consumer loan portfolio, succeeding in this effort with an $8,522,000 increase
in loans to individuals in 1994, compared to a $6,036,000 increase in 1993. This
emphasis on consumer loans and the resulting growth in that category of loans
was a major factor leading to the increase in total loans.
50
<PAGE>
At year-end 1994, management management expected loan volume management expected
loan remain steady due toncertainty in the interest rate environment.
Past Due Loans and Nonperforming Assets. Loans past due 90 days or
more at December 31, 1994 totaled $219,000, compared to $326,000 at December 31,
1993. In addition, nonaccrual loans totaled $420,000 at December 31, 1994,
compared to $1,864,000 at December 31, 1993. Management believes that the
category of nonaccrual loans has stabilized as the local economy has continued
its recovery. Other real estate owned totaled $1,083,000 in 1994, compared to
$225,000 in 1993, and restructured loans amounted to $229,000 at December 31,
1994, compared to $598,000 at December 31, 1993. The bank has an active program
to convert nonperforming loans to performing assets. This was demonstrated in
1994 by a decrease of $1,813,000 in nonperforming loans, compared to an increase
in other real estate owned of only $858,000.
Securities. As a result of the investment of funds acquired in a
purchase of deposits, securities held to maturity and available for sale at
December 31, 1994 increased $6,985,000 over 1993. Effective January 1, 1994, NBI
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Upon adoption of SFAS No. 115, certain investment securities totaling
$17,451,000 were reclassified from securities held to maturity to securities
available for sale. NBI has classified all of its investment securities as
either held to maturity or available for sale because NBI does not maintain a
securities trading account.
NBB's investment policy stresses safety with a program of purchasing
high quality securities such as U.S. Treasury and U.S. Government Agency issues,
state, county and municipal bonds, corporate bonds, and other bank qualified
investments. Management adjusts its investment strategy in response to market
conditions and available investment vehicles.
Deposits. On April 16, 1994, NBB purchased the deposits of the
Pembroke Office of First Union National Bank of Virginia. As a result, NBB
assumed $14,514,000 in total deposits and $33,000 in accrued interest payable.
By year-end 1994, NBI's total deposits had increased $10,934,000 over 1993.
Capital Resources. Total stockholders' equity increased $1,883,000
from 1993 to 1994. Net income, less cash dividends on common stock of $993,000,
and the issuance of NBI common stock to NBI's Employee Stock Ownership Plan for
$86,000 account for this increase. The $126,000 decrease in stockholders' equity
at December 31, 1994 represents the excess of amortized costs over the fair
values of securities available for sale, net of income taxes, at year-end as
prescribed by SFAS No. 115. Net unrealized gains or losses on securities
available for sale, net of income taxes, which is recorded as a separate
component of stockholders' equity, will continue to be subject to change in
future years due to fluctuations in fair values, sales, purchases, maturities
and calls of securities classified as available for sale. There are no expected
material changes in the mix or relative cost of capital resources.
NBI has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 10.08% at year-end 1994
compared to 9.78% at year-end 1993. Banks are required to apply percentages to
various assets, including off-balance sheet assets, to reflect their perceived
risk. Regulatory defined capital is divided by risk-weighted assets in
determining a bank's risk-based capital ratio. No regulatory authorities have
advised NBI or NBB of any specific leverage ratios applicable to them. Both
NBI's and NBB's capital adequacy ratios exceed regulatory requirements, and they
provide added flexibility to take advantage of business opportunities as they
arise.
51
<PAGE>
Capital Analysis.
<TABLE>
<CAPTION>
December 31, 1994
-----------------
Capital Components Consolidated NBB
- ------------------ ------------ ---
<S> <C> <C>
Tier 1 capital $ 18,963,000 18,663,000
Risk-adjusted tier 2 capital 1,606,000 1,606,000
------------ -----------
Total risk-adjusted capital $ 20,569,000 20,269,000
============ ===========
<CAPTION>
Asset Components Consolidated NBB
- ---------------- ------------ ---
<S> <C> <C>
Adjusted risk-weighted assets $128,053,000 128,051,000
Year-to-date adjusted average assets 197,121,000 195,765,000
<CAPTION>
Capital Ratios Required Consolidated NBB
- -------------- -------- ------------ ---
<S> <C> <C> <C>
Common stockholders' equity -% 10.08 9.95
Regulatory capital 6 10.67 10.33
Risk-weighted capital:
Tier 1 4 14.81 14.57
Tier 1 + tier 2 8 16.06 15.83
Leverage ratio 3-5 9.62 9.53
</TABLE>
Liquidity. Liquidity is the ability to provide sufficient cash flow to
meet financial commitments and to fund additional loan demand or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, securities sales, calls and maturities and short-term
borrowings. NBB maintained an adequate liquidity level during 1994 and 1993. The
liquidity ratio at December 31, 1994 was 26.1%, compared with 26.3% at
December 31, 1993, as deposits acquired were used to purchase securities and
fund loan demand. Management is not aware of any future capital expenditures or
other significant demands or commitments which would result in material
increases or decreases in liquidity.
Future Accounting Considerations. The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan." SFAS No. 114 requires that certain loans which have been determined
to be impaired be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 114 also requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal of all receivables when assessing the need for a loss
accrual.
In October 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. To accomplish that, SFAS No.
118 eliminates the provisions in SFAS No. 114 that described how a creditor
should report income on an impaired loan. SFAS No. 118 does not change the
provisions in SFAS No. 114 that required a creditor to measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
52
<PAGE>
SFAS No. 118 is effective concurrent with the effective date of SFAS
No. 114. The mandatory adoption date of SFAS No. 114 and SFAS No. 118 by NBI was
January 1, 1995 and, consistent with the requirements of SFAS No. 114, they were
adopted by NBI on a prospective basis. NBI did not elect early adoption of SFAS
No. 114 and SFAS No. 118 and anticipates that the effects of adoption will not
materially impact its consolidated financial statements.
Three Months Ended September 30, 1995 and September 30, 1994
Performance Summary. Net income for the current quarter amounted to
$827,000, an increase of $24,000 or 3.0% over the corresponding quarter in 1994.
This increase resulted from a decrease in the provision for loan losses, an
increase in noninterest income and an increase in noninterest expense.
Net Interest Income. Net interest income increased $18,000 or 7.6% in
the current quarter over the corresponding quarter in 1994. Interest income
increased $347,000 or 9.2% due to an increase in loans. Interest expense
increased $329,000 or 23.1% due to an increase in deposits.
Provision and Allowance for Loan Losses. The provision for loan losses
decreased $65,000 or 43.3% in the current quarter over the corresponding quarter
in 1994 due to a decline in net charge offs and a stabilization of past due and
nonaccrual loans. Management considers the provision adequate.
Noninterest Income. Noninterest income increased $55,000 or 14.2% in
the current quarter over the corresponding quarter in 1994 due to an increase in
service charges on deposit accounts, credit card fees, and trust income.
Noninterest Expense. Noninterest expense increased $74,000 or 4.7% in
the current quarter over the corresponding quarter in 1994 due principally to
increases in salaries and employee benefits, credit card processing and net
costs of other real estate owned.
Income Taxes. NBI's effective tax rate for the current quarter of
25.0% is comparable to the 22.7% effective rate in the corresponding quarter of
1994.
Nine Months Ended September 30, 1995 and September 30, 1994
Performance Summary. Net income for the nine months ended September
30, 1995 increased $176,000 or 7.8% compared to the corresponding period of the
previous year. This compared to a $321,000 or 16.5% increase for the September
30, 1994 period compared to September 30, 1993. The increase in net income for
the nine months ended September 30, 1995 was attributable principally to an
increase in net interest income, a decrease in the provision for loan losses and
an increase in noninterest expense.
Net Interest Income. Net interest income increased $369,000 or 5.6%
from 1994 to 1995 compared to an increase of $211,000 or 3.3% from 1993 to 1994.
Interest income increased $1,153,000 over 1994 due to increases in the loan
portfolio and changes in the yields on other earning assets. Interest expense
increased $784,000 from 1994 to 1995 due to growth in total deposits and changes
in the mix of deposit liabilities to time deposits.
Provision and Allowance for Loan Losses. The provision for loan losses
decreased $155,000 or 40.8% in 1995 compared to 1994 because past due and
nonaccrual loans have stabilized. The allowance for loan losses to period-end
loans, net of unearned income, approximated 1.70% at September 30, 1995,
compared to 1.73% at December 31, 1994. Management considers the provision
adequate.
53
<PAGE>
Noninterest Income. During the first nine months of 1995, total
noninterest income rose $35,000 or 2.8% over the same period last year. This
increase was due primarily to increases in service charges on deposit accounts,
credit card fees and other income.
Noninterest Expense. Noninterest expense increased $302,000 or 6.7%
for the nine months ended September 30, 1995, compared to a $206,000 or 4.8%
increase for the 1993 to 1994 period. The largest component of the increase was
due to the increased cost of salaries and employee benefits. Fringe benefit
costs for pension, medical and dental coverage have increased in the past year.
Other operating expense increases were in the areas of data processing, credit
card processing and net costs of other real estate owned. Net costs of other
real estate owned increased $56,000 due mainly to write-downs of OREO property.
The FDIC assessment decreased by $19,000 reflecting a decrease in the FDIC rate
charged for deposits.
Income Taxes. NBI's effective tax rate of 23.5% for the nine months
ended September 30, 1995 is comparable to 22.8% for the nine months ended
September 30, 1994.
Balance Sheet. Total assets have risen $6,953,000 since year-end 1994.
This increase is the result of stronger loan demand for all categories of loans.
Total deposits increased $4,516,000 since year-end 1994 with time deposits
increasing $9,392,000. This increase was a result of higher rates paid on time
deposits compared to rates paid on interest-bearing and savings deposits. NBI's
stockholders' equity was $22,257,000 at September 30, 1995, compared to
$20,137,000 at year-end 1994. The increase of $2,120,000 resulted from earnings
retention and a turnaround in net unrealized gains on securities available for
sale.
Liquidity. NBI maintained an adequate level of liquidity during the
first nine months of 1995 and 1994. The liquidity ratio was 23.8% at September
30, 1995, and 27% at September 30, 1994. Certain assets are maintained on a
short-term basis to meet liquidity demands anticipated by management.
Capital Resources. NBI continues to maintain a strong capital position
with the increase in total capital attributable to retained earnings and the
adoption of SFAS No. 115. Both NBI's and NBB's capital adequacy ratios exceed
regulatory requirements, and they provide added flexibility to take advantage of
business opportunities as they arise.
Capital Analysis.
<TABLE>
<CAPTION>
September 30, 1995
------------------
Capital Components Consolidated NBB
- ------------------ ------------ ---
<S> <C> <C>
Tier 1 capital $ 20,375,000 20,258,000
Risk-adjusted tier 2 capital 1,713,000 2,105,000
------------ -----------
Total risk-adjusted capital $ 22,088,000 22,363,000
============ ==========
<CAPTION>
Asset Components Consolidated NBB
- ---------------- ------------ ---
<S> <C> <C>
Adjusted risk-weighted assets $136,672,000 136,652,000
Year-to-date adjusted average assets 198,858,000 198,978,000
Capital Ratios Required Consolidated NBB
- -------------- -------- ------------ ---
<S> <C> <C> <C>
Common stockholders' equity -% 10.78 10.32
Regulatory capital 6 10.88 10.42
Risk-weighted capital:
Tier 1 4 14.91 14.21
Tier 1 + tier 2 8 16.16 15.46
Leverage ratio 3-5 10.25 9.76
</TABLE>
54
<PAGE>
NBI STATISTICAL DATA
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. AVERAGE BALANCE SHEETS
The following table presents, for the periods indicated, condensed
daily average balance sheet information:
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,838 4,837 4,019
Federal funds sold 3,489 3,828 3,848
Securities available for sale:
Taxable 12,923 14,967 ---
Securities held to maturity:
Taxable 27,087 30,403 40,925
Nontaxable 26,185 23,890 18,794
Mortgage loans held for sale 679 995 1,253
Loans, net 117,847 111,708 107,583
Other assets 7,604 6,553 6,077
-------- ------- -------
Total assets $200,652 197,181 182,499
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 21,821 20,167 16,929
Interest-bearing demand deposits 58,245 63,710 63,598
Savings deposits 16,847 20,650 21,412
Time deposits 81,431 71,886 62,463
Total deposits 178,344 176,413 164,402
Short-term borrowings 62 374 9
Other liabilities 1,033 803 604
Long-term debt --- --- 25
-------- ------- -------
Total liabilities 179,439 177,590 165,040
Stockholders' equity 21,213 19,591 17,459
-------- ------- -------
Total liabilities and stockholders' equity $200,652 197,181 182,499
======== ======= =======
</TABLE>
55
<PAGE>
B. ANALYSIS OF NET INTEREST EARNINGS
The table below shows for the major categories of interest-earning
assets and interest-bearing liabilities, the interest earned or paid, the
average yield or rate on the daily average balance outstanding, net interest
income and net yield on average interest-earning assets for the periods
indicated:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
------------------ ----------------- -----------------
Average Average Average Average Average Average
($ in thousands) Balance Interest Yield/Rate(4) Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ------------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net (1) (2) (3) $117,847 8,851 10.01% $111,708 10,300 9.22% $107,583 10,379 9.65%
Taxable securities 40,010 2,014 6.71% 45,370 2,961 6.53% 40,925 2,930 7.16%
Nontaxable securities (1) 26,185 1,497 7.62% 23,890 1,877 7.86% 18,794 1,683 8.95%
Federal funds sold 3,489 152 5.81% 3,828 155 4.05% 3,848 122 3.17%
-------- ------- -------- ------- -------- -------
Total interest-earning assets $187,531 12,514 8.90% $184,796 15,293 8.28% $171,150 15,114 8.83%
======== ======= ======= ======== ======= ===== ======== ======= =====
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 58,245 1,356 3.10% $ 63,710 1,759 2.76% $ 63,598 1,908 3.00%
Savings deposits 16,847 340 2.69% 20,650 559 2.71% 21,412 636 2.97%
Time deposits 81,431 3,241 5.31% 71,886 3,321 4.62% 62,463 3,277 5.25%
Short-term borrowings 62 4 8.60% 374 16 3.33% 9 --- 3.33%
Long-term debt --- --- --- --- --- --- 25 2 8.00%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $156,585 4,941 4.21% $156,620 5,655 3.61% $147,507 5,823 3.95%
======== ======= ======= ======== ======= ===== ======== ======= =====
Net interest income and
interest rate spread $ 7,573 4.69% $ 9,638 4.67% 9,291 4.88%
======= ======= ======= ===== ======= =====
Net yield on average
interest-earning assets 5.38% 5.22% 5.43%
======= ===== =====
</TABLE>
(1) Interest on nontaxable loans and securities is computed on a fully taxable
equivalent basis using a Federal income tax rate of 34% in 1995, 1994 and
1993.
(2) Loan fees of $156 in 1995, $193 in 1994 and $593 in 1993 are included in
total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
(4) Annualized.
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
NBI's primary source of revenue is net income, which is the difference
between the interest and fees earned on loans and investments and the interest
paid on deposits and other funds. NBI's net interest income is affected by
changes in the amount and mix of interest-earning assets and interest-bearing
liabilities and by changes in yields earned on interest-earning assets and rates
paid on interest-bearing liabilities. The tables below set forth, for the
periods indicated, a summary of the changes in interest income and interest
expense resulting from changes in average asset and liability balances (volume)
and changes in average interest rates (rate).
56
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995 Over
September 30, 1994 1994 Over 1993 1993 Over 1992
------------------------------------- ----------------------------- -----------------------------
Changes Net Changes Net Changes Net
Due To Dollar Due To Dollar Due To Dollar
($ in thousands) Rates (2) (3) Volume (2) (3) Change Rates (2) Volume (2) Change Rates (2) Volume (2) Change
------------- -------------- ------ --------- ---------- ------ --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income: (1)
Loans $ 742 485 1,227 (470) 391 (79) (829) (224) (1,053)
Taxable securities 74 (264) (190) (273) 304 31 (291) (201) (492)
Nontaxable securities (50) 177 127 (234) 428 194 (256) 239 (17)
Federal funds sold 58 (21) 37 34 (1) 33 (40) (30) (70)
----- ----- ----- ----- ----- ----- ----- ----- ------
Increase (decrease)
in income on
interest-earning
assets 824 377 1,201 (943) 1,122 179 (1,416) (216) (1,632)
----- ----- ----- ----- ----- ----- ----- ----- ------
Interest expense:
Interest-bearing
demand deposits 189 (124) 65 (153) 4 (149) (637) 289 (348)
Savings deposits (5) (81) (86) (55) (22) (77) (216) 103 (113)
Time deposits (186) 1,002 816 (423) 467 44 (723) (1,036) (1,759)
Short-term
borrowings 9 (20) (11) 2 14 16 --- (1) (1)
Long-term debt --- --- --- (1) (1) (2) 1 (5) (4)
----- ----- ----- ----- ----- ----- ----- ----- ------
Increase (decrease)
in expense of
interest-bearing
liabilities 7 777 784 (630) 462 (168) (1,575) (650) (2,225)
----- ----- ----- ----- ----- ----- ----- ----- ------
Increase (decrease) in
net interest income $ 817 (400) 417 (313) 660 347 159 434 593
===== ===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
(1) Taxable equivalent basis using a Federal income tax rate of 34%
(2) Variances caused by the change in rate times the change in volume are
allocated equally.
(3) Annualized.
INTEREST RATE SENSITIVITY
The tables below set forth, as of the dates indicated, the
distribution of repricing opportunities of NBI's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap ratio (i.e., interest rate sensitivity gap divided
by total interest-earning assets) and the cumulative interest rate sensitivity
gap ratio. The tables set forth the time periods during which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented
in the following tables. For example, although certain assets and liabilities
may have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear on the tables.
57
<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
An interest rate sensitivity table showing all major interest
sensitive asset and liability categories for the time intervals indicated and
cumulative "gaps" for each interval is set forth below:
<TABLE>
<CAPTION>
INTEREST RATE September 30, 1995
----------------------------------------------------------------------------
SENSITIVITY TABLE Interest-sensitive (days)
--------------------------------
($ in thousands) (Greater than)
Interest-earning assets: 1-90 91-180 181-365 1-5 Years 5 Years Total
-------- ------- ------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial loans $ 6,248 4,482 8,841 13,652 4,799 38,022
Real estate mortgage loans 5,042 3,618 7,136 11,018 3,873 30,687
Real estate construction loans 6,210 1,175 489 --- --- 7,874
Loans to individuals 20,928 2,231 4,301 18,133 1,067 46,660
------- ------- ------- ------- ------- -------
Total loans, net of unearned
income (1) 38,428 11,506 20,767 42,803 9,739 123,243
------- ------- ------- ------- ------- -------
Mortgage loans held for sale 1,318 --- --- --- --- 1,318
Federal funds sold 4,610 --- --- --- --- 4,610
Securities available for sale 1,502 1,250 2,747 3,907 3,448 12,854
Securities held to maturity 3,416 1,080 6,308 22,262 20,039 53,105
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 49,274 13,836 29,822 68,972 33,226 195,130
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits 57,446 --- --- --- --- 57,446
Savings deposits 16,038 --- --- --- --- 16,038
Time deposits 11,914 14,027 22,497 36,435 288 85,161
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities $ 85,398 14,027 22,497 36,435 288 158,645
======= ======= ======= ======= ======= =======
Cumulative interest-sensitivity
gap $(36,124) (36,315) (28,990) 3,547 36,485 36,485
======= ======= ======= ======= ======= =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.58 0.63 0.76 1.02 1.23 1.23
======= ======= ======= ======= ======= =======
</TABLE>
(1) Excluding nonaccrual loans.
NBI is sensitive to interest rate changes, as liabilities generally
reprice or mature before interest-earning assets. The above gap table reflects
NBI's rate-sensitive position at September 30, 1995, and is not necessarily
reflective of its position throughout the year. The carrying amounts of
interest-rate sensitive assets and liabilities are presented in the periods in
which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
58
<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
An interest-sensitivity table showing all major interest sensitive asset and
liability categories for the time intervals indicated and cumulative "gaps" for
each interval is set forth below:
<TABLE>
<CAPTION>
INTEREST RATE December 31, 1994
SENSITIVITY TABLE ---------------------------------------------------------------------------------
($ in thousands) Interest-sensitive (days)
--------------------------------
1-90 91-180 181-365 1-5 Years (Greater than) 5 Years Total
-------- ------- ------- --------- ---------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial and industrial loans $ 5,939 4,453 8,289 12,029 5,094 35,804
Real estate mortgage loans 4,987 3,738 6,960 10,099 4,276 30,060
Real estate construction loans 3,726 621 879 240 --- 5,466
Loans to individuals 20,770 1,932 3,754 16,540 978 43,974
-------- ------- ------- ------ ------ -------
Total loans, net of unearned income (1) 35,422 10,744 19,882 38,908 10,348 115,304
-------- ------- ------- ------ ------ -------
Federal funds sold 1,400 --- --- --- --- 1,400
Securities available for sale 1,517 --- 2,005 6,897 1,695 12,114
Securities held to maturity 2,589 4,064 4,121 28,225 18,390 57,389
-------- ------- ------- ------ ------ -------
Total interest-earning assets $ 40,928 14,808 26,008 74,030 30,433 186,207
======== ======= ======= ====== ====== =======
Interest-bearing liabilities:
Interest-bearing demand deposits 59,794 --- --- --- --- 59,794
Savings deposits 19,257 --- --- --- --- 19,257
Time deposits 11,439 9,543 19,993 26,208 8,586 75,769
-------- ------- ------- ------ ------ -------
Total interest-bearing
liabilities $ 90,490 9,543 19,993 26,208 8,586 154,820
======== ======= ======= ====== ====== =======
Cumulative interest-sensitivity
gap $(49,562) (44,297) (38,282) 9,540 31,387 31,387
======== ======= ======= ====== ====== =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.45 0.56 0.68 1.07 1.20 1.20
======== ======= ======= ====== ====== =======
</TABLE>
(1) Excluding nonaccrual loans.
NBI is sensitive to interest rate changes, as liabilities generally
reprice or mature before interest-earning assets. The above gap table reflects
NBI's rate-sensitive position at December 31, 1994, and is not necessarily
reflective of its position throughout the year. The carrying amounts of
interest-rate sensitive assets and liabilities are presented in the periods in
which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
59
<PAGE>
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The amortized costs and fair values of securities available for sale
as of September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
--------------------- -------------------
Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 2,502 2,505 3,516 3,456
U.S. Government agencies
and corporations (1) 7,930 8,031 7,197 7,121
Other securities 2,327 2,318 1,592 1,537
------- ------ ------ ------
Total securities available for sale $12,759 12,854 12,305 12,114
======= ====== ====== ======
</TABLE>
The amortized costs of securities held to maturity as of September 30,
1995 and December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
------------------ ----------------- -----------------
Amortized Amortized Amortized
($ in thousands) Costs Costs Costs
----- ----- -----
<S> <C> <C> <C>
Investments held to maturity:
U.S. Treasury $ 6,757 9,722 12,319
U.S. Government agencies
and corporations (1) 11,133 15,220 22,318
States and political subdivisions 28,345 26,073 20,698
Other securities 6,870 6,374 7,183
------- ------ ------
Total securities held to maturity $53,105 57,389 62,518
======= ====== ======
</TABLE>
(1) Mortgage-backed securities are included in the totals for U.S. Government
agencies and corporations.
B. MATURITIES AND ASSOCIATED YIELDS
The following tables present the maturities for those securities
available for sale and held to maturity as of September 30, 1995 and
December 31, 1994.
SECURITIES AVAILABLE FOR SALE
- -----------------------------
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
----------------------- ---------------------
Amortized Average Amortized Average
($ in thousands) Costs Yield (1) Costs Yield (1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 2,000 5.20% $ 1,516 5.43%
One to five years 500 6.87% 2,000 5.81%
------- -------
Total 2,500 5.54% 3,516 5.64%
------- -------
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
----------------------- ---------------------
Amortized Average Amortized Average
($ in thousands) Costs Yield (1) Costs Yield (1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies and
corporations (2):
Within one year 3,005 7.57% 1,784 5.31%
One to five years 2,784 6.73% 3,779 7.34%
Five to ten years 2,058 8.04% 1,552 8.39%
After ten years 85 7.15% 82 6.78%
------- -------
Total 7,932 7.39% 7,197 7.06%
------- -------
Other securities:
Within one year 500 4.78% 253 6.15%
One to five years 706 6.17% 1,206 5.59%
Five to ten years 990 6.92% --- ---
After ten years --- --- --- ---
No maturity 131 6.00% 133 6.00%
------- -------
Total 2,327 6.18% 1,592 5.72%
------- -------
Total securities available for sale $12,759 6.81% $12,305 6.48%
======= ====== ======= ======
</TABLE>
(1) Taxable equivalent basis.
(2) Mortgage-backed securities are included in the totals for U.S. Government
agencies and corporations.
SECURITIES HELD TO MATURITY
- ------------------------------
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
----------------------- ---------------------
Amortized Average Amortized Average
($ in thousands) Costs Yield (1) Costs Yield (1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 4,752 4.88% 4,959 4.71%
One to five years 2,006 6.38% 4,763 5.78%
------- -------
Total 6,758 5.33% 9,722 5.23%
------- -------
U.S. Government agencies and
corporations (2):
Within one year 1,543 7.93% 2,731 6.59%
One to five years 6,062 6.73% 8,583 7.05%
Five to ten years 3,321 7.45% 3,747 7.56%
After ten years 207 8.29% 159 8.10%
------- -------
Total 11,133 7.14% 15,220 7.10%
------- -------
States and political subdivisions:
Within one year 3,251 8.77% 2,555 9.99%
One to five years 9,592 7.54% 9,782 8.00%
Five to ten years 13,520 7.32% 11,898 7.30%
After ten years 1,981 8.44% 1,838 8.42%
------- -------
Total 28,344 7.64% 26,073 7.90%
------- -------
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
----------------------- ---------------------
Amortized Average Amortized Average
($ in thousands) Costs Yield (1) Costs Yield (1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Other securities:
Within one year 1,301 7.54% 753 5.76%
One to five years 5,056 6.29% 5,621 6.58%
Five to ten years 513 6.66% --- ---
After ten years --- --- --- ---
------- -------
Total 6,870 6.05% 6,374 6.48%
------- -------
Total securities held to maturity $53,105 7.03% $57,389 7.08%
======= ====== ======= ======
</TABLE>
(1) Taxable equivalent basis.
(2) Mortgage-backed securities are included in the totals for U.S. Government
agencies and corporations.
III. LOAN PORTFOLIO
NBI concentrates its lending activities in commercial and industrial
loans, real estate mortgage loans both residential and business, and loans to
individuals. The following tables set forth (i) a comparison of NBI's loan
portfolio by major category of loans as of the dates indicated and (ii) the
maturities and interest rate sensitivity of the loan portfolio at September 30,
1995 and December 31, 1994.
A. TYPES OF LOANS
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Commercial and industrial loans $ 38,212 35,984 45,618
Real estate mortgage loans 30,841 30,212 26,638
Real estate construction loans 7,919 5,543 3,946
Loans to individuals 48,502 45,767 37,245
-------- ------- -------
Total loans 125,474 117,506 113,447
Less unearned income (1,811) (1,782) (1,192)
-------- ------- -------
Total loans, net of unearned income 123,663 115,724 112,255
Less allowance for loans losses (2,105) (2,006) (2,038)
-------- ------- -------
Total loans, net $121,558 113,718 110,217
======== ======= =======
</TABLE>
62
<PAGE>
B. MATURITIES AND INTEREST RATE SENSITIVITIES
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------
After
($ in thousands) (Less than) 1 Year 1-5 Years 5 Years Total
------------------ --------- ------- ------
<S> <C> <C> <C> <C>
Commercial and industrial $21,877 13,760 2,575 38,212
Real estate construction 7,919 --- --- 7,919
Less loans with predetermined
interest rates (7,463) (3,525) (2,575) (13,563)
------- ------ ------ -------
Loans with adjustable rates $22,333 10,235 --- 32,568
======= ====== ====== =======
<CAPTION>
December 31, 1994
-----------------------------------------------------------
After
($ in thousands) (Less than) 1 Year 1-5 Years 5 Years Total
------------------ --------- ------- ------
<S> <C> <C> <C> <C>
Commercial and industrial $20,863 12,031 3,090 35,984
Real estate construction 5,274 269 --- 5,543
Less loans with predetermined
interest rates (6,643) (3,800) (3,090) (13,533)
------- ------ ------ -------
Loans with adjustable rates $19,494 8,500 --- 27,994
======= ====== ====== =======
</TABLE>
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate loan amounts for nonaccrual
loans and accruing loans which are contractually past due ninety days or more as
to interest or principal payments, restructured loans and other real estate
owned, net.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Nonaccrual loans $ 420 420 1,864
Restructured loans --- 229 598
------ ----- -----
Total nonperforming loans 420 649 2,462
Other real estate owned, net 946 1,083 225
------ ----- -----
Total nonperforming assets $1,366 1,732 2,687
====== ===== =====
Loans contractually past due 90 days
or more (excludes nonaccrual loans) $ 191 219 326
====== ===== =====
</TABLE>
63
<PAGE>
The effect of nonaccrual and restructured loans on interest income is
presented below:
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended
September 30, December 31,
($ in thousands) 1995 1994 1993
----- ---- ----
<S> <C> <C> <C>
Interest that would have been
recorded in accordance with
original terms $ 32 57 263
Interest recorded in income --- 10 76
----- ---- ----
Net impact on interest income $ (32) (47) (187)
===== ==== ====
</TABLE>
Interest is recognized on the cash basis for all loans carried in nonaccrual
status. Loans generally are placed in nonaccrual status when the collection of
principal or interest is ninety days or more past due, unless the obligation is
both well-secured and in the process of collection.
2. Potential Problem Loans
At September 30, 1995 and December 31, 1994 and 1993, there were no
loans not disclosed above which management had serious doubts as to the
borrower's ability to comply with present loan repayment terms.
3. Foreign Outstandings
At September 30, 1995 and December 31, 1994, there were no foreign
outstandings.
4. Loan Concentrations
At September 30, 1995 and December 31, 1994, there were no
concentrations of loans exceeding 10% of total loans which are not otherwise
disclosed as a category of loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of
each period; changes in the allowance for loan losses arising from loans charged
off and recoveries on loans previously charged off by loan category; and
additions to the allowance which have been charged to operating expense:
<TABLE>
<CAPTION>
September 30, December 31,
------------- ---------------------
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Average loans outstanding $117,847 111,708 107,583
======== ======= =======
Balance at beginning of year 2,006 2,038 1,782
Charge-offs:
Commercial and industrial loans 20 72 231
Real estate mortgage loans --- 192 282
Real estate construction loans --- 53 ---
Loans to individuals 159 307 221
-------- ------- -------
Total loans charged off 179 624 734
-------- ------- -------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
------------- ---------------------
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Recoveries
Commercial and industrial loans $ 9 7 10
Real estate mortgage loans 5 4 5
Real estate construction loans --- --- ---
Loans to individuals 39 41 45
-------- ------- -------
Total recoveries 53 52 60
-------- ------- -------
Net loans charged off 126 572 674
-------- ------- -------
Additions charged to operations 225 540 930
-------- ------- -------
Balance at end of year $ 2,105 2,006 2,038
======== ======= =======
Net charge-offs to average loans
outstanding (annualized for 9-30-95) .14% .51% .63%
======== ======= =======
</TABLE>
Factors influencing management's judgment in determining the amount of the
loan loss provision charged to operating expense include the quality of the loan
portfolio as determined by management, historical loan loss experience,
diversification as to type of loans in the portfolio, the amount of secured as
compared with unsecured loans and the value of underlying collateral, banking
industry standards and averages, and general economic conditions.
B. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount
deemed necessary to provide for anticipated losses within the categories of
loans as of September 30, 1995 and December 31, 1994 and 1993 as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
-------------------------- ------------------------ -----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Allowance Category to Allowance Category to Allowance Category to
($ in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial
loans $ 470 30.45% $ 624 30.62% $ 810 40.21%
Real estate
mortgage loans 133 24.58% 164 25.71% 163 23.48%
Real estate
construction
loans 36 6.31% 36 4.72% 54 3.48%
Loans to
individuals 375 38.66% 500 38.95% 615 32.83%
Unallocated 1,091 --- 682 --- 396 ---
------ ------ ------ ------ ------ ------
$2,105 100.00% $2,006 100.00% $2,038 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
65
<PAGE>
V. DEPOSITS
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in excess
of 10% of average total deposits are presented below:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
--------------------------- ------------------------ -----------------------
Average Average Average Average Average Average
($ in thousands) Amounts Rates Paid (1) Amounts Rates Paid Amounts Rates Paid
-------- -------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 21,821 --- $ 20,167 --- $ 16,929 ---
Interest-bearing
demand deposits 58,245 3.10% 63,710 2.76% 63,598 3.00%
Savings deposits 16,847 2.69% 20,650 2.71% 21,412 2.97%
Time deposits 81,431 5.31% 71,886 4.62% 62,463 5.25%
-------- -------- --------
Average total
deposits $178,344 $176,413 $164,402
======== ======== ========
</TABLE>
(1) Annualized
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and other
time deposits of $100,000 or more:
<TABLE>
<CAPTION>
September 30, 1995
------------------------------------------------------------------------
Over 3 Months Over 6 Months
3 Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
-------- ------------- ------------- ------- ------
<S> <C> <C> <C> <C> <C>
Certificates of
deposit $1,599 2,186 3,596 2,120 9,501
Other time
deposits --- 351 --- 2,807 3,158
------ ----- ----- ----- ------
Total time deposits of
$100,000 or more $1,599 2,537 3,596 4,927 12,659
====== ===== ===== ===== ======
<CAPTION>
December 31, 1994
------------------------------------------------------------------------
Over 3 Months Over 6 Months
3 Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
-------- ------------- ------------- ------- ------
<S> <C> <C> <C> <C> <C>
Certificates of
deposit $1,273 738 4,300 1,736 8,047
Other time
deposits 232 255 164 2,028 2,679
------ ----- ----- ----- ------
Total time deposits of
$100,000 or more $1,505 993 4,464 3,764 10,726
====== ===== ===== ===== ======
</TABLE>
66
<PAGE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average stockholders' equity and to average
total assets, and certain other ratios are presented below:
<TABLE>
<CAPTION>
September 30, December 31,
------------- -------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on average assets (1) 1.60% 1.51 1.45
Return on average equity (1) 15.38 15.19 15.43
Dividend payout ratio (1) and (2) 28.03 34.05 32.00
Average equity to average assets 10.43 9.94 9.38
</TABLE>
(1) Annualized for the nine months ended September 30, 1995.
(2) Dividends paid for the nine months ended September 30, 1995 are not
indicative of dividends paid on an annual basis. NBI has historically paid
semi-annual dividends in June and December.
BUSINESS OF BTC
History and Business
The antecedents of BTC are in a charter issued on September 28, 1889
for Clinch Valley Bank. On December 22, 1893, another charter was issued in
substantially the same form and to virtually the same organizers for a bank to
be called Bank of Clinch Valley. In 1929, Bank of Clinch Valley merged with
Farmers National Bank, under the charter of the former, and the name of the
resulting institution became "Farmers Bank of Clinch Valley." The name "Bank of
Tazewell County" resulted from the 1964 merger of Bank of Graham, Bluefield,
Virginia, with Farmers Bank of Clinch Valley.
As a bank chartered under the laws of the Commonwealth of Virginia,
BTC is subject to primary supervision, examination and regulation by the BFI and
is subject to applicable provisions of Virginia law insofar as such provisions
do not conflict with or are not preempted by federal banking laws. BTC is also a
member of the Federal Reserve System and, therefore, under the supervision of
the Federal Reserve Board. As a member of the Federal Reserve System, it is
subject to a variety of federal banking laws and regulations. The deposits of
BTC are also insured under the Federal Deposit Insurance Act, up to the
applicable limits thereof. See "CERTAIN REGULATORY CONSIDERATIONS."
BTC presently has no corporate parent, subsidiaries or other
affiliates. At September 30, 1995, BTC had approximately $177 million in assets,
$41 million in net loans, $150 million in deposits and $25 million in
stockholders' equity.
Banking Services
BTC is engaged in substantially all of the business operations
customarily conducted by independent commercial banks in Virginia. Most of BTC's
business originates from the communities of Tazewell and Bluefield and other
communities in Tazewell County, Virginia and in Mercer County, West Virginia.
BTC provides its banking services from seven offices located in Tazewell and
Bluefield. BTC's banking services include the acceptance of checking and savings
deposits, and the making of commercial, real estate, personal, automobile and
67
<PAGE>
other installment loans. BTC also offers trust services, traveler's checks,
notary public and other customary bank services to its customers. BTC does not
issue credit cards.
BTC's deposits are attracted primarily from individuals and small
business-related sources. BTC also attracts deposits from several local
agencies. In connection with municipal deposits, BTC is generally required to
pledge securities to secure such deposits, except for the first $100,000 of such
deposits, which are insured by the FDIC.
As of September 30, 1995, BTC had approximately 16,450 deposit
accounts, representing approximately 6,150 noninterest-bearing (demand) accounts
with balances totaling approximately $16.6 million for an average balance per
account of approximately $2,700; 6,600 savings, interest-bearing demand and
money market accounts with balances totaling approximately $55.2 million for an
average balance per account of approximately $8,400 and 3,700 time certificate
of deposit accounts with balances totaling approximately $79 million for an
average balance per account of approximately $21,500.
The areas in which BTC has directed virtually all of its lending
activities are (i) commercial loans; (ii) installment loans; and (iii) mortgage
loans (which include commercial mortgage loans). As of September 30, 1995, these
three categories accounted for approximately 16%, 18% and 66%, respectively, of
BTC's loan portfolio.
The principal sources of BTC's revenues are (i) interest and fees on
loans; (ii) interest on investments; (iii) service charges on deposit accounts
and other charges and fees; (iv) income from fiduciary activities; and (v)
interest on federal funds sold (funds loaned on short-term basis to other
banks). For the year ended December 31, 1994, these sources comprised 32%, 61%,
2%, 1% and 4%, respectively, of BTC's total operating income.
BTC has not engaged in any material research activities relating to
the development of new services or the improvement of existing bank services
since 1994, when ATMs were opened in the Cumberland Park and Westgate branch
offices.
There has been no significant change in the types of services offered
by BTC in the last ten years, except in connection with new types of accounts
allowed by statute or regulation in recent years and the introduction of ATMs at
two of its branch offices. BTC has no present plans regarding "a new line of
business" requiring the investment of a material amount of total assets.
There is no emphasis on foreign sources and application of funds.
BTC's business, based upon historical performance, is not seasonal. BTC is not
dependent upon a single customer or group of related customers for a material
portion of its deposits, nor is a material portion of BTC's loans concentrated
within a single industry or group of related industries. Management of BTC is
unaware of any material effect upon BTC's capital expenditures, earnings or
competitive position as a result of federal, state or local environmental
regulation.
BTC holds no patents, licenses (other than licenses obtained from bank
regulatory authorities), franchises or concessions.
Trust Department
Through its trust department, BTC conducts a general trust business in
its service area, including personal and corporate trust services. Personal
trust services include the administration and settlement of decedents' estates,
administration of testamentary and inter vivos trusts, and agency or custodian
accounts. Corporate trust service include acting as administrator or trustee of
employee benefit plans, including BTC's Employees' Pension Plan. The trust
department has approximately 104 accounts with approximately $21 million in
assets under administration. Fiduciary assets under the administration of the
trust department are not included among the assets of BTC for purposes of its
financial statements or financial reporting.
68
<PAGE>
Employees
As of September 30, 1995, BTC had a total of 68 full-time employees
and one part-time employee. The management of BTC believes that its employee
relations are satisfactory.
Properties
BTC currently owns the land and buildings of six of its seven offices.
BTC leases the land and the building at which the Westgate branch office is
located. The lease provides for an annual rental of $13,000 and expires in
September 2003. BTC believes that its existing facilities are adequate for its
current needs and any anticipated growth.
Legal Proceedings
Due to the nature of its business, BTC is a party to claims and legal
proceedings arising in the ordinary course of business. After taking into
account information furnished by counsel to BTC as to the status of various
claims and proceedings to which BTC is a party, management is of the opinion
that the aggregate potential liability represented thereby will not have a
material adverse effect upon the financial condition of BTC.
Competition
The banking and financial services business in Virginia generally, and
in BTC's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. BTC competes for loans and
deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these competitors
are much larger in total assets and capitalization, have greater access to
capital markets and offer a broader array of financial services than BTC. In
order to compete with the other financial services providers, BTC principally
relies upon local promotional activities, personal relationships established by
officers, directors and employees with its customers, and specialized services
tailored to meet its customers' needs.
BTC SELECTED FINANCIAL INFORMATION
The following table presents certain unaudited historical selected
financial data for BTC as of and for the five years in the period ended
December 31, 1994 and as of and for the nine months ended September 30, 1995 and
1994. The data as of and for the five years in the period ended December 31,
1994 is derived from the audited financial statements of BTC and the notes
thereto. The data as of and for the nine months ended September 30, 1995 and
1994 is derived from the unaudited financial statements of BTC. In the opinion
of management, such unaudited financial statements have been prepared on the
same basis as the audited financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the unaudited periods. Results for the nine
months ended September 30, 1995 should not be considered necessarily indicative
of the results to be expected for the full year. The information below is
qualified in its entirety by the detailed information and financial statements
included elsewhere herein, and should be read in conjunction with "BTC'S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the financial statements of BTC and notes thereto included
elsewhere in this Prospectus/Proxy Statement.
69
<PAGE>
BTC (Historical)
Selected Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------- ---------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data ($ in thousands
except per share data):
Interest income $ 9,077 8,640 11,500 11,399 12,257 12,997 12,787
Interest expense 4,444 3,751 5,029 4,929 5,917 8,034 8,072
-------- ------- ------- ------- ------- ------- -------
Net interest income 4,633 4,889 6,471 6,470 6,340 4,963 4,715
Provision for loan losses - 6 13 23 148 25 112
-------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 4,633 4,883 6,458 6,447 6,192 4,938 4,603
Noninterest income 211 303 440 858 73 328 525
Noninterest expense 2,309 2,280 3,567 3,147 2,996 2,782 2,560
-------- ------- ------- ------- ------- ------- -------
Income before income taxes 2,535 2,906 3,331 4,158 3,269 2,484 2,568
Income taxes 736 858 944 1,186 878 471 556
-------- ------- ------- ------- ------- ------- -------
Net income $ 1,799 2,048 2,387 2,972 2,391 2,013 2,012
======== ======= ======= ======= ======= ======= =======
Per Share Data:
Net income $ .95 1.08 1.26 1.57 1.27 1.07 1.07
Cash dividends declared .25 .25 .52 .51 .47 .41 .41
Stock dividend (1) - - 200% 10% - - -
Book value per share 13.25 12.23 11.93 12.02 10.98 10.18 9.53
Average shares (in thousands) 1,888 1,888 1,888 1,888 1,888 1,888 1,888
Selected Balance Sheet Data at
End of Period ($ in thousands):
Loans, net $ 41,122 42,486 42,571 39,939 44,515 42,898 51,927
Securities available for sale 28,432 24,737 24,105 15,327 - - -
Securities held to maturity 89,892 92,062 90,623 97,119 104,400 98,527 80,399
Total assets 177,488 174,230 173,405 171,079 170,382 165,409 154,586
Total deposits 150,668 149,838 149,050 146,299 147,207 143,703 133,826
Stockholders' equity 25,013 23,089 22,521 22,697 20,731 19,227 17,986
Selected Ratios:
Return on average assets (2) 1.36% 1.58 1.38 1.76 1.43 1.24 1.37
Return on average equity (2) 10.08 11.93 10.41 13.38 11.80 10.69 11.55
Dividend payout ratio (2) (3) 35.09 30.86 41.27 32.48 37.00 38.32 38.32
Average equity to average assets 13.50 13.26 13.26 13.15 12.08 11.63 11.90
Allowance for loan losses to period end:
Loans, net of unearned 1.33 1.27 1.26 1.35 1.21 1.05 .87
Nonaccrual and restructured loans (4) 185 - - 3,206 5,450 1,824 1,060
Nonperforming assets (4) 167 813 813 940 736 592 317
Net charge-offs (recoveries) to average net loans (2) (.03) .02 .03 .05 .14 .05 .23
Nonperforming assets to period end
loans, net of unearned income plus
foreclosed properties .80 .12 .16 .14 .16 .18 .27
Leverage 14.46 14.10 14.09 13.44 - - -
Tier 1 risk-based capital 41.97 41.68 39.89 40.50 - - -
Total risk-based capital 42.88 42.62 40.79 41.47 - - -
Average loans to average deposits 27.46 27.83 28.00 29.75 30.11 32.97 38.46
</TABLE>
70
<PAGE>
(1) 200% stock dividend in 1994 and 10% stock dividend in July 1993.
(2) Annualized for the nine months ended September 30, 1995 and 1994.
(3) Dividends paid for the nine months ended September 30, 1995 and 1994 are not
indicative of dividends paid on an annual basis. BTC has historically
declared semi-annual dividends in June and December with payment being made
in the following month.
(4) Rounded to nearest whole percent.
BTC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with BTC's
selected financial data, BTC's statistical information, and BTC's financial
statements and notes thereto included elsewhere in this Prospectus/Proxy
Statement. All per share amounts have been adjusted to give effect to the 200%
stock dividend declared on October 11, 1994 and paid to BTC stockholders on
February 1, 1995.
Overview
Net income was $1.8 million ($.95 per share) for the nine months ended
September 30, 1995 compared to net income of $2.0 million ($1.08 per share) for
the corresponding period in 1994. Net income for the three months ended
September 30, 1995 was $553,000 ($.29 per share) compared to $616,000 ($.33 per
share) for the corresponding period in 1994. The decline in net income for the
nine months ended September 30, 1995 as compared to the corresponding period in
1994 was due primarily to decreases in net interest income and noninterest
income.
Net income was $2.4 million ($1.26 per share) for the year ended
December 31, 1994, as compared to $3.0 million ($1.57 per share) and $2.4
million ($1.27 per share) for the years ended December 31, 1993 and 1992,
respectively. The decrease in net income in 1994 was due primarily to a decrease
in noninterest income and an increase in noninterest expense.
Net Interest Income
BTC's primary source of revenue is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid on deposits and other funds. BTC's net interest income is affected
by changes in the amount and mix of interest-earning assets and interest-bearing
liabilities and changes in yields earned on interest-earning assets and rates
paid on interest-bearing liabilities.
Net interest income declined $256,000 for the nine months ended
September 30, 1995 compared to the corresponding period in 1994 because total
interest income grew at a slower rate than did total interest expense. This, in
turn, resulted from the average rates earned on interest-earning assets
increasing at a slower rate than did the average rates paid on interest-bearing
liabilities. The interest rate spread and the net yield on average interest
earning assets (both computed on a fully tax equivalent basis) declined 51 and
38 basis points, respectively, at September 30, 1995 from their levels at
December 31, 1994. Market indicators lead management to expect a narrower
interest margin for the rest of 1995 and, therefore, a continued reduction in
net interest income.
Total interest income for the nine months ended September 30, 1995
increased by $437,000 from the comparable period in 1994. While an increase in
interest-earning assets contributed to such result, it was principally effected
by increased rates earned on such assets. Total interest expense for the nine
months ended September 30, 1995 increased by $693,000 from September 30, 1994.
Such increase was more greatly influenced by changes in the rates paid on
interest-bearing liabilities than in the increase in volume of these
liabilities.
71
<PAGE>
Net interest income increased $1,000 for the year ended December 31,
1994 as compared to the year-end results for 1993, as total interest income grew
at approximately the same rate as did total interest expense. The interest rate
spread on a fully tax equivalent basis increased one basis point from its level
at December 31, 1993. However, the yield on average interest-earnings assets on
a fully tax equivalent basis declined by five basis points from its level at
December 31, 1993. This decline reflects the general increase in market interest
rates and negative impact of interest rate floors on BTC's adjustable rate
loans. These interest rate floors adversely impacted net interest income in the
increasing interest rate environment because the actual rates on adjustable rate
loans did not increase initially and did not increase as rapidly as the increase
in the cost of interest-bearing liabilities.
Total interest income for the year ended December 31, 1994 increased
by $100,000 from December 31, 1993. On a fully tax equivalent basis, an increase
in the volume of interest-earning assets was almost totally offset by a decrease
in the rates earned on such assets during the period. This decline in rates was
the result of loans repricing downward during the first and second quarters of
1994, the impact of lowering the contractual interest rate floor on several
loans to their fully indexed rate. Total interest expense for the year ended
December 31, 1994 increased by $100,000 from December 31, 1993. On a fully tax
equivalent basis, the decrease in rates paid on interest-bearing liabilities
during the period more than offset the increase resulting from volume. BTC
changed its deposit strategy in 1994 and began to focus on raising lower rate
savings deposits to facilitate the runoff of higher rate certificates of
deposit. This strategy was successful in reducing BTC's deposit costs during a
rising interest rate environment in the third and fourth quarters of 1994.
For further information concerning net interest income, the rates
earned and paid on interest-earning assets and interest-bearing liabilities and
the effect of changes in rate and volume on these results, see "BTC STATISTICAL
DATA."
Provision for Loan Losses
BTC maintains an allowance for loan losses to cover the known and
inherent risk of loss associated with its loan portfolio. The provision for loan
losses is charged against income and is applied to the allowance for loan
losses.
The provision for loan losses declined $10,000 for the year ended
December 31, 1994 compared to 1993, as management maintained the allowance for
loan losses at $545,000 even though period-end loans increased by $2.6 million.
BTC took no provision for loan losses during the nine months ended September 30,
1995, as recoveries on loans previously charged-off exceeded loans written-off
against the allowance for loan losses by $8,000. As a result of such recoveries,
the allowance for loan losses increased to $553,000 at September 30, 1995.
Although BTC maintains its allowance for loan losses at a level which
it considers to be adequate to provide for potential losses, there can be no
assurance that such losses will not exceed the estimated amounts, thereby
adversely affecting the future results of operations. The calculation of the
adequacy of the allowance for loans losses is based on a variety of factors,
including underlying collateral values, delinquency trends and historical loan
loss experience.
For further information concerning the allowance for loans losses and
asset quality, see "BTC STATISTICAL DATA."
Noninterest Income
Noninterest income for the nine months ended September 30, 1995
declined by $92,000 as compared to September 30, 1994 principally as a result of
a net realized loss on securities of $85,000, as compared to a $4,000 gain for
the comparable period in 1994.
72
<PAGE>
Noninterest income for the year ended December 31, 1994 declined by
$418,000 as compared to year-end 1993 principally attributable to a $375,000
recovery in 1993 in connection with certain losses in the securities portfolio
which were recognized in prior years. For further discussion of the securities
portfolio, see "--Securities" below.
Noninterest Expense
Noninterest expense for the nine months ended September 30, 1995
increased by $29,000 as compared to September 30, 1994, as salaries and employee
benefits increased by $12,000, occupancy and furniture and fixtures increased by
$92,000 and other operating expenses declined by $75,000.
Noninterest expense for the year ended December 31, 1994 increased by
$420,000 as compared to year-end 1993 principally resulting from an increase of
$69,000 in salaries and employee benefits, as well as a $331,000 increase in
other operating expense, principally attributable to $141,000 in additional
franchise taxes for 1992, 1993 and 1994 paid to the Commonwealth of Virginia as
a result of a deficiency in those years. The remaining $191,000 represented a
general increase in many of the other categories of other operating expenses,
including advertising, costs of examinations, insurance, supplies and the like.
Income Taxes
Lower taxable earnings during the first nine months of 1995 resulted
in a $122,000 decrease in federal income tax expense from the comparable period
in 1994. Likewise, federal income tax expense declined $242,000 between December
31, 1994 and 1993 as a result of lower taxable earnings. BTC's effective tax
rate was 29.0% at September 30, 1995 as compared to 29.5% at September 30, 1994
and 28.3% at December 31, 1994, as compared to 28.5% at December 31, 1993.
Balance Sheet
Average total assets increased $3.3 million between December 31, 1994
and September 30, 1995, while average total assets increased $5.5 million
between December 31, 1993 and 1994. This asset growth was reflected in BTC's
investment portfolio, with the average amount of securities held in all
categories increasing from $109.5 million at December 31, 1993 to $118.1 million
at September 30, 1995. Average net loans between December 31, 1993 and
September 30, 1995 remained virtually identical in amount reflecting the
continued lack of significant loan demand in BTC's markets.
Average total deposits increased $2.3 million between December 31,
1994 and September 30, 1995, while average total deposits increased $5.5 million
between December 31, 1993 and 1994. Average demand deposits and average interest
bearing demand deposits remained stable between December 31, 1993 and September
30, 1995, increasing only approximately $837,000 in the aggregate. The mix of
savings and time deposits did change during this period as average savings
deposits decreased $6.1 million from December 31, 1993 to September 30, 1995,
while average time deposits increased $13.1 million during the same period. The
change in the mix of savings and time deposits and the overall increase in time
deposits reflects the increasing interest rates paid during the period as the
average rate on time deposits increased from 4.15% at December 31, 1993 to 5.04%
at September 30, 1995.
Average stockholders' equity increased $974,000 between December 31,
1994 and September 30, 1995, while average stockholders' equity increased
$835,000 between December 31, 1993 and 1994. These increases reflects earnings
retention and, in the case of the September 30, 1995 average amounts, the
improvement in net unrealized gains on securities available for sale resulting
from the application of SFAS 115.
For additional information concerning average balance sheet amounts,
see "BTC STATISTICAL DATA."
73
<PAGE>
Securities
Effective January 1, 1994, BTC adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" promulgated
by the FASB. Upon adoption of SFAS No. 115, certain investment securities
totaling $25.0 million were reclassified from securities held to maturity to
securities available for sale. BTC has reclassified all of its investment
securities into these two categories because BTC does not maintain trading
securities.
BTC investment policy stresses safety with a program of purchasing
high quality securities such as U.S. Treasury and U.S. government sponsored
agency issues, state, county and municipal bonds, corporate bonds and other bank
qualified investments. Management adjusts its investment strategy in response to
market conditions and available investment vehicles.
At September 30, 1995, BTC owned taxable municipal housing bonds,
known as Guaranteed Investment Contracts, in the amount of $676,000. These bonds
were purchased in 1986 at a price of $1.5 million and were guaranteed by
Executive Life Insurance Company ("ELIC"). At the time of purchase, the bonds
were considered a prudent investment and were rated as AAA by Standard & Poor's.
No housing was ever built with the proceeds of the bonds and, in 1991, ELIC
defaulted on its guaranty and was seized by the California Department of
Insurance. Partial payments have been made on the bonds from the residue of
assets in ELIC and more payments are expected to be received in the future. BTC
has recognized losses in prior years of $461,000. Additional losses, estimated
at approximately $67,000, may be recognized if it can be determined that
additional payments by the trustees of the bonds will be insufficient to pay the
remaining balance.
For additional information concerning BTC's investment portfolio, see
"BTC STATISTICAL DATA."
Liquidity
Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demand or withdrawal of
existing deposits. BTC's primary source of funds are deposits, redemptions and
sales of investment securities, and payments of principal and interest on loans.
While maturities and scheduled principal amortization on loans are a reasonably
predictable source of funds, deposit flows and mortgage loan prepayments are
greatly influenced by the level of interest rates, economic conditions, and
competition.
The primary lending and investment activities of BTC have been the
origination of adjustable rate real estate loans, the purchase of U.S.
government sponsored agency securities and, to a lesser extent, the purchase of
short-term investment such as Fed Funds. Investing activities provide a source
of long and short term liquidity. Lending and investment activities are funded
primarily by principal and interest payments on loans and interest bearing
deposit growth. The major source of funds for BTC's investment activities during
1994 and the first nine months of 1995 was an increase in average deposits of
$5.5 million and $2.3 million in the respective periods.
BTC's most liquid assets are cash, cash in banks and Fed Funds. The
levels of these assets depend on BTC's operating, financing, lending and
investing activities during any given period. At September 30, 1995 and at
December 31, 1994 and 1993, these liquid assets totaled $12.3 million, $11.7
million and $12.9 million, respectively.
Liquidity for BTC is monitored on a daily basis and evaluated as a
part of long-term financial strategy. Excess funds are generally invested in Fed
Funds. In the event that BTC should require funds beyond its ability to generate
them internally, additional sources of funds are available through the use of
borrowings against U.S. government sponsored agency securities and through
borrowings from the Federal Reserve's discount window. At September 30, 1995 and
at December 31, 1994 and 1993, BTC had no outstanding borrowings from the
Federal Reserve.
74
<PAGE>
In the Spring of 1995, BTC became a member of the Federal Home Loan
Bank of Atlanta and eligible to participate in various borrowing programs from
such Bank. In connection with such membership, BTC purchased $537,000 of such
Bank's securities. BTC had no outstanding borrowings from the Federal Home Loan
Bank of Atlanta at September 30, 1995.
Capital Resources
BTC continues to maintain a strong capital position with the increase
in total capital attributable to retained earnings. BTC's objective is to
maintain a strong level of capital that will support asset growth, protect
against credit risks and ensure compliance with regulatory and industry
standards.
BTC is subject to certain leverage and risk-based capital adequacy
standards mandated by the Federal Reserve Board. See "CERTAIN REGULATORY
CONSIDERATIONS--NBB and BTC--Capital Requirements." BTC was in compliance with
all such requirements at September 30, 1995 and at December 31, 1994 and 1993.
The following tables set forth BTC's capital ratios as of the dates
indicated:
<TABLE>
<CAPTION>
At December 31, 1994
----------------------------
Required Actual Excess
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I risk-based capital ratio 4.00% 39.89 35.89
Total risk-based capital ratio 8.00 40.79 32.79
Leverage capital ratio 4.00 14.09 10.09
<CAPTION>
At September 30, 1995
----------------------------
Required Actual Excess
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I risk-based capital ratio 4.00% 41.97 37.97
Total risk-based capital ratio 8.00 42.88 34.88
Leverage capital ratio 4.00 14.46 10.46
</TABLE>
Certain information concerning the computation of BTC's capital ratios
as of September 30, 1995 is set forth in the following table:
<TABLE>
<CAPTION>
($ in thousands) September 30, 1995
------------------
<S> <C>
Capital Components
- ----------------
Tier I capital $ 25,473
Risk-adjusted tier II capital 553
--------
Total risk-adjusted capital $ 26,026
========
Asset Components
- ----------------
Adjusted risk-weighted assets $ 60,692
Year-to-date adjusted average assets 176,108
</TABLE>
At September 30, 1995, BTC did not have any material commitments for
the expenditure of its capital.
Dividends on shares of BTC's Common Stock have customarily been paid
semi-annually on January 2 and July 1 of each year with the dividend actually
declared in the preceding December and June. On January 2, 1995, a cash dividend
of $.80 per share was paid to holders of the then outstanding shares. On
February 1, 1995, BTC paid a stock dividend of 200%. On July 1, 1995, BTC paid a
cash dividend of $.25 per share (as adjusted for the
75
<PAGE>
200% stock dividend). It is anticipated that a cash dividend of $.27 per share
will be declared in December 1995 and paid on or about January 2, 1996. Since
the dividend will be declared in 1995, the amount of such dividend will be
accrued against 1995 earnings.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principals which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of BTC's operations. Unlike most industrial companies,
nearly all the assets and liabilities of BTC are monetary. As a result, interest
rates have a greater impact on BTC's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Accounting Considerations
The FASB has in the last several years issued a number of statements
of financial accounting standards which impact upon the business of banking. The
cumulative effect of the adoption of these changes in accounting standards by
BTC has not been material. For a discussion of the changes in accounting, see
"--Securities" and "CERTAIN REGULATORY CONSIDERATIONS--Accounting Changes."
BTC STATISTICAL DATA
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. AVERAGE BALANCE SHEETS
The following tables present, for the periods indicated, condensed
average balance sheet information for BTC, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily
balances. Nonaccrual loans are included in loans. Tax exempt income is presented
on a tax equivalent basis.
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 4,697 4,271 4,205
Federal funds sold 7,686 7,417 8,728
Securities available for sale:
Taxable 26,186 25,056 14,488
Securities held to maturity:
Taxable 82,580 80,688 84,778
Nontaxable 9,349 10,361 10,243
Loans, net 41,483 41,268 41,444
Other assets 4,127 3,720 3,362
-------- ------- -------
Total Assets $176,108 172,781 167,248
======== ======= =======
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 16,497 16,557 15,992
Interest-bearing demand deposits 13,905 13,472 13,573
Savings deposits 39,206 47,255 45,299
Time deposits 81,485 71,470 68,379
-------- ------- -------
Total deposits 151,093 148,754 143,243
Short-term borrowings 597 517 601
Other liabilities 633 699 1,428
-------- ------- -------
Total liabilities 152,323 149,970 145,272
Stockholders' equity 23,785 22,811 21,976
-------- ------- -------
Total Liabilities and Stockholders' Equity $176,108 172,781 167,248
======== ======= =======
</TABLE>
B. ANALYSIS OF NET INTEREST EARNINGS
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
--------------------------------- ------------------------------ ------------------------------
Average Average Average Average Average Average
($ in thousands) Balance Interest Yield/Rate(4) Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ------------- ------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net(1)(2)(3) $ 41,483 3,006 9.66% $ 41,268 3,557 8.62% $ 41,444 3,757 9.07%
Taxable securities 108,766 5,295 6.49% 105,744 6,966 6.59% 99,266 6,588 6.64%
Nontaxable securities(1) 9,349 666 9.50% 10,361 1,033 9.97% 10,243 1,206 11.77%
Federal funds sold 7,686 336 5.83% 7,417 295 3.98% 8,728 257 2.94%
-------- ------ -------- ------ -------- ------
Total interest-earning assets $167,284 9,303 7.42% $164,790 11,851 7.19% $159,681 11,808 7.39%
======== ====== ===== ======== ====== ===== ======== ====== =====
Interest-Bearing Liabilities:
Interest-bearing demand
deposits $ 13,905 299 2.87% $ 13,472 216 1.60% $ 13,573 219 1.61%
Savings deposits 39,206 1,183 4.02% 47,255 2,054 4.35% 45,299 2,064 4.55%
Time deposits 81,485 2,937 4.81% 71,470 2,739 3.83% 68,379 2,629 3.84%
Short-term borrowings 597 25 5.58% 517 20 3.87% 601 17 2.83%
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities $135,193 4,444 4.38% $132,714 5,029 3.79% $127,852 4,929 3.85%
======== ====== ===== ======== ====== ===== ======== ====== =====
Net interest income and
interest rate spread $4,859 3.04% $6,822 3.40% $6,879 3.54%
====== ===== ====== ===== ====== =====
Net yield on average
interest-earnings assets 3.87% 4.14% 4.31%
===== ===== =====
</TABLE>
(1) Interest on nontaxable loans and securities is computed on a fully taxable
equivalent basis using a Federal income tax rate of 34% in 1995, 1994 and
1993.
(2) Loan fees of $56 in 1995, $81 in 1994 and $73 in 1993 are included in total
interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
(4) Annualized.
77
<PAGE>
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
BTC's primary source of revenue is net interest income, which is the
difference between the interest and fees earned on loans and investments and the
interest paid on deposits and other funds. BTC's net interest income is affected
by changes in the amount and mix of interest-earning assets and interest-bearing
liabilities and by changes in yields earned on interest-earning assets and rates
paid on interest-bearing liabilities. The tables below set forth, for the
periods indicated, a summary of the changes in interest income and interest
expense resulting from changes in average asset and liability balances (volume)
and changes in average interest rate (rate). The change in interest due to both
rate and volume has been allocated equally to change due to volume and change
due to rate. Tax exempt income is presented on a tax equivalent basis.
<TABLE>
<CAPTION>
Nine months ended September 1995 over September 1994
----------------------------------------------------
Changes Due To:
($ in thousands) Rates (2)(3) Volume (2) Net dollar change
------------ ---------- -----------------
<S> <C> <C> <C>
Interest income: (1)
Loans $ 398 (47) 351
Taxable securities (273) 297 24
Nontaxable securities (18) (59) (77)
Federal funds sold 25 88 113
----- ----- -----
Increase in income on interest-earning assets $ 132 279 411
----- ----- -----
Interest expense:
Interest-bearing demand deposits $ 49 (49) -
Savings deposits (25) (218) (243)
Time deposits 419 507 926
Short-term borrowings 18 (8) 10
----- ----- -----
Increase in expense of interest-bearing liabilities $ 461 232 693
----- ----- -----
(Decrease) increase in net interest income $(329) 47 (282)
===== ===== =====
</TABLE>
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume are
allocated equally.
(3) Annualized.
<TABLE>
<CAPTION>
December 1994 over December 1993
-----------------------------------------------------
Changes Due To:
($ in thousands) Rates(2) Volume(2) Net Dollar Change
------- --------- -----------------
<S> <C> <C> <C>
Interest income (1)
Loans $ (186) (14) (200)
Taxable securities (49) 427 378
Nontaxable securities (184) 11 (173)
Federal funds sold 77 (39) 38
------ ------ -----
(Decrease) increase in income
on interest-earning assets $ (342) 385 43
------ ------ -----
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
December 1994 over December 1993
----------------------------------------------------
Changes Due To:
($ in thousands) Rates (2)(3) Volume (2) Net dollar change
------------ ---------- -----------------
<S> <C> <C> <C>
Interest expense:
Interest-bearing demand deposits $ (1) (2) (3)
Savings deposits (94) 84 (10)
Time deposits (7) 117 110
Short-term borrowings 5 (2) 3
----- ---- -----
(Decrease) increase in expense of interest-
bearing liabilities $ (97) 197 100
----- ---- -----
(Decrease) increase in net interest
income $(245) 188 (57)
===== ==== =====
</TABLE>
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume are
allocated equally.
INTEREST RATE SENSITIVITY
The tables below set forth, as of the dates indicated, the
distribution of repricing opportunities of BTC's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest
rate sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap ratio (i.e., interest rate sensitivity gap divided
by total interest-earning assets) and the cumulative interest rate sensitivity
gap ratio. The tables set forth the time periods during which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented
in the following tables. For example, although certain assets and liabilities
may have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear on the tables.
ANALYSIS OF INTEREST RATE SENSITIVITY
An interest rate sensitivity table showing all major interest-
sensitive asset and liability categories for the time intervals indicated and
cumulative "gaps" for each interval is set forth below.
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------------------------
INTEREST RATE Interest sensitive (days)
SENSITIVITY TABLE ------------------------------
($ in thousands) 1-90 91-180 181-365 1-5 Years (Greater than) 5 Years Total
---- ------ ------- --------- ---------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Consumer $ 60 101 403 5,409 58 6,031
Mortgage 4,640 1,071 6,082 8,146 8,161 28,100
Commercial 6,162 282 219 212 669 7,544
-------- ------- ------- -------- -------- -------
Total loans, net of
unearned income 10,862 1,454 6,704 13,767 8,888 41,675
-------- ------- ------- -------- -------- -------
Federal funds sold 6,350 - - - - 6,350
Securities available for sale 1,197 - - 17,470 9,765 28,432
Securities held to maturity 1,100 3,603 12,631 53,453 19,105 89,892
-------- ------- ------- -------- -------- -------
Total interest-earning assets $ 19,509 5,057 19,335 84,690 37,758 166,349
-------- ------- ------- -------- -------- -------
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------------------------
INTEREST RATE Interest sensitive (days)
SENSITIVITY TABLE ------------------------------
($ in thousands) 1-90 91-180 181-365 1-5 Years (Greater than) 5 Years Total
---- ------ ------- --------- ---------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 18,949 - - - - 18,949
Savings deposits 36,371 - - - - 36,371
Time deposits 13,955 18,703 20,746 25,356 - 78,760
-------- ------- ------- -------- -------- -------
Total interest-bearing
liabilities 69,275 18,703 20,746 25,356 - 134,080
-------- ------- ------- -------- -------- -------
Interest sensitivity period
gap $(49,766) (13,646) (1,411) 59,334 37,758 32,269
======== ======= ======= ======== ======== =======
Cumulative interest-
sensitivity gap $(49,766) (63,412) (64,823) (5,489) 32,269 32,269
======== ======= ======= ======== ======== =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.28 0.28 0.40 0.96 1.24 1.24
======== ======= ======= ======== ======== =======
</TABLE>
ANALYSIS OF INTEREST RATE SENSITIVITY
An interest rate sensitivity table showing all major interest
sensitive asset and liability categories for the time intervals indicated and
period and cumulative "gaps" for each interval is set forth below:
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------------------------------
INTEREST RATE Interest sensitive (days)
SENSITIVITY TABLE ------------------------------
($ in thousands) 1-90 91-180 181-365 1-5 Years (Greater than) 5 Years Total
---- ------ ------- --------- ---------------------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Consumer $ 69 82 367 5,227 79 5,824
Mortgage 5,363 986 6,746 7,767 8,158 29,020
Commercial 6,612 234 486 228 712 8,272
-------- ------- ------- -------- -------- -------
Total loans, net of
unearned income 12,044 1,302 7,599 13,222 8,949 43,116
-------- ------- ------- -------- -------- -------
Federal funds sold 6,225 - - - - 6,225
Securities available for sale 101 - 489 15,430 8,085 24,105
Securities held to maturity 2,200 900 2,601 60,479 24,443 90,623
-------- ------- ------- -------- -------- -------
Total interest-earning assets $ 20,570 2,202 10,689 89,131 41,477 164,069
-------- ------- ------- -------- -------- -------
Interest-bearing liabilities:
Interest-bearing demand
deposits 13,669 - - - - 13,669
Savings deposits 46,963 - - - - 46,963
Time deposits 27,120 11,515 16,148 18,117 - 72,900
-------- ------- ------- -------- -------- -------
Total interest-bearing
liabilities $ 87,752 11,515 16,148 18,117 - 133,532
-------- ------- ------- -------- -------- -------
Interest sensitivity period
gap $(67,182) (9,313) (5,459) 71,014 41,477 30,537
======== ======= ======= ======== ======== =======
Cumulative interest-
sensitivity gap $(67,182) (76,495) (81,954) (10,940) 30,537 30,537
======== ======= ======= ======== ======== =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.23 0.23 0.29 0.92 1.23 1.23
======== ======= ======= ======== ======== =======
</TABLE>
80
<PAGE>
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The following table shows the carrying amounts and the approximate
fair values of those securities available for sale at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values Costs Values
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 1,982 1,962 1,981 1,781 1,000 997
U.S. Government and agencies 26,479 25,794 24,492 22,223 14,291 14,231
Equity securities 15 22 15 22 15 20
Other securities 698 654 79 79 79 79
------- ------ ------ ------ ------ ------
Total securities available for sale $29,174 28,432 26,567 24,105 15,385 15,327
======= ====== ====== ====== ====== ======
</TABLE>
The following table shows the amortized costs of securities held to
maturity at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
------------------ ----------------- -----------------
Amortized Amortized Amortized
Costs Costs Costs
----- ----- -----
<S> <C> <C> <C>
Securities held to maturity:
U.S. Treasury $24,585 25,595 29,064
U.S. Government and agencies 54,370 52,119 53,734
State and municipal securities 10,337 12,409 12,821
Corporate securities 600 500 1,500
------- ------ ------
Total securities held to maturity $89,892 90,623 97,119
======= ====== ======
</TABLE>
B. MATURITIES AND ASSOCIATED YIELDS
The following tables present the maturities for those securities
held "to maturity" and "available for sale" as of September 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------------------------------
Held to Maturity Available for Sale
---------------- ------------------
($ in thousands) Amortized Average Amortized Average
Costs Yield(1) Costs Yield(1)
----- -------- ----- --------
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 7,022 7.45% $ - -
One to five years 14,531 6.62% 1,000 5.12%
Five to ten years 3,032 5.88% 982 6.18%
------- -------
Total $24,585 6.65% $ 1,982 5.65%
------- -------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995
--------------------------------------------------------
Held to Maturity Available for Sale
---------------- ------------------
($ in thousands) Amortized Average Amortized Average
Costs Yield(1) Costs Yield(1)
----- -------- ----- --------
<S> <C> <C> <C> <C>
U.S. Government
agencies and
corporations (2):
Within one year $ 8,924 7.05% 1,500 4.23%
One to five years 34,782 6.16% 16,622 5.19%
Five to ten years 11,264 6.79% 9,070 6.15%
------- -------
Total $54,970 6.67% 27,192 5.19%
------- -------
State and political
subdivisions:
Within one year 2,076 7.28% - -
One to five years 4,033 8.53% - -
Five to ten years 3,751 7.66% - -
After ten years 477 8.07% - -
------- -------
Total 10,337 7.89% - -
------- -------
Total securities $89,892 7.07% $29,174 5.42%
======= ===== ======= =====
</TABLE>
(1) Taxable equivalent basis.
(2) Mortgage-backed securities are included in the totals for U.S. Government
agencies and corporations.
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------------------------
Held to Maturity Available for Sale
---------------- ------------------
($ in thousands) Amortized Average Amortized Average
Costs Yield(1) Costs Yield
----- -------- ----- -----
<S> <C> <C> <C> <C>
U.S. Treasury:
Within one year $ 1,000 9.91% $ - -
One to five years 21,035 6.91% 1000 5.12%
Five to ten years 3,560 5.78% 981 6.18%
------- -------
Total 25,595 7.53% 1,981 5.65%
------- -------
U.S. Government agencies
and corporations (2):
Within one year 2,750 8.67% 601 4.23%
One to five years 34,334 6.30% 14,417 5.23%
Five to ten years 14,535 6.85% 5,466 6.41%
After ten years 1,000 9.10% 4,102 6.09%
------- -------
Total $52,619 7.73% $24,586 5.49%
------- -------
State and political subdivisions:
Within one year $ 2,151 10.18% - -
One to five years 5,427 7.69% - -
Five to ten years 3,744 8.04% - -
After ten years 1,087 8.20% - -
------- -------
Total 12,409 8.53% - -
------- -------
Total securities $90,623 7.93% $26,567 5.57%
======= ===== ======= =====
</TABLE>
82
<PAGE>
(1) Taxable equivalent basis.
(2) Mortgage-backed securities are included in the totals for U.S. Government
agencies and corporations.
III. LOAN PORTFOLIO
A. TYPES OF LOANS
BTC concentrates its lending activities in mortgage loans, both
residential and business. The following tables set forth (i) a comparison of
BTC's loan portfolio by major category of loans as of the dates indicated; and
(ii) the maturities and interest rate sensitivity of the loan portfolio at
September 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
September 30, December 31, December 31,
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
TYPES OF LOANS:
Consumer $ 9,125 6,545 6,149
Mortgage 28,720 29,020 27,942
Commercial 4,563 8,272 7,121
------- ------ ------
Total loans 42,408 43,837 41,212
Less unearned income 733 721 728
------- ------ ------
Total loans, net of unearned income 41,675 43,116 40,484
Less allowance for loan losses 553 545 545
------- ------ ------
Total loans, net $41,122 42,571 39,939
======= ====== ======
</TABLE>
B. MATURITIES AND INTEREST RATE SENSITIVITIES
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------------------
($ in thousands) (Less than) 1 Year 1 - 5 Years After 5 years Total
------------------ ----------- ------------- -------
<S> <C> <C> <C> <C>
TYPES OF LOANS:
Consumer $ 2,937 6,112 76 9,125
Mortgage 12,413 8,146 8,161 28,720
Commercial 3,682 212 669 4,563
Less loans with predetermined
interest rates (313) (1,675) (8,161) (10,149)
------- ------ ------ -------
Loans with adjustable rates $18,719 12,795 745 32,259
======= ====== ====== =======
<CAPTION>
December 31, 1994
-----------------------------------------------------------------
($ in thousands) (Less than) 1 Year 1 - 5 Years After 5 years Total
------------------ ----------- ------------- -------
<S> <C> <C> <C> <C>
TYPES OF LOANS:
Consumer $ 530 5,918 97 6,545
Mortgage 13,095 7,767 8,158 29,020
Commercial 7,332 228 712 8,272
Less loans with predetermined
interest rates (654) (7,761) (7,968) (16,383)
------- ------ ------ -------
Loans with adjustable rates $20,303 6,152 999 27,454
======= ====== ====== =======
</TABLE>
83
<PAGE>
At September 30, 1995, BTC had no foreign loans outstanding. BTC
also did not have any concentration of loans except as disclosed above. At
September 30, 1995, approximately $8.9 million of total loans constituted loan
participations purchased from other financial institutions. These loan
participations are principally composed of commercial mortgages.
C. RISK ELEMENTS
1. Nonaccrual and Past Due Loans
The following table sets forth information regarding BTC's asset
quality as of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
Nonaccrual loans $ 299 $ -
-----
Total nonperforming loans 299 -
----- -----
Other real estate owned, net 33 67
----- -----
Total nonperforming assets $ 332 $ 67
===== =====
Accruing loans past due
90 days or more $ 546 $ 271
===== =====
</TABLE>
The effect of nonaccrual loans on interest income is presented below:
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
Interest that would have been
recorded in accordance with
original terms $ 10 -
Interest recorded in income - -
----- -----
Net impact on interest income $ 10 -
===== =====
</TABLE>
BTC's management is responsible for monitoring loan performance which
is chiefly done through a review of loan delinquencies and personal knowledge of
customers. Loan delinquencies are also reported to and reviewed by the BTC Board
of Directors on a monthly basis. BTC does not maintain a "watch" list nor has it
implemented an internal loan classification process. Except as set forth in the
preceding table, there are no loans which management has serious doubts as to
the borrower's ability to comply with present loan repayment terms.
BTC does not have a formal nonaccrual policy. A loan is placed on
nonaccrual when, in the judgment of management, it is doubtful that full
principal and interest will be collected. When loans are placed on nonaccrual
status, all uncollected interest accrued is reversed from earnings. Once on
nonaccrual status, interest on a loan is only recognized on a cash basis. Loans
may be returned to accrual status if management believes that all remaining
principal and interest is fully collectible and there has been at least six
months of sustained repayment performance since the loan was placed on
nonaccrual.
If a loan's credit quality deteriorates to the point that collection
of principal is believed by management to be doubtful and the value of
collateral securing the obligation is insufficient, BTC generally takes steps to
protect
84
<PAGE>
and liquidate the collateral. Any loss resulting from the difference between the
loan balance and the fair market value of the property is recognized by a charge
to the allowance for loan losses. When the property is held for sale after
foreclosure, it is subject to periodic appraisal. If the appraisal indicates
that the property will sell for less than its recorded value, BTC recognizes the
loss by a charge to noninterest expense.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
BTC maintains an allowance for loan losses that is increased by
provisions charged against earnings and reduced by net loan charge-offs. Loans
are charged off when they are deemed to be uncollectible, or partially charged
off when portions of a loan are deemed uncollectible. Recoveries are generally
recorded only when cash payments are received.
The following table provides certain information with respect to BTC's
allowance for loan losses as well as charge-offs and recoveries for the periods
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
------------- --------------------
($ in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Average loans outstanding $41,483 41,268 41,444
======= ====== ======
Balance at beginning of period 545 545 545
------- ------ ------
Charge-offs:
Consumer 4 15 25
Mortgage - - 3
Commercial - - -
------- ------ ------
Total loans charged off 4 15 28
------- ------ ------
Recoveries:
Consumer 12 2 5
Mortgage - - -
Commercial - - -
------- ------ ------
Total recoveries 12 2 5
------- ------ ------
Net loans charged off (recoveries) (8) 13 23
------- ------ ------
Additions charged to operations - 13 23
------- ------ ------
Balance at end of period $ 553 545 545
======= ====== ======
Net charge-offs to average loans
outstanding (annualized for 9-30-95) (0.03)% 0.03% 0.05%
========= ======= =======
</TABLE>
BTC's allowance for loan losses at September 30, 1995 was $553,000.
The determination of this allowance requires the use of estimates and
assumptions regarding the risks inherent in individual loans and the loan
portfolio in its entirety. In addition, regulatory agencies periodically review
and may require BTC to make additions to its allowance for loan losses. While
BTC's management believes these estimates and assumptions are reasonable, no
assurance can be given that they will not be proven incorrect in the future.
B. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
BTC does not allocate its allowance for loan losses by category
of loan.
85
<PAGE>
V. DEPOSITS
The following tables set forth information concerning (i) average
rates paid outstanding for the periods indicated; and (ii) the maturities of
time deposits over $100,000 at September 30, 1995:
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994 December 31, 1993
--------------------------- ------------------------ -----------------------
Average Average Average Average Average Average
($ in thousands) Amounts Rates Paid (1) Amounts Rates Paid Amounts Rates Paid
------- -------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 16,497 - $ 16,557 - $ 15,992 -
Interest-bearing
demand deposits 13,905 2.87% 13,472 1.57% 13,573 2.90%
Savings deposits 39,206 3.53% 47,255 3.45% 45,299 3.69%
Time deposits 81,485 5.04% 71,470 4.15% 68,379 4.15%
-------- -------- --------
Average total
deposits $151,093 $148,754 $143,243
======== ======== ========
</TABLE>
(1) Annualized.
B. TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------------
Over 3 Months Over 6 Months
3 Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Certificates of deposit $8,845 774 5,477 3,066 18,162
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The following table set forth the ratio of net income to average
stockholders' equity and to average total assets, and certain other ratios as of
the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
------------- ------------ ------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on average assets (1) 1.36% 1.38 1.76
Return on average equity (1) 10.08 10.41 13.38
Dividend payout ratio (1 and 2) 35.09 41.27 32.48
Average equity to average assets 13.50 13.26 13.15
</TABLE>
(1) Annualized for the nine months ended September 30, 1995.
(2) Dividends paid for the nine months ended September 30, 1995 are not
indicative of dividends paid on an annual basis. BTC has historically
declared semi-annual dividends in June and December with payment being made
in the following month.
86
<PAGE>
BTC MANAGEMENT AND OWNERSHIP OF EQUITY SECURITIES
Security Ownership of Certain Beneficial Owners of BTC Common Stock
Management knows of no persons who, as of September 30, 1995, owned
beneficially more than 5% of the outstanding shares of BTC Common Stock.
Security Ownership of Management of BTC
The following table sets forth certain information, as of September 30,
1995, with respect to (i) the BTC Board of Directors and BTC's executive
officers and (ii) the current directors and executive officers of BTC as a
group. Unless otherwise indicated, each person listed has sole investment and
voting power with respect to the shares of BTC Common Stock listed:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL OWNERSHIPS(1)
------------------------
NAME AND OFFICES DIRECTOR AMOUNT PERCENT OF
HELD WITH BTC AGE SINCE HELD CLASS
- ------------- --- ----- ---- -----
<S> <C> <C> <C> <C>
Ralph S. Bailey 73 1986 6,021 *
Director
T. C. Bowen, Jr. 75 1953 67,129 3.56
Chairman of the
Board
A. A. Crouse 55 1977 47,600 2.52
Executive Vice
President, Cashier,
Secretary and
Director
James A. Deskins 63 1974 6,693 *
Director
R. E. Dodson 72 1965 59,904 3.17
President, Chief
Executive Officer
and Director
Carl C. Gillespie (2) 86 1959 16,300 *
Director, Former
Chairman of the
Board
James S. Gillespie, Jr. (2) 57 1979 17,439 *
Director
Charles E. Green, III 44 1986 27,564 1.46
Director
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL OWNERSHIPS(1)
------------------------
NAME AND OFFICES DIRECTOR AMOUNT PERCENT OF
HELD WITH BTC AGE SINCE HELD CLASS
- ------------- --- ----- ---- -----
<S> <C> <C> <C> <C>
E. P. Greever 76 1968 5,631 *
Director
Jack H. Harry 57 1985 38,675 2.05
Director
William T. Peery 71 1955 38,604 2.04
Director
J. M. Pope 82 1956 8,991 *
Director
William H. VanDyke 72 1966 38,255 2.03
Director
All Directors and
Executive Officers as a
Group (13) 378,806 20.06
- ---------------------------
</TABLE>
As used throughout this Prospectus/Proxy Statement, unless specified otherwise,
the term "Executive Officer" means, with respect to BTC, the President/Chief
Executive Officer and the Executive Vice-President and Cashier.
* Less than 1%.
(1) Includes all shares beneficially owned, whether directly or indirectly,
individually or together with associates. Includes any shares owned by or
with a spouse and any stock of which beneficial ownership may be acquired
within sixty days of September 30, 1995.
(2) Carl C. Gillespie and James S. Gillespie are second cousins once removed.
Background of Directors and Executive Officers
Set forth below are brief summaries of the background and business
experience of all of the directors and executive officers of BTC. Unless
otherwise indicated, each person had been in the stated occupation with the same
entity for more than five years.
Ralph S. Bailey has been retired since 1986. Prior to his retirement, he
served as a branch manager for a national finance company.
T. C. Bowen, Jr. is partner in the law firm of Bowen, Bowen & Bowen, P.C.
Such law firm has provided legal services to BTC in the past, and it is
anticipated that such firm will continue to provide legal services to BTC after
the Merger.
88
<PAGE>
A. A. Crouse has been the Executive Vice President of BTC since 1984 and
prior thereto held various positions with BTC. Mr. Crouse is also the corporate
secretary of BTC.
James A. Deskins has been the President of Deskins Super Market, Inc. since
1970.
R. E. Dodson has been the President and Chief Executive Officer of BTC
since 1973.
Carl C. Gillespie was a partner in the law firm of Gillespie, Hart,
Altizer and Whitesell from 1957 until January 1, 1995.
James S. Gillespie, Jr. has been Vice President of Hunter Paving, Inc.
since 1990. He also served as President of the Jim Sam Gillespie Farm.
Charles E. Green, III has been a registered representative for Equitable
Life since 1974.
E. P. Greever has been retired since 1983. Prior to his retirement, Mr.
Greever was the Treasurer for the County of Tazewell.
Jack H. Harry has been engaged in a variety of wholly or closely held
companies, partnerships and proprietorships, including Harry Enterprises, Inc.,
Harry Mobile Homes, Inc., Greenbrier Advertising, Inc., Farmer and Harry, Inc.,
Farmer and Harry (a co-partnership), Jack H. Harry Housing and C & J
Partnership. Mr. Harry has held various officer positions within these
enterprises.
William T. Peery has been the President of Cargo Oil Co., Inc. since 1970.
J. M. Pope has been retired since 1975. Prior thereto, Mr. Pope held
various positions with BTC.
William H. VanDyke has been the President of Lynn Camp Coal Corp., Vice
President of Candlewax Smokeless Fuel Co., Inc. and President of R. O. VanDyke &
Co., Inc.
No director of BTC serves as a director of any company which has a class of
securities registered pursuant to Section 12 of the Exchange Act, or subject to
the requirements of Section 15(d) of such Exchange Act, or of any company
registered as an investment company under the Investment Company Act of 1940, as
amended. None of the directors were selected pursuant to any arrangement or
understanding other than with the directors and officers of BTC acting in their
capacities as such. There are no family relationships between any two or more of
the directors or executive officers except as discussed above. Except in
connection with the proposed Merger, management of BTC is not aware of any
arrangements which may, at a subsequent date, result in a change of control of
BTC. See "THE MERGER."
Messrs. Bowen, Crouse, Dodson and Peery have been selected by the BTC Board
of Directors as the initial BTC Board Representatives to the NBI Board of
Directors after the Merger. See "THE MERGER--Management and Operations of NBI
and BTC after the Merger."
Committees of the BTC Board
BTC does not have a standing Nominating Committee or Compensation
Committee. The following paragraphs set forth information concerning certain
committees of the BTC Board of Directors and their respective members.
The Audit Committee is comprised of Messrs. Greever (Chairman), Deskins,
Green, Bailey and Pope. During 1994, this Committee met once. It has met twice
during 1995. The Audit Committee establishes audit policy, reviews and approves
the audit plan of the internal auditor, evaluates the effectiveness of the
internal and
89
<PAGE>
external auditors, determines any restrictions on the scope of the
internal auditor, meets with the internal auditor to discuss reports and
concerns, evaluates BTC's accounting policies, evaluates BTC's system of
internal controls and risk assessment through the analyses performed by the
internal auditor, reviews regulatory agency reports and management's responses
thereto, reviews and approves the annual financial statements and the external
auditor's management letter and reports to the Board of Directors.
The Finance Committee is comprised of Messrs. Bowen (Chairman), Dodson,
Peery, Pope, VanDyke and Carl C. Gillespie. During 1994, this Committee met
three times. It has met three times during 1995. The Finance Committee reviews
and approves loans. It also serves as an executive committee in the absence of
the Board of Directors.
During 1994, the BTC Board met twelve times. No director attended less
than 75% of the aggregate of (i) the total number of meetings of the BTC Board;
and (ii) the total number of meetings held by all committees of the BTC Board on
which such director served during 1994.
BTC DIRECTORS AND OFFICERS COMPENSATION
Remuneration and Other Information with Respect to Executive Officers
The executive officers of BTC are elected annually by the BTC Board of
Directors following the Annual Meeting of Stockholders of BTC and serve at the
pleasure of the BTC Board. There are no employment agreements between BTC and
any of the executive officers or employees of BTC.
The following table sets forth the aggregate compensation for services
rendered to BTC in all capacities paid or accrued for the fiscal year ended
December 31, 1994 to the President and Chief Executive Officer, R. E. Dodson.
Mr. Dodson is the only executive officer whose aggregate compensation was in
excess of $100,000 during 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------
Name and Principal All Other
Position Year Salary($)(1) Bonus($)(2) Compensation($)(3)
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
R. E. Dodson 1994 90,910 12,325 43,310
President and Chief
Executive Officer
</TABLE>
________________________
(1) This amount includes fees paid to Mr. Dodson as a director of BTC.
(2) This amount reflects the 14.14% bonus paid to all personnel of BTC.
(3) This amount reflects nine months of pension benefits (commencing on April
1, 1995) paid to Mr. Dodson pursuant to BTC's Employees' Pension Plan. The
Bank provides Mr. Dodson with an automobile for his use. No amount is
stated as the amount of any personal usage by Mr. Dodson. BTC is reimbursed
by Mr. Dodson for any personal use on a yearly basis.
90
<PAGE>
Director Compensation
Directors of BTC are paid fees of $300 per meeting for their services as
directors, including attendance at regular and special BTC Board meetings and
committee meetings. There were $51,400 in directors fees paid during 1994. No
additional fees are paid for attendance at special Board meetings or committee
meetings.
Pension Plan
BTC maintains a tax-qualified pension plan for qualified employees under
the Bank of Tazewell County Employees' Pension Plan (the "BTC Plan"). The BTC
Plan was initially effective on October 20, 1965, but was amended in its
entirety effective October 20, 1989. The BTC Plan covers all officers and
employees who, as of April 20 or October 20 of any year, have reached the age of
twenty-one and who have had one year of service. BTC is required under the BTC
Plan to make contributions to a related trust in such amounts as are estimated
to be sufficient to provide the required benefits under such Plan determined on
an actuarially sound basis. Officers and employees are not permitted to make
contributions to the BTC Plan. Benefits generally commence on the later of a
participant reaching age 65 or the date on which the participant completes five
years of participation in the BTC Plan. The normal form of benefit is a monthly
pension payable during the participant's lifetime with a minimum of 120 monthly
payments, but other payment options may be elected under certain circumstances.
In general, the standard monthly pension benefit is equal to the sum of (i) 1.5%
of "plan compensation" multiplied by the years of credited service (but not in
excess of 35 years) at normal retirement date, plus (ii) .59% of "plan
compensation" in excess of $800 multiplied by the years of credited service (but
not in excess of 35 years). "Plan compensation" is equal to the highest monthly
average obtained from the sum of any of a participant's five annual compensation
amounts divided by the number of months such participant was compensated during
such period. For purposes of such calculation, annual compensation may not
exceed $200,000.
The following table shows the estimated annual benefits payable from the
BTC Plan upon retirement on specific compensation and years of service
classification, assuming continuation of the BTC Plan in its present form:
<TABLE>
<CAPTION>
Years of Service
----------------------------------------------------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$25,000 6,988 9,317 11,647 13,976 16,305
50,000 14,825 19,767 24,709 29,651 34,593
75,000 22,663 30,217 37,772 45,326 52,880
100,000 30,500 40,667 50,834 61,001 71,168
</TABLE>
Mr. Dodson's benefits under the BTC Plan are fully vested and funded. Mr.
Dodson began receiving a monthly benefit of $4,812 on April 1, 1994, which is in
addition to his salary at BTC.
Certain Relationships and Related Transactions Regarding BTC
Certain of the directors and executive officers of BTC, the companies or
organizations with which they are affiliated, and members of their immediate
families are customers of, and had banking transactions with BTC in the ordinary
course of BTC's business during 1994, and BTC expects to have banking
transactions with such persons in the future. All loans and commitments to lend
to such persons were made on substantially the same terms, including interest
rates, repayment terms and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness and, in
the opinion of management of BTC, did not involve more than a normal risk of
collectibility or present other unfavorable features.
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During 1994, the law firm of Bowen, Bowen & Bowen, P.C., of which T. C.
Bowen, Chairman of the Board of BTC, is a partner, provided legal services to
BTC in the amount of $10,000. Such amount exceeded 5% of such firm's gross
revenues in 1994. It is anticipated that such firm will continue to provide
legal services to BTC in the future.
CERTAIN REGULATORY CONSIDERATIONS
NBI, NBB and BTC are subject to various state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including NBI, NBB and BTC, are disadvantaged relative
to other competitors who are not as highly regulated, and their costs of doing
business are much higher. The following is a brief summary of the material
provisions of certain statutes, rules and regulations which affect NBI, NBB
and/or BTC and, if the Merger is consummated, will affect BTC. This summary is
qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below and is not intended to be an exhaustive
description of the statutes or regulations which are applicable to the
businesses of NBI, NBB and/or BTC. Any change in applicable laws or regulations
may have a material adverse effect on the business and prospects of NBI, NBB
and/or BTC.
NBI
NBI is a bank holding company within the meaning of the BHCA and Chapter 13
of the Virginia Banking Act, as amended (the "Virginia Banking Act"). The
activities of NBI also are governed by the Glass-Steagall Act of 1933 (the
"Glass-Steagall Act").
The BHCA. The BHCA is administered by the Federal Reserve Board, and NBI
is required to file with the Federal Reserve Board an annual report and such
additional information as the Federal Reserve Board may require pursuant to the
BHCA. The Federal Reserve Board also is authorized to examine NBI and its
subsidiaries. The BHCA requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before (i) it or any of its subsidiaries
(other than a bank) acquires substantially all the assets of any bank; (ii) it
acquires ownership or control of any voting shares of any bank if after such
acquisition it would own or control, directly or indirectly, more than 5% of the
voting shares of such bank; or (iii) it merges or consolidates with any other
bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as NBI, subject to certain exemptions for certain transactions. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of NBI. Control is rebuttably presumed to
exist if a person acquires 10% or more, but less than 25%, of any class of
voting securities of NBI. The regulations provide a procedure for challenging
the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in, nonbanking activities, unless the
Federal Reserve Board, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities that the Federal Reserve Board has
determined by regulation to be proper incidents to the business of a bank
holding company include making or servicing loans and certain types of leases,
engaging in certain insurance and discount brokerage activities, performing
certain data processing services, acting in certain circumstances as a fiduciary
or investment or financial
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adviser, owning savings associations and making investments in certain
corporations or projects designed primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on NBI under
the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying"
capital to risk-weighted assets. These requirements are described below under
"--Capital Requirements." Subject to its capital requirements and certain other
restrictions, NBI can borrow money to make a capital contribution to NBB and, if
the Merger is consummated, to BTC, and such loans may be repaid from dividends
paid from NBB and BTC to NBI (although the ability of NBB and BTC to pay
dividends are subject to regulatory restrictions as described below in "--NBB
and BTC--Limits on Dividends and Other Payments"). NBI can raise capital for
contribution to NBB and BTC by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities
laws.
The Virginia Banking Act. All Virginia bank holding companies must
register with the Virginia Commission under the Virginia Banking Act. A
registered bank holding company must provide the Virginia Commission with
information with respect to the financial condition, operations, management and
intercompany relationships of the holding company and its subsidiaries. The
Virginia Commission also may require such other information as is necessary to
keep itself informed about whether the provisions of Virginia law and the
regulations and orders issued thereunder by the Virginia Commission have been
complied with, and may make examinations of any bank holding company and its
subsidiaries.
In March 1994, the Virginia General Assembly adopted an amendment to
Chapter 15 of the Virginia Banking Act to allow bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. This amendment may
permit bank holding companies from throughout the United States to enter the
Virginia market, subject to federal and state approval. See "NBB and BTC--
Branching."
Glass-Steagall Act. NBI also is restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit NBI from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale or distribution of securities. The interpretation, scope and
application of the provisions of the Glass-Steagall Act currently are being
considered and reviewed by regulators and legislators, and the interpretation
and application of those provisions have been challenged in the federal courts.
NBI does not presently engage in securities-related activities in any material
respect.
NBB and BTC
General. NBB, NBI's sole operating subsidiary, is a national banking
association incorporated under the laws of the United States and is subject to
examination by the Office of the Comptroller of the Currency (the "OCC").
Deposits in NBB are insured by the FDIC up to a maximum amount (generally
$100,000 per depositor, subject to aggregation rules). The OCC and the FDIC
regulate or monitor all areas of NBB's operations, including security devices
and procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rates payable on deposits, interest rates or fees chargeable
on loans, establishment of branches, corporate reorganizations and maintenance
of books and records. The OCC requires NBB to maintain certain capital ratios.
NBB is required by the OCC to prepare quarterly reports on NBB's financial
condition and to conduct an annual audit of its financial affairs in compliance
with minimum standards and procedures prescribed by the OCC. NBB also is
required by the OCC to adopt internal control structures and procedures in order
to safeguard assets and monitor and reduce risk exposure. While appropriate for
safety and soundness of banks, these requirements impact banking overhead costs.
BTC is, and, if the Merger is consummated, BTC will continue to be,
organized as a Virginia-chartered banking corporation and is and will be
regulated and supervised by the BFI of the Virginia Commission. In addition,
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as a federally insured bank, BTC is regulated and supervised by the Federal
Reserve Board, which serves as its primary federal regulator, and is subject to
certain regulations promulgated by the FDIC. Under the provisions of federal
law, federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their affiliates, on investments in the
stock or other securities of affiliates and on the taking of such stock or
securities as collateral from any borrower. In addition, such banks are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit or the providing of any property or service.
The Virginia Commission and the Federal Reserve Board conduct regular
examinations of BTC reviewing the adequacy of the loan loss reserves, quality of
the loans and investments, propriety of management practices, compliance with
laws and regulations, and other aspects of the bank's operations. In addition
to these regular examinations, Virginia chartered banks must furnish to the
Federal Reserve Board quarterly reports containing detailed financial statements
and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of
the Community Reinvestment Act of 1977 (the "CRA"), which require the
appropriate federal bank regulatory agency, in connection with its regular
examination of a bank, to assess the bank's record in meeting the credit needs
of the community served by the bank, including low and moderate-income
neighborhoods. The banking regulators recently have substantially overhauled
the implementing CRA regulations. Under the new regulations, banks will have
the option of being assessed for CRA compliance under one of several methods.
Small banks will be evaluated differently than larger banks and technically are
not subject to some data collection requirements. The focus of the new
regulations is on the volume and distribution of a bank's loans, with particular
emphasis on lending activity in low and moderate-income areas and to low and
moderate-income persons. The new regulations place added importance on a bank's
product delivery system, particularly branch localities. The new regulations
will require banks, other than small banks, to comply with significantly
increased data collection requirements. The regulatory agency's assessment of
the bank's record is made available to the public. Further, such assessment is
required for any bank which has applied to, among other things, establish a new
branch office that will accept deposits, relocate an existing office, or merge,
consolidate with or acquire the assets or assume the liabilities of a federally
regulated financial institution. It is likely that banks' compliance with the
CRA, as well as other so-called fair lending laws, will face heightened
government scrutiny and that costs associated with compliance will increase.
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC may establish a branch office anywhere in Virginia.
National banks, like NBB, are required by the National Bank Act to adhere
to branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval
of one or more of the Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia. NBB currently has no plans or agreements whereby NBB would acquire
other banks or thrifts.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
The Interstate Act, which became effective September 29, 1995, allows bank
holding companies to acquire banks in any state, without regard to state law,
except that if the state has a minimum requirement for the amount of time a bank
must be in existence, that law must be preserved. Under the Virginia Banking
Act, a Virginia bank or all of the subsidiaries of Virginia holding companies
sought to be acquired must have been in continuous operation for more than two
years before the date of such proposed acquisition. See "--NBI--The Virginia
Banking Act." The Interstate Act permits banks to acquire out-of-state branches
through interstate mergers, beginning June 1, 1997. States can opt-in to
interstate branching earlier, or opt-out before June 1, 1997. De novo
branching, where an out-of-state bank holding company sets up a new branch in
another state, would require a state's specific approval. An acquisition or
merger would not be permitted under the Interstate Act if the
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bank, including its insured depository affiliates, would control more than 10%
of the total amount of deposits of insured depository institutions in the United
States, or would control 30% or more of the total amount of deposits of insured
depository institutions in any state.
Virginia has, by statute, elected to "opt-in" fully to interstate branching
under the Interstate Act, effective July 1, 1995. Under the Virginia statute,
Virginia state banks may, with the approval of the Virginia Commission,
establish and maintain a de novo branch or acquire one or more branches in a
state other than Virginia, either separately or as part of a merger. Procedures
also are established to allow out-of-state domiciled banks to establish or
acquire branches in Virginia, provided the "home" state of the bank permits
Virginia banks to establish or acquire branches within its borders. The
activities of such branches would be subject to the same laws as Virginia
domiciled banks, unless such activities are prohibited by the law of the state
where the bank is organized. The Virginia Commission would have the authority
to examine and supervise out-of-state state banks to ensure that the branch is
operating in a safe and sound manner and in compliance with the laws of
Virginia. The Virginia statute authorizes the BFI to enter into cooperative
agreements with other state and federal regulators for the examination and
supervision of out-of-state state banks with Virginia operations, or Virginia
domiciled banks with operations in other states. Likewise, national banks, with
the approval of the OCC, may branch into and out of the state of Virginia. Any
Virginia branch of an out-of-state national bank is subject to Virginia law
(enforced by the OCC) with respect to intrastate branching, consumer protection,
fair lending and community reinvestment as if it were a branch of a Virginia
bank, unless preempted by federal law.
The Interstate Act will permit banks and bank holding companies throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and will make it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by NBI, NBB and
BTC may increase as a result of the Interstate Act and the Virginia interstate
banking statutes.
Deposit Insurance. NBB and BTC are subject to FDIC deposit insurance
assessments. See "--Legislative Developments--Deposit Insurance."
Governmental Policies. The operations of NBB and BTC are affected not only
by general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and
credit and interest rates in order to influence general economic conditions.
These policies have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not
pay dividends from its capital; all dividends must be paid out of net profits
then on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case of a quarterly or semi-annual dividend). The approval of the
OCC is required if the total of all dividends declared by a national bank in any
calendar year exceeds the total of its net profits for that year combined with
its retained net profits for the preceding two years, less any required
transfers to surplus or to fund the retirement of preferred stock. At September
30, 1995, retained net profits available for NBB dividends were approximately
$5,715,000.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan
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and lease losses will not be considered an element of "undivided profits then on
hand" and provisions to the allowance are treated as expenses and therefore not
part of "net profits." Accordingly, a national bank with an allowance greater
than its statutory bad debts may not include the excess in calculating undivided
profits for dividend purposes. Further, a national bank may be able to use a
portion of its earned capital surplus account as "undivided profits then on
hand," depending on the composition of that account.
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account. At September 30, 1995, BTC had retained earnings of $3,426,000 which
were legally available for the payment of dividends.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay
dividends. A Virginia state bank is permitted to declare a dividend out of its
"net undivided profits," after providing for all expenses, losses, interest and
taxes accrued or due by the bank. In addition, a deficit in capital originally
paid in must be restored to its initial level, and no dividend can be paid which
could impair the bank's paid in capital. The BFI further has authority to limit
the payment of dividends by a Virginia bank if it determines the limitation is
in the public interest and is necessary to ensure the bank's financial
soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements. See "--Capital Requirements" below.
Capital Requirements. The Federal Reserve Board has adopted risk-based
capital guidelines in final form which are applicable to NBI and BTC. The
Federal Reserve Board guidelines redefine the components of capital, categorize
assets into different risk classes and include certain off-balance sheet items
in the calculation of risk-weighted assets. The minimum ratio of qualified
total capital to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8.0%. At least half of the total
capital must be comprised of Tier 1 capital. The remainder may consist of a
limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of loan and lease loss reserves. The OCC has
adopted similar regulations applicable to NBB. The Tier 1 and total risk-based
capital ratios of NBI as of September 30, 1995, were 14.91% and 16.16%,
respectively. NBB's Tier 1 and total risk-based capital ratios as of September
30, 1995, were 14.21% and 15.46%, respectively. BTC's Tier 1 and total risk-
based capital ratios as of September 30, 1995, were 42.01% and 42.92%,
respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio (Tier 1 capital to total assets less intangibles) guidelines that are
applicable to NBI and BTC. The OCC has adopted similar regulations applicable
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to NBB. These guidelines provide for a minimum ratio of 3.0% for banks that
meet certain specified criteria, including that they have the highest regulatory
rating. All other banks will be required to maintain a leverage ratio of 4.0%
or greater, based upon their particular circumstances and risk profiles. NBI's,
NBB's and BTC's leverage ratios, as of September 30, 1995, were 10.25%, 9.76%
and 14.54%, respectively. The guidelines also provide that banks experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. NBI, NBB and BTC are
unable to predict whether higher capital ratios would be imposed and, if so, at
what levels and on what schedule.
Legislative Developments
The difficulties encountered nationwide by financial institutions during
1990 and 1991 prompted federal legislation designed to reform the banking
industry and to promote the viability of the industry and of the deposit
insurance system. FDICIA, which became effective on December 19, 1991, bolsters
the deposit insurance fund, tightens bank regulation and trims the scope of
federal deposit insurance as summarized below.
FDIC Funding. The legislation bolsters the bank deposit insurance fund
with $70 billion in borrowing authority and increases to $30 billion from $5
billion the amount the FDIC can borrow from the U.S. Treasury to cover the cost
of bank failures. The loans, plus interest, would be repaid by premiums that
banks pay on domestic deposits over the next fifteen years.
Prompt Corrective Action. Among other things, FDICIA requires the federal
banking agencies to take "prompt corrective action" in respect of banks that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The following table sets
forth the minimum capital ratios that a bank must satisfy in order to be
considered well capitalized or adequately capitalized under Federal Reserve
Board regulations. See "NBI'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Capital Adequacy" for information on NBB's
capital ratios and see "BTC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Capital Resources" for a discussion of
BTC's capital ratios.
<TABLE>
<CAPTION>
Adequately Well
Capitalized Capitalized
------------ ------------
<S> <C> <C>
Tier 1 Risk-Based Capital Ratio 4% 6%
Total Risk-Based Ratio 8% 10%
Leverage Ratio 4% 5%
</TABLE>
If a bank does not meet all of the minimum capital ratios necessary to be
considered adequately capitalized, it will be considered undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on the
amount of the shortfall in its capital.
If a depository institution's principal federal regulator determines that
an otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An
institution's principal federal regulator may deem the institution to be
engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
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Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. In addition, its holding company may be
required to guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subjected to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual on-
site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety
and soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
Deposit Insurance. FDICIA reduces the scope of federal deposit insurance.
The most significant change ended the "too big to fail" doctrine, under which
the government protects all deposits in most banks, including those exceeding
the $100,000 insurance limit. The FDIC's ability to reimburse uninsured
deposits--those over $100,000 and foreign deposits--has been sharply limited.
Since December 1993, the Federal Reserve Board's ability to finance
undercapitalized banks with extended loans from its discount window has been
restricted. In addition, only the best capitalized banks will be able to offer
insured brokered deposits without FDIC permission or to insure accounts
established under employee pension plans.
The FDIC establishes rates for the payment of premiums by federally insured
banks for deposit insurance. A Bank Insurance Fund (the "BIF") is maintained
for commercial banks, with insurance premiums from the industry used to offset
losses from insurance payouts when banks fail. Beginning in 1993, insured
depository institutions like NBB and BTC pay for deposit insurance under a risk-
based premium system. Under this system, a depository institution pays to the
BIF from $.23 to $.31 per $100 of insured deposits depending on its capital
levels and risk profile, as determined by its primary federal regulator on a
semi-annual basis. The FDIC, effective September 15, 1995, lowered assessments
from their current rates of $.23 to $.31 per $100 of insured deposits to rates
of $.04 to $.31, depending on the health of the bank, as a result of the
recapitalization of the BIF. On November 14, 1995, the FDIC voted to drop its
premiums for well capitalized banks to zero effective January 1, 1996. Other
banks will be charged risk-based premiums up to $.27 per $100 of deposits. Both
NBI and BTC are expected to qualify for the zero premium rate in 1996.
Congress also is expected to act soon on provisions to strengthen the
Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds
that were issued to recapitalize the SAIF's successor as a result of payments
made due to the insolvency of savings and loan associations and other federally
insured savings institutions in the late 1980s and early 1990s. Costs for these
measures could be passed along, in part, to the banking industry.
Many of the provisions of FDICIA did not become effective until December
1993. In addition, many of the provisions will be implemented through the
adoption of regulations by the various federal banking agencies. The precise
effect of the legislation on NBI, NBB and BTC cannot be assessed at this time,
and there can be no assurance that such regulations will not materially affect
operating results, financial condition or liquidity of NBI, NBB and/or BTC.
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are being
considered by the executive branch of the federal government, Congress and
various state governments, including Virginia. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry. It cannot be predicted whether any of these proposals will
be adopted or, if adopted, how these proposals will affect NBI, NBB and/or BTC.
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Accounting Changes
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes," which superseded SFAS No. 96 of the same title. SFAS No. 109, which
became effective for fiscal years beginning after December 31, 1992, employs an
asset and liability approach in accounting for income taxes payable or
refundable at the date of the financial statements as a result of all events
that have been recognized in the financial statements and as measured by the
provisions of enacted tax laws. Adoption by NBI and BTC of SFAS No. 109 did not
have a material impact on NBI's or BTC's results of operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments," which is effective for fiscal years ending
after December 15, 1992 (December 15, 1995, in the case of entities with less
than $150 million in total assets). SFAS No. 107 requires financial
intermediaries to disclose, either in the body of their financial statements or
in the accompanying notes, the "fair value" of financial instruments for which
it is "practicable to estimate that value." SFAS No. 107 defines "fair value" as
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are deemed the best evidence of the fair
value of such instruments. Most deposit and loan instruments issued by financial
intermediaries are subject to SFAS No. 107, and its effect will be to require
financial statement disclosure of the fair value of most of the assets and
liabilities of financial intermediaries such as BTC and NBB. Management is
unable to predict what effect, if any, such disclosure requirements could have
on the market prices of the common stock of NBI or BTC or their abilities to
raise funds in the financial markets.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114 prescribes the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will be unable to
collect all principal and interest amounts due according to the contracted terms
of the loan agreement. A creditor is required to measure impairment by
discounting expected future cash flows at the loan's effective interest rate, or
by reference to an observable market price, or by determining that foreclosure
is probable. SFAS No. 114 also clarifies the existing accounting for in-
substance foreclosures by stating that a collateral-dependent real estate loan
would be reported as real estate owned only if the lender had taken possession
of collateral.
SFAS No. 118 amended SFAS No. 114, to allow a creditor to use existing
methods for recognizing interest income on an impaired loan. To accomplish
that, it eliminated the provisions in SFAS No. 114 that described how a creditor
should report income on an impaired loan. SFAS No. 118 did not change the
provisions in SFAS No. 114 that require a creditor to measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or as a practical expedient, at the observable market
price of the loan or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to
require information about the recorded investments in certain impaired loans and
about how a creditor recognizes interest income related to those impaired loans.
SFAS No. 114 is effective for financial statements issued for fiscal years
beginning after December 15, 1994. Although earlier application is encouraged,
it is not required.
In May 1993, the FASB issued SFAS No. 115 "Accounting For Certain
Investments in Debt and Equity Securities" addressing the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments would
be classified in three categories and accounted for as follows: (i) debt and
equity securities that the entity has the positive intent and ability to hold to
maturity would be classified as "held to maturity" and reported at amortized
cost; (ii) debt and equity securities that are held for current resale would be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in operations; and (iii) debt and equity securities
not classified as either securities held to maturity or trading securities would
be classified as securities available for sale, and reported at fair value, with
unrealized gains and losses excluded from operations and reported as a separate
component of stockholders' equity.
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The statement is effective for financial statements for calendar year 1994, but
may be applied to an earlier fiscal year for which annual financial statements
have not been issued. BTC adopted SFAS No. 115 effective December 31, 1993, and
NBI adopted SFAS No. 115 effective January 1, 1994. The cumulative effect of the
change in accounting was not material to either NBI or BTC.
DESCRIPTION OF NBI CAPITAL STOCK
The descriptive information supplied herein outlines certain provisions of
the Articles and Bylaws of NBI and the Virginia Act. The information does not
purport to be complete and is qualified in all respects by reference to the
provisions of NBI's Articles and Bylaws and the Virginia Act.
Authorized Capital
The authorized capital stock of NBI consists of 5,000,000 shares of NBI
common stock, $2.50 par value ("NBI Common Stock"), and 5,000,000 shares of
preferred stock, no par value per share ("NBI Preferred Stock"). As of
September 30, 1995, there were 1,714,152 shares of NBI Common Stock, and no
shares of NBI Preferred Stock issued and outstanding.
The Merger Agreement provides that NBI will, prior to the Merger Effective
Date, increase the number of shares of NBI Common Stock issued and outstanding
by means of a stock dividend totaling 190,768 shares of NBI Common Stock;
provided certain conditions are satisfied. See "THE MERGER--NBI Share
Dividend." Giving effect to the NBI Share Dividend, 1,904,920 shares of NBI
Common Stock will be issued and outstanding immediately prior to the Merger
Effective Date.
NBI Common Stock
Subject to the prior rights of the holders of any NBI Preferred Stock,
holders of NBI Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of liquidation or dissolution, to receive the net assets of NBI
remaining after payment of all liabilities and after payment to holders of all
shares of NBI Preferred Stock of the full preferential amounts to which such
holders are respectively entitled, in proportion to their respective holdings.
See "CERTAIN REGULATORY CONSIDERATIONS--NBB and BTC--Limits on Dividends
and Other Payments" for information relating to certain regulatory restrictions
on the payment of dividends by national banks, including NBI's subsidiary
national bank, NBB.
Subject to the rights of the holders of any NBI Preferred Stock then
outstanding, all voting rights are vested in the holders of the shares of NBI
Common Stock, each share being entitled to one vote on all matters requiring
stockholder action and in the election of directors. Holders of NBI Common
Stock have no preemptive, subscription or conversion rights. All of the
outstanding shares of NBI Common Stock are fully paid and nonassessable, and the
NBI Common Shares issuable to the stockholders of BTC upon consummation of the
Merger will, upon issuance, be fully paid and nonassessable.
NBI Preferred Stock
The NBI Board of Directors is authorized to issue shares of NBI Preferred
Stock from time to time in one or more series and to fix and determine the
relative preferences, privileges, limitations and rights of the shares of any
series, including dividend rights and dividend rates, voting rights, liquidation
price, redemption rights and redemption prices, sinking fund requirements and
conversion rights. Each series of NBI Preferred Stock will rank on a parity as
to dividends and assets with all other series according to the respective
dividend rates and amounts
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attributable upon voluntary or involuntary liquidation, dissolution or winding
up of NBI fixed for each series and without preference or priority of any series
over any other series. All shares of NBI Preferred Stock will rank, with respect
to dividends and liquidation rights, senior to the NBI Common Stock. The ability
of the Board of Directors to issue NBI Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
holders of NBI Common Stock, and, under certain circumstances, may discourage an
attempt by others to gain control of NBI.
Change in Control Provisions
The following provisions of NBI's Articles could have the effect of
delaying, deterring or preventing a change in control of NBI.
Article 6 of NBI's Articles requires the approval of the holders of at
least 80% of each class of NBI's outstanding voting stock for certain mergers
and other business combinations involving NBI and beneficial owners of 5% or
more of NBI's outstanding capital stock entitled to vote for the election of
directors, unless (i) the proposed business combination has been approved by a
majority of the members of the Board of Directors who are not affiliated with
the beneficial owner and who were directors before the beneficial owner became
such beneficial owner, or (ii) certain conditions regarding the nature and
amount of consideration to be received in the proposed business combination by
holders of NBI's capital stock have been satisfied. The affirmative vote of the
holders of at least 80% of each class of NBI's outstanding voting stock is
required to amend Article 6 or to adopt any provision inconsistent with
Article 6.
Additionally, NBI's Articles (i) classify the Board into three classes, as
nearly equal in number as possible, each of which serves for three years, with
one class being elected each year; (ii) provide that directors may be removed
only for cause and only by the holders of two-thirds or more of each class of
NBI's outstanding voting stock; (iii) provide that any vacancy on the Board of
Directors or newly-created directorships may be filled by a majority of the
remaining directors then in office, even if less than a quorum; (iv) provide
that the number of directors may not be less than nine nor more than twenty-six,
such definite number within that limitation to be set by the Bylaws of NBI; (v)
provide that the power to amend or adopt the Bylaws is vested in the Board of
Directors to act by the vote of two-thirds of a quorum, including two-thirds of
the directors unaffiliated with certain 5% beneficial owners; (vi) increase to
80% of each class of NBI's outstanding voting stock, the vote required for
stockholders to adopt, alter, amend or repeal certain provisions of the Articles
or to adopt any provision inconsistent with certain provisions of the Articles;
and (vii) increase to 80% of each class of NBI's outstanding voting stock, the
vote required for stockholders to adopt new Bylaws, or to alter, amend or repeal
Bylaws adopted by either the stockholders or the Board of Directors of NBI.
The Bylaws include provisions setting forth specific conditions under
which: (i) business may be transacted at an annual meeting of stockholders and
(ii) persons may be nominated for election as directors of NBI at an annual
meeting of stockholders.
In addition to the foregoing, in certain instances the issuance of
authorized but unissued shares of NBI Common Stock or NBI Preferred Stock may
have an anti-takeover effect.
See "CERTAIN DIFFERENCES IN THE RIGHTS OF BTC AND NBI STOCKHOLDERS."
State Anti-Takeover Statutes
The Virginia Act includes two anti-takeover statutes, the Affiliated
Transactions Statute and the Control Share Acquisitions Statute, applicable to
NBI.
The Affiliated Transactions Statute restricts certain transactions
("affiliated transactions") between a Virginia corporation having more than 300
stockholders of record and a beneficial owner of more than 10% of any class of
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voting stock (an "interested stockholder"). An "affiliated transaction" is
defined in the Virginia Act as any of the following transactions with or
proposed by an interested stockholder: a merger; a share exchange; certain
dispositions of assets or guaranties of indebtedness other than in the ordinary
course of business; certain significant securities issuances; dissolution of the
corporation; or reclassification of the corporation's securities. Under the
statute, an affiliated transaction generally requires the approval of a majority
of disinterested directors and two-thirds of the voting shares of the
corporation other than shares owned by an interested stockholder during a three-
year period commencing as of the date the interested stockholder crosses the 10%
threshold. This special voting provision does not apply if a majority of
disinterested directors approved the acquisition of the more than 10% interest
in advance. After the expiration of the three-year moratorium, an interested
stockholder may engage in an affiliated transaction only if it is approved by a
majority of disinterested directors or by two-thirds of the outstanding shares
held by disinterested stockholders, or if the transaction complies with certain
fair price provisions. This special voting rule is in addition to, and not in
lieu of, other voting provisions contained in the Virginia Act and NBI's
Articles.
The Control Share Acquisitions Statute provides that, with respect to
Virginia corporations having 300 or more stockholders of record, shares acquired
in a transaction that would cause the acquiring person's aggregate share
ownership to meet or exceed any of three thresholds (20%, 33-1/3% or 50%) have
no voting rights unless such rights are granted by a majority vote of the shares
not owned by the acquiring person or any officer or employee-director of the
corporation. The statute sets out a procedure whereby the acquiring person may
call a special stockholder's meeting for the purpose of considering whether
voting rights should be conferred. Acquisitions pursuant to a merger or share
exchange to which the corporation is a party and acquisitions pursuant to a
tender or exchange offer arising out of an agreement to which the corporation is
a party are exempt from the statute.
CERTAIN DIFFERENCES IN RIGHTS OF BTC AND NBI STOCKHOLDERS
General
Stockholders of BTC, whose rights are governed by BTC's Articles and Bylaws
and by the Virginia Act and the Virginia Banking Act will, upon consummation of
the Merger, become stockholders of NBI. The rights of such stockholders as
stockholders of NBI will then be governed by the Articles and Bylaws of NBI and
by the Virginia Act.
Except as set forth below, there are no material differences between the
rights of a BTC stockholder under BTC's Articles and Bylaws and under the
Virginia Act and the rights of an NBI stockholder under the Articles of NBI and
under the Virginia Act, on the other hand. This summary does not purport to be
a complete discussion of, and is qualified in its entirety by reference to, the
governing law and the Articles and Bylaws of each corporation.
See "CERTAIN REGULATORY CONSIDERATIONS" for a discussion of federal and
state regulatory requirements affecting the businesses of BTC and NBI.
Authorized Capital
BTC
BTC's Articles authorize the issuance of up to 6,000,000 shares of BTC
Common Stock, par value $1.00 per share, of which 1,888,209 shares were issued
and outstanding as of the Record Date.
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NBI
NBI's authorized capital is set forth under "DESCRIPTION OF NBI CAPITAL
STOCK--Authorized Capital."
Preemptive Rights of Stockholders
BTC
BTC stockholders currently have preemptive rights. The BTC Charter
Amendment, if approved, would, among other things, eliminate preemptive rights
of BTC stockholders. See "THE MERGER--BTC Charter Amendment."
NBI
NBI stockholders have no preemptive rights.
Amendment of Charter or Bylaws
BTC
Under Virginia law, BTC's Articles may be amended if the amendment is
adopted by the Board of Directors and approved by a vote of the holders of more
than two-thirds of the votes entitled to be cast on the amendment by each voting
group entitled to vote thereon.
BTC's Bylaws provide that all amendments made to the Bylaws shall be made
at a meeting of the Board of Directors by a vote of at least two-thirds of all
of the directors and after the proposed amendment has been submitted to the
Board of Directors at a meeting assembled at least one month before the final
amendment is adopted.
NBI
NBI's Articles generally may be amended if the amendment is adopted by the
Board of Directors and approved by a vote of the holders of more than two-thirds
of the votes entitled to be cast on the amendment by each voting group entitled
to vote thereon. NBI's Articles, however, require the affirmative vote of at
least 80% of NBI's voting stock to amend or repeal, or to adopt any provision
inconsistent with, certain provisions of its Articles. See "DESCRIPTION OF NBI
CAPITAL STOCK--Other Provisions."
NBI's Articles generally provide that the Board of Directors may, by a two-
thirds vote of a quorum, amend its Bylaws; provided, however, that, if there is
a stockholder (or any affiliate or associate of such stockholder) who, after May
11, 1993, acquires direct or indirect beneficial ownership of 5% or more of
NBI's capital stock entitled to vote in the election of directors (an
"Interested Stockholder"), such two-thirds vote shall include a two-thirds of
directors ("Continuing Directors") (i) none of whom is an Interested Stockholder
or an affiliate or associate of an Interested Stockholder, and (ii) each of whom
was a member of the NBI Board of Directors immediately prior to the time that
the Interested Stockholder became and Interested Stockholder. Under the NBI
Articles, stockholders may adopt new Bylaws or amend Bylaws adopted by the
stockholders or the Board of Directors by the affirmative vote of the holders of
not less than 80% of each class of the voting stock of NBI and may, by a similar
vote, prohibit the Board of Directors from amending any Bylaws adopted by the
stockholders. The affirmative vote of the holders of not less than 80% of each
class of voting stock is required to amend the provisions of NBI's Articles
establishing the foregoing rights.
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Effective as of the Merger Effective Date, NBI has agreed to cause its
Bylaws to be amended as follows: (i) the number of NBI directors shall be set at
nine (see discussion under "THE MERGER--Interests of Certain Persons"); (ii) the
affirmative vote of six out of nine NBI directors shall be required to approve
any of the following actions: (a) membership on the Board of Directors of BTC
(provided, however, that a director of BTC may be removed by action of NBI as
sole stockholder of BTC by the vote of a simple majority of NBI directors in the
event that such director commits a violation of law applicable to his duties as
a director of BTC which has a material adverse effect on BTC or engages in any
conduct in connection with his duties as a director for which he would not be
entitled to indemnification under the Articles of Incorporation of BTC), (b)
amendments to the Articles of Incorporation or Bylaws of BTC, (c) the merger,
consolidation or sale of all or substantially all of the assets of BTC, and (d)
a recommendation to the shareholders of NBI to merge, consolidate or sell all or
substantially all of the assets of NBI, where such recommendation is required by
law; (iii) to change the provisions requiring that NBI directors also be NBB
directors to permit directors of BTC to serve on the NBI Board as well; and (iv)
the Executive Committee shall not authorize or approve any action on behalf of
NBI described in (ii) above. NBI has agreed that these Bylaws amendment shall
not be amended or rescinded by action of its Board of Directors without the
affirmative vote of at least six directors until January 1, 2001, on and after
which time such Bylaw amendments may be amended or rescinded by a simple
majority vote of its Board of Directors as provided in the Bylaws of NBI. See
"THE MERGER--Management and Operations of NBI and BTC after the Merger."
Size and Classification of Board of Directors
BTC
BTC's Articles and Bylaws provide that the number of directors shall not be
less than five and shall be fixed by the Bylaws of BTC. The current number of
BTC directors is fixed at thirteen.
NBI
NBI's Articles provide for a Board of Directors consisting of not less than
nine nor more than twenty-six members, with the number to be fixed in NBI's
Bylaws. The Bylaws currently provide that the number of directors shall be ten.
There currently are nine members and one vacancy on the NBI Board of Directors.
No increase in the number of directors may shorten the term of any director then
in office. The NBI Board of Directors is divided into three classes, each as
nearly equal in number as possible, with one class being elected annually.
Effective as of the Merger Effective Date, NBI will cause its Bylaws to be
amended to set the number of directors at nine and shall obtain the resignations
of four directors currently serving on the NBI Board of Directors. The four NBI
Board Vacancies created by such resignations will be filled by BTC Board
Representatives. See "THE MERGER--Management and Operations of NBI and BTC
after the Merger" and "--Interests of Certain Persons."
Removal of Directors
BTC
Directors of BTC may be removed, with or without cause, by the stockholders
by a majority of the votes entitled to be cast at a stockholders' meeting called
for such purpose at which a quorum is present. BTC's Bylaws provide that any
director also may be removed at any time by a majority vote of the Board of
Directors of BTC.
NBI
Directors of NBI may be removed only for cause and only by a vote of the
holders of at least two-thirds of each class of the voting stock of NBI then
outstanding at a meeting called for that purpose.
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Director Exculpation
BTC
BTC's Articles provide for the limitation or elimination of personal
liability of each BTC director and officer to the fullest extent permitted by
the Virginia Act, as the same may be in effect from time to time. In accordance
with the Virginia Act, that limitation of liability does not apply if the
director or officer engaged in willful misconduct or a knowing violation of
criminal law or any federal or state securities law. The BTC Charter Amendment
would delete this provision from the Articles of BTC. Accordingly, under the
Virginia Act, the liability of a director or officer of BTC, as a director or
officer of BTC would be the greater of $100,000 or the amount of compensation
received by the officer or director in the twelve months preceding the act or
omission giving rise to the liability. See "THE MERGER--BTC Charter Amendment."
NBI
NBI's Articles provide for the limitation or elimination of personal
liability of directors or officers of NBI to the fullest extent permitted by the
Virginia Act, as the same may be in effect from time to time.
Indemnification
BTC
BTC's Articles provide for indemnification or reimbursement of directors,
officers and employees of BTC to the fullest extent permitted by the Virginia
Act, as it may be amended and as set forth in the Articles. The right to
indemnification under BTC's Articles does not extend to: (i) indemnification or
reimbursement for amounts actually paid to BTC pursuant to a settlement
agreement, or in satisfaction of a judgment arising out of litigation that was
brought by or in the right of BTC; and (ii) indemnification of any amount or
expense where the director, officer or employee has been finally adjudged to be
liable by reason of gross negligence or willful misconduct in the performance of
his duties. The BTC Charter Amendment would amend these indemnification
provisions, as described under "THE MERGER--BTC Charter Amendment."
NBI
NBI's Articles require indemnification of any director or officer against
liability incurred in connection with any proceeding to which that person is
made a party by virtue of such person's service as a director or officer of NBI,
or service as a director, officer, employee or agent of another entity at the
request of NBI, except in the case of willful misconduct or a knowing violation
of the criminal law. In certain circumstances, NBI's Articles also require NBI
to reimburse a director or officer made a party to a proceeding in advance of
the final disposition of the proceeding. NBI's Articles permit indemnification
of any other person who is or was a party to a proceeding by reason of the fact
that such person is or was an employee or agent of NBI, or is or was serving
another entity at the request of NBI, to the same extent as if such person was a
director or officer. Indemnification and advancement of and reimbursement for
expenses is subject to a determination that indemnification is appropriate by a
majority of a quorum consisting of directors not at the time parties to the
proceeding. In the event that such a quorum cannot be obtained or there has
been a change in the composition of the majority of the Board of Directors after
the date of the alleged act with respect to which indemnification is claimed,
such determination shall be made by special legal counsel.
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Director Nominations and Stockholder Proposals
BTC
Neither BTC's Articles nor Bylaws establish any procedures that may be
followed for stockholders to nominate individuals for election to the Board of
Directors or to submit a proposal to a vote of the stockholders of BTC.
NBI
NBI's Bylaws establish procedures that must be followed for stockholders to
nominate persons for election to NBI's Board of Directors or to submit a
proposal to a vote of stockholders of NBI at an annual meeting of stockholders.
Such nominations or proposals must be made by delivering written notice to the
President of NBI not less than sixty nor more than ninety days prior to the
annual meeting; provided, however, that if less than seventy days' notice of the
date of the meeting is given, such written notice by the stockholder must be
delivered not later than the tenth day after the day on which such notice of the
date of the meeting was given. Notice will be deemed to have been given more
than seventy days prior to the meeting if a meeting is called on the second
Tuesday of April (or if such date falls on a legal holiday, the next business
day) regardless as to when public disclosure is made. The nomination or
stockholder proposal notice must set forth (i) a brief description of the
proposal and the reasons for its submission; (ii) the name and address of the
stockholder, as they appear on NBI's books; (iii) the classes and number of
shares of NBI owned by the stockholder; and (iv) any material interest of the
stockholder in such proposal other than such holder's interest as a stockholder
of NBI. The Chairman of the meeting will, if the facts warrant, determine that
a nomination or stockholder proposal is not made in accordance with the
provision prescribed by the Bylaws and the defective nomination or stockholder
proposal will be disregarded.
Required Stockholder Vote for Certain Actions
BTC
The Virginia Act generally provides that mergers, share exchanges and a
corporation's sale of all or substantially all of its assets other than in the
usual or regular course of business must be adopted by the Board of Directors
and approved by more than two-thirds of all votes entitled to be cast by each
voting group entitled to vote on the plan of merger, share exchange or sale of
assets, unless the corporation's board of directors requires a greater vote or
the corporation's articles of incorporation provide for a greater or lesser vote
(which BTC's Articles and Bylaws do not). With respect to a merger, no vote of
the stockholders of the surviving corporation is required if: (i) the
corporation's articles of incorporation will not differ significantly after the
merger; (ii) the corporation's stockholders will hold the same number of shares,
with identical designations, preferences, limitations and relative rights, after
the merger; (iii) the number of voting shares outstanding immediately after the
merger (including shares issuable upon conversion of securities or exercise of
rights or warrants issued in the merger) will not exceed by more than 20% the
total number of voting shares of the surviving corporation outstanding before
the merger; and (iv) the number of shares entitling their holders to unlimited
participation in distributions outstanding after the merger, plus the number of
participating shares issuable as a result of such merger (including shares
issuable upon conversion of securities or exercise of rights or warrants issued
in the merger), will not exceed by more than 20% the total number of such shares
outstanding before the merger.
NBI
NBI's Articles require the approval of holders of at least 80% of each
class of NBI outstanding voting stock for certain mergers, share exchanges,
sales of assets and other business combinations involving NBI and beneficial
owners of 5% or more of NBI's outstanding capital stock entitled to vote for the
election of directors (before or after the transaction) unless (i) the
transaction has been approved by a majority of the members of the Board of
Directors who are not affiliated with the beneficial owner and who were
directors before the beneficial owner became such
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beneficial owner, or (ii) certain conditions regarding the nature and amount of
consideration to be received in the transaction by holders of NBI capital stock
have been satisfied. If required under this provision, such 80% approval is
required, notwithstanding the fact that no vote is required or that a lesser
percentage is specified by the Virginia Act or in any agreement to which NBI is
a party. The affirmative vote of the holders of at least 80% of each class of
NBI's outstanding voting stock is required to amend or to adopt any provision
inconsistent with these requirements.
Voluntary Dissolution
BTC
Under the Virginia Act, a corporation's board of directors may propose
dissolution for submission to the stockholders. Unless the board of directors
requires a greater vote, dissolution to be authorized must be approved by the
holders of more than two-thirds of all votes entitled to be cast on the proposal
to dissolve. The board of directors may condition its submission of a proposal
for dissolution on any basis. Subject to federal and state bank regulatory
requirements, the provisions of the Affiliated Transactions Statute will apply
if the dissolution of BTC is proposed by or on behalf of an Interested
Stockholder.
NBI
NBI may be dissolved if its Board of Directors proposes dissolution, and
more than two-thirds of the shares of NBI entitled to vote thereon approve;
provided, however, that under NBI's Articles, the approval of the holders of at
least 80% of each class of NBI's outstanding voting stock is required for the
adoption of a plan or proposal for liquidation or dissolution if the same is not
approved by a majority of the directors, including a majority of the Continuing
Directors. The requirements of the Affiliated Transactions Statute will apply
if dissolution of NBI is proposed by or on behalf of an Interested Stockholder.
See "DESCRIPTION OF NBI CAPITAL STOCK--State Anti-Takeover Statutes" above.
RESALE OF NBI COMMON SHARES
The NBI Common Shares have been registered under the Securities Act,
thereby allowing such shares to be traded freely and without restriction by
those holders of BTC Common Stock who receive such shares following consummation
of the Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act, but generally including directors, certain executive officers
and certain large stockholders) of BTC or NBI. The Merger Agreement provides
that each holder of BTC Common Stock who is deemed by BTC to be an affiliate of
it will enter into an agreement with NBI not later than thirty days prior to the
Merger Effective Date providing, among other things, that such affiliate will
not transfer any NBI Common Shares received by such holder in the Merger except
in compliance with the Securities Act and will not sell or otherwise transfer
such shares until financial results of NBI and its subsidiaries (including BTC)
for at least thirty days of combined operations are published. This
Prospectus/Proxy Statement does not cover any resales of NBI Common Shares.
ADDITIONAL MATTERS
From time to time NBB has entered into transactions with BTC in the
ordinary course of business, including, without limitation, the sale of loan
participations in commercial and mortgage loans.
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LEGAL OPINIONS
The validity of the NBI Common Shares being offered hereby is being passed
upon for NBI by Marilyn B. Buhyoff, Esq., Secretary of NBI and Senior Vice
President-Administration of NBB. Ms. Buhyoff is also a stockholder of NBI.
TAX OPINION
KPMG Peat Marwick LLP, independent auditors of NBI, has delivered an
opinion concerning certain federal income tax consequences of the Merger. See
"THE MERGER--Certain Federal Income Tax Consequences."
EXPERTS
The consolidated financial statements of NBI as of December 31, 1994 and
1993, and for each of the years in the three-year period ended December 31,
1994, have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent auditors, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP refers to a change in
accounting for certain investments in debt and equity securities as of January
1, 1994 and a change in accounting for income taxes as of January 1, 1993.
The financial statements of BTC as of December 31, 1994 and 1993, and for
each of the years in the three-year period ended December 31, 1994, have been
included herein and in the Registration Statement in reliance upon the report of
Cook Associates, LLP, independent auditors, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the Board of Directors
of BTC knows of no matters which will be presented for consideration at the
Special Meeting other than as set forth in the Notice of Special Meeting
accompanying this Prospectus/Proxy Statement. However, if any other matters
shall come before the meeting or any adjournment or adjournments thereof to be
voted upon, the enclosed proxy shall be deemed to confer discretionary authority
to the individuals named as proxies therein to vote the shares represented by
such proxy as to any such matters.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
NBI:
Annual Financial Statements:
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets - December 31, 1994 and 1993............................ F-3
Consolidated Statements of Income - Years Ended December 31, 1994, 1993
and 1992..................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1994, 1993 and 1992............................................. F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 1994,
1993 and 1992................................................................ F-6
Notes to Consolidated Financial Statements - December 31, 1994, 1993 and 1992....... F-7
Interim Financial Statements (Unaudited):
Consolidated Balance Sheets - September 30, 1995 (unaudited) and
December 31, 1994............................................................ F-27
Consolidated Statements of Income - Three Months Ended September 30,
1995 and 1994 (unaudited).................................................... F-29
Consolidated Statements of Income - Nine Months Ended September 30, 1995
and 1994 (unaudited)......................................................... F-31
Consolidated Statements of Changes in Stockholders' Equity - Nine Months
Ended September 30, 1995 and 1994 (unaudited)................................ F-33
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
1995 and 1994 (unaudited).................................................... F-34
Notes to Consolidated Financial Statements - September 30, 1995 and 1994
(unaudited) and December 31, 1994............................................ F-36
BTC:
Annual Financial Statements:
Independent Auditors' Report........................................................ F-45
Balance Sheets - December 31, 1994 and 1993......................................... F-46
Statements of Income - Years Ended December 31, 1994, 1993 and 1992................. F-47
Statements of Changes in Stockholders' Equity - Years Ended December 31,
1994, 1993 and 1992.......................................................... F-48
Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992............. F-50
Notes to Financial Statements - December 31, 1994, 1993 and 1992.................... F-52
Interim Financial Statements (Unaudited):
Balance Sheets - September 30, 1995 (unaudited) and December 31, 1994............... F-64
Statements of Income - Three Months Ended September 30, 1995 and 1994
(unaudited).................................................................. F-65
Statements of Income - Nine Months Ended September 30, 1995 and 1994
(unaudited).................................................................. F-66
Statements of Changes in Stockholders' Equity - Nine Months Ended
September 30, 1995 and 1994 (unaudited)...................................... F-67
Statements of Cash Flows - Nine Months Ended September 30, 1995
and 1994 (unaudited)......................................................... F-68
Notes to Financial Statements - September 30, 1995 and 1994 (unaudited)
and December 31, 1994........................................................ F-69
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
National Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiary as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1994. These consolidated financial statements are the responsibility of
Bankshares' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Bankshares, Inc. and subsidiary as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in notes 1(C) and 3 to the consolidated financial statements,
Bankshares adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994. As discussed in notes 1(J) and 11 to the consolidated
financial statements, Bankshares adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," as of
January 1, 1993.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
February 10, 1995
F-2
<PAGE>
National Bankshares, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
$ in thousands, December 31, 1994 and 1993 1994 1993
-------- --------
<S> <C> <C> <C>
Assets Cash and due from banks (notes 2 and 19) $ 6,648 4,177
Federal funds sold (note 19) 1,400 2,620
Securities available for sale (notes 3 and 19) 12,114 ---
Securities held to maturity (market value $55,816
in 1994 and $64,672 in 1993) (notes 4 and 19) 57,389 62,518
Mortgage loans held for sale (notes 17, 18 and 19) 392 1,752
Loans (notes 5, 6, 7, 18 and 19):
Real estate construction loans 5,543 3,946
Real estate mortgage loans 30,212 26,638
Commercial and industrial loans 35,984 45,618
Loans to individuals 45,767 37,245
-------- --------
Total loans 117,506 113,447
Less unearned income on loans (1,782) (1,192)
-------- --------
Loans, net of unearned income 115,724 112,255
Less allowance for loan losses (note 6) (2,006) (2,038)
-------- --------
Loans, net 113,718 110,217
-------- --------
Bank premises and equipment, net (note 8) 2,762 2,685
Accrued interest receivable 1,698 1,568
Other real estate owned, net (note 7) 1,083 225
2,523 932
-------- --------
Other assets (notes 11 and 20)
Total assets $199,727 186,694
======== ========
Liabilities and Noninterest-bearing deposits 23,816 19,138
Stockholders' Interest-bearing deposits 59,794 64,131
Equity Savings deposits 19,257 20,651
Time deposits (note 9) 75,769 63,782
-------- --------
Total deposits (note 19) 178,636 167,702
-------- --------
Accrued interest payable 225 191
Other liabilities (note 10) 729 547
-------- --------
Total liabilities 179,590 168,440
-------- --------
Stockholders' equity (notes 13 and 14):
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding 1,714,152
shares in 1994 and 1,709,672 shares in 1993 4,285 4,274
Surplus 1,187 1,112
Undivided profits 14,791 12,868
Net unrealized losses on securities available for sale (126) ---
-------- --------
Total stockholders' equity 20,137 18,254
-------- --------
Commitments and contingent liabilities (notes 10 and 17)
-------- --------
Total liabilities and stockholders' equity $199,727 186,694
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
$ in thousands, except per share data. Years ended December 31, 1994, 1993 and 1992 1994 1993 1992
---- ---- ----
<S> <C> <C> <C> <C>
Interest Interest and fees on loans $10,207 10,265 11,311
Income Interest on money market investments 155 122 192
Interest on investment securities - taxable 2,961 2,930 3,422
Interest on investment securities - nontaxable 1,239 1,111 1,122
------- ------- -------
Total interest income 14,562 14,428 16,047
------- ------- -------
Interest Interest on certificates of deposit of $100,000 or more 427 373 665
Expense Interest on other deposits 5,212 5,448 7,376
Interest on federal funds purchased 16 --- 1
Interest on long-term debt --- 2 6
------- ------- -------
Total interest expense 5,655 5,823 8,048
------- ------- -------
Net interest income 8,907 8,605 7,999
Provision for loan losses (note 6) 540 930 1,060
Net interest income after provision for loan losses 8,367 7,675 6,939
------- ------- -------
Noninterest Service charges on deposit accounts 667 594 522
Income Other service charges and fees 169 120 103
Credit card fees 355 317 307
Trust income 417 373 297
Other income 19 112 59
Realized securities gains (losses), net (notes 3 and 4) (20) 25 (1)
------- ------- -------
Total noninterest income 1,607 1,541 1,287
Noninterest Salaries and employee benefits (note 10) 2,991 2,730 2,480
Expense Occupancy and furniture and fixtures 654 646 584
Data processing and ATM 235 211 208
FDIC assessment 387 369 382
Credit card processing 340 271 273
Goodwill amortization (note 20) 20 --- ---
Net costs of other real estate owned 37 287 256
Other operating expense 1,494 1,341 1,217
------- ------- -------
Total noninterest expense 6,158 5,855 5,400
------- ------- -------
Income before income tax expense and cumulative effect
of change in accounting principle 3,816 3,361 2,826
Income tax expense (note 11) 900 717 498
------- ------- -------
Income before cumulative effect of change in accounting 2,916 2,644 2,328
principle
Cumulative effect at January 1, 1993 of change
in accounting for income taxes (note 11) --- 28 ---
------- ------- -------
Net income $ 2,916 2,672 2,328
======= ======= =======
Per share amounts (note 13):
Income before cumulative effect of change in accounting
principle $1.70 1.54 1.37
Cumulative effect at January 1, 1993 of change
in accounting for income taxes (note 11) --- .02 ---
------- ------- -------
Net income per share $1.70 1.56 1.37
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Securities
$ in thousands, except per share data. Common Undivided Available
Years ended December 31, 1994, 1993 and 1992 Stock Surplus Profits For Sale Total
----- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1991 $4,242 1,016 9,456 --- 14,714
Net income --- --- 2,328 --- 2,328
Net proceeds from issuance of common stock
(7,380 shares) (note 13) 18 48 --- --- 66
Cash dividends ($.43 per share) --- --- (733) --- (733)
------ ------ ------- ----- -------
Balances, December 31, 1992 4,260 1,064 11,051 --- 16,375
Net income --- --- 2,672 --- 2,672
Net proceeds from issuance of common stock
(5,528 shares) (note 13) 14 48 --- --- 62
Cash dividends ($.50 per share) --- --- (855) --- (855)
------ ------ ------- ----- -------
Balances, December 31, 1993 4,274 1,112 12,868 --- 18,254
Cumulative effect of change in accounting for securities
available for sale at January 1, 1994, net of income
taxes of $141 --- --- --- 273 273
Net income --- --- 2,916 --- 2,916
Net proceeds from issuance of common stock
(4,480 shares) (note 13) 11 75 --- --- 86
Cash dividends ($.58 per share) --- --- (993) --- (993)
Change in net unrealized gains (losses) on securities
available for sale, net of income tax benefit of $206 --- --- --- (399) (399)
------ ------ ------- ----- -------
Balances, December 31, 1994 $4,285 1,187 14,791 (126) 20,137
====== ====== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
$ in thousands. Years ended December 31, 1994, 1993 and 1992 1994 1993 1992
---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows Net income $ 2,916 2,672 2,328
from Adjustments to reconcile net income to net cash provided by
Operating operating activities:
Activities (Note 16) Provision for loan losses 540 930 1,060
Provision for deferred income taxes (59) (61) (154)
Depreciation of bank premises and equipment 400 370 334
Amortization of intangibles 123 44 44
Amortization of premiums and accretion of discounts, net 158 149 92
Gain on bank premises and equipment disposals --- (1) (4)
Loss on calls of securities available for sale, net 27 --- ---
(Gain) loss on calls of securities held to maturity, net (7) (25) 1
Net (increase) decrease in mortgage loans held for sale 1,360 (850) (521)
Losses and write-downs on other real estate owned 8 233 256
(Increase) decrease in:
Accrued interest receivable (150) 225 217
Other assets (235) 180 (203)
Increase (decrease) in:
Accrued interest payable 34 46 (212)
Other liabilities 182 166 104
-------- ------- -------
Net cash provided by operating activities 5,297 4,078 3,342
-------- ------- -------
Cash Flows Net (increase) decrease in money market investments 1,220 2,395 (3,195)
from Proceeds from sales of securities held to maturity --- 981 943
Investing Proceeds from calls and maturities of securities available for sale 8,804 --- ---
Activities Proceeds from calls and maturities of securities held to maturity 6,260 14,334 11,707
(Notes 3 and 16) Purchases of securities available for sale (3,725) --- ---
Purchases of securities held to maturity (18,693) (17,515) (14,131)
Net (increase) decrease in loans made to customers (5,030) (5,343) 6,477
Proceeds from disposal of other real estate owned 91 555 263
Other real estate owned expenditures --- --- (55)
Recoveries on loans charged off 52 60 42
Bank premises and equipment expenditures (478) (406) (343)
Proceeds from sale of bank premises and equipment 1 6 4
-------- ------- -------
Net cash provided by (used in) investing activities (11,498) (4,933) 1,712
-------- ------- -------
Cash Flows Deposits assumed, net of premium paid 13,159 --- ---
from Net increase (decrease) in time deposits 3,871 1,968 (43,582)
Financing Net increase (decrease) in other deposits (7,451) 101 38,861
Activities Net proceeds from issuance of common stock 86 62 66
Principal payments on long-term debt --- (61) (66)
Cash dividends paid (993) (855) (733)
-------- ------- -------
Net cash provided by (used in) financing activities 8,672 1,215 (5,454)
-------- ------- -------
Net increase (decrease) in cash and due from banks 2,471 360 (400)
Cash and due from banks at beginning of year 4,177 3,817 4,217
-------- ------- -------
Cash and due from banks at end of year $ 6,648 4,177 3,817
======== ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
$ in thousands, except per share data. December 31, 1994, 1993 and 1992
Note 1 The accounting and reporting policies of National
Summary of Bankshares, Inc. and its wholly-owned subsidiary, The National
Significant Bank of Blacksburg (NBB), conform to generally accepted
Accounting accounting principles and general practices within the banking
Policies industry. In preparing the consolidated financial statements,
management is required to make certain estimates, assumptions
and loan evaluations that affect its consolidated financial
statements for the period. Actual results could vary
significantly from those estimates.
Changing economic conditions, adverse economic prospects
for NBB's borrowers, as well as regulatory agency action as a
result of an examination, could cause NBB to recognize
additions to the allowance for loan losses and may also affect
the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans.
The following is a summary of the more significant
accounting policies.
(A) Consolidation
The consolidated financial statements include the accounts
of National Bankshares, Inc. and its wholly-owned subsidiary
(Bankshares). All significant intercompany balances and
transactions have been eliminated.
(B) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and due from banks.
(C) Securities
Effective January 1, 1994, Bankshares adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and accordingly, has recorded the effect of
this adoption in the accompanying consolidated financial
statements for the year ended December 31, 1994. SFAS No. 115
established new standards of accounting and reporting for
investments in equity securities that have readily-determinable
fair values and for all investments in debt securities. SFAS
No. 115 requires those investments to be classified in three
categories: (1) debt securities that the organization has the
positive intent and ability to hold to maturity are classified
as "held to maturity securities" and reported at amortized
cost; (2) debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as "trading securities" and reported at fair
value, with unrealized gains and losses included in net income;
and (3) debt and equity securities not classified as either
held to maturity securities or trading securities are
classified as "available for sale securities" and reported at
fair value, with unrealized gains and losses excluded from net
income and reported, net of income taxes, in a separate
component of stockholders' equity.
Securities available for sale are reported at fair value,
with unrealized gains and losses excluded from net income and
reported, net of income taxes, in a separate component of
stockholders' equity. Securities held to maturity are stated at
cost, adjusted for amortization of premiums and accretion of
discounts on a basis which approximates the level yield method.
F-7
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Bankshares does not maintain trading securities. Gains and
losses on securities are accounted for on the completed
transaction basis by the specific identification method.
A decline in the fair value of any available for sale or
held to maturity security below cost that is deemed other than
temporary is charged to income resulting in the establishment
of a new cost basis for the security.
(D) Loans
Loans are stated at the amount of funds disbursed plus the
applicable amount, if any, of unearned interest and other
charges less payments received. Income on installment loans is
recognized on methods which approximate the level yield method.
Interest on all other loans is accrued based on the balance
outstanding times the applicable interest rate.
Interest is recognized on the cash basis for all loans
carried in nonaccrual status. Loans generally are placed in
nonaccrual status when the collection of principal or interest
is 90 days or more past due, unless the obligation is both
well-secured and in the process of collection.
Loan origination and commitment fees and certain direct
costs are being deferred, and the net amount amortized as an
adjustment of the related loan's yield. These amounts are being
amortized over the contractual life of the related loans.
Mortgage loans held for sale are carried at the lower of
cost or fair value.
(E) Allowance for Loan Losses
The allowance for loan losses is a valuation allowance
consisting of the cumulative effect of the provision for loan
losses, plus any amounts recovered on loans previously charged
off, minus loans charged off. The provision for loan losses
charged to expense is the amount necessary in management's
judgement to maintain the allowance for loan losses at a level
it believes adequate to absorb losses in the collection of its
loans.
(F) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is charged to expense
over the estimated useful lives of the assets on the straight-
line basis. Costs of maintenance and repairs are charged to
expense as incurred and improvements are capitalized.
(G) Other Real Estate Owned
Other real estate, acquired through foreclosure or deed in
lieu of foreclosure, is carried at the lower of the recorded
investment or its fair value, less estimated costs to sell (net
realizable value). When the property is acquired, any excess of
the loan balance over net realizable value is charged to the
allowance for loan losses. Increases or decreases in the net
realizable value of such properties are credited or charged to
income by adjusting the valuation allowance for other real
estate owned. Net costs of maintaining or operating foreclosed
properties are expensed as incurred.
F-8
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
(H) Intangible Assets
Included in other assets are deposit intangibles of $872
and $68 at December 31, 1994 and 1993, respectively, and
goodwill of $427 at December 31, 1994. Deposit intangibles are
being amortized on a straight-line basis over either a seven-
year or ten-year period and goodwill is being amortized on a
straight-line basis over a fifteen-year period. (See note 20).
(I) Pension Plan
Bankshares has a defined benefit pension plan which covers
substantially all full-time officers and employees. The
benefits are based upon length of service and a percentage of
the employee's compensation during the final years of
employment. Pension costs are computed based upon the
provisions of SFAS No. 87. NBB contributes to the pension plan
amounts deductible for federal income tax purposes.
(J) Income Taxes
Effective January 1, 1993, Bankshares adopted the
provisions of SFAS No. 109, "Accounting for Income Taxes," and
has reported the cumulative effect of that change in the method
of accounting for income taxes in the 1993 consolidated
statement of income. SFAS No. 109 requires a change from the
deferred method of accounting for income taxes of Accounting
Principles Board (APB) Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Pursuant to the deferred method under APB Opinion 11,
which was applied by Bankshares prior to January 1, 1993,
deferred income taxes were recognized for income and expense
items that were reported in different years for financial
reporting purposes and income tax purposes using the tax rate
applicable in the year of the calculation. Under the deferred
method, deferred taxes were not adjusted for subsequent changes
in tax rates.
(K) Trust Assets and Income
Assets (other than cash deposits) held by the Trust
Department in a fiduciary or agency capacity for customers are
not included in the consolidated financial statements since
such items are not assets of NBB. Trust income is recognized on
the accrual basis.
(L) Net Income Per Share
Net income per share is based upon the weighted average
number of common shares outstanding (1,710,310 shares in 1994,
1,707,764 shares in 1993 and 1,701,372 shares in 1992).
F-9
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
(M) Off-Balance Sheet Financial Instruments
In the ordinary course of business, NBB has entered into
off-balance sheet financial instruments consisting of
commitments to extend credit and standby letters of credit.
Such financial instruments are recorded in the financial
statements when they become payable.
(N) Fair Value of Financial Instruments
The following methods and assumptions were used to
estimate the fair value of each class of financial instrument
for which it is practicable to estimate that value:
(1) Cash and Due from Banks
The carrying amount is a reasonable estimate of fair
value.
(2) Federal Funds Sold
The carrying amount is a reasonable estimate of fair
value.
(3) Securities
The fair value of securities, except certain state
and municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations
received from securities dealers. The fair value of
certain state and municipal securities is not readily
available through market sources other than dealer
quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for
differences between the quoted instruments and the
instruments being valued.
(4) Loans
Fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are
segregated by type such as mortgage loans held for sale,
commercial, real estate - commercial, real estate -
construction, real estate - mortgage, credit card and
other consumer loans. Each loan category is further
segmented into fixed and adjustable rate interest terms
and by performing and nonperforming categories.
The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the
loan, as well as estimates for operating expenses and
prepayments. The estimate of maturity is based on
Bankshares' historical experience with repayments for each
loan classification, modified, as required, by an estimate
of the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is
based on estimated cash flows which are discounted using a
rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined
using available market information and specific borrower
information.
F-10
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
(5) Deposits
The fair value of demand and savings deposits is the
amount payable on demand. The fair value of fixed maturity
time deposits and certificates of deposit is estimated
using the rates currently offered for deposits with
similar remaining maturities.
(6) Commitments to Extend Credit and Standby Letters of
Credit
The only amounts recorded for commitments to extend
credit, standby letters of credit and financial guarantees
written are the deferred fees arising from these
unrecognized financial instruments. These deferred fees
are not deemed significant at December 31, 1994 and 1993,
and as such, the related fair values have not been
estimated.
Note 2 To comply with Federal Reserve regulations, NBB is
Restrictions on required to maintain certain average reserve balances. The
Cash daily average reserve requirements were $1,567 and $1,426 for
the weeks including December 31, 1994 and 1993, respectively.
Note 3 As discussed in note 1(C), effective January 1, 1994,
Securities Bankshares adopted the provisions of SFAS No. 115, "Accounting
Available for Certain Investments in Debt and Equity Securities." Upon
for Sale adoption of SFAS No. 115, certain investment securities
totaling $17,451 were reclassified from securities held to
maturity to securities available for sale. The cumulative
effect of this change in accounting at January 1, 1994 was to
increase securities available for sale by $414, decrease the
net deferred tax asset by $141 and increase stockholders'
equity by $273.
The amortized costs, gross unrealized gains, gross
unrealized losses and fair values for securities available for
sale by major security type as of December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----- ----- ------ ------
<S> <C> <C> <C> <C>
($ in thousands)
Available for sale:
U.S. Treasury $ 3,516 1 (61) 3,456
U.S. Government agencies and corporations 6,936 7 (68) 6,875
Mortgage-backed securities 261 --- (15) 246
Other securities 1,592 --- (55) 1,537
------- ------ ------ -------
Total securities available for sale $12,305 8 (199) 12,114
======= ====== ====== =======
</TABLE>
The amortized costs and fair values of securities
available for sale at December 31, 1994, by contractual
maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
F-11
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1994
Amortized Fair
Costs Values
----- ------
<S> <C> <C>
($ in thousands)
Due in one year or less $ 3,553 3,513
Due after one year through five years 6,985 6,845
Due after five years through ten years 1,552 1,541
Due after ten years 82 82
No maturity 133 133
------- -------
$12,305 12,114
======= =======
</TABLE>
Note 4 The amortized costs, gross unrealized gains, gross
Securities unrealized losses and fair values for securities held to
Held to maturity by major security type as of December 31, 1994 and
Maturity 1993 were as follows:
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----- ----- ------ ------
<S> <C> <C> <C> <C>
($ in thousands)
Held to maturity:
U.S. Treasury $ 9,722 44 (219) 9,547
U.S. Government agencies and corporations 14,073 20 (296) 13,797
States and political subdivisions 26,073 212 (1,091) 25,194
Mortgage-backed securities 1,147 8 (17) 1,138
Other securities 6,374 14 (248) 6,140
------- ------ ------- -------
Total securities held to maturity $57,389 298 (1,871) 55,816
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----- ----- ------ ------
<S> <C> <C> <C> <C>
($ in thousands)
Held to maturity:
U.S. Treasury $12,319 283 (25) 12,577
U.S. Government agencies and corporations 22,318 925 (8) 23,235
States and political subdivisions 20,698 862 (24) 21,536
Other securities 7,183 151 (10) 7,324
------- ------ ------ -------
Total securities held to maturity $62,518 2,221 (67) 64,672
======= ====== ====== =======
</TABLE>
F-12
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The amortized costs and fair values of securities held to
maturity at December 31, 1994, by contractual maturity, are
shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
December 31, 1994
Amortized Fair
Costs Values
----- ------
<S> <C> <C>
($ in thousands)
Due in one year or less $ 10,998 11,006
Due after one year through five years 28,749 28,085
Due after five years through ten years 15,645 14,820
Due after ten years 1,997 1,905
------- -------
$ 57,389 55,816
======== =======
</TABLE>
Proceeds from sales of securities held to maturity during
1993 and 1992 were $981 and $943, respectively. Gross gains of
$67 and $35 during 1993 and 1992, respectively, and gross
losses of $42 and $36 during 1993 and 1992, respectively, were
realized on these sales.
The carrying value of securities pledged to secure public
and trust deposits, and for other purposes as required or
permitted by law, was $5,403 at December 31, 1994 and $6,999 at
December 31, 1993.
Note 5 In the normal course of business, NBB has made loans to
Loans to officers and directors. As of December 31, 1994 and 1993, there
Officers and were direct loans to officers and directors of $1,750 and
Directors $1,336, respectively. In addition, there were loans of $1,798
and $1,381 at December 31, 1994 and 1993, respectively, which
were endorsed by directors and/or officers or had been made to
companies in which directors and/or officers had an equity
interest.
The following schedule summarizes amounts receivable from
executive officers and directors of Bankshares, and their
immediate families or associates:
<TABLE>
<CAPTION>
Year ended
December 31,
($ in thousands) 1994
----
<S> <C>
Balance, beginning of year $ 2,717
Additions 4,597
Amounts collected (3,766)
-------
Balance, end of year $ 3,548
=======
</TABLE>
F-13
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Note 6 Changes in the allowance for loan losses are as follows:
Allowance
for Loan
Losses
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Balances, beginning of year $2,038 1,782 1,665
Provision for loan losses 540 930 1,060
Recoveries 52 60 42
Loans charged off (624) (734) (985)
------ ------ -----
Balances, end of year $2,006 2,038 1,782
====== ====== =====
</TABLE>
Note 7 Nonperforming assets consist of the following:
Nonperforming
Assets
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Nonaccrual loans $ 420 1,864
Restructured loans 229 598
------ -----
Total nonperforming loans 649 2,462
Other real estate owned, net 1,083 225
------ -----
Total nonperforming assets $1,732 2,687
====== =====
</TABLE>
There were no material commitments to lend additional
funds to customers whose loans were classified as nonperforming
at December 31, 1994.
F-14
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The following table shows the interest that would have been
earned on nonaccrual and restructured loans if they had been
current in accordance with their original terms and the recorded
interest that was included in income on those loans:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Scheduled interest:
Nonaccrual loans $ 38 194 137
Restructured loans 19 69 ---
----- ----- -----
Total scheduled interest $ 57 263 137
===== ===== =====
Recorded interest:
Nonaccrual loans $ 1 25 47
Restructured loans 9 51 ---
----- ----- -----
Total recorded interest $ 10 76 47
===== ===== =====
</TABLE>
Changes in the valuation allowance for other real estate
owned are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Balances, beginning of year $ 409 220
Provision for other real estate --- 200
owned (360) (11)
Write-offs ----- ------
Balances, end of year $ 49 409
===== ======
</TABLE>
Note 8 Bank premises and equipment stated at cost, less accumulated
Bank Premises depreciation, are as follows:
and Equipment
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Premises $ 3,171 2,945
Furniture and equipment 2,310 2,257
Construction-in-progress 34 7
------- -------
5,515 5,209
Less accumulated depreciation (2,753) (2,524)
------- -------
Total $ 2,762 2,685
======= =======
</TABLE>
Note 9 Included in time deposits are certificates of deposit and
Time Deposits other time deposits of $100 or more in the aggregate amounts of
$10,726 at December 31, 1994 and $10,639 at December 31, 1993.
F-15
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Note 10 NBB has a Retirement Accumulation Plan qualifying under
Employee Benefit IRS Code Section 401(k). Eligible participants in the plan can
Plans contribute up to 10 percent of their total annual compensation
to the plan. Employee contributions are matched by NBB based
on a percentage of an employee's total annual compensation
contributed to the plan. For the years ended December 31,
1994, 1993 and 1992, NBB contributed $76, $69 and $54,
respectively, to the plan.
National Bankshares, Inc. has a nonleveraged Employee
Stock Ownership Plan (ESOP) which enables employees with one
year of service who have attained the age of 21 prior to the
plan's January 1 and July 1 enrollment dates to own common
stock in Bankshares. Contributions to the ESOP are determined
annually by the Board of Directors. Contribution expense
amounted to $145, $134 and $115 for the years ended December
31, 1994, 1993 and 1992, respectively. Dividends on ESOP
shares are charged to undivided profits. As of December 31,
1994, the number of allocated shares held by the ESOP was
43,840 and the number of unallocated shares was 7,266. All
shares held by the ESOP are treated as outstanding in
computing Bankshares' net income per share. The ESOP has the
right of first refusal for any shares distributed to a
participant in the event the participant elects to sell the
shares. Upon reaching age 55 with ten years of plan
participation, a vested participant has the right to diversify
50 percent of his or her allocated ESOP shares and the ESOP
would be obligated to purchase those shares.
NBB also has a noncontributory defined benefit pension
plan which covers all full-time officers and employees with
six months of service who have attained the age of 20 years
and six months prior to the plan's January 1 enrollment date.
The pension plan's benefit formulas generally base payments to
retired employees upon their length of service and a
percentage of qualifying compensation during their final years
of employment. The pension plan's assets are invested
principally in U.S. Government agency obligations and mutual
funds.
The plan's funded status at December 31, 1994 and 1993 is
as follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
($ in thousands) ---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $546 in 1994 and $606 in 1993 $ 601 687
======= =======
Projected benefit obligation for service rendered to date $(1,068) (1,284)
Plan assets at fair value 924 963
-------- -------
Projected benefit obligation in excess of plan assets (144) (321)
Unrecognized net asset at January 1, 1987 being amortized
over 15 years (72) (82)
Unrecognized net loss from past experience different from
that assumed 101 423
Prior service cost not yet recognized in net periodic
pension cost (53) (34)
-------- -------
Accrued pension cost included in other liabilities $ (168) (14)
======== =======
</TABLE>
F-16
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
($ in thousands)
Net pension cost includes the following (income)
expense components:
Service cost-benefits earned during the year $ 147 104 74
Interest cost on projected benefit obligation 89 68 50
Actual return on plan assets 8 (35) (63)
Net amortization and deferral (90) (59) (25)
----- ---- ----
Net pension expense $ 154 78 36
===== ==== ====
</TABLE>
The weighted average discount rate was 8.5% in 1994, 7% in
1993 and 8.25% in 1992. The rate of increase in future
compensation levels was 5% for 1994, 1993 and 1992. These rates
were used in determining the actuarial present value of the
projected benefit obligation. The expected long-term rate of
return on assets was 9% in 1994, 1993 and 1992.
Note 11 As discussed in note 1(J), Bankshares adopted SFAS No. 109
Income Taxes as of January 1, 1993. The cumulative effect of this change in
accounting for income taxes of $28 is reported separately in
the 1993 consolidated statement of income. Prior years'
consolidated financial statements have not been restated to
apply the provisions of SFAS No. 109.
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Income $ 900 717 498
Stockholders' equity, for net unrealized
losses on securities available for sale
recognized for financial reporting
purposes (65) --- ---
----- ---- ----
$ 835 717 498
===== ==== ====
</TABLE>
F-17
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The components of federal income tax expense attributable
to income before income tax expense and cumulative effect of
change in accounting principle are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Current $959 750 652
Deferred (59) (33) (154)
---- ---- ----
Total income tax expense $900 717 498
==== ==== ====
</TABLE>
Taxes resulting from securities transactions amounted to
an income tax benefit of $7 for the year ended December 31,
1994, an income tax expense of $9 for the year ended December
31, 1993 and no income tax benefit or expense for the year
ended December 31, 1992.
The following is a reconciliation of the "expected"
federal income tax expense on income before income tax expense
and cumulative effect of change in accounting principle with
the reported income tax expense:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Expected tax expense (34%) $1,297 1,143 961
Tax-exempt interest income (521) (490) (484)
Nondeductible interest expense 55 47 56
Alternative minimum tax ------ ----- (32)
Other, net 69 17 (3)
------ ----- ----
Reported tax expense $ 900 717 498
====== ===== ====
</TABLE>
F-18
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1994 and 1993 are presented
below:
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Deferred tax assets:
Loans, principally due to allowance for loan losses
and unearned fee income $ 504 561
Other real estate owned, principally due to
valuation allowance 1 13
Deferred compensation and other liabilities, due to
accrual for financial reporting purpose 143 85
Net unrealized losses on securities available for sale 65 ---
Deposit intangibles and goodwill 13 ---
Nonaccrual interest on loans 30 ---
----- ----
Total gross deferred tax assets 756 659
Less valuation allowance --- ---
----- ----
Net deferred tax assets 756 659
----- ----
Deferred tax liabilities:
Bank premises and equipment, principally due to
differences in depreciation (39) (58)
Securities, due to differences in discount accretion (26) (29)
Deposit intangibles and other assets (51) (56)
----- ----
Total gross deferred liabilities (116) (143)
----- ----
Net deferred tax asset included in other assets $ 640 516
===== ====
</TABLE>
Bankshares has determined that a valuation allowance for
the gross deferred tax assets is not necessary at December 31,
1994 and 1993 due to the fact that the realization of the
entire gross deferred tax assets can be supported by the amount
of taxes paid during the carryback period available under
current tax laws.
F-19
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1992, deferred income tax
benefits attributable to income before income tax expense and
cumulative effect of change in accounting principle results
from timing differences in the recognition of income and
expense for income tax and financial reporting purposes. The
sources of timing differences resulting in deferred income
taxes and the tax effect of each were as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1992
-----------------
<S> <C>
($ in thousands)
Provision for loan losses $ (40)
Alternative minimum tax 23
Losses and write-downs on
other real estate owned (84)
Other (53)
-----
Deferred income tax benefit $(154)
=====
</TABLE>
Note 12 Long-term debt consisted of an unsecured equity commitment
Long-term Debt note maturing January 12, 1995 with interest at the U.S. Prime
Rate plus .5%. During 1993, this indebtedness was paid in full.
Note 13 During 1994, 1993 and 1992, the ESOP purchased 4,480,
Common Stock 5,528 and 7,380 shares of the common stock of National
Transactions Bankshares, Inc. at a price of $19.35, $11.00 and $9.00 per
share, respectively. The net proceeds from these stock
issuances have been credited to common stock and surplus in the
respective years.
Note 14 National Bankshares, Inc.'s principal source of funds for
Restrictions dividend payments is dividends received from its subsidiary.
on Payments of For the years ended December 31, 1994, 1993 and 1992, dividends
Dividends and received from NBB were $1,133, $992 and $815, respectively.
Capital
Requirements Under applicable federal laws, the Comptroller of the
Currency restricts the total dividend payments of NBB in any
calendar year to the net profits of that year as defined,
combined with retained net profits for the preceding two years.
At December 31, 1994, retained net profits which were free of
such restrictions amounted to approximately $3,600.
NBB is required to maintain minimum amounts of capital to
total risk-weighted assets, as defined by the banking
regulators. At December 31, 1994, NBB is required to have
minimum Tier 1 and total capital ratios of 4.00% and 8.00%,
respectively. NBB's actual ratios at that date were 14.57% and
15.83%, respectively. NBB's leverage ratio at December 31, 1994
was 9.53%.
F-20
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Note 15 Condensed financial information of National Bankshares,
Parent Company Inc. (Parent) is presented below:
Financial
Information
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Assets:
Cash due from subsidiary $ 71 40
Investment in subsidiary, at equity 19,837 18,010
Other assets 3 1
Refundable income taxes due from subsidiary 275 232
------- ------
Total assets $20,186 18,283
======= ======
Liabilities and stockholders' equity: 49 29
Other liabilities
Stockholders' equity (notes 13 and 14):
Preferred stock of no par value.
Authorized 5,000,000 shares; none
issued and outstanding --- ---
Common stock of $2.50 par value.
Authorized 5,000,000 shares; issued
and outstanding 1,714,152 shares in
1994 and 1,709,672 shares in 1993 4,285 4,274
Surplus 1,187 1,112
Undivided profits 14,791 12,868
Net unrealized losses on securities
available for sale (126) ---
------- ------
Total stockholders' equity 20,137 18,254
------- ------
Commitments and contingent liabilities
(notes 10 and 17)
------- ------
Total liabilities and stockholders'
equity $20,186 18,283
======= ======
</TABLE>
F-21
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Condensed Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Income:
Dividends from subsidiary (note 14) $ 1,133 992 815
------- ----- -----
Expenses:
Interest on long-term debt --- 2 6
Other expenses 127 108 77
------- ----- -----
Total expenses 127 110 83
------- ----- -----
Income before income tax benefit, cumulative
effect of change in accounting principle
and equity in undistributed net income of
subsidiary 1,006 882 732
Applicable income tax benefit 43 37 28
------- ----- -----
Income before cumulative effect of change in
accounting principle and equity in
undistributed net income subsidiary 1,049 919 760
Cumulative effect at January 1, 1993 of change
in accounting for income taxes (note 11) --- 19 ---
------- ----- -----
Income before equity in undistributed net income
of subsidiary 1,049 938 760
Equity in undistributed net income of subsidiary 1,867 1,734 1,568
------- ----- -----
Net income $ 2,916 2,672 2,328
======= ===== =====
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
($ in thousands)
Cash flows from operating activities:
Net income $ 2,916 2,672 2,328
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiary (1,867) (1,734) (1,568)
Provision for deferred income taxes --- (19) ---
Increase in other assets (2) (1) ---
Increase in refundable income taxes due from
subsidiary (43) (37) (24)
Increase (decrease) in other liabilities 20 (3) 10
------- ------ ------
Net cash provided by operating activities 1,024 878 746
------- ------ ------
</TABLE>
F-22
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of common stock of subsidiary $ (86) --- ---
Principal payments on long-term debt --- (61) (66)
Net proceeds from issuance of common stock 86 62 66
Dividends paid (993) (855) (733)
----- ----- -----
Net cash used in financing activities (993) (854) (733)
----- ----- -----
Net increase in cash 31 24 13
Cash due from subsidiary at beginning of year 40 16 3
----- ----- -----
Cash due from subsidiary at end of year $ 71 40 16
===== ===== =====
</TABLE>
Note 16 Bankshares paid $5,621, $5,775 and $8,260 for interest and
Supplemental $1,159, $706 and $675 for income taxes, net of refunds, in
Cash Flow 1994, 1993 and 1992, respectively. Noncash investing activities
Information consisted of $624, $734 and $985 of loans charged against the
allowance for loan losses in 1994, 1993 and 1992, respectively,
and $191 of net unrealized losses included in securities
available for sale, $65 of deferred tax assets included in
other assets and $126 of net unrealized losses on securities
available for sale included in stockholders' equity for the
year ended December 31, 1994. Noncash investing activities also
consisted of $937, $176 and $595 of foreclosed loans
transferred to other real estate owned in 1994, 1993 and 1992,
respectively. In addition, $20 of accrued interest receivable
relating to a foreclosed loan was also transferred to other
real estate owned in 1994.
Note 17 NBB is a party to financial instruments with off-balance
Financial sheet risk in the normal course of business to meet the
Instruments financing needs of its customers. These financial instruments
with Off- include commitments to extend credit and standby letters of
Balance credit. Those instruments involve, to varying degrees, elements
Sheet Risk of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement NBB has in
particular classes of financial instruments.
NBB's exposure to credit loss, in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit,
is represented by the contractual amount of those instruments.
NBB uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments.
NBB may require collateral or other security to support
the following financial instruments with credit risk:
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
($ in thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 30,244 23,365
======== =======
Standby letters of credit $ 3,117 $ 588
======== =======
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of
F-23
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. NBB evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if required by NBB upon extension of
credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments
issued by NBB to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending
loans to customers. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment
and income-producing commercial properties.
NBB originates mortgage loans for sale to secondary market
investors subject to contractually specified and limited
recourse provisions. In 1994, NBB originated $15,084 and sold
$16,444 to investors, compared to $33,853 originated and
$33,003 sold in 1993. Every contract with each investor
contains certain recourse language. In general, NBB may be
required to repurchase a previously sold mortgage loan if there
is major noncompliance with defined loan origination or
documentation standards, including fraud, negligence or
material misstatement in the loan documents. Repurchase may
also be required if necessary governmental loan guarantees are
canceled or never issued, or if an investor is forced to buy
back a loan after it has been resold as a part of a loan pool.
In addition, NBB may have an obligation to repurchase a loan if
the mortgagor has defaulted early in the loan term. This
potential default period ranges from four to sixteen months
after sale of a loan to the investor.
Note 18 NBB does a general banking business, serving the
Concentrations commercial, agricultural and personal banking needs of its
of Credit Risk customers in its trade territory, commonly referred to as the
New River Valley, which consists of Montgomery and Giles
Counties, Virginia and portions of adjacent counties. Operating
results are closely correlated with the economic trends within
this area which are, in turn, influenced by the area's three
largest employers, Virginia Polytechnic Institute and State
University, the Radford Army Ammunition Plant (Hercules, Inc.)
and Hoechst-Celanese. Other industries include a wide variety
of manufacturing and retail concerns. The ultimate
collectibility of the loan portfolios and the recovery of the
carrying amounts of repossessed property are susceptible to
changes in the market conditions of this area. Real estate
construction loans are concentrated within NBB's trade
territory. The commercial portfolio is diversified with no
significant concentrations of credit within a single industry.
As of December 31, 1994 and 1993, approximately $24 million and
$31 million, respectively, of the commercial loan portfolio
consisted of loans secured by commercial real estate. Loans to
individuals included approximately $18 million and $13 million,
respectively, of loans to finance the purchase of vehicles.
These loans are generally collateralized by the related
property. As of December 31, 1994 and 1993, the real estate
mortgage portfolio included approximately $21 million of
residential mortgage loans secured by 1-4 family properties.
NBB has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally
collateralized by the related property and with loan amounts
established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval is
primarily a function of collateral and the evaluation of the
creditworthiness of the individual borrower or project based on
available financial information.
F-24
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Note 19 The estimated fair values of Bankshares' financial
Fair Value of instruments at December 31, 1994 and 1993 are as follows:
Financial
Instruments
<TABLE>
<CAPTION>
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
($ in thousands)
Financial assets:
Cash and due from banks $ 6,648 6,648 4,177 4,177
Federal funds sold 1,400 1,400 2,620 2,620
Securities 69,503 67,930 62,518 64,672
Mortgage loans held for sale 392 392 1,752 1,752
Loans, net 113,718 113,019 110,217 113,347
-------- -------- ------- -------
Total financial assets $191,661 189,389 181,284 186,568
======== ======= ======= =======
Financial liabilities: 178,636 176,376 167,702 168,328
Deposits -------- ------- ------- -------
Total financial liabilities $178,636 176,376 167,702 168,328
======== ======= ======= =======
</TABLE>
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at
one time Bankshares' entire holdings of a particular financial
instrument. Because no market exists for a significant portion
of Bankshares' financial instruments, fair value estimates are
based on judgements regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect
these estimates.
Fair value estimates are based on existing on-and off-
balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. Significant assets that are not considered
financial assets include deferred tax assets and bank premises
and equipment. In addition, the tax ramifications related to
the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in the estimates.
Note 20 On November 23, 1993, NBB entered into an agreement to
Purchase purchase the deposits and certain fixed assets of the Pembroke
Transaction Office of First Union National Bank of Virginia. Settlement of
this purchase agreement occurred on April 16, 1994, with the
assumption of $14,514 in total deposits and $33 in accrued
interest payable. In conjunction with this purchase, deposit
intangibles of $908 are being amortized on a straight-line
basis over a ten-year period and goodwill of $447 is being
amortized on a straight-line basis over a fifteen-year period.
Note 21 The Financial Accounting Standards Board (FASB) has
Future issued SFAS No. 114, "Accounting by Creditors for Impairment
Accounting of a Loan." SFAS No. 114 requires that certain loans which
Considerations have been determined to be impaired be measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at
the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 114
also requires creditors to evaluate the collectibility of both
contractual interest and contractual principal of all
receivables when assessing the need for a loss accrual.
F-25
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
In October 1994, the FASB issued SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." SFAS No. 118 amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest
income on an impaired loan. To accomplish that, SFAS No. 118
eliminates the provisions in SFAS No. 114 that described how a
creditor should report income on an impaired loan. SFAS No. 118
does not change the provisions in SFAS No. 114 that required a
creditor to measure impairment based on the present value of
expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable
market price of the loan or the fair value of the collateral if
the loan is collateral dependent. SFAS No. 118 amends the
disclosure requirements in SFAS No. 114 to require information
about the recorded investment in certain impaired loans and
about how a creditor recognizes interest income related to
those impaired loans.
SFAS No. 118 is effective concurrent with the effective
date of SFAS No. 114. The mandatory adoption date of SFAS No.
114 and SFAS No. 118 by Bankshares is January 1, 1995 and,
consistent with the requirements of SFAS No. 114, they will be
adopted by Bankshares on a prospective basis. Bankshares did
not elect early adoption of SFAS No. 114 and SFAS No. 118, and
anticipates that the effects of adoption will not materially
impact its consolidated financial statements.
------------------------------------------------------
F-26
<PAGE>
National Bankshares, Inc.
Consolidated Balance Sheets
September 30, 1995 (Unaudited) and December 31, 1994
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) $ 5,381 6,648
Federal funds sold 4,610 1,400
Securities available for sale, at fair value (note 3) 12,854 12,114
Securities held to maturity at amortized cost (fair value
$53,832 in 1995 and $55,816 in 1994) (note 3) 53,105 57,389
Mortgage loans held for sale (note 4) 1,318 392
Loans:
Real estate 7,919 5,543
Real estate mortgage loans 30,841 30,212
Commercial and industrial loans 38,212 35,984
Loans to individuals 48,502 45,767
-------- -------
Total loans 125,474 117,506
Less unearned income on loans (1,811) (1,782)
-------- -------
Loans, net of unearned income 123,663 115,724
Less allowance for loan losses (note 5) (2,105) (2,006)
-------- -------
Loans, net 121,558 113,718
-------- -------
Bank premises and equipment, net 2,670 2,762
Accrued interest receivable 1,909 1,698
Other real estate owned, net (note 6) 946 1,083
Other assets (notes 7 and 8) 2,329 2,523
-------- -------
Total assets $206,680 199,727
======== =======
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
($ in thousands) September 30, December 31,
1995 1994
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 24,507 23,816
Interest-bearing deposits 57,446 59,794
Savings deposits 16,038 19,257
Time deposits (note 9) 85,161 75,769
------------ -----------
Total deposits 183,152 178,636
------------ -----------
Accrued interest payable 242 225
Other liabilities 1,029 729
------------ -----------
Total liabilities 184,423 179,590
------------ -----------
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
5,000,000 shares; issued and outstanding
1,714,152 4,285 4,285
Surplus 1,187 1,187
Undivided profits 16,722 14,791
Net unrealized gains (losses) on
securities available for sale 63 (126)
------------ -----------
Total stockholders' equity 22,257 20,137
------------ -----------
Total liabilities and
stockholders' equity $206,680 199,727
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Income
Three Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,079 2,655
Interest on federal funds sold 57 4
Interest on securities-taxable 676 799
Interest on securities-nontaxable 326 333
------ ------
Total interest income 4,138 3,791
------ ------
INTEREST EXPENSE
Interest on time certificates of deposit of
$100,000 or more 145 107
Interest on other deposits 1,607 1,303
Interest on federal funds purchased 2 15
------ ------
Total interest expense 1,754 1,425
------ ------
Net interest income 2,384 2,366
Provision for loan losses (note 5) 85 150
------ ------
Net interest income after provision
for loan losses 2,299 2,216
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 175 162
Other service charges and fees 43 49
Credit card fees 117 90
Trust income 95 81
Other income 13 4
Realized securities gains, net --- 2
------ ------
Total noninterest income 443 388
------ ------
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
---- ----
<S> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits $ 789 765
Occupancy and furniture and fixtures 132 138
Data processing and ATM 87 83
FDIC assessment 71 97
Credit card processing 104 86
Goodwill amortization 7 7
Net costs of other real estate owned 54 3
Other operating expense 395 386
------ -----
Total noninterest expense 1,639 1,565
------ -----
Income before income tax expense 1,103 1,039
Income tax expense (note 7) 276 236
------ -----
Net income $ 827 803
====== =====
Net income per share $0.48 0.47
====== =====
Average shares (in thousands) 1,714 1,710
====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Income
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,754 7,532
Interest on federal funds sold 152 115
Interest on securities-taxable 2,014 2,204
Interest on securities-nontaxable 988 904
-------- --------
Total interest income 11,908 10,755
-------- --------
INTEREST EXPENSE
Interest on time certificates of deposit
of $100,000 or more 387 320
Interest on other deposits 4,550 3,822
Interest on federal funds purchased 4 15
-------- --------
Total interest expense 4,941 4,157
-------- --------
Net interest income 6,967 6,598
Provision for loan losses (note 5) 225 380
-------- --------
Net interest income after provision
for loan losses 6,742 6,218
-------- --------
NONINTEREST INCOME
Service charges on deposit accounts 528 495
Other service charges and fees 118 123
Credit card fees 330 275
Trust income 271 325
Other income 31 17
Realized securities gains (losses), net (1) 7
-------- --------
Total noninterest income 1,277 1,242
-------- --------
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
---- ----
<S> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits $ 2,359 2,204
Occupancy and furniture and fixtures 400 421
Data processing and ATM 272 244
FDIC assessment 271 290
Credit card processing 306 250
Goodwill amortization 22 12
Net costs of other real estate owned 85 29
Other operating expense 1,106 1,069
--------- --------
Total noninterest expense 4,821 4,519
--------- --------
Income before income tax expense 3,198 2,941
Income tax expense (note 7) 753 672
--------- --------
Net income $ 2,445 2,269
========= ========
Net income per share $ 1.43 1.33
========= ========
Average shares (in thousands) 1,714 1,710
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Securities
Common Undivided Available
($ in thousands) Stock Surplus Profits For Sale Total
------- ------- --------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $4,274 1,112 12,868 --- 18,254
Cumulative effect of change
in accounting for
securities available for
sale at January 1, 1994,
net of income taxes of
$141 --- --- --- 273 273
Net income --- --- 2,269 --- 2,269
Cash dividends ($.27 per
share) --- --- (462) --- (462)
Change in net unrealized
(losses) on securities
available for sale, net of
income tax benefit of $160 --- --- --- (310) (310)
------- ------ -------- ------- -------
Balances, September 30,
1994 $4,274 1,112 14,675 (37) 20,024
======= ====== ======== ======= =======
Balances, December 31, 1994 4,285 1,187 14,791 (126) 20,137
Net income --- --- 2,445 --- 2,445
Cash dividends ($.30 per
share) --- --- (514) --- (514)
Change in net unrealized
gains on securities
available for sale, net
of income taxes of $97 --- --- --- 189 189
------- ------ -------- ------- -------
Balances, September 30,
1995 $4,285 1,187 16,722 63 22,257
======= ====== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
National Bankshares, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (note 11)
Net income $2,445 2,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 225 380
Provision for deferred income taxes (119) ---
Depreciation of bank premises and equipment 288 300
Amortization of intangibles 116 83
Amortization of premiums and accretion of
discounts, net 42 113
Gain on bank premises and equipment
disposals (8) ---
Loss on maturities of securities available
for sale, net 3 ---
Gain on calls of securities held to
maturity, net (2) (7)
Net decrease (increase) in mortgage loans
held for sale (926) 1,491
Losses and write-downs on other real estate
owned 49 5
(Increase) decrease in:
Accrued interest receivable (211) (367)
Other assets 100 (264)
Increase (decrease) in:
Accrued interest payable 17 (6)
Other liabilities 300 (72)
------ ------
Net cash provided by operating
activities 2,319 3,925
------ ------
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (note 11)
Net increase (decrease) in money market
investments $(3,210) 1,725
Proceeds from calls and maturities of securities
available for sale 4,021 5,293
Proceeds from calls and maturities of securities
held to maturity 10,183 2,926
Purchases of securities available for sale (4,492) (988)
Purchases of securities held to maturity (5,925) (18,616)
Net increase in loans made to customers (8,118) (3,063)
Proceeds from disposal of other real estate owned 88 62
Recoveries on loans charged off 53 38
Bank premises and equipment expenditures (197) (406)
Proceeds from sale of bank premises and equipment 9 1
------- -------
Net cash used in investing
activities (7,588) (13,028)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES (note 11)
Deposits assumed, net of premium paid --- 13,159
Net increase in time deposits 9,392 3,283
Net decrease in other deposits (4,876) (6,059)
Cash dividends paid (514) (462)
------- -------
Net cash provided by financing
activities 4,002 9,921
------- -------
Net increase (decrease) in cash and due from
banks (1,267) 818
Cash and due from banks at beginning of year 6,648 4,177
------- -------
Cash and due from banks at end of period $ 5,381 4,995
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
September 30, 1995 and 1994 (Unaudited) and December 31, 1994
($ in thousands)
1. GENERAL
-------
The consolidated financial statements of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiary, The National Bank of
Blacksburg (NBB), conform to generally accepted accounting principles 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 months and nine months ended September 30, 1995 are not necessarily
indicative of results of operations for the full year or any other interim
period. The interim period consolidated financial statements and notes
included herein should be read in conjunction with the notes to consolidated
financial statements included in the Corporation's 1994 Annual Report to
Stockholders.
2. CASH EQUIVALENTS
----------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks.
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
--------------------------------------------------
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
September 30, 1995 and December 31, 1994 are as follows:
<TABLE>
<CAPTION>
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ 2,502 10 (7) 2,505
U.S. Government agencies and
corporations 7,690 99 (3) 7,786
Mortgage-backed securities 240 5 --- 245
Other securities 2,327 20 (29) 2,318
-------- --- ---- ------
Total securities available
for sale $ 12,759 134 (39) 12,854
======== === ==== ======
</TABLE>
F-36
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ 3,516 1 (61) 3,456
U.S. Government agencies and
corporations 6,936 7 (68) 6,875
Mortgage-backed securities 261 --- (15) 246
Other securities 1,592 --- (55) 1,537
------- --- ----- ------
Total securities available
for sale $12,305 8 (199) 12,114
------- --- ----- ------
</TABLE>
The amortized costs and fair values of securities available for sale at
September 30, 1995 and December 31, 1994, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,505 5,521 3,553 3,513
Due in one year through five years 3,990 4,008 6,985 6,845
Due in five years through ten years 3,048 3,109 1,552 1,541
Due after ten years 85 85 82 82
No maturity 131 131 133 133
------- ------ ------ ------
Total securities held to
maturity $12,759 12,854 12,305 12,114
======= ====== ====== ======
</TABLE>
F-37
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities held to maturity by major security type as of September
30, 1995 and December 31, 1994 are as follows:
<TABLE>
<CAPTION>
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 6,757 47 (40) 6,764
U.S. Government agencies
and corporations 10,116 179 (8) 10,287
States and political subdivisions 28,345 576 (77) 28,844
Mortgage-backed securities 1,017 31 --- 1,048
Other 6,870 57 (38) 6,889
------- ------ ------- ------
Total securities held to
maturity $53,105 890 (163) 53,832
======= ====== ======= ======
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury 9,722 44 (219) 9,547
U.S. Government agencies
and corporations 14,073 20 (296) 13,797
States and political subdivisions 26,073 212 (1,091) 25,194
Mortgage-backed securities 1,147 8 (17) 1,138
Other 6,374 14 (248) 6,140
------- ------ ------- ------
Total securities held to
maturity $57,389 298 (1,871) 55,816
======= ====== ======= ======
</TABLE>
The amortized costs and fair values of securities held to maturity at September
30, 1995 and December 31, 1994, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
F-38
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Due in one year or less $10,847 10,898 10,998 11,006
Due in one year through five years 22,716 23,022 28,749 28,085
Due in five years through ten years 17,354 17,670 15,645 14,820
Due after ten years 2,188 2,242 1,997 1,905
------- ------ ------ ------
Total securities held to
maturity $53,105 53,832 57,389 55,816
======= ====== ====== ======
</TABLE>
4. MORTGAGE BANKING ACTIVITIES
---------------------------
NBB originates mortgage loans for sale to secondary market investors subject
to contractually specified and limited recourse provisions. Every contract
with each investor contains certain recourse language. In general, NBB may
be required to repurchase a previously sold mortgage loan if there is major
noncompliance with defined loan origination or documentation standards,
including fraud, negligence or material misstatement in the loan documents.
Repurchase may also be required if necessary governmental loan guarantees
are canceled or never issued, or if an investor is forced to buy back a loan
after it has been resold as a part of a loan pool. In addition, NBB may have
an obligation to repurchase a loan if the mortgagor has defaulted early in
the loan term. This potential default period ranges from four to sixteen
months after sale of a loan to the investor.
Mortgage loans held for sale are carried at the lower of cost or fair value.
For the nine months ended September 30, 1995, NBB originated $11,475 and
sold $10,549 in mortgage loans to investors.
5. ALLOWANCE FOR LOAN LOSSES
-------------------------
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, beginning of period $2,084 2,098 2,006 2,038
Provision for loan losses 85 150 225 380
Recoveries 17 11 53 38
Loans charged off (81) (207) (179) (404)
------- ------ ------ ------
Balance, end of period $2,105 2,052 2,105 2,052
======= ====== ====== ======
</TABLE>
F-39
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
6. IMPAIRED LOANS AND NONPERFORMING ASSETS
---------------------------------------
Effective January 1, 1995, Bankshares adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114
requires that certain loans which have been determined to be impaired be
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. SFAS No. 114 also required creditors to
evaluate the collectibility of both contractual interest and contractual
principal of all receivables when assessing the need for a loss accrual. In
addition, SFAS No. 114 eliminates the requirement that a creditor account
for certain loans as foreclosed assets prior to the time the creditor has
taken possession of the underlying collateral, resulting in the
reclassification of in-substance foreclosures from foreclosed properties to
loans.
SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. To accomplish that,
SFAS No. 118 eliminates the provisions in SFAS No. 114 that described how a
creditor should report income on an impaired loan. SFAS No. 118 does not
change the provisions in SFAS No. 114 that required a creditor to measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of
the collateral if the loan is collateral dependent. SFAS No. 118 amends the
disclosure requirements in SFAS No. 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans.
SFAS No. 114 does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. For Bankshares, loans
collectively reviewed for impairment include all consumer loans, single
family loans and performing multi-family and nonresidential real estate
loans, excluding loans which have entered into the "workout process."
Bankshares considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Bankshares will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Bankshares' impaired loans within the scope of SFAS No. 114
include nonaccrual loans (excluding those collectively reviewed for
impairment), troubled debt restructurings and certain other nonperforming
loans. For collateral dependent loans, Bankshares based the measurement of
these impaired loans on the fair value of the loan's underlying collateral.
For all other loans, Bankshares bases the measurement of these impaired
loans on the more readily determinable of the present value of expected
future cash flows discounted at the loan's effective interest rate or the
observable market price. Impairment losses are recognized through an
increase in the allowance for loan losses and a corresponding charge to the
provision for loan losses. Adjustments to impairment losses due to changes
in the fair value of impaired loans' underlying collateral are included in
the provision for loan losses. When an impaired loan is either sold,
transferred to foreclosed properties or written down, any related valuation
allowance is charged off against the allowance for loan losses.
The adoption of SFAS No. 114, as amended by SFAS No. 118, did not have a
material impact on Bankshares' consolidated financial statements due to
Bankshares' continuing policy of measuring loan impairment based on the fair
value of the underlying collateral which is consistent with the methods
prescribed in SFAS No. 114. In addition, Bankshares had previously
reclassified in-substance foreclosures from other real estate owned to loans
as of December 31, 1993 as prescribed by SFAS No. 114; therefore, no further
reclassification from other real estate owned to loans was required upon
adoption.
F-40
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
As of September 30, 1995, the recorded investment in impaired loans was
$420 and the amount of the related allowance for loan losses was $263 for a
net investment of $157.
During the nine months ended September 30, 1995, the average recorded
investment in impaired loans was $420, and there was no related amount of
interest income recognized during the time within that period that the
loans were impaired.
The following table presents information concerning nonperforming assets.
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994
------------- ------------
<S> <C> <C>
Nonaccrual loans $ 420 420
Restructured loans --- 229
------ -----
Total nonperforming loans 420 649
Other real estate owned, net 946 1,083
------ -----
Total nonperforming assets $1,366 1,732
====== =====
Loans contractually past due 90
days or more (excludes non-
accrual loans) $ 191 219
====== =====
</TABLE>
Loans are generally placed in nonaccrual status when the collection of
principal or interest is 90 days or more past due, unless the obligation is
both well-secured and in the process of collection.
The following table shows the interest that would have been earned on
nonaccrual and restructured loans if they had been current in accordance
with their original terms and the recorded interest that was earned and
included in income on these loans:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
($ in thousands) 1995 1994
------ ------
<S> <C> <C>
Scheduled interest:
Nonaccrual loans $ 32 28
Restructured loans --- 14
------ ------
Total scheduled interest $ 32 42
====== ======
Recorded interest:
Nonaccrual loans $ --- ---
Restructured loans --- 3
------ ------
Total recorded interest $ --- 3
====== ======
</TABLE>
F-41
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
Other real estate, acquired through foreclosure or deed in lieu of
foreclosure, is carried at the lower of the recorded investment or its fair
value, less estimated costs to sell (net realizable value). When the
property is acquired, any excess of the loan balance over net realizable
value is charged to the allowance for loan losses. Increases or decreases
in the net realizable value of such properties are credited or charged to
income by adjusting the valuation allowance for other real estate owned.
Net costs of maintaining or operating foreclosed properties are expensed as
incurred.
Changes in the valuation allowance for other real estate owned are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balances, beginning of period $ 49 49 49 49
Provision for other real estate owned 49 --- 49 ---
------ ------ ------ ------
Balances, end of period $ 98 49 98 49
====== ====== ====== ======
</TABLE>
7. INCOME TAXES
------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1995 are presented below:
<TABLE>
<CAPTION>
September 30,
($ in thousands) 1995
<S> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 545
Other real estate owned, principally due to valuation 26
allowance
Deferred compensation, due to accrual for financial
reporting purposes 169
Deposit intangibles and goodwill 26
Nonaccrual interest on loans 4
-----
Total gross deferred tax assets 770
Less valuation allowance ---
-----
Net deferred tax assets 770
Deferred tax liabilities:
Net unrealized gains on securities available for sale (32)
Bank premises and equipment, principally due to
differences in depreciation (17)
Securities, due to differences in discount accretion (31)
Prepaid expenses and other assets (28)
-----
Total gross deferred liabilities (108)
-----
Net deferred tax asset included in other assets $ 662
=====
</TABLE>
F-42
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
The effective tax rate and the components of income tax expense do not
differ significantly from such amounts disclosed in prior periods.
Bankshares has determined that a valuation allowance for the gross deferred
tax assets is not necessary at September 30, 1995 due to the fact that the
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current
tax laws.
<TABLE>
<CAPTION>
Total income taxes are allocated as follows:
Nine Months Ended
September 30,
($ in thousands) 1995 1994
---- ----
<S> <C> <C>
Income $753 672
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial reporting
purposes 97 (19)
---- ----
Total income taxes $850 653
==== ====
</TABLE>
8. INTANGIBLE ASSETS
-----------------
Included in other assets are deposit intangibles, net of amortization, of
$778 and $872 at September 30, 1995 and December 31, 1994, respectively, and
goodwill, net of amortization, of $405 and $427 at September 30, 1995 and
December 31, 1994, respectively. Deposit intangibles are being amortized on
a straight-line basis over a ten-year period and goodwill is being amortized
on a straight-line basis over a fifteen-year period.
9. TIME DEPOSITS
-------------
Included in time deposits are certificates of deposit and other time
deposits of $100,000 or more in the aggregate amounts of $12,659 at
September 30, 1995 and $10,726 at December 31, 1994.
10. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
In the normal course of business, there are various commitments and
contingent liabilities such as commitments to extend credit which are not
reflected in the accompanying consolidated financial statements. No losses
are anticipated by management as a result of these transactions. Commitments
under standby letters of credit at September 30, 1995 were $1,943 and at
December 31, 1994, $3,117.
11. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Bankshares paid $4,924 and $4,163 for interest and $671 and $859 for income
taxes, net of refunds, at September 30, 1995 and September 30, 1994,
respectively. Noncash investing activities consisted of $179 and $404 of
loans charged against the allowance for loan losses for the periods ended
September 30, 1995 and September 30, 1994, respectively, and $95 of net
unrealized gains included in securities available for sale for
F-43
<PAGE>
National Bankshares, Inc.
Notes to Consolidated Financial Statements
the period ended September 30, 1995 and $56 of net unrealized losses
included in securities available for sale for the period ended September
30, 1994. There were no foreclosed loans transferred into other real estate
owned for the period ended September 30, 1995 as compared to $297
transferred for the period ended September 30, 1994.
--------------------------------------------------
F-44
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
of Bank of Tazewell County:
We have audited the accompanying balance sheets of Bank of Tazewell
County as of December 31, 1994 and 1993, and the related statements of
earnings, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1994. These financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Bank of
Tazewell County as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
COOK ASSOCIATES, LLP
Richlands, Virginia
January 24, 1995
(except for Note 16
as to which the date
is November 9, 1995)
F-45
<PAGE>
Bank of Tazewell County
Balance Sheets
December 31, 1994 and 1993
ASSETS
<TABLE>
<CAPTION>
($ in thousands) 1994 1993
------ ------
<S> <C> <C>
Cash and cash equivalents (note 2) $ 10,986 $ 15,081
Securities held to maturity (note 3) 90,623 97,119
Securities available for sale (note 3) 24,105 15,327
Trading account securities - -
Loans - less allowance for loan losses of $545
and $545, respectively (note 4) 42,571 39,939
Bank premises and equipment (note 5) 1,960 1,470
Other assets (note 6) 3,160 2,143
-------- --------
TOTAL ASSETS $173,405 $171,079
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits non-interest bearing 15,518 16,283
Deposits interest bearing ($100 and over
$25,371 and $15,605, respectively) 133,532 130,016
-------- --------
Total deposits 149,050 146,299
Accrued interest 349 343
Other liabilities (note 7) 1,485 1,740
-------- --------
TOTAL LIABILITIES 150,884 148,382
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock:
Par value $1 per share, 6,000,000 shares
authorized, 1,888,209 issued and outstanding
in 1994 after 200% stock dividend and 629,403 in
1993 after 10% stock dividend 1,888 629
Paid-in capital 2,000 2,000
Retained earnings 20,258 20,106
Net unrealized depreciation on investment
securities available for sale, net of
tax $837 and $19 in 1994 and 1993 (1,625) (38)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 22,521 22,697
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $173,405 $171,079
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-46
<PAGE>
Bank of Tazewell County
Statements of Earnings
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
($ in thousands) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,557 $ 3,758 $ 4,104
Interest on deposits with banks - - 114
Interest from securities 7,648 7,369 7,609
Interest on federal funds sold 295 257 327
Interest on trading account securities - 15 103
------- ------- -------
Total Interest Income 11,500 11,399 12,257
------- ------- -------
INTEREST EXPENSE
Interest on certificates of deposit over $100 778 562 812
Interest on other deposits 4,231 4,350 5,079
Interest on demand notes issued to U.S. Treasury 20 17 26
------- ------- -------
Total interest expense 5,029 4,929 5,917
------- ------- -------
Net interest income 6,471 6,470 6,340
Provision for loan losses (note 4) 13 23 148
------- ------- -------
Net interest income after provision for loan
losses 6,458 6,447 6,192
------- ------- -------
OTHER INCOME
Trading account profit - 23 98
Income from fiduciary activities 98 61 66
Securities gains (losses), net 6 27 (496)
Other operating income (note 8) 336 747 406
------- ------- -------
Total other income 440 858 74
------- ------- -------
OTHER EXPENSE
Salaries, wages and other employee benefits 1,818 1,749 1,626
Occupancy expense of bank premises 160 153 145
Furniture and equipment expense 218 205 159
Other operating expenses 1,371 1,040 1,066
------- ------- -------
Total other expense 3,567 3,147 2,996
------- ------- -------
Earnings before income taxes 3,331 4,158 3,270
Provisions for income taxes (note 10) 944 1,186 879
------- ------- -------
Net earnings $ 2,387 $ 2,972 $ 2,391
======= ======= =======
Net earnings per share $ 1.26 $ 1.57 $ 1.27
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-47
<PAGE>
Bank of Tazewell County
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized
Loss On
Common Stock Securities
------------ Paid-In Available Retained
($ in thousands) Shares Par Value Capital for Sale Earnings Total
------ --------- ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Year ended 1992:
December 31, 1991 572 $572 $2,000 $ (-) $16,655 $19,227
Net income for 1992 --- --- --- --- 2,391 2,391
Cash dividends $1.55
per share --- --- --- --- (887) (887)
------ ------ ------- ------- -------- --------
Balance:
December 31, 1992 572 $572 $2,000 $ (-) $18,159 $20,731
====== ====== ======= ======= ======== ========
Year ended 1993
December 31, 1992 572 $572 $2,000 $ (-) $18,159 $20,731
Net income for 1993 - - - - 2,972 2,972
Cash dividends
$.80 per share on
572,330 shares - - - - (458) (458)
$.80 per share on
629,403 shares - - - - (504) (504)
10% stock dividend 57 57 (57) -
Purchase of 160
fractional shares at
$3.80 per tenth of
a share - - - - (6) (6)
Unrealized loss on
investment
securities
available for sale - - - (38) - (38)
------ ------ ------- ------- -------- --------
Balance:
December 31, 1993 629 $629 $2,000 $ (38) $20,106 $22,697
====== ====== ======= ======= ======== ========
</TABLE>
F-48
<PAGE>
<TABLE>
<CAPTION>
Unrealized
Loss On
Common Stock Securities
------------ Paid-In Available Retained
($ in thousands) Shares Par Value Capital for Sale Earnings Total
------ --------- ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Year ended 1994
December 31, 1993 629 $ 629 $2,000 (38) $20,106 $22,697
Net income 2,387 2,387
Cash dividends
$1.55 per share - - - - (976) (976)
Unrealized loss on
investment
securities
available for sale - - - (1,587) - (1,587)
200% stock dividend 1,259 1,259 - - (1,259) -
------ ------- ------- -------- -------- --------
Balance:
December 31, 1994 1,888 $1,888 $2,000 $(1,625) $20,258 $22,521
====== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
Bank of Tazewell County
Statements of Cash Flows
Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
($ in thousands) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Operating activities:
Net earnings $ 2,387 $ 2,972 $ 2,391
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation 144 132 73
Provision for loan losses 13 23 148
Accretion of investment securities
discounts (89) (72) (39)
Net (gain) loss on sale of securities (6) (50) 330
(Increase) in prepaid expenses (105) (2) (43)
(Increase)/decrease in deferred tax
credits (810) 32 57
(Increase)/decrease in interest
receivable (119) 2 (452)
Increase/(decrease) in interest
payable 6 (54) 92
Decrease in other accrued expenses (255) (186) -
-------- -------- --------
NET CASH PROVIDED BY OPERATIONS 1,166 2,797 2,557
-------- -------- --------
Investing Activities:
Proceeds from sales and maturities of
trading and investment securities 27,435 40,792 39,525
Purchase of trading and investment
securities (30,806) (48,125) (41,943)
Capital expenditures (637) (299) (425)
Net (increase)/decrease in loans (2,632) 4,576 (1,784)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,640) (3,056) (4,627)
-------- -------- --------
Financing activities:
Net increase/(decrease) in deposit
accounts 2,751 (908) 3,497
Net (decrease)/increase in short term
borrowings (397) 174 275
Dividends paid (975) (944) (830)
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,379 (1,678) 2,942
-------- -------- --------
</TABLE>
F-50
<PAGE>
<TABLE>
<S> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS $ (4,095) $ (1,937) $ 872
Cash and cash equivalents at beginning
of year 15,081 17,018 16,146
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 10,986 $ 15,081 $ 17,018
======== ======== ========
Supplemental Disclosures:
Cash paid during the years for:
Interest on deposits $ 5,023 $ 4,984 $ 6,312
======== ======== ========
Income taxes $ 1,000 $ 1,197 $ 850
======== ======== ========
Transfers from loans to real estate
acquired through foreclosure $ 12 $ - $ 43
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
Years Ended December 31, 1994, 1993 and 1992
($ in thousands)
1. THE SIGNIFICANT ACCOUNTING POLICIES OF BANK OF TAZEWELL COUNTY ARE AS
FOLLOWS: (CONTINUED)
ORGANIZATION
The Bank of Tazewell County is a state bank located in Tazewell, Virginia
with branches in Bluefield, Virginia. The majority of the Bank's operations
are conducted within Tazewell County.
INVESTMENTS IN SECURITIES
The Bank's investments in securities are classified in three categories and
accounted for as follows.
Trading Securities
------------------
Government bonds held principally for resale in the near term are
classified as trading securities and recorded at their fair values.
Realized and unrealized gains and losses on trading securities are
included in other income.
Securities to be Held to Maturity
---------------------------------
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for
amortization of premiums, and accretion of discounts which are recognized
in interest income using the interest method over the period to maturity.
Securities Available for Sale
-----------------------------
Securities available for sale consist of bonds, notes, debentures and
certain equity securities not classified as trading securities or as
securities to be held to maturity.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary have resulted
in write-downs of the individual securities to their fair value. The related
write-downs have been included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific identification method.
LOANS
Loans are stated at the amount of unpaid principal, reduced by any unearned
discount included and an allowance for credit losses. Interest income on
commercial and real estate loans is credited to operations based upon the
principal amount outstanding. Interest income on installment loans is accrued
and credited to operating income on the sum-of-the-digits method over the
life of each loan. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful.
F-52
<PAGE>
Bank Of Tazewell County
Notes to Financial Statements
($ in thousands)
1. THE SIGNIFICANT ACCOUNTING POLICIES OF BANK OF TAZEWELL COUNTY ARE AS
FOLLOWS: (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans, and other pertinent
factors. Credits deemed uncollectible are charged to the allowance.
Provisions for loan losses and recoveries on loans previously charged off are
added to the allowance.
BANK PREMISES AND EQUIPMENT
Land is stated at cost. Bank premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line and
declining balance methods over the useful lives of the assets, which range
from five to forty years. The costs of major improvements are capitalized.
The expenditures for maintenance and repairs are charged to expense as
incurred. Gains or losses on assets sold are included in other operating
income and appropriate adjustments are made to the accumulated depreciation
account.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the statement of
income (after exclusion of nontaxable income such as interest on state and
municipal securities) and include deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement
purposes. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled as prescribed in SFAS No. 109, "Accounting for Income Taxes." As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
PENSION COSTS
The Bank maintains a noncontributory, trusteed pension plan for the benefit
of eligible employees meeting certain service and age requirements. It is the
Bank's policy to fund accrued pension cost. Prior service costs are being
amortized over ten years.
TRUST ASSETS AND INCOME
Assets held by Bank of Tazewell County in a fiduciary or agency capacity for
its customers are not included in the Balance Sheets since such items are not
assets of the Bank. Trust Department income is recognized on the cash basis
of accounting which in this instance is not materially different from
reporting on the accrual basis of accounting.
CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Bank considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments as disclosed herein:
CASH AND CASH EQUIVALENTS
-------------------------
The carrying amounts of cash and short-term instruments approximate their
fair value.
F-53
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
1. THE SIGNIFICANT ACCOUNTING POLICIES OF BANK OF TAZEWELL COUNTY ARE AS
FOLLOWS: (CONCLUDED)
Trading Securities
------------------
Fair values for trading account securities which also are the amounts
recognized in the balance sheet, are based on quoted market prices,
where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments
except in the case of certain options and swaps where pricing models
are used.
Securities to be Held to Maturity and Securities Available for Sale
-------------------------------------------------------------------
Fair values for investment securities, excluding restricted equity
securities, are based on quoted market prices. The carrying values of
restricted equity securities approximate fair values.
Loans Receivable
----------------
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for real estate and commercial loans are estimated
using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrower of similar
credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
Deposit Liabilities
-------------------
The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is,
their carrying amounts). The carrying amounts of variable-rate, fixed-
term money market accounts and certificates of deposit approximate
their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities
on time deposits.
2. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS:
The bank is required to maintain an average reserve balance with the Federal
Reserve Bank. The average amount of the reserve balance was approximately
$148 at December 31, 1994, 1993 and 1992.
3. INVESTMENT SECURITIES: (CONTINUED)
The carrying amounts of investment securities as shown in the consolidated
balance sheets of the Bank and their approximate full values at December
31 were as follows:
F-54
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
($ in thousands) Costs Gains Losses Values
----------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Securities available for sale:
December 31, 1994:
U.S. Government and agency
securities $ 26,473 $ 10 $ 2,479 $ 24,004
Equity securities 15 7 - 22
Other securities 79 - - 79
---------- -------- -------- ----------
$ 26,567 $ 17 $ 2,479 $ 24,105
========== ======== ======== ==========
December 31, 1993:
U.S. Government and agency
securities $ 15,290 $ 9 $ 71 $ 15,228
Equity securities 15 5 - 20
Other securities 79 - - 79
--------- -------- --------- ----------
$ 15,384 $ 14 $ 71 $ 15,327
========= ======== ========= ==========
Securities to be held to maturity:
December 31, 1994:
U.S. Government and agency
securities $ 77,714 $ 104 $ 2,479 $ 75,339
State and municipal securities 12,409 203 864 11,748
Corporate securities 500 - 3 479
--------- -------- --------- ----------
$ 90,623 $ 307 $ 3,346 $ 87,584
========= ======== ========= ==========
December 31, 1993:
U.S. Government and agency
securities $ 82,798 $ 2,846 $ 175 $ 85,469
State and municipal securities 12,821 1,019 276 13,564
Corporate securities 1,500 18 1 1,517
--------- -------- --------- ----------
$ 97,119 $ 3,883 $ 452 $100,550
========= ======== ========= ==========
</TABLE>
Assets principally securities, carried at approximately $11,545 at December 31,
1994 and $11,526 at December 31, 1993 were pledged to secure public deposits and
for other purposes required or permitted by law.
F-55
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
3. INVESTMENT SECURITIES: (CONCLUDED)
The scheduled maturities of securities to be held to maturity and securities
available for sale at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Securities To Be Securities
Held To Maturity Available For Sale
------------------------ --------------------
<S> <C> <C> <C> <C>
Amortized Fair Amortized Fair
Costs Values Costs Values
---------- --------- ---------- --------
Due in one year or less $ 5,701 $ 5,735 $ 595 $ 590
Due from one year to five
years 67,208 65,075 16,904 15,430
Due from five years
through ten years 17,331 16,364 4,972 4,352
Due after ten years 383 410 4,096 3,733
--------- --------- --------- ---------
$ 90,623 $ 87,584 $ 26,567 $ 24,105
========= ========= ========= =========
</TABLE>
4. LOANS AND ALLOWANCE FOR LOAN LOSSES: (CONTINUED)
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Commercial $ 8,272 $ 7,121
Mortgage 29,020 27,942
Consumer 6,545 6,149
--------- ---------
43,837 41,212
Unearned discount 721 728
--------- ---------
43,116 40,484
Allowance for loan losses 545 545
--------- ---------
Loans, net $ 42,571 $ 39,939
========= =========
</TABLE>
Loans on which the accrual of interest has been discontinued or reduced,
amounted to $-0-, $17 and $10 at December 31, 1994, 1993 and 1992, respectively.
If interest and those loans had been accrued, such income would have
approximated $1 for 1994, 1993 and 1992, respectively. Interest income on those
loans, which is recorded only when received, amounted to $1 for 1993 and 1992.
F-56
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
4. LOANS AND ALLOWANCE FOR LOAN LOSSES: (CONTINUED)
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Balance, beginning of year $ 545 $ 545
Provision for loan losses 13 23
Recoveries of loans previously
charged off 2 5
Loans charged to allowance (15) (28)
------- -------
Balance, end of period $ 545 $ 545
======= =======
</TABLE>
5. BANK PREMISES AND EQUIPMENT:
The major categories of these assets are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Land $ 357 $ 359
Building and improvements 1,816 1,417
Furniture, fixtures and equipment 1,318 1,080
------ ------
3,491 2,856
Less accumulated depreciation 1,531 1,386
------ ------
$1,960 $1,470
====== ======
</TABLE>
Depreciation charged to operating expense amount to $144, $132 and $74 in 1994,
1993 and 1992, respectively.
6. OTHER ASSETS:
The components of the Bank's other assets were as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Interest receivable $ 2,011 $ 1,919
Prepaid expenses 158 93
Repossessions 4 -
Other real estate 67 41
Buckhorn Coal Company 4 4
Prepaid income tax 83 44
Deferred tax credits 833 42
-------- --------
Total other assets $ 3,160 $ 2,143
======== ========
</TABLE>
F-57
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
7. OTHER LIABILITIES:
The components of the Bank's other liabilities were as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Dividends payable $ 504 $ 504
Notes payable, U.S. Treasury 791 1,188
Other 190 48
-------- --------
Total other liabilities $1,485 $1,740
======== ========
</TABLE>
8. OTHER OPERATING INCOME:
The components of the Bank's other operating income were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Service charges on deposit accounts and
safe deposit box rental $ 135 $ 144 $ 138
Other service charges, commissions
and fees 151 130 166
Miscellaneous operating income 50 468 97
Federal reserve stock - 5 5
-------- -------- --------
$ 336 $ 747 $ 406
======== ======== ========
</TABLE>
9. PENSION PLAN: (CONTINUED)
The Bank has a defined benefit pension plan covering substantially all of
its employees. The plan provides normal, early, late, death and disability
retirement benefits based on an average of qualifying compensation for the
highest five consecutive calendar years, excluding the year of
determination. The Bank's policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions
are intended to provide not only for benefits attributed to service to date
but, also for those expected to be earned. Actuarially determined
contributions of the Pension Plan were $203 and $186 and $81 in 1994, 1993
and 1992, respectively.
The Bank accounts for pension costs by use of Financial Accounting Standard
No. 87, "Employers' Accounting for Pensions," and No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits."
F-58
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
9. PENSION PLAN: (CONTINUED)
Pension expense for 1994, 1993 and 1992 included the following components:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
(a) Service cost for benefits earned
during year $ 126 $ 93 $ 75
(b) Interest cost on projected benefit
obligations 192 156 167
(c) Actual investment income earned on
plan's assets 21 74 79
(d) Amortization of unrecognized
transition obligation - Net of asset
gain or loss deferred (150) (108) ( 91)
------ ----- -----
(e) Net pension expense: (a+b-c+d): $ 147 $ 67 $ 72
====== ===== =====
</TABLE>
The discount rate used was 7% for 1994, 7% for 1993 and 8% for 1992 and the
rate of increase in future compensation levels used was 5% in each year in
determining the actuarial present value of the projected benefit obligation.
The expected long-term rate of return on the Plan's assets was 7.5% for
1994, 8% for 1993 and 8% for 1992.
The funded status of the Pension Plan and the accrued pension cost
recognized at December 31, 1994, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Accumulated benefit obligations,
including vested benefits of $1,853,
$1,688 and $1,359 at December 31,
1994, 1993 and 1992, respectively $1,861 $1,692 $1,360
======== ======== ========
Projected benefit obligations for
participants service rendered to date $2,668 $2,781 $1,963
Plan assets at fair market value 2,501 2,333 2,082
-------- -------- --------
Unfunded projected benefit obligation 167 448 (119)
Unrecognized prior service cost (299) (315) (102)
Unrecognized net gain loss (183) (407) 52
Unrecognized net transition asset 224 239 253
-------- -------- --------
Prepaid pension cost included in other
assets $ (91) $ (35) $ 84
======== ======== ========
</TABLE>
F-59
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
9. PENSION PLAN: (CONTINUED)
About 40% of the Plan's assets are invested in Certificates of Deposit and
6% in U.S. Government Securities at October 20, 1994. For 1994, 1993 and
1992, pension costs for the Pension Plan were determined by the Frozen Entry
Age Actuarial Cost Method.
10. PROVISION FOR INCOME TAXES:
The provisions for income taxes consists of:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Income taxes currently payable $ 917 $1,153 $ 902
Deferred income taxes arising
from timing differences 27 33 (23)
-------- -------- --------
$ 944 $1,186 $ 879
======== ======== ========
Effective tax rate 28.4% 28.5% 26.9%
Nontaxable interest on municipal
obligations 6.5% 6.1% 8.1%
Other (.9)% (.6)% (1.0)%
-------- --------- --------
Statutory Federal Rate 34.0% 34.0% 34.0%
======== ======== ========
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Allowance for loan losses $ 26 $ 35 $ 26
Pension expense (31) (12) 29
-------- -------- --------
Net deferred tax (liability)
asset before available for
sale (5) 23 55
Available for sale tax effects 837 19 -
-------- -------- --------
Net deferred tax asset total $ 832 $ 42 $ 55
======== ======== ========
</TABLE>
11. RELATED PARTY TRANSACTIONS:
Officers and directors are loan customers in the ordinary course of
business. These loans are made on substantially the same terms as those
prevailing at the time for comparable loans with other persons and do not
involve more than normal risk of collectibility or present other unfavorable
features. These loans amounted to $2,115, $1,727 and $1,137 at December 31,
1994, 1993 and 1992, respectively.
F-60
<PAGE>
Bank of Tazwell County
Notes To Financial Statements
($ in thousands)
12. CONTINGENT LIABILITIES AND COMMITMENTS:
The Bank's financial statements do not reflect various commitments and
contingent liabilities that arise in the normal course of business and that
involve elements of credit risk, interest rate risk and liquidity risk.
These commitments and contingent liabilities are commitments to extend
credit, commercial letters of credit and standby letters of credit. A
summary of the Bank's commitments and contingent liabilities at December 31,
1994 is as follows:
<TABLE>
<CAPTION>
Notional
Amount
----------
<S> <C>
Commitments to extend credit $ 3,061
Standby letters of credit 65
</TABLE>
Commitments to extend credit, commercial letters of credit and standby
letters of credit all include exposure to some credit loss in the event of
nonperformance of the customer. The Bank's credit policies and procedures
for credit commitments and financial guarantees are the same as those for
extension of credit that are recorded on the balance sheets. Because these
instruments have fixed maturity dates, and because many of them expire
without being drawn upon, they do not generally present any significant
liquidity risk to the Bank. The Bank has not incurred any losses on its
commitments in either 1994, 1993 or 1992.
13. RENTAL EXPENSE:
The Bank leases its Westgate branch facility under a noncancellable
agreement which expires September 19, 2003, with an annual rental of $13.
The total minimum rental commitment at December 31, 1994, under this lease,
is $114 which is due as follows:
<TABLE>
<S> <C> <C>
Due in year ending December 31, 1995 $ 13
1996 13
1997 13
1998 13
1999 13
Due in remaining years of lease term 49
-------
$ 114
=======
</TABLE>
F-61
<PAGE>
Bank of Tazwell County
Notes To Financial Statements
($ in thousands)
14. FINANCIAL INSTRUMENTS:
Deposit Liabilities
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1994
----------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 10,986 $ 10,986
Securities held to maturity 90,623 87,584
Securities available for sale 24,105 24,105
Loans 43,116 42,851
Less: Allowance for loan losses 545 545
---------- ----------
$168,285 $164,981
========== ==========
Financial liabilities:
Deposits $149,050 $148,127
========== ==========
1993
----------------------
Carrying Fair
Amount Value
---------- ----------
<S> <C> <C>
Financial assets:
Cash and short-term investments 15,081 15,081
Investment securities 97,202 100,633
Investment securities held-for-sale 15,249 15,249
Loans 40,484 40,611
Less: Allowance for loan losses 545 545
---------- ----------
$167,471 $171,029
========== ==========
Financial liabilities:
Deposits $146,299 $146,484
========== ==========
</TABLE>
F-62
<PAGE>
Bank of Tazwell County
Notes To Financial Statements
($ in thousands)
15. CONCENTRATIONS OF CREDIT:
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted primarily to customers in the Bank's market area.
Essentially all such customers are depositors of the Bank. The
concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess
of the Bank's legal lending limit.
16. STOCK DIVIDEND:
The Board of Directors authorized a 200% stock dividend on the Banks $1 par
value common stock payable February 1, 1995 to stockholders of record on
January 20, 1995. As a result of this dividend, 1,258,806 additional shares
were issued and retained earnings was reduced by $1,258,806. All references
in the accompanying financial statements to the number of common shares and
per share amounts have been restated to reflect the stock dividend which was
accounted for as a stock split.
F-63
<PAGE>
Bank of Tazewell County
Balance Sheets
September 30, 1995 (Unaudited) and December 31, 1994
<TABLE>
<CAPTION>
September 30, December 31,
($ in thousands) 1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) $ 7,320 $ 4,761
Federal funds sold 6,350 6,225
Securities available for sale, at fair value 28,432 24,105
(note 3)
Securities held to maturity (fair value $90,073 89,892 90,623
in 1995 and $87,584 in 1994) (note 3)
Loans:
Real estate construction loans 100 100
Real estate mortgage loans 28,620 28,920
Commercial and industrial loans 4,563 8,272
Loans to individuals 9,125 6,545
-------- --------
Total loans 42,408 43,837
Less unearned income on loans (733) (721)
-------- --------
Loans, net of unearned income 41,675 43,116
Less allowance for loan losses (note 4) (553) (545)
-------- --------
Loans, net 41,122 42,571
-------- --------
Bank premises and equipment, net 1,868 1,960
Accrued interest receivable 1,961 2,011
Other real estate owned, net (note 5) 33 67
Other assets (notes 5 and 6) 510 1,082
-------- --------
Total assets $177,488 $173,405
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Noninterest-bearing deposits 16,588 15,518
Interest-bearing deposits 18,949 13,669
Savings deposits 36,371 46,963
Time deposits (note 7) 78,760 72,900
-------- --------
Total deposits 150,668 149,050
Accrued interest payable 429 349
Other liabilities 1,378 1,485
-------- --------
Total liabilities $152,475 $150,884
-------- --------
Stockholders' equity:
Common stock of $1.00 par value. Authorized
6,000,000 shares; issued and outstanding 1,888,209 1,888 1,888
Surplus 2,000 2,000
Undivided profits 21,585 20,258
Net unrealized (losses) on securities
available for sale (460) (1,625)
-------- --------
Total stockholders' equity 25,013 22,521
-------- --------
Total liabilities and stockholders' equity $177,488 $173,405
======== ========
See accompanying notes to financial statements.
</TABLE>
F-64
<PAGE>
Bank of Tazewell County
Statements of Income
Three Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 946 $ 980
Interest on federal funds sold 88 66
Interest on securities-taxable 1,778 1,733
Interest on securities-nontaxable 133 163
------- -------
Total interest income 2,945 2,942
------- -------
INTEREST EXPENSE
Interest on time certificates of 293 225
deposit of $100,000 or more 1,246 1,078
Interest on other deposits ------- -------
Total interest expense 1,539 1,303
------- -------
Net interest income 1,406 1,639
Provision for loan losses (note 4) 0 0
------- -------
Net interest income after provision for loan losses 1,406 1,639
------- -------
NONINTEREST INCOME
Service charges on deposit accounts 69 64
Other service charges and fees 13 16
Trust income 14 21
Other income - 2
Realized securities (losses), net (85) -
------- -------
Total noninterest income 11 103
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 402 409
Occupancy and furniture and fixtures 116 49
Other operating expense 121 347
------- -------
Total noninterest expense 639 805
------- -------
Income before income tax expense 778 937
Income tax expense (note 6) 225 321
------- -------
Net income $ 553 $ 616
======= =======
Net income per share $.29 $.33
======= =======
Average shares (in thousands) 1,888 1,888
======= =======
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
Bank of Tazewell County
Statements of Income
Nine Months Ended September 30, 1995 And 1994
(Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
($ in thousands, except per share data) 1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,006 $2,655
Interest on federal funds sold 336 223
Interest on securities-taxable 5,295 5,271
Interest on securities-nontaxable 440 491
------- ------
Total interest income 9,077 8,640
------- ------
INTEREST EXPENSE
Interest on time certificates of 839 560
deposit of $100,000 or more 3,605 3,191
Interest on other deposits ------- ------
Total interest expense 4,444 3,751
------- ------
Net interest income 4,633 4,889
Provision for loan losses (note 4) - 6
------- ------
Net interest income after provision for loan losses 4,633 4,883
------- ------
NONINTEREST INCOME
Service charges on deposit accounts 203 179
Other service charges and fees 30 43
Trust income 55 69
Other income 8 8
Realized securities (losses) (85) 4
gains, net ------- ------
Total noninterest income 211 303
------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 1,191 1,179
Occupancy and furniture and 314 222
fixtures 804 879
Other operating expense ------- ------
Total noninterest expense 2,309 2,280
------- ------
Income before income tax expense 2,535 2,906
Income tax expense (note 6) 736 858
------- ------
Net income $ 1,799 $2,048
======= ======
Net income per share $.95 $1.08
======= ======
Average shares (in thousands) 1,888 1,888
======= ======
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
Bank of Tazewell County
Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses) on
Common Undivided Securities
($ in thousands) Stock Surplus Profits Available for Sale Total
-------- --------- ----------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $ 629 $2,000 $ 20,098 $ (37) $ 22,690
Net income - - 2,048 - 2,048
Cash dividends - - (472) - (472)
Change in net unrealized (losses) on securities
availabl e for sale, net of income tax benefit
of $606 - - - (1,177) (1,177)
-------- --------- ----------- -------------------- -----------
Balances, September 30, 1994 $ 629 $ 2,000 $ 21,674 $ (1,214) $ 23,089
======== ========= =========== ==================== ===========
Balances, December 31, 1994 1,888 2,000 20,258 (1,625) 22,521
Net income - - 1,799 - 1,799
Cash dividends - - (472) - (472)
Change in net unrealized gains on securities - - -
available for sale, net of income taxes of $600 - - - 1,165 1,165
-------- --------- ----------- -------------------- -----------
Balances, September 30, 1995 $ 1,888 $ 2,000 $ 21,585 $ (460) $ 25,013
======== ========= =========== ==================== ===========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
Bank of Tazewell County
Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
($ in thousands) September 30, September 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (see note 9)
Net income $ 1,799 $ 2,048
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of bank premises and equipment 124 106
Amortization of premiums and accretion of
discounts, net (75) (55)
Gain on maturities of securities available for
sale, net (5) (4)
Provision for bond losses 90 -
Losses and write-downs on other real estate owned 1 13
Decrease (increase) in:
Accrued interest receivable 50 48
Other assets 659 (751)
Increase (decrease) in:
Accrued interest payable 80 (39)
Other liabilities (635) (511)
------------- -------------
Net cash provided by operating activities $ 2,088 $ 855
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES (note 9)
Net (increase) decrease in money market
investments $ (125) $ 6,175
Proceeds from calls and maturities of
securities available for sale 1,519 2,171
Proceeds from calls and maturities of
securities held to maturity 9,231 20,542
Purchases of securities available for sale (3,324) (10,945)
Purchases of securities held to maturity (9,853) (17,273)
Net decrease (increase) in loans made to
customers 1,467 (2,547)
Proceeds from disposal of other real estate
owned - 16
Recoveries on loans charged off 9 -
Bank premises and equipment expenditures (127) (468)
------------- -------------
Net cash used in investing activities $ (1,203) $ (2,329)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES (note 9)
Net increase in time deposits $ 548 $ 3,227
Net increase in other deposits 1,070 312
Net increase (decrease) in short term treasury
borrowings 528 (229)
Cash dividends paid (472) (472)
------------- -------------
Net cash provided by financing activities $ 1,674 $ 2,838
------------- -------------
Net increase in cash and due from banks $ 2,559 $ 1,364
Cash and due from banks at beginning of year 4,761 3,806
------------- -------------
Cash due from banks at end of nine months $ 7,320 $ 5,170
============= =============
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
September 30, 1995 and 1994 (Unaudited) and December 31, 1994
($ in thousands)
1. GENERAL
-------
The accompanying interim period 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 financial
statements have been included. The results of operations for the three
months and nine months ended September 30, 1995 are not necessarily
indicative of results of operations for the full year or any other interim
period. The interim period financial statements and notes included herein
should be read in conjunction with the notes to financial statements
included in the Corporation's 1994 Annual Report to Stockholders.
2. CASH EQUIVALENTS
----------------
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks.
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONTINUED)
--------------------------------------------------------------
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ 1,982 $ - $ (20) $ 1,962
U.S. Government agencies and
corporations 12,972 1 (301) 12,672
Mortgage-backed securities 13,507 - (385) 13,122
Equity securities 15 7 - 22
Other securities 654 - - 654
----------- ----------- ------------ --------
Total securities available
for sale $ 29,130 $ 8 $ (706) $ 28,432
=========== =========== ============ ========
</TABLE>
F-69
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONTINUED)
--------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury $ 981 $ - $ (109) $ 872
U.S. Government agencies
and corporations 10,471 - (1,817) 8,654
Mortgage-backed securities 15,021 11 (554) 14,478
Equity securities 15 7 - 22
Other securities 79 - - 79
----------- ------------ ------------ ----------
Total securities
available for sale $26,567 $18 $(2,480) $ 24,105
=========== ============ ============ ==========
</TABLE>
The amortized costs and fair values of securities available for sale at
September 30, 1995 and December 31, 1994, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Amortized Fair Amortized Fair
Costs Values Costs Values
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 500 $ 499 $ 594 $ 590
Due in one year through
five years 18,570 18,169 16,904 15,430
Due in five years through
ten years 5,962 5,800 4,972 4,352
Due after ten years 4,098 3,964 4,096 3,733
----------- -------- ----------- --------
$29,130 $28,432 $26,566 $24,105
=========== ======== =========== ========
</TABLE>
F-70
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONTINUED)
--------------------------------------------------------------
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, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 24,585 $ 400 $ (133) $ 24,852
U.S. Government agencies and
corporations 35,365 326 (338) 35,353
States and political
subdivisions 10,337 369 (542) 10,164
Mortgage-backed securities 19,005 332 (243) 19,094
Other 600 10 - 610
----------- ------------ ------------ ----------
Total securities held
to maturity $ 89,892 $1,437 $(1,256) $ 90,073
=========== ============ ============ ==========
<CAPTION>
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Costs Gains Losses Values
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury $ 25,599 $ 43 $ (840) $ 24,802
U.S. Government agencies and
corporations 31,868 50 (835) 31,083
States and political
subdivisions 12,409 203 (864) 11,748
Mortgage-backed securities 20,247 11 (804) 19,454
Other 500 - (3) 497
----------- ------------ ------------ ----------
Total securities held
to maturity $ 90,623 $ 307 $(3,346) $ 87,584
=========== ============ ============ ==========
</TABLE>
F-71
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONCLUDED)
--------------------------------------------------------------
The amortized costs and fair values of securities held to maturity at
September 30, 1995 and December 31, 1994, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Amortized Fair Amortized Fair
Costs Values Costs Values
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 17,924 $ 17,706 $ 5,701 $ 5,735
Due in one year through
five years 53,164 53,304 67,208 65,075
Due in five years through
ten years 18,327 18,562 17,331 16,364
Due after ten years 477 501 383 410
----------- ---------- ----------- ----------
$ 89,892 $ 90,073 $ 90,623 $ 87,584
=========== ========== =========== ==========
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES
-------------------------
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1995 1994
------ ------
<S> <C> <C>
Balance, beginning of year $ 545 $ 545
Provision for loan losses - 6
Recoveries 12 1
Loan charged off (4) (7)
------ ------
Balance, end of period $ 553 $ 545
====== ======
</TABLE>
5. IMPAIRED LOANS AND NONPERFORMING ASSETS (CONTINUED)
---------------------------------------------------
As of September 30, 1995, the average recorded investment in impaired loans
was $299 and there was no related amount of interest income recognized
during the time within that period that the loans were impaired.
F-72
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
5. IMPAIRED LOANS AND NONPERFORMING ASSETS (CONCLUDED)
---------------------------------------------------
The following table represents information concerning nonperforming assets:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------------- ----------------
<S> <C> <C>
Nonaccrual loans $ 299 $ -
Restructured loans - -
------- -------
Total nonperforming loans 299 -
Other real estate owned, net 33 67
------- -------
Total nonperforming assets $ 332 $ 67
======= =======
Loans contractually past due
90 days or more (excludes
nonaccrual loans) $ 546 $ 271
======= =======
</TABLE>
Bank of Tazewell County does not have a formal nonaccrual policy. A loan is
placed on nonaccrual when, in the judgment of management, it is doubtful
that full principal and interest will be collected.
The following table shows the interest that would have been earned on
nonaccrual and restructured loans if they had been current in accordance
with their original terms and the recorded interest that was earned and
included in income on these loans:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
------ ------
<S> <C> <C>
Scheduled interest:
Nonaccrual loans $ 10 $ -
Restructured loans - -
------ ------
Total scheduled interest $ 10 $ -
====== ======
Recorded interest:
Nonaccrual loans - -
Restructured loans - -
------ ------
Total recorded interest $ - $ -
====== ======
</TABLE>
Other real estate, acquired through foreclosure or deed in lieu of
foreclosure, is carried at the lower of the recorded investment or its fair
value, less estimated costs to sell (net realized value). When the property
is acquired, any excess of the loan balance over net realizable value is
charged to the allowance for loan losses. Increases or decreases in the net
realizable value of such properties are credited or charged to income by
adjusting the valuation allowance for other real estate owned. Net costs of
maintaining or operating foreclosed properties are expensed as incurred.
F-73
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
6. INCOME TAXES
------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1995 are presented below:
<TABLE>
<CAPTION>
September 30,
1995
---------------
<S> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses $ 26
Net unrealized losses on securities available for sale 237
---------------
Net deferred tax assets $ 263
---------------
Deferred tax liabilities:
Pension costs $ (31)
---------------
Total gross deferred liabilities $ (31)
---------------
Net deferred tax asset included in other assets $ 232
===============
</TABLE>
The effective tax rate and the components of income tax expense do not
differ significantly from such amounts disclosed in prior periods.
The Bank has determined that a valuation allowance for the gross deferred
tax assets is not necessary at September 30, 1995 due to the fact that the
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
------ ------
<S> <C> <C>
Income $ 736 $ 858
Stockholders' equity, for net gains (losses) on
securities available for sale recognized for
financial reporting purposes 600 (606)
------ -----
Total income taxes $1,336 $ 252
====== =====
</TABLE>
7. TIME DEPOSITS
-------------
Included in time deposits are certificates of deposit and other time
deposits of $100,000 or more in the aggregate amounts of $21,560 at
September 30, 1995, and $25,371 at December 31, 1994.
F-74
<PAGE>
Bank of Tazewell County
Notes To Financial Statements
($ in thousands)
8. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
In the normal course of business, there are various commitments and
contingent liabilities such as commitments to extend credit which are not
reflected in the accompanying financial statements. No losses are
anticipated by management as a result of these transactions. Commitments
under standby letters of credit at September 30, 1995 were $86 and at
December 31, 1994, $65.
9. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The Bank paid $1,459 and $1,342 for interest and $603 and $774 for income
taxes, net of refunds, at September 30, 1995 and September 30, 1994,
respectively. Noncash investing activities consisted of $4 and $7 of loans
charged against the allowance for loan losses for the periods ended
September 30, 1995 and September 30, 1994, respectively, and $1,165 of net
unrealized gains included in securities available for sale for the period
ended September 30, 1995 and $1,176 of net unrealized loss included in
securities available for sale for the period ended September 30, 1994.
Noncash investing activities also did not include any foreclosed loans
transferred into other real estate owned for the period ended September 30,
1995 as compared to $4 transferred for the period ended September 30, 1994.
F-75
<PAGE>
ATTACHMENT A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 28th day of August, 1995
(this "Plan"), by and among National Bankshares, Inc., a Virginia corporation
("NBI") and the Bank of Tazewell County, a Virginia bank ("BTC").
RECITALS:
(A) NBI. NBI is a corporation duly organized and existing in good standing
under the laws of the Commonwealth of Virginia, with its principal executive
offices located in Blacksburg, Virginia. As of the date hereof, NBI has
5,000,000 authorized shares of Common Stock, each of $2.50 par value ("NBI
Common Stock"), and 5,000,000 authorized shares of Preferred Stock, no par value
("NBI Preferred Stock") (no other class of capital stock being authorized), of
which 1,714,152 shares of NBI Common Stock and no shares of NBI Preferred Stock,
respectively, are issued and outstanding as of July 31, 1995. NBI has one
subsidiary, The National Bank of Blacksburg, a national banking association
("NBB") and NBI owns 100% of the stock of NBB ("NBB Stock"). NBB has one
subsidiary, NB Operating, Inc., which has no assets, no liabilities, no
operations and engages in no business activities as of the date hereof and NBB
owns 100% of the stock of such subsidiary.
(B) BTC. BTC is a corporation duly organized and existing in good standing
under the laws of the Commonwealth of Virginia, with its principal executive
offices located in Tazewell, Virginia and is authorized to do business as a bank
in Virginia. BTC is an insured bank as defined in the Federal Deposit Insurance
Act, as amended, and is a member of the Federal Reserve System. As of the date
hereof, BTC has 6,000,000 authorized shares of Common Stock, each of $1.00 par
value ("BTC Common Stock"), (no other class of capital stock being authorized),
of which 1,888,209 shares of BTC Common Stock were issued and outstanding as of
July 31, 1995. The holders of BTC Common Stock presently have preemptive rights.
BTC does not have any subsidiary corporations or other entities. BTC Common
Stock is not and never has been subject to the provisions of Section 12, 13,
14(a), 14(c), 14(d), 15(d) or 16 of the Securities Exchange Act of 1934, as
amended, (together with the rules and regulations promulgated thereunder, the
"Exchange Act") nor has BTC ever been nor is it now subject to Section 12 of the
Exchange Act and the regulations of the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC") or the Securities and Exchange Commission
("SEC") thereunder. BTC is not subject to regulation under 12 CFR, Section 11,
Section 206 or Section 335, and does not file and has never filed any reports or
disclosures pursuant thereto.
(C) Rights, Etc. There are no shares of NBI Common Stock, NBI Preferred
Stock, NBB Stock, or BTC Common Stock authorized and reserved for issuance, and
neither NBI, NBB, nor BTC has any commitment to authorize, issue or sell any
such shares or any securities or obligations convertible into or exchangeable
for, or giving any person any right to subscribe for or acquire from such party,
any such shares and no securities or obligations representing any such rights
are outstanding. Neither NBI, NBB, nor BTC has granted or made any commitment to
grant any options or share appreciation rights with respect to the BTC Common
Stock, the NBI Common Stock, or the NBB Stock, as the case may be.
(D) This Transaction. NBI will, prior to the Merger Effective Date, own
100% of the outstanding shares ("NBI Interim Bank Common Stock") of a duly
chartered Virginia bank ("NBI Interim Bank") and the Boards of Directors of NBI
and BTC, respectively, deem it advisable and in the best interests of NBI and
BTC and their stockholders that BTC be acquired by NBI through a merger of NBI
Interim Bank into BTC pursuant to this Agreement and Plan of Merger.
(E) Approvals. The Board of Directors of each of NBI and BTC has approved
and adopted, at meetings of each of such Board of Directors, this Plan and has
authorized, subject to such further modifications as may be agreed by the
Presidents of NBI and BTC, respectively, not inconsistent herewith, the
execution hereof in counterparts. At the meeting of the BTC Board of Directors,
the Board of Directors of BTC recommended the Plan as so executed to its
shareholders.
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(F) Share Dividend. In connection with the consummation of this Plan, it
is intended that NBI shall cause a share dividend totalling 190,768 shares of
NBI Common Stock to be declared and issued pro rata to and among the holders of
shares of NBI Common Stock in accordance with the provisions of Paragraph (F) of
Article II.
(G) NASDAQ. Trading of the NBI Common Stock and BTC Common Stock,
respectively, is presently reflected on the Over the Counter Electronic Bulletin
Board ("NASD Bulletin Board") of the National Association of Securities Dealers
("NASD").
(H) Benefits of Plan. NBI and BTC believe the Plan and its consummation
are in the respective best interests of each corporation and its shareholders
for the following reasons, among others: (1) the Merger will allow them to
provide banking and related financial services more effectively and efficiently;
(2) the Merger will expand the range of banking and related financial services
which they can provide; (3) the Merger will enhance the safety and soundness of
their operations; (4) the Merger will enable them to expand the market for their
banking and related financial services; and (4) the Merger will expand the
number and diversity of their shareholder bases and enhance the liquidity of
such investments.
NOW, THEREFORE, in consideration of their mutual promises and obligations,
the parties hereto adopt and make this Plan and prescribe the terms and
conditions thereof and the manner and basis of carrying it into effect, which
shall be as follows:
I. THE MERGER
(A) The Continuing Corporation. On the Merger Effective Date (as
hereinafter defined), NBI Interim Bank shall merge into BTC (the "Merger"), the
separate existence of NBI Interim Bank shall cease and BTC (the "Continuing
Corporation") shall survive.
(B) Rights, Etc. Upon consummation of the Merger, the Continuing
Corporation shall thereupon and thereafter possess all of the rights,
privileges, immunities and franchises, of a public as well as of a private
nature, of each of the merging corporations; and all property, real, personal
and mixed, and all debts due on whatever account, and all other choses in
action, and all and every other interest, of or belonging to or due to each of
the corporations so merged, shall be deemed to be vested in the Continuing
Corporation without further act or deed; and the title to any real estate or any
interest therein, vested in any of such corporations, shall not revert or be in
any way impaired by reason of the Merger as provided by the laws of the
Commonwealth of Virginia.
(C) Liabilities. Upon consummation of the Merger, the Continuing
Corporation shall thenceforth be responsible and liable for all the liabilities,
obligations and penalties of each of the corporations so merged.
(D) Articles of Incorporation; Bylaws; Directors; Officers of Continuing
Corporation. The Articles of Incorporation of the Continuing Corporation shall
be those of BTC, as amended pursuant to the Charter Amendment as more
particularly described in Paragraph (B) of Article V, and the Bylaws of the
Continuing Corporation shall be those of BTC, as amended pursuant to the
requirements of Paragraph (K) of Article V. The officers and directors of BTC in
office immediately prior to the Merger becoming effective shall be the officers
and directors of the Continuing Corporation, who shall hold office until such
time as their successors are elected and qualified in accordance with the
Articles and Bylaws of the Continuing Corporation.
(E) Merger Closing; Merger Effective Date. The Merger shall become
effective at 11:59 p.m. on the date the Virginia State Corporation Commission
("SCC") issues a certificate of merger reflecting the Merger (the "Merger
Effective Date"). Unless otherwise agreed upon in writing by the chief executive
officers of NBI and BTC, subject to the conditions to the obligations of the
parties to effect the Merger as set forth in Article VI, the parties shall use
their reasonable efforts to cause the Merger Effective Date to occur as soon as
practicable following the satisfaction of the conditions set forth in Paragraphs
(A), (B) and (C) of Article VI. All documents required by the
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terms of this Agreement to be delivered at or prior to consummation of the
Merger will be exchanged by the parties at the closing of the Merger (the
"Merger Closing"), which shall be held on the Merger Effective Date at the
principal executive offices of NBI (or at such other location as may be mutually
agreed upon by the parties). Prior to the Merger Closing, NBI Interim Bank and
BTC shall execute and deliver to the SCC, Articles of Merger containing a Plan
of Merger in substantially the form of Exhibit A hereto (the "Plan of Merger").
---------
(F) Bylaws and Directors of NBI. Effective as of the Merger Effective
Date, NBI shall cause its Bylaws to be amended as follows: (1) the number of NBI
directors shall be set at nine (9); (2) the affirmative vote of six (6) out of
the nine (9) NBI directors shall be required to approve any of the following
actions: (a) membership on the Board of Directors of the Continuing Corporation
(provided, however, that notwithstanding the foregoing, a director of the
Continuing Corporation may be removed by action of NBI as sole shareholder of
the Continuing Corporation authorized by the vote of a simple majority of NBI
directors in the event that such director commits a violation of law applicable
to his duties as a director of the Continuing Corporation which has a material
adverse financial affect on the Continuing Corporation or engages in any conduct
in connection with his duties as a director for which he would not be entitled
to indemnification under the Articles of Incorporation of the Continuing
Corporation); (b) amendments to the Articles of Incorporation or Bylaws of the
Continuing Corporation; (c) the merger, consolidation or sale of all or
substantially all of the assets of the Continuing Corporation; and (d) a
recommendation to the shareholders of NBI to merge, consolidate or sell all or
substantially all of the assets of NBI, where such recommendation is required by
law; (3) to change the provisions requiring that NBI directors also be NBB
directors to permit BTC directors to serve on the NBI Board as well; and (4) the
Executive Committee shall not authorize or approve any action on behalf of NBI
described in Paragraph (2) hereof. NBI agrees that the foregoing Bylaw
amendments shall not be amended or rescinded by action of its Board of Directors
without the affirmative vote of at least six (6) directors until January 1,
2001, on and after which time such Bylaw amendments may be amended or rescinded
by a simple majority vote of its Board of Directors as provided in the Bylaws of
NBI.
(G) NBI Corporate Actions. Effective as of the Merger Effective Date, NBI
shall obtain the resignations of five directors currently serving on the NBI
Board of Directors spread as nearly equally as possible among the three classes
of NBI directors, thereby reducing the number of persons then serving on the NBI
Board of Directors to five and, in conjunction with the amendment to the NBI
Bylaws referred to in (F)(1) above, creating four vacancies on the NBI Board of
Directors ("NBI Board Vacancies"). NBI agrees that the remaining five NBI
directors shall fill the NBI Board Vacancies with four persons selected by BTC
("BTC Board Representatives") from among the current members of the BTC Board of
Directors by electing them to the NBI Board Vacancies until the next following
annual shareholders meeting. NBI further agrees that, unless any BTC Board
Representative's service on the Board is terminated for cause in accordance with
the provisions of NBI's Articles of Incorporation, it shall renominate the BTC
Board Representatives for reelection to the remaining term of their respective
classes at the next annual shareholders meeting following the Merger Effective
Date and shall continue to renominate for reelection by the NBI shareholders
those of the BTC Board Representatives who must stand for reelection as a result
of the expiration of their class term as of the NBI annual shareholders meetings
in 1997, 1998, 1999, and 2000, respectively. In the event of the death or
resignation of any BTC Board Representative creating a vacancy on the NBI Board
of Directors at any time before the NBI annual shareholders meeting in 2000, the
Board of the Continuing Corporation shall be entitled to select a replacement to
fill such vacancy and the NBI Board shall elect such replacement to fill the
vacancy created by such death or resignation. Thereafter, such replacement
director shall be deemed to be a BTC Board Representative within the meaning of
this Paragraph (G). On the Merger Effective Date, or as soon thereafter as
practicable, the NBI Board of Directors shall appoint an Executive Committee
consisting of five (5) of its members, two (2) of whom shall be BTC Board
Representatives.
II. MERGER CONSIDERATION
(A) Outstanding NBI Interim Bank Common Stock. Each share of NBI Interim
Bank Common Stock issued and outstanding immediately prior to the Merger
Effective Date, on and after the Merger Effective Date, shall be converted
automatically into 1,888.209 shares of common stock of the Continuing
Corporation and shall constitute the only issued and outstanding shares of
common stock of the Continuing Corporation.
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(B) Outstanding BTC Common Stock. Each share (excluding shares held by BTC
or by NBI or by its subsidiary, in each case other than in a fiduciary capacity
or as a result of debts previously contracted) of BTC Common Stock issued and
outstanding immediately prior to the Merger Effective Date shall, by virtue of
the Merger, automatically and without any action on the part of the holder
thereof on the Merger Effective Date, become and be converted into the right to
receive one share of NBI Common Stock (the "Exchange Ratio"), it being
understood that such Exchange Ratio takes into account the share dividend to be
declared by the NBI Board of Directors as set forth in Paragraph (F) below.
(C) Stockholder Rights; Stock Transfers. On the Merger Effective Date,
holders of BTC Common Stock shall cease to be, and shall have no rights as,
stockholders of BTC other than to receive the Merger consideration provided
under Paragraph (B) above and Paragraph (D) below. After the Merger Effective
Date, there shall be no transfers on the stock transfer books of BTC or the
Continuing Corporation of the shares of BTC Common Stock which were issued and
outstanding immediately prior to the Merger becoming effective.
(D) Fractional Shares. Notwithstanding any other provision hereof, no
fractional shares of NBI Common Stock and no certificates or scrip therefor, or
other evidence of ownership thereof, will be issued in the Merger; instead, NBI
shall pay to each holder of BTC Common Stock who would otherwise be entitled to
a fractional share an amount in cash determined by multiplying such fractional
share by the closing sale price of BTC Common Stock for the final bona fide
trade on the last day on which such stock has traded prior to the Merger
Effective Date, as reflected in the NASD Bulletin Board.
(E) Exchange Procedures. As promptly as practicable after the Merger
Effective Date, NBI shall send or cause to be sent to each former stockholder of
BTC of record immediately prior to the Merger Effective Date transmittal
materials for use in exchanging such stockholder's certificates of BTC for the
consideration set forth in Paragraphs (B) and (D) above. Any fractional share
checks which a BTC stockholder shall be entitled to receive in exchange for such
stockholder's shares of BTC Common Stock, and any dividends paid on any shares
of NBI Common Stock, that such stockholder shall be entitled to receive prior to
the delivery to NBI of such stockholder's certificates representing all of such
stockholder's shares of BTC Common Stock will be delivered to such stockholder
only upon delivery to NBI of the certificates representing all of such shares
(or indemnity satisfactory to NBI, in its judgment, after consultation with the
President of the Continuing Corporation, if any of such certificates are lost,
stolen or destroyed). No interest will be paid on any such fractional share
checks or dividends which the holder of such shares shall be entitled to receive
upon such delivery. After the Merger Effective Date, to the extent permitted by
law, former stockholders of record of BTC shall be entitled to vote at any
meeting of holders of NBI Common Stock, the number of whole shares of NBI Common
Stock into which their respective shares of BTC Common Stock are converted,
regardless of whether such holders have exchanged their certificates
representing BTC Common Stock for certificates representing NBI Common Stock in
accordance with the provisions of this Plan .
(F) Share Dividend. NBI agrees to increase the number of shares of NBI
Common Stock issued and outstanding by means of a stock dividend totalling
190,768 shares of NBI Common Stock, the record date therefor which shall be
prior to the Merger Effective Date; provided, however, that NBI shall not be
required to declare such stock dividend until: (1) satisfaction of the
conditions set forth in Paragraphs (A), (B) and (C) of Article VI; and (2) such
time as BTC acknowledges in writing that all conditions to its obligation to
consummate the Merger (and BTC's right to terminate this Plan) have been waived
or satisfied.
(G) Shares Held by BTC or NBI. Each of the shares of BTC Common Stock held
by BTC, by NBI or its subsidiary, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, shall be canceled and
retired at the Merger Effective Date and no consideration shall be issued in
exchange therefor.
(H) Dissenting Stockholders. Any holder of shares of BTC Common Stock
who perfects his dissenters' rights of appraisal in accordance with and as
contemplated by Article 15 of the Virginia Stock Corporation Act shall be
entitled to receive the value of such shares in cash as determined pursuant to
the provision of such law; provided, however, that no such payment shall be made
-------- -------
to any dissenting stockholder unless and until such dissenting
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stockholder has complied with the applicable provisions of the Virginia Stock
Corporation Act and duly surrendered the certificate or certificates
representing the shares for which payment is being made. In the event that a
dissenting BTC shareholder fails to perfect, or effectively withdraws or loses,
his right to appraisal and payment for his shares, after the Merger Effective
Date, NBI shall issue and deliver the consideration to which such holder of BTC
Common Stock is entitled under Article II (without interest) upon surrender by
such holder of the certificate or certificates representing shares of BTC Common
Stock held by him.
III. ACTIONS PENDING MERGER
A. Without the prior written consent or approval of a proper officer of the
other party, BTC and NBI will not and NBI will cause its subsidiary NBB, not to:
(1) Stock Distributions. Make, declare or pay any dividend other than
dividends from NBB to NBI, the NBI share dividend as provided in Paragraph (F)
of Article II, or BTC or NBI Common Stock cash dividends consistent with past
practice and in an amount not greater than the last previous cash dividend paid
prior hereto by NBI or BTC, as the case may be (provided, however, that in the
case of BTC, it may at its option accelerate the record and payment dates of its
semi-annual cash dividend, if any, which would regularly in accordance with past
practice be payable in January, 1996 or July, 1996 ("BTC January or July cash
dividend", as the case may be) so that the record and payment dates of the BTC
January or July cash dividend, as the case may be, occur prior to the Merger
Effective Date if the Merger Effective Date will occur: (a) after the record
date of the second semi-annual NBI cash dividend, if any, for 1995 which would
regularly in accordance with past practices be payable in December, 1995, but
prior to the BTC January cash dividend if it were not so accelerated or (b)
after the record date of the first semi-annual NBI cash dividend, if any, for
1996 which would regularly in accordance with past practices be payable in June,
1996 but prior to the BTC July cash dividend if it were not so accelerated) and
any limitations on the payment of dividends Previously Disclosed or declare or
make any distribution on, or directly or indirectly combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital stock (other than in a
fiduciary capacity in the ordinary course of its business and consistent with
past practice or in connection with stock received on a debt previously
contracted basis) or authorize the creation or issuance of, or issue, any
additional shares of its capital stock, or any options, calls or commitments
relating to its capital stock or any securities or obligations convertible into
or exchangeable for, or giving any person any right to subscribe for or acquire
from its shares of its capital stock or any securities or obligations
convertible into or exchangeable for shares of its capital stock, or issue any
long-term debt;
(2) Employment Contracts. Enter into any employment contracts with,
increase the rate of compensation of (except in accordance with existing policy
consistent with past practice or pursuant to any agreement existing and as in
effect on the date hereof and Previously Disclosed), or pay or agree to pay any
bonus to, any of its directors, officers or employees, except in accordance with
plans or agreements existing and as in effect on the date hereof and Previously
Disclosed;
(3) Employee Benefit Plans. Enter into or modify (except as may be required
by applicable law) any pension, retirement, stock option, stock purchase,
savings, profit sharing, deferred compensation, consulting, bonus, group
insurance or other employee benefit, incentive or welfare contract, plan or
arrangement, or any trust agreement related thereto, in respect of any of its
directors, officers or other employees, including without limitation taking any
action that accelerates (1) the vesting or exercise of any benefits payable
thereunder, or (2) the right to exercise any employee stock options or stock
appreciation rights outstanding thereunder;
(4) Asset Disposition. Dispose of, grant an encumbrance against or
discontinue any portion of its assets, business or properties, which is material
to BTC or to NBI and its subsidiary taken as a whole, as the case may be, or
merge or consolidate with, or acquire all or any substantial portion of, the
business or property of any other entity (except foreclosures, acquisitions of
control in its fiduciary capacity or securitization transactions, in each case
in the ordinary course of business consistent with past practice or the
formation and capitalization of NBI Interim Bank by NBI in accordance with the
Plan);
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(5) Constituent Documents. Amend its Articles of Incorporation or Bylaws
except as contemplated by this Plan. True and correct copies of its Articles of
Incorporation and Bylaws have been delivered to the other;
(6) Material Transactions. (a) Settle any material litigation or (b) enter
into any material transaction or make any material commitment relating to the
assets and business of BTC or NBI and its subsidiary taken as a whole, otherwise
than as contemplated hereby or in the ordinary course of business consistent
with past practice;
(7) Actions Not in Ordinary Course. Take any other action not in the
ordinary course of business consistent with past practice; or
(8) Agreements. Agree to take any of the foregoing actions.
B. Formation of NBI Interim Bank. NBI agrees that, promptly after the
execution hereof, it shall cause to be formed a Virginia corporation which shall
be named and become NBI Interim Bank. The authorized capital stock of NBI
Interim Bank shall consist of 50,000 shares of common stock, $1.00 par value, of
which 1,000 shares shall be subscribed for by NBI pending consummation of the
Plan. NBI shall file any governmental applications necessary to qualify NBI
Interim Bank to merge with BTC as contemplated hereby. NBI shall cause NBI to
execute the Articles of Merger and to take all steps necessary to consummate the
Merger provided that no such steps need be taken which materially adversely
impacts the economic or business benefits of the transactions contemplated by
this Plan so as to render inadvisable the consummation of the Merger.
IV. REPRESENTATIONS AND WARRANTIES
BTC hereby represents and warrants to NBI, and NBI hereby represents
and warrants to BTC, as follows:
(A) Recitals. The facts set forth in the Recitals of this Plan with respect
to it and, in the case of NBI, its subsidiary, are true and correct;
(B) Capitalization. The outstanding shares of it and, in the case of NBI,
its subsidiary, are validly issued and outstanding, fully paid and
nonassessable, and in the case of NBI only, subject to no preemptive rights;
(C) General Corporate Power and Ownership of Properties. It, and in the
case of NBI, its subsidiary, have the corporate power and authority to carry on
its business as it is now being conducted and to own all of its material
properties and assets and it and, in the case of NBI, its subsidiary have good
and marketable title to or a valid leasehold interest in all of the properties
and assets thereof reflected as owned or leased in its balance sheet as of
December 31, 1994, and included in the Financial Reports as hereinafter defined
and in all properties and assets acquired or leased by it or, in the case of
NBI, its subsidiary, since December 31, 1994. None of such properties is subject
to any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind except: (1) mechanic's, carrier's, worker's or similar liens
arising in the ordinary course of business; (2) as Previously Disclosed; (3)
imperfections of title, if any, none of which is material in amount or
materially detracts from the value or impairs the existing use of the property
subject thereto or the operations of BTC or, in the case of NBI, NBI and its
subsidiary taken as a whole; and (4) liens of current taxes not due and payable;
(D) Specific Corporate Authority. Subject to any necessary receipt of
approval by its stockholders and the regulatory approvals referred to in
Paragraphs (B) and (C) of Article VI, this Plan has been authorized by all
necessary corporate action of it and is a valid and binding agreement of it
enforceable against it in accordance with its terms, subject to (1) bankruptcy,
insolvency and other laws of general applicability relating to or affecting
creditors' rights; (2) general equity principles; and (3) in the case of BTC,
Section 8 of the Federal Deposit Insurance Act;
(E) No Default. The execution, delivery and performance of this Plan and
the consummation of the transactions contemplated hereby and thereby by it, will
not constitute: (1) a breach of violation of, or a default
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under, any law, rule or regulation or any judgment, decree, order, governmental
permit or license, franchise or agreement, indenture, instrument or
authorization of or held by it or, in the case of NBI, its subsidiary or to
which it or, in the case of NBI, its subsidiary or their respective properties
is subject or bound, which breach, violation or default is reasonably likely to
have a Material Adverse Effect on it; or (2) a breach or violation of, or a
default under, its Articles of Incorporation or Bylaws;
(F) Financial Reports. Except as Previously Disclosed, (1) in the case of
NBI only, its Annual Report on Form 10-K, for the fiscal year ended December 31,
1994, and all other documents filed or to be filed subsequent to December 31,
1994 under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act in the form
filed with the Securities and Exchange Commission (the "SEC"), all of which have
been Previously Disclosed, and (2) in the case of BTC only (a) its reports to
shareholders for the fiscal years ended December 31, 1993 and December 31, 1994,
together with the audited balance sheets and related statements of income,
stockholder's equity and changes in financial position for the same periods as
Previously Disclosed; (b) all correspondence and other reports to BTC
shareholders during 1993, 1994 and 1995, all of which have been Previously
Disclosed; (c) all proxy solicitations related to BTC's meetings of shareholders
(whether annual or special) during 1993, 1994 and 1995 (all of the foregoing
reports and documents of NBI and BTC are hereinafter referred to as "Financial
Reports") did not and will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets in or incorporated by
reference into the Financial Reports (including the related notes and schedules
thereto) fairly presents and will fairly present the financial position of the
entity or entities to which it relates as of its date and each of the statements
of income and changes in stockholders' equity and cash flows or equivalent
statements in the Financial Reports (including any related notes and schedules
thereto) fairly presents and will fairly present the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth therein,
in each case in accordance with generally accepted accounting principles
consistently applied, except as may be noted therein, subject to normal and
recurring year-end audit adjustments in the case of unaudited statements;
(G) Regulatory Reports. BTC has Previously Disclosed to NBI, and NBI has
Previously Disclosed to BTC, copies of (1) BTC's and, in the case of NBI, NBB's
"Annual Report of Condition and Income" on Form FFIEC 033, as delivered to the
appropriate bank regulatory authority for the years ended December 31, 1993 and
December 31, 1994, and for the periods ending March 31, 1995 and June 30, 1995,
respectively; (2) all other material reports and documents filed with or sent to
any federal or state regulatory authority by it, or in the case of NBI, NBB
during 1994 and 1995; and (3) to the extent not prohibited by law, all reports
of any state or federal regulatory authority relating to it or, in the case of
NBI, NBB and received during or relating to matters in 1994 or 1995 (all of the
foregoing reports and documents are hereinafter referred to as "Regulatory
Reports"). As of their respective dates the Regulatory Reports referred to in
(1) and (2) above complied in all material respects with all legal and
regulatory requirements applicable thereto and the Regulatory Reports referred
to in (1) above are accurate in all material respects and fairly present the
financial condition and income of the reporting entity for the period(s) covered
thereby;
(H) Material Events. Except as Previously Disclosed, since December 31,
1994, no event has occurred which is reasonably likely to have a Material
Adverse Effect on it;
(I) Litigation. Except as Previously Disclosed, no litigation, proceeding
or controversy before any court or governmental agency is pending which is
reasonably likely to have a Material Adverse Effect on it and, to the best of
its knowledge, no such litigation, proceeding or controversy has been
threatened; and except as Previously Disclosed neither it, nor in the case of
NBI, NBB, nor their respective properties is a party to or is subject to any
order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, any federal or state
governmental agency or authority charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits which restricts
or purports to restrict in any material respect the conduct of the business of
it, in the case of NBI, NBB or their respective properties, or in any manner
relates to the capital, liquidity, credit policies or management of it or, in
the case of NBI, NBB; and,
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except as Previously Disclosed, neither it nor, in the case of NBI, NBB has been
advised by any such regulatory authority that such authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of understanding,
commitment letter or similar submission;
(J) Material Contracts. Except as Previously Disclosed or as previously
disclosed in the Financial Reports and except for this Plan, neither it nor in
the case of NBI, NBB is bound by any material (as to it and its subsidiaries
taken as a whole) contract to be performed after the date hereof;
(K) Commissions. All negotiations relative to this Plan and the
transactions contemplated hereby have been carried on by it directly with the
other parties hereto and no action has been taken by it that would give rise to
any valid claim against any party hereto for a brokerage commission, finder's
fee or other like payment, excluding a fee in an amount Previously Disclosed to
be paid to McKinnon Co., Inc., who have acted as financial advisors to NBI, and
a fee to be paid to Baxter Fentriss & Company, who has acted as financial
advisor to BTC;
(L) ERISA. Except as Previously Disclosed:
(1) all "employee benefit plans" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
covering employees or former employees of it and its subsidiaries (the
"Employees") are Previously Disclosed, true and complete copies of which have
been made available to the other party;
(2) all employee benefit plans covering Employees, to the extent
subject to ERISA (the "ERISA Plans"), are in compliance with ERISA, except for
failure to so comply which are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it; each ERISA Plan which is an
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA
("Pension Plan") and which is intended to be qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), has either (a)
received a favorable determination letter from the Internal Revenue Service, or
(b) is or will be the subject of an application for a favorable determination
letter, and it is not aware of any circumstances likely to result in the
revocation or denial of any such favorable determination letter; there is no
pending or, to the best of its knowledge, threatened litigation relating to the
ERISA Plans which is reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on it; and neither it nor, in the case of NBI,
NBB has engaged in a transaction with respect to any ERISA Plan that, assuming
the taxable period of such transaction expired as of the date hereof, would
subject it or, in the case of NBI, NBB to a tax or penalty imposed by either
Section 4975 of the Code or Section 502(i) of ERISA in an amount which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it;
(3) no liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by it or, in the case of NBI, NBB with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them or
any entity which is considered one "employer" with it under Section 4001(a)(14)
of ERISA or Section 414 of the Code (an "ERISA Affiliate"), which liability is
reasonably likely to have a Material Adverse Effect on it; it and its
subsidiaries have not incurred and do not expect to incur any withdrawal
liability with respect to a multiemployer plan under Subtitle E of Title IV of
ERISA; and to its knowledge no notice of a "reportable event" within the meaning
of Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or the Pension Plan
of an ERISA Affiliate within the 12-month period ending on the date hereof;
(4) during the current plan year and the immediately preceding three
plan years of such ERISA Plan, all contributions required to be made under the
terms of any ERISA Plan of it, or in the case of NBI, NBB or an ERISA Affiliate
have been timely made; and no pension plan of it, in the case of NBI, NBB, or an
ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived)
within the meaning of Section 412 of the
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Code or Section 302 of ERISA which is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it;
(5) under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the ERISA Plan's most recent actuarial
valuation) did not exceed the then current value of the assets of such ERISA
Plan, and there has been no material adverse change in the financial position of
such ERISA Plan since the last day of the most recent plan year; and
(6) there are no material current or projected liabilities for retiree
health or life insurance benefits;
(M) Regulatory Approvals. It knows of no reason why the regulatory
approvals referred to in Paragraphs (B) and (C) of Article VI should not be
obtained without the imposition of any condition of the type referred to in the
proviso following such Paragraph (C);
(N) Subsidiaries. In the case of BTC, it has no subsidiaries. NBI has one
subsidiary, which is NBB, and NBB has one subsidiary, which is NB Operating,
Inc.;
(O) Collective Bargaining Contracts. Neither it nor in the case of NBI, NBB
is a party to, or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization, nor
is it or in the case of NBI, NBB the subject of a proceeding asserting that it
and in the case of NBI, NBB has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel it or such
subsidiary to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it or in
the case of NBI, NBB pending or, to the best of its knowledge, threatened, nor
is it aware of any activity involving it or in
the case of NBI, NBB's employees seeking to certify a collective bargaining
unit or engaging in any other organization activity;
(P) Classified Assets. (1) NBI has Previously Disclosed a list of the
aggregate amounts of loans, extensions of credit or other assets of NBB, that
have been classified as of June 30, 1995 by NBB ("NBB Asset Classification") and
(2) BTC has Previously Disclosed a list of the loans, extensions of credit or
other assets of BTC that were classified by the examiners of the Board of
Governors of the Federal Reserve System in its last preceding examination ("BTC
Asset Classification") and has Previously Disclosed a list of its loans and
extensions of credit by BTC in the respective initial principal amount of
$100,000 or more, any payment of which is, as of the date so disclosed,
delinquent ("BTC Delinquent Loan List"). The NBB Asset Classification, the BTC
Asset Classification and the BTC Delinquent Loan List are, respectively,
accurate and complete in all material respects and no amounts of loans,
extensions of credit or other assets that have been classified as of the
respective date of the NBB or BTC Asset Classification by any regulatory
examiner as "Other Loans Specially Mentioned", "Substandard", "Doubtful",
"Loss", or words of similar import are excluded from the amounts disclosed in
the NBB or BTC Asset Classification as of the respective date thereof other than
amounts of loans, extensions of credit or other assets that were charged off by
BTC or NBB, as the case may be, prior to the respective date of the NBB or BTC
Asset Classification;
(Q) Affiliates. Except as Previously Disclosed, to the best of its
knowledge, there is no person who, as of the date of this Plan, may be deemed to
be an "affiliate" of BTC or NBI as that term is used in Rule 145 under the
Securities Act of 1933, as amended (together with the rules and regulations
thereunder, the "Securities Act"; hereinafter the Securities Act and the
Exchange Act are referred to as the "Federal Securities Laws");
(R) Insurance Policies. It has made available to the other party correct
and complete copies of all of its and in the case of NBI, NBB's insurance
policies respecting the properties, operations, liabilities, officers,
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directors and employees thereof, all of which are in full force and effect or
provide coverage to it, and in the case of NBI, NBB or their officers, directors
and employees;
(S) NBI Stock. In the case of NBI only, the shares of NBI Common Stock to
be issued in exchange for shares of BTC Common Stock, upon consummation of the
Merger, will have been duly authorized and, when issued in accordance with the
terms of this Plan, will be validly issued, fully paid and nonassessable and
subject to no preemptive rights;
(T) Takeover Laws. It has taken all necessary action to exempt the
transactions contemplated by this Plan from, or the transactions contemplated by
this Plan are otherwise exempt from, any applicable state takeover laws in
effect as of the date of this Plan, including, without limitation, Articles 14
and 14.1 of the Virginia Stock Corporation Act;
(U) Approval of This Transaction. It has taken all action so that the
entering into of this Plan and the consummation of the transactions contemplated
hereby and thereby (including without limitation the Merger) or any other action
or combination of actions, or any other transactions, contemplated hereby or
thereby do not and will not (1) require a vote of stockholders (other than as
set forth in Paragraph (A) of Article VI); or (2) result in the grant of any
rights to any person under its Articles of Incorporation or Bylaws or under any
agreement; or (3) except as set forth in Paragraphs (B) and (C) of Article VI,
require any consent or approval under any law, rule, regulation, judgment,
decree, order, governmental permit or license or, except as Previously
Disclosed, the consent or approval of any other party to any agreement,
indenture or instrument;
(V) Environmental Laws. (1) To its knowledge, it and in the case of NBI,
NBB, the Participation Facilities and the Loan Properties (each as defined
below) are, and have been, in compliance with all Environmental Laws (as defined
below), except for instances of noncompliance which are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it;
(2) there is no proceeding pending or, to its knowledge, threatened
before any court, governmental agency or board or other forum in which it or in
the case of NBI, NBB or any Participation Facility has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a defendant
or potentially responsible party (a) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (b) relating to the release or
threatened release into the environment of any Hazardous Material (as defined
below), whether or not occurring at or on a site owned, leased or operated by it
or in the case of NBI, NBB or any Participation Facility, except for such
proceedings pending or threatened that are not reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on it;
(3) to its knowledge, there is no proceeding pending or threatened
before any court, governmental agency or board or other forum in which any Loan
Property (or it or in the case of NBI, NBB in respect of any Loan Property) has
been, or with respect to threatened proceedings, reasonably would be expected to
be, named as a defendant or potentially responsible party (a) for alleged
noncompliance (including by any predecessor) with any Environmental Law or (b)
relating to the release or threatened release into the environment of any
Hazardous Material, whether or not occurring at or on a Loan Property, except
for such proceedings pending or threatened that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it;
(4) to its knowledge, there is no reasonable basis for any proceeding
of a type described in subparagraphs (2) or (3) above;
(5) to its knowledge, during the period of (a) its or in the case of
NBI, NBB's ownership or operation of any of their respective current properties,
(b) its or in the case of NBI, NBB's participation in the management of any
Participation Facility, or (c) its or in the case of NBI, NBB's holding of a
security interest in a Loan Property, there have been no releases of Hazardous
Material in, on, under or affecting any such property,
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Participation Facility or Loan Property, except for such releases that are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it;
(6) to its knowledge, prior to the period of (a) its or in the case of
NBI, NBB's ownership or operation of any of their respective current properties,
(b) its or in the case of NBI, NBB's participation in the management of any
Participation Facility, or (c) its or in the case of NBI, NBB's holding of a
security interest in a Loan Property, there were no releases of Hazardous
Material in, on, under or affecting any such property, Participation Facility or
Loan Property, except for such releases that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it;
(7) the following definitions apply for purposes of this Paragraph (V):
"Loan Property" means any property owned by it or in the case of NBI, NBB or in
which it or in the case of NBI, NBB holds a security interest, and, where
required by the context, includes the owner or operator of such property, but
only with respect to such property; "Participation Facility" means any facility
in which it or in the case of NBI, NBB participates in the management and, where
required by the context, includes the owner or operator or such property, but
only with respect to such property; "Environmental Law" means (a) any federal,
state and local law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity,
relating to (i) the protection, preservation or restoration of the environment
(including, without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and animal life or
any other natural resource), or to human health or safety, or (ii) the exposure
to, or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of Hazardous
Material, in each case as amended and as now in effect and includes, without
limitation, the federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the
federal Water Pollution Control Act of 1972, the federal Clean Air Act, the
federal Clean Water Act, the federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the federal
Solid Waste Disposal Act and the federal Toxic Substances Control Act, and the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and Health Act of 1970, the Consumer Protection Act, each as amended and
as now in effect, and (b) any common law or equitable doctrine (including,
without limitation, injunctive relief and tort doctrines such as negligence,
nuisance, trespass and strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Hazardous Material; "Hazardous Material" means
any substance presently listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated, under any Environmental
Law, whether by type or quantity, and includes, without limitation, any oil or
other petroleum product, toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl;
(W) Taxes. Except as Previously Disclosed, (1) all reports and returns with
respect to Taxes (as defined below) that are required to be filed by or with
respect to it or in the case of NBI, NBB, including without limitation
consolidated federal income tax returns of it and in the case of NBI, NBB
(collectively, the "Tax Returns"), have been duly filed, or requests for
extensions have been timely filed and have not expired, for periods ended on or
prior to June 30, 1995, and on or prior to the date of the most recent fiscal
year end immediately preceding the Merger Effective Date, except to the extent
all such failures to file, taken together, are not reasonably likely to have a
Material Adverse Effect on it, and such Tax Returns were true, complete and
accurate in all material respects, (2) all taxes (which shall mean federal,
state, local or foreign income, gross receipts, windfall profits, severance,
property, production, sales, use, license, excise, franchise, employment,
withholding or similar taxes imposed on the income, properties or operations of
it or in the case of NBI, NBB, together with any interest, additions, or
penalties with respect thereto and any interest in respect of such additions or
penalties, collectively the "Taxes") shown to be due on the Tax Returns have
been paid in full, (3) the Tax Returns have been examined by the Internal
Revenue Service or the appropriate state, local or foreign taxing authority or
the period for assessment of the Taxes in respect of which such Tax Returns were
required to be filed has expired, (4) all Taxes due with respect to completed
and settled examinations have been paid in full, (5) no issues have been raised
by the relevant taxing authority in
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connection with the examination of any of the Tax Returns which are reasonably
likely to result in a determination that would have a Material Adverse Effect on
it, except as reserved against in its Financial Reports, and (6) no waivers of
statutes of limitations (excluding such statutes that relate to years currently
under examination by the Internal Revenue Service) have been given by or
requested with respect to any Taxes of it or in the case of NBI, NBB;
(X) Legal Compliance. It and in the case of NBI, NBB are in substantial
compliance with all applicable laws relating to their business or employment
practices or the ownership of their properties and are in substantial compliance
with each applicable law, ordinance, order, decree or resolution of any
governmental entity applicable to the conduct thereof or the ownership of the
properties thereto in each case which either alone or in the aggregate have or
would have a Material Adverse Effect on it;
(Y) Certain Interests. Except in arm's length transactions pursuant to
normal commercial terms and conditions, no executive officer or director of it
or in the case of NBI, NBB has any material interest in any property, real or
personal, tangible or intangible, used in or pertaining to the business of it
and in the case of NBI, NBB, except for the usual rights of a shareholder in it;
no such person is indebted to it or in the case of NBI, NBB, except for normal
business expense advances; and neither it nor in the case of NBI, NBB is
indebted to such person except for amounts due under normal and disclosed
compensation arrangements or reimbursement of ordinary business expenses;
(Z) Licenses. It and in the case of NBI, NBB have in effect all approvals,
authorizations, consents, licenses, clearances, and orders of and registrations
with all governmental and regulatory authorities the failure to have and comply
with which either alone or in the aggregate would have a Material Adverse Effect
on it;
(AA) Liabilities. Except to the extent reflected or reserved against in
it's Financial Reports and except as Previously Disclosed or incurred in the
ordinary course of business since the date of its most recent Financial Report,
it and in the case of NBI, NBB has no material liability or obligation of any
nature whether accrued, absolute, contingent or otherwise and whether due or to
become due;
(BB) Pooling of Interests. It has taken no action that would cause the
Merger to fail to qualify for pooling of interests accounting treatment; and
(CC) Ten Percent Shareholders. It has no shareholder who owns of record or
beneficially 10% or more of the outstanding shares of BTC Common Stock, or NBI
Common Stock, as the case may be, and there is no person known to it who,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has or shares (1) voting power which includes the
power to vote or to direct the voting of, such shares and/or (2) investment
power, which includes the power to dispose or to direct the disposition, of 10%
or more of the outstanding shares of BTC Common Stock or NBI Common Stock, as
the case may be (all of the foregoing, "10% Ownership"). There is no person to
its knowledge who, directly or indirectly, has created or uses a trust, proxy,
power of attorney, pooling arrangement or any other contract, arrangement or
device with the purpose or effect of divesting such person of 10% Ownership or
preventing the vesting of 10% Ownership. A person shall also be deemed to be a
beneficial owner for purposes of the foregoing if that person has the right to
acquire beneficial of such shares within 60 days.
V. COVENANTS
BTC hereby covenants to NBI, and NBI hereby covenants to BTC, that:
(A) Best Efforts to Complete Merger. Subject to the terms and conditions of
this Plan, it shall use its best efforts in good faith to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary, proper
or desirable, or advisable under applicable laws, as promptly as practicable so
as to permit consummation of the Merger as soon as reasonably practicable and to
otherwise enable consummation of the
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transactions contemplated hereby and shall cooperate fully with the other
parties hereto to that end (it being understood that any amendments to the
Registration Statement (as hereinafter defined) or a resolicitation of proxies
as a consequence of an acquisition agreement by NBI or any of its subsidiaries
shall not violate this covenant), including (1) using its best efforts to lift
or rescind any order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article VI, and each of BTC and NBI shall use, and shall cause
each of their respective subsidiaries to use, its best efforts to obtain all
consents (governmental or other) necessary or desirable for the consummation of
the transactions contemplated by this Plan; and (2) in the case of BTC,
cooperating with NBI in supplying such information as NBI may reasonably request
in connection with any public offerings of securities by NBI prior to the Merger
Effective Date;
(B) BTC Proxy Statement. In the case of BTC only, (1) it shall promptly
prepare and provide to NBI prior to its filing and mailing a proxy statement
(the "Proxy Statement") to be mailed to the holders of BTC Common Stock in
connection with the Merger and to be filed by NBI in a registration statement
(the "Registration Statement") with the SEC, which shall conform to all
applicable legal requirements; (2) without limiting the foregoing, at the time
such Proxy Statement or any amendment or supplement thereto is mailed to holders
of BTC Common Stock and at all times thereafter up to and including the meeting
of BTC shareholders referred to in Subparagraph (3) of this Paragraph (B), the
Proxy Statement and such amendments and supplements will comply in all material
respects with the provisions (to the extent applicable) of the Exchange Act and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading; provided, however, in no event shall any party
hereto be liable for any untrue statement of a material fact or omission to
state a material fact in the Proxy Statement made in reliance upon, and in
conformity with, written information concerning another party furnished by such
other party specifically for use in the Proxy Statement; (3) it shall hold a
special meeting (the "Meeting") of the holders of BTC Common Stock as soon as
practicable after the Registration Statement has become effective for purposes
of voting upon this Plan, the Plan of Merger and the Merger contemplated hereby
and thereby, together with amendments to the BTC Articles of Incorporation
eliminating the preemptive rights of the holders of shares of BTC Common Stock
and conforming the BTC Articles precisely to the provisions of Articles III and
V of the Articles of Incorporation of NBI Interim Bank by adding the same to and
eliminating any contrary, inconsistent or similar provisions from the BTC
Articles, including but not limited to the elimination in their entirety of the
First and Third Amendments to the BTC Articles which were adopted by the
shareholders of BTC on March 17, 1992 (the "BTC Charter Amendment"); and (4)
subject to the fiduciary duties of the Board of Directors of BTC (as advised in
writing by its counsel), it shall use its best efforts to solicit and obtain
votes of the holders of BTC Common Stock in favor of the above proposals and
shall once, at NBI's request, recess or adjourn the meeting for a period up to
45 days if such recess or adjournment is deemed by NBI to be necessary or
desirable;
(C) Registration Statement Contents. When the Registration Statement or any
post-effective amendment or supplement thereto shall become effective, and at
all times subsequent to such effectiveness, up to and including the date of the
Meeting, such Registration Statement and all amendments or supplements thereto,
with respect to all information set forth therein furnished or to be furnished
by BTC relating to BTC and by NBI relating to NBI and NBB, (1) will comply in
all material respects with the provisions of the Securities Act and any other
applicable statutory or regulatory requirements, and (2) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading; provided, however, in no event shall any party hereto be liable for
any untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
written information concerning another party furnished by such other party
specifically for use in the Registration Statement. In connection with the
preparation of the Registration Statement and related Prospectus/Proxy
Statement, each will cooperate with the other and will furnish the information
concerning itself required by law to be included therein;
(D) Effectiveness of Registration Statement. NBI will provide BTC a copy of
the Registration Statement and any supplement or amendment thereto before the
same is filed and advise BTC, promptly after NBI receives notice thereof, of the
time when the Registration Statement has become effective, of the issuance of
any stop
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order or the suspension of the qualification of the NBI Common Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information;
(E) Public Announcements. It agrees that, unless approved by the other
party hereto in advance, it will not issue any press release or written
statement for general circulation relating to the transactions contemplated
hereby, except as otherwise required by law or applicable NASD or stock exchange
rule;
(F) Review of Information. (1) Upon reasonable notice, it shall afford the
other party hereto, and its officers, employees, counsel, accountants and other
authorized representatives, access, during normal business hours throughout the
period prior to the Merger Effective Date, to all of its and in the case of NBI,
NBB's properties, books contracts, commitments and records and, during such
period, it shall furnish promptly to the other party hereto (a) a copy of each
material report, schedule and other document filed by it pursuant to the
requirements of the Securities Laws or any state laws, rules and regulations
regulating the issuance, sale or exchange of securities or the markets in which
any of the foregoing occurs ("Blue Sky Law(s)" which together with the Federal
Securities Laws are hereinafter referred to as the "Securities Laws") or banking
laws, and (b) all other information concerning its business, properties and
personnel as the other parties hereto may reasonably request, provided that no
investigation pursuant to this Paragraph (F) by any party shall affect or be
deemed to modify or waive any representation or warranty made by any other party
hereto or the conditions to the obligation of the first party to consummate the
transactions contemplated by the Plan; and (2) each party hereto will not use
any information obtained pursuant to this Paragraph (F) for any purpose
unrelated to the consummation of the transactions contemplated by this Plan and,
if the Merger is not consummated, will hold all information and documents
obtained pursuant to this paragraph in confidence (as provided in Paragraph (F)
of Article VIII) unless and until such time as such information or documents
become publicly available other than by reason of any action or failure to act
by such party or as it is advised by counsel that any such information or
document is required by law or applicable NASD or stock exchange rule to be
disclosed,and in the event of the termination of this Plan, each party will,
upon request by the other party, deliver to the other all documents so obtained
by it or destroy such documents;
(G) No Solicitation. It: (1) shall not, and shall direct the officers,
directors, employees and other persons affiliated with it or any investment
banker, attorney, accountant or other representative of it, not to, directly or
indirectly, solicit or encourage inquiries or proposals with respect to, or
(except as required by the fiduciary duties of its Board of Directors as advised
in writing by its counsel) furnish any nonpublic information relating to or
participate in any negotiations or discussion concerning, any acquisition or
purchase of all or a substantial portion of the assets of, or a substantial
equity interest in, it or in the case of NBI, NBB or any merger or other
business combination with it or in the case of NBI, NBB other than as
contemplated by this Plan; (2) shall notify the other party immediately if any
such inquiries or proposals are received by, or any such negotiations or
discussions are sought to be initiated with, it or in the case of NBI, NBB; and
(3) shall instruct its officers, directors, agents, advisors and affiliates (and
in the case of NBI, NBB's executive officers and directors) to refrain from
doing any of the foregoing;
(H) Filing of Registration Statement. In the case of NBI only, it shall, as
promptly as practicable following the date of this Plan, prepare and file the
Registration Statement with the SEC and NBI shall use its best efforts to cause
the Registration Statement to be declared effective as soon as practicable after
the filing thereof;
(I) Blue Sky. In the case of NBI only, it shall use its best efforts to
obtain, prior to the effective date of the Registration Statement, all necessary
Blue Sky Law permits and approvals, provided that NBI shall not be required by
virtue thereof to submit to general jurisdiction in any state. NBI agrees to
provide copies to BTC of applications for Blue Sky Law permits and approvals
prior to filing the same;
(J) Affiliates. It will cause each person who may be deemed to be an
"affiliate" of it for purposes of Rule 145 under the Securities Act to execute
and deliver to NBI on or before the mailing of the Proxy Statement an agreement
in the form attached hereto as Exhibit B-1 (in the case of BTC affiliates) or in
-----------
the form attached hereto
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as Exhibit B-2 (in the case of NBI affiliates) restricting the disposition of
-----------
such affiliate's shares of BTC or NBI Common Stock, as the case may be and, in
the case of BTC affiliates, the shares of NBI Common Stock to be received by
such person in exchange for such person's shares BTC Common Stock;
(K) BTC Bylaws, Policies and Practices. In the case of BTC only: (1) it
shall cause its Board of Directors to conform its Bylaws to those of NBI Interim
Bank by adopting the Bylaws of NBI Interim Bank which are in the form attached
hereto as Exhibit C as those of BTC excepting only the use of the name of NBI
---------
Interim Bank; and (2) it shall use its best efforts to modify and change its
credit, investment, litigation, real estate valuation and trust department
policies and practices (including loan classifications and levels of reserves)
prior to the Merger Effective Date so as to be consistent on a mutually
satisfactory basis with those of NBB and generally accepted accounting
principles. BTC shall not be required to modify or change any such bylaws,
policies or practices, however, until (x) satisfaction of the conditions set
forth in Paragraphs (A), (B) and (C) of Article VI, (y) such time as BTC and NBI
shall reasonably agree that the Merger Effective Date will occur prior to public
disclosure of such modifications or changes in regular periodic earnings
releases or periodic reports filed with the FDIC, and (2) such time as NBI
acknowledges in writing that all conditions to NBI's obligation to consummate
the Merger (and NBI's rights to terminate this Plan) have been waived or
satisfied; provided, however, that in all circumstances BTC shall make such
modifications and changes not later than immediately prior to the Merger
Effective Date and provided, further, that such modifications and changes, once
-------- -------
implemented, shall not affect the Exchange Ratio. BTC's representations,
warranties and covenants and contained in the Plan shall not be deemed to be
untrue or breached in any respect for any purpose as a consequence of any
modifications or changes undertaken solely on account of this Paragraph (K);
(L) State Takeover Laws. It shall not take any action that would cause the
transactions contemplated by this Plan to be subject to any applicable state
takeover statute in effect as of the date of this Plan and shall take all
necessary steps to exempt (or ensure the continued exemption of) the
transactions contemplated by this Plan from, or if necessary challenge the
validity or applicability of, any applicable state takeover law, as now or
hereafter in effect, including, without limitation, Articles 14 and 14.1 of the
Virginia Stock Corporation Act;
(M) BTC Special Shareholder Rights. In the case of BTC only: (1) it shall
take all necessary steps to ensure that the entering into of this Plan and the
consummation of the transactions contemplated hereby and thereby (including
without limitation the Merger) and any other action or combination of actions,
or any other transactions contemplated hereby or thereby do not and will not
result in the grant of any rights to any person under the Articles of
Incorporation of Bylaws of BTC (other than the right, if any, of a dissenting
stockholder under Article 15 of the Virginia Stock Corporation Act and the right
of holders of BTC Common Stock to vote to approve this Plan) or under any
agreement to which BTC is a party, and (2) it shall use its best efforts to
cause the Charter Amendment to be adopted by the shareholders of BTC and filed
with and made effective by the SCC prior to the Merger Effective Date;
(N) BTC Shareholder Approval Rights. In the case of BTC, only, it shall not
adopt any plan or other arrangement that would adversely affect in any way the
rights of the holders of BTC Common Stock to vote to approve this Plan;
(O) Best Efforts for Merger. It undertakes and agrees to use its best
efforts to cause the Merger to be effected and to take no action which would
cause the Merger to fail to qualify for pooling of interests accounting
treatment;
(P) Government Applications. In the case of NBI only, it shall promptly
seek the following consents and approvals with respect to the Merger: (1)
approval of the charter of the NBI Interim Bank by the SCC ("Interim Approval");
(2) approval of the Merger by the FDIC under the Bank Merger Act of 1960 ("FDIC
Approval"); (3) approval of the Merger by the BFI pursuant to Va. Code (S) 6.1-
44 ("State Bank Merger Approval"); (4) approval of the Merger by the Board of
Governors of the Federal Reserve Board under the Bank Holding Company Act, as
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<PAGE>
amended ("FRB Approval"); and (5) approval of the BFI, to the extent necessary,
under Chapter 13 of Title 6.1 of the Code of Virginia ("State Holding Company
Approval"). Both NBI and BTC will use their best efforts to obtain and will
cooperate with each other in making applications for the foregoing approvals or
other actions advisable in the reasonable judgment of NBI and BTC to consummate
the Merger including, but not limited to, promptly furnishing information
relating to it and its subsidiaries required to be set forth therein; provided,
--------
however, that any approval shall not require a change which materially adversely
- -------
impacts the economic or business benefits of the transactions contemplated by
this Plan so as to render inadvisable the consummation of the Merger; and
provided, further, that NBI shall provide drafts of applications for the
- -------- -------
foregoing approvals to BTC for review and comment prior to their filing with the
responsible governmental agency, will inform BTC of any comments received from
the responsible governmental agency with respect to any of such applications and
filings and will notify BTC of the action, if any, of the responsible
governmental agency thereon as soon as reasonably practicable after it receives
notice thereof and BTC agrees to review and provide any comments it may have
promptly so as not to delay or disrupt the application process;
(Q) Environmental Tests. It will allow the other to conduct, through
designated representatives, environmental and engineering tests provided that no
test or information discovered pursuant thereto shall be deemed to affect or
modify or waive any representation or warranty made by the other party hereto or
the conditions to the obligation of the first party to consummate the
transactions contemplated by the Plan;
(R) Listing of NBI Common Stock. NBI will use its best efforts, after the
consummation of the Plan, to cause the NBI Common Stock, including but not
limited to the shares of NBI Common Stock to be issued to the holders of shares
of BTC Common Stock in connection with the consummation of the Plan, to be
listed on the NASDAQ Stock Market ("NASDAQ Stock Market").
(S) Certain Continuing Corporation Obligations. After the consummation of
the Plan, the Continuing Corporation shall not change, alter or amend its Bylaws
as in effect at the time of the Merger or issue or authorize to be issued any
stock, common or preferred, or other securities or options, warrants, rights to
subscribe to or securities or rights convertible into shares of stock, common or
preferred, or other securities, without the consent of NBI.
VI. CONDITIONS TO CONSUMMATION OF THE MERGER.
Consummation of the Merger is conditioned upon:
(A) Approval of the Merger, the Charter Amendment and the other
transactions contemplated hereby by the requisite vote of the stockholders of
the parties hereto, as may be required;
(B) Issuance of a certificate of effectiveness for the Charter Amendment by
the SCC and procurement of the Interim Approval, FDIC Approval, the State Bank
Merger Approval, the FRB Approval, and the State Holding Company Approval, as
may be necessary, and the expiration of any statutory waiting period relating
thereto;
(C) Procurement of all other regulatory consents and approvals and
satisfaction of all other requirements prescribed by law which are necessary to
the consummation of the Merger; provided, however, that no approval or consent
in Paragraph (B) or (C) of this Article VI shall have imposed any condition or
requirement which would materially adversely impact the economic or business
benefits of the transactions contemplated by this Plan so as to render
inadvisable the consummation of the Merger;
(D) There shall not be in effect any order, decree or injunction of any
court or agency of competent jurisdiction that enjoins or prohibits consummation
of the Merger;
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(E) BTC and its directors shall have received from KPMG Peat Marwick
letters, dated the date of or shortly prior to (i) the mailing of the Proxy
Statement, and (ii) the Merger Effective Date, in form and substance
satisfactory to BTC with respect to NBI's consolidated financial position and
results of operations, which letters shall be based upon customary specified
procedures undertaken by such firm; and (iii) the Merger Effective Date to the
effect that they are not aware of any facts or circumstances relating to actions
taken by NBI or actions that NBI has failed to take that might cause the Merger
not to qualify for pooling of interests accounting treatment;
(F) NBI shall have received from Cook Associates letters, dated the date of
or shortly prior to (1) the mailing of the Proxy Statement, (2) the public
offerings of any securities by NBI prior to the Merger Effective Date, and (3)
the Merger Effective Date, in form and substance satisfactory to NBI with
respect to BTC's financial position and results of operations, which letters
shall be based upon customary specified procedures undertaken by such firm, and
NBI shall have received from Cook Associates a letter, dated as of the Merger
Effective Date in form and substance satisfactory to NBI, to the effect that
Cook Associates are not aware of any facts or circumstances relating to actions
taken by BTC or actions that BTC has failed to take that might cause the Merger
not to qualify for pooling of interests accounting treatment;
(G) BTC shall have received an opinion, dated the Merger Effective Date, of
Marilyn Buhyoff, counsel for NBI and the NBI Interim Bank, in form reasonably
satisfactory to BTC, which shall cover the matters contained in Exhibit D
hereto;
(H) NBI and its directors and officers who sign the Registration Statement
shall have received an opinion, dated the Merger Effective Date: (1) of Bowen,
Bowen & Bowen, P.C. in form reasonably satisfactory to NBI, which shall cover
the matters contained in Exhibit E hereto and (2) of John F. Stuart, A
Professional Corporation to the effect that he has acted as special counsel to
BTC in connection with the negotiation, approval and adoption of this Plan, and
the provision of information by BTC to NBI with respect to the Proxy Statement,
and that: (a) the Proxy Statement (including any documents relating to BTC
incorporated by reference therein as of the mailing date thereof), complied in
all material respects as to form with the requirements of applicable laws, rules
and regulations; and (b) he does not believe that, insofar as it relates to BTC,
the Proxy Statement on the mailing date contained any untrue statement of
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading (such opinion
may state that such counsel does not assume any responsibility for the accuracy
or fairness of the statements contained in the Proxy Statement; and that he does
not express any opinion or belief as to material in the Proxy Statement insofar
as it includes or reflects any information relating to or supplied by entities
other than BTC or as to any financial statements or other financial data
contained in the Proxy Statement);
(I) (1) Each of the representations and warranties contained herein of NBI
shall be true and correct as of the date of this Plan and upon the Merger
Effective Date with the same effect as though all such representations and
warranties had been made on the Merger Effective Date, except (a) for any such
representations and warranties made as of a specified date, which shall be true
and correct as of such date, (b) as expressly contemplated by this Plan, or (c)
for representations and warranties (other than the representations and
warranties set forth in Paragraph (A) of Article IV, which shall be true and
correct in all material respects) the inaccuracies of which relate to matters
that, individually or in the aggregate, do not materially adversely affect the
Merger and the other transactions contemplated by this Plan, and (2) each and
all of the agreements and covenants of NBI to be performed and complied with
pursuant to this Plan and the other agreements contemplated hereby prior to the
Merger Effective Date shall have been duly performed and complied with in all
material respects, and BTC shall have received a certificate or certificates
signed by the Chief Executive Officer and Chief Financial Officer of NBI dated
the Merger Effective Date, to such effect;
(J) (1) Each of the representations and warranties contained herein of BTC
shall be true and correct as of the date of this Plan and upon the Merger
Effective Date with the same effect as though all such representations and
warranties had been made on the Merger Effective Date, except (a) for any such
representations and warranties
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<PAGE>
made as of a specified date, which shall be true and correct as of such date,
(b) as expressly contemplated by this Plan, or (c) for representations and
warranties (other than the representations and warranties set forth in Paragraph
(A) of Article IV, which shall be true and correct in all material respects) the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Plan, and (2) each and all of the agreements and covenants
of BTC to be performed and complied with pursuant to this Plan and the other
agreements contemplated hereby prior to the Merger Effective Date shall have
been duly performed and complied with in all material respects, and NBI shall
have received a certificate signed by the Chief Executive Officer and the Chief
Financial Officer of BTC dated the Merger Effective Date, to such effect;
(K) The Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC or any other regulatory authority;
(L) NBI shall have received all Blue Sky Law approvals, permits and other
authorizations necessary to consummate the Merger;
(M) NBI and BTC shall have received an opinion from KPMG Peat Marwick to
the effect that (1) the acquisition of BTC Common Stock by NBI and the Merger
constitutes a reorganization under Section 368 of the Internal Revenue Code, and
(2) no gain or loss will be recognized by stockholders of BTC who receive shares
of NBI Common Stock in exchange for their shares of BTC Common Stock except that
gain or loss may be recognized as to cash received in lieu of fractional share
interests and, in rendering their opinion, may require and rely upon
representations contained in certificates of officers of NBI, BTC and others;
(N) NBI and BTC shall have received a letter, dated as of the Merger
Effective Date, in form and substance reasonably acceptable to NBI and BTC, from
KPMG Peat Marwick to the effect that the acquisition of BTC Common Stock by NBI
and the Merger will qualify for pooling of interests accounting treatment; and
(O) NBI shall have received from each affiliate of BTC and NBI,
respectively, the affiliates letter referred to in Paragraph (J) of Article V,
to the extent necessary to assure in the reasonable judgment of NBI that the
acquisition of BTC Common Stock by NBI and the Merger will qualify for pooling
of interests accounting treatment;
(P) At the time the Proxy Statement is mailed to the holders of BTC Common
Stock and on the Merger Effective Date, the Board of Directors of NBI shall have
received an opinion from McKinnon & Company, Inc. that the terms of the Merger
are fair to the shareholders of NBI from a financial point of view.
(Q) At the time the Proxy Statement is mailed to the holders of shares of
BTC Common Stock and on the Merger Date, the Board of Directors of BTC shall
have received an opinion from Baxter, Fentriss & Company that the terms of the
Merger are fair to the shareholders of BTC from a financial point of view.
provided, however, that a failure to satisfy any of the conditions set
forth in the proviso following Paragraph (C) or in Paragraph (F), (H), (J),
(L), (O), or (P) of this Article VI shall only constitute conditions if
asserted by NBI and a failure to satisfy any of the conditions set forth in
the proviso following Paragraph (C), Paragraph (E), (G), (I), or (Q) of
this Article VI shall only constitute conditions if asserted by BTC.
VII. TERMINATION.
This Plan may be terminated prior to the Merger Effective Date, either
before or after receipt of required stockholder approval:
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(A) by the mutual consent of NBI and BTC, if the Board of Directors of each
so determines by vote of a majority of the members of its entire Board;
(B) by NBI or BTC, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event of (1) a breach by the
other party of any representation or warranty contained herein, which breach
cannot be or has not been cured within thirty (30) days after the giving of
written notice to the breaching party of such breach and which breaches,
individually or in the aggregate, materially adversely affect the Merger and the
other transactions contemplated by this Plan, or (2) a material breach by the
other party of any of the covenants or agreements contained herein, which breach
cannot be or has not been cured within thirty (30) days after the giving of
written notice to the breaching party of such breach; provided, however, that a
breach can only be asserted as a basis for termination pursuant to this
paragraph (B) by a party who is not itself at such time in breach hereof and
provided, further, that termination under this Paragraph (B) shall not relieve
any party from liability under Paragraph (E)(2) of Article VIII;
(C) by NBI or BTC, if its Board of Directors so determines by vote of a
majority of the members of its entire Board, in the event that the Merger is not
consummated by June 30, 1996, and provided, further, that termination under this
Paragraph (C) shall not relieve any party from liability under Paragraph (E)(2)
of Article VIII;
(D) by NBI or BTC, if its Board of Directors so determines by a vote of a
majority of the members of its entire Board, in the event that (1) any common
stockholder approval contemplated by Paragraph (A) of Article VI is not obtained
at a meeting or meetings called for the purpose of obtaining such approval; (2)
Interim Approval, FDIC Approval, State Bank Merger Approval, FRB Approval, or
State Holding Company Approval, to the extent necessary to consummate the Merger
legally, is finally and unconditionally denied; or (3) the Board of Directors of
NBI recommends to NBI shareholders approval of a sale of all or substantially
all of the assets of NBI or the merger or consolidation of NBI with and into
another entity with the effect that NBI will not be the surviving corporation in
such merger or consolidation; provided, however, that termination under this
Paragraph (D) shall not relieve any party from liability under Paragraph (E)(2)
of Article VIII.
VIII. OTHER MATTERS.
(A) Survival. If the Merger Effective Date occurs, the agreements of
Article II, Paragraphs (R) and (S) of Article V, and Paragraphs (A), (C), (D),
(F), (I), (J) and (K) of this Article VIII shall survive the Merger Effective
Date; all other representations, warranties, agreements and covenants contained
in this Plan shall be deemed to be conditions of the Merger and shall not
survive the Merger Effective Date. If this Plan is terminated prior to the
Merger Effective Date, the agreements and representations of the parties in
Paragraph (K) of Article IV, Paragraphs (F)(2) and (G) of Article V and
Paragraphs (A), (E), (F) and (I) of this Article VIII shall survive such
termination. In the event of the termination and abandonment of this Plan
pursuant to the provisions of Article VII, this Plan shall become void and have
no effect, except (1) as provided in the immediately preceding sentence; and (2)
no party shall be relieved or released from any liability arising out of a
breach of any provisions of this Plan except as provided in Paragraph (E)(2) of
this Article.
(B) Waiver, Amendment. Prior to the Merger Effective Date, any provision of
this Plan may be (1) waived by the party benefitted by the provision, or (2)
amended or modified at any time (including the structure of the transaction), by
an agreement in writing among the parties hereto approved by their respective
Boards of Directors and executed in the same manner as this Plan, except that,
after the vote by the stockholders of BTC, the consideration to be received by
the stockholders of BTC for each share BTC Common Stock shall not be decreased.
(C) Counterparts. This Plan may be executed in one or more counterparts,
each of which shall be deemed to constitute an original. This Plan shall become
effective when one counterpart has been signed by each party hereto.
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(D) Governing Law. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Virginia.
(E) Fees and Expenses.
(1) In the event that the Plan is terminated in accordance with the
provisions of Article VII otherwise than on account of a breach by NBI or in the
event it is terminated in accordance with the provisions of Paragraph (D)(3) of
Article VII, and in either such event the provisions of Paragraph (2) of this
Paragraph E are not applicable, then the total documented out-of-pocket costs,
expenses and fees incurred by BTC and NBI (regardless of when incurred) in
connection with and arising out of the Merger and the other transactions
contemplated by this Plan (including, without limitation, amounts paid or
payable to investment bankers, to counsel and accountants, and to governmental
and regulatory agencies) shall be aggregated and each party hereto shall be
responsible for paying one-half (1/2) of the same, and shall promptly make such
reimbursement to the other party as is necessary to effectuate this result.
(2) To compensate NBI or BTC, as the case may be, for entering into
this Plan, taking action to consummate the transactions contemplated hereunder
and incurring the costs and expenses related thereto, including but not limited
to the foregoing of other opportunities and other damages which would be
sustained but would also be difficult to ascertain in the event that any of the
following events occur, the subject party (as hereinafter defined) agrees to pay
the other party (if the "subject party" is BTC, then the "other party" shall be
NBI and vice versa) unconditionally and absolutely the sum of $2,500,000 as the
----------
other party's exclusive remedy if, prior to the termination of this Plan
pursuant to Article VII hereof, any of the following shall occur:
(a) Without the consent of the other party, the subject party shall
have entered into an agreement with any person (other than as
contemplated by this Plan) to effect (i) a merger, consolidation or
similar transaction involving the subject party or any of its
significant subsidiaries, (ii) the disposition, by sale, lease,
exchange or otherwise, of assets or deposits of subject party or
any of its significant subsidiaries representing in either case 25%
or more of the consolidated assets or deposits of the subject party
and its subsidiaries or (iii) the issuance, sale or other
disposition by the subject party of (including by way of merger,
consolidation, share exchange or any similar transaction)
securities representing 25% or more of the voting power of the
subject party or any of its significant subsidiaries (each of (i),
(ii) or (iii), an "Acquisition Transaction"); or
(b) Any person shall have acquired beneficial ownership (as such term
is defined in Rule 13d-3 promulgated under the Exchange Act) of, or
the right to acquire beneficial ownership of, or any "group" (as
such term is defined in Section 13(d)(3) of the Exchange Act) shall
have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 20% or more of the voting power of
the subject party or any of its significant subsidiaries and,
---
within one year from termination of this Plan the subject party
enters into an Acquisition Transaction with such person or group,
as the case may be.
(3) In the event that neither Paragraph (1) nor Paragraph (2) of this
Paragraph (E) are applicable, each party hereto will bear all expenses incurred
by it in connection with this Plan and the transactions contemplated hereby,
except printing expenses which shall be shared equally between BTC and NBI. It
is understood and agreed that the printer of the Registration Statement and
Proxy Statement shall be mutually selected by NBI and BTC.
(4) Payments to be made hereunder shall be made in immediately
available funds within thirty (30) days following the day on which the party
entitled to payment notifies the other party in writing that the events
entitling it to payment of the same have occurred and upon failure to pay the
same when due the other party shall
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<PAGE>
be entitled to recover from the other party all collection costs and expenses,
including but not limited to reasonable legal fees.
(F) Confidentially. Except as otherwise provided in Paragraph (F)(2) of
Article V, each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed.
(G) Notices. All notices, requests and other communications hereunder
to a party shall be in writing and shall be deemed to have been duly given when
delivered by hand, telegram or facsimile (confirmed in writing) to such party at
its address set forth below or such other address as such party may specify by
notice to the parties hereto.
If to NBI or NBI Interim Bank, to:
Mr. James G. Rakes
President
National Bankshares, Inc.
P.O. Box 90002
Blacksburg, Virginia 24062-9002
Copy to:
Douglas W. Densmore, Esq.
Woods, Rogers & Hazlegrove, P.L.C.
10 S. Jefferson Street
P.O. Box 14125
Roanoke, Virginia 24038-4125
If to BTC, to each:
T. C. Bowen, Jr.
R. E. Dodson
Bank of Tazewell County
P.O. Box 687
Tazewell, VA 24651
Copy to:
John F. Stuart, Esq.
Farrell & Lavin
1735 I Street, N.W.
Suite 814
Washington, D.C. 20006
(H) Definitions. Any term defined anywhere in this Plan shall have the
meaning ascribed to it for all purposes of this Plan (unless expressly noted to
the contrary). In addition:
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(1) the term "knowledge" when used with respect to a party shall mean
the knowledge, after due inquiry, of any "Executive Officer" of such party or,
in the case of NBI, of NBB, as such term is defined in Regulation O of the
Federal Reserve Board;
(2) the term "Material Adverse Effect," when applied to a party, shall
mean an event, occurrence or circumstance (including without limitation (a) the
making of any provisions for possible loan and lease losses, write-downs of
other real estate and taxes and (b) any breach of a representation or warranty
by such party) which (i) has or is reasonably likely to have a material adverse
effect on the financial position, results of operations or business of the party
and its subsidiaries, taken as a whole, or (ii) would materially impair the
party's ability to perform its obligations under this Plan or the consummation
of the Merger and the other transactions contemplated by this Plan; provided,
however, that, solely for purposes of measuring whether an event, occurrence or
circumstance has a material adverse effect on such party's results of
operations, the term "results of operations" shall mean net interest income plus
non-interest income (less securities gains) less gross expenses (excluding
provisions for possible loan and lease losses, write-downs of other real estate
and taxes); and provided, further, that material adverse effect and material
impairment shall not be deemed to include the impact of (x) changes in banking
and similar laws of general applicability or interpretations thereof by courts
or governmental authorities, (y) changes in generally accepted accounting
principles or regulatory accounting requirements applicable to banks and bank
holding companies generally and (z) the effects of Merger on the operating
performance of the parties to this Plan;
(3) the term "Previously Disclosed" by a party shall mean information
set forth in a written disclosure letter that is delivered by that party to the
other party contemporaneously with the execution of this Plan and specifically
designated as information "Previously Disclosed" pursuant to this Plan;
provided, however, that any information so disclosed shall specify the provision
- -------- -------
of this Plan pursuant to which such information is being disclosed and shall not
be deemed to be disclosed pursuant to any other provision of, or for any other
purpose under, this Plan unless otherwise indicated; provided, further, the mere
inclusion of an item in a disclosure letter shall not be deemed an admission by
a party that such item represents a material exception of fact, event or
circumstances or that such item is reasonably likely to result in a Material
Adverse Effect.
(I) Entire Understanding. This Plan represents the entire understanding of
the parties hereto with reference to the transactions contemplated hereby and
supersede any and all other oral or written agreements heretofore made, include
without limitation the Confidentiality Agreement, dated June 16, 1995 between
NBI and BTC. Nothing in this Plan expressed or implied, is intended to confer
upon any person, other than the parties hereto or their respective successors,
any rights, remedies, obligations or liabilities under or by reason of this
Plan, other than as provided in Paragraph (K) below.
(J) Benefit Plans. It is the parties' intention that upon consummation of
the Merger, or as soon as administratively practicable thereafter, employees of
BTC and its subsidiaries shall be entitled to participate in NBI's severance,
benefit and similar plans (excluding qualified retirement plans) on the same
terms and conditions as employees NBI's and its subsidiaries, giving effect to
years of service and prior earnings with BTC and its subsidiaries as if such
service were with NBI. The parties agree to engage experts, including but not
limited to actuaries, to make recommendations as to how the qualified retirement
plans should be handled and shall use their best efforts to come to an agreement
regarding all benefit plans which shall be in the form of an amendment to this
Agreement. The parties agree that to the extent possible no employee of BTC who
elects coverage by NBI's medical insurance plans shall be excluded coverage
thereunder (for such employee or any other covered person) on the basis of a
preexisting condition that was not also excluded under BTC's medical insurance
plans and that, if an NBI plan will not take the place of a BTC plan pursuant to
this Agreement, then such BTC benefit plan shall remain in effect until the
benefit plan of NBI is available for participation by the officers and employees
of BTC.
(K) Indemnification. (1) In the case of NBI only, it agrees that for the
six-year period following the Merger Effective Date, it shall cause the
Continuing Corporation and any successor thereto or any subsidiary thereof, as
may be applicable, to indemnify and hold harmless any person who has rights to
indemnification from BTC to
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the same extent and on the same conditions as such person is entitled to
indemnification pursuant to BTC's Articles of Incorporation as in effect on the
date of this Plan, to the extent legally permitted to do so, with respect to
matters occurring on or prior to the Merger Effective Date (regardless of
whether a claim is asserted in connection therewith on or prior to the Merger
Effective Date or thereafter) and the adoption of the Charter Amendment shall
not affect the right, if any, to indemnification of any person under this
Paragraph (K) with respect to such pre-Merger matters. Without limiting the
foregoing, in any case in which approval by the Continuing Corporation may be
required to effectuate any such indemnification, NBI shall cause the Continuing
Corporation to direct, at the election of the party to be indemnified, that the
determination of any such approval shall be made by independent counsel mutually
agreed upon between NBI and the indemnified party. NBI shall use its reasonable
best efforts to provide coverage to the officers and directors of the Continuing
Corporation under NBI policy or policies of director and officers liability
insurance on the same or substantially similar terms then in effect for the
directors and officers of NBB and the Continuing Corporation shall reimburse NBI
for the additional premium incurred by it in connection with providing such
coverage.
If NBI or any of its successors or assigns shall consolidate with or merge
into any other entity and shall not be the continuing or surviving entity of
such consolidation or merger or shall transfer all or substantially all of its
assets to any entity, then and in each case, proper provisions shall be made so
that the successors and assigns of NBI shall assume the obligations set forth in
this Paragraph (K)(1). NBI shall pay all reasonable costs, including attorneys'
fees, that may be incurred by any Indemnified Party in enforcing the indemnity
and other obligations provided for in this Paragraph (K)(1).
(2) With respect to matters occurring after the Merger Effective Date, the
rights, if any, of any person to be held harmless or indemnified shall be
governed by the Articles of Incorporation and Bylaws of the Continuing
Corporation as provided in Paragraph (D) of Article I, and by the Articles of
Incorporation of NBI, to the extent applicable by their terms.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
National Bankshares, Inc.
By: s/James G. Rakes
---------------------------------------
James Rakes
President
Bank of Tazewell County
By: s/R. E. Dodson
---------------------------------------
R. E. Dodson
President
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<PAGE>
Exhibit A
ARTICLES OF MERGER
MERGING
NBI INTERIM BANK
a Virginia corporation
INTO
BANK OF TAZEWELL COUNTY
a Virginia corporation
Pursuant to the provisions of Section 13.1-720 of the Virginia Stock
Corporation Act, Bank of Tazewell County, a Virginia banking corporation (the
"Continuing Corporation"), as the surviving corporation, and NBI Interim Bank, a
Virginia corporation (the "Disappearing Corporation"), as the disappearing
corporation, hereby execute and deliver the following articles of merger and set
forth:
1. The Plan of Merger (the "Plan") pursuant to which the
Disappearing Corporation will merge into the Continuing Corporation is
attached hereto as Annex 1.
2. The Plan was adopted by the unanimous consent of the sole
shareholder of the Disappearing Corporation.
3. The Plan was submitted to the shareholders of the Continuing
Corporation by its board of directors in accordance with the
provisions of Chapter 9 of Title 13.1 of the Code of Virginia, and;
(a) The designation, number of outstanding shares, and the number of
votes entitled to be cast by each voting group entitled to vote
separately on the Plan were:
No. of
Designation Outstanding Shares No. of Votes
----------- ------------------ ------------
Common
$1.00 Par Value
(b) The total number of votes cast for and against the Plan by
each voting group entitled to vote separately on the Plan were:
Total No. of Votes Total No. of Votes
Voting Group Cast for the Plan Cast Against the Plan
------------ ----------------- ---------------------
Common
$1.00 Par Value
4. Pursuant to Section 13.1-606 of the Virginia Stock
Corporation Act, the effective time and date of the merger shall be
_____________________________, ___.m. on _____________________________,
1995.
The undersigned, __________________________________, of NBI Interim Bank,
and ______________________________________, of Bank of Tazewell County,
each declare that the facts herein stated are true as of _________________
______, 1995.
A-24
<PAGE>
NBI INTERIM BANK
By:____________________________
Its:___________________________
BANK OF TAZEWELL COUNTY
By:____________________________
Its:___________________________
A-25
<PAGE>
Annex 1
To Exhibit A
PLAN OF MERGER
A. NBI Interim Bank ("NBI Interim Bank") is a corporation organized and
existing under the laws of the Commonwealth of Virginia and is a wholly-owned
subsidiary of National Bankshares, Inc., a Virginia corporation ("NBI").
B. Bank of Tazewell County ("BTC") is a banking corporation organized and
existing under the laws of the Commonwealth of Virginia.
C. The NBI Interim Bank and BTC and their respective Boards of Directors
and their respective shareholders have approved a statutory merger of NBI
Interim Bank with and into BTC upon the terms and conditions set forth herein.
1. Merger. At the Effective Time (as defined below), NBI
------
Interim Bank shall be merged with and into BTC (the "Merger") in accordance with
the provisions of Article 12 of the Virginia Stock Corporation Act and Article 4
of the Virginia Banking Act. BTC shall be and continue in existence as the
surviving corporation (the "Continuing Corporation") and the separate corporate
existence of NBI Interim Bank shall cease.
2. Effective Time. The Merger shall become effective at the
--------------
time when a certificate of merger in respect thereof shall have been issued by
the State Corporation Commission of the Commonwealth of Virginia (the "Effective
Time") but in no event before the conditions in Article VI of the Agreement and
Plan of Merger between NBI and BTC dated as of August 28, 1995 (the "Agreement")
shall have been fulfilled or waived.
3. Effect of Merger on Outstanding Shares. As of the Effective
--------------------------------------
Time, by virtue of the Merger and without any action on the part of the holder
of any share of common stock, $1.00 par value of BTC (each, a "BTC Share") or
the holder of any share of the common stock $1.00 par value of NBI Interim Bank
(a "Interim Bank Share"):
(a) The shareholders of BTC having eliminated preemptive rights
pursuant to an amendment to the BTC Articles of Incorporation
which shall be effective as of the Effective Time, each issued
and outstanding Interim Bank Share shall be converted into
1,888,209 shares of common stock of the Continuing Bank and
shall constitute the only issued and outstanding shares of
common stock of the Continuing Bank.
(b) Each outstanding BTC Share (other than any share as to which
dissenters' rights are exercised) shall be converted into the
right to receive one share of common stock, $2.50 par value, of
NBI ("NBI Shares") it being understood that such conversion
takes into account the 190,768 share stock dividend declared by
NBI's Board of Directors and payable to shareholders of record
before the Merger Effective Date, as provided in the Agreement.
(c) The number of NBI Shares to be received pursuant to this
Section 3 by each holder of BTC Shares at the Effective Time
shall be proportionately adjusted for any increase or decrease
(exclusive of the stock dividend referred to in Section 3(b))
in the number of issued NBI Shares from the date of this
Agreement to the Effective Time resulting from a subdivision or
consolidation of shares or the payment of a share dividend or
any other increase or decrease in the number of NBI Shares
effective without receipt of "adequate consideration" as
defined under applicable Virginia law.
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<PAGE>
(d) From and after the Effective Time the holders of certificates
formerly representing BTC Shares shall cease to have any rights
with respect thereto other than any dissenters' rights and
their sole right shall be to receive NBI Shares and cash
pursuant to Sections 3(b) and 3(e). After the Effective Time,
there shall be no transfers on the stock transfer books of BTC
or Continuing Corporation of the shares of BTC which were
issued and outstanding immediately prior to the Effective Time.
(e) Fractional Shares. Notwithstanding any other provision hereof,
no fractional shares of NBI Shares and no certificates or scrip
therefor, or other evidence of ownership thereof, will be
issued in the Merger; instead, NBI shall pay to each holder of
BTC Shares who would otherwise be entitled to a fractional
share an amount in cash determined by multiplying such
fractional shares by the closing sale price of BTC Shares for
the final bona fide trade on the last day on which such stock
was traded prior to the Merger Effective Date, as reflected in
the Over the Counter Electronic Bulletin Board of the National
Association of Securities Dealers, Inc.
(f) Dissenting Shareholders. Any holder of BTC Shares who perfects
his dissenters' rights of appraisal in accordance with and as
contemplated by Article 15 of the Virginia Stock Corporation
Act shall be entitled to receive the value of such shares in
cash as determined pursuant to such provision of law; provided,
however, that no such payment shall be made to any dissenting
stockholder unless and until such dissenting stockholder has
complied with the applicable provisions of the Virginia Stock
Corporation Act and duly surrendered the certificate or
certificates representing the shares for which payment is made.
In the event that a dissenting stockholder of BTC fails to
perfect, or effectively withdraws or loses, his right to
appraisal and of payment for his shares, after the Effective
Time NBI shall issue and deliver the consideration to which
such holder of BTC Shares is entitled under this Plan of Merger
(without interest) upon surrender by such holder of the
certificate or certificates representing the BTC Shares held by
him.
(g) Exchange Procedures. As promptly as practicable after the
Effective Time, NBI shall send or cause to be sent to each
former stockholder of BTC of record immediately prior to the
Effective Time transmittal materials for use in exchanging such
stockholder's certificates of BTC Shares (other than shares
held by stockholders who perfect their dissenters' rights as
provided under Paragraph (f) above) for the consideration set
forth in Paragraphs (b) and (e) above. Any fractional share
checks which a BTC stockholder shall be entitled to receive in
exchange for such stockholder's BTC Shares, and any dividends
paid on any shares of NBI Shares, that such stockholder shall
be entitled to receive prior to the delivery to NBI of such
stockholder's certificates representing all of such
stockholder's BTC Shares will be delivered to such stockholder
only upon delivery to NBI of the certificates representing all
of such shares (or indemnity satisfactory to NBI, in its
judgment after consultation with the President of BTC, if any
of such certificates are lost, stolen or destroyed). No
interest will be paid on any such fractional share checks or
dividends to which the holder of such shares shall be entitled
to receive upon such delivery. After the Effective Time, to the
extent permitted by law, former stockholders of record of BTC
shall be entitled to vote at any meeting of holders of NBI
Shares, the number of whole shares of NBI Shares into which
their respective BTC shares are converted, regardless of
whether such holders have exchanged their certificates
representing BTC Shares for certificates representing NBI
Shares in accordance with the provisions of this Plan of
Merger.
(h) Anti-Dilution Provisions. In the event NBI changes the number
of shares of NBI Shares issued and outstanding prior to the
Effective Time as a result of a stock split, share
A-27
<PAGE>
dividend (other than the share dividend referred to in 3(b)
above), recapitalization or similar transaction with respect to
the outstanding NBI Shares and the record date therefor shall
be prior to the Effective Time, the Exchange Ratio shall be
proportionately adjusted.
(i) Shares Held by BTC or NBI. Each of the BTC Shares held by BTC
or by NBI or its subsidiary, in each case other than in a
fiduciary capacity or as a result of debts previously
contracted, shall be canceled and retired at the effectiveness
of the Merger and no consideration shall be issued in exchange
therefor.
4. Articles of Incorporation and Bylaws. Taking into effect the amendments
thereto required to be made by the Agreement, the Articles of Incorporation and
Bylaws of BTC in effect at the Effective Time shall continue (until amended or
repealed as provided by applicable law) to be the Articles of Incorporation and
Bylaws of the Continuing Corporation after the Effective Time.
5. Officers and Directors. The officers and directors of BTC immediately
prior to the Effective Time shall be the officers and directors of the
Continuing Corporation after the Effective Time to serve, in accordance with the
Bylaws of the Continuing Corporation, until their successors are duly elected
and qualified, or their earlier death, resignation or removal.
6. Termination of Abandonment. This Plan of Merger shall terminate and the
Merger abandoned at any time prior to the Effective Time if the Agreement is
terminated in accordance with its terms.
7. Amendment. Pursuant to Section 13.1-718(I) of the Virginia Stock
Corporation Act, the Board of Directors of BTC and NBI Interim Bank reserve the
right to amend this Plan of Merger at any time prior to issuance of the
certificate of merger by the State Corporation Commission of the Commonwealth of
Virginia; provided, however, that any such amendment made subsequent to the
submission of this Plan of Merger to the shareholders of BTC or NBI Interim Bank
may not: (i) alter or change the amount or kind of shares, securities, cash,
property or rights to be received in exchange for or in conversion of all or any
of the shares of any class or series of such corporation; (ii) alter or change
any of the terms and conditions of this Plan of Merger if such alteration or
change would adversely affect the shares of any class or series of such
corporation; or (iii) alter or change any term of the articles of incorporation
of any corporation (except as provided herein) whose shareholders must approve
this Plan of Merger.
A-28
<PAGE>
ATTACHMENT B
Bank of Tazewell County
Amendment of Articles of Incorporation
approved by the Board of Directors
and recommended to the Shareholders
Amendment No. 1 - Board of Directors
RESOLVED, that the Articles of Incorporation of Bank of Tazewell County
shall be amended so that the provision establishing the number of directors
shall be amended in its entirety to read as follows:
"The Board of Directors of the Bank shall consist of not less than five nor
more than twenty-five shareholders of the Bank or its holding company as
hereinafter provided, the exact number to be fixed and determined from time to
time by resolution of a majority of the full Board of Directors or by resolution
of the shareholders at any annual or special meeting thereof. Each Director
shall own at least the amount of capital stock in this Bank or in a bank holding
company controlling this Bank as may be required by Virginia law. Any vacancy in
the Board of Directors may be filled by action of the Board of Directors."
Amendment No. 2 - No Preemptive Rights of Stockholders
RESOLVED, that the Articles of Incorporation of Bank of Tazewell County
shall be amended by adding the following provision:
"No shareholder shall have any preemptive right to acquire proportional
amounts of the Bank's unissued shares or any security convertible into or
carrying a right to subscribe for or acquire shares."
Amendment No. 3 - Indemnification of Directors and Officers
RESOLVED, that the Articles of Incorporation of Bank of Tazewell County
shall be amended so that the provisions approved by the shareholders on March
17, 1992, regarding indemnification and the limitation of liability of
directors, officers and certain other persons shall be amended in their entirety
to read as follows:
"(1) In this Article:
"applicant" means the person seeking indemnification pursuant to
this Article.
"expenses" includes counsel fees.
"liability" means the obligation to pay a judgment, settlement,
penalty, fine, including any excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to a proceeding.
"party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
B-1
<PAGE>
"proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative
and whether formal or informal.
(2) The Bank shall, to the extent permitted by the applicable banking laws,
indemnify (i) any person who was or is a party to any proceeding, including a
proceeding brought by a shareholder in the right of the Bank or brought by or on
behalf of shareholders of the Bank, by reason of the fact that he or she is or
was a director or officer of the Bank, or (ii) any director or officer who is or
was serving at the request of the Bank as a director, trustee, partner or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against any liability incurred by him or her
in connection with such proceeding unless he or she engaged in willful
misconduct or a knowing violation of criminal law. A person is considered to be
serving an employee benefit plan at the Bank's request if his duties to the Bank
also impose duties on, or otherwise involve services by, him to the plan or to
participants in or beneficiaries of the plan. The Board of Directors is hereby
empowered by a majority vote of a quorum of disinterested Directors, to enter
into a contract to indemnify any director or officer in respect of any
proceedings arising from any act or omission, whether occurring before or after
the execution of such contract.
(3) No amendment or repeal of this Article shall have any effect on the
rights provided under this Article with respect to any act or omission occurring
prior to such amendment or repeal. The Bank shall promptly take all such
actions, and make all such determinations, as shall be necessary or appropriate
to comply with its obligation to make any indemnity under this Article and shall
promptly pay or reimburse all reasonable expenses including attorneys' fees,
incurred by any such director or officer in connection with such actions and
determinations or proceedings of any kind arising therefrom.
(4) The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section (2) of this Article.
(5) Any indemnification under section (2) of this Article (unless ordered
by a court) shall be made by the Bank only as authorized in the specific case
upon a determination that indemnification of the applicant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in section (2).
The determination shall be made:
(a) By the Board of Directors by a majority vote of a quorum
consisting of Directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under subsection (a) of this
section, by a majority vote of a committee duly designated by the Board of
Directors (in which designation Directors who are parties may participate),
consisting solely of two or more Directors not at the time parties to the
proceeding;
(c) By special legal counsel;
(i) Selected by the Board of Directors or its committee in the
manner prescribed in subsection (a) or (b) of this section; or
(ii) If a quorum of the Board of Directors cannot be obtained
under subsection (a) of this section and a committee cannot be designated under
subsection (b) of this section, selected by majority vote of the full Board of
Directors, in which selection Directors who are parties may participate; or
(d) By the shareholders, but shares owned by or voted under the control
of Directors who are at the time parties to the proceeding may not be voted on
the determination.
B-2
<PAGE>
Any evaluation as to reasonableness of expenses shall be made in the same
manner as the determination that indemnification is appropriate, except that if
the determination is made by special legal counsel, such evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (c)
of this section (5) to select counsel.
Notwithstanding the foregoing, in the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel the Board of Directors and the applicant each shall select
a nominee, and the nominees shall select such special legal counsel.
(6) (a) To the extent permitted by applicable banking laws and regulations,
the Bank shall pay for or reimburse the reasonable expenses incurred by any
applicant who is a party to a proceeding in advance of final disposition of the
proceeding or the making of any determination under section (5) if the following
conditions are met:
(i) The Board, in good faith, determines in writing that:
(A) the director has a substantial likelihood of prevailing on
the merits:
(B) in the event the director does not prevail, he or she will
have the financial capability to reimburse the Bank; and
(C) payment of expenses by the Bank will not adversely affect the
Bank's safety and soundness.
To the extent required by applicable banking laws and regulations, if
at any time the Board believes that either conditions (A), (B) or (C) are no
longer met, the Bank shall cease paying such expenses or premiums. The Board
shall enter into a written agreement with the director, specifying the
conditions under which he or she will be required to reimburse the Bank, which
agreement shall require reimbursement for expenses already paid, if and to the
extent the Board finds that the director willfully misrepresented factors
relevant to the Board's determination of conditions (A) or (B), or if a final
decision assessing penalties or requiring payments is returned. The Bank shall
ensure that it complies with all applicable laws and regulations affecting loans
to directors, officers and employees, in the event reimbursement is required.
(ii) Additionally, the applicant must furnish the Bank:
(A) a written statement of his good faith belief that he or she
has met the standard of conduct described in section (2); and
(B) a written undertaking, executed personally or on his or her
behalf to repay the advance if it is ultimately determined that he or she did
not meet such standard of conduct.
(b) Authorizations of payments under this section shall be made
by the persons specified in section (5).
(7) The Board of Directors is hereby empowered, by majority vote of a
quorum consisting of disinterested Directors, to cause the Bank to indemnify or
contract to indemnify any person not specified in section (2) of this Article
who was, is or may become a party to any proceeding by reason of the fact that
he or she is or was an employee or agent of the Bank, or is or was serving at
the request of the Bank as director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, to the
B-3
<PAGE>
same extent as if such person were specified as one to whom indemnification is
granted in section (2). The provisions of sections (3) through (6) and (11) of
this Article shall be applicable to any indemnification provided hereafter
pursuant to this section (7).
(8) The Bank may purchase and maintain insurance to indemnify it against
the whole or any portion of the liability assumed by it in accordance with this
Article and may also procure insurance, in such amounts as the Board of
Directors may determine, on behalf of any person who is or was a director,
officer, employee or agent of the Bank, or is or was serving at the request of
the Bank as a director, officer, employee or agent of another corporation,
partnership joint venture, trust, employee benefit plan or other enterprise,
against any liability asserted against or incurred by him or her in any such
capacity or arising from his status as such, whether or not the Bank would have
power to indemnify him against such liability under the provisions of this
Article.
(9) Every reference herein to directors, officers, employees or agents
shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators.
(10) Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
(11) The provisions of this Article and of any contracts or agreements
(other than insurance acquired pursuant to Section (8)) entered into pursuant to
it shall apply only to conduct, actions and omissions of any applicant occurring
or arising after the date and time these Articles are made effective by the
State Corporation Commission of Virginia and the merger of NBI Interim and the
Bank of Tazewell County is made effective by the issuance of a certificate of
the Virginia State Corporation Commission."
Amendment No. 4 - Deletions
RESOLVED, that the Articles of Incorporation of Bank of Tazewell County
shall be amended by deleting the following: (i) the provision approved by the
shareholders on April 15, 1964, stating that the Board of Directors shall have
the right to sell 25% of the remaining authorized and unissued shares, as to
which shares shareholders will not have preemptive rights; (ii) the provision
approved by the shareholders on March 17, 1992, stating that the Board of
Directors may sell up to 10,000 shares of authorized stock, as to which shares
shareholders will not have preemptive rights; (iii) any and all other provisions
inconsistent with the elimination of preemptive rights of shareholders with
respect to securities of the Bank; and (iv) any and all other provisions
inconsistent with the amendment of the indemnification and limitation of
liability of directors, officers and certain other persons set out in Amendment
No. 3 above.
B-4
<PAGE>
ATTACHMENT C
DRAFT
[Date of Proxy Mailing]
The Board of Directors
Bank of Tazewell County
309 E. Main Street
Tazewell, Virginia 24651
Dear Members of the Board:
Bank of Tazewell County, Tazewell, Virginia ("Tazewell") and National
Bankshares, Inc., Blacksburg, Virginia ("National") have entered into an
Agreement providing for the acquisition of Tazewell by National ("Acquisition").
The terms of the Acquisition are set forth in the Agreement and Plan of Merger
dated August 28, 1995.
The terms of the Acquisition provide that, with the possible exception of those
shares as to which dissenter's rights may be perfected, each common share of
Tazewell will be converted into shares of common stock of National.
You have asked our opinion as to whether the proposed transaction pursuant to
the terms of the Acquisition are fair to the respective shareholders of Tazewell
from a financial point of view.
In rendering our opinion, we have evaluated the consolidated financial
statements of Tazewell available to us from published sources. In addition, we
have, among other things: (a) to the extent deemed relevant, analyzed selected
public information of certain other financial institutions and compared Tazewell
and National from a financial point of view to the other financial institutions;
(b) considered the historical market price of the common stock of Tazewell and
National; (c) compared the terms of the Acquisition with the terms of certain
other comparable transactions to the extent information concerning such
acquisitions was publicly available; (d) reviewed the Agreement and Plan of
Merger and related documents; and (e) made such other analyses and examinations
as we deemed necessary. We also met with various senior officers of Tazewell and
National to discuss the foregoing as well as other matters that may be relevant.
We have not independently verified the financial and other information
concerning Tazewell, or National or other data which we have considered in our
review. We have assumed the accuracy and completeness of all such information;
however, we have no reason to believe that such information is not accurate and
compete. Our conclusion is rendered on the basis of securities market conditions
prevailing as of the date hereof and on the conditions and prospects, financial
and otherwise, of Tazewell and National as they exist and are known to us as of
September 30, 1995.
It is understood that this opinion may be included in its entirety in any
communication by Tazewell or the Board of Directors to the stockholders of
Tazewell. The opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on the foregoing, and subject to the limitations described above, we are
of the opinion that the terms of the Acquisition are fair to the shareholders of
Tazewell from a financial point of view.
Very truly yours,
Baxter Fentriss and Company
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<PAGE>
ATTACHMENT D
ARTICLE 15 OF THE VIRGINIA STOCK CORPORATION ACT
RELATING TO DISSENTERS' RIGHTS
(S) 13.1-729. DEFINITIONS. - In this article:
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under (S) 13.1-730 and who exercises that right when and in the manner
required by (S)(S) 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
(S) 13.1-730. RIGHT TO DISSENT. - A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by (S) 13.1-718 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
(S) 13.1-719;
2. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation if the shareholder was entitled to vote on the sale
or exchange or if the sale or exchange was in furtherance of a dissolution on
which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or (ii) held by at least 2,000 record
shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such
shares provide otherwise;
D-1
<PAGE>
2. In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests
and cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other corporation or
limited liability company which, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting at which
the plan of merger or share exchange is to be acted on, were either listed
subject to notice of issuance on a national securities exchange or held of
record by at least 2,000 record shareholders or members; or
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and
is not approved by a majority of "disinterested directors" as such terms are
defined in (S) 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or
sets aside the corporate action; or
3. His demand for payment is withdrawn with the written consent of
the corporation.
(S) 13.1-731. DISSENT BY NOMINEES AND BENEFICIAL OWNERS. - A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
(S) 13.1-732. NOTICE OF DISSENTERS' RIGHTS. - A. If proposed corporate
action creating dissenters' rights under (S) 13.1-730 is submitted to a vote at
a shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under (S) 13.1-730
is taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in writing
all record shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in (S) 13.1-734.
(S) 13.1-733. NOTICE OF INTENT TO DEMAND PAYMENT. - A. If proposed
corporate action creating dissenters' rights under (S) 13.1-730 is submitted to
a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights (i) shall deliver to the corporation before the vote is taken
written notice of his intent to demand payment for his shares if the proposed
action is effectuated and (ii) shall not vote such shares in favor of the
proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for his shares under this article.
(S) 13.1-734. DISSENTERS' NOTICE. - A. If proposed corporate action
creating dissenters' rights under (S) 13.1-730 is authorized at a shareholders'
meeting, the corporation, during the ten-day period after the effectuation of
such corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of (S) 13.1-733.
D-2
<PAGE>
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and
when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
(S) 13.1-735. DUTY TO DEMAND PAYMENT. - A. A shareholder sent a
dissenters' notice described in (S) 13.1-734 shall demand payment, certify that
he acquired beneficial ownership of the shares before or after the date required
to be set forth in the dissenters' notice pursuant to subdivision 3 of
subsection B of (S) 13.1-734, and, in the case of certificated shares, deposit
his certificates in accordance with the terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(S) 13.1-736. SHARE RESTRICTIONS. - A. The corporation may restrict
the transfer of uncertificated shares from the date the demand for their payment
is received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
(S) 13.1-737. PAYMENT. - A. Except as provided in (S) 13.1-738, within
thirty days after receipt of a payment demand made pursuant to (S) 13.1-735, the
corporation shall pay the dissenter the amount the corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in the
city or county where the corporation's principal office is located, or, if none
in this Commonwealth, where its registered office is located or (ii) at the
election of any dissenter residing or having its principal office in the
Commonwealth, by the circuit court in the city or county where the dissenter
resides or has its principal office. The court shall dispose of the complaint on
an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under
(S) 13.1-739; and
4. A copy of this article.
(S) 13.1-738. AFTER-ACQUIRED SHARES. - A. A corporation may elect to
withhold payment required by (S) 13.1-737 from a dissenter unless he was the
beneficial owner of the shares on the date of the first publication by news
media or the first announcement to shareholders generally, whichever is earlier,
of the terms of the proposed corporate action, as set forth in the dissenters'
notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation
D-3
<PAGE>
shall send with its offer an explanation of how it estimated the fair value of
the shares and of how the interest was calculated, and a statement of the
dissenter's right to demand payment under (S) 13.1-739.
(S) 13.1-739. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.- A. A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate (less any payment under (S) 13.1-737), or reject the
corporation's offer under (S) 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under (S) 13.1-737 or offered under (S) 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
(S) 13.1-740. COURT ACTION. - A. If a demand for payment under (S)
13.1-739 remains unsettled, the corporation shall commence a proceeding within
sixty days after receiving the payment demand and petition the circuit court in
the city or county described in subsection B of this section to determine the
fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under (S) 13.1-738.
(S) 13.1-741. COURT COSTS AND COUNSEL FEES. - A. The court in an
appraisal proceeding commenced under (S) 13.1-740 shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under (S) 13.1-
739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of (S)(S) 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed did not act in good faith with respect to the rights
provided by this article.
D-4
<PAGE>
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A of (S) 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
D-5
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
- ------- -----------------------------------------
Section 13.1-692.1 of the Virginia Act places a limitation on the
liability of officers and directors of a corporation in any proceeding brought
by or in the right of the corporation or brought by or on behalf of stockholders
of the corporation. The damages asserted against an officer or director arising
out of a single transaction, occurrence, or course of conduct shall not exceed
the greater of $100,000 or the amount of cash compensation received by the
officer or director from the corporation during the 12 months immediately
preceding the act or omission for which liability was imposed. The statute also
authorizes the corporation, in its articles of incorporation or, if approved by
the stockholders, in its bylaws, to provide for a different specific monetary
limit on, or to eliminate entirely, liability. The liability of an officer or
director shall not be limited or eliminated if the officer or director engaged
in willful misconduct or a knowing violation of the criminal law or any federal
or state securities law. NBI's Articles of Incorporation contain a provision
which eliminates, to the full extent that the laws of the Commonwealth of
Virginia permit, the liability of an officer or director to NBI or its
stockholders for monetary damages for any breach of duty as a director or
officer.
NBI's Articles of Incorporation also require NBI to indemnify any
director or officer who is or was a party to a proceeding, including a
proceeding by or in the right of the corporation, by reason of the fact that he
is or was such a director or officer or is or was serving at the request of NBI
as a director, officer, employee or agent of another entity. Directors and
officers of NBI are entitled to be indemnified against all liabilities and
expenses incurred by the director or officer in the proceeding, except such
liabilities and expenses as are incurred because of his or her willful
misconduct or knowing violation of the criminal law. Unless a determination has
been made that indemnification is not permissible, a director or officer also is
entitled to have NBI make advances and reimbursement for expenses prior to final
disposition of the proceeding upon receipt of a written undertaking from the
director or officer to repay the amounts advanced or reimbursed if it is
ultimately determined that he or she is not entitled to indemnification. The
Board of Directors of NBI also has the authority to extend to employees, agents,
and other persons serving at the request of NBI the same indemnification rights
held by directors and officers, subject to all of the accompanying conditions
and obligations.
Virginia Code (S) 13.1-700.1 permits a court, upon application of a
director or officer, to review NBI's determination as to a director's or
officer's request for advances, reimbursement or indemnification. If it
determines that the director or officer is entitled to such advances,
reimbursement or indemnification, the court may order NBI to make advances
and/or reimbursement for expenses or to provide indemnification, in which case
the court shall also order NBI to pay the officer's or director's reasonable
expenses incurred to obtain the order. With respect to a proceeding by or in the
right of the corporation, the court may order indemnification to the extent of
the officer's or director's reasonable expenses if it determines that,
considering all the relevant circumstances, the officer or director is entitled
to indemnification even though he or she was adjudged liable, and may also order
NBI to pay the officer's and director's reasonable expenses incurred to obtain
the order.
NBI maintains directors and officers liability insurance, which
provides coverage of up to $5,000,000, subject to certain deductible amounts. In
general, the policy insures (i) NBI's directors and officers against loss by
reason of any of their wrongful acts, and/or (ii) NBI against loss arising from
claims against the directors and officers by reason of their wrongful acts, all
subject to the terms and conditions contained in the policy.
In addition to the foregoing, Paragraph (K) of Article VII of the
Merger Agreement contains certain indemnification provisions relating to the
Merger.
II-1
<PAGE>
Item 21. Exhibits and Financial Statements Schedules.
- ------- -------------------------------------------
(a) Exhibit No. Description
----------- -----------
(2) Agreement and Plan of Merger, including the
related Plan of Merger (incorporated herein
by reference to Attachment A to the
Prospectus/Proxy Statement included in this
Registration Statement)*
(3)(i) Articles of Incorporation of NBI, as
amended (incorporated herein by reference
to Exhibit 3(a) to NBI's Form 10-K for the
fiscal year ended December 31, 1993)
(3)(ii) Bylaws of NBI (incorporated herein by
reference to Exhibit 3(b) to NBI's Form 10-
K for the fiscal year ended December 31,
1993)
(4)(i) All instruments defining the rights of
holders of long-term debt of NBI and its
subsidiaries (not filed pursuant to
(4)(iii) of Item 601(b) of Regulation S-K;
to be furnished upon request of the
Commission)
(5) Opinion of Marilyn B. Buhyoff, Esq.
(8) Tax opinion of KPMG Peat Marwick LLP
10(i) Computer Software License Agreement dated
June 18, 1990, by and between Information
Technology, Inc. and NBB (incorporated
herein by reference to Exhibit 10(e) of
NBI's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10(ii) Employment Agreement dated January 1, 1992,
by and between NBI and James G. Rakes
(incorporated herein by reference to
Exhibit 10(a) of NBI's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1992)
10(iii) Capital Accumulation Plan (included in
Exhibit No. 10(ii) above)
10(iv) Employee Lease Agreement dated May 7, 1992,
by and between NBI and NBB (incorporated
herein by reference to Exhibit 10(c) of
NBI's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992)
10(v) NBI Director's Compensation Agreement
21 Subsidiaries of NBI (incorporated herein by
reference to Exhibit 22 of NBI's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1992)
(23)(i) Consent of KPMG Peat Marwick LLP
(23)(ii) Consent of Marilyn B. Buhyoff, Esq.
(included in Exhibit (5))
(23)(iii) Consent of Baxter, Fentriss & Company
(23)(iv) Consent of Cook Associates, LLP
(24) Power of Attorney
II-2
<PAGE>
(27) Financial Data Schedule
(99) Form of Proxy for the Special Meeting of
Stockholders of BTC
___________________
*Omitted exhibits to be furnished upon request of the Commission.
Item 22. Undertakings.
- ------- ------------
(a)(1) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of any
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities and Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(3) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and NBI being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Montgomery,
Commonwealth of Virginia, on December 8, 1995.
NATIONAL BANKSHARES, INC.
By: /s/James G. Rakes
------------------------------------
James G. Rakes, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title
--------- -----
/s/J. G. Rakes President,Chief Executive Officer
- ------------------------------- and Director
J. G. Rakes
/s/Joan C. Nelson Treasurer (Principal Financial
- ------------------------------- Officer and Principal Accounting
Joan C. Nelson Officer
*
/s/C. L. Boatwright Director and Vice Chairman
- ------------------------------- of the Board
C. L. Boatwright
*
/s/L. A. Bowman Director
- -------------------------------
L. A. Bowman
*
/s/R. E. Christopher, Jr. Director and Chairman of the
- ------------------------------- Board
R. E. Christopher, Jr.
*
/s/P. A. Duncan Director
- ------------------------------
P. A. Duncan
*
/s/J. M. Shuler Director
- ------------------------------
J. M. Shuler
*
/s/J. R. Stewart Director
- ------------------------------
J. R. Stewart
II-4
<PAGE>
*
/s/J. L. Webb, Jr. Director
- ------------------------------
J. L. Webb, Jr.
*
/s/P. P. Wisman Director
- -------------------------------
P. P. Wisman
*By James G. Rakes, Attorney-in-Fact
/s/James G. Rakes
- ------------------------------
James G. Rakes
Date: December 8, 1995
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
-------------
Page No.
--------
<C> <S> <C>
(2) Agreement and Plan of Merger, including the related Plan of Merger
(incorporated herein by reference to Attachment A to the
Prospectus/Proxy Statement included in this Registration Statement)*
(3)(i) Articles of Incorporation of NBI, as amended (incorporated herein by
reference to Exhibit 3(a) to NBI's Form 10-K for the fiscal year ended
December 31, 1993)
(3)(ii) Bylaws of NBI (incorporated herein by reference to Exhibit 3(b) to
NBI's Form 10-K for the fiscal year ended December 31, 1993)
(4)(i) All instruments defining the rights of holders of long-term debt of
NBI and its subsidiaries (not filed pursuant to (4)(iii) of Item
601(b) of Regulation S-K; to be furnished upon request of the
Commission)
(5) Opinion of Marilyn B. Buhyoff, Esq.
(8) Tax opinion of KPMG Peat Marwick LLP
10(i) Computer Software License Agreement dated June 18, 1990, by and
between Information Technology, Inc. and NBB (incorporated herein by
reference to Exhibit 10(e) of NBI's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10(ii) Employment Agreement dated January 1, 1992, by and between NBI and
James G. Rakes (incorporated herein by reference to Exhibit 10(a) of
NBI's Annual Report on Form 10-K for the fiscal year ended December
31, 1992)
10(iii) Capital Accumulation Plan (included in Exhibit No. 10(ii) above)
10(iv) Employee Lease Agreement dated May 7, 1992, by and between NBI and
NBB (incorporated herein by reference to Exhibit 10(c) of NBI's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992)
10(v) NBI Director's Compensation Agreement
21 Subsidiaries of NBI (incorporated herein by reference to Exhibit 22 of
NBI's Annual Report on Form 10-K for the fiscal year ended December
31, 1992)
(23)(i) Consent of KPMG Peat Marwick LLP
(23)(ii) Consent of Marilyn B. Buhyoff, Esq. (included in Exhibit (5))
(23)(iii) Consent of Baxter, Fentriss & Company
(23)(iv) Consent of Cook Associates, LLP
(24) Power of Attorney
(27) Financial Data Schedule
(99) Form of Proxy for the Special Meeting of Stockholders of BTC
</TABLE>
___________________
*Omitted exhibits to be furnished upon request of the Commission.
<PAGE>
Exhibit 5
December 6, 1995
Board of Directors
National Bankshares, Inc.
100 South Main Street
Blacksburg, VA 24060
Gentlemen:
I have acted as counsel for National Bankshares, Inc. (the
"Corporation") in connection with the registration on Form S-4 (the
"Registration Statement") of 1,888,209 shares of the Corporation's Common
Stock, $2.50 par value per share (the "Common Shares"), which are issuable
under the terms of an Agreement and Plan of Merger (the "Plan of Merger"),
dated as of August 28, 1995, by and among the Corporation and the Bank of
Tazewell County.
On the basis of such investigation as I deemed necessary, I am of the
opinion that:
(1) the Corporation has been duly incorporated and is validly
existing under the laws of the Commonwealth of Virginia, and
(2) the Common Shares have been duly authorized and, when issued
in accordance with the terms and conditions set forth in the Plan of
Merger, will be validly issued, fully paid and nonassessable.
I hereby consent to the use of my name under the heading "Legal
Opinions" in the Prospectus/Proxy Statement included in the Registration
Statement and any amendments thereto and to the filing of this opinion as
an Exhibit to the Registration Statement.
Very truly yours,
/s/Marilyn B. Buhyoff
Marilyn B. Buhyoff
Secretary
Counsel
<PAGE>
Exhibit 8
December 8, 1995
Private
- -------
Board of Directors Board of Directors
National Bankshares, Inc. Bank of Tazewell County
Blacksburg, Virginia Tazewell, Virginia
Board Members:
You have requested the opinion of KPMG Peat Marwick LLP (KPMG) regarding
the merger of NBI Interim Bank (Interim), a wholly owned bank subsidiary of
National Bankshares, Inc. (NBI), with and into Bank of Tazewell County
(BTC). Specifically, you have requested us to opine that the form and
substance of the merger of Interim with and into BTC will constitute a tax-
free reorganization under sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended, (hereinafter all section
references are to the Internal Revenue Code unless otherwise indicated) and
that no gain or loss will be recognized by the shareholders of BTC upon the
receipt of NBI common stock in exchange for their BTC common stock upon
consummation of the merger.
Our opinion as to the tax-free reorganization treatment of the merger of
Interim with and into BTC does not include BTC common shareholders who
exercise their statutory dissenters' rights against the merger and receive
cash payments.
FACTS
-----
NBI, a Virginia corporation, is a bank holding company with its principal
executive offices located in Blacksburg, Virginia. NBI has a 100% owned
subsidiary, The National Bank of Blacksburg (NBB), a national banking
association. NBB has a 100% owned inactive subsidiary, NB Operating, Inc.
NBI and its subsidiaries file a consolidated federal income tax return.
NBI has 5,000,000 authorized shares of common stock, par value $2.50, of
which 1,714,152 were issued and outstanding as of July 31, 1995. Each
share of NBI common stock has one vote. NBI has 5,000,000 authorized
shares of preferred stock, no par value, of which none were outstanding as
of July 31, 1995. Trading of NBI common stock is reflected on the Over the
Counter Electronic Bulletin Board of the National Association of Securities
Dealers (NASD Bulletin Board).
BTC is a Virginia banking corporation with its principal executive offices
located in Tazewell, Virginia. BTC has 6,000,000 authorized shares of
common stock, par value $1.00, of which 1,888,209 were issued and
outstanding as of July 31, 1995. Trading of BTC common stock is reflected
on the NASD Bulletin Board. BTC has no other class of stock authorized or
outstanding.
For what have been represented to KPMG to be valid business purposes, NBI
and BTC want to combine their businesses. In order to reach that result,
the following transaction is proposed:
1. Pursuant to an agreement and plan of merger (the Plan) dated August 28,
1995 between NBI and BTC, NBI will, prior to the merger effective date,
form a Virginia banking corporation which shall be named and become NBI
Interim Bank (Interim). Interim will have 50,000 authorized common shares,
$1.00 par value, of which 1,000 shares shall be subscribed for by NBI
pending consummation of the Plan.
2. In connection with the consummation of the Plan, NBI shall declare a share
dividend totaling 190,768 shares of NBI common stock to be issued pro rata
to and among the holders of NBI common stock. The record date of this
dividend shall be prior to the merger effective date.
<PAGE>
Page 2
3. Also pursuant to the agreement and plan of merger, Interim will merge with
and into BTC in accordance with Virginia state law, with BTC surviving the
merger
4. The actual merger will entail the following:
(a) On the effective date of the merger, each share of NBI Interim Bank
common stock issued and outstanding as of the merger effective date
shall be converted automatically into 1,888.209 shares of BTC. This
shall represent all of the issued and outstanding shares of BTC.
(b) Each share of BTC issued and outstanding immediately prior to the
merger effective date shall become and be converted into the right to
receive one share of NBI common stock, taking into account the share
dividends to be declared by NBI as set forth in "2" above.
(c) On the merger effective date, holders of BTC common stock shall cease
to be, and shall have no rights as, shareholders of BTC other than to
receive NBI common stock as described in "4(b)" above or cash in lieu
of fractional shares as described in "4(d)" below.
(d) No fractional shares of NBI common stock will be issued in the merger,
but rather NBI will pay cash in lieu thereof with the amount of cash to
be paid to be determined based upon the closing price per share of BTC
common stock as reflected on the NASD Bulletin Board on the last day
such stock has traded prior to the merger effective date.
5. Each BTC shareholder has the right to dissent from the merger in accordance
with the Virginia Stock Corporation Act. Each shareholder validly
exercising and perfecting dissenter's rights will be entitled to receive
from NBI the fair market value of his or her shares in cash
REPRESENTATIONS
---------------
The following representations have been made to KPMG. These representations form
an integral part of the opinion rendered by KPMG. It is understood that KPMG has
not independently verified any representation:
(a) The fair market value of the NBI common stock or cash to be received by
each of the BTC shareholders in the merger will be approximately equal, in
each instance, to the fair market value of the BTC common stock surrendered
in the exchange.
(b) There is no plan or intention by the BTC shareholders to sell or otherwise
dispose of any NBI common stock received by them in the transaction which
would reduce their ownership of NBI common stock to a number of shares
having, in the aggregate, a fair market value as of the date of the
transaction of less than 50 percent of the fair market value of all of the
formerly outstanding stock of BTC as of the date of the transaction. For
purposes of this representation, shares of BTC surrendered by dissenters or
exchanged for cash in lieu of fractional shares will be treated as
outstanding stock of BTC on the date of the transaction. Moreover, the
sale, redemption or other disposition of stock occurring prior or
subsequent to the exchange which is part of the reorganization will be
considered in determining whether there will be a 50 percent continuing
interest through stock ownership as of the effective date of the
reorganization.
(c) Following the transaction, BTC will hold at least 90 percent of the fair
market value of its net assets and at least 70 percent of the fair market
value of its gross assets. In addition, BTC will hold at least 90 percent
of the fair market value of Interim's net assets and at least 70 percent of
the fair market value of Interim's gross assets it held immediately prior
to the transaction. For purposes of this representation, amounts paid by
BTC or Interim to dissenters or shareholders who receive cash in lieu of
fractional shares, amounts used
<PAGE>
Page 3
by BTC or Interim to pay reorganization expenses and all redemptions and
distributions (except for regular, normal dividends) made by BTC will be
included as assets of BTC or Interim, respectively, immediately prior to
the transaction.
(d) Prior to the transaction, NBI will be in control of Interim within the
meaning of section 368(c) of the Code.
(e) Following the transaction, BTC will not issue additional shares of its
stock that would result in NBI losing control of BTC within the meaning of
section 368(c) of the Code
(f) NBI has no plan or intention to reacquire any of its stock to be issued in
the proposed merger.
(g) NBI has no plan or intention to liquidate BTC, to merge BTC with or into
another corporation, to sell or otherwise dispose of the stock of BTC, or
to cause BTC to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business, dispositions in
arm's-length transactions to avoid duplicative facilities or possible
regulatory objections, or transfers of assets to a corporation controlled
by BTC.
(h) The liabilities of Interim assumed by BTC and the liabilities to which the
transferred assets of Interim are subject were incurred by Interim in the
ordinary course of its business.
(i) Following the transaction, BTC will continue its historic business or use a
significant portion of its historic business assets in a business.
(j) NBI, Interim, BTC and the shareholders of BTC will each pay their own fees
and expenses incurred in connection with the merger, except that printing
expenses for the prospectus and proxy statement will be shared equally by
NBI and BTC.
(k) There is no intercorporate debt existing between NBI and BTC or between
Interim and BTC that was issued, acquired, settled or will be settled at a
discount.
(l) In the merger, shares of BTC stock representing control of BTC, as defined
in section 368(c) of the Code, will be exchanged solely for voting stock of
NBI. For purposes of this representation, shares of BTC stock exchanged
for cash furnished by NBI will be treated as outstanding BTC stock on the
date of the transaction.
(m) At the time of the transaction, BTC will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to
which any person could acquire stock in BTC that, if exercised or
converted, would effect NBI's acquisition or retention of control of BTC,
as defined in section 368(c) of the Code.
(n) NBI does not own, nor has it owned during the past five years (except with
respect to shares owned in a fiduciary capacity), any shares of stock of
BTC.
(o) No two parties to the merger are investment companies within the meaning of
such term as used in section 368(a)(2)(F)(iii) and (iv).
(p) On the date of the merger the fair market value of the assets of BTC will
exceed the sum of its liabilities plus the liabilities, if any, to which
the transferred assets are subject.
<PAGE>
Page 4
(q) BTC is not under the jurisdiction of a court in a Title 11 or similar case
within the meaning of section 368(a)(3)(A).
(r) None of the NBI common stock being issued to the BTC shareholders will
represent compensation for past or future services or for a covenant not to
compete. The compensation to be paid to BTC directors, officers and
employees who are stockholders of BTC and who will be employed following
the merger will not be part of the consideration paid for their BTC common
stock but will be commensurate in each instance with amounts paid to third
parties bargaining at arm's-length for similar services.
(s) NBI will pay cash in lieu of fractional shares merely as a convenience and
not as separately bargained for consideration. The total cash paid in lieu
of NBI fractional shares will be less than one percent of the total
consideration received by the BTC shareholders and no BTC shareholder will
receive cash in lieu of more than one fractional share.
The opinions expressed in this letter are rendered only with respect to the
- ---------------------------------------------------------------------------
specific matters discussed herein, and we express no opinion with respect to any
- --------------------------------------------------------------------------------
other legal, federal, or state income tax aspect of this transaction. The
- -------------------------------------------------------------------------
opinions contained herein are based on the facts, circumstances, and
- --------------------------------------------------------------------
representations stated above. If any of the above-stated facts, circumstances,
- ------------------------------------------------------------------------------
or representations are not entirely complete or accurate, it is imperative that
- -------------------------------------------------------------------------------
we be informed immediately, as the inaccuracy could have a material effect on
- -----------------------------------------------------------------------------
our conclusions and we have not independently verified each of the above facts
- ------------------------------------------------------------------------------
or representations.
- -------------------
In rendering our opinion, we are relying upon the relevant provisions of the
- ----------------------------------------------------------------------------
Internal Revenue Code of 1986, as amended; the regulations thereunder; and
- --------------------------------------------------------------------------
judicial and administrative interpretations thereof, all of which are subject to
- --------------------------------------------------------------------------------
change or modification by subsequent legislative, regulatory, administrative or
- -------------------------------------------------------------------------------
judicial decisions. Such change could also have an effect on our conclusions.
- -----------------------------------------------------------------------------
Unless specifically requested to do otherwise, KPMG undertakes no responsibility
- --------------------------------------------------------------------------------
to update this opinion in the event of any such subsequent change or
- --------------------------------------------------------------------
modification.
- -------------
DISCUSSION
----------
Classification as a reorganization
- ----------------------------------
Section 368(a)(l)(A) provides that the term "reorganization" includes a
statutory merger. The term statutory merger refers to a merger effected pursuant
to the corporate laws of the United States, a state or territory, or the
District of Columbia. Treasury Regulation ("Reg.") section 1.368-2(b).
In order to qualify as a reorganization by operation of section 368(a)(2)(E),
the transaction must meet two requirements. First, after the transaction, the
corporation surviving the merger (i.e., BTC) must hold substantially all of its
properties and the properties of the merged corporation (i.e., Interim). Second,
the former shareholders of the surviving corporation (i.e., BTC) must exchange,
for an amount of voting stock of the controlling corporation (i.e., NBI), an
amount of stock in the surviving corporation which constitutes control of such
corporation. Control for this purpose is defined in section 368(c) as the direct
ownership of stock possessing at least 80 percent of the total combined voting
power and at least 80 percent of the total number of shares of all other classes
of stock.
The term "substantially all" has the same meaning as the phrase is used in
section 368(a)(1)(C). Reg. section 1.368-2(b)(2). Section 368(a)(1)(C) and the
regulations promulgated thereunder do not define what constitutes substantially
all of the properties of a corporation. The Internal Revenue Service ("the
Service") has established a quantitative test as to the amount of assets of a
corporation that will satisfy the substantially all properties requirement for
purposes of obtaining a private letter ruling. Under Revenue Procedure 77-37,
1977-2 C.B. 568, the "substantially all" requirement of section 368(a)(2)(E) is
satisfied if the surviving corporation retains at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets it held immediately
<PAGE>
Page 5
before the merger, and if the surviving corporation gets at least the same
percentages of the assets the merged subsidiary held immediately before the
merger.
The "ninety/seventy" guidelines are arbitrary percentages selected by the
Service that do not necessarily represent judicial interpretations of the
meaning of the phrase "substantially all of the properties" under various
subdivisions of section 368. See Louis F. Vicreck v. United States, 83-2
---------------------------------
U.S.T.C. para. 9664 (Cl.Cts.); Ralph C. Wilson, Sr., 46 T.C. 334 (1966);
--------------------
John G. Moffat, 42 T.C. 558, 363 F.2nd 860 (9th Cir. 1966) (Aff'g T.C.) 66-
- --------------
2 U.S.T.C. para. 9498; James Armour, Inc., 43 T.C. 295 (1964); Smothers v.
------------------ -----------
United States, 642 F.2nd 894 (5th Cir. 1981) (aff'g DC), 79-1 U.S.T.C. para.
- -------------
9216; and American Manufacturing Company Inc., 55 T.C. 204 (1970).
-----------------------------------
What constitutes "substantially all of the properties" in a situation other
than a request for ruling from the Service depends upon the facts and
circumstances in each case rather than upon any particular percentage.
Revenue Ruling 57-518, 1957-2 C.B. 253. The Service is of the view that
the "substantially all of the properties" requirement applies separately to
each trade or business of the transferor corporation.
Requisite to all reorganizations under section 368(a)(1) are: (1) a valid
corporate business purpose, (2) a continuity of the business enterprise
under the modified corporate form and (3) a continuity of interest in the
acquiring or transferee corporation on the part of those persons who
directly or indirectly were the owners of the acquiring or transferor
corporation prior to the reorganization. Reg. section 1.368-1(b). The
term "reorganization" does not embrace the mere purchase by one corporation
of the properties of another. Reg. section 1.368-2(a). These regulations
reflect well-developed judicial interpretations of the statutory definition
of a reorganization, the purpose of which is to exclude from the scope of
the reorganization provisions those transactions that are in fact sales.
Continuity of business enterprise requires that the acquiring corporation
either continue the acquired corporation's historic business or use a
significant portion of the acquired's historic business assets. Reg.
section 1.368-1(d)(2).
The regulations under section 368(a) do not establish the amount of
qualifying consideration necessary to satisfy the continuity of shareholder
interest requirement. However, the Service has promulgated a definite test
as to the amount of consideration necessary to satisfy the continuity of
interest requirement for purposes of obtaining a private letter ruling.
Under Revenue Procedure 77-37, 1977-2 C.B. 568, the continuity of interest
requirement of Reg. section 1.368-1(b) is satisfied if:
...there is continuing interest through stock ownership in the acquiring or
transferee corporation...on the part of the former shareholders of the
acquired or transferor corporation (or a corporation in "control" thereof
within the meaning of section 368(c) of the Code) which is equal in value,
as of the effective date of the reorganization, to at least 50 percent of
the value of all the formerly outstanding stock of the acquired or
transferor corporation as of the same date. It is not necessary that each
shareholder of the acquired or transferor corporation receive in the
exchange, stock of the acquiring or transferor corporation, or a
corporation in "control" thereof, which is equal in value to at least 50
percent of the value of his former stock interest in the acquired or
transferor corporation, so long as one or more of the shareholders of the
acquired or transferor corporation have a continuing interest through stock
ownership in the acquiring or transferee corporation (or a corporation in
"control" thereof) which is, in the aggregate, equal in value to at least
50 percent of the value of all of the formerly outstanding stock of the
acquired or transferor corporation.
The 50 percent definitive test of this revenue procedure does not as a
matter of law establish the amount of qualifying consideration necessary to
meet the continuity of interest requirement of Reg. section 1.368-1(b). In
other words, the continuation of a capital stock ownership in the acquiring
corporation equal to less than 50 percent of the value of the stock of the
acquired corporation does not in itself mark a discontinuity of interest.
The Supreme Court in John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935),
-------------------------------
36-1 U.S.T.C. para. 9019, held that there was a
<PAGE>
Page 6
reorganization even though the shareholders of the acquired corporation received
less than half of their total consideration in the form of stock of the
acquiring corporation and received nonvoting preferred stock. It is only
necessary that the shareholders continue to have a definite and substantial
equity interest in the assets of the acquiring corporation. Revenue Ruling 61-
156, 1961-2 C.B. 62.
Provided that (1) the merger of Interim with and into BTC qualifies as a
statutory merger under the applicable federal and state laws and is
undertaken for a valid corporate business purpose as represented above, (2)
after the transaction BTC continues its historic business and (3) BTC
shareholders exchange for NBI voting common stock an amount of BTC stock
meeting the continuity of shareholder interest test, then the merger of
Interim with and into BTC will constitute
a reorganization within the meaning of section 368(a)(1)(A) and section
368(a)(2)(E). NBI, BTC and Interim will each be "a party to the
reorganization" within the meaning of section 368(b).
Federal income tax consequences to exchanging shareholders
- ----------------------------------------------------------
Section 354(a)(1) provides that no gain or loss will be recognized if stock
of a corporation which is a party to a reorganization is, pursuant to the
plan of reorganization, exchanged solely for stock of such corporation or
of another corporation which is a party to the reorganization. Section
356(a)(1) in relevant part provides that if money or other property is
received in an exchange to which section 354 would otherwise apply, then
gain, if any, to the recipient will be recognized to the extent of the sum
of the money and fair market value of the other property received. If the
exchange has the effect of the distribution of a dividend, then the amount
of gain recognized that is not in excess of each distributee shareholder's
ratable share of the undistributed earnings and profits of the acquired
corporation will be treated as a dividend. Section 356(a)(2). No loss
will be recognized on the exchange. Section 356(c). Section 358 provides
that shareholders are entitled to a carryover basis for stock received in a
reorganization transaction qualifying under section 354 or 356. Where a
cash payment by the acquiring corporation to the shareholders of the
acquired corporation is in lieu of fractional share interests, representing
a mere rounding-off of the fractions in the exchange and not a separately
bargained-for consideration, such cash payment shall be treated under
section 302 as in redemption of the fractional share interests. Rev. Rul.
66-365, 1966-2 C.B. 116.
The BTC shareholders who receive solely NBI common stock in exchange for
their BTC common stock will not recognize any gain or loss pursuant to
section 354(a)(1). The tax basis which these BTC shareholders will have in
their newly received NBI stock will be the same as their present tax basis
in the BTC stock. Section 358(a).
If the property received in an exchange has the same (i.e., carryover)
basis as the property given up, then section 1223(1) applies to determine
the holding period for the property received. Section 1223(1) provides
that the period during which the taxpayer held the property surrendered in
the exchange is added to the period he or she holds the property received
in the exchange in order to determine the holding period of the property
received.
The tacking of the previous holding period applies only if the property
exchanged was a capital asset in the taxpayer's hands at the time of the
exchange. Section 1223(1). The status of property as a capital asset is
determined under section 1221, which defines "capital asset" as any
property of a taxpayer other than property within specified
classifications. As a general rule, stock of a corporation would be
treated as a capital asset under this section. Provided that his or her
BTC stock is a capital asset, then each BTC shareholder will be able to
include his or her respective ownership period of the BTC stock in
determining the holding period of the NBI stock received in the proposed
transaction.
The payment of cash in lieu of fractional share interests of NBI common
stock will be treated as if the fractional share was distributed to BTC
shareholders as part of the exchange and then redeemed by NBI. These
payments will be treated as having been received by BTC shareholders as
distributions in full payment in exchange for the stock redeemed as
provided in section 302(a). Gain or loss to the shareholder is determined
based on the difference between the full amount of cash received and the
adjusted basis allocable to the fractional share. Provided that his
<PAGE>
Page 7
or her BTC stock is a capital asset, then the gain or loss recognized as a
result of receiving cash in lieu of a fractional share will be a capital
gain or loss to the shareholder.
CONCLUSION
----------
Based on the foregoing facts and representations, it is the opinion of KPMG
that the merger of Interim with and into BTC and the acquisition of BTC by
NBI, in accordance with federal banking and Virginia state law, will be
treated as a tax-free reorganization under section 368(a)(1)(A) and section
368(a)(2)(E) of the Code.
The federal income tax effects of the reorganization to the BTC shareholders
are summarized as follows:
1. No gain or loss will be recognized by the shareholders of BTC who receive
solely shares of NBI voting common stock (including a fractional share
interest to which they are entitled) for their BTC common stock upon
consummation of the exchange.
2. The basis of the NBI common stock received (including a fractional share
interest to which they are entitled) by such BTC shareholders will be the
same as the basis of the BTC stock surrendered in the exchange. Provided
that the BTC stock surrendered was a capital asset in the shareholder's
hands immediately prior to the exchange, the holding period of the NBI
stock (including a fractional share interest to which they are entitled)
will include the holding period of the BTC stock.
3. Cash received by a BTC shareholder in lieu of a fractional share interest
in NBI common stock will be treated as received in full payment in exchange
for such fractional share interest. Provided the fractional share would
have constituted a capital asset in the hands of such holder, the
shareholder will recognize a capital gain or loss in an amount equal to the
difference between the amount of cash received and the portion of the
adjusted tax basis in the BTC common stock allocable to the fractional
share interest.
Very truly yours,
KPMG Peat Marwick LLP
<PAGE>
Exhibit 10(v)
FORM
OF
DIRECTOR'S COMPENSATION AGREEMENT
---------------------------------
This Agreement is entered into this first day of January, 1984,
between THE NATIONAL BANK OF BLACKSBURG, 100 Main Street, Blacksburg,
Virginia 24060 (herein referred to as the "Bank") and Dr. Charles L.
Boatwright, 615 Patrick Henry Drive, Blacksburg, Virginia 24060 (herein
referred to as the "Director").
W I T N E S S E T H
-------------------
WHEREAS, the Bank recognizes that the competent and faithful efforts
of Director on behalf of the Bank have contributed significantly to the
success and growth of the Bank; and
WHEREAS, the Bank values the efforts, abilities and accomplishments of
the Director and recognizes that his services are vital to its continued
growth and profits in the future; and
WHEREAS, the Bank desires to compensate the Director and retain his
services for five years, if elected, to serve on the Board of Directors.
Such compensation is set forth below; and
WHEREAS, the Director, in consideration of the foregoing, agrees to
continue to serve as a Director, if elected,
NOW, THEREFORE, it is mutually agreed as follows:
1. Compensation. The Bank agrees to pay Director the total sum of
------------
$33,240 payable in monthly installments of $277.00 for 120 consecutive
months, commencing on the first day of the month following Director's 65th
birthday. Payments to the Director will terminate when the 120 payments
have been made or at the time of the Director's death, whichever occurs
first.
2. Death of Director Before Age 65. In the event Director should
-------------------------------
die before reaching age 65, the Bank agrees to pay to Director's
beneficiary, designated in writing to the Bank, the sum of $277.00 per
month for 120 consecutive months. Payments will begin on the first day of
the month following Director's death.
3. Death of Director After Age 65. If the Director dies after age
------------------------------
65, prior to receiving the full 120 monthly installments, the remaining
monthly installments will be paid to the Director's designated beneficiary
(ies). The beneficiary (ies) shall receive all remaining monthly
installments which the Director would have received until the total sum of
$33,240 set forth in paragraph "1" is paid. If the Director fails to
designate a beneficiary in writing to the Bank, the balance of monthly
installments remaining at the time of his death shall be paid to the legal
representative of the estate of the Director.
4. Termination of Service as a Director. If the Director, for any
------------------------------------
reason other than death, fails to serve five consecutive years as a
Director, he will receive monthly compensation beginning at age 65 on the
basis that the number of full months served bears to the required number of
60 months times the compensation stated in paragraph "1." For example, if
the Director serves only 36 months, he will be entitled to 36/60 or 60% of
the compensation stated in paragraph "1."
5. Suicide. No payments will be made to the Director's beneficiary
-------
(ies) or to his estate in the event of death by suicide during the first
three years of this Agreement.
<PAGE>
6. Status of Agreement. This Agreement does not constitute a
-------------------
contract of employment between the parties, nor shall any provision of this
Agreement restrict the right of the Bank's Shareholders to replace the
Director or the right of the Director to terminate his service.
7. Binding Effect. This Agreement shall be binding upon the parties
--------------
hereto and upon the successors and assigns of the Bank, and upon the heirs
and legal representatives of the Director.
8. Interruption of Service. The service of the Director shall not
-----------------------
be deemed to have been terminated or interrupted due to his absence from
active service on account of illness, disability, during any authorized
vacation or during temporary leaves of absence granted by the Bank for
reasons of professional advancement, education, health or government
service, or during military leave for any period if the Director is elected
to serve on the Board following such interruption.
9. Forfeiture of Compensation by Competition. The Director agrees
-----------------------------------------
that all rights to compensation following age 65 shall be forfeited by him
if he engages in competition with the Bank, without the prior written
consent of the Bank, within a radius of 50 miles of the main office of the
Bank for a period of ten years, coinciding with the number of years that
the Director shall receive such compensation.
10. Assignment of Rights. None of the rights to compensation under
--------------------
this Agreement are assignable by the Director or any beneficiary or
designee of the Director and any attempt to anticipate, sell, transfer,
assign, pledge, encumber or change Director's right to receive compensation
shall be void.
11. Status of Director's Rights. The rights granted to the Director
---------------------------
or any designee or beneficiary under this Agreement shall be solely those
of an unsecured creditor of the Bank.
12. Amendments. This Agreement may be amended only by a written
----------
agreement signed by the parties.
13. If the Bank shall acquire an insurance policy or any other asset
in connection with the liabilities assumed by it hereunder, it is expressly
understood and agreed that neither Director nor any beneficiary of Director
shall have any right with respect to, or claim against, such policy or
other asset except as expressly provided by the terms of such policy or in
the title to such other asset. Such policy or asset shall not be deemed to
be held under any trust for the benefit of Director or his beneficiaries or
to be held in any way as collateral security for the fulfilling of the
obligations of the Bank under this Agreement except as may be expressly
provided by the terms of such policy or other asset. It shall be, and
remain, a general, unpledged, unrestricted asset of the Bank.
14. This Agreement shall be construed under and governed by the laws
of the State of Virginia.
15. Interpretation. Wherever appropriate in this Agreement, words
--------------
used in the singular shall include the plural and the masculine shall
include the feminine gender.
16. This Agreement shall be binding upon and inure to the benefit of
any successor of the Bank and any such successor shall be deemed
substituted for the Bank under the terms of this Agreement. As used
herein, the term "successor" shall include any person, corporation or other
business entity which at any time, whether by merger, purchase or
otherwise, acquires all or substantially all of the stock, assets or
business of the Bank.
<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement the day and
year above written.
THE NATIONAL BANK OF BLACKSBURG
-------------------------------
By: s/ James G. Rakes
----------------------------------
(SEAL) JAMES G. RAKES, PRESIDENT
s/ R. W. Gibbs s/ Charles L. Boatwright
- -------------------------- ------------------------------------- (SEAL)
Witness CHARLES L. BOATWRIGHT, M.D., DIRECTOR
<PAGE>
THE NATIONAL BANK OF BLACKSBURG
BOARD OF DIRECTORS
DEFERRED COMPENSATION "BRICK" PLAN DIRECTOR PARTICIPANTS
<TABLE>
<CAPTION>
PHOENIX
LIFE POLICY DATE OF DATE OF
SOCIAL DATE OF NUMBER DEFERRED FIRST OF
DATE OF SECURITY PHOENIX AND FACE COMP. 120 AMOUNT OF
DIRECTOR'S NAME BIRTH NUMBER LIFE POLICY AMOUNT AGMT. PAYMENTS PAYMENT
- --------------- ----- ------ ----------- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles L. Boatwright 03/08/26 ###-##-#### 03/01/85 2,329,477 01/01/84 04/01/91 $277.00/month
$ 27,797 120 months
Linden A. Bowman 03/22/32 ###-##-#### 12/01/84 2,320,072 01/01/84 04/01/97 $485.17/month
$ 37,772 120 months
Robert E. Christopher, Jr. 10/09/28 ###-##-#### 12/01/84 2,320,250 01/01/84 11/01/93 $359.25/month
$ 32,534 120 months
Paul A. Duncan 05/23/30 ###-##-#### 11/22/84 2,320,298 01/01/84 06/01/95 $435.92/month
$ 35,987 120 months
James G. Rakes 08/17/44 ###-##-#### 01/01/86 2,355,103 01/01/85 09/01/09 $1,610.50/month
$ 65,702 120 months
James M. Shuler 12/31/43 ###-##-#### 05/06/89 2,474,541 01/01/89 01/01/09 $909.25/month
$ 111,991 120 months
</TABLE>
<PAGE>
Exhibit 23(i)
Independent Auditors' Consent
The Board of Directors
National Bankshares, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading of "Experts" in the joint Prospectus/Proxy
Statement. We also consent to the references to our firm under the
headings "SUMMARY-Certain Federal Income Tax Consequences," "THE MERGER-
Certain Federal Income Tax Consequences" and "Tax Opinion" in the joint
Prospectus/Proxy Statement and to the filing of the tax opinion as an
exhibit to the Registration Statement on Form S-4.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
December 8, 1995
<PAGE>
Exhibit 23(iii)
CONSENT OF FINANCIAL ADVISERS
We consent to the inclusion of our Fairness Opinion issued to Bank of
Tazewell County in this registration statement on Form S-4. We also
consent to the reference to our firm under the captions "SUMMARY," "THE
MERGER--Background of the Merger," "THE MERGER--Recommendations of the
Board of Directors of BTC; Reasons for the Merger," and "THE MERGER--
Opinions of BTC's Financial Adviser," and to the references to our firm and
inclusion of our Fairness Opinion in the Prospectus/Proxy Statement forming
part of the Registration Statement on Form S-4.
BAXTER FENTRISS AND COMPANY
Richmond, Virginia
November 28, 1995
<PAGE>
Exhibit 23(iv)
Independent Auditors' Consent
To the Board of Directors and Stockholders
Of Bank of Tazewell County:
We consent to the use of our report included herein and to the reference to
our firm under the heading of "Experts" in the Prospectus/Proxy Statement.
COOK ASSOCIATES, LLP
December 8, 1995
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and/or
directors of National Bankshares, Inc., a Virginia corporation (the "Company"),
does hereby constitute and appoint James G. Rakes, Jr. and Marilyn B. Buhyoff,
and each of them (with full power to each of them to act alone), his true and
lawful Attorneys in Fact and Agents for him and on his behalf and in his name,
place and stead in any and all capacities and particularly as an officer and/or
director of the Company to sign, execute and affix his seal thereto and file any
of the documents referred to below relating to the registration in connection
with the Agreement and Plan of Merger dated as of August 28, 1995, among the
Company and the Bank of Tazewell County ("BTC"), 1,888,209 shares of the
Company's Common Stock:
A Registration Statement of the Company respecting 1,888,209 shares of
Company Common Stock, on Form S-4, under the Securities Act of 1933, as
amended, and any and all amendments to the Registration Statement,
including post-effective amendments, with all exhibits and any and all
documents required to be filed with respect thereto with the Securities and
Exchange Commission and/or any regulatory authority for any State in the
United States of America;
granting unto said Attorneys and each of them full power and authority to do and
perform every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully, to all intents and purposes,
as he himself might or could do if personally present, hereby ratifying and
confirming all that said Attorneys in Fact and Agents or each of them may
lawfully do or cause to be done by virtue hereof.
WITNESS the signatures and seals of the undersigned this 8th day of
November, 1995.
s/ L. A. Bowman (SEAL)
------------------------------
s/ Paul A. Duncan (SEAL)
------------------------------
s/ Charles L. Boatwright (SEAL)
-----------------------------
s/ Jeffery R. Stewart (SEAL)
-----------------------------
s/ J. Lewis Webb (SEAL)
-----------------------------
s/ Paul P. Wisman (SEAL)
----------------------------
s/ James M. Shuler (SEAL)
----------------------------
<PAGE>
s/ James G. Rakes (SEAL)
----------------------------
s/ R. E. Christopher (SEAL)
----------------------------
<PAGE>
COMMONWEALTH OF VIRGINIA )
) to-wit:
COUNTY OF MONTGOMERY )
I, Ieda P. Sturgil, a Notary Public in and for the County of Montgomery, in
the State of Virginia, do hereby certify that
L. A. Bowman James G. Rakes
Paul A. Duncan Robert E. Christopher, Jr.
Charles L. Boatwright
Jeffrey R. Stewart
J. Lewis Webb
Paul P. Wisman
James M. Shuler
whose names are signed to the foregoing writing bearing date the 8th day of
November, 1995, this day personally appeared before me and acknowledged the
same in my City and State aforesaid.
GIVEN under my hand and seal this 8th day of November, 1995.
/s/ Ieda P. Sturgill
Notary Public
My Commission Expires:
Feb. 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NATIONAL
BANKSHARES, INC.'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
QUARTER ENDED SEPTEMBER 30, 1995, AS SET FORTH IN THE COMPANY'S QUARTERLY REPORT
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 5,381
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,610
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,854
<INVESTMENTS-CARRYING> 53,105
<INVESTMENTS-MARKET> 53,832
<LOANS> 124,981
<ALLOWANCE> 2,105
<TOTAL-ASSETS> 206,680
<DEPOSITS> 183,152
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,271
<LONG-TERM> 0
<COMMON> 4,285
0
0
<OTHER-SE> 17,972
<TOTAL-LIABILITIES-AND-EQUITY> 206,680
<INTEREST-LOAN> 8,754
<INTEREST-INVEST> 3,002
<INTEREST-OTHER> 152
<INTEREST-TOTAL> 11,908
<INTEREST-DEPOSIT> 4,937
<INTEREST-EXPENSE> 4,941
<INTEREST-INCOME-NET> 6,967
<LOAN-LOSSES> 225
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 4,821
<INCOME-PRETAX> 3,198
<INCOME-PRE-EXTRAORDINARY> 3,198
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,445
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 0
<LOANS-NON> 420
<LOANS-PAST> 191
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,006
<CHARGE-OFFS> 179
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 2,105
<ALLOWANCE-DOMESTIC> 1,014
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,091
</TABLE>
<PAGE>
Exhibit 99
(Preliminary Copy)
Bank of Tazewell County
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned holder of Bank of Tazewell County ("BTC") common stock hereby
constitutes and appoints _____________________________ or either of them, the
true and lawful attorneys and proxies of the undersigned, each with full power
of substitution, for and on behalf of the undersigned, to act and vote at the
Special Meeting of Stockholders to be held on ________________, 1996 at
____________, local time, in ______________________, and at any adjournment or
adjournments thereof.
(Continued, and to be signed, on other side)
<PAGE>
(Preliminary Copy)
3 To approve an Agreement and Plan of Merger, dated as of August 28, 1995,
among BTC and National Bankshares, Inc. ("NBI"), pursuant to which (i) NBI
Interim Bank, a wholly owned subsidiary of NBI, would merge with and into
BTC, and (ii) each outstanding share of BTC common stock (excluding any
shares held by dissenting stockholders and certain shares held by NBI or
BTC) would be converted into the right to receive one share of NBI common
stock, with cash in lieu of the issuance of any fractional share interest,
all on and subject to the terms and conditions contained therein, together
with an amendment to and restatement of the BTC Articles of Incorporation
eliminating the preemptive rights of holders of BTC common stock and
conforming the BTC Articles of Incorporation to certain provisions of the
Articles of Incorporation of NBI Interim Bank.
FOR AGAINST ABSTAIN
[_] [_] [_]
3 In their discretion, to act and vote upon such other business as may
properly come before the meeting or any adjournment or adjournments
thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED
AS SPECIFIED ABOVE. IF NO SPECIFICATION IS MADE,
THIS PROXY WILL BE VOTED FOR PROPOSAL 1 SET FORTH
ABOVE.
The undersigned hereby acknowledges
receipt of the combined Notice of Special
Meeting of Stockholders and
Prospectus/Proxy Statement that
accompanied this Proxy and ratifies all
lawful actions taken by the above-named
attorneys and proxies.
Date: _______________________________199__
____________________________________(SEAL)
____________________________________(SEAL)
Note: Signature(s) should agree with
name(s) on BTC stock certificate(s).
Executors, administrators, trustees and
other fiduciaries, and persons signing on
behalf of corporations or partnerships,
should so indicate when signing.
