UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1995 O-15204
NATIONAL BANKSHARES, INCORPORATED
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(Exact name of Registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 South Main Street
Blacksburg, Virginia 24060
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (540) 552-2011
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per Share
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(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 20, 1996 was $42,732,548. The aggregate market value
was computed based on a price determined from transactions known to management
of the Registrant since its stock is not extensively traded, listed on any
exchange, or quoted by NASDAQ. (In determining this amount, the registrant
assumes that all of its Directors and principal Officers are affiliates. Such
assumption shall not be deemed conclusive for any other purposes.)<PAGE>
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 20, 1996
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COMMON STOCK, $2.50 PAR VALUE 1,714,152
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for
the year ended December 31, 1995, is incorporated by reference into Parts I and
II of this report.
Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 9, 1996 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
(This report contains 88 pages.)
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(The Index of Exhibits are on pages 39-40.)<PAGE>
NATIONAL BANKSHARES, INCORPORATED
ANNUAL REPORT FOR 1995 ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 4-31
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of
Security Holders 31
Executive Officers of the Registrant 32
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 33
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 33
Item 8. Financial Statements and
Supplementary Data 33
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of
the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain
Beneficial Owners and Management 34
Item 13. Certain Relationships and Related
Transactions 34
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 35-37
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PART I
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Item 1. Business of Bankshares.
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History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding
Company Act (BHCA). Bankshares 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 services to individuals,
businesses, local government units and institutional customers. These products
and services include accepting deposits in the form of checking accounts, money
market deposit accounts, interest-bearing demand deposit 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 orders, travelers checks, 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
operation, NBB offers a variety of fiduciary, personal and corporate trust
services.
NBB makes loans in all major loan categories, including commercial,
commercial and residential real estate, construction and consumer loans.
Commercial Loans
Loans are made to businesses and individuals for business purposes on both
secured and unsecured bases. NBB's loan policies normally require commercial
loan requests to be accompanied by complete documentation of income, by income
tax returns and by a full credit history.
Unsecured commercial loans must be supported by a satisfactory balance sheet
and income statement. The source of repayment and applicable secondary
repayment sources are identified in evaluating the loan request and must be
clear before the loan is closed. Short-term unsecured loans are usually for a
term of ninety-days or less and are repayable from a definite source. Other
unsecured commercial loans may be placed on a demand basis if the source of
repayment is known but the timing is unknown.
Commercial lines of credit may be secured or unsecured. They are generally
granted with the requirements of an annual review and the further requirement
that they be fully paid for a continuous thirty-day period during the twelve-
month term of the line of credit.
Business loans made on a secured basis may be secured by a security interest
in marketable equipment, accounts receivable, business equipment and/or general
intangibles of the business. In addition, or in the alternative, the loan may
be secured by a deed of trust lien on business real estate. Secured commercial
loans made for the purpose of financing working capital needs or for equipment
typically carry terms of from five to seven years. Deed of trust loans may
extend up to thirty years, although twenty years or less is a more preferred
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term. Prior to committing to make any such loan, the request is evaluated
based on the cash flow of the business entity involved. Commercial loans which
are secured by real estate are controlled by a specific NBB loan policy which
states that the cash flow coverage ratio from the project should be no less
than 1.1 to 1.0. If the ratio is not achieved but the borrower has a well-
documented secondary source of repayment, the loan may still be considered.
Regardless of the value of collateral or the strength of any guarantors, it is
NBB's policy to require the business to exhibit sufficient cash flow to service
the debt. Liquidation of collateral or the strength of a guarantor serves as a
secondary source of repayment.
Commercial real estate loans in excess of $50,000 require a market appraisal
from an independent appraiser, unless the requirement is formally waived by
NBB's Board of Directors or its internal Loan Committee. Other standard
underwriting criteria include property surveys, title search and proper title
insurance and hazard insurance which insures NBB's interest in the real estate.
The loan to value ratio may vary, but it generally does not exceed 80% without
approval by the internal Loan Committee.
In some instances, when small business loans do not meet NBB's normal
underwriting criteria, NBB will work with the borrower and the Small Business
Administration ("SBA") to obtain a SBA guarantee of all or a portion of the
loan amount so that credit can be granted.
The risks associated with commercial loans are related to the strength of
the individual business, the value of loan collateral and the general health of
the economy.
Residential Real Estate Loans
Loans which are secured by residential real estate generally are subject to
the same underwriting criteria as commercial real estate loans. However, if a
residential mortgage loan exceeds 80% of the appraised value of the property,
private mortgage insurance is generally required. The creditworthiness of the
borrower, his or her total outstanding indebtedness, sources of income and the
value and marketability of the real estate are all factors which are evaluated.
Standard underwriting ratios of 28% mortgage debt to gross income and 36% total
debt to gross income are applied. Senior lending officers may approve
exceptions to these ratios if other factors are present. Residential real
estate loans may have a term of up to thirty years.
NBB participates in insured loan programs sponsored by the Department of
Housing and Urban Development, the Veterans Administration and the Virginia
Housing Development Authority. Each of these programs contains specific
requirements and restrictions, in addition to NBB's general loan application
and underwriting requirements.
It is NBB's policy to attempt to sell all residential real estate loans in
the secondary market on a servicing released basis. There are occasions when a
borrower or the real estate do not qualify under secondary market criteria, but
the loan request represents a reasonable credit risk. Also, an otherwise
qualified borrower may not want to have their real estate loan sold. When
those occasions arise, if the loans meet NBB's internal underwriting criteria,
the loan will be closed and placed in NBB's portfolio.
Residential real estate loans carry risks associated with the continued
creditworthiness of the borrower and the value of the collateral.
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Construction Loans
Construction loans are made to financially responsible individuals or
businesses who have contracted for construction of structures. The loans are
secured by a first lien on the real estate improvements. NBB's loan policy is
that the loan to value ratio is not to exceed 80% of the lower of the cost or
appraisal value. In addition, a firm commitment for permanent financing or a
satisfactory prequalification for a permanent loan must be in place.
Construction loans are subject to the same general underwriting criteria as
commercial and residential real estate loans. All construction loans also are
made with the requirement that title insurance provides affirmative lien waiver
coverage. Construction draws are made in accordance with NBB's inspection
schedule or, for larger commercial projects, after architects's certification.
The normal loan term for residential projects is six to twelve months, and most
commercial projects do not exceed eighteen months.
In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral at any point in time may be less than the principal amount of
the loan. In order to reduce risks associated with this type of loan, NBB does
not allow development costs, such as surveys and architect's fees, to be made a
part of the loan amount. Loans for commercial office or multi-unit residential
properties (eight units or more) will not usually be considered until 50% of
the space is pre-leased. Finally, NBB deals only with experienced contractors
who are known to NBB and who have sufficient financial strength to complete the
construction project.
Consumer Loans
NBB places emphasis on loans to consumers. A completed loan application, a
credit report and, if the principal amount is above $5,000, a recent personal
financial statement are required for each loan. Loan officers also evaluate
the character of the individual borrower. In considering a consumer loan
request, NBB has established the criteria that the borrower's total monthly
debt payments, including the loan for which application is being made should
not exceed 36% of gross monthly income or 50% of net monthly income. Although
exceptions may be approved by senior lenders or the internal Loan Committee,
the maximum term for different types of loans include: vehicles - five years;
mobile homes - twelve years; second mortgage - fifteen years; equity line - ten
year and property improvement -five years.
Loans used to purchase vehicles or other specific personal property and
loans associated with real estate are usually secured with a lien on the
subject vehicle or property. Consumer loans may also be granted on an
unsecured basis, if the customer's income and credit history are deemed to
support the extension of credit. Most consumer loans are monthly payment
loans, although a single payment loan may be made when there is an identified
definite source of repayment.
Negative changes in a customer's financial circumstances due to a large
number of factors, such as illness or loss of employment, can place the
repayment of a consumer loan at risk. In addition, deterioration in collateral
value can add risk to consumer loans.
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NBB also originates a small number of student loans which are sold to the
Student Loan Marketing Association ("SLMA") when the individual student is no
longer enrolled as a full-time student at a qualifying college or university.
Apart from selling residential mortgage loans in the secondary market and
selling student loans to SLMA, NBB will occasionally buy or sell all or a
portion of a loan for various other reasons. NBB will consider selling a loan,
or a participation in a loan, if: (i) the full amount of the loan would exceed
NBB's legal lending limit to a single borrower; (ii) the full amount of the
loan, when combined with a borrower's previously outstanding loans, would
exceed NBB's legal lending limit to a single borrower; (iii) the Board of
Directors or the internal Loan Committee believes that a particular borrower
has a sufficient level of debt at NBB; (iv) the borrower requests the sale; (v)
NBB's loan to deposit ratio is close to the upper limit set forth by NBB
policy; and/or (vi) the loan may create too great a concentration of NBB's
loans in one particular location or in one particular type of loan.
NBB will consider purchasing a loan, or a participation in a loan, from
another financial institution if the loan meets all applicable credit quality
standards and (i) the loan to deposit ratio is at a level where additional
loans would be desirable; and (ii) a common customer requests the purchase.
The following table sets forth, for the three fiscal years ended December
31, 1995, 1994 and 1993 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.
Percentage of
Period Class of Service Total Revenues
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December 31, 1995 Interest and Fees on Loans 66.3%
Interest on Securities 22.4%
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%
Bankshares 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 December 31, 1995, Bankshares had total consolidated assets of approximately
$203 million and trust assets with a market value of approximately $64 million
under management or administration. As of that date, Bankshares had
approximately $123 million in consolidated net loans, approximately $180
million in consolidated deposits and approximately $23 million in consolidated
stockholders' equity.
Bankshares management will consider strategic acquisition opportunities in
businesses which complement or expand Bankshares' current operations.
Bankshares currently has no specific acquisition plans, other than the
affiliation with the Bank of Tazewell County (BTC), and there can be no
assurance that any acquisitions will be made or what the terms of such
acquisitions, if any, may be.
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Market Area
NBB's primary service area consists of the northern portion of Montgomery
County and all of Giles County, Virginia. This area includes the towns of
Blacksburg and Christiansburg in Montgomery County and the towns of Pearisburg
and Pembroke in Giles County. The local economy is diverse and is oriented
toward higher education, retail and service, light manufacturing and
agriculture. For the years 1995, 1994 and 1993 the unemployment rate in
Montgomery County was 3.0%, 3.20% and 4.85%, respectively, and the rate in
Giles County during those years was 8.40%, 7.40% and 10.41%, respectively. In
1995, the rate for Montgomery County dropped to 3.0% and the Giles County
unemployment rate increased to 8.4%. Montgomery County's largest employer is
Virginia Polytechnic Institute and State University ("VPI & SU") located in
Blacksburg. VPI & SU is the Commonwealth's land grant college and also its
largest university. Employment at VPI & SU has remained stable over the past
three years, and it is not expected to change materially in the next few years.
A second state supported university, Radford University, is located on the
western edge of the Bankshares' service area. It too has provided stable
employment opportunities in the region.
One of the area's major employers, the Radford Army Ammunition Plant (the
"RAAP"), has experienced significant layoffs since the early 1990s, with
employment there dropping from a high of approximately 3,800 to approximately
1,200 employees. These layoffs have had no significant impact on NBI's
business, although they did contribute to the area's relatively high
unemployment rate in the early 1990s. It is possible that employment levels at
the RAAP will continue to decline, but the local area has already absorbed the
major impact of layoffs at that facility. Giles County's primary employer is a
Hoechst-Celanese plant, which manufactures the material from which cigarette
filters are made. Employment at that location has remained steady or declined
slightly in the past three years. Several other small manufacturing concerns
are located in Montgomery and Giles Counties. These concerns manufacture
diverse products and are not dependent upon one sector of the economy.
Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have in the past
several years constructed additional facilities and attracted additional health
care providers to Montgomery County, making it a center for basic health care
services. VPI & SU's Corporate Research Center has brought several small high
tech companies to Blacksburg, and further expansion is planned.
Montgomery County has experienced good growth, with the total fair market
value of real estate, measured in constant dollars, increasing 49% in the years
between 1980 and 1992. Growth is predicted to continue through the year 2000;
however, the rate may be somewhat slower, as the predicted rate of population
growth in Montgomery County is expected to moderate. Neighboring Giles County
is more rural and had only 22% of Montgomery County's total population in 1990.
Giles County has experienced a slight decline in population since the 1990
census. Total fair market value of real estate, measured in real dollars,
increased in Giles County by 54% between 1980 and 1992, but declined by 9% over
that twelve-year period, as measured in constant dollars. The continued slow
decline of Giles County's population is predicted to continue through the year
2000. However, since the total population of the County reported in the 1990
census was only 16,366, and the population projected by the Virginia Employment
Commission for Giles in the year 2000 is 16,121, the predicted decline of 245
individuals is not expected to materially impact Bankshares' business in Giles
County.
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Bankshares' primary service area offers the advantages of a good quality of
life, scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and
it has had some recent success attracting retirees, particularly from the
Northeast and urban Northern Virginia. These marketing efforts are expected to
continue.
Competition
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
that headquarter elsewhere compete in NBB's service area and have substantially
greater resources than NBB. 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, 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 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.
Registrant's Organization and Employment
Bankshares and NBB are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for executive officers, and
conducts substantially all of its operations through NBB. All compensation
paid to officers and employees is paid by NBB, except for fees paid by
Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1995 NBB employed 98 full time equivalent employees at its
main office, operations center and branch offices.
Regulation and Supervision
Bankshares and NBB 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 Bankshares and NBB 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 Bankshares
and NBB. 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
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are applicable to the businesses of Bankshares and NBB. Any change in
applicable laws or regulations may have a material adverse effect on the
business and prospects of Bankshares and NBB.
Bankshares
Bankshares 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 Bankshares 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
Bankshares 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
Bankshares 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 Bankshares, 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 Bankshares.
Control is rebuttably presumed to exist if a person acquires 10% or more, but
less than 25%, of any class of voting securities of Bankshares. 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 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 Bankshares
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 Requirement." Subject to its capital requirements and
certain other restrictions, Bankshares can borrow money to make a capital
contribution to NBB and such loans may be repaid from dividends paid from NBB
to Bankshares (although the ability of NBB to pay dividends is subject to
regulatory restrictions as described below in "-NBB-Limits on Dividends and
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Other Payments"). Bankshares can raise capital for contribution to NBB 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.
Glass-Steagall Act. Bankshares also is restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit Bankshares 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
General. NBB, Bankshares' 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.
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Community Reinvestment Act. NBB is subject to the provisions of the
Community Reinvestment Act of 1977 (the "CRA"), which requires 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.
At its last examination, NBB received the highest CRA rating that can be given.
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, Bankshares will be able to acquire existing banking operations in
Virginia. Bankshares currently has no plans or agreements whereby Bankshares
would acquire other banks or thrifts other than the Bank of Tazewell County.
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 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
-12-<PAGE>
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 Bureau of Financial
Institutions 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 NBB may
increase as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. NBB is subject to FDIC deposit insurance assessments.
See "--Legislative Developments--Deposit Insurance."
Government Policies. The operations of NBB is 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 December 31, 1995 retained net profits available for NBB dividends
were approximately $4,256,000.
-13-<PAGE>
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 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.
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 Bankshares. 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 Bankshares as of December 31, 1995 were 15.01% and 16.27%,
respectively. NBB's Tier 1 and total risk-based capital ratios as of December
31, 1995 were 14.96% and 16.21%, 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 Bankshares. The OCC has adopted similar regulations applicable
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. Bankshares' and NBB's leverage ratios, as of December 31, 1995 were
10.31% and 10.27%, 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. Bankshares and NBB are
unable to predict whether higher capital ratios would be imposed and, if so, at
what levels and on what schedule.
-14-<PAGE>
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.
Adequately Well
Capitalized Capitalized
----------- -----------
Tier 1 Risk-Based Capital Ratio 4% 6%
Total Risk-Based Ratio 8% 10%
Leverage Ratio 4% 5%
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.
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 subject
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.
-15-<PAGE>
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 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. The FDIC has voted to drop its premiums for well
capitalized banks to $2,000 per year effective January 1, 1996. NBB has
qualified for the minimum annual premium rate of $2,000 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 1980's and early 1990's. 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 Bankshares and NBB 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 Bankshares and/or
NBB.
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 Bankshares and/or
NBB.
-16-<PAGE>
Other Business Concerns
The banking industry is particularly sensitive to interest rate
fluctuations, as the spread between the rates which must be paid on deposits
and those which may be charged on loans is an important component of profit.
In addition, the interest which can be earned on a bank's invested funds has a
significant effect on profits. Rising interest rates typically reduce the
demand for new loans, particularly the real estate loans which represent a
significant portion of NBB's loan demand. Variable rate loans in NBB's
portfolio are also affected by increased interest rates in that borrowers may
not have sufficient income to support the increased debt service payments
required. Approximately 62% of NBB's loan portfolio as of December 31, 1995,
consisted of commercial real estate, real estate mortgage and construction
loans. A significant contraction in the local real estate market could have an
adverse effect on NBB's loan generation ability and its earnings.
The banking industry is also impacted by general economic conditions. In
times of recession or economic contraction, borrowers may be more prone to
default on loan obligations, and demand for new loans may be reduced, thereby
reducing or eliminating a bank's profits. Bankshares' market area relies
heavily on three major employers, Virginia Polytechnic Institute and State
University, the Radford Army Ammunition Plant, located in Montgomery and
Pulaski Counties, Virginia, and the Hoescht-Celanese Plant, located in
neighboring Giles County, Virginia. Large workforce reductions by these
employers, without a corresponding increase in jobs by other employers, could
create economic hardship in Bankshares' trading market and could result in
reduced corporate profits. Over the past several years, the impact of
reductions in the workforce at the Radford Army Ammunition Plant and the
Hoescht-Celanese Plant and limited duration hiring freezes at Virginia
Polytechnic Institute and State University has been offset by job growth in
other sections, particularly in retail and service jobs. Future changes in
employment patterns are not expected to have a material adverse effect on
Bankshares' financial position.
Bankshares' business is dependent upon the business of NBB, its wholly owned
subsidiary. Therefore, all risks attendant to NBB and the banking business in
general will directly affect Bankshares. Other than NBB, Bankshares owns no
material assets and does not separately conduct material operations or
business.
-17-<PAGE>
STATISTICAL DISCLOSURE BY NATIONAL BANKSHARES, INC.
AND SUBSIDIARY (BANKSHARES)
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
-----------------------------------------------------------------------
A. AVERAGE BALANCE SHEETS
The following table presents, for the years indicated, condensed
daily average balance sheet information.
($ in thousands)
December 31,
ASSETS 1995 1994 1993
------ ------ ------ ------
Cash and due from banks $ 4,873 4,837 4,019
Federal funds sold 4,258 3,828 3,848
Securities available for sale:
Taxable 12,675 14,967 ---
Nontaxable 853 --- ---
Securities held to maturity:
Taxable 26,011 30,403 40,925
Nontaxable 26,215 23,890 18,794
Mortgage loans held for sale 723 995 1,253
Loans, net 118,760 111,708 107,583
Other assets 7,538 6,553 6,077
-------- ------- -------
Total assets $201,906 197,181 182,499
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand
deposits 22,230 20,167 16,929
Interest-bearing demand deposits 57,562 63,710 63,598
Savings deposits 16,393 20,650 21,412
Time deposits 82,956 71,886 62,463
-------- ------- -------
Total deposits 179,141 176,413 164,402
Short-term borrowings 46 374 9
Other liabilities 1,136 803 604
Long-term debt --- --- 25
-------- ------- -------
Total liabilities 180,323 177,590 165,040
Stockholders' equity 21,583 19,591 17,459
-------- ------- -------
Total liabilities and
stockholders' equity $201,906 197,181 182,499
======== ======= =======
-18-<PAGE>
<TABLE>
B. ANALYSIS OF NET INTEREST EARNINGS
The following table shows the major categories of interest-earning assets and interest-bearing
liabilities, the interest earned or paid, the average yield or rate on the daily average balance
outstanding, net interest income and net yield on average interest-earning assets for the years
indicated.
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net (1)(2)(3) $118,760 11,953 10.06% 111,708 10,300 9.22% 107,583 10,379 9.65%
Taxable securities 38,686 2,656 6.87% 45,370 2,961 6.53% 40,925 2,930 7.16%
Nontaxable
securities (1) 27,068 2,021 7.47% 23,890 1,877 7.86% 18,794 1,683 8.95%
Federal funds sold 4,258 250 5.87% 3,828 155 4.05% 3,848 122 3.17%
-------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-
earning assets $188,772 16,880 8.94% 184,796 15,293 8.28% 171,150 15,114 8.83%
======== ====== ===== ======= ====== ===== ======= ====== =====
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 57,562 1,772 3.08% 63,710 1,759 2.76% 63,598 1,908 3.00%
Savings deposits 16,393 445 2.71% 20,650 559 2.71% 21,412 636 2.97%
Time deposits 82,956 4,476 5.40% 71,886 3,321 4.62% 62,463 3,277 5.25%
Short-term borrowings 46 3 6.52% 374 16 4.28% 9 --- 3.33%
Long-term debt --- --- --- --- --- --- 25 2 8.00%
-------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-
bearing liabilities $156,957 6,696 4.27% 156,620 5,655 3.61% 147,507 5,823 3.95%
======== ====== ===== ======= ====== ===== ======= ====== =====
Net interest income and
interest rate spread 10,184 4.67% 9,638 4.67% 9,291 4.88%
====== ===== ====== ===== ====== =====
Net yield on average
interest-earning assets 5.39% 5.22% 5.43%
===== ===== =====
(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a
Federal income tax rate of 34%.
(2) Loan fees of $249 in 1995, $193 in 1994 and $593 in 1993 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
</TABLE>
-19-<PAGE>
<TABLE>
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Bankshares' primary source of revenue is net income, which is the difference between the interest
and fees earned on loans and investments and the interest paid on deposits and other funds.
Bankshares' net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets
and rates paid on interest-bearing liabilities. The following table sets forth, for the years
indicated, a summary of the changes in interest income and interest expense resulting from changes
in average asset and liability balances (volume) and changes in average interest rates (rate).
<CAPTION>
1995 Over 1994 1994 Over 1993
-------------- --------------
Changes Due To Changes Due To
Net Dollar Net Dollar
Rates(2) Volume(2) Change Rates(2) Volume(2) Change
($ in thousands) -------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:(1)
Loans $ 978 675 1,653 (470) 391 (79)
Taxable securities 148 (453) (305) (273) 304 31
Nontaxable securities (97) 241 144 (234) 428 194
Federal funds sold 76 19 95 34 (1) 33
------ ----- ----- ----- ----- -----
Increase(decrease) in income
on interest-earning assets $1,105 482 1,587 (943) 1,122 179
------ ----- ----- ----- ----- -----
Interest expense:
Interest-bearing demand deposits $ 192 (179) 13 (153) 4 (149)
Savings deposits 2 (116) (114) (55) (22) (77)
Time deposits 603 552 1,155 (423) 467 44
Short-term borrowings 6 (19) (13) 2 14 16
Long-term debt --- --- --- (1) (1) (2)
------ ----- ----- ----- ----- -----
Increase(decrease) in expense of
interest-bearing liabilities $ 803 238 1,041 (630) 462 (168)
------ ----- ----- ----- ----- -----
Increase (decrease) in net
interest income $ 302 244 546 (313) 660 347
====== ===== ===== ===== ===== =====
(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 have been allocated to rate and
volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
</TABLE>
-20-<PAGE>
Analysis of Interest Rate Sensitivity
The table below sets forth, as of December 31, 1995, the distribution of
repricing opportunities of Bankshares' 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 table sets 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 table. 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 table.
Bankshares has a formal asset/liability management program. The primary
goal of the program is to provide management with information related to the
rate sensitivity of certain assets and liabilities and the effect of changing
rates on profitability and capital accounts. While this planning process is
designed to protect NBB over the long-term, it does not provide near-term
protection from "interest rate shocks," as interest rate sensitive assets and
liabilities do not, by their nature, move up or down in tandem in response to
changes in the overall rate environment. Therefore, Bankshares' profitability
in the near-term may temporarily be affected, either positively by a falling
interest rate scenario, or negatively by a period of rising rates.
An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend
to affect adversely net interest income while a positive gap would generally
tend to result in an increase in net interest income. During a period of
declining interest rates, a negative gap would generally tend to result in
increased net interest income, while a positive gap would generally tend to
affect adversely net interest income. Bankshares' future earnings may be
adversely affected by a sharp upturn in interest rates as Bankshares is
liability sensitive for a period extending beyond one year. In a falling rate
environment earnings would benefit to a certain degree from this position,
because assets at higher rate levels would reprice downward at a slower rate
than interest sensitive liabilities. Over the one to five year period,
Bankshares' cumulative interest-sensitivity position reflects an asset
sensitive position. This would mean Bankshares would benefit initially from
falling rates but would be adversely affected by rising rates. This would
depend, however, on the length of time rates were rising and falling and the
length of time rates remained stable at the level ultimately reached.
-21-<PAGE>
<TABLE>
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 on the following table.
<CAPTION>
INTEREST RATE December 31, 1995
SENSITIVITY TABLE (1) Interest-sensitive (days)
1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
------ ------ ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial and industrial loans $10,100 766 794 1,118 617 13,395
Real estate mortgage loans 3,909 8,196 17,500 21,892 7,443 58,940
Real estate construction loans 5,055 736 216 --- --- 6,007
Loans to individuals 20,668 2,410 4,368 17,691 1,154 46,291
------- ------- ------- ------ ------ -------
Total loans, net of unearned income (2) 39,732 12,108 22,878 40,701 9,214 124,633
------- ------- ------- ------ ------ -------
Federal funds sold --- --- --- --- --- ---
Securities available for sale 1,250 2,260 4,531 6,658 11,872 26,571
Securities held to maturity 1,621 1,853 2,403 17,881 16,408 40,166
Mortgage loans held for sale 880 --- --- --- --- 880
------- ------- ------- ------ ------ -------
Total interest-earning assets $43,483 16,221 29,812 65,240 37,494 192,250
======= ======= ======= ------ ------ -------
Interest-bearing liabilities:
Interest-bearing demand deposits $54,143 --- --- --- --- 54,143
Savings deposits 15,153 --- --- --- --- 15,153
Time deposits 15,098 12,932 22,717 36,578 191 87,516
------- ------- ------- ------ ------ -------
Total interest-bearing liabilities $84,394 12,932 22,717 36,578 191 156,812
======= ======= ======= ====== ====== =======
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 0.52 0.61 0.75 0.99 1.23 1.23
======= ======= ======= ====== ====== =======
Cumulative interest-sensitivity gap (40,911) (37,622) (30,527) (1,865) 35,438 35,438
======= ======= ======= ====== ====== =======
(1) Bankshares is sensitive to interest rate changes, as liabilities generally reprice or mature
before interest-earning assets. The above gap table reflects Bankshares' rate-sensitive position
at December 31, 1995, and is not necessarily reflective of its position throughout the year. The
carrying amounts of interest-rate sensitive assets and liabilities are presented in the periods
in which they reprice to market rates or mature and are summed to show the interest-rate
sensitivity gap.
(2) Excludes nonaccrual loans.
</TABLE>
-22-<PAGE>
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
All securities held in 1993 were classified as held to maturity. The
amortized costs and fair values of securities available for sale as
of December 31, 1995 and 1994 were as follows:
December 31,
1995 1994
AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES
--------- ------ --------- ------
Securities available for sale:
U.S. Treasury $ 4,002 3,997 3,516 3,456
U.S. Government agencies
and corporations (1) 11,175 11,383 7,197 7,121
States and political
subdivisions 6,384 6,340 --- ---
Other securities 4,836 4,851 1,592 1,537
------- ------ ------ ------
Total securities
available for sale $26,397 26,571 12,305 12,114
======= ====== ====== ======
The amortized costs of securities held to maturity as of December 31,
1995, 1994 and 1993 were as follows:
December 31,
($ in thousands) 1995 1994 1993
------ ------ ------
Securities held to maturity:
U.S. Treasury $ 2,755 9,722 12,319
U.S. Government agencies and
corporations (1) 5,643 15,220 22,318
States and political subdivisions 26,660 26,073 20,698
Other securities 5,108 6,374 7,183
------- ------ ------
Total securities held to maturity $40,166 57,389 62,518
======= ====== ======
(1) Mortgage-backed securities are included in the totals for U.S.
Government agencies and corporations. The majority of Mortgage-
backed Securities and Collateralized Mortgage Obligations held
at December 31, 1995 were backed by U.S. agencies. These
holdings are "grandfathered" under existing rules and are not
required to be periodically subjected to the Financial
Institution Examination Council's (FFIEC) high risk mortgage
security test. These tests address possible fluctuations in the
average life and price sensitivity which are the primary risks
associated with this type of security. Such tests are usually
subject to regulatory review. It is managements' judgement,
however, that these tests are a prudent measure and accordingly
the bank voluntarily conducts these tests on a periodic basis.
Except for U.S. Government securities, Bankshares has no securities
with any issuer that exceeds 10% of its stockholders' equity.
-23-<PAGE>
<TABLE>
B. MATURITIES AND ASSOCIATED YIELDS
The following table presents the maturities for those securities available for sale and held to
maturity as of December 31, 1995 and weighted average yield for each range of maturities.
<CAPTION>
Securities Available For Sale (1)
($ in thousands except for Within One One to Five to After Ten
% data) Year Five Year Ten Year Year No Maturity Total
---------- --------- -------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $3,997 --- --- --- --- 3,997
5.01% --- --- --- --- 5.01%
U.S.Government agencies 3,551 4,097 3,157 578 --- 11,383
and corporations 7.10% 6.88% 7.46% 7.34% --- 7.13%
States and political --- 353 2,903 3,084 --- 6,340
subdivisions --- 5.66% 6.95% 7.01% --- 6.91%
Other securities 493 2,208 1,520 500 130 4,851
4.79% 5.72% 6.78% 7.00% 6.00% 6.10%
------ ------ ------ ------ ------ ------
8,041 6,658 7,580 4,162 130 26,571
Total 5.92% 6.43% 7.13% 7.05% 6.00% 6.57%
====== ====== ====== ====== ====== ======
Securities Held to Maturity (1)
U.S. Treasury 1,250 1,505 --- --- --- 2,755
6.80% 7.04% --- --- --- 6.93%
U.S. Government agencies 402 3,336 1,781 124 --- 5,643
and corporations 7.96% 7.29% 7.71% 8.29% --- 7.49%
States and political 2,923 9,747 11,718 2,272 --- 26,660
subdivisions 8.00% 7.55% 7.39% 8.24% --- 7.59%
Other securities 1,302 3,293 513 --- --- 5,108
8.13% 6.54% 6.66% --- --- 6.95%
------ ------ ------ ------ ------ ------
5,877 17,881 14,012 2,396 --- 40,166
Total 7.77% 7.27% 7.40% 8.24% --- 7.45%
====== ====== ====== ====== ====== ======
Total portfolio 13,918 24,539 21,592 6,558 130 66,737
6.20% 7.04% 7.31% 7.49% 6.00% 7.10%
====== ====== ====== ====== ====== ======
(1) Rates shown represent weighted average yield on a fully taxable basis. Mortgage-backed
securities are included in the totals for U.S. Government agencies and corporation and are
allocated based upon estimated cash flow at December 31, 1995.
</TABLE>
-24-<PAGE>
III. LOAN PORTFOLIO
--------------
Bankshares concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i) a
comparison of Bankshares' loan portfolio by major category of loans as of
the dates indicated and (ii) the maturities and interest rate sensitivity
of the loan portfolio at December 31, 1995.
A. TYPES OF LOANS
December 31,
($ in thousands) 1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Commercial and
industrial loans $ 40,749 35,984 45,618 44,403 46,612
Real estate mortgage
loans 31,798 30,212 26,638 28,719 28,320
Real estate construction
loans 6,007 5,543 3,946 3,975 6,163
Loans to individuals 48,132 45,767 37,245 31,209 35,717
-------- ------- ------- ------- -------
Total loans 126,686 117,506 113,447 108,306 116,812
Less unearned income (1,633) (1,782) (1,192) (484) (721)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 125,053 115,724 112,255 107,822 116,091
Less allowance for loans
losses (2,080) (2,006) (2,038) (1,782) (1,665)
-------- ------- ------- ------- -------
Total loans, net $122,973 113,718 110,217 106,040 114,426
======== ======= ======= ======= =======
B. MATURITIES AND INTEREST RATE SENSITIVITIES
December 31, 1995
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $23,237 11,850 5,662 40,749
Real estate construction 6,007 --- --- 6,007
Less loans with pre-
determined interest
rates (6,358) (3,768) (5,662) (15,788)
------- ------- ------ -------
Loans with adjustable
rates $22,886 8,082 --- $30,968
======= ======= ====== =======
-25-<PAGE>
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate loan amounts for
nonaccrual loans and accruing loans which are con-tractually
past due ninety days or more as to interest or principal
payments, restructured loans and other real estate owned, net.
December 31,
($ in thousands) 1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Nonaccrual loans:
Commercial and industrial $ --- --- 710 483 196
Real estate mortgage 390 390 1,123 884 434
Real estate construction --- --- --- --- ---
Loans to individuals 30 30 31 23 47
------ ------ ------ ------ -----
420 420 1,864 1,390 677
------ ------ ------ ------ -----
Restructured loans:
Commercial and industrial --- 229 598 --- ---
------ ------ ------ ------ -----
Total nonperforming loans 420 649 2,462 1,390 677
Other real estate owned, net 739 1,083 225 837 875
------ ------ ------ ------ -----
Total nonperforming assets $1,159 1,732 2,687 2,227 1,552
====== ====== ====== ====== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 6 3 44 131 13
Real estate mortgage 60 45 --- 323 ---
Real estate construction --- 87 243 237 235
Loans to individuals 144 84 39 65 172
------ ------ ------ ------ -----
$ 210 219 326 756 420
====== ====== ====== ====== =====
The effect of nonaccrual and restructured loans on interest
income is presented below:
December 31,
($ in thousands) 1995
------------
Interest that would have been recorded in
accordance with original terms $ 42
Interest recorded in income 5
-----
Net impact on interest income $ 37
=====
-26-<PAGE>
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
Effective January 1, 1995, Bankshares adopted the provisions of
SFAS No. 114, as amended by SFAS No. 118. At December 31, 1995,
the recorded investment in loans which have been identified as
impaired loans, in accordance with SFAS No. 114, totaled
$539,000. Of this amount, $90,000 related to loans with no
valuation allowance and $449,000 related to loans with a
corresponding valuation allowance of $319,000.
For the year ended December 31, 1995, the average recorded
investment in impaired loans was approximately $757,000, and the
total interest income recognized on impaired loans was $47,000
of which $5,000 was recognized on a cash basis. The balance of
impaired loans at January 1, 1995 totaled approximately
$812,000. The initial adoption to SFAS No. 114 did not require
an increase to Bankshares' allowance for loan losses. The
impact of SFAS No. 114, as amended by SFAS No. 118, was
immaterial to Bankshares' consolidated financial statements as
of and for the year ended December 31, 1995.
3. Foreign Outstandings
At December 31, 1995, 1994 and 1993, there were no foreign
outstandings.
4. Loan Concentrations
At December 31, 1995, there were no other concentrations of
loans exceeding 10% of total loans which are not otherwise
disclosed as a category of loans, except for loans secured by
vehicles which approximated $22 million.
-27-<PAGE>
<TABLE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to operating
expense:
<CAPTION>
December 31,
($ in thousands) 1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $118,760 111,708 107,583 109,780 116,735
======== ======= ======= ======= =======
Balance at beginning of year $ 2,006 2,038 1,782 1,665 1,662
Charge-offs:
Commercial and industrial loans 22 72 231 438 374
Real estate mortgage loans --- 192 282 177 46
Real estate construction loans --- 53 --- --- ---
Loans to individuals 247 307 221 370 262
-------- ------- ------- ------- -------
Total loans charged off 269 624 734 985 682
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 9 7 10 16 2
Real estate mortgage loans 7 4 5 --- 2
Real estate construction loans --- --- --- --- ---
Loans to individuals 52 41 45 26 66
-------- ------- ------- ------- -------
Total recoveries 68 52 60 42 70
Net loans charged off 201 572 674 943 612
Additions charged to operations 275 540 930 1,060 615
Balance at end of year $ 2,080 2,006 2,038 1,782 1,665
======== ======= ======= ======= =======
Net charge-offs to average loans
outstanding .17% .51% .63% .86% .52%
======== ======= ======= ======= =======
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, the 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.
</TABLE>
-28-<PAGE>
<TABLE>
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 for the years indicated as follows:
<CAPTION>
December 31,
1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
($ in Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
and
industrial
loans $ 381 32.16% 624 30.62% 810 40.21% 823 41.00% 790 39.90%
Real estate
mortgage
loans 155 25.10% 164 25.71% 163 23.48% 206 26.52% 250 24.24%
Real estate
construction
loans 100 4.74% 36 4.72% 54 3.48% 50 3.67% 75 5.28%
Loans to
individuals 197 38.00% 500 38.95% 615 32.83% 497 28.81% 350 30.58%
Unallocated 1,247 --- 682 --- 396 --- 206 --- 200 ---
------ ------ ----- ------ ----- ------ ----- ------ ----- ------
$2,080 100.00% 2,006 100.00% 2,038 100.00% 1,782 100.00% 1,665 100.00%
====== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
-29-<PAGE>
V. DEPOSITS
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
1995 1994 1993
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 22,230 --- 20,167 --- 16,929 ---
Interest-bearing
demand deposits 57,562 3.08% 63,710 2.76% 63,598 3.00%
Savings deposits 16,393 2.71% 20,650 2.71% 21,412 2.97%
Time deposits 82,956 5.40% 71,886 4.62% 62,463 5.25%
-------- ------- -------
Average total
deposits $179,141 176,413 164,402
======== ======= =======
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and other
time deposits of $100,000 or more:
DECEMBER 31, 1995
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $ 2,099 1,367 4,504 2,230 10,200
Other time deposits 356 104 110 2,588 3,158
------- ------ ------ ------ ------
Total time deposits
of $100,000 or
more $ 2,455 1,471 4,614 4,818 13,358
======= ====== ====== ====== ======
-30-<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:
December 31,
1995 1994 1993
------ ------ ------
Return on average assets 1.62% 1.51% 1.45%
Return on average equity 15.09% 15.19% 15.43%
Dividend payout ratio 33.17% 34.05% 32.00%
Average equity to average assets 10.59% 9.94% 9.38%
Item 2. Properties.
- --------------------
Bankshares' headquarters, including the Main Office of NBB, are located at
100 South Main Street, Blacksburg, Virginia. In addition to the Main Office
location, NBB owns six branch offices: two in the Town of Blacksburg; one in
the Town of Christiansburg; one in Montgomery County; one in the Town of
Pearisburg; and the sixth in the Town of Pembroke. NBB leases office space
near the Main Office which is occupied by NBB's trust, marketing, audit,
compliance and credit review departments.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes, which enables NBB to perform all its data processing
functions in-house. NBB views its modern data processing equipment and present
customer service facilities as being adequate to support future growth
expectations. Management anticipates, however, that with the constantly
changing technological environment that significant capital expenditures will
be necessary to remain current.
Item 3. Legal Proceedings.
- ---------------------------
Neither Bankshares nor NBB is currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's business.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1995.
-31-<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 9, 1996.
The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices within
Bankshares held by each officer; and each person's principal occupation or
employment during the past five years.
YEAR ELECTED AN
NAME AGE OFFICES AND POSITIONS HELD OFFICER/DIRECTOR
------------------ --- -------------------------- ----------------
James G. Rakes 51 President and Chief Executive 1986
Officer, National Bankshares,
Inc.; and President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
F. Brad Denardo 43 Corporate Officer, National 1989
Bankshares, Inc.; and Executive
Vice President since 1989 and
Senior Vice President - Loans
since 1985 of The National Bank
of Blacksburg.
Marilyn B. Buhyoff 47 Secretary, National Bankshares, 1989
Inc.; and Senior Vice President
- Administration since 1992,
Vice President/ Administra-tion
since 1990 and Personnel
Officer since 1987 of The
National Bank of Blacksburg.
Joan C. Nelson 45 Treasurer, National Bankshares, 1993
Inc.; and Cashier since 1993,
Senior Vice President/
Operations since 1989 and Vice
President/Operations since 1986
of the National Bank of
Blacksburg.
The executive officers listed above have served Bankshares and/or its
subsidiary in the aforementioned executive capacity for the past five years.
-32-<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
There is no established trading market for the stock of National Bankshares,
Inc. As of March 20, 1996, the total number of holders of the Registrant's
common stock was 684.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 13 of Bankshares' 1995 Annual
Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 1995 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
- --------------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 5 through 13 of Bankshares' 1995 Annual Report to Stockholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 16 through 41 of Bankshares'
1995 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1995 and 1994
3. Consolidated Statements of Income - Years Ended December 31, 1995,
1994 and 1993
4. Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1995, 1994 and 1993
5. Consolidated Statements of Cash Flows - Years Ended December 31,
1995, 1994 and 1993
6. Notes to Consolidated Financial Statements - December 31, 1995, 1994
and 1993
-33-<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 1995 are listed on page
32 herein.
Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 3 through 4 of Bankshares' Proxy
Statement dated March 20, 1996, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 6 through
10 of Bankshares' Proxy Statement dated March 20, 1996 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Principal Holders of
Securities" on page 1 and under "Election of Directors" on pages 2 through 3 of
Bankshares' Proxy Statement dated March 20, 1996 is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 11 of Bankshares' Proxy Statement dated March 20, 1996 is
incorporated herein by reference.
-34-<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1995 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 16
Consolidated Balance Sheets -
December 31, 1995 and 1994 17
Consolidated Statements of
Income - Years ended December
31, 1995, 1994 and 1993 19
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1995, 1994 and
1993 21
Consolidated Statements of Cash
Flows - Years ended December 31,
1995, 1994 and 1993 22
Notes to Consolidated
Financial Statements - December
31, 1995, 1994 and 1993 24
2. Financial Statement Schedules:
-----------------------------
All schedules are omitted as
the required information is
inapplicable or the informa-
tion is presented in the
Consolidated Financial State-
ments or related notes.
* Incorporated by reference from the indicated pages of the 1995 Annual Report
to Stockholders.
-35-<PAGE>
3. Exhibits:
--------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, (incorporated
as amended, of National herein by
Bankshares, Inc. reference to
Exhibit 3(a) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws of National (incorporated
Bankshares, Inc. herein by
reference to
Exhibit 3(b) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certifi- (incorporated
cate for National Bank- herein by
shares, Inc. common stock, reference to
$2.50 par value Exhibit 4(a) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Four of the (incorporated
Articles of Incorporation herein by
of National Bankshares, reference to
Inc. included in Exhibit Exhibit 4(b) of
No. 3(a)) the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, herein by
1990, by and between reference to
Information Technology, Exhibit 10(e) of
Inc. and The National Bank the Annual Report
of Blacksburg on Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and herein by
between National Bankshares, reference to
Inc. and James G. Rakes Exhibit 10(a) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
-36-<PAGE>
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. herein by
10(a)) reference to
Exhibit 10(b) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employee Lease Agreement (incorporated
dated May 7, 1992, by and herein by
between National Bank- reference to
shares, Inc. and The Exhibit 10(c) of
National Bank of Blacksburg the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1995 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being
furnished for the informa-
tion of the Commission only
and is not deemed to be
filed as part of this
Report on Form 10-K) 41
21(i) Subsidiaries of National (incorporated
Bankshares, Inc. herein by
reference to
Exhibit 22 of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
* Indicates a management contract or compensatory plan required to
be filed herein.
(b) Reports on Form 8-K filed during the last quarter of the period
covered by this report:
-----------------------------------------------------------------
None.
(c) Exhibits required by Item 601 of Regulation S-K:
-----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X:
--------------------------------------------------------
See Item 14(a)2 above.
-37-<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Bankshares, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL BANKSHARES, INC.
BY: /s/ James G. Rakes
----------------------------------
James G. Rakes, President
and Chief Executive Officer
DATE: March 26, 1996
----------------------------------
BY: /s/ Joan C. Nelson
----------------------------------
Joan C. Nelson
Treasurer
DATE: March 26, 1996
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
NAME DATE TITLE
---- ---- -----
/s/ C. L. Boatwright March 26, 1996 Director and Vice Chairman of
-------------------------- -------------- the Board
C. L. BOATWRIGHT
/s/ L. A. Bowman March 25, 1996 Director
-------------------------- --------------
L. A. BOWMAN
/s/ R. E. Christopher, Jr. March 22, 1996 Director and Chairman of the
-------------------------- -------------- Board
R. E. CHRISTOPHER, JR.
Director
-------------------------- --------------
P. A. DUNCAN
/s/ J. G. Rakes March 26, 1996 President and Chief Executive
-------------------------- -------------- Officer - National
J. G. RAKES Bankshares, Inc.
/s/ J. M. Shuler March 25, 1996 Director
-------------------------- --------------
J. M. SHULER
/s/ J. R. Stewart March 22, 1996 Director
-------------------------- --------------
J. R. STEWART
Director
-------------------------- --------------
J. L. WEBB, JR.
Director
-------------------------- --------------
P. P. WISMAN
-38-<PAGE>
INDEX TO EXHIBITS
-----------------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National Bankshares, herein by
Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws of National Bankshares, (incorporated
Inc. herein by
reference to
Exhibit 3(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate for (incorporated
National Bankshares, Inc. common herein by
stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles (incorporated
of Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-39-<PAGE>
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1995 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K) 41
21(i) Subsidiaries of National (incorporated
Bankshares, Inc. herein by
reference to
Exhibit 22 of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
* Indicates a management contract or compensatory plan required to be filed
herein.
-40-<PAGE>
National Bankshares, Inc.
1995 Annual Report
-41-<PAGE>
Financial Highlights $ In thousands, except per share data.
1995 1994 1993
-------- -------- --------
Net income per share $ 1.90 1.70 1.56
Book value per share 13.16 11.75 10.68
Cash dividends declared per share .63 .58 .50
Total assets 203,389 199,727 186,694
Total securities 66,737 69,503 62,518
Loans, net 122,973 113,718 110,217
Total deposits 179,673 178,636 167,702
Stockholders' equity 22,554 20,137 18,254
Contents
----------------------------------------------------------
Community Connections 2
To Our Stockholders 3
Selected Consolidated Financial Data 4
Management's Discussion and Analysis 5
Statement of Management's Responsibility 15
Independent Auditors' Report 16
Consolidated Financial Statements 17
Comparative Statements of Trust Assets 42
Corporate Information 46
-1-<PAGE>
Community Connections
PHOTOGRAPH OF 1995 VALENTINE SOCIAL FOR OUR
PRIMELINE CUSTOMERS
PHOTOGRAPH OF 1995 TOUR DUPONT
PHOTOGRAPH OF NBB'S MARKET PLACE BRANCH MANAGER MAKING A
DONATION TO MONTGOMERY COUNTY PARKS & RECREATION
The National Bank has been a part of life in the New River Valley for over
a century. We have financed homes that are now historic and automobiles that
have become antiques. We have been there to assist generations of area
residents when they opened their first savings accounts as children, bought new
homes as young adults, established and expanded businesses and enjoyed
financial security in retirement. While NBB has grown and kept pace with
changing technology, our bankers have never forgotten the importance of
building and maintaining personal relationships with their customers.
PHOTOGRAPH OF BANK DAY AT MAIN OFFICE
CUSTOMER SERVICE REPRESENTATIVE DEMONSTRATES HOW TO USE AN ATM
PHOTOGRAPH OF NBB'S HETHWOOD OFFICE MANAGER
HOSTING VISIT BY ELEMENTARY SCHOOL CHILDREN
PHOTOGRAPH OF NBB EMPLOYEES CAROLING AT SHOWALTER NURSING HOME
As an involved corporate citizen, The National Bank has helped our
communities meet diverse educational and civic goals. We have placed banking
professionals in local classrooms, and we have brought students into our
offices. NBB and its employees have helped build hospitals and public
recreation facilities, and through the years we have contributed volunteers and
resources to support countless worthwhile artistic and charitable activities.
Even though life in the New River Valley and banking at NBB have undergone many
changes since 1891, The National Bank's connections to the community remain
solid and strong.
-2-<PAGE>
National Bankshares, Inc.
To Our Stockholders:
During 1995 National Bankshares, Inc. continued its profitable tradition,
once again achieving record earnings. Net income for the year reached
$3,256,000, an increase of 11.7% over 1994. Growth in the loan portfolio and
improved asset quality were important components of this solid performance.
Already strong capital levels rose through the year, and dividends paid to
stockholders were $0.63 per share in 1995, up from $0.58 per share paid in the
previous year.
Customers, stockholders, employees and the Board of Directors all
contribute to Bankshares' consistently positive operating results. Customers
and stockholders have been loyal and have offered us long term support.
Employees regularly strive to provide friendly, high quality customer service.
Knowledgeable individuals serve on the Boards of Directors of the holding
company and the bank, and the companies regularly benefit from their business
expertise. Several directors have been with National Bankshares since its
formation in 1986 and have even longer tenure on The National Bank's board. We
miss the contributions of our most senior director, John M. Barringer, who
retired in September after more than forty years of distinguished service.
Good progress continues to be made toward completion of the pending merger
with Bank of Tazewell County. Certain unanticipated developments, including
government closings and severe winter weather, have delayed the proposed
consummation of the transaction. Assuming all merger conditions are met and
regulatory approvals granted, we now hope to finalize the merger in the second
quarter of 1996. Despite the delays, the Board of Directors and management of
National Bankshares remain enthusiastic about the prospects of the affiliation.
The Board is especially positive about the expanded opportunities and potential
benefits which this merger offers to our stockholders.
As we begin our 105th year, new projects and exciting changes are planned.
We expect to build our future with a focus on the same principles that have
guided National Bankshares and The National Bank since 1891. We are committed
to continuing the tradition of offering quality community banking, emphasizing
state of the art financial services with a personal touch.
PHOTOGRAPH OF
JAMES G. RAKES
James G. Rakes
President and
Chief Executive Officer
-3-<PAGE>
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Selected Interest income $ 16,071 14,562 14,428 16,047 17,732
Income Interest expense 6,696 5,655 5,823 8,048 10,886
Statement Net interest income 9,375 8,907 8,605 7,999 6,846
Data: Provision for loan
losses 275 540 930 1,060 615
Noninterest income 1,777 1,607 1,541 1,287 967
Noninterest expense 6,587 6,158 5,855 5,400 4,738
Income taxes 1,034 900 689 498 416
Net income 3,256 2,916 2,672 2,328 2,044
Per Share Net income $ 1.90 1.70 1.56 1.37 1.21
Data: Cash dividends
declared .63 .58 .50 .43 .39
Book value per share 13.16 11.75 10.68 9.61 8.67
Selected Loans, net $122,973 113,718 110,217 106,040 114,214
Balance Total securities 66,737 69,503 62,518 60,442 59,054
Sheet Data Total assets 203,389 199,727 186,694 182,595 185,829
at End Total deposits 179,673 178,636 167,702 165,633 170,354
of Year: Stockholders' equity 22,554 20,137 18,254 16,375 14,714
Selected Return on average
Ratios: assets 1.62 1.51 1.45 1.26 1.12
Return on average
equity 15.09 15.19 15.43 14.98 14.63
Dividend payout ratio 33.17 34.05 32.00 31.49 32.14
Average equity to
average assets 10.59 9.94 9.38 8.44 7.66
Average Equity to Average Assets Graph
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
7.66% 8.44% 9.38% 9.94% 10.59%
Cash Dividends Per Share Graph
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$0.39 0.43 0.50 0.58 0.63
-4-<PAGE>
Management's Discussion and Analysis
($ In millions)
Net Income Graph
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$ 2.0 2.3 2.7 2.9 3.3
Net Interest Income Graph
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$ 6.8 8.0 8.6 8.9 9.4
Total Assets Graph
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$185.8 182.6 186.7 199.7 203.4
($ In thousands)
PERFORMANCE SUMMARY
Bankshares' net income for 1995 was $3,256, an increase of $340 or 11.7%
over 1994. This produced a return on average assets and average equity of
1.62% and 15.09%, respectively. This increase was primarily due to improvement
in the net yield on interest-earning assets which was 5.39% in 1995 and 5.22%
in 1994. Net interest income for 1995 was $9,375, an increase of $468 or 5.3%
over 1994.
Net income for 1994 was $2,916, an increase of $244 or 9.1% over 1993. The
return on average assets and average equity for 1994 was 1.51% and 15.19%,
respectively. The increase over 1993 resulted primarily from a decrease in the
loan loss provision which declined $390 or 41.9% and net interest income which
increased by $302 or 3.5% over 1993.
NET INTEREST INCOME
1995 vs. 1994
Net interest income was $9,375 and $8,907 for 1995 and 1994, respectively.
This increase was attributable in part to rising asset yields which increased
to 8.94% in 1995 from 8.28% in 1994. This increase also resulted in part from
an internal shift in funds from investments to higher yielding loans. At the
same time the cost to fund interest-earning assets rose from 3.06% in 1994 to
3.55% in 1995. This increase was primarily due to general rate increases in
the marketplace as overall deposit growth was nominal. The net yield on
interest-earning assets which factors in both capital and demand deposits as a
funding source was 5.39% in 1995 and 5.22% in 1994.
In April 1994, Bankshares acquired the deposits of the Pembroke Office of
First Union National Bank of Virginia which increased total deposits
approximately $14,514. This addition produced excess liquidity which was
initially absorbed by the investment portfolio. In 1995, NBB was able to shift
a portion of these funds to the loan portfolio and in doing so increased the
yield on interest-earning assets. These changes combined to produce an
improvement in the net yield on interest-earning assets. Average interest-
earning assets for 1995 were $188,772, an increase of $3,976 or 2.2% over 1994
-5-<PAGE>
due in part to the Pembroke deposits obtained in the second quarter of 1994,
nominal deposit growth and internally generated capital. Average interest-
bearing liabilities were $156,957 for 1995, an increase of $337 or .2% over
1994. Deposit growth in 1995 was a nominal .6% and was the result of
Bankshares' excess liquidity position which allowed it to take a less
aggressive stance in the procurement of external funds. The full absorption of
excess liquidity created by the acquisition of the Pembroke Office deposits and
nominal deposit growth is expected to continue.
1994 vs. 1993
Net interest income for 1994 was $8,907, an increase of $302 or 3.5% over
the previous year. The acquisition of deposits totaling $14,514 from First
Union National Bank of Virginia significantly impacted Bankshares' net interest
income for 1994. The influx of deposits from the deposit acquisition produced
a positive volume related change in interest-earning assets; however, it
created a negative rate change as these assets were invested in lower yielding
investments because insufficient loan demand existed to absorb the funds.
Asset yields were 8.28% in 1994 and 8.83% in 1993. Loan yields declined from
9.65% in 1993 to 9.22% in 1994 in part due to the increasing prime rate which
caused a substantial decline in commercial loan volume. The decrease in
commercial loan volume was offset in part by an increase in consumer loan
volume caused by an aggressive pricing strategy primarily at the Pembroke
Office formerly a branch of First Union National Bank of Virginia. The federal
funds rate was up slightly in 1994 as it reacted to market changes more quickly
than other interest-earning assets. Average interest-earning assets totaled
$184,796 in 1994 compared to $171,150 in 1993.
Interest expense was higher in 1994 due to the volume increase that
resulted from the acquisition of the First Union deposits. However, these
deposits were generally lower rate deposits than Bankshares' which lessened the
impact on interest expense. Average rates paid on deposits was 3.61% in 1994
compared to 3.95% in 1993. With the additional liquidity, Bankshares was
positioned to take a less aggressive position in obtaining external funds which
offset to some extent the impact of the rising rate environment. Average
interest-bearing liabilities totaled $156,620 in 1994 compared to $147,507 in
1993. The growth in interest-earning assets and in deposits was due
principally to the acquisition of deposits from First Union National Bank of
Virginia.
INTEREST RATE SENSITIVITY
Bankshares has systems and procedures in place to monitor interest rate
sensitivity and modifies its asset and liability management strategies in
response to changing economic conditions. Bankshares is sensitive to rising
interest rate changes as liabilities generally reprice or mature more quickly
than interest-earning assets.
Bankshares' future earnings may be adversely affected by a sharp upturn in
interest rates as Bankshares is liability sensitive for a period extending
beyond one year. In a falling rate environment earnings would benefit to some
extent from this position as assets at higher rate levels would generally
reprice downward at a slower rate than interest sensitive liabilities.
Beyond one year, Bankshares' cumulative interest sensitive position
reflects a slightly liability sensitive position indicating that the adverse
effect of rising rates or benefit from falling rates would dissipate in the one
to five year time period.
The impact of rising rates is dependent, however, upon the magnitude, the
length of the rising or falling rate trend and the period of time rates remain
stable at a given level. Management typically adjusts its asset/liability
strategies during times of rising and falling rates to minimize or maximize the
impact of changing rate scenarios.
-6-<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the portfolio, concentrations of credit and asset quality,
as well as other internal and external factors such as general economic
conditions.
An internal credit review department performs pre-credit reviews of large
credits and on an ongoing basis, conducts analyses to systematically evaluate
loan quality and provides management with an early warning of asset
deterioration. Changing trends in the loan mix are also evaluated in
determining the adequacy of the allowance.
Loan Loss Data
($ In thousands except for %)
1995 1994 1993
------ ------ ------
Provision for loan losses $ 275 540 930
Net charge-offs to average net loans .17% .51 .63
Allowance for loan losses to
loans, net of unearned interest 1.66% 1.73 1.82
Allowance for loan losses to
nonperforming loans 495.24% 309.09 82.79
Allowance for loan losses to
nonperforming assets 179.47% 115.82 75.85
Nonperforming assets to loans, net of
unearned income, plus other real
estate owned .92% 1.48 2.39
Nonaccrual loans $ 420 420 1,864
Restructured loans --- 229 598
Other real estate owned, net 739 1,083 225
-------- ------- -------
Total nonperforming assets $ 1,159 1,732 2,687
Accruing loans past due 90 days or more $ 210 219 326
======== ======= =======
Nonperforming loans include nonaccrual and restructured loans.
Nonperforming loans and nonperforming assets do not include accruing loans past
due 90 days or more. Nonperforming assets totaled $1,159 at December 31, 1995,
and represents a $573 or 33.1% decrease from December 31, 1994. In 1994, other
real estate owned increased by $858 as nonaccrual real estate loans moved into
foreclosure. Nonaccrual loans, which totaled $1,864 in 1993, declined to $420
in 1994. The ratios in the above table reflect an overall trend of improving
asset quality that has allowed management to decrease the provision for loan
losses and at the same time maintain an adequate loan loss allowance.
While continual efforts are made to improve overall asset quality,
management is unable to estimate when and under what exact terms problem assets
will be resolved.
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." At December 31,
1995, the recorded investment in loans which have been identified as impaired
loans, in accordance with SFAS No. 114, totaled $539. Of this amount, $90
related to loans with no valuation allowance, and $449 related to loans with a
-7-<PAGE>
corresponding valuation allowance of $319. For the year ended December 31,
1995, the average recorded investment in the impaired loans was approximately
$757, and the total interest income recognized on impaired loans was $47, of
which $5 was recognized on a cash basis. The balance of impaired loans at
January 1, 1995 totaled approximately $812. The initial adoption of SFAS No.
114 did not require an increase to Bankshares' allowance for loan losses. The
impact of SFAS No. 114, as amended by SFAS No. 118, was immaterial to
Bankshares' consolidated financial statements as of and for the year ended
December 31, 1995.
NONINTEREST INCOME
1995 vs. 1994
Noninterest income totaled $1,777 in 1995 and $1,607 in 1994 which
represents an increase of $170 or 10.6%. Service charges on deposit accounts
increased by $52 or 7.8% due to an increase in levels of demand deposits which
on an average daily basis increased $2,063 or 10.2%. Trust income declined by
$12 or 2.9%, while credit card fees increased by $95 or 26.8%. Other
categories in the noninterest income area fluctuated slightly. The variances
were attributable to general business conditions and business development
efforts.
1994 vs. 1993
Noninterest income for 1994 and 1993 was $1,607 and $1,541, respectively,
which represents an increase of $66 or 4.3%. Service charges on deposits for
1994 were $667 and $594 in 1993, an increase of $73 or 12.3%. This increase
was due in part to the revision of fee schedules in mid-1993 which were in
effect for all of 1994 and a general increase in business levels. Trust income
was $417 for 1994 and $373 for 1993, an increase of $44 or 11.8% and a result
of an increase in trust assets which grew $7,049 or 14.5% from 1993 to 1994.
Credit card fees showed a continuing trend of improvement increasing $38
or 12.0%. The remainder of the categories fluctuated due to general business
conditions, with the exception of securities gains and losses, which show
nominal amounts in both years.
NONINTEREST EXPENSE
1995 vs. 1994
Noninterest expense for 1995 was $6,587, an increase of $429 or 7.0% over
1994. In 1995, salaries and employee benefits increased by $83 or 2.8% due to
normal salary increases, staff additions and certain benefits linked with the
increased profitability of NBB.
The cost of Federal Deposit Insurance declined sharply by $181 or 46.8%
from 1994. With the Bank Insurance Fund reaching mandated levels, banks in
general became eligible for refunds on premiums previously paid and for reduced
premiums in future periods. Bankshares received a refund in 1995 of
approximately $110 and expects future premiums to be nominal in amount, based
on information currently available.
Net costs related to the liquidation and holding of other real estate
owned rose $158 in 1995 and was the result of higher than normal levels of
properties owned. Resolution of these problem assets continues to receive
strong emphasis.
The other operating expense category increased by $298 or 19.9% from 1994
and was due primarily to expenses associated with the proposed merger discussed
below and a contribution to a community development corporation. A substantial
portion of Bankshares' involvement in the community development corporation
will be recovered through future tax deductions and tax credits over a ten year
period. The remaining components of the increase in noninterest expense
reflected higher costs associated with general business conditions.
-8-<PAGE>
1994 vs. 1993
Noninterest expense was $6,158 in 1994 compared to $5,855 in 1993,
resulting in an increase of 5.2% in 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 in 1994 reflected FDR's higher fee
structure. The 1994 noninterest expense figure also includes certain costs
associated with NBB's purchase in April, 1994 of the Pembroke, Virginia office
of First Union National Bank of Virginia. Deposit intangibles of $908 are
being amortized over a ten-year period, and goodwill of $447 is being amortized
on a straight-line basis over a fifteen-year period. Net costs of other real
estate owned were $37 in 1994, compared to $287 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, affects the
expenses incurred.
INCOME TAXES
Higher taxable income in 1995 resulted in a $134 or 14.9% increase in
federal income tax expense when compared to 1994. A comparison of 1994 to 1993
also reflects an increase of $183 or 25.5%. Tax exempt income continues to be
the primary difference in the "expected" and effective federal income tax rate.
Bankshares' effective tax rate for 1995, 1994 and 1993 was 24.1%, 23.6% and
21.3%, respectively.
Bankshares 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 under current tax laws.
EFFECTS OF INFLATION
Bankshares' 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 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
1995 vs. 1994
Total assets at year-end 1995 totaled $203,389, an increase of 1.8% over
1994. Average assets for 1995 totaled $201,906 an increase of $4,725 or 2.4%
over 1994. Loans, net of unearned income, outstanding at year-end 1995 were
$125,053, an increase of 8.1% from the same point in time in 1994. This growth
was funded by a shift from investments to loans, increased internally generated
capital and a nominal growth in deposits.
The use of excess internal liquidity to fund loan growth allowed
Bankshares to place less emphasis on the procurement of external funds in the
market place and avoid the associated cost of such activities.
1994 vs. 1993
Total assets at year-end 1994 were $199,727 which represents an increase
of $13,033 or 7.0% from 1993. Average assets were $197,181 in 1994 and
$182,499 in 1993, an increase of $14,682 or 8.0%. The growth reflected above
was principally due to the acquisition of the deposits of the Pembroke Office
from First Union National Bank of Virginia. The influx of deposits created
excess liquidity which was initially placed in the investment portfolio until
the funds could be absorbed into the loan portfolio. Given the excess
liquidity, Bankshares took a less aggressive stance in the procurement of
external funds which reduced interest expense.
-9-<PAGE>
LOANS
1995 vs. 1994
Loans, net of unearned income, at year-end 1995 and 1994 were $125,053 and
$115,724, respectively, which represents an increase of $9,329 or 8.1%. Real
estate construction loans increased by $464 or 8.4% while real estate mortgage
loans increased by $1,586 or 5.2%. Commercial and industrial loans increased
by $4,765 or 13.2% in 1995. Loans to individuals also reflected growth,
increasing by $2,365 or 5.2%.
Average total loans for 1995 were $118,760 and $111,708 for 1994.
Management continues to place emphasis on loan growth as a means to absorb
excess liquidity and improve profitability.
1994 vs. 1993
Total loans, net of unearned income, at year-end 1994 were $115,724, an
increase of $3,469 or 3.1%. During 1994 real estate construction loans
increased by $1,597 or 40.4%.
Real estate mortgage loans increased by $3,574 or 13.4% in 1994. Due to
the rising rates experienced in 1994, commercial loans declined by $9,634 or
21.1%. At the same time consumer loans increased by $8,522 or 22.9%. This was
due to an aggressive pricing strategy primarily focused at the newly acquired
Pembroke Office, formerly a branch of First Union National Bank of Virginia.
As previously discussed, this action had the effect of increasing volume, but
reducing the overall yield on loans due to the lower rates on these extensions
of credit.
Average loans for 1994 were $111,708 and $107,583 in 1994 and 1993,
respectively.
SECURITIES
1995 vs. 1994
In late 1995, the Financial Accounting Standards Board granted financial
institutions a one time opportunity to transfer securities from held to
maturity to available for sale. Conditions of this transfer provided that
institutions opting to make this shift could do so without bringing into
question their ability and positive intent to hold to maturity their remaining
held to maturity securities. Bankshares utilized this one time opportunity to
shift approximately $8,199 in securities held to maturity to the available for
sale category on December 1, 1995.
The average balances for securities available for sale were $13,528 during
1995 and $14,967 in 1994. Year-end balances were $26,571 and $12,114 in 1995
and 1994, respectively.
The average balances for securities held to maturity were $52,226 and
$54,293 in 1995 and 1994, respectively. Year-end balances for 1995 and 1994
were $40,166 and $57,389.
Year-end balances reflect more clearly the shift of investments associated
with the one time transfer of $8,199 described above and the general decline in
securities held to maturity due to calls and maturities.
Bankshares' 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, mortgage-backed
securities and other bank qualified investments. Bankshares has classified all
of its investment securities as either held to maturity or available for sale,
as Bankshares does not engage in trading activities. Investment strategies are
adjusted in response to market conditions and available investment vehicles.
At December 31, 1995, NBB had no investment concentrations in any single
issues that (excluding U.S. Government) exceeded ten percent of capital.
-10-<PAGE>
1994 vs. 1993
Effective January 1, 1994, Bankshares adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." Upon
adoption of SFAS No. 115, certain investment securities totaling $17,451 were
reclassified from securities held to maturity to securities available for sale.
At December 31, 1994, there were $12,114 in securities available for sale and
$57,389 in securities held to maturity.
DEPOSITS
1995 vs. 1994
Average total deposits at December 31, 1995, totaled $179,141 compared to
$176,413 in 1994, an increase of $2,728 or 1.5%. The low growth rate was in
part due to Bankshares' excess liquidity position and its ability to meet the
funding needs internally. The deposit mix shifted toward time deposits away
from interest-bearing demand deposits and savings accounts due to the higher
rates paid on time deposits.
Average time deposits increased by $10,403, while average interest-bearing
demand deposits and savings accounts declined by $6,149 and $3,589 in 1995 and
1994, respectively.
1994 vs. 1993
Average total deposits for the year 1994 were $176,413, an increase of
$12,011 or 7.3% from 1993. The principal source of the increase was the
acquisition of the deposits of the Pembroke Office, formerly a branch of First
Union National Bank of Virginia, which added approximately $14,514 to the
deposit base.
LIQUIDITY
1995 vs. 1994
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Sources of liquidity include deposits, loan principal and interest
repayments, sales, calls and maturities of securities and short-term
borrowings. NBB maintained an adequate liquidity level during 1995 and 1994.
Management is not aware of any trends, commitments or events that will result
in or that are reasonably likely to result in a material increase or decrease
in liquidity other than the effects of the proposed merger discussed below.
Net cash from operating activities of $3,964 in 1995 decreased $1,333 from
1994 and was primarily attributable to a change in the real estate loans held
for sale category which fluctuates based upon loan demand and the timing of
loan sales in the secondary market.
Cash flows from investing activities continue to reflect the shifting of
investments to the loan portfolio and securities held to maturity to available
for sale. Net cash flows from securities, fed funds sold, and operating
activities for 1995 of $3,065, $1,400 and $3,964, respectively, and cash on
hand were used to fund the net increase in loans of $9,598.
1994 vs. 1993
Net cash provided by operations, which consisted principally of net
income, amounted to $5,297 and $4,078 in 1994 and 1993 respectively. Net cash
flows from financing activities, which consists principally of net increases in
deposits, amounted to $8,672 in 1994 and $1,215 in 1993. Cash flows from
operations and financing activities were invested in loans and securities in
1994 and 1993.
CAPITAL RESOURCES
1995 vs. 1994
Total stockholders' equity increased $2,417 from 1994 to 1995, with net
income, less cash dividends on common stock of $1,080, accounting primarily for
the increase. Net unrealized gains or losses on securities available for sale,
-11-<PAGE>
net of income taxes, were $115 at December 31, 1995 and ($126) at December 31,
1994. These unrealized net gains and losses are recorded as a separate
component of stockholders' equity and will continue to be subject to change in
future years due to fluctuations in fair values, sales, purchases, maturities
and calls of securities classified as available for sale. There are no
material commitments for capital expenditures as of December 31, 1995. In
addition, there are no expected material changes in the mix or relative cost of
capital resources other than the effects of the proposed merger discussed
below.
Bankshares has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 11.09% at year-end 1995
compared to 10.08% at year-end 1994. Banks are required to apply percentages
to various assets, including off-balance sheet assets, to reflect their
perceived risk. Regulatory defined capital is divided by risk-weighted assets
in determining the bank's risk-based capital ratio. No regulatory authorities
have advised Bankshares or The National Bank of Blacksburg (NBB) of any
specific leverage ratios applicable to them. Both Bankshares' and NBB's
capital adequacy ratios exceed regulatory requirements and they provide added
flexibility to take advantage of business opportunities as they arise.
Capital Analysis
($ In thousands) 1995
-------
Capital Components Consolidated NBB
------------------ ------------ -----
Tier 1 capital $ 20,637 20,550
Risk-adjusted tier 2 capital 1,723 1,722
-------- -------
Total risk-adjusted capital 22,360 22,272
======== =======
Asset Components Consolidated NBB
---------------- ------------ -----
Adjusted risk-weighted assets 137,462 137,391
Year-to-date adjusted average assets 200,095 200,173
Capital Ratios Required Consolidated NBB
-------------- -------- ------------ -----
Common stockholders' equity 11.09% 11.06%
Regulatory capital 6% 11.16% 11.14%
Risk-weighted capital:
Tier 1 4% 15.01% 14.96%
Tier 1 + Tier 2 8% 16.27% 16.21%
Leverage ratio 3% - 5% 10.31% 10.27%
1994 vs. 1993
Total stockholders' equity increased $1,883 from 1993 to 1994. Net income
less cash dividends on common stock of $993 and the issuance of Bankshares'
common stock to Bankshares' Employee Stock Ownership Plan for $86 account for
this increase. The $126 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.
The ratio of total stockholders' equity to total assets was 10.08% at
year-end 1994 compared to 9.78% at year-end 1993.
-12-<PAGE>
FUTURE ACCOUNTING CONSIDERATIONS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of." SFAS No. 121 requires companies to review long-
lived assets and certain identifiable intangibles to be held, used or disposed
of for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Bankshares is required to
adopt this statement in 1996, and believes the adoption of this statement will
not have a significant effect on its consolidated financial statements.
PROPOSED MERGER
In August of 1995, Bankshares and the Bank of Tazewell County (BTC)
entered into an affiliation agreement whereby Bankshares and BTC would merge.
Stockholders of Bankshares would receive an additional .11129 share of common
stock for each of their shares, and stockholders of BTC would receive one share
of Bankshares' common stock for each of their shares. The agreement is subject
to approval of stockholders of BTC and regulatory authorities.
The merger of Bankshares and BTC will have a combination of positive and
negative effects on Bankshares' financial position, results of operations,
liquidity and capital. While both entities have strong earnings, Bankshares'
return on assets and equity can be expected to decline due to the lower ratios
exhibited by BTC. BTC's lower ratios are due to its excess liquidity which is
presently invested in the securities portfolio due to the lack of loan demand
in BTC's trade area. It is expected that BTC's ratios could be enhanced over
time by purchasing loans from NBB, as NBB's trade area is more developed and
loan demand is higher. Both Bankshares and BTC have strong capital positions
which have generally trended upward, the result of earnings growth coupled with
a generally moderate dividend payout.
The overall impact of the merger is expected to be positive with regard to
liquidity and capital; however, excess liquidity will have to be absorbed into
BTC's loan portfolio to increase net interest income. The minimal levels of
noninterest income at BTC are also viewed as a potential opportunity for
increased income in the future.
At December 31, 1995, BTC had assets of approximately $178 million and net
income of approximately $2.3 million. The affiliation is anticipated to be
accounted for as a pooling-of-interests and to become effective in the second
quarter of 1996.
COMMON STOCK INFORMATION AND DIVIDENDS
National Bankshares, Inc.'s common stock is traded on a very limited basis
in the over-the-counter market and is not listed on any exchange or quoted on
NASDAQ. Local brokerage firms are familiar with and active in trading in the
common stock of National Bankshares, Inc. As of December 31, 1995, there were
688 stockholders of Bankshares' common stock. The following is a summary of
the market price per share and cash dividend per share of the common stock of
National Bankshares, Inc. for 1995 and 1994. Prices do not necessarily reflect
the prices which would have prevailed had there been an active trading market,
nor do they reflect unreported trades, which may have been at lower or higher
prices.
Common Stock Market Prices
--------------------------------
Dividend
1995 1994 Per Share
High Low High Low 1995 1994
------ ----- ------ ----- ---- ----
First Quarter $23.50 21.50 18.50 15.00 -- --
Second Quarter 25.00 22.00 20.50 18.25 .30 .27
Third Quarter 25.00 23.00 21.50 20.00 -- --
Fourth Quarter 25.50 24.00 25.50 22.50 .33 .31
-13-<PAGE>
Bankshares' 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 disclosed in note 12
of the Notes to Consolidated Financial Statements.
Stockholders' Equity Graph
(Millions)
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$14.7 16.4 18.3 20.1 22.6
Book Value Graph
(Dollars)
1991 1992 1993 1994 1995
------ ------ ------ ------ ------
$ 8.67 9.61 10.68 11.75 13.16
-14-<PAGE>
Statement of Management's Responsibility
Management is responsible for the preparation, content and integrity of
the consolidated financial statements, related notes and all other information
included in this annual report. The financial data has been prepared in
accordance with generally accepted accounting principles and, management
believes, fairly and consistently presents Bankshares' financial position and
results of operations.
Bankshares maintains a system of internal controls which provides
reasonable assurances that assets are protected and that accounting records are
reliable for the preparation of consolidated financial statements.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors. Bankshares' internal auditors report to the committee. On
a periodic basis, the committee meets with the internal auditors, independent
auditors and management to discuss matters relating to the quality of internal
control, financial reporting and audit scope. Both internal auditors and
independent auditors have access to the audit committee, without management
present if desired, to freely discuss their evaluation of Bankshares' system of
internal controls and any other matters.
JAMES G. RAKES JOAN C. NELSON
President and Treasurer
Chief Executive Officer
-15-<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, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in notes 1(D) and 5 to the consolidated financial statements,
Bankshares adopted the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," as of
January 1, 1995. 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 9 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 16, 1996
-16-<PAGE>
Consolidated Balance Sheets
$ In thousands, December 31, 1995 and 1994 1995 1994
-------- --------
Assets Cash and due from banks (notes 2 and 17) $ 5,405 6,648
Federal funds sold (note 17) --- 1,400
Securities available for sale (notes 3 and
17) 26,571 12,114
Securities held to maturity (fair value
$40,866 in 1995 and $55,816 in 1994)(notes
3 and 17) 40,166 57,389
Mortgage loans held for sale (notes 15, 16
and 17) 880 392
Loans (notes 4, 5, 16 and 17):
Real estate construction loans 6,007 5,543
Real estate mortgage loans 31,798 30,212
Commercial and industrial loans 40,749 35,984
Loans to individuals 48,132 45,767
-------- -------
Total loans 126,686 117,506
Less unearned income on loans (1,633) (1,782)
-------- -------
Loans, net of unearned income 125,053 115,724
Less allowance for loan losses (note 5) (2,080) (2,006)
-------- -------
Loans, net 122,973 113,718
-------- -------
Bank premises and equipment, net (note 6) 2,685 2,762
Accrued interest receivable 1,667 1,698
Other real estate owned, net (note 5) 739 1,083
Other assets (notes 9 and 18) 2,303 2,523
-------- -------
Total assets $203,389 199,727
======== =======
Liabilities Noninterest-bearing demand deposits 22,861 23,816
and Interest-bearing demand deposits 54,143 59,794
Stockholders' Savings deposits 15,153 19,257
Equity Time deposits (note 7) 87,516 75,769
-------- -------
Total deposits (note 17) 179,673 178,636
-------- -------
Accrued interest payable 258 225
Other liabilities (note 8) 904 729
-------- -------
Total liabilities 180,835 179,590
-17-<PAGE>
Stockholders' equity (notes 9, 11 and 12):
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 4,285 4,285
Surplus 1,187 1,187
Undivided profits 16,967 14,791
Net unrealized gains (losses) on
securities available for sale 115 (126)
-------- -------
Total stockholders' equity 22,554 20,137
Commitments and contingent liabilities
(notes 8, 15 and 18)
-------- -------
Total liabilities and stockholders'
equity $203,389 199,727
======== =======
See accompanying notes to consolidated financial statements.
-18-<PAGE>
Consolidated Statements of Income
$ In thousands, except per share data. Years ended
December 31, 1995, 1994 and 1993 1995 1994 1993
-------- -------- --------
Interest Interest and fees on loans $11,831 10,207 10,265
Income Interest on federal funds sold 250 155 122
Interest on securities - taxable 2,656 2,961 2,930
Interest on securities - nontaxable 1,334 1,239 1,111
------- ------ ------
Total interest income 16,071 14,562 14,428
------- ------ ------
Interest Interest on time deposits of
Expense $100,000 or more (note 7) 745 586 557
Interest on other deposits 5,947 5,053 5,264
Interest on federal funds purchased 4 16 ---
Interest on long-term debt (note 10) --- --- 2
------- ------ ------
Total interest expense 6,696 5,655 5,823
------- ------ ------
Net interest income 9,375 8,907 8,605
Provision for loan losses (note 5) 275 540 930
------- ------ ------
Net interest income after
provision for loan losses 9,100 8,367 7,675
------- ------ ------
Noninterest Service charges on deposit accounts 719 667 594
Income Other service charges and fees 163 169 120
Credit card fees 450 355 317
Trust income 405 417 373
Other income 39 19 112
Realized securities gains (losses),
net (note 3) 1 (20) 25
------- ------ ------
Total noninterest income 1,777 1,607 1,541
------- ------ ------
Noninterest Salaries and employee benefits
Expense (note 8) 3,074 2,991 2,730
Occupancy and furniture and fixtures 530 558 526
Data processing and ATM 349 331 331
FDIC assessment 206 387 369
Credit card processing 411 340 271
Goodwill amortization (note 18) 30 20 ---
Net costs of other real estate owned 195 37 287
Other operating expense 1,792 1,494 1,341
------- ------ ------
Total noninterest expense 6,587 6,158 5,855
Income before income tax expense and
cumulative effect of change in
accounting principle 4,290 3,816 3,361
Income tax expense (note 9) 1,034 900 717
------- ------ ------
-19-<PAGE>
Income before cumulative effect of
change in accounting principle 3,256 2,916 2,644
Cumulative effect at January 1,
1993 of change in accounting for
income taxes (note 9) --- --- 28
------- ------ ------
Net income $ 3,256 2,916 2,672
======= ====== ======
Per share amounts (note 11):
Income before cumulative effect of
change in accounting principle $ 1.90 1.70 1.54
Cumulative effect at January 1,
1993 of change in accounting for
income taxes (note 9) --- --- .02
------- ------ ------
Net income per share $ 1.90 1.70 1.56
======= ====== ======
See accompanying notes to consolidated financial statements.
-20-<PAGE>
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Net Unrealized
Gains (Losses)
on Securities
$ In thousands, except per share data. Common Undivided Available For
Years ended December 31, 1995, 1994 and 1993 Stock Surplus Profits Sale Total
------- ------- --------- -------------- -------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1992 $4,260 1,064 11,051 --- 16,375
Net income --- --- 2,672 --- 2,672
Net proceeds from issuance of common stock
(5,528 shares) (note 11) 14 48 --- --- 62
Cash dividends ($.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 $141 --- --- --- 273 273
Net income --- --- 2,916 --- 2,916
Net proceeds from issuance of common stock
(4,480 shares) (note 11) 11 75 --- --- 86
Cash dividends ($.58 per share) --- --- (993) --- (993)
Change in net unrealized gains (losses) on
securities available for sale, net of income
tax benefit of $206 --- --- --- (399) (399)
------ ----- ------ ----- ------
Balances, December 31, 1994 4,285 1,187 14,791 (126) 20,137
Net income --- --- 3,256 --- 3,256
Cash dividends ($.63 per share) --- --- (1,080) --- (1,080)
Change in net unrealized gains (losses) on
securities available for sale, net of income
taxes of $124 --- --- --- 241 241
------ ----- ------ ----- ------
Balances, December 31, 1995 $4,285 1,187 16,967 115 22,554
====== ===== ====== ===== ======
See accompanying notes to consolidated financial statements.
</TABLE>
-21-<PAGE>
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 1995, 1995 1994 1993
1994 and 1993 ------ ------ ------
Cash Flows Net income $ 3,256 2,916 2,672
from Adjustments to reconcile net income to
Operating net cash provided by operating
Activities activities:
(Note 14) Provision for loan losses 275 540 930
Provision for deferred income taxes (132) (59) (61)
Depreciation of bank premises and
equipment 361 400 370
Amortization of intangibles 145 123 44
Amortization of premiums and accretion
of discounts, net 67 158 149
Gains on bank premises and equipment
disposals (9) --- (1)
Losses on calls of securities
available for sale, net 3 27 ---
Gains on calls of securities held to
maturity, net (4) (7) (25)
Net (increase) decrease in mortgage
loans held for sale (488) 1,360 (850)
Losses and write-downs on other real
estate owned 168 8 233
(Increase) decrease in:
Accrued interest receivable 31 (150) 225
Other assets 83 (235) 180
Increase in:
Accrued interest payable 33 34 46
Other liabilities 175 182 166
------- ------- -------
Net cash provided by operating
activities 3,964 5,297 4,078
------- ------- -------
Cash Net decrease in federal funds sold 1,400 1,220 2,395
Flows Proceeds from sales of securities held
from to maturity --- --- 981
Investing Proceeds from calls and maturities of
Activities securities available for sale 6,528 8,804 ---
(Notes 3 Proceeds from calls and maturities of
and 14) securities held to maturity 16,408 6,260 14,334
Purchases of securities available for
sale (12,442) (3,725) ---
Purchases of securities held to maturity (7,429) (18,693) (17,515)
Net increase in loans made to customers (9,598) (5,030) (5,343)
Proceeds from disposal of other real
estate owned 176 91 555
Recoveries on loans charged off 68 52 60
Bank premises and equipment expenditures (284) (478) (406)
Proceeds from sale of bank premises and
equipment 9 1 6
------- ------- -------
Net cash used in investing activities (5,164) (11,498) (4,933)
------- ------- -------
-22-<PAGE>
Cash Flows Deposits assumed, net of premium paid --- 13,159 ---
from Net increase in time deposits 11,747 3,871 1,968
Financing Net increase (decrease) in other deposits (10,710) (7,451) 101
Activities Net proceeds from issuance of common
(Note 14) stock --- 86 62
Principal payments on long-term debt --- --- (61)
Cash dividends paid (1,080) (993) (855)
------- ------- -------
Net cash provided by (used in)
financing activities (43) 8,672 1,215
------- ------- -------
Net increase (decrease) in cash and due
from banks (1,243) 2,471 360
Cash and due from banks at beginning of
year 6,648 4,177 3,817
------- ------- -------
Cash and due from banks at end of year $ 5,405 6,648 4,177
======= ======= =======
See accompanying notes to consolidated financial statements.
-23-<PAGE>
Notes to Consolidated Financial Statements
$ In thousands, except per share data. December 31, 1995, 1994 and 1993
Note 1: Summary of Significant Accounting Policies
The accounting and reporting policies of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiary, The National Bank of Blacksburg
(NBB), conform to generally accepted accounting principles and general
practices within the banking 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. 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.
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. Bankshares does not engage in securities trading. 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, including impaired installment loans
that have not been placed in nonaccrual status, is recognized on methods
which approximate the level yield method. Interest on all other loans,
including impaired other loans that have not been placed in nonaccrual
status, 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.
-24-<PAGE>
Loan origination and commitment fees and certain direct costs are being
deferred, and the net amount amortized as an adjustment to the related
loan's yield. These amounts are being amortized over the contractual life
of the related loans.
Effective January 1, 1995, Bankshares adopted the provisions of 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, as amended by SFAS No. 118,
requires that impaired loans within the scope of the statements be presented
in the financial statements at the present value of expected future cash
flows or at the fair value of the loan's collateral if the loan is deemed
"collateral dependent." A valuation allowance is required to the extent
that the measure of the impaired loans is less than the recorded investment.
SFAS No. 114 does not apply to large groups of small-balance homogeneous
loans such as residential real estate mortgage, consumer installment, home
equity and bank card loans, which are collectively evaluated for impairment.
SFAS No. 118 allows a creditor to use existing methods for recognizing
interest income on an impaired loan.
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. Depreciable lives include
40 years for premises and 3-10 years for furniture and equipment. 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.
(H) Intangible Assets
Included in other assets are deposit intangibles of $757 and $872 at
December 31, 1995 and 1994, respectively, and goodwill of $397 and $427 at
December 31, 1995 and 1994, respectively. 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.
-25-<PAGE>
(I) Pension Plan
NBB 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 the asset and
liability method of accounting for income taxes. Under this method,
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. 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.
(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 (1,714,152 shares in 1995, 1,710,310 shares in
1994 and 1,707,764 shares in 1993).
(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 values of securities are determined by quoted market
prices or dealer quotes. The fair value of certain state and municipal
securities is not readily available through market sources other than
dealer quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences between the
quoted instruments and the instruments being valued.
-26-<PAGE>
(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.
(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, 1995 and
1994, and as such, the related fair values have not been estimated.
(O) Reclassifications
Certain reclassifications have been made to prior years' consolidated
financial statements to place them on a basis comparable with the 1995
consolidated financial statements.
Note 2: Restrictions on Cash
To comply with Federal Reserve regulations, NBB is required to maintain
certain average reserve balances. The daily average reserve requirements were
$1,667 and $1,567 for the weeks including December 31, 1995 and 1994,
respectively.
Note 3: Securities
As discussed in note 1(C), effective January 1, 1994, Bankshares adopted the
provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Upon 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 $273.
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 1995 and 1994 are as follows:
-27-<PAGE>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 4,002 9 (14) 3,997
U.S. Government agencies and
corporations 10,942 207 (4) 11,145
States and political subdivisions 6,384 3 (47) 6,340
Mortgage-backed securities 233 5 --- 238
Other securities 4,836 35 (20) 4,851
-------- ----- ----- ------
Total securities available
for sale $ 26,397 259 (85) 26,571
======== ===== ===== ======
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
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
======== ===== ===== ======
The amortized costs and fair values of single maturity securities available
for sale at December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities included in these totals are
allocated based upon estimated cash flows at December 31, 1995.
December 31, 1995
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 8,025 8,041
Due after one year through five years 6,597 6,658
Due after five years through ten years 7,457 7,580
Due after ten years 4,188 4,162
No maturity 130 130
------- ------
$26,397 26,571
======= ======
-28-<PAGE>
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of
December 31, 1995 and 1994 are as follows:
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 2,755 49 (3) 2,801
U.S. Government agencies and
corporations 4,682 149 --- 4,831
States and political subdivisions 26,660 481 (82) 27,059
Mortgage-backed securities 961 31 --- 992
Other securities 5,108 81 (6) 5,183
------- ----- ----- ------
Total securities held to
maturity $40,166 791 (91) 40,866
======= ===== ===== ======
December 31, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
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 $57,389 298 (1,871) 55,816
======= ===== ====== ======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities included in these totals are
allocated based upon estimated cash flows at December 31, 1995.
December 31, 1995
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 5,877 5,926
Due after one year through five years 17,881 18,242
Due after five years through ten years 14,012 14,264
Due after ten years 2,396 2,434
-------- ------
$ 40,166 40,866
======== ======
-29-<PAGE>
There were no sales of securities held to maturity during 1995 or 1994.
Proceeds from the sale of securities held to maturity during 1993 were $981.
Gross gains of $67 and gross losses of $42 were realized on these sales in
1993.
The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $5,661 at
December 31, 1995 and $5,403 at December 31, 1994.
On November 15, 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." This Special Report
contained a unique provision that allowed entities to, concurrent with the
initial adoption of the implementation guidance but no later than December 31,
1995, reassess the appropriateness of the classifications of all securities
held at the time. In connection with this one-time reassessment, Bankshares
transferred securities classified as held to maturity with amortized costs of
approximately $8,199 to available for sale securities, increased by the related
unrealized gain in the amount of approximately $11 on December 1, 1995.
Entities opting to make such a transfer could do so without bringing into
question their ability and positive intent to hold the remaining held to
maturity portfolio until maturity.
Note 4: Loans to Officers and Directors
In the normal course of business, NBB has made loans to officers and
directors. As of December 31, 1995 and 1994, there were direct loans to
officers and directors of $1,718 and $1,750, respectively. In addition, there
were loans of $1,881 and $1,798 at December 31, 1995 and 1994, respectively,
which were endorsed by directors and/or officers or had been made to companies
in which directors and/or officers had an equity interest.
The following schedule summarizes amounts receivable from executive officers
and directors of Bankshares, and their immediate families or associates:
Year ended
December 31,
($ In thousands) 1995
------------
Aggregate balance, beginning of year $ 3,548
Additions 4,869
Collections (4,818)
--------
Aggregate balance, end of year $ 3,599
========
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance for
Loan Losses
Nonperforming assets consist of the following:
December 31,
($ In thousands) 1995 1994
------ ------
Nonaccrual loans $ 420 420
Restructured loans --- 229
------ -----
Total nonperforming loans 420 649
Other real estate owned, net 739 1,083
------ -----
Total nonperforming assets 1,159 1,732
------ -----
Accruing loans past due 90 days or more 210 219
====== =====
-30-<PAGE>
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1995.
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:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Scheduled interest:
Nonaccrual loans $ 42 38 194
Restructured loans --- 19 69
------ ---- ----
Total scheduled interest $ 42 57 263
====== ==== ====
Recorded interest:
Nonaccrual loans $ 5 1 25
Restructured loans --- 9 51
------ ---- ----
Total recorded interest $ 5 10 76
====== ==== ====
Changes in the valuation allowance for other real estate owned are as
follows:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Balances, beginning of year $ 49 409 220
Provision for other real estate
owned 124 --- 200
Write-offs (82) (360) (11)
------ ----- -----
Balances, end of year $ 91 49 409
====== ===== =====
As discussed in note 1(D), effective January 1, 1995, Bankshares adopted the
provisions of SFAS No. 114, as amended by SFAS No. 118. At December 31, 1995,
the recorded investment in loans which have been identified as impaired loans,
in accordance with SFAS No. 114, totaled $539. Of this amount, $90 were
related to loans with no valuation allowance and $449 related to loans with a
corresponding valuation allowance of $319.
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $757, and the total interest income recognized
on impaired loans was $47 of which $5 was recognized on a cash basis. The
balance of impaired loans at January 1, 1995 totaled approximately $812. The
initial adoption of SFAS No. 114 did not require an increase to Bankshares'
allowance for loan losses. The impact of SFAS No. 114, as amended by SFAS No.
118, was immaterial to Bankshares' consolidated financial statements as of and
for the year ended December 31, 1995.
-31-<PAGE>
Changes in the allowance for loan losses are as follows:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Balances, beginning of year $2,006 2,038 1,782
Provision for loan losses 275 540 930
Recoveries 68 52 60
Loans charged off (269) (624) (734)
------ ------ ------
Balances, end of year $2,080 2,006 2,038
====== ====== ======
Note 6: Bank Premises and Equipment
Bank premises and equipment stated at cost, less accumulated depreciation,
are as follows:
December 31,
($ In thousands) 1995 1994
------ ------
Premises $ 3,331 3,171
Furniture and equipment 2,382 2,310
Construction-in-progress 30 34
------- ------
5,743 5,515
Less accumulated depreciation (3,058) (2,753)
------- ------
Total bank premises and equipment $ 2,685 2,762
======= ------
Note 7: Time Deposits
Included in time deposits are certificates of deposit and other time
deposits of $100 or more in the aggregate amounts of $13,358 at December 31,
1995 and $10,726 at December 31, 1994.
Note 8: Employee Benefit Plans
NBB has a Retirement Accumulation Plan qualifying under IRS Code Section
401(k). Eligible participants in the plan can contribute up to 10% 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, 1995, 1994 and 1993,
NBB contributed $78, $76 and $69, 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 $163, $145 and
$134 for the years ended December 31, 1995, 1994 and 1993, respectively.
Dividends on ESOP shares are charged to undivided profits. As of December 31,
1995, the number of allocated shares held by the ESOP was 43,840 and the number
of unallocated shares was 7,266. All shares held by the ESOP are treated as
outstanding in computing Bankshares' net income per share. The ESOP has the
right of first refusal for any shares distributed to a participant in the event
the participant elects to sell the shares. Upon reaching age 55 with ten years
of plan participation, a vested participant has the right to diversify 50% of
his or her allocated ESOP shares and the ESOP would be obligated to purchase
those shares.
-32-<PAGE>
NBB also has a noncontributory defined benefit pension plan which covers all
full-time officers and employees with one year of service who have attained the
age of 21 prior to the plan's January 1 and July 1 enrollment dates. The
pension plan's benefit formulas generally base payments to retired employees
upon their length of service and a percentage of qualifying compensation during
their final years of employment. The pension plan's assets are invested
principally in U.S. Government agency obligations and mutual funds.
The plan's funded status at December 31, 1995 and 1994 is as follows:
December 31,
($ In thousands) 1995 1994
------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $881 in 1995 and $546 in 1994 $ 970 601
======= ======
Projected benefit obligation for service rendered to
date (1,745) (1,068)
Plan assets at fair value 992 924
------- ------
Projected benefit obligation in excess of plan
assets (753) (144)
Unrecognized net asset at January 1, 1987 being
amortized over 15 years (61) (72)
Unrecognized net loss from past experience
different from that assumed 559 101
Prior service cost not yet recognized in net
pension cost (21) (53)
------- ------
Accrued pension cost included in other liabilities $ (276) (168)
======= ======
Net pension cost includes the following (income) expense components:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Service cost-benefits earned during the year $ 111 147 104
Interest cost on projected benefit obligation 92 89 68
Actual return on plan assets (124) 8 (35)
Net amortization and deferral 29 (90) (59)
------ ---- -----
Net pension cost $ 108 154 78
====== ==== =====
The weighted average discount rate was 7% in 1995, 8.5% in 1994 and 7% in
1993. The rate of increase in future compensation levels was 5% in 1995, 1994
and 1993. 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 1995, 1994 and 1993.
-33-<PAGE>
Note 9: Income Taxes
As discussed in note 1(J), Bankshares adopted SFAS No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes of
$28 is reported separately in the 1993 consolidated statement of income.
Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Income $1,034 900 717
Stockholders' equity, for net unrealized gains
(losses) on securities available for sale
recognized for financial reporting purposes 124 (65) ---
------ ---- -----
Total income taxes $1,158 835 717
====== ==== =====
The components of federal income tax expense attributable to income
before income tax expense and cumulative effect of change in accounting
principle are as follows:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Current $1,166 959 750
Deferred (132) (59) (33)
------ ----
Total income tax expense $1,034 900 717
====== ==== ====
Taxes resulting from securities transactions amounted to a tax benefit of $7
for the year ended December 31, 1994 and an income tax expense of $9 for the
year ended December 31, 1993.
The following is a reconciliation of the "expected" federal income tax
expense on income before income tax expense and cumulative effect of change in
accounting principle with the reported income tax expense:
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Expected income tax expense (34%) $ 1,459 1,297 1,143
Tax-exempt interest income (551) (521) (490)
Nondeductible interest expense 67 55 47
Other, net 59 69 17
------- ----- -----
Reported income tax expense $ 1,034 900 717
======= ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below:
-34-<PAGE>
December 31,
($ In thousands) 1995 1994
------ ------
Deferred tax assets:
Loans, principally due to allowance for loan losses and
unearned fee income $ 534 504
Other real estate owned, principally due to valuation
allowance 33 1
Deferred compensation and other liabilities, due to
accrual for financial reporting purpose 158 143
Net unrealized losses on securities available for sale --- 65
Deposit intangibles and goodwill 28 13
Nonaccrual interest on loans 19 30
Community development corporation related tax credit 34 ---
----- -----
Total gross deferred tax assets 806 756
Less valuation allowance --- ---
----- -----
Net deferred tax assets 806 756
----- -----
Deferred tax liabilities:
Bank premises and equipment, principally due to
differences in depreciation (20) (39)
Securities, due to differences in discount accretion (30) (26)
Other assets (49) (51)
Net unrealized gains on securities available for sale (59) ---
----- -----
Total gross deferred liabilities (158) (116)
----- -----
Net deferred tax asset included in other assets $ 648 640
===== =====
Bankshares has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1995 and 1994 due to the fact that
the realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.
Note 10: Long-Term Debt
Long-term debt consisted of an unsecured equity commitment note maturing
January 12, 1995 with interest at the U.S. Prime Rate plus .5%. During 1993,
this indebtedness was paid in full.
Note 11: Common Stock Transactions
During 1994 and 1993, the ESOP purchased 4,480 and 5,528 shares of the
common stock of National Bankshares, Inc. at a price of $19.35 and $11.00 per
share, respectively. There was no stock purchased in 1995 for the ESOP. The
net proceeds from these stock issuances have been credited to common stock and
surplus in the respective years.
Note 12: Restrictions on Payments of Dividends and Capital Requirements
National Bankshares, Inc.'s principal source of funds for dividend payments
is dividends received from its subsidiary. For the years ended December 31,
1995, 1994 and 1993, dividends received from NBB were $1,055, $1,133 and $993,
respectively.
-35-<PAGE>
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, 1995, retained net profits which were free of such
restrictions amounted to approximately $4,256.
NBB is required to maintain minimum amounts of capital to total risk-
weighted assets, as defined by the banking regulators. At December 31, 1995,
NBB is required to have minimum Tier 1 and total capital ratios of 4% and 8%,
respectively. NBB's actual ratios at that date were 15.01% and 16.27%,
respectively. NBB's leverage ratio at December 31, 1995 was 10.31%.
Note 13: Parent Company Financial Information
Condensed financial information of National Bankshares, Inc. (Parent) is
presented below:
Condensed Balance Sheets
December 31,
($ In thousands) 1995 1994
------ ------
Assets:
Cash due from subsidiary $ 14 71
Investment in subsidiary, at equity 22,467 19,837
Other assets --- 3
Refundable income taxes due from subsidiary 113 275
------- ------
Total assets $22,594 20,186
======= ======
Liabilities and stockholders' equity:
Other liabilities 40 49
Stockholders' equity (notes 9, 11 and 12):
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 4,285 4,285
Surplus 1,187 1,187
Undivided profits 16,967 14,791
Net unrealized gains (losses) on securities available
for sale 115 (126)
------- ------
Total stockholders' equity 22,554 20,137
Commitments and contingent liabilities (notes 8, 15
and 18)
------- ------
Total liabilities and stockholders' equity $22,594 20,186
======= ======
-36-<PAGE>
Condensed Statements of Income
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Income:
Dividends from subsidiary (note 12) $ 1,055 1,133 993
------- ------ ------
Expenses:
Interest on long-term debt --- --- 2
Other expenses 285 127 109
------- ------ ------
Total expenses 285 127 111
------- ------ ------
Income before income tax benefit,
cumulative effect of change in accounting
principle and equity in undistributed net
income of subsidiary 770 1,006 882
Applicable income tax benefit 97 43 37
------- ------ ------
Income before cumulative effect of change
in accounting principle and equity in
undistributed net income of subsidiary 867 1,049 919
Cumulative effect at January 1, 1993 of
change in accounting for income taxes
(note 9) --- --- 19
------- ------ ------
Income before equity in undistributed
net income of subsidiary 867 1,049 938
Equity in undistributed net income of
subsidiary 2,389 1,867 1,734
------- ------ ------
Net income $ 3,256 2,916 2,672
======= ====== ======
-37-<PAGE>
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 1995 1994 1993
------ ------ ------
Cash flows from operating activities:
Net income $ 3,256 2,916 2,672
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
subsidiary (2,389) (1,867) (1,734)
Provision for deferred income taxes --- --- (19)
(Increase) decrease in other assets 3 (2) (1)
(Increase) decrease in refundable
income taxes due from subsidiary 162 (43) (37)
Increase (decrease) in other liabilities (9) 20 (3)
------- ------ ------
Net cash provided by operating
activities 1,023 1,024 878
------- ------ ------
Cash flows from financing activities:
Purchase of common stock of subsidiary --- (86) ---
Principal payments on long-term debt --- --- (61)
Net proceeds from issuance of common stock --- 86 62
Dividends paid (1,080) (993) (855)
------- ------ ------
Net cash used in financing activities (1,080) (993) (854)
------- ------ ------
Net increase (decrease) in cash (57) 31 24
Cash due from subsidiary at beginning of year 71 40 16
------- ------ ------
Cash due from subsidiary at end of year $ 14 71 40
======= ====== ======
Note 14: Supplemental Cash Flow Information
Bankshares paid $6,663, $5,621 and $5,775 for interest and $1,086, $1,159
and $706 for income taxes, net of refunds, in 1995, 1994 and 1993,
respectively. Noncash investing activities consisted of $269, $624 and $734 of
loans charged against the allowance for loan losses in 1995, 1994 and 1993,
respectively. In addition, for the years ended December 31, 1995 and 1994,
noncash investing activities included changes in net unrealized gains (losses)
on securities available for sale of $365 and ($191), respectively, changes in
deferred tax assets included in other assets of ($124) and $65, respectively,
and changes in net unrealized gains (losses) on securities available for sale
included in stockholders' equity of $241 and ($126), respectively. See Note 3
for noncash transfers of securities.
Note 15: Financial Instruments with Off-Balance Sheet Risk
NBB is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The contract amounts of those instruments reflect the extent of involvement NBB
has in particular classes of financial instruments.
-38-<PAGE>
NBB's exposure to credit loss, in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit, is represented by the contractual amount of those
instruments. NBB uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
NBB may require collateral or other security to support the following
financial instruments with credit risk:
December 31,
($ In thousands) 1995 1994
------ ------
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $28,284 30,244
Standby letters of credit 1,934 3,117
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 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. Extensions of credit arising from these commitments are
predominantly variable rate in nature; the principal exception being
construction loans which are at fixed rates, but have terms generally less than
one year.
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 1995, NBB
originated $15,515 and sold $15,027 to investors, compared to $15,084
originated and $16,444 sold in 1994. 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 is approximately twelve months after sale of a loan to
the investor. Sold loans with potential recourse totaled approximately $15,027
at December 31, 1995.
Note 16: Concentrations of Credit Risk
NBB does a general banking business, serving the commercial, agricultural
and personal banking needs of its 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
-39-<PAGE>
Institute and State University, the Radford Army Ammunition Plant and Hoechst-
Celanese. Other industries include a wide variety of manufacturing and retail
and service 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, 1995 and 1994, approximately $31 million and $24
million, respectively, of the commercial loan portfolio consisted of loans
secured by commercial real estate. Loans to individuals included approximately
$22 million and $18 million, respectively, of loans secured by vehicles. As of
December 31, 1995 and 1994, the real estate mortgage portfolio included
approximately $21 million of residential mortgage loans secured by 1-4 family
properties.
NBB has established operating policies relating to the credit process and
collateral in loan originations. Loans to purchase real and personal property
are generally collateralized by the related property and with loan amounts
established based on certain percentage limitations of the property's total
stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual
borrower or project based on available financial information.
Note 17: Fair Value of Financial Instruments
The estimated fair values of Bankshares' financial instruments at December
31, 1995 and 1994 are as follows:
December 31,
1995 1994
Estimated Estimated
($ In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
Financial assets:
Cash and due from banks $ 5,405 5,405 6,648 6,648
Federal funds sold --- --- 1,400 1,400
Securities 66,737 67,437 69,503 67,930
Mortgage loans held for sale 880 880 392 392
Loans, net 122,973 123,447 113,718 113,019
-------- ------- ------- -------
Total financial assets 195,995 197,169 191,661 189,389
======== ======= ======= =======
Financial liabilities:
Deposits 179,673 182,905 178,636 176,376
-------- ------- ------- -------
Total financial liabilities 179,673 182,905 178,636 176,376
======== ======= ======= =======
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.
-40-<PAGE>
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 18: Pending Affiliation and Purchase Transaction
In August 1995, Bankshares and the Bank of Tazewell County (BTC) entered
into an affiliation agreement, whereby Bankshares and BTC would merge.
Stockholders of Bankshares would receive an additional .11129 share of common
stock for each of their shares and stockholders of BTC would receive one share
of Bankshares common stock for each of their shares. The agreement is subject
to approval of stockholders of BTC and regulatory authorities. At December 31,
1995, BTC had assets of approximately $178 million and net income of
approximately $2.3 million for the year ended December 31, 1995. The
affiliation is anticipated to be accounted for as a pooling-of-interests and to
become effective in the second quarter of 1996.
On November 23, 1993, NBB entered into an agreement to purchase the deposits
and certain fixed assets of the Pembroke 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 19: Future Accounting Considerations
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of." SFAS No. 121 requires companies to review long-lived
assets and certain identifiable intangibles to be held, used or disposed of,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Bankshares is required to
adopt this statement in 1996. Bankshares believes the adoption of this
statement will not have a significant effect on its consolidated financial
statements.
-41-<PAGE>
Comparative Statements of Trust Assets
(Unaudited)
Market value, $ In thousands, December 31,
1995 1994 1993
------ ------ ------
Noninterest-bearing deposits - own bank $ 54 590 32
Interest-bearing deposits - own bank 248 540 445
Interest-bearing deposits - other banks 1,793 1,965 440
U.S. Government and agency obligations 5,362 7,119 6,418
State, county and municipal obligations 8,518 7,319 7,388
Money market mutual funds 2,060 1,833 1,835
Other notes and bonds 3,593 6,669 7,289
Common and preferred stock 28,444 16,156 13,131
Real estate mortgages 1,236 733 564
Real estate 1,336 1,539 1,495
Miscellaneous 579 383 431
------- ------ ------
Total discretionary assets 53,223 44,846 39,468
Nondiscretionary assets 11,261 10,745 9,074
------- ------ ------
Total assets $64,484 55,591 48,542
======= ====== ======
Assets (other than cash deposits) held by the Trust Department in a
fiduciary or agency capacity are not included in the consolidated
financial statements since such items are not assets of NBB.
-42-<PAGE>
National Bankshares, Inc. and
The National Bank Boards of Directors
PHOTOGRAPH OF NATIONAL BANKSHARES, INC. AND THE NATIONAL BANK
BOARDS OF DIRECTORS
Seated Left to Right: Standing Left to Right:
Charles L. Boatwright Paul P. Wisman
Vice Chairman of the Board Grundy National Bank
Physician Vice President of Investments
Nicewonder Investments
Robert E. Christopher, Jr. Manager of Assets
Chairman of the Board
Retired J. Lewis Webb, Jr.
Dentist
Jeffrey R. Stewart
Educational Consultant Paul A. Duncan
Holiday Motor Corp.
James G. Rakes President
National Bankshares, Inc.
The National Bank of Blacksburg James M. Shuler
President and Chief Executive Officer Companion Animal Clinic, Inc.
President
Virginia House of Delegates
Delegate
L. Allen Bowman
Poly-Scientific
President
On September 21, 1995, the Boards accepted with regret the resignation of
Director John M. Barringer after more than forty years of distinguished and
dedicated service. Through the years Mr. Barringer's contributions to the bank
have been valuable and numerous, and his fellow Directors very much miss his
knowledge, experience and wry sense of humor.
-43-<PAGE>
Advisory Boards of Directors
PHOTOGRAPH OF MONTGOMERY COUNTY ADVISORY BOARD MEMBERS
Seated Left to Right: Standing Left to Right:
James C. Stewart James L. Dowdy
Virginia Center for Innovative Technology Blacksburg Floor Fashions
Regional Director
Dan A. Dodson
Arlene A. Saari ERA Townside, Inc.
Partyrama and The Emporium Realtor and Broker
Owner
W. Clinton Graves
T. Cooper Via Clinton's Transfer and Storage
L.L. Brown Agency, Inc. Owner
President
James J. Owen
Virginia Polytechnic Institute
and State University
Associate Professor Emeritus
Giles County Advisory Board
PHOTOGRAPH OF GILES COUNTY ADVISORY BOARD MEMBERS
Seated Left to Right: Standing Left to Right:
Buford Steele Paul B. Collins
Retired Patrick Enterprises, Inc.
President
Scarlet B. Ratcliffe
Clerk of the Circuit Court of Giles County John H. Givens, Jr.
Givens Funeral Home, Inc.
Kenneth L. Rakes Owner
Virginian Leader Corp.
President and Publisher Ross E. Martin
Retired
H.M. Scanland, Jr.
Mountain Lake Resort
General Manager
Emeritus Board
J. Stephen Burrows* William W. Dobyns Robert F. Farrier
Ruth C. Horton* Howard L. Price Leo C. Scott
George A. Gray Howard R. Hale *Co-Chairmen of the Board
-44-<PAGE>
Officers of The National Bank of Blacksburg
President and Offices Operations
Chief Executive Officer Hethwood Joan C. Nelson
James G. Rakes -------- Senior Vice President
Sharon W. Duncan Operations and Cashier
Accounting and Vice President
Financial Reporting Office Manager William E. Himes
Fred Jackson, III Security Officer
Controller Main Office
----------- Personnel and
Audit Dana L. Sutphin Administration
Shelby M. Evans Assistant Vice President Marilyn B. Buhyoff
Corporate Auditor Office Manager Senior Vice President
Administration
David K. Skeens Market Place
Auditor ------------ Trust
Jeffery L. Tickle Thomas M. Murphy
Credit Review Assistant Vice President Vice President
Paul B. Cassell, Jr. Office Manager Trust Officer
Vice President
Credit Review North Main H.W. Swink, Jr.
---------- Assistant Trust Officer
Patrick L. Lamm Phyllis P. Duncan
Credit Review Officer Assistant Vice President Connie T. Lovern
Office Manager Trust Operations Officer
Information Systems
Larry K. Hayes Pearisburg
Vice President ----------
Rick A. Reed
Loans Senior Vice President
F. Brad Denardo Office Manager
Executive Vice President
Pembroke
T.W. Johnson, Jr. --------
Vice President Jerry B. Smith
Commercial Loans Vice President
Office Manager
James A. Mattox
Commercial Loan Officer South Main
----------
Bryce W. McCall David A. Capwell
Assistant Vice President Assistant Cashier
Construction and Office Manager
Mortgage Loans
Ieda P. Sturgill
Assistant Vice President
Loans
Jerry H. Albert The National Bank of Blacksburg is an equal
Assistant Cashier opportunity employer committed to treating all
employees and applicants for employment equally
Terry T. Stafford and fairly.
Loans Operations Officer
Karen A. Stoevener
Mortgage Loan Officer
-45-<PAGE>
Corporate Information
National Bankshares, Inc. - Officers
James G. Rakes Marilyn B. Buhyoff Joan C. Nelson
President and Secretary Treasurer
Chief Executive Officer
F. Brad Denardo Shelby M. Evans
Corporate Officer Corporate Auditor
Annual Meeting
The annual meeting of stockholders will be held on Tuesday, April 9, 1996,
at 3 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.
Requests for Information
Analysts, investors and those seeking financial information should contact:
James G. Rakes
President and Chief Executive Officer
540/552-2011 or
800/552-4123
Those seeking general stockholder information should contact:
Marilyn B. Buhyoff
Secretary
540/552-2011 or
800/552-4123
Form 10-K
A Form 10-K Report filed with the Securities and Exchange Commission is
available to stockholders without charge upon written request to the
Secretary of National Bankshares, Inc., 100 South Main Street, P.O. Box
90002, Blacksburg, VA 24062-9002.
Corporate Office Registered Agent
National Bankshares, Inc. James G. Rakes
100 South Main Street 100 South Main Street
Blacksburg, VA 24060 Blacksburg, VA 24060
P.O. Box 90002 P.O. Box 90002
Blacksburg, VA 24062-9002 Blacksburg, VA 24062-9002
The National Bank - Office Locations
Main Office Hethwood Office Pearisburg Office
100 South Main Street 900 Hethwood Boulevard 201 Main Street
Blacksburg, VA 24060 Blacksburg, VA 24060 Pearisburg, VA 24134
North Main Office Market Place Office Pembroke Office
901 North Main Street 120 Peppers Ferry Road Snidow Street
Blacksburg, VA 24060 Christiansburg, VA 24073 Pembroke, VA 24136
South Main Office Trust Department
3600 South Main Street 201 Church Street
Blacksburg, VA 24060 Blacksburg, VA 24060
-46-<PAGE>
National Bankshares, Inc.
100 South Main Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
-47-<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
YEAR-END 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,405
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,571
<INVESTMENTS-CARRYING> 40,166
<INVESTMENTS-MARKET> 55,816
<LOANS> 125,933
<ALLOWANCE> 2,080
<TOTAL-ASSETS> 203,389
<DEPOSITS> 179,673
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,162
<LONG-TERM> 0
0
0
<COMMON> 4,285
<OTHER-SE> 18,269
<TOTAL-LIABILITIES-AND-EQUITY> 203,389
<INTEREST-LOAN> 11,831
<INTEREST-INVEST> 3,990
<INTEREST-OTHER> 250
<INTEREST-TOTAL> 16,071
<INTEREST-DEPOSIT> 6,692
<INTEREST-EXPENSE> 6,696
<INTEREST-INCOME-NET> 9,375
<LOAN-LOSSES> 275
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 6,587
<INCOME-PRETAX> 4,290
<INCOME-PRE-EXTRAORDINARY> 4,290
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,256
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
<YIELD-ACTUAL> 5.39
<LOANS-NON> 420
<LOANS-PAST> 210
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 539
<ALLOWANCE-OPEN> 2006
<CHARGE-OFFS> 269
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 2,080
<ALLOWANCE-DOMESTIC> 2,080
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,247
</TABLE>
