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, 1996 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 14, 1997 was $87,477,875. 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 14, 1997
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COMMON STOCK, $2.50 PAR VALUE 3,792,833
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1996, 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 8, 1997 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 40 pages.)
(The Index of Exhibits are on pages 39-40.)<PAGE>
NATIONAL BANKSHARES, INCORPORATED
ANNUAL REPORT FOR 1996 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.
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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 two wholly-owned
subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), collectively referred to as "the Company".
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock in a
one-for-one exchange for all the outstanding common stock of Bank of Tazewell
County, Tazewell, Virginia. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for the periods prior to the combination have been restated to include the
accounts and results of operations of Bank of Tazewell County. There were no
adjustments of a material amount resulting from Bank of Tazewell County's
adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share effected in
the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered in 1891. NBB
operates a full-service banking business from its headquarters in Blacksburg,
Virginia, and its six area branch offices. A seventh branch is expected to open
in the second quarter of 1997. 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, collections, night depository, safe deposit, 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 personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the resulting institution became Farmers Bank of Clinch Valley. Bank of
Tazewell County resulted from the 1964 merger of Bank of Graham, Bluefield,
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Virginia with Farmers Bank of Clinch Valley. BTC provides general retail and
commercial banking services to individuals, businesses and local government
units. These services include commercial, real estate and consumer loans.
Deposit accounts offered include demand deposit accounts, interest-bearing
demand deposit accounts, money market deposit accounts, savings accounts and
certificates of deposit. Other services include automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous service
normally offered by commercial banks. BTC also conducts a general trust
business.
BTC makes commercial, residential real estate and consumer loans.
Commercial Loans
NBB and BTC make loans to businesses and to individuals for business purposes
on both secured and unsecured bases. Loan requests are granted based upon
several factors including credit history, past and present relationships with
the bank and marketability of collateral. Unsecured commercial loans must be
supported by a satisfactory balance sheet and income statement. 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.
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 secured by residential real estate are originated by both bank
subsidiaries. Loans originated by BTC are typically held in the bank's loan
portfolio. NBB sells in the secondary market on a servicing released basis a
substantial percentage of the residential real estate loans it originates.
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 choose not to have their
mortgage loan sold. On these occasions, if the loan meets NBB's internal
underwriting criteria, the loan will be closed and placed in NBB's portfolio.
In its secondary market operation, NBB participates in insured loan programs
sponsored by the Department of Housing and Urban Development, the Veterans
Administration and the Virginia Housing Development Authority. It is
anticipated that BTC will also become engaged in sales of mortgages in the
secondary market.
Residential real estate loans carry risk associated with the continued credit-
worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is limited due to the nature of its market
area.
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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 may be at any point in time less than the principal amount of the
loan.
Construction loans also bear the risk that the general contractor, who may or
may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are permanent financing of construction loans may
likewise under certain circumstances be affected by external financial pressures
on those customers.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. 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. NBB also originates a small number of
student loans that are sold to the Student Loan Marketing Association.
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.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market mortgage loans and
student loans regularly sold by NBB. Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB regularly sells loans and participations in loans to BTC. BTC's loan to
deposit ratio is at a level where additional loans are desirable, and NBB's loan
to deposit ratio is at a level which its management considers to be optimal
without the loans sold to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.
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The following table sets forth, for the three fiscal years ended December 31,
1996, 1995 and 1994 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.
Percentage of
Period Class of Service Total Revenues
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December 31, 1996 Interest and Fees on Loans 54.98%
Interest on Investments 34.61%
December 31, 1995 Interest and Fees on Loans 51.72%
Interest on Investments 38.16%
December 31, 1994 Interest and Fees on Loans 48.97%
Interest on Investments 42.15%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market 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 1996, 1995 and 1994 the unemployment rate in
Montgomery County was 3.3%, 3.0% and 3.2%, respectively, and the rate in Giles
County during those years was 8.4%, 8.4% and 7.4%, respectively. 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 in the western edge of NBB's service area. It too has provided stable
employment opportunities in the region.
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
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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 NBB's business in Giles County.
NBB's primary market 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.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, Virginia. This includes the towns of Tazewell and Bluefield, Virginia
and Bluefield, West Virginia. BTC's primary market area has largely depended on
the coal mining industry and farming for its economic base. In recent years,
coal companies have mechanized and this has reduced the number of individuals
required for the production of coal. There are still a number of support
industries for the coal mining business that continue to provide employment in
the area. Additionally, several new businesses have been established in the
area, and Bluefield, West Virginia has begun to emerge as a regional medical
center. Unemployment has stabilized, and real estate values also remain stable
and comparable to other areas in southwest Virginia.
For 1996, 1995 and 1994 the unemployment rate for Tazewell County was 9.5%,
10.2% and 13.9%, respectively. In the same years, Mercer County, West
Virginia's unemployment rate was 5.2%, 5.7% and 7.2%, respectively.
Competition
The banking and financial service business in Virginia generally, and in NBB's
and BTC's market areas specifically, is highly competitive. The increasingly
competitive environment is a result of changes in regulation, changes in
technology and product delivery systems and the accelerating pace of
consolidation among financial service providers. The Company's bank
subsidiaries compete for loans and deposits with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
money market funds, credit unions and other nonbank financial service providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than NBB and BTC. In order to compete with these other financial
service providers, NBB and BTC rely upon service-based business philosophies,
personal relationships with customers, specialized services tailored to meet
customers' needs and the convenience of office locations. In addition, the
banks are generally competitive with other financial institutions in their
market areas with respect to interest rates paid on deposit accounts, interest
rates charged on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC 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 its subsidiaries. All
compensation paid to officers and employees is paid by NBB, except for fees paid
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by Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1996, NBB employed 103 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1996
employed 67 in its various offices and operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.
National Bankshares, Inc.
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 Bank Holding Company Act. 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. 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
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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. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and such loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The 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 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 is also 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.
Bankshares does not presently engage in securities-related activities in any
material respect.
NBB and BTC
General. NBB 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).
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The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare
quarterly reports on NBB's financial condition and to conduct an annual audit of
its financial affairs in compliance with minimum standards and procedures
prescribed by the OCC. NBB also is required by the OCC to adopt internal
control structures and procedures in order to safeguard assets and monitor and
reduce risk exposure. While appropriate for safety and soundness of banks,
these requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-
in-arrangements in connection with any extension of credit or the providing of
any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which 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 revised the implementing CRA
regulations. Under the new regulations, banks have the option of being assessed
for CRA compliance under one of several methods. Small banks are 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 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.
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NBB and BTC received CRA ratings of "Outstanding" and "Satisfactory"
respectively, in their last examinations by their primary federal bank
regulators.
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval
of one or more of the Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia.
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. 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 State Corporation
Commission, establish and maintain a de novo branch or acquire one or more
branches in a state other than Virginia, either separately or as part of a
merger. Procedures also are established to allow out-of-state domiciled banks
to establish or acquire branches in Virginia, provided the "home" state of the
bank permits Virginia banks to establish or acquire branches within its borders.
The activities of such branches would be subject to the same laws as Virginia
domiciled banks, unless such activities are prohibited by the law of the state
where the bank is organized. The Virginia State Corporation 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
-12-<PAGE>
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 the Company may
increase as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Both NBB and BTC qualified for the minimum
annual premium rate of $2,000 per year in 1996. Beginning in 1997, all banks,
including NBB and BTC, will be subject to a higher FDIC assessment which will
fund interest payments for bank issues to resolve problems associated with the
savings and loan industry. This assessment will continue until 2018-2019. The
assessment will vary over the period from 1.29 cents to 2.43 cents per $100 of
deposits.
Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and
credit and interest rates in order to influence general economic conditions.
These policies have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case of a quarterly or semi-annual dividend). The approval of
the OCC is required if the total of all dividends declared by a national bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus or to fund the retirement of preferred stock.
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
-13-<PAGE>
composition of that account.
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid
in must be restored to its initial level, and no dividend can be paid which
could impair the bank's paid in capital. The Bureau of Financial Institutions
further has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Requirements. The Federal Reserve Board has adopted risk-based
capital guidelines in final form which are applicable to Bankshares and BTC.
The Federal Reserve Board guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of risk-weighted assets. The minimum ratio of
qualified total capital to risk-weighted assets (including certain off-balance
sheet items, such as standby letters of credit) is 8.0%. At least half of the
total capital must be comprised of Tier 1 capital for a minimum ratio of Tier 1
Capital to risk-weighted assets of 4.0%. 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.
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 and BTC. The OCC has adopted similar regulations applicable to
-14-<PAGE>
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
CAMEL rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. 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, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.
Legislative Developments
The difficulties encountered nationwide by financial institutions during 1990
and 1991 prompted federal legislation designed to reform the banking industry
and to promote the viability of the industry and of the deposit insurance
system. FDICIA, which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank regulation and trims the scope of federal
deposit insurance as summarized below.
FDIC Funding. The legislation bolsters the bank deposit insurance fund with
$70 billion in borrowing authority and increases to $30 billion from $5 billion
the amount the FDIC can borrow from the U.S. Treasury to cover the cost of bank
failures. The loans, plus interest, would be repaid by premiums that banks pay
on domestic deposits over the next fifteen years.
Prompt Corrective Action. Among other things, FDICIA requires the federal
banking agencies to take "prompt corrective action" in respect to banks that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
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
-15-<PAGE>
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.
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.
As of September 29, 1996, "The Depository Insurance Fund Act of 1996" became
law. This legislation provided for a one time assessment on banks that had
previously acquired certain deposits from savings and loan institutions.
Neither NBB or BTC were subject to that special assessment. Beginning in 1997,
all banks will be subject to increased assessments that are designed to finally
resolve problems associated with the savings and loan industry.
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals,
could significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted on how these
proposals would affect the Company.
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 and BTC's loan demand, as well as certain NBB loans in which BTC
participates.
-16-<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 1996 1995 1994
------ ---- ---- ----
Cash and due from banks $ 11,493 10,189 9,108
Federal funds sold 8,903 12,105 11,245
Securities available for sale:
Taxable 65,992 41,695 40,023
Nontaxable 6,679 930 ---
Securities held to maturity:
Taxable 79,599 105,701 111,091
Nontaxable 25,133 35,668 34,251
Mortgage loans held for sale 850 723 995
Loans, net 177,419 159,920 152,976
Other assets 11,977 11,475 10,273
-------- ------- -------
Total assets $388,045 378,406 369,962
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand
deposits $ 41,997 38,833 36,724
Interest-bearing demand deposits 76,017 77,545 77,182
Savings deposits 49,783 54,698 67,905
Time deposits 168,141 159,185 143,356
-------- ------- -------
Total deposits 335,938 330,261 325,167
Short-term borrowings 433 593 891
Other liabilities 2,215 1,826 1,502
-------- ------- -------
Total liabilities 335,586 332,680 327,560
Stockholders' equity 49,459 45,726 42,402
-------- ------- -------
Total liabilities and
stockholders' equity $388,045 378,406 369,962
======== ======= =======
-17-<PAGE>
<TABLE>
B. ANALYSIS OF NET INTEREST EARNINGS
The following table shows the major categories of interest-earning assets and interest-bearing
liabilities, the interest earned or paid, the average yield or rate on the daily average balance
outstanding, net interest income and net yield on average interest-earning assets for the years
indicated.
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ 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) $178,269 17,339 9.73% 160,643 15,897 9.90% 153,971 13,857 9.00%
Taxable securities 145,591 8,877 6.10% 147,396 9,723 6.60% 151,114 9,966 6.60%
Nontaxable
securities (1) 31,812 2,971 9.34% 36,598 2,856 7.80% 34,251 2,910 8.50%
Federal funds sold 8,903 567 6.37% 12,105 704 5.82% 11,245 450 4.00%
-------- ------- ------- ------- ------- -------
Total interest-
earning assets $364,575 29,754 8.16% 356,742 29,180 8.18% 350,581 27,183 7.75%
======== ======= ======= ======= ======= =======
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 76,017 2,182 2.87% 77,545 2,353 3.03% 77,182 1,975 2.56%
Savings deposits 49,783 1,646 3.31% 54,698 1,798 3.29% 67,905 2,613 3.85%
Time deposits 168,141 9,181 5.46% 159,185 8,517 5.35% 143,356 6,060 4.23%
Short-term borrowings 433 27 6.24% 593 35 5.90% 891 36 4.04%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities $294,374 13,036 4.43% 292,021 12,703 4.35% 289,334 10,684 3.69%
======== ======= ======= ======= ======= =======
Net interest income
and interest rate
spread 16,718 3.73% 16,477 3.83% 16,499 4.06%
======= ======= =======
Net yield on average
interest-earning
assets 4.59% 4.62% 4.71%
(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 $374 in 1996, $305 in 1995 and $274 in 1994 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
</TABLE>
-18-<PAGE>
<TABLE>
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other funds.
The Company's net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and
rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated,
a summary of the changes in interest income and interest expense resulting from changes in average
asset and liability balances (volume) and changes in average interest rates (rate).
<CAPTION>
1996 Over 1995 1995 Over 1994
Changes Due To Changes Due To
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:(1)
Loans $ (276) 1,718 1,442 1,421 619 2,040
Taxable securities (728) (118) (846) 2 (245) (243)
Nontaxable securities 518 (403) 115 (246) 192 (54)
Federal funds sold 62 (199) (137) 217 37 254
------ ------ ------ ------ ------ ------
Increase(decrease) in
income on interest-
earning assets $ (424) 998 574 1,394 603 1,997
------ ------ ------ ------ ------ ------
Interest expense:
Interest-bearing demand
deposits $ (125) (46) (171) 369 9 378
Savings deposits 10 (162) (152) (349) (466) (815)
Time deposits 178 486 664 1,736 721 2,457
Short-term borrowings 2 (10) (8) 13 (14) (1)
------ ------ ------ ------ ------ ------
Increase(decrease) in
expense of interest-
bearing liabilities $ 65 268 333 1,769 250 2,019
------ ------ ------ ------ ------ ------
Increase (decrease) in net
interest income $ (489) 730 241 (375) 353 (22)
====== ====== ====== ====== ====== ======
(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>
-19-<PAGE>
ANALYSIS OF INTEREST RATE SENSITIVITY
The table below sets forth, as of December 31, 1996, the distribution of
repricing opportunities of the Company's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap ratio (i.e., interest rate
sensitivity gap divided by total interest-earning assets) and the cumulative
interest rate sensitivity gap ratio. The 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.
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. The Company's 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 might 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, the Company's cumulative interest-sensitivity position reflects an
asset sensitive position. This would mean the Company 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.
-20-<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, 1996
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 $ 20,528 5,928 14,293 29,064 17,585 87,398
Real estate mortgage loans 1,475 4,407 9,481 14,625 13,434 43,422
Real estate construction loans 6,295 --- --- --- --- 6,295
Loans to individuals 19,367 2,828 5,242 29,150 1,855 58,442
-------- ------- ------- ------- ------- -------
Total loans, net of unearned income (2) $ 47,665 13,163 29,016 72,839 32,874 195,557
-------- ------- ------- ------- ------- -------
Federal funds sold $ 1,910 --- --- --- --- 1,910
Securities available for sale 24,587 9,250 2,750 13,300 12,647 62,534
Securities held to maturity 21,265 16,800 7,175 38,548 24,922 108,710
Mortgage loans held for sale 516 --- --- --- --- 516
-------- ------- ------- ------- ------- -------
Total interest-earning assets $ 95,943 39,213 38,941 124,687 70,443 369,227
======== ======= ======= ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 73,804 --- --- --- --- 73,804
Savings deposits 48,164 --- --- --- --- 48,164
Time deposits 42,042 26,977 52,905 46,455 141 168,520
Other borrowings 627 --- --- --- --- 627
-------- ------- ------- ------- ------- ---
-------
Total interest-bearing liabilities $164,637 26,977 52,905 46,455 141 291,115
======== ======= ======= ======= ======= =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.58 0.71 0.71 1.03 1.27 1.27
======== ======= ======= ======= ======= =======
Cumulative interest-sensitivity gap $(68,694) (56,458) (70,422) 7,810 78,112 78,112
======== ======= ======= ======= ======= =======
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or mature
before interest-earning assets. The above gap table reflects the Company's rate-sensitive
position at December 31, 1996, and is not necessarily reflective of its position throughout the
year. The carrying amounts of interest-rate sensitive assets and liabilities are presented in
the periods in which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
</TABLE>
-21-<PAGE>
<TABLE>
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The amortized costs and fair values of securities available for sale as of December 31, 1996,
1995 and 1994 were as follows:
<CAPTION>
December 31,
1996 1995 1994
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES COSTS VALUES
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 8,740 8,790 14,991 15,322 5,497 5,237
U.S. Government agencies and
corporations 33,840 33,640 42,586 42,809 26,887 24,942
States and political subdivisions 8,868 8,619 7,613 7,567 --- ---
Mortgage-backed securities (1) 4,568 4,452 4,748 4,645 4,802 4,402
Other securities 7,074 7,033 5,505 5,527 1,686 1,638
------- ------ ------ ------ ------ ------
Total securities available for sale $62,910 62,534 75,443 75,870 38,872 36,219
======= ====== ====== ====== ====== ======
The amortized costs of securities held to maturity as of December 31, 1996, 1995 and 1994 were as
follows:
<CAPTION>
December 31,
($ in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Securities held to maturity:
U.S. Treasury $ 11,547 19,330 35,317
U.S. Government agencies and corporations 54,804 49,938 66,192
States and political subdivisions 34,144 36,428 38,482
Mortgage-backed securities (1) 767 961 1,147
Other securities 7,448 5,108 6,874
-------- ------- -------
Total securities held to maturity $108,710 111,765 148,012
======== ======= =======
(1) The majority of Mortgage-backed Securities and Collateralized Mortgage Obligations held at
December 31, 1996 were backed by U.S. agencies. Certain holdings are required to be
periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk
mortgage security test. These tests address possible fluctuations in the average life and
price sensitivity which are the primary risks associated with this type of security. Such
tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds
10% of stockholders' equity.
</TABLE>
-22-<PAGE>
<TABLE>
B. MATURITIES AND ASSOCIATED YIELDS
The following table presents the maturities for those securities available for sale and held to
maturity as of December 31, 1996 and weighted average yield for each range of maturities.
<CAPTION>
Maturities and Yields
December 31, 1996
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
-------- --------- ---------- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
------------------
U.S. Treasury $ 2,006 3,339 3,445 --- --- $ 8,790
6.99% 6.87% 6.06% --- --- 6.58%
U.S. Agencies 3,442 16,344 13,363 491 --- 33,640
5.02% 5.99% 7.01% 7.41% --- 6.32%
Mortgage-backed securities 315 28 2,896 1,213 --- 4,452
6.06% 7.24% 5.99% 5.86% --- 5.97%
Taxable Securities --- --- 1,557 806 --- 2,363
--- --- 6.67% 7.63% --- 6.98%
Nontaxable Securities --- 351 4,906 999 --- 6,256
--- 6.15% 6.95% 7.20% --- 6.95%
Corporate 1,001 2,214 1,487 1,523 --- 6,225
5.58% 6.39% 6.79% 7.07% --- 6.53%
Other securities --- --- --- --- 808 808
--- --- --- --- 7.03% 7.03%
------ ------ ------ ------ ------ -------
Total 6,764 22,276 27,654 5,032 808 62,534
5.73% 6.16% 6.74% 6.91% 7.03% 6.24%
====== ====== ====== ====== ====== =======
Held To Maturity
----------------
U.S. Treasury 5,003 4,022 2,522 --- --- 11,547
6.08% 4.91% 5.58% --- --- 5.56%
U.S. Agencies 10,598 32,732 10,974 500 --- 54,804
5.15% 6.02% 6.73% 8.07% --- 6.02%
Mortgage-backed securities --- 394 373 --- --- 767
--- 8.00% 7.97% --- --- 7.99%
Taxable Securities 210 605 1,329 495 --- 2,639
8.47% 6.48% 6.97% 7.45% --- 7.07%
Nontaxable Securities 2,571 13,519 13,110 2,305 --- 31,505
9.00% 7.67% 7.67% 8.30% --- 7.79%
Corporate 251 3,527 1,961 460 --- 6,199
8.05% 6.49% 7.15% 7.45% --- 6.83%
Other securities 148 694 210 197 --- 1,249
7.52% 5.87% 9.41% 8.99% --- 7.16%
------ ------ ------ ------ ------ -------
Total 18,781 55,493 30,479 3,957 --- 108,710
6.02% 6.39% 7.08% 8.10% --- 6.45%
====== ====== ====== ====== ====== =======
(1) Rates shown represent weighted average yield on a fully taxable basis.
</TABLE>
-23-<PAGE>
III. LOAN PORTFOLIO
--------------
The Company 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 the Company's loan portfolio by major category of loans
as of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 1996.
A. TYPES OF LOANS
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Commercial and industrial
loans $ 87,519 59,609 59,213 67,359 69,984
Real estate mortgage
loans 43,917 45,589 44,447 40,236 42,771
Real estate construction
loans 6,295 6,007 5,643 3,967 4,062
Loans to individuals 60,991 56,920 52,031 43,084 37,349
-------- ------- ------- ------- -------
Total loans 198,722 168,125 161,334 154,646 154,166
Less unearned income (2,549) (2,307) (2,494) (1,907) (1,284)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 196,173 165,818 158,840 152,739 152,882
Less allowance for loans
losses (2,575) (2,625) (2,551) (2,583) (2,327)
-------- ------- ------- ------- -------
Total loans, net $193,598 163,193 156,289 150,156 150,555
======== ======= ======= ======= =======
B. MATURITIES AND INTEREST RATE SENSITIVITIES
December 31, 1996
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $41,255 29,366 16,898 87,519
Real estate
construction 6,295 --- --- 6,295
Less loans with
predetermined interest
rates (8,640) (9,616) (14,443) (32,699)
------- ------- ------- -------
Loans with adjustable
rates $38,910 19,750 2,455 61,115
======= ======= ======= =======
-24-<PAGE>
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual
loans, restructured loans, other real estate owned, net and
accruing loans which are contractually past due ninety days or
more as to interest or principal payments.
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ 121 270 --- 710 483
Real estate mortgage 495 418 390 1,123 884
Real estate construction --- --- --- --- ---
Loans to individuals --- 30 30 31 23
------ ----- ----- ----- -----
$ 616 718 420 1,864 1,390
------ ----- ----- ----- -----
Restructured loans:
Commercial and industrial --- --- 229 598 ---
------ ----- ----- ----- -----
Total nonperforming loans $ 616 718 649 2,462 1,390
Other real estate owned, net 474 762 1,150 225 837
------ ----- ----- -----
Total nonperforming assets $1,090 1,480 1,799 2,687 2,227
====== ===== ===== ===== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 14 11 4 45 144
Real estate mortgage 252 250 219 198 377
Real estate construction --- --- 87 243 237
Loans to individuals 192 313 180 128 144
------ ----- ----- ----- -----
$ 458 574 490 614 902
====== ===== ===== ===== =====
The effect of nonaccrual and restructured loans on interest
income is presented below:
($ in thousands) 1996 1995 1994
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 68 59 38
Restructured loans --- --- 19
---- ---- ----
Total scheduled interest $ 68 59 57
---- ---- ----
Recorded interest:
Nonaccrual loans $ 24 5 1
Restructured loans --- --- 9
---- ---- ----
Total recorded interest $ 24 5 10
==== ==== ====
-25-<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
At December 31, 1996, the recorded investment in loans which
have been identified as impaired loans totaled $725,000. Of
this amount, $354,000 related to loans with no valuation
allowance and $371,000 related to loans with a corresponding
valuation allowance of $290,000. For the year-ended December
31, 1996, the average recorded investment in impaired loans
was approximately $800,000 and the total interest income
recognized on impaired loans was $33,000 of which $23,000 was
recognized on a cash basis.
At December 31, 1995, the recorded investment in loans which
have been identified as impaired loans totaled $837,000. Of
this amount, $133,000 related to loans with no valuation
allowance and $704,000 related to loans with a corresponding
valuation allowance of $419,000. For the year ended December
31, 1995, the average recorded investment in impaired loans
was approximately $906,000, 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 of SFAS No. 114 did not require an increase to the
Company's allowance for loan losses. The impact of SFAS No.
114, as amended by SFAS No. 118, was immaterial to the
Company's consolidated financial statements as of and for the
year ended December 31, 1995.
3. Foreign Outstandings
At December 31, 1996, 1995 and 1994, there were no foreign
outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the
commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, commonly referred to as the
New River Valley, consists of Montgomery and Giles Counties,
Virginia and portions of adjacent counties. NBB's operating
results are closely correlated with the economic trends within
this area which are, in turn, influenced by the area's three
largest employers, Virginia Polytechnic Institute and State
University, Montgomery County Schools and Hoechst-Celanese.
Other industries include a wide variety of manufacturing,
retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and
other communities in Tazewell County, Virginia and in Mercer
County, West Virginia. BTC's service area has largely
depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have
mechanized and reduced the number of persons engaged in the
-26-<PAGE>
production of coal. There are still a number of support
industries for the coal mining business that continue to
provide employment in the area. Additionally, several new
businesses have been established in the area and Bluefield,
West Virginia has begun to emerge as a regional medical
center. 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 these areas.
At December 31, 1996 and 1995, approximately $71 million and
$52 million, respectively, of the loan portfolio were
concentrated in commercial real estate. This represents
approximately 36% and 34% of the loan portfolio at December
31, 1996 and 1995, respectively. Included in commercial real
estate at December 31, 1996 and 1995 was approximately $49
million and $25 million, respectively, in loans for college
housing and professional office buildings. Loans for the
purpose of acquiring residential real estate were
approximately $60 million and $56 million at December 31, 1996
and 1995, respectively. This represents approximately 31% and
34% of the loan portfolio at December 31, 1996 and 1995,
respectively. Loans primarily for the purpose of purchasing
automobiles were approximately $29 million and $25 million at
December 31, 1996 and 1995, respectively. This represents
approximately 15% of the loan portfolio at December 31, 1996
and 1995.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally
collateralized by the related property and with loan amounts
established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval
is primarily a function of collateral and the evaluation of
the creditworthiness of the individual borrower or project
based on available financial information.
-27-<PAGE>
<TABLE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to operating
expense:
<CAPTION>
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding $177,419 159,920 152,976 149,027 153,487
======== ======= ======= ======= =======
Balance at beginning of year 2,625 2,551 2,583 2,327 2,121
Charge-offs:
Commercial and industrial loans 95 23 72 231 441
Real estate mortgage loans 11 9 192 285 198
Real estate construction loans --- --- 53 --- ---
Loans to individuals 400 259 322 246 406
-------- ------- ------- ------- -------
Total loans charged off 506 291 639 762 1,045
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 4 10 7 10 17
Real estate mortgage loans 64 16 4 5 ---
Real estate construction loans --- --- --- --- ---
Loans to individuals 57 57 43 50 26
-------- ------- ------- ------- -------
Total recoveries 125 83 54 65 43
-------- ------- ------- ------- -------
Net loans charged off 381 208 585 697 1,002
-------- ------- ------- ------- -------
Additions charged to operations 331 282 553 953 1,208
-------- ------- ------- ------- -------
Balance at end of year 2,575 2,625 2,551 2,583 2,327
======== ======= ======= ======= =======
Net charge-offs to average loans outstanding 0.21% 0.13% 0.38% 0.47% 0.65%
======== ======= ======= ======= =======
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,
1996 1995 1994 1993 1992
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 $ 403 44.04% 411 35.46% 679 36.70% 860 43.56% 873 45.40%
Real estate
mortgage
loans 305 22.10% 363 27.12% 364 27.55% 373 26.02% 416 27.74%
Real estate
construction
loans 51 3.17% 100 3.57% 37 3.50% 54 2.56% 50 2.63%
Loans to
individuals 504 30.69% 271 33.85% 569 32.25% 685 27.86% 567 24.23%
Unallocated 1,312 1,480 902 611 421
------ ------ ------ ------ ------
$2,575 100.00% 2,625 100.00% 2,551 100.00% 2,583 100.00% 2,327 100.00%
======= ====== ====== ====== ======
</TABLE>
-29-<PAGE>
V. DEPOSITS
--------
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
1996 1995 1994
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 41,997 --- 38,833 --- 36,724 ---
Interest-bearing
demand deposits 76,017 2.87% 77,545 3.03% 77,182 2.56%
Savings deposits 49,783 3.31% 54,698 3.29% 67,905 3.85%
Time deposits 168,141 5.46% 159,185 5.35% 143,356 4.23%
-------- ------- -------
Average total
deposits $335,938 4.43% 330,261 4.35% 325,167 3.69%
======== ======= =======
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
DECEMBER 31, 1996
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $11,314 3,431 12,682 6,322 33,749
Other time deposits 292 105 --- 3,268 3,665
------- ------ ------- ------ ------
Total time
deposits of
$100,000 or more $11,606 3,536 12,682 9,590 37,414
======= ====== ======= ====== ======
-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,
1996 1995 1994
---- ---- ----
Return on average assets 1.58% 1.46% 1.43%
Return on average equity 12.37% 12.08% 12.51%
Dividend payout ratio 37.55% 37.32% 37.13%
Average equity to average assets 12.75% 12.08% 11.46%
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. An additional branch in
the Rich Creek area of Giles County is expected to open in the second quarter
of 1997. NBB leases office space near the Main Office which is occupied by
NBB's trust, marketing, audit, compliance and credit review departments. An
additional property was acquired in 1996 to provide for additional office
space, reducing the need for leased properties.
Bank of Tazewell County owns the land and building of six of its seven
offices. The bank leases the land and building for its seventh office. The
Main Office is located at Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in North Tazewell and two are located
in Bluefield, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC also owns all of its computer and data
processing hardware and is a licensee of the software it utilizes. This
allows each bank to perform its data processing functions in-house.
Management anticipates that with the constantly changing technological
environment that significant future capital expenditures will be necessary.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and
BTC's banking 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, 1996.
-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 8, 1997.
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 52 President and Chief 1986
Executive Officer, National
Bankshares, Inc.; and
President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
F. Brad Denardo 44 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 48 Secretary & Counsel, 1989
National Bankshares, 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 46 Treasurer, National 1993
Bankshares, 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
subsidiaries 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 14, 1997, the total number of holders of the
Registrant's common stock was 1,184.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 13 of Bankshares' 1996
Annual Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 7 of
Bankshares' 1996 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 8 through 17 of Bankshares' 1996 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 19 through 43 of Bankshares'
1996 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1996 and 1995
3. Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994
4. Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
6. Notes to Consolidated Financial Statements - December 31, 1996, 1995 and
1994
-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, 1996 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 2 through 4 of Bankshares' Proxy
Statement dated March 14, 1997, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 5 through
9 of Bankshares' Proxy Statement dated March 14, 1997 is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Election of Directors" on pages 2 through 4 of Bankshares'
Proxy Statement dated March 14, 1997 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 through 12 of Bankshares' Proxy Statement dated March
14, 1997 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:
1996 Annual Report
To Stockholders Page(s)*
1. Financial Statements:
--------------------
Independent Auditors' Report 19
Consolidated Balance Sheets -
December 31, 1996 and 1995 20
Consolidated Statements of
Income - Years ended December
31, 1996, 1995 and 1994 21
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1996, 1995 and
1994 22
Consolidated Statements of Cash
Flows - Years ended December 31,
1996, 1995 and 1994 23
Notes to Consolidated
Financial Statements - December
31, 1996, 1995 and 1994 24-43
2. Financial Statement Schedules:
-----------------------------
Independent Auditor's Report of
Cook & Associates, LLP covering
the financial statements of Bank
of Tazewell County as of and for
the years ended December 31, 1995
and 1994, is filed as an Exhibit
and is incorporated by reference
herein. Exhibit 99
* Incorporated by reference from the indicated pages of the 1996 Annual
Report to Stockholders.
-35-<PAGE>
3. Exhibits:
--------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
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, as amended, of National 41
Bankshares, Inc.
4(i) Specimen copy of certificate (incorporated
for National Bankshares, Inc. herein by
common 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 Four of the Articles of (incorporated
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)
*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)
-36-<PAGE>
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*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) 1996 Annual Report to 53
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)
21(i) Subsidiaries of National 107
Bankshares, Inc.
27 Financial Data Schedule 108
99 Independent Auditor's Report of 109
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* 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 28, 1997
------------------------------
BY: /s/Joan C. Nelson
------------------------------
Joan C. Nelson
Treasurer
DATE: March 28, 1997
------------------------------
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 28, 1997 Director and Vice
------------------------ -------------- Chairman of the Board
C. L. BOATWRIGHT
/s/T. C. Bowen, Jr. March 28, 1997 Director
------------------------ --------------
T. C. BOWEN, JR.
/s/A. A. Crouse March 28, 1997 Director
------------------------ --------------
A. A. CROUSE
/s/R. E. Christopher, Jr. March 27, 1997 Director and Chairman of
------------------------ -------------- the Board
R. E. CHRISTOPHER, JR.
/s/R. E. Dodson March 28, 1997 Director
------------------------ --------------
R. E. DODSON
Director
------------------------ --------------
P. A. DUNCAN
/s/W. T. Peery March 28, 1997 Director
------------------------ --------------
W. T. PEERY
/s/J. G. Rakes March 28, 1997 President and Chief
------------------------ -------------- Executive Officer -
J. G. RAKES National Bankshares, Inc.
/s/J. R. Stewart March 27, 1997 Director
------------------------ --------------
J. R. STEWART
-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, as amended of National 41
Bankshares, Inc.
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) 1996 Annual Report to 53
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)
21(i) Subsidiaries of National 107
Bankshares, Inc.
27 Financial Data Schedule 108
99 Independent Auditor's Report of 109
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* Indicates a management contract or compensatory plan required to be
filed herein.
-40-<PAGE>
EXHIBIT NO. 3(ii)
- -----------------
AMENDED AND RESTATED
BYLAWS
OF
NATIONAL BANKSHARES, INC.
BLACKSBURG, VIRGINIA
Adopted November 24, 1993
Amended May 29, 1996
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ARTICLE I. SHAREHOLDERS
SECTION 1.1. Annual Meeting.
--------------
The annual meeting of the shareholders to elect directors and for the
transaction of such other business as may properly come before the
meeting shall be held on the second Tuesday in April of each year or, if
such date falls on a legal holiday, the next business day.
SECTION 1.2. Special Meetings.
----------------
Special meetings of shareholders may be called by the Chairman of the
Board of Directors, the President or by a majority of the Board of
Directors. Business transacted at all special meetings shall be confined
to the purpose(s) stated in the notice.
SECTION 1.3. Place of Meeting.
----------------
The Board of Directors (the "Board") may designate any place inside or
outside Virginia for any annual or special meeting of the shareholders.
If no designation is made, the meeting will be at the principal office of
the Corporation.
SECTION 1.4. Notice of Meeting.
-----------------
Except as otherwise required by the Virginia Stock Corporation Act, as
now in effect or hereafter from time to time amended (the "Act"), written
notice stating the time and location of the meeting, and, in case of a
special meeting, the purpose(s) of the meeting, shall be delivered not
less than ten nor more than sixty days before the meeting date, either
personally or by mail, to each shareholder of record entitled to vote at
such meeting. If mailed, the notice will be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
shareholder at his address as it appears on the stock transfer books of
the Corporation.
SECTION 1.5. Closing of Transfer Books or Fixing of Record Date.
--------------------------------------------------
For the purpose of determining shareholders entitled to notice of or vote
at any shareholders' meeting, or any adjournment thereof, or entitled to
receive payment of any dividend, or in order to determine shareholders
for any other proper purpose, the Board may close the stock transfer
books for a stated period not to exceed seventy days. If the stock
transfer books are closed to determine shareholders entitled to notice of
or vote at a shareholders' meeting, such books shall be closed for at
least ten days immediately preceding such meeting. In lieu of closing
the stock transfer books, the Board may fix in advance a date as the
record date for a determination of shareholders, such date to be not more
than seventy days, and in case of a shareholders' meeting, not less than
ten days, prior to the date on which the particular action requiring a
determination of shareholders is to be taken. If the stock transfer
books are not closed and no record date is fixed for the determination of
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shareholders entitled to notice of or vote at a shareholders' meeting, or
shareholders entitled to receive payment of a dividend, the day before
the notice of the meeting is mailed or the date on which the resolution
of the Board declaring such dividend is adopted, as the case may be,
shall be the record date for the determination of shareholders. Any
determination of shareholders entitled to vote at a shareholders' meeting
made as provided in this Section shall apply to any adjournment thereof,
unless the Board fixes a new record date, which it shall do if the
meeting is adjourned to a date more than 120 days after the date fixed
for the original meeting.
SECTION 1.6. Presiding Officer and the Secretary.
-----------------------------------
The Chairman or the President, or, in their absence, an officer
designated by the Board, shall preside at all shareholder meetings, and
the Secretary shall serve as secretary. Otherwise, a chairman or
secretary shall be elected by a majority vote of the shareholders present
to act in the absence of those officers.
SECTION 1.7. Voting Lists.
------------
The Secretary or other person having charge of the stock transfer books
of the Corporation shall make, at least ten days before each
shareholders' meeting, a complete list of the shareholders entitled to
vote at such meeting, or any adjournment thereof, with the address of and
the number of shares held by each, which list, for a period of ten days
prior to such meeting, shall be kept on file at the registered office of
the Corporation and shall be subject to inspection by any shareholder at
any time during usual business hours, subject to any limitations on such
right provided by the Act or other provisions of law. Such list shall
also be produced and kept open at the time and place of the meeting for
inspection by any shareholder during the whole time of the meeting for
the purposes thereof. The original stock transfer book is "prima facie"
evidence as to the shareholders who are entitled to examine such list or
transfer books or to vote at any shareholders' meeting.
SECTION 1.8. Quorum.
------
Unless otherwise provided in the Corporation's Articles of Incorporation
(the "Articles"), a majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a
quorum at a shareholders' meeting. If less than a quorum is present at a
meeting, a majority of the shares so represented may adjourn the meeting
from time to time without further notice. At such adjourned meeting at
which a quorum is present or represented, any business may be transacted
which might have been transacted at the original meeting. The
affirmative vote of the majority of the shares represented at the meeting
and entitled to vote on the subject matter shall be the act of the
shareholders, unless the vote of a greater number is required by the Act
or the Articles, and except that in the election of directors those
receiving the greatest number of votes shall be deemed elected, even
though not receiving a majority.
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SECTION 1.9. Proxies.
-------
At all meetings of shareholders, a shareholder may vote by proxy executed
in writing by the shareholder or by his duly authorized attorney in fact.
Such proxy shall be filed with the Secretary before or at the meeting.
No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
SECTION 1.10. Action by Shareholders Without a Meeting.
----------------------------------------
Any action required to be taken at a meeting of the shareholders of the
Corporation, or any action which may be taken at a meeting of the
shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof.
SECTION 1.11. Shareholder Proposals or Nominations.
------------------------------------
No business shall be transacted at any meeting of shareholders, except
such business as shall be (a) specified in the notice of meeting given as
provided in Section 1.4 of this Article I; (b) otherwise brought before
the meeting by or at the direction of the Board; or (c) otherwise brought
before the meeting by a shareholder of record of the Corporation entitled
to vote at the meeting in compliance with the procedure set forth in this
Section 1.11. For business to be brought before a meeting by a
shareholder pursuant to (c) above, the shareholder must have given timely
notice in writing to the President of the Corporation. To be timely, a
shareholder's notice shall be delivered to, or mailed and received at,
the principal executive offices of the Corporation not less than sixty
days nor more than ninety days prior to the meeting; provided, however,
in the event that less than seventy days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than
the close of business on the tenth day following the day on which such
notice of the date of the meeting or such public disclosure was made.
Notice shall be deemed to have been given more than seventy days in
advance of an annual meeting of shareholders if the annual meeting is
called on the date indicated by Section 1.1 of this Article I without
regard to when public disclosure thereof is made. Notice of actions to
be brought before a meeting pursuant to (c) above shall set forth, as to
each matter the shareholder proposes to bring before the meeting; (a) a
brief description of the business desired to be brought before the
meeting and the reasons for bringing such business before the meeting;
and (b) as to the shareholder giving the notice, (i) the name and
address, as they appear on the Corporation's books, of such shareholder,
(ii) the classes and number of shares of the Corporation which are owned
of record or beneficially by such shareholder, and (iii) any material
interest of such shareholder in such business other than his interest as
a shareholder of the Corporation. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted on a shareholder
proposal or nomination except in accordance with the provisions set forth
in this Section 1.11. The requirements of this Section are in addition
to any other requirements established by law and do not impair the effect
of the requirements of Section 1.2 of these Bylaws relating to business
permitted to be transacted at special shareholders' meetings. The
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Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that any business was not properly brought before
the meeting in accordance with the provision prescribed by these ByLaws
and, if he should so determine, he shall so declare to the meeting and
any such business not so properly brought before the meeting shall not be
transacted.
ARTICLE II. BOARD OF DIRECTORS
SECTION 2.1. General Powers.
--------------
The business and affairs of the Corporation shall be managed and
administered by the Board of Directors. Except as limited by the Act,
all corporate powers shall be vested in and exercised by the Board.
SECTION 2.2. Number, Tenure and Qualifications.
---------------------------------
The number of directors of the Corporation shall be nine. The number of
directors may be increased or decreased from time to time by amendment of
these Bylaws within the variable range established by the Articles. At
each annual meeting of shareholders, the number of directors equal to the
number of the class whose term expires at the time of such meeting shall
be elected to hold office until the third succeeding annual meeting and
until their successors shall have been elected and qualify.
Directors reaching the age of 73 shall be ineligible for renomination to
the Board of Directors of the Corporation at the expiration of the term
of office during which the director becomes 73 years of age; provided,
however, that the foregoing clause shall not apply to Charles L.
Boatwright, T.C. Bowen, Jr., A. A. Crouse, R. E. Dodson, and William T.
Peery.
SECTION 2.3 Regular Meetings.
----------------
A meeting of the Board shall be held immediately after each annual
meeting of shareholders without notice other than that given by these
Bylaws, at which meeting there shall be elected at least a Chairman of
the Board (the "Chairman"), a President, a Secretary and a Treasurer, who
shall hold such offices until the first meeting of the Board following
the next annual meeting of shareholders and until their successors shall
be elected and qualify or until their earlier resignation or removal.
Regular meetings of the Board shall be held as provided by resolution of
the Board.
SECTION 2.4. Special Meetings.
----------------
Special meetings of the Board may be called by or at the request of the
Chairman, the President or by a majority of the Board. The person or
persons calling a special meeting of the Board may fix any place inside
or outside Virginia as the place for holding that special meeting.
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SECTION 2.5. Action by Directors Without a Meeting; Telephonic Attendance.
------------------------------------------------------------
Any action of the board, or of any committee of the Board, may be taken
without a meeting if a consent in writing, setting forth the action so
taken, shall be signed by all of the directors, or by all of the members
of the committee, as the case may be. Directors may participate in
meetings of the Board and committees of the Board by, and such meetings
may be conducted through, the use of any means of communication by which
all directors participating may simultaneously hear each other during the
meeting. Directors so participating are deemed to be present in person
at the meeting and will be counted in determining whether a quorum is
present.
SECTION 2.6. Notice.
------
Notice of any special meeting (which notice need not state the purpose of
or business to be conducted at the meeting) shall be given by written
notice delivered personally or mailed to each director at his business
address, or by telephone, facsimile or telegram. If notice is by
personal delivery, facsimile or telephone, the delivery, facsimile
transmission or telephone call shall be at least two days prior to the
special meeting. If notice is given by mail or telegram, such notice
shall be deposited in the United States mail, postage prepaid, and
addressed to each director at his business address or delivered to the
telegraph company, as the case may be, at least five days prior to the
special meeting.
SECTION 2.7. Quorum.
------
Except as may otherwise be provided in the Articles or in these Bylaws, a
majority of the full Board or of the full membership of any committee
thereof shall constitute a quorum for the transaction of business at any
meeting of the Board or such committee, as the case may be. If less than
such majority is present at a meeting, a majority of directors present
may adjourn the meeting from time to time without further notice.
SECTION 2.8. Committees.
----------
By resolution, the Board shall designate from among Board members an
Executive Committee, which shall exercise all of the authority of the
Board except as limited by law, the Articles or the Board itself. The
Executive Committee may take no action described in Subsections (i),
(ii), (iii), (iv), or (v) of Subsection 2.9(b) of these Bylaws. Such
action may only be taken by the Board of Directors as described in such
Subsections. The Board may designate from among its members other
committees for such purposes and with such powers as the Board may
determine. All committees shall keep regular minutes of their meetings
and shall report their actions to the Board at its next regular meeting.
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SECTION 2.9. Manner of Acting.
----------------
(a) The act of the majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board or any
committee thereof, unless the Articles or these Bylaws require the
vote of a greater number of directors.
(b) Notwithstanding the foregoing or any other provision in these
bylaws, the affirmative vote of six (6) out of nine (9) directors
shall be required to approve any of the following actions:
(i) Authorization for the Corporation as sole shareholder of Bank
of Tazewell County to vote in the election of any person to
serve on the board of directors of Bank of Tazewell County or
in the removal as a director of any person serving on the
board of directors of Bank of Tazewell County except that
action by the Corporation as sole shareholder of the Bank of
Tazewell County may be authorized by the Board of this
Corporation as if this subsection 2.9(b) were not a part of
the Corporation's Bylaws in the event that the Corporation's
Board of Directors determines as a part of its authorization
for removal or a court of competent jurisdiction or regulatory
authority having jurisdiction over the Bank of Tazewell County
determines that such director(s) of the Bank of Tazewell
County being removed have committed a violation of law
applicable to his or their duties as director(s) which has a
material adverse financial effect on Bank of Tazewell County
or have engaged in conduct as director(s) for which he or they
would not be entitled to indemnification under the Articles of
Bank of Tazewell County as amended;
(ii) Authorization for the Corporation as sole shareholder of the
Bank of Tazewell County to vote on any proposed amendment to
the articles of incorporation or bylaws of the Bank of
Tazewell County;
(iii) Authorization for the Corporation as sole shareholder of the
Bank of Tazewell County to vote on the merger, consolidation
or sale of all or substantially all of the assets of the Bank
of Tazewell County.
(iv) A recommendation to the shareholders of the Corporation to
merge, consolidate or sell all or substantially all of the
assets of the Corporation, where such recommendation is
required by law; and
(v) A modification prior to January 1, 2001 to any of the
following provisions of the Bylaws added to such Bylaw by
these amendment;
(1) the first sentence of Section 2.2;
(2) the last paragraph of Section 2.2;
(3) the second sentence of Section 2.8; and/or
(4) subsection 2.9(b)(i) through (iv)
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On and after January 1, 2001 subsections 2.9(b)(i) through (iv) may be
amended or repealed by the Directors of the Corporation as if this
subsection 2.9(b)(v) had not been adopted and as of January 1, 2001 this
subsection 2.9(b)(v) shall automatically and without further action cease
to be of force and effect.
SECTION 2.10 Vacancies.
---------
Any vacancy occurring in the Board, including a vacancy resulting from an
increase by not more than two in the number of directors, may be filled
by the affirmative vote of a majority of the remaining directors, though
less than a quorum of the Board. If a vacancy is filled by the
shareholders, a vacant office held by a director elected by a voting
group of shareholders shall be filled by vote of only the holders of that
voting group.
SECTION 2.11. Compensation.
------------
Payment to the directors for the expense, if any, of attendance at
meetings of the Board, and of a fixed sum for attendance at meetings of
the Board or a stated salary as director may be authorized by Board
resolution. Members of special or standing committees may be authorized
by Board resolution to receive compensation for attending meetings.
SECTION 2.12. Honorary Directors.
------------------
The Board shall not appoint any Honorary Director, Honorary Chairman,
Honorary President, or Honorary Officer.
ARTICLE III. OFFICERS
SECTION 3.1. Generally.
---------
Any one or more offices may be held by the same person.
SECTION 3.2. Chairman.
--------
The Board shall appoint, from one of its members, a Chairman to serve in
said capacity at the pleasure of the Board. He shall preside at all
meetings of the Board and shall be an ex-officio member of all committees
of the Board. The Board may also designate a Vice Chairman to serve as
and perform all duties of the Chairman in the Chairman's absence.
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SECTION 3.3. President.
---------
The Board shall appoint a President of the Corporation to serve at the
pleasure of the Board. The President shall supervise the carrying out of
the policies adopted or approved by the Board and shall be the Chief
Executive Officer of the Corporation. He shall have general executive
powers, as well as the specific powers conferred by these Bylaws. He
shall also have and may exercise such further powers and duties as from
time to time may be conferred upon or assigned to him by the Board.
SECTION 3.4. Secretary.
---------
The Board shall appoint a Secretary to serve at the pleasure of the
Board. The Secretary shall: (a) keep the minutes of the shareholders',
Board and Committee meetings in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; (c) be custodian of
the corporate records and the Corporation's seal and see that the
Corporation's seal is affixed to all documents for which it is required;
(d) sign with the President or other designated officer stock
certificates of the Corporation issued as authorized by resolution of the
Board; (e) have general charge of the stock transfer books and
shareholder list of the Corporation; and (f) in general perform all
duties incident to the office of Secretary and such other duties as may
from time to time be assigned to him by the President or the Board.
SECTION 3.5. Treasurer.
---------
The Board shall appoint a Treasurer, and if required by the Board, the
Treasurer shall give a bond for the faithful discharge of his duties in
such sum and with such surety or sureties as the Board shall determine.
He shall: (a) have charge and custody of and be responsible for all funds
and securities of the Corporation; (b) receive and give receipts for
monies due and payable to the Corporation from any source whatsoever, and
deposit all such monies in the name of the Corporation in such banks,
trust companies or other depositories as shall be selected by the Board;
and (c) in general perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to
him by the President or by the Board.
SECTION 3.6. Other Officers.
--------------
The Board may appoint such other officers as it deems appropriate to
transacting the business of the Corporation. Such officers shall
exercise such powers and perform such duties as pertain to their offices
or are assigned to them by the President or the Board. The Board may by
resolution authorize any duly appointed officer to appoint one or more
officers or assistant officers.
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SECTION 3.7. Removal.
-------
Any officer or agent elected or appointed by the Board may be removed by
the Board at any time, with or without cause, but such removal shall be
without prejudice to the contract rights, if any, of the person so
removed. Any officer or agent appointed by another officer may be
removed at any time, with or without cause, by the Board or by such
appointing officer.
SECTION 3.8. Vacancies.
---------
The Board may fill any vacancy occurring in the offices of the
Corporation at any regular meeting of the Board or at a special meeting
of the Board called for that purpose. An officer elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in
office.
ARTICLE IV. STOCK CERTIFICATES AND THEIR TRANSFER
SECTION 4.1. Certificate for Shares.
----------------------
The Board will determine the form of certificates representing shares of
the Corporation. Such certificates shall bear the signature (or a
facsimile thereof if such certificates are countersigned by an
appropriate party in accordance with the Act) of the President or a Vice
President and the Secretary or an Assistant Secretary and shall bear the
corporate seal or a facsimile thereof. All stock certificates shall be
consecutively numbered or otherwise identified. The name and address of
the person to whom the shares represented thereby are issued, and the
number of shares and date of issue, shall be entered on the stock
transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates will
be issued until the former certificate for a like number of shares has
been surrendered and canceled, except that a replacement for a lost,
destroyed or mutilated certificate may be issued upon such terms and
indemnity to the Corporation as the Board prescribes. No stock
certificate will be issued, and no dividend payment will be made, for
fractional shares of common stock.
SECTION 4.2. Transfer of Shares.
------------------
Transfer of shares shall be made only on the stock transfer books of the
Corporation by the holder of record or by his legal representative, who
must furnish evidence of authority satisfactory to the Corporation, and
on surrender for cancellation of the certificate for such shares. The
Corporation may treat the holder of record of any share or shares of
stock as the holder in fact thereof and accordingly is not bound to
recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not it shall have notice
thereof, except as expressly provided by the laws of the Commonwealth of
Virginia.
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ARTICLE V. CONTRACTS, LOANS,
CHECKS, DEPOSITS AND INVESTMENTS
SECTION 5.1. Contracts.
---------
The Board may authorize any officer(s) or agent(s) to enter into any
contract or execute and deliver any instrument in the name and on behalf
of the Corporation, either generally or confined to specific instances.
SECTION 5.2. Loans.
-----
No loan shall be contracted on behalf of the Corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a
resolution of the Board, either generally or confined to specific
instances.
SECTION 5.3. Checks, Drafts, etc.
--------------------
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the Corporation
shall be signed by those officer(s) or agent(s) of the Corporation
designated in, and in the manner determined by, resolution of the Board.
SECTION 5.4. Deposits.
--------
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in banks, trust
companies or other depositories selected by the Board.
ARTICLE VI. SEAL
The Board of Directors shall provide a seal which shall be circular in
form and shall have inscribed thereon the name of the Corporation, state of
incorporation and the words "Corporate Seal."
ARTICLE VII. BYLAWS
Unless otherwise provided in the Articles, these Bylaws may be amended,
altered or repealed and new Bylaws adopted upon a vote of two-thirds of the
directors present and voting at a meeting at which a quorum is present,
provided that notice of the proposed amendment, alteration or repeal shall be
given in writing delivered personally to each director at his business
address, or by telephone, facsimile, or telegram. If notice is by personal
delivery, facsimile or telephone, the delivery, facsimile or telephone call
shall be at least two days prior to the meetings at which such amendment,
alternation or repeal is to be considered. If notice is given by mail or
telegram, such notice shall be deposited in the United States mail, postage
prepaid, and addressed to each director at his business address or delivered
to the telephone company, as the case may be, at least five days prior to the
meeting at which such amendment, alteration or repeal is to be considered.
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ARTICLE VIII. WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or
director of the Corporation under the provisions of these Bylaws, the Articles
or the Act, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice. Attendance at or
participation in any shareholders' meeting by a shareholder, or at any Board
or Board committee meeting by a director, waives any required notice unless
objection is timely made as provided by the Act.
(SEAL)
_______________________________
Secretary
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NATIONAL BANKSHARES
1996 Annual Report
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Contents
--------
In the Community 2
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To Our Stockholders 6
------------------------------------------------
Selected Consolidated Financial Data 7
------------------------------------------------
Management's Discussion and Analysis 8
------------------------------------------------
Statement of Management's Responsibility 20
------------------------------------------------
Independent Auditors' Report 21
------------------------------------------------
Consolidated Financial Statements 22
------------------------------------------------
Notes to Consolidated Financial Statements 28
------------------------------------------------
Corporate Information 52
------------------------------------------------
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NBB
The National Bank
"For a Future You Can Bank On...Bank on Us!" It's not just a slogan, it's
The National Bank's commitment to be there for you and your family. It also
reflects our promise to remain true to our hometown roots. This is not a
commitment we take lightly. It's one we've made to generations of New River
Valley residents. The National Bank has been a local fixture for over a
century, through good times and bad. We intend to work hard to continue the
tradition of offering our neighbors a full range of financial services with a
personal touch.
PHOTOGRAPH OF MAIN OFFICE MANAGER SERVING REFRESHMENTS
TO CUSTOMERS DURING 4TH OF JULY CELEBRATION.
PHOTOGRAPH OF NBB HOSTING 1996 ANNUAL COMMUNITY BREAKFAST.
We understand what makes a community bank different. We know that our
customers deserve exceptional service. They expect a personal greeting and a
friendly smile. They want to develop long term relationships with our banking
and trust professionals, and they look for honest advice from bankers who will
be with them for the long haul. Our customers want their bank to keep up with
the times and to offer new and more convenient ways for them to manage their
finances. They would also like The National Bank to take an active and visible
role in their hometown.
PHOTOGRAPH OF "PENNIES FROM HEAVEN" HELD AT
HETHWOOD BRANCH FOR KIPPS ELEMENTARY STUDENTS.
-55-<PAGE>
PHOTOGRAPH OF CHRISTMAS WITH HEAD START
PHOTOGRAPH OF PEMBROKE HERITAGE FESTIVAL
NBB is proud to be a part of the community. The bank and its employees
contribute time, talent and resources to a large number of important
activities. Every year we consult with community leaders and seek their advice
on how The National Bank can most effectively serve our locality. NBB's
bankers work with school children, and they volunteer with senior citizens.
They generously share their expertise with groups promoting economic
development at the regional and local levels. We like to participate, both as
a company and as individuals, in community festivals and celebrations. The New
River Valley is our home, and we believe that it is important to give something
back to the citizens who have rewarded us with their support and confidence for
almost 106 years.
PHOTOGRAPH OF WILDERNESS TRAIL FESTIVAL
PHOTOGRAPH OF RICH CREEK AUTUMN FEST
The National Bank--For a Future You Can Bank On... Bank On Us!
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Bank of Tazewell County
We are excited about the future of Bank of Tazewell County and its
affiliation with National Bankshares, Inc. Since this is the first year that
BTC will appear as a part of National Bankshares' Annual Report, a brief
description of BTC might be fitting.
PHOTOGRAPH OF R.E. DODSON AND ALONZO CROUSE
PHOTOGRAPH OF MAIN STREET FESTIVAL
BTC began in 1889 as "The Clinch Valley Bank", with roots in Tazewell,
Virginia. In 1893 the name was changed to "Bank of Clinch Valley". In 1929
Bank of Clinch Valley merged with "Farmers National Bank", also located in
Tazewell, to form the "Farmers Bank of Clinch Valley". In 1964 the Farmers
Bank of Clinch Valley merged with the Bank of Graham, Bluefield, Virginia,
establishing the "Bank of Tazewell County". Bank of Graham was organized in
1890 and had operated continuously in Bluefield, Virginia in the eastern
section of Tazewell County since that date. On May 31, 1996, in what is
believed to be the most significant development in its history, BTC became a
wholly owned subsidiary of National Bankshares, Inc.
PHOTOGRAPH OF DAYCARE AND PRESCHOOL STUDENTS AT BTC ON HALLOWEEN
BTC has always prided itself on its mission of satisfying the banking
needs of its customers in the areas where it operates. We are particularly
gratified that because of the affiliation with Bankshares, we will be able to
enlarge the scope of services offered. We are currently cooperating with the
highly skilled staff of Bankshares in working out the details of a
Visa/MasterCard credit card, secondary market mortgage loans and home equity
lines. These are just a few of the increased services the merger will allow
BTC to provide.
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PHOTOGRAPH OF KIDZOWN PLAYGROUND
Our history has been built on a philosophy of safety and soundness,
service to our customers, and the goal of being a good corporate citizen. We
support and participate in numerous activities and projects that make the
communities in which we do our banking very desirable areas in which to live
and rear our families.
PHOTOGRAPH OF A GINGERBREAD HOUSE DISPLAY
PHOTOGRAPH OF 1996 CHRISTMAS PARADE
Finally, we would like to express our appreciation to all who have made
BTC what it is today. The cornerstone of any business is the strength of its
people, whether they are shareholders, customers or bank personnel. We face
the future with the optimism and confidence that will enable us to embrace a
vision of success equal to or greater than our previous accomplishments.
PHOTOGRAPH OF THE TAZEWELL COUNTY FAIR
Bank of Tazewell County---We''ll Be There To Serve You All The Days Of
Your Life.
-58-<PAGE>
National Bankshares
To Our Stockholders:
This past year proved to be momentous for National Bankshares, Inc. At the
same time the holding company was celebrating its tenth anniversary, we were
completing our first major expansion, a merger with Bank of Tazewell County.
We learned many things from this endeavor. We found that it takes stacks of
paper and numerous regulatory approvals before banking firms can combine. We
now know that mergers require a major commitment of time from directors,
employees and consultants. Most significantly, we discovered the importance of
working with the right merger partner. We were extremely fortunate to have the
Tazewell bank affiliate with us, where we dealt with individuals of integrity
and goodwill throughout the long and complex process.
In the several months since the completion of the merger, directors, officers
and employees of National Bankshares, The National Bank and Bank of Tazewell
County have worked together and come to know each other better. There are many
more similarities than differences among us. Both banks have deep roots in the
localities they serve. They are true community banks, committed to providing
high quality, personalized service to customers. NBB and BTC each has a
dedicated board of directors and a staff of experienced bankers. Looking to
the future, we plan to build on the strengths which both banks bring to
National Bankshares.
It is gratifying to report positive financial results to you at the end of the
first year of combined operations. When you review this Annual Report, you
will notice that 1996 net income reached over $6.1 million, 10.71% higher than
the combined totals of Bankshares and BTC in 1995. A solid 18.63% increase in
net loans, growth of 13.06% in noninterest income and a 5.16% reduction in
noninterest expense contributed to increased earnings. National Bankshares
ended 1996 with total assets of $388.9 million.
As National Bankshares, Inc. embarks on its first full year with more than one
subsidiary, we felt that it would be a fitting time to introduce a new
corporate logo. We hope you will agree that this design, which depicts
"...energy and the dynamic image of a rising sun..", is an appropriate symbol
for a corporation that has a positive view of growth and change, but also an
appreciation for the importance of enduring fundamentals. This is also a good
opportunity to thank you, our stockholders, for your continued support and to
restate our commitment to build and operate an exceptional community bank
holding company.
James G. Rakes
President and PICTURE OF
Chief Executive Officer JAMES G. RAKES
-59-<PAGE>
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Selected Interest income $ 28,647 28,094 26,062 25,827 28,304
Income Interest expense 13,036 12,703 10,684 10,752 13,965
Statement Net interest income 15,611 15,391 15,378 15,075 14,339
Data: Provision for loan
losses 331 282 553 953 1,208
Noninterest income 2,693 2,382 2,047 2,399 1,360
Noninterest expense 9,515 10,033 9,725 9,002 8,396
Income taxes 2,341 1,933 1,844 1,903 1,376
Net income 6,117 5,525 5,303 5,644 4,719
Per Share Net income $ 1.61 1.46 1.40 1.49 1.25
Data: Cash dividends declared 0.62 0.57 0.52 0.45 0.39
Book value per share(1) 13.56 12.70 11.25 10.81 9.81
Selected Loans, net $193,598 163,193 156,289 150,156 150,555
Balance Total securities 171,244 187,635 184,231 174,964 164,842
Sheet Total assets 388,850 380,915 373,132 357,773 352,977
Data at Total deposits 334,584 330,313 327,686 314,001 312,840
End Stockholders' equity 49,801 48,154 42,658 40,951 37,106
of Year:
Selected Loans, net $177,419 160,643 152,976 149,027 153,487
Balance Total securities 177,403 183,994 185,365 154,740 161,406
Sheet Total assets 388,045 378,406 369,962 349,747 353,673
Daily Total deposits 335,938 330,261 325,167 307,645 314,518
Averages: Stockholders' equity(1) 49,459 45,726 42,402 39,435 35,552
Selected Return on average assets 1.58 1.46 1.43 1.61 1.33
Ratios: Return on average
equity(1) 12.37 12.08 12.51 14.31 13.27
Dividend payout ratio 37.55 37.32 37.13 32.18 34.29
Average equity to
average assets(1) 12.75 12.08 11.46 11.28 10.05
(1) Includes amount related to common stock subject to ESOP put
option. The effect is immaterial.
Average Equity to Average Assets Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
10.05% 11.28% 11.46% 12.08% 12.75%
(Dollars)
Cash Dividends Per Share Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
0.39 0.45 0.52 0.57 0.62
-60-<PAGE>
Management's Discussion and Analysis
($ In millions)
Net Income Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 4.7 5.6 5.3 5.5 6.1
Net Interest Income Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 14.3 15.1 15.4 15.4 15.6
($ In thousands, except per share data.)
PERFORMANCE SUMMARY 1996 v. 1995 Net income in 1996 for National Bankshares,
Inc. (Bankshares) and its wholly owned subsidiaries, The National Bank of
Blacksburg (NBB) and Bank of Tazewell County (BTC), (the Company) was $6,117,
an increase of $592 or 10.71%. This produced a return on average assets and
average equity of 1.58% and 12.37%, respectively.
Net income for 1995 was $5,525 which resulted in a return on average
assets of 1.46% and a return on average equity of 12.08%.
Earnings per share for 1996 was $1.61, which represents an increase of
$.15 per share over 1995.
NET INTEREST INCOME Net interest income for 1996 was $15,611, an increase of
$220 or 1.43% when compared with 1995. This increase was primarily due to an
increase in interest-earning assets which rose by $7,785 or 2.15%. The net
yield on interest-earning assets for 1996 was 4.59%, a four basis point
decrease from 1995 caused by a slight decline in the yield on interest-earning
assets. The cost to fund interest-earning assets was 3.57% in 1996 and 3.56%
in 1995.
During 1996, management's strategy was to fund increases in the loan
portfolio through liquidity generated principally from the securities
portfolio. While the Company experienced a good degree of success in this
endeavor, a substantial portion of the growth took place in the highly rate-
competitive commercial loan area. This limited the effect of the loan growth
on the yield on interest-earning assets and net interest income.
The Company continues to have excess liquidity which will permit it to
increase the loan portfolio through the use of existing funds.
INTEREST RATE SENSITIVITY The Company 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. The Company
is sensitive to rising interest rate changes as liabilities generally reprice
or mature more quickly than interest-earning assets.
Future earnings may be adversely affected by a sharp upturn in interest
rates as the Company 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.
-61-<PAGE>
Beyond one year, the Company's 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.
PROVISION AND ALLOWANCE FOR LOAN LOSSES The adequacy of the allowance for loan
losses is based on management's judgement and analysis of current and
historical loss experience, risk characteristics of the loan portfolio,
concentrations of credit and asset quality, as well as other internal and
external factors such as general economic conditions.
An internal credit review department performs pre-credit reviews of large
credits and provides management with an early warning of asset quality
deterioration. Changing trends in the loan mix are also evaluated in
determining the adequacy of the allowance for loan losses.
Loan loss and other industry indicators related to asset quality are
presented in the following table.
Loan Loss Data
($ In thousands) 1996 1995
------ ------
Provision for loan losses $ 331 282
Net charge-offs to average net loans 0.21% 0.13%
Allowance for loan losses to loans,
net of unearned income and deferred fees 1.31% 1.58%
Allowance for loan losses to
nonperforming loans 418.02% 365.60%
Allowance for loan losses to
nonperforming assets 236.24% 177.37%
Nonperforming assets to loans,
net of unearned income, plus
other real estate owned 0.55% 0.89%
Nonaccrual loans $ 616 718
Restructured loans --- ---
Other real estate owned, net 474 762
------- -------
Total nonperforming assets $ 1,090 1,480
------- -------
Accruing loans past due 90 days
or more $ 458 574
------- -------
Nonperforming loans include nonaccrual and restructured loans.
Nonperforming loans do not include accruing loans past due 90 days or more.
Nonperforming assets shown in the above table have decreased by $390 or 26.35%
from 1995 and represent the continuation of a declining trend.
Net charge-offs for 1996 were .21% up slightly from 1995 when that ratio
was .13%. While the Company did experience a small increase in net charge-
offs, overall the trend of improving assets quality continues. The provision
for loan losses, which was up $49 or 17.38%, was made to not only cover current
year net charge-offs, but to prevent excessive deterioration of the ratio of
the allowance for loan losses to loans, net of unearned income.
-62-<PAGE>
Management's Discussion and Analysis
While continual efforts are made to improve overall asset quality,
management is unable to estimate when and under what exact terms problem
credits will be resolved. With the information available to it, management
does not anticipate any significant deterioration in asset quality and expects
the positive trend to continue. However, changing economic conditions, the
timing and extent of such and the ultimate impact on the Company's asset
quality is not within management's ability to predict with any degree of
precision.
At December 31, 1996, the recorded investment in loans which have been
identified as impaired, in accordance with SFAS No. 114, totaled $725. Of this
amount, $354 related to loans with no valuation allowance, and $371 related to
loans with a corresponding valuation allowance of $290. For the year ended
December 31, 1996, the average recorded investment in impaired loans was
approximately $800, and the total interest income recognized on impaired loans
was $33, of which $23 was recognized on a cash basis.
NONINTEREST INCOME Noninterest income for 1996 was $2,693 up $311 or 13.06%
from 1995.
Service charges on deposit accounts were up $190 or 19.13% from the
previous year. The level of these charges is driven by demand deposit volume,
service charge rates in effect, waiver policy, types of accounts opened and the
willingness of account holders to bear penalty charges such as overdraft fees.
While management can exert direct influence over some of the above variables,
it can do so only in varying degrees with others. Increases for 1996 were
largely attributable to volume.
Other service charges and fees are composed of safe deposit box rent,
charges associated with letters of credit and other miscellaneous items. These
charges were up $41 or 17.98% over 1995.
Trust income in 1996 rose by $123 or 25.63% over 1995. Factors affecting
this increase include an increase in estate settlement income and the retention
of managed assets after the closing of estates. Due to its nature, estate
business volume and the related income is not within management's ability to
predict. Management accordingly cannot determine if such income levels are
sustainable.
Credit card income is composed of numerous types of fees and charges,
including overlimit charges, annual fees, and merchant discount. Credit card
income for 1996 was $511 up $61 or 13.56% over 1995. Given the highly
competitive market which limits the amount of charges set, volume increases are
the principal means used by the Company to enhance revenues.
Net gains from securities activities were down $85 or 46.70% from 1995.
Gains and losses can occur as a result of portfolio restructuring, called
securities and certain market adjustments. The majority of the gains for 1996
consisted of market adjustments to an allowance set up to cover potential
losses on certain bonds held by BTC. The amount of these bonds not covered by
reserves is not material to the Company's consolidated financial statements,
hence is not expected to have a material effect on future operating results.
NONINTEREST EXPENSE Noninterest expenses for 1996 were $9,515 compared to
$10,033 in 1995, which represents a $518 or 5.16% decrease.
Salaries and fringe benefits expense for 1996 increased $244 or 4.85% over
1995. This increase was largely due to a $177 increase in net pension cost,
routine merit adjustments, promotions and other normal compensation related
items.
Occupancy and furniture and fixtures expense experienced a slight decrease
in 1996 of 3.91%, however, expenses in this area are expected to increase in
-63-<PAGE>
National Bankshares, Inc. and Subsidiaries
1997 due to the scheduled opening of a new branch facility in the second
quarter.
The cost of Federal Deposit Insurance continued to decline significantly
in 1996 by $375 or 98.94% from 1995. With the Bank Insurance Fund reaching
mandated levels, banks in general became eligible in 1995 for refunds on
premiums previously paid and for reduced premiums in future periods. The
Company expects future premiums to be nominal in amount, based on information
currently available.
Net costs of other real estate owned decreased sharply by $190 or 97.44%
from 1995 due primarily to a $119 reduction in the provision for losses on
other real estate owned in 1996. Efforts to market the remaining properties
continue, however, the exact timing, terms and conditions of sale of such
properties remains unknown.
The other operating expense category decreased by $251 or 9.65% from 1995
and was due primarily to a $111 reduction in expenses associated with the
merger, from $268 in 1995 to $157 in 1996, and a reduction in charitable
contributions of $70. Other operating expenses in 1995 included a contribution
to a community development corporation which was not incurred in 1996.
INCOME TAXES Higher taxable income in 1996 resulted in a $408 increase in
income tax expense when compared to 1995. Tax exempt interest income continues
to be the primary difference between the "expected" and reported income tax
expense. The Company's effective tax rate for 1996 and 1995 was 27.68% and
25.92%, respectively. The increase in the effective tax rate for 1996 was due
primarily to the level of tax exempt interest income being comparable to 1995.
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary due to the fact that realization of the
entire amount of gross deferred tax assets can be supported by the amount of
taxes paid during the carryback period under current tax laws.
EFFECTS OF INFLATION The Company's consolidated statements of income 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 Total assets at year-end 1996 were $388,850 which represents an
increase of $7,935 or 2.08% over the previous year. Excluding corporate
acquisitions, deposits are the Company's primary method of achieving growth.
In both 1996 and 1995, the Company experienced excess liquidity, therefore
management's strategy has been to stress the absorption of those funds before
pursuing external sources. Accordingly, rates paid to attract deposits have
moderated which in turn produces a lower level of deposit growth. In 1996,
deposits grew by a nominal $4,271 or 1.29%.
Total Assets Graph
(Millions)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$353.0 357.8 373.1 380.9 388.9
-64-<PAGE>
Management's Discussion and Analysis
LOANS Loans, net of unearned income and deferred fees grew by $30,355 or
18.31% in 1996. Commercial loans which grew by $27,910 or 46.82% accounted for
the largest portion of increase.
Loans to individuals increased by $4,071 and represented a 7.15% increase
over 1995.
The Company routinely engages in the origination and sale of mortgage
loans in the secondary market. During 1996, the Company originated $17,907 in
mortgage loans and sold $18,271, respectively.
Management, as a part of its strategic plan, will continue to pursue loan
growth as long as the market can provide such growth without compromising
underwriting standards.
SECURITIES Overall bank owned securities declined by $16,391 or 8.74%. The
largest portion of the decrease took place in the available for sale portfolio
which declined by $13,336 or 17.58%. Funds were in turn used to fund loan
growth.
The Company's investment policy stresses safety with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
Investment strategies are adjusted in response to market conditions and
available investment vehicles.
At December 31, 1996, the Company had no investment concentrations in any
single issue (excluding U.S. Government) that exceeded ten percent of capital.
DEPOSITS Total deposits at year-end 1996 were $334,584 which represents only a
nominal increase from 1995. Noninterest-bearing demand deposits grew $4,280,
an increase of 10.75%. Savings deposits declined by $2,384 or 4.72%. This
decline was offset by increases in interest-bearing demand deposits and the
majority of the funds shifted to the higher earning time deposits category.
Limited growth in the deposit area is expected to continue until excess
liquidity in the securities portfolio is absorbed and a need for external
funding arises.
LIQUIDITY Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demands 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. The Company maintained an adequate liquidity level during 1996 and
1995. 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.
Net cash from operating activities of $7,968 in 1996 increased $1,604 from
1995 and was primarily attributable to the increase in net income and the
change in the mortgage 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
securities to the loan portfolio and securities held to maturity to available
for sale. Net cash flows provided by operating activities, federal funds sold,
securities and financing activities for 1996 of $7,968, $5,815, $15,541 and
$1,930, respectively, were used principally to fund the net increase in loans
of $31,633.
-65-<PAGE>
National Bankshares, Inc. and Subsidiaries
CAPITAL RESOURCES Total stockholders' equity increased $1,647 from 1995 to
1996, with net income, less cash dividends on common stock of $2,297, and
common stock subject to ESOP put option of $1,643 recorded outside
stockholders' equity at December 31, 1996, accounting primarily for the
increase. Net unrealized gains (losses) on securities available for sale, net
of income taxes, were ($248) at December 31, 1996, and $282 at December 31,
1995. 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.
Stockholders' Equity Graph
(Millions)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 37.1 41.0 42.7 48.2 49.8
Book Value Graph
(Dollars)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 9.81 10.81 11.25 12.70 13.56
In November 1996, the Company entered into contracts for the construction
of a new branch facility totaling $342. Construction is expected to be
completed in Spring 1997. Total remaining commitments under the construction
and related equipment purchases contracts as of December 31, 1996, approximated
$178. There are no other material commitments for capital expenditures as of
December 31, 1996. In addition, there are no expected material changes in the
mix or relative cost of capital resources.
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 12.81% at year-end 1996
compared to 12.64% at year-end 1995. 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 National Bankshares, Inc., The National Bank of Blacksburg or Bank
of Tazewell County of any specific leverage ratios applicable to them. National
Bankshares, Inc., The National Bank of Blacksburg and Bank of Tazewell County's
capital adequacy ratios exceed regulatory requirements and provide added
flexibility to take advantage of business opportunities as they arise. See
note 11 of the Notes to Consolidated Financial Statements for additional
information.
FUTURE ACCOUNTING CONSIDERATIONS In June 1996, the Financial Accounting
Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. This Statement provides accounting and reporting standards for
-66-<PAGE>
Management's Discussion and Analysis
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not
expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
MERGER On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock
in a one-for-one exchange for all the outstanding common stock of Bank of
Tazewell County, Tazewell, Virginia. This business combination has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements for the periods prior to the combination have been
restated to include the accounts and results of operations of Bank of Tazewell
County. There were no adjustments of a material amount resulting from Bank of
Tazewell County's adoption of Bankshares' accounting policies.
In May, 1996, Bankshares declared a stock split of .11129 per share
effected in the form of a stock dividend to the holders of Bankshares common
stock just prior to the merger effective date to facilitate the one-for-one
common stock exchange ratio. All stockholders' equity accounts, share and per
share data have been adjusted retroactively to reflect the stock split. The
Bank of Tazewell County is well capitalized with excess liquidity, and should
provide the Company with an expanded market place.
COMMON STOCK INFORMATION AND DIVIDENDS National Bankshares, Inc.'s common
stock is traded on a 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, 1996, there were 1,184 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 1996 and 1995.
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
1996 1995 Per Share
High Low High Low 1996 1995
------ ------ ------ ------ ------ ------
First Quarter $26.50 24.00 23.50 21.50 -- --
Second Quarter 26.25 24.50 25.00 22.00 .30 .27
Third Quarter 27.00 24.50 25.00 23.00 -- --
Fourth Quarter 26.50 25.00 25.50 24.00 .32 .30
Bankshares' primary source of funds for dividend payments is dividends
from its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell
County. Bank regulatory agencies restrict dividend payments of the
subsidiaries as more fully disclosed in note 11 of the Notes to Consolidated
Financial Statements.
-67-<PAGE>
National Bankshares, Inc. and Subsidiaries
PERFORMANCE SUMMARY 1995 v. 1994 The Company's net income for 1995 was
$5,525, an increase of $222 or 4.19%. This produced a return on average assets
and equity of 1.46% and 12.08%, respectively. Net income for 1994 was $5,303
which resulted in a return on average assets of 1.43% and a return on average
equity of 12.51%.
While these results reflect a slight improvement in the return on average
assets, the return on average equity declined. That decline was caused by the
continued high level of profitability coupled with a dividend payout ratio of
37.32%.
Earnings per share for 1995 was $1.46, up $.06 per share from 1994.
NET INTEREST INCOME Net interest income for 1995 was $15,391 compared to
$15,378 in 1994, a nominal increase. The net yield on interest-earning assets
for 1995 was 4.63%, slightly lower than in 1994 at which time the net yield was
4.71%.
In April 1994, the Company acquired the deposits of the Pembroke Office of
the First Union National Bank of Virginia which increased its deposits
approximately $14,514. This addition produced excess liquidity which was
initially absorbed by the securities portfolio. With the excess liquidity
position, the Company was allowed to take a less aggressive stance in
attracting external funds. The full absorption of excess liquidity created by
the acquisition of the Pembroke Office deposits and nominal deposit growth is
expected to continue.
This acquisition, in combination with the rising rate environment,
produced the slight decline in the net yield on interest-earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES Loan loss and other industry
indicators related to asset quality are presented in the following table.
Loan Loss Data
($ In thousands) 1995 1994
------ ------
Provision for loan losses $ 282 553
Net charge-offs to average net loans 0.13% 0.38%
Allowance for loan losses to loans,
net of unearned income and deferred fees 1.58% 1.61%
Allowance for loan losses to
nonperforming loans 365.60% 393.07%
Allowance for loan losses to
nonperforming assets 177.37% 141.80%
Nonperforming assets to loans,
net of unearned income, plus
other real estate owned 0.89% 1.12%
Nonaccrual loans $ 718 420
Restructured loans --- 229
Other real estate owned, net 762 1,150
------- ------
Total nonperforming assets $ 1,480 1,799
------- ------
Accruing loans past due 90 days or more $ 574 490
------- ------
-68-<PAGE>
Management's Discussion and Analysis
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 $1,480 at December 31, 1995
which represents a $319 or 17.73% decrease from December 31, 1994. In 1994,
other real estate owned increased by $884 as nonaccrual real estate loans moved
into foreclosure. Nonaccrual loans, which totaled $420 in 1994, increased $298
in 1995. The majority of this increase related to one impaired loan at the
Company's BTC subsidiary.
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 $837. Of this amount, $133
related to loans with no valuation allowance, and $704 related to loans with a
corresponding valuation allowance of $419. For the year ended December 31,
1995, the average recorded investment in the impaired loans was approximately
$906 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 the Company's allowance for loan losses.
The impact of SFAS No. 114, as amended by SFAS No. 118, was immaterial to the
Company's consolidated financial statements as of and for the year ended
December 31, 1995.
NONINTEREST INCOME Noninterest income for 1995 was $2,382, up $335 or 16.37%
from 1994.
Income from service charges on deposits is largely dictated by demand
deposit volume, service charge rates, waiver policy and the willingness of
account holders to bear penalty charges such as overdraft and insufficient
funds fees. While management can exert direct influence over some of these
variables, it can do so only in varying degrees with others. All of the above
factors contributed to the increase in this category of $82 or 9.00%.
Other service charges and fees is composed of fees associated with safe
deposit box rent, letters of credit and other services. The miscellaneous
nature of this category makes it subject to fluctuations. In 1995 this
category declined by $18 or 7.32%.
Trust income for 1995 was down from 1994 by $35 or 6.80%. Trust income
may fluctuate depending on the volume of business, particularly estate account
settlements. A continued financial relationship with heirs after an estate
closing can build business volume, but is unpredictable. Market factors also
affect the level of income earned.
Credit card income continues to show improvement. For 1995, credit card
income was up $95 or 26.76% over the previous year. Credit card income
includes various fees and charges, primarily annual fees and merchant discount.
Because of the highly competitive nature of this product, the Company must
offer fees at market levels in order to retain cardholders. Given this
inability to adjust fees, the Company generally relies on increased volume to
generate additional revenues.
Net securities gains for 1995 were $182, as opposed to a net loss of $14
in 1994. The increase in net gains was due principally to calls of securities.
-69-<PAGE>
National Bankshares, Inc. and Subsidiaries
NONINTEREST EXPENSE Noninterest expense for 1995 was $10,033 compared to
$9,725 in 1994. This represents a $308 increase or 3.17%.
Salaries and employee benefits increased $117 or 2.38%. This increase was
due to routine merit adjustments, promotions and other normal compensation
related items, offset by a decrease of $75 in net pension cost.
The cost of Federal Deposit Insurance declined sharply by $334 or 46.84%
from 1994. With the Bank Insurance Fund reaching mandated levels, banks in
general became eligible in 1995 for refunds on premiums previously paid and for
reduced premiums in future periods.
Net costs related to the liquidation and holding of other real estate
owned rose $158 in 1995 due primarily to a $124 increase in the provision for
losses on other real estate owned in 1995 to reduce the carrying amount of
certain properties to their net realizable values.
The other operating expense category increased by $302 or 13.13% from 1994
and was due primarily to expenses associated with the merger in the amount of
$268 incurred in 1995, and a contribution to a community development
corporation expensed in 1995. A substantial portion of the Company's
involvement in the community development corporation will be recovered through
future tax deductions and tax credits over a ten year period.
INCOME TAXES Higher taxable income in 1995 resulted in a $89 or 4.83% increase
in income tax expense when compared to 1994. Tax exempt interest income
continues to be the primary difference between the "expected" and reported
income tax expense. The Company's effective tax rate for 1995 and 1994 was
25.92% and 25.80%, respectively.
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary due to the fact that realization of the
entire amount of gross deferred tax assets can be supported by the amount of
taxes paid during the carryback period under current tax laws.
EFFECTS OF INFLATION The Company's consolidated statements of income 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 Total assets at year-end 1995 totaled $380,915, an increase of
$7,783 or 2.09% over 1994. Average assets for 1995 totaled $378,406 an
increase of $8,444 or 2.28% over 1994. Loans, net outstanding at year-end 1995
were $163,193, an increase of 4.42% from the same point in time in 1994. This
growth was funded by a shift from securities to loans, increased internally
generated capital and a nominal growth in deposits.
The use of excess internal liquidity to fund loan growth allowed the
Company to place less emphasis on the procurement of external funds in the
market place and avoid the associated cost of such activities.
LOANS Loans, net of unearned interest and deferred fees, at December 31, 1995
were $165,818. This represents an increase of $6,978 or 4.39% over 1994 year
end. Management continues in its efforts to add to the loan portfolio as long
as such growth can be accomplished without compromising underwriting standards.
-70-<PAGE>
Management's Discussion and Analysis
SECURITIES 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. The Company utilized this one time opportunity to
shift approximately $30,156 in securities held to maturity to the available for
sale category on December 1, 1995.
The year-end balances for securities available for sale were $75,870 and
$36,219 in 1995 and 1994, respectively, and the year-end balances for
securities held to maturity were $111,765 and $148,012 in 1995 and 1994,
respectively. Year-end 1995 balances reflect more clearly the shift of
investments associated with the one time transfer of $30,156 described above
and the general decline in securities held to maturity due to calls and
maturities.
The Company's investment policy stresses safety with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
Investment strategies are adjusted in response to market conditions and
available investment vehicles.
At December 31, 1995, the Company had no investment concentrations in any
single issue (excluding U.S. Government) that exceeded ten percent of capital.
DEPOSITS Average total deposits at December 31, 1995, totaled $330,261
compared to $325,167 in 1994, an increase of $5,094 or 1.57%. The low growth
rate was in part due to the Company's excess liquidity position and its ability
to meet funding needs.
LIQUIDITY Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demand or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities and short-term
borrowings. The Company 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.
Net cash from operating activities of $6,364 in 1995 decreased $1,357 from
1994 and was primarily attributable to the change in the mortgage loans held
for sale category which fluctuates based upon loan demand and the timing of
loan sales in the secondary market.
CAPITAL RESOURCES Total stockholders' equity increased $5,496 from 1994 to
1995, with net income, less cash dividends on common stock of $2,062,
accounting primarily for the increase. Net unrealized gains (losses) on
securities available for sale, net of income taxes, were $282 at December 31,
1995 and ($1,751) 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.
-71-<PAGE>
National Bankshares, Inc. and Subsidiaries
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 12.64% at year-end
1995. 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 National Bankshares,
Inc. or its subsidiaries, The National Bank of Blacksburg or Bank of Tazewell
County, of any specific leverage ratios applicable to them. Bankshares' and
its subsidiaries' capital adequacy ratios exceed regulatory requirements and
provide added flexibility to take advantage of business opportunities as they
arise. See note 11 of the Notes to Consolidated Financial Statements for
additional information.
-72-<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 auditor reports to the committee. On
a periodic basis, the committee meets with the internal auditor, independent
auditors and management to discuss matters relating to the quality of internal
control, financial reporting and audit scope. Both the internal auditor 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
-73-<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 subsidiaries as of December 31, 1996 and 1995, 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,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Bank of Tazewell County, a wholly owned subsidiary,
which statements reflect total assets constituting 46.6 percent and 46.5
percent and total interest income constituting 42.8 percent and 44.1 percent in
1995 and 1994, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Bank of
Tazewell County for 1995 and 1994, is based solely on the report of the other
auditors.
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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of National Bankshares, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in notes 1(D) and 5 to the consolidated financial statements,
the Company 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, the Company 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.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 17, 1997
-74-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands except share and per share data, 1996 1995
December 31, 1996 and 1995 ------ ------
Assets Cash and due from banks (notes 2 and 16) $ 10,080 10,055
Federal funds sold (note 16) 1,910 7,725
Securities available for sale
(notes 3 and 16) 62,534 75,870
Securities held to maturity (fair value
$108,755 in 1996 and $112,778 in 1995) 108,710 111,765
Mortgage loans held for sale (notes 14,
15 and 16) 516 880
Loans (notes 4, 5, 15 and 16):
Real estate construction loans 6,295 6,007
Real estate mortgage loans 43,917 45,589
Commercial and industrial loans 87,519 59,609
Loans to individuals 60,991 56,920
-------- --------
Total loans 198,722 168,125
Less unearned income and deferred fees (2,549) (2,307)
-------- --------
Loans, net of unearned income and
deferred fees 196,173 165,818
Less allowance for loan losses (note 5) (2,575) (2,625)
-------- --------
Loans, net 193,598 163,193
-------- --------
Bank premises and equipment, net (note 6) 5,037 4,679
Accrued interest receivable 3,510 3,621
Other real estate owned, net (note 5) 474 762
Other assets (note 9) 2,481 2,365
-------- --------
Total assets $388,850 380,915
======== ========
Liabilities Noninterest-bearing demand deposits $ 44,096 39,816
and Interest-bearing demand deposits 73,804 73,101
Stockholders' Savings deposits 48,164 50,548
Equity Time deposits (note 7) 168,520 166,848
-------- --------
Total deposits (note 16) 334,584 330,313
-------- --------
Other borrowed funds (note 16) 627 161
Accrued interest payable 700 744
Other liabilities (note 8) 1,495 1,543
-------- --------
Total liabilities 337,406 332,761
-------- --------
Common stock subject to ESOP put option
(note 8) 1,643 ---
-75-<PAGE>
Stockholders' equity (notes 9, 10, 11
and 17):
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 3,792,833 shares 9,482 9,482
Retained earnings 42,210 38,390
Net unrealized gains (losses) on
securities available for sale (248) 282
Common stock subject to ESOP put option
(64,796 shares at $25.35 per share)
(note 8) (1,643) ---
-------- --------
Total stockholders' equity 49,801 48,154
Commitments and contingent liabilities
(notes 6, 8 and 14)
-------- --------
Total liabilities and stockholders'
equity $388,850 380,915
======== ========
See accompanying notes to consolidated financial statements.
-76-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
$ In thousands, except per share data. Years ended
December 31, 1996, 1995 and 1994 1996 1995 1994
------ ------ ------
Interest Interest and fees on loans $ 17,232 15,761 13,764
Income Interest on federal funds sold 567 704 450
Interest on securities - taxable 8,877 9,723 9,966
Interest on securities - nontaxable 1,971 1,906 1,882
-------- ------- -------
Total interest income 28,647 28,094 26,062
-------- ------- -------
Interest Interest on time deposits of
Expense $100,000 or more (note 7) 2,070 1,898 1,364
Interest on other deposits 10,939 10,770 9,284
Interest on borrowed funds 27 35 36
-------- ------- -------
Total interest expense 13,036 12,703 10,684
-------- ------- -------
Net interest income 15,611 15,391 15,378
Provision for loan losses (note 5) 331 282 553
-------- ------- -------
Net interest income after
provision for loan losses 15,280 15,109 14,825
-------- ------- -------
Noninterest Service charges on deposit accounts 1,183 993 911
Income Other service charges and fees 269 228 246
Credit card fees 511 450 355
Trust income 603 480 515
Other income 30 49 34
Realized securities gains (losses),
net (note 3) 97 182 (14)
-------- ------- -------
Total noninterest income 2,693 2,382 2,047
-------- ------- -------
Noninterest Salaries and employee benefits (note 8) 5,278 5,034 4,917
Expense Occupancy and furniture and fixtures 884 920 936
Data processing and ATM 497 462 462
FDIC assessment 4 379 713
Credit card processing 466 411 340
Goodwill amortization 30 30 20
Net costs of other real estate owned 5 195 37
Other operating expense 2,351 2,602 2,300
-------- ------- -------
Total noninterest expense 9,515 10,033 9,725
-------- ------- -------
Income before income tax expense 8,458 7,458 7,147
Income tax expense (note 9) 2,341 1,933 1,844
-------- ------- -------
Net income $ 6,117 5,525 5,303
======== ======= =======
Net income per share $ 1.61 1.46 1.40
======== ======= =======
See accompanying notes to consolidated financial statements.
-77-<PAGE>
<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Net Unrealized Common
Gains (Losses) Stock
on Securities Subject to
$ in thousands except share and per share data. Common Retained Available ESOP Put
Years ended December 31, 1996, 1995 and 1994. Stock Surplus Earnings For Sale Option Total
-------- ------- -------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 as previously
reported $ 4,274 1,112 12,868 --- --- 18,254
.11129 for one stock split 190,472 additional
shares issued 476 (476) --- --- --- ---
Adjustment in connection with pooling-of-
interests 4,721 (711) 18,725 (38) --- 22,697
------- ------ ------- ------ ------ ------
Balances, December 31, 1993 as restated 9,471 (75) 31,593 (38) --- 40,951
Cumulative effect of change in accounting for
securities available for sale at January 1,
1994, net of income taxes of $141 --- --- --- 273 --- 273
Net Income --- --- 5,303 --- --- 5,303
Net proceeds from issuance of common stock
(4,480 shares) (note 10) 11 75 --- --- --- 86
Cash dividends ($.52 per share) --- --- (993) --- --- (993)
Cash dividends of BTC declared prior to merger --- --- (976) --- --- (976)
Change in net unrealized gains (losses)
on securities available for sale, net of
income tax benefit of $1,023 --- --- --- (1,986) --- (1,986)
------- ------ ------- ------ ------ ------
Balances, December 31, 1994 as restated 9,482 --- 34,927 (1,751) --- 42,658
Net income --- --- 5,525 --- --- 5,525
Cash dividends ($.57 per share) --- --- (1,080) --- --- (1,080)
Cash dividends of BTC declared prior to merger --- --- (982) --- --- (982)
Change in net unrealized gains (losses) on
securities available for sale, net of income
taxes of $1,047 --- --- --- 2,033 --- 2,033
------- ------ ------- ------ ------ ------
Balances, December 31, 1995 as restated 9,482 --- 38,390 282 --- 48,154
Net income --- --- 6,117 --- --- 6,117
Cash dividends ($.62 per share) --- --- (1,787) --- --- (1,787)
Cash dividends of BTC declared prior to merger --- --- (510) --- --- (510)
Change in net unrealized gains (losses) on
securities available for sale, net of income
tax benefit of $273 --- --- --- (530) --- (530)
Common stock subject to ESOP put option --- --- --- --- (1,643) (1,643)
------- ------ ------- ------ ------ ------
Balances, December 31, 1996 $ 9,482 --- 42,210 (248) (1,643) 49,801
======= ====== ======= ====== ====== ======
See accompanying notes to consolidated financial statements.
</TABLE>
-78-<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 1996, 1995 1996 1995 1994
and 1994 ------ ------ ------
Cash Flows Net income $ 6,117 5,525 5,303
from Adjustments to reconcile net income to net
Operating cash provided by operating activities:
Activities Provision for loan losses 331 282 553
(Note 13) Recovery of bond losses (89) --- ---
Provision for deferred income taxes (4) (120) (32)
Depreciation of bank premises and
equipment 517 535 544
Amortization of intangibles 121 145 123
Amortization of premiums and accretion
of discounts, net 52 (32) 69
(Gains) losses on bank premises and
equipment disposals 7 (9) ---
(Gains) losses on sales and calls of
securities available for sale, net (3) (2) 27
Gains on calls of securities held to
maturity, net (5) (180) (13)
Net (increase) decrease in mortgage
loans held for sale 364 (488) 1,360
(Gains) losses and write-downs on other
real estate owned (9) 168 8
(Increase) decrease in:
Accrued interest receivable 111 88 (242)
Other assets 40 129 (343)
Increase (decrease) in:
Accrued interest payable (44) 170 40
Other liabilities 462 153 324
------- ------- -------
Net cash provided by operating
activities 7,968 6,364 7,721
------- ------- -------
Cash Flows Net (increase) decrease in federal funds
from sold 5,815 (100) 6,270
Investing Proceeds from sales of securities
Activities available for sale 1,000 1,867 ---
(Notes 3 Proceeds from calls and maturities of
and 13) securities available for sale 21,938 8,134 9,964
Proceeds from calls and maturities of
securities held to maturity 35,569 28,592 30,865
Purchases of securities available for sale (10,397) (16,432) (16,068)
Purchases of securities held to maturity (32,477) (22,271) (36,707)
Purchases of loan participations (1,704) --- (1,000)
Collections of loan participations 2,448 1,928 510
Net increase in loans made to customers (31,633) (9,197) (7,213)
Proceeds from disposal of other real
estate owned 325 220 91
Recoveries on loans charged off 125 83 54
Bank premises and equipment expenditures
Proceeds from sale of bank premises and (882) (492) (1,112)
equipment --- 9 1
------- ------- -------
Net cash used in investing activities (9,873) (7,659) (14,345)
------- ------- -------
-79-<PAGE>
Cash Flows Deposits assumed, net of premium paid --- --- 13,159
from Net increase in time deposits 1,672 18,179 8,471
Financing Net increase (decrease) in other deposits 2,599 (15,552) (9,300)
Activities Net proceeds from issuance of common stock --- --- 86
(Note 13) Net increase (decrease) in other borrowed
funds 466 (630) (397)
Cash dividends paid (2,807) (2,056) (1,969)
------- ------- -------
Net cash provided by (used in)
financing activities 1,930 (59) 10,050
------- ------- -------
Net increase (decrease) in cash and due
from banks 25 (1,354) 3,426
Cash and due from banks at beginning of
year 10,055 11,409 7,983
------- ------- -------
Cash and due from banks at end of year $10,080 10,055 11,409
======= ======= =======
See accompanying notes to consolidated financial statements.
-80-<PAGE>
Notes to Consolidated Financial Statements
$ In thousands, except share and per share data.December 31, 1996, 1995 and 1994
Note 1: Summary of Significant Accounting Policies The accounting and reporting
policies of National Bankshares, Inc. (Bankshares) and its wholly owned
subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), conform to generally accepted accounting principles and general practices
within the banking industry (see note 17 for merger with BTC). 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 borrowers, as
well as regulatory agency action as a result of an examination, could cause NBB
and BTC 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 subsidiaries (the Company).
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, the Company 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. The Company
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.
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.
-81-<PAGE>
National Bankshares, Inc. and Subsidiaries
Effective January 1, 1995, the Company 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
$666 and $757 at December 31, 1996 and 1995, respectively, and goodwill of
$367 and $397 at December 31, 1996 and 1995, respectively. Deposit
intangibles are being amortized on a straight-line basis over a ten-year
period and goodwill is being amortized on a straight-line basis over a
fifteen-year period.
(I) Pension Plans The Company sponsors two separate defined benefit pension
plans which cover 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. The Company contributes
to the pension plans amounts deductible for federal income tax purposes.
(J) Income Taxes Income taxes are accounted for under the asset and
liability 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
-82-<PAGE>
Notes to Consolidated Financial Statements
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 Departments in a fiduciary or agency capacity for customers are not
included in the consolidated financial statements since such items are not
assets of the Company. 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 (3,792,833 shares in 1996 and
1995 and 3,788,859 shares in 1994).
(M) Off-Balance Sheet Financial Instruments In the ordinary course of
business, the Company 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.
(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 the Company's
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) Other Borrowed Funds Other borrowed funds represents treasury tax
and loan deposits. The carrying amount is a reasonable estimate of fair
value because the deposits are generally repaid within 1 to 120 days from
the transaction date.
-83-<PAGE>
National Bankshares, Inc. and Subsidiaries
(7) Commitments to Extend Credit and Standby Letters of Credit T h e
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, 1996 and 1995, and as such, the
related fair values have not been estimated.
(O) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations or
liquidity.
(P) Reclassifications Certain reclassifications have been made to prior
years' consolidated financial statements to place them on a basis comparable
with the 1996 consolidated financial statements.
Note 2: Restrictions on Cash To comply with Federal Reserve regulations, the
Company is required to maintain certain average reserve balances. The daily
average reserve requirements were $2,914 and $2,530 for the weeks including
December 31, 1996 and 1995, respectively.
Note 3: Securities As discussed in note 1(C), effective January 1, 1994, the
Company adopted the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". 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 $273.
The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities available for sale by major security type as of December
31, 1996 and 1995 are as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 8,740 116 (66) 8,790
U.S. Government agencies and
corporations 33,840 149 (349) 33,640
States and political subdivisions 8,688 86 (155) 8,619
Mortgage-backed securities 4,568 12 (128) 4,452
Other securities 7,074 25 (66) 7,033
-------- ------ ------ -------
Total securities available for
sale $ 62,910 388 (764) 62,534
======== ====== ====== =======
-84-<PAGE>
Notes to Consolidated Financial Statements
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 14,991 352 (21) 15,322
U.S. Government agencies and
corporations 42,586 476 (253) 42,809
States and political subdivisions 7,613 3 (49) 7,567
Mortgage-backed securities 4,748 8 (111) 4,645
Other securities 5,505 42 (20) 5,527
-------- ------ ------ -------
Total securities available for
sale $ 75,443 881 (454) 75,870
======== ====== ====== =======
The amortized costs and fair values of single maturity securities available
for sale at December 31, 1996, 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, 1996.
December 31, 1996
Amortized Fair
($ In thousands) Costs Values
--------- --------
Due in one year or less $ 6,768 6,764
Due after one year through five years 22,325 22,276
Due after five years through ten years 27,872 27,654
Due after ten years 5,144 5,032
No maturity 801 808
-------- -------
$ 62,910 62,534
======== =======
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,
1996 and 1995 are as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 11,547 36 (148) 11,435
U.S. Government agencies and
corporations 54,804 215 (604) 54,415
States and political subdivisions 34,144 530 (105) 34,569
Mortgage-backed securities 767 29 --- 796
Other securities 7,448 103 (11) 7,540
-------- ------ ------ -------
Total securities held to
maturity $108,710 913 (868) 108,755
======== ====== ====== =======
-85-<PAGE>
National Bankshares, Inc. and Subsidiaries
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 19,330 167 (32) 19,465
U.S. Government agencies and
corporations 49,938 188 (16) 50,110
States and political subdivisions 36,428 802 (202) 37,028
Mortgage-backed securities 961 31 --- 992
Other securities 5,108 81 (6) 5,183
-------- ------ ------ -------
Total securities held to
maturity $111,765 1,269 (256) 112,778
======== ====== ====== =======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are allocated
based upon estimated cash flows at December 31, 1996.
December 31, 1996
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 18,781 18,820
Due after one year through five years 55,493 55,480
Due after five years through ten years 30,479 30,414
Due after ten years 3,957 4,041
-------- -------
$108,710 108,755
======== =======
There were no sales of securities held to maturity during 1996, 1995 or 1994.
The carrying value of securities pledged to secure public and trust deposits,
and for other purposes as required or permitted by law, was $18,446 at December
31, 1996 and $16,262 at December 31, 1995.
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, the Company
transferred securities classified as held to maturity with amortized costs of
approximately $30,156 to available for sale securities, increased by the related
unrealized gain in the amount of approximately $643 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.
-86-<PAGE>
Notes to Consolidated Financial Statements
Note 4: Loans to Officers and Directors In the normal course of business, loans
have been made to executive officers and directors of Bankshares and its
subsidiaries. As of December 31, 1996 and 1995, there were direct loans to
executive officers and directors of $2,567 and $3,332, respectively. In
addition, there were loans of $2,145 and $2,550 at December 31, 1996 and 1995,
respectively, which were endorsed by directors and/or executive officers or had
been made to companies in which directors and/or executive officers had an
equity interest.
The following schedule summarizes amounts receivable from executive officers
and directors of Bankshares and its subsidiaries, and their immediate families
or associates:
Year ended
December 31,
($ In thousands) 1996
------------
Aggregate balance, beginning of year $ 5,882
Additions 3,449
Collections (4,619)
-------
Aggregate balance, end of year $ 4,712
=======
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance for
Loan Losses Nonperforming assets consist of the following:
December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Nonaccrual loans $ 616 718 420
Restructured loans --- --- 229
------- ------ ------
Total nonperforming loans 616 718 649
Other real estate owned, net 474 762 1,150
------- ------ ------
Total nonperforming assets $ 1,090 1,480 1,799
------- ------ ------
Accruing loans past due 90 days or more $ 458 574 490
======= ====== ======
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1996.
-87-<PAGE>
National Bankshares, Inc. and Subsidiaries
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) 1996 1995 1994
------ ------ ------
Scheduled interest:
Nonaccrual loans $ 68 59 38
Restructured loans --- --- 19
------- ------ ------
Total scheduled interest $ 68 59 57
======= ====== ======
Recorded interest:
Nonaccrual loans $ 24 5 1
Restructured loans --- --- 9
------- ------ ------
Total recorded interest $ 24 5 10
======= ====== ======
Changes in the valuation allowance for other real estate owned are as
follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Balances, beginning of year $ 91 49 409
Provision for other real estate owned 5 124 ---
Write-offs --- (82) (360)
------- ------ ------
Balances, end of year $ 96 91 49
======= ====== ======
As discussed in note 1(D), effective January 1, 1995, the Company adopted the
provisions of SFAS No. 114, as amended by SFAS No. 118. At December 31, 1996,
the recorded investment in loans which have been identified as impaired loans,
in accordance with SFAS No. 114, totaled $725. Of this amount, $354 related to
loans with no valuation allowance and $371 related to loans with a corresponding
valuation allowance of $290. At December 31, 1995, the recorded investment in
loans which have been identified as impaired loans totaled $837. Of this
amount, $133 related to loans with no valuation allowance and $704 related to
loans with a corresponding valuation allowance of $419.
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $800, and the total interest income recognized
on impaired loans was $33 of which $23 was recognized on a cash basis. For the
year ended December 31, 1995, the average recorded investment in impaired loans
was approximately $906, and the total interest income recognized on impaired
loans was $47 of which $5 was recognized on a cash basis. The balance of
-88-<PAGE>
Notes to Consolidated Financial Statements
impaired loans at January 1, 1995 totaled approximately $812. The initial
adoption of SFAS No. 114 did not require an increase to the Company's allowance
for loan losses. The impact of SFAS No. 114, as amended by SFAS No. 118, was
immaterial to the Company's consolidated financial statements as of and for the
year ended December 31, 1995.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Balances, beginning of year $ 2,625 2,551 2,583
Provision for loan losses 331 282 553
Recoveries 125 83 54
Loans charged off (506) (291) (639)
------- ------ ------
Balances, end of year $ 2,575 2,625 2,551
======= ====== ======
Note 6: Bank Premises and Equipment Bank premises and equipment stated at cost,
less accumulated depreciation, are as follows:
December 31,
($ In thousands) 1996 1995
------ ------
Premises $ 5,787 5,511
Furniture and equipment 3,936 3,764
Construction-in-progress 249 30
------- ------
9,972 9,305
Less accumulated depreciation (4,935) (4,626)
------- ------
Total bank premises and equipment $ 5,037 4,679
======= ======
The Company leases a branch facility as well as certain other office space
under noncancellable operating leases that expire over the next seven years.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1996 are:
Years ending December 31, Amount
------
1997 $ 83
1998 60
1999 36
2000 13
2001 13
Later years through 2003 23
----
$228
====
-89-<PAGE>
National Bankshares, Inc. and Subsidiaries
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 $37,414 at
December 31, 1996 and $35,127 at December 31, 1995. At December 31, 1996, the
scheduled maturities of time deposits are as follows: $120,448 in 1997; $19,701
in 1998; $3,137 in 1999; $24,530 in 2000; $563 in 2001; and $141 thereafter.
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,
1996, 1995 and 1994, NBB contributed $83, $78 and $76, respectively, to the
plan.
Bankshares 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 Bankshares common
stock. Contributions to the ESOP are determined annually by the Board of
Directors. Contribution expense amounted to $200, $163 and $145 for the years
ended December 31, 1996, 1995 and 1994, respectively. Dividends on ESOP shares
are charged to retained earnings. As of December 31, 1996, the number of
allocated shares held by the ESOP was 47,560 and the number of unallocated
shares was 17,236. All shares held by the ESOP are treated as outstanding in
computing the Company's net income per share. Bankshares or 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 Bankshares or the ESOP, with the agreement
of the Trustee, would be obligated to purchase those shares. The ESOP contains
a put option which allows a withdrawing participant to require Bankshares or the
ESOP, if the plan administrator agrees, to purchase his or her allocated shares
if the shares are not readily tradeable on an established market at the time of
its distribution. Accordingly, at December 31, 1996, 64,796 shares of stock
held by the ESOP, at their estimated fair value, which is based on the most
recent available independent valuation, is recorded outside of stockholders'
equity. Bankshares does not anticipate any material cash requirements in each
of the next five years relating to the ESOP.
The Company also sponsors two separate noncontributory defined benefit
pension plans which cover substantially all of its employees. The pension plans'
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 NBB pension plan's assets are invested principally in U.S.
Government agency obligations (53%), mutual funds (22%), and equity securities
(18%). The BTC pension plan's assets are invested principally in BTC
certificates of deposit (29%), U.S. Government agency obligations (26%), U.S.
Treasury securities (25%), and money market funds (18%).
-90-<PAGE>
Notes to Consolidated Financial Statements
The plans' funded status at December 31, 1996 and 1995 is as follows:
December 31,
($ In thousands) 1996 1995
------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,148 in 1996 and $3,110 in 1995 $ 3,252 3,210
======== =======
Projected benefit obligation for service rendered to
date (5,160) (5,094)
Plan assets at fair value 3,950 3,498
-------- -------
Projected benefit obligation in excess of plan
assets (1,210) (1,596)
Unrecognized net transition asset (228) (251)
Unrecognized net loss from past experience different
from that assumed 989 1,438
Prior service cost not yet recognized in net pension
cost 246 262
-------- -------
Net accrued pension cost (includes accrued
pension cost of $346 in 1996 and $276 in 1995
included in other liabilities, and prepaid
pension cost of $143 in 1996 and $129 in 1995
included in other assets) $ (203) (147)
======== =======
Net pension cost includes the following (income) expense components:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Service cost-benefits earned during the
year $ 327 223 273
Interest cost on projected benefit
obligation 353 288 281
Actual return on plan assets (185) (304) (13)
Net amortization and deferral (92) 19 (240)
------- ------ ------
Net pension cost $ 403 226 301
======= ====== ======
Assumptions used in accounting for the pension plans as of December 31, 1996,
1995 and 1994 are as follows:
NBB BTC
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Weighted average discount rate 7.75% 7% 8.5% 7% 7% 8%
Expected long-term rate of return 9% 9% 9% 9% 7.5% 8%
Rate of increase in future
compensation 5% 5% 5% 5% 5% 5%
-91-<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 9: Income Taxes Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Income $ 2,341 1,933 1,844
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial
reporting purposes (273) 1,047 (882)
------- ------ ------
Total income taxes $ 2,068 2,980 962
======= ====== ======
The components of federal income tax expense attributable to income before
income tax expense are as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Current $ 2,345 2,053 1,876
Deferred (4) (120) (32)
------- ------ ------
Total income tax expense $ 2,341 1,933 1,844
======= ====== ======
Taxes resulting from securities transactions amounted to a tax expense of $33
for the year ended December 31, 1996, $62 for the year ended December 31, 1995,
and a tax benefit of $5 for the year ended December 31, 1994.
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Expected income tax expense (34%) $ 2,876 2,536 2,430
Tax-exempt interest income (756) (744) (740)
Nondeductible interest expense 99 88 75
Other, net 122 53 79
------- ------ ------
Reported income tax expense $ 2,341 1,933 1,844
======= ====== ======
-92-<PAGE>
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
December 31,
($ In thousands) 1996 1995
---- ----
Deferred tax assets:
Loans, principally due to allowance for
loan losses and unearned fee income $ 545 560
Other real estate owned, principally
due to valuation allowance 33 33
Deferred compensation and other
liabilities, due to accrual for
financial reporting purpose 138 115
Deposit intangibles and goodwill 35 28
Nonaccrual interest on loans 23 19
Community development corporation
related tax credit 30 34
Net unrealized losses on securities
available for sale 128 ---
------ ------
Total gross deferred tax assets 932 789
Less valuation allowance --- ---
------ ------
Net deferred tax assets 932 789
------ ------
Deferred tax liabilities:
Bank premises and equipment,
principally due to differences in
depreciation (12) (20)
Securities, due to differences in
discount accretion (43) (30)
Other assets (55) (49)
Net unrealized gains on securities
available for sale --- (145)
------ ------
Total gross deferred liabilities (110) (244)
------ ------
Net deferred tax asset included in
other assets $ 822 545
====== ======
The Company has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1996 and 1995, due to the fact that
the realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.
-93-<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 10: Common Stock Transactions During 1994, the ESOP purchased 4,480 shares
of the common stock of Bankshares at a price of $19.35 per share. There was no
stock purchased from Bankshares by the ESOP in 1996 and 1995. The net proceeds
from the stock issuance in 1994 have been credited to common stock and surplus.
Note 11: Restrictions on Payments of Dividends and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 1996, 1995
and 1994, dividends received from subsidiary banks were $1,901, $1,055 and
$1,133, respectively.
Bank regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
1996, retained net income which was free of such restriction amounted to
approximately $7,572.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Bankshares and its subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Bankshares' and its subsidiaries' capital amounts and classification
are also subject to qualitative judgments by regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and its subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that Bankshares and its subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notifications from the appropriate
regulatory authorities categorized Bankshares and its subsidiaries as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, Bankshares and its subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since those
notifications that management believes have changed Bankshares' and its
subsidiaries' category.
-94-<PAGE>
Notes to Consolidated Financial Statements
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables.
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1996:
Total capital (to risk
weighted assets)
Bankshares consolidated $53,193 23.00% 18,497 8% n/a n/a
NBB 26,175 16.29% 12,855 8% 16,069 10%
BTC 27,007 38.30% 5,642 8% 7,052 10%
Tier I capital (to risk
weighted assets):
Bankshares consolidated $50,618 21.89% 9,249 4% n/a n/a
NBB 24,171 15.04% 6,428 4% 9,641 6%
BTC 26,436 37.49% 2,821 4% 4,231 6%
Tier I capital (to
average assets):
Bankshares consolidated $50,618 12.96% 15,620 4% n/a n/a
NBB 24,171 11.20% 8,636 4% 10,795 5%
BTC 26,436 15.14% 6,984 4% 8,730 5%
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1995:
Total capital (to risk
weighted assets)
Bankshares consolidated $48,350 24.47% 15,799 8% n/a n/a
NBB 22,272 16.21% 10,991 8% 13,739 10%
BTC 25,991 43.24% 4,808 8% 6,011 10%
Tier I capital (to risk
weighted assets):
Bankshares consolidated $46,083 23.33% 7,900 4% n/a n/a
NBB 20,550 14.96% 5,496 4% 8,244 6%
BTC 25,446 42.33% 2,404 4% 3,607 6%
Tier I capital (to
average assets):
Bankshares consolidated $46,083 12.25% 15,051 4% n/a n/a
NBB 20,550 10.27% 8,007 4% 10,009 5%
BTC 25,446 14.45% 7,044 4% 881 5%
-95-<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 12: Parent Company Financial Information Condensed financial information
of National Bankshares, Inc. (Parent) is presented below:
Condensed Balance Sheets
December 31,
($ In thousands) 1996 1995
---- ----
Assets Cash due from subsidiaries $ 20 14
Investment in subsidiaries, at equity 51,434 48,067
Refundable income taxes due from
subsidiaries 25 113
------- -------
Total assets $51,479 48,194
======= =======
Liabilities Other liabilities $ 35 40
and ------- -------
Stockholders' Common stock subject to ESOP put option
Equity (note 8) 1,643 ---
------- -------
Stockholders' equity (notes 9, 10, 11 and
17):
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
3,792,833 shares 9,482 9,482
Retained earnings 42,210 38,390
Net unrealized gains (losses) on securities
available for sale (248) 282
Common stock subject to ESOP put option
(64,796 shares at $25.35 per share)(note 8) (1,643) ---
------- -------
Total stockholders' equity 49,801 48,154
Commitments and contingent liabilities
(notes 6, 8 and 14)
------- -------
Total liabilities and stockholders' equity $51,479 48,194
======= =======
-96-<PAGE>
Notes to Consolidated Financial Statements
Condensed Statements of Income
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Income Dividends from subsidiaries (note 11) $ 1,901 1,055 1,133
Expenses Other expenses 232 285 127
------- ------- -------
Income before income tax benefit and
equity in undistributed net income
of subsidiaries 1,669 770 1,006
Applicable income tax benefit 41 97 43
------- ------- -------
Income before equity in undistributed
net income of subsidiaries 1,710 867 1,049
Equity in undistributed net income of
subsidiaries 4,407 4,658 4,254
------- ------- -------
Net income $ 6,117 5,525 5,303
======= ======= =======
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Cash Flows Net income $ 6,117 5,525 5,303
from Adjustments to reconcile net income
Operating to net cash provided by operating
Activities activities:
Equity in undistributed net income
of subsidiaries (4,407) (4,658) (4,254)
(Increase) decrease in other assets --- 3 (2)
(Increase) decrease in refundable
income taxes due from subsidiaries 88 162 (43)
Increase (decrease) in other
liabilities (5) (9) 20
------- ------ ------
Net cash provided by operating
activities 1,793 1,023 1,024
------- ------ ------
Cash Flows Cash flows from financing activities:
from Purchase of common stock of
Financing subsidiaries --- --- (86)
Activities Net proceeds from issuance of
common stock --- --- 86
Dividends paid (1,787) (1,080) (993)
------- ------ ------
Net cash used in financing
activities (1,787) (1,080) (993)
------- ------ ------
Net increase (decrease) in cash 6 (57) 31
Cash due from subsidiary at beginning
of year 14 71 40
------- ------ ------
Cash due from subsidiary at end of
year $ 20 14 71
======= ====== ======
-97-<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 13: Supplemental Cash Flow Information The Company paid $13,080, $12,533
and $10,644 for interest and $1,839, $1,942 and $2,159 for income taxes, net of
refunds, in 1996, 1995 and 1994, respectively. Noncash investing activities
consisted of $506, $291 and $639 of loans charged against the allowance for loan
losses in 1996, 1995 and 1994, respectively. Noncash investing activities also
included $28 in 1996 and $26 in 1994 of loans transferred to other real estate
owned. In addition, for the years ended December 31, 1996 , 1995 and 1994,
noncash investing activities included changes in net unrealized gains (losses)
on securities available for sale of ($803), $3,080 and ($2,595), respectively,
changes in deferred tax assets included in other assets of $273, ($1,047) and
$882, respectively, and changes in net unrealized gains (losses) on securities
available for sale included in stockholders' equity of ($530), $2,033 and
($1,713), respectively. See note 3 for noncash transfers of securities.
Note 14: Financial Instruments with Off-Balance Sheet Risk The Company is a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheets. The contract
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The Company may require collateral or other security to support the following
financial instruments with credit risk:
December 31,
($ In thousands) 1996 1995
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 32,087 32,378
======== ======
Standby letters of credit $ 1,380 1,969
======== ======
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. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
required by the Company 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.
-98-<PAGE>
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by the Company
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.
The Company originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In 1996,
the Company originated $17,907 and sold $18,271 to investors, compared to
$15,515 originated and $15,027 sold in 1995. Every contract with each investor
contains certain recourse language. In general, the Company 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, the Company 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 $18,271 at December 31,
1996.
Note 15: Concentrations of Credit Risk The Company does a general banking
business, serving the commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, commonly referred to as the New River Valley,
consists of Montgomery and Giles Counties, Virginia and portions of adjacent
counties. NBB's operating results are closely correlated with the economic
trends within this area which are, in turn, influenced by the area's three
largest employers, Virginia Polytechnic Institute and State University,
Montgomery County Schools and Hoechst-Celanese. Other industries include a wide
variety of manufacturing, retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and other communities
in Tazewell County, Virginia and in Mercer County, West Virginia. BTC's service
area has largely depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have mechanized and reduced the
number of persons engaged in the production of coal. There are still a number
of support industries for the coal mining business that continue to provide
employment in the area. Additionally, several new businesses have been
established in the area and Bluefield, West Virginia has begun to emerge as a
regional medical center. 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 these areas.
At December 31, 1996 and 1995, approximately $71 million and $52 million,
respectively, of the loan portfolio were concentrated in commercial real estate.
This represents approximately 36% and 34% of the loan portfolio at December 31,
1996 and 1995, respectively. Included in commercial real estate at December 31,
1996 and 1995 was approximately $49 million and $25 million, respectively, in
loans for college housing and professional office buildings. Loans for the
purpose of acquiring residential real estate were approximately $60 million and
$56 million at December 31, 1996 and 1995, respectively. This represents
approximately 31% and 34% of the loan portfolio at December 31, 1996 and 1995,
respectively. Loans primarily for the purpose of purchasing automobiles were
approximately $29 million and $25 million at December 31, 1996 and 1995,
respectively. This represents approximately 15% of the loan portfolio at
December 31, 1996 and 1995.
-99-<PAGE>
National Bankshares, Inc. and Subsidiaries
The Company has established operating policies relating to the credit process
and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information.
Note 16: Fair Value of Financial Instruments The estimated fair values of the
Company's financial instruments at December 31, 1996 and 1995 are as follows:
December 31,
1996 1995
Carrying Estimated Carrying Estimated
($ In thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 10,080 10,080 10,055 10,055
Federal funds sold 1,910 1,910 7,725 7,725
Securities 171,244 171,289 187,635 188,648
Mortgage loans held for
sale 516 516 880 880
Loans, net 193,598 192,201 163,193 163,290
-------- ------- ------- -------
Total financial assets $377,348 375,996 369,488 370,598
======== ======= ======= =======
Financial liabilities:
Deposits $334,584 331,758 330,313 334,066
Other borrowed funds 627 627 161 161
-------- ------- ------- -------
Total financial
liabilities $335,211 332,385 330,474 334,227
======== ======= ======= =======
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 the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect these estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
-100-<PAGE>
Notes to Consolidated Financial Statements
Note 17: Business Combination On June 1, 1996, Bankshares issued 1,888,209
shares of its common stock in a one-for-one exchange for all the outstanding
common stock of Bank of Tazewell County, Tazewell, Virginia. This business
combination has been accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements for the periods prior to the combination
have been restated to include the accounts and results of operations of Bank of
Tazewell County. There were no adjustments of a material amount resulting from
Bank of Tazewell County's adoption of Bankshares' accounting policies.
In May, 1996, Bankshares declared a stock split of .11129 per share effected
in the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying financial statements are
summarized below:
Six months
ended June 30, Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Revenues:
National Bankshares, Inc. $ 9,286 17,848 16,169
Bank of Tazewell County 6,166 12,628 11,940
-------- ------ ------
Combined $ 15,452 30,476 28,109
======== ====== ======
Net Income:
National Bankshares, Inc. $ 1,883 3,256 2,916
Bank of Tazewell County 1,106 2,269 2,387
-------- ------ ------
Combined $ 2,989 5,525 5,303
======== ====== ======
Note 18: Future Accounting Considerations In June 1996, the Financial
Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not
expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
-101-<PAGE>
The National Bank of Blacksburg Board of Directors
Robert E. Christopher, Jr.
Chairman of the Board
PICTURE OF ROBERT Retired
E. CHRISTOPHER, JR.,
CHARLES L. BOATWRIGHT Charles L. Boatwright
AND JAMES G. RAKES Vice Chairman of the Board
Physician
James G. Rakes
National Bankshares, Inc.
The National Bank
President and
Chief Executive Officer
James M. Shuler
Companion Animal Clinic, Inc.
President
Virginia House of Delegates PICTURE OF
Delegate JAMES M. SHULER, L.
ALLEN BOWMAN AND
L. Allen Bowman PAUL A. DUNCAN
Litton Poly-Scientific
Retiring President
Paul A. Duncan
Holiday Motor Corp.
President
Jeffrey R. Stewart
Educational Consultant
PICTURE OF
JEFFREY R. STEWART, J. Lewis Webb, Jr.
J. LEWIS WEBB, JR. AND Dentist
PAUL P. WISMAN
Paul P. Wisman
Grundy National Bank
Vice President of Investments
Nicewonder Investments
Manager of Assets
The National Bank of Blacksburg Advisory Boards
Montgomery County Advisory Board Dan A. Dodson, James L. Dowdy, W. Clinton
Graves, James J. Owen, Arlene A. Saari, James C. Stewart, T. Cooper Via
Giles Advisory Board Paul B. Collins, John H. Givens, Jr., Ross E. Martin,
Kenneth L. Rakes, Scarlet B. Ratcliffe, H.M. Scanland, Jr., Buford Steele
-102-<PAGE>
Bank of Tazewell County Board of Directors
Alonzo A. Crouse
Bank of Tazewell County
PICTURE OF Executive Vice President,
ALONZO A. CROUSE, CARL Secretary and Cashier
C. GILLESPIE AND R. E.
DODSON Carl C. Gillespie
Honorary Chairman of the Board
Attorney
R.E. Dodson
Bank of Tazewell County
President and
Chief Executive Officer
James A. Deskins
Deskins Super Market, Inc.
President PICTURE OF
JAMES A. DESKINS,
Ralph S. Bailey RALPH S. BAILEY AND
Retired JAMES S. GILLESPIE,
JR.
James S. Gillespie, Jr.
Jim Sam Gillespie Farm
President
E.P. Greever
Retired
PICTURE OF
E.P. GREEVER, WILLIAM William T. Peery
T. PEERY, CHARLES E. Cargo Oil Co., Inc.
GREEN, III AND JACK H. President
HARRY
Charles E. Green, III
Equitable Financial Services
District Manager
Jack H. Harry
Harry's Enterprises, Inc.
President
J.M. Pope
Retired
PICTURE OF
James G. Rakes J.M. POPE, JAMES G.
National Bankshares, Inc. RAKES AND WILLIAM H.
The National Bank VANDYKE
President and
Chief Executive Officer
William H. VanDyke
Candlewax Smokeless Fuel Co.
Vice President
T.C. Bowen, Jr.
Chairman of the Board
Attorney
-103-<PAGE>
National Bankshares, Inc. Board of Directors
James G. Rakes
National Bankshares, Inc.
PICTURE OF The National Bank
JAMES G. RAKES, ROBERT President and
E. CHRISTOPHER, JR. AND Chief Executive Officer
R.E. DODSON
Robert E. Christopher, Jr.
Chairman of the Board
Retired
R.E. Dodson
Bank of Tazewell County
President and
Chief Executive Officer
Alonzo A. Crouse
Bank of Tazewell County
Executive Vice President, PICTURE OF
Secretary and Cashier ALONZO A. CROUSE,
T.C. BOWEN, JR. AND
T.C. Bowen, Jr. CHARLES L.
Attorney BOATWRIGHT
Charles L. Boatwright
Vice Chairman of the Board
Physician
Paul A. Duncan
Holiday Motor Corp.
PICTURE OF President
PAUL A. DUNCAN, WILLIAM
T. PEERY AND JEFFREY R. William T. Peery
STEWART Cargo Oil Co., Inc.
President
Jeffrey R. Stewart
Educational Consultant
-104-<PAGE>
Corporate Information
NATIONAL BANKSHARES, INC. OFFICERS James G. Rakes
President and Chief Executive Officer
Marilyn B. Buhyoff
Secretary and Counsel
F. Brad Denardo
Corporate Officer
Shelby M. Evans
Corporate Compliance Officer
Joan C. Nelson
Treasurer
David K. Skeens
Corporate Auditor
ANNUAL MEETING The Annual meeting of stockholders will be held on Tuesday,
April 8, 1997 at 3:00 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
-105-<PAGE>
National Bankshares
100 South Main Street/P.O. Box 90002
Blacksburg, Virginia 24062
-106-<PAGE>
EXHIBIT NO. 21(i)
- -----------------
Subsidiaries of the Registrant
1. The National Bank of Blacksburg
National Banking Association
Chartered under the laws of the United States of America
Doing business as The National Bank of Blacksburg and also as The
National Bank
2. Bank of Tazewell County
Incorporated under the laws of the State of Virginia
Doing business as Bank of Tazewell County
-107-<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,080
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,910
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,534
<INVESTMENTS-CARRYING> 108,710
<INVESTMENTS-MARKET> 108,755
<LOANS> 196,173
<ALLOWANCE> 2,575
<TOTAL-ASSETS> 388,850
<DEPOSITS> 334,584
<SHORT-TERM> 627
<LIABILITIES-OTHER> 3,838
<LONG-TERM> 0
0
0
<COMMON> 9,482
<OTHER-SE> 40,319
<TOTAL-LIABILITIES-AND-EQUITY> 388,850
<INTEREST-LOAN> 17,232
<INTEREST-INVEST> 10,848
<INTEREST-OTHER> 567
<INTEREST-TOTAL> 28,647
<INTEREST-DEPOSIT> 13,009
<INTEREST-EXPENSE> 13,036
<INTEREST-INCOME-NET> 15,611
<LOAN-LOSSES> 331
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 9,515
<INCOME-PRETAX> 8,458
<INCOME-PRE-EXTRAORDINARY> 8,458
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,117
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 4.59
<LOANS-NON> 616
<LOANS-PAST> 458
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 725
<ALLOWANCE-OPEN> 2,625
<CHARGE-OFFS> 506
<RECOVERIES> 125
<ALLOWANCE-CLOSE> 2,575
<ALLOWANCE-DOMESTIC> 2,575
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,312
</TABLE>
EXHIBIT NO. 99
- --------------
Cook Associates, LLP
Certified Public Accounts
Members Division For CPA Firms AICPA
And The Virginia Society
Of Certified Public Accounts
Originating Office
P.O. Box 580
Richlands, Virginia
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Bank of Tazewell County
Tazewell, Virginia
We have audited the accompanying balance sheets of Bank of Tazewell
County as of December 31, 1995 and 1994, and the related statements of
income, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Bank of
Tazewell County as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accounting principles.
As discussed in Note 1 and 11 to the financial statements, Bank of
Tazewell County adopted the provisions of Statement of Financial Accounting
Standards No.'s 114 and 118, "Accounting by Creditors for Impairment of a
Loan" as of January 1, 1995.
February 27, 1996 Cook Associates, LLP
-109-<PAGE>
